Financial Management

FINANCIAL MANAGEMENT
BASICS OF FINANCIAL MANAGEMENT
1. The decision function of financial management can be broken down into

decisions.
(a) Financing and investment
(b) Investment, financing & asset management
(c) Financing and dividend
(d) Capital budgeting, cash management & credit management
2. The funds raised by the issue of ________ are the best from the risk point of
view for the company.
(a) equity shares
(b) debentures
(c) both (a) & (b)
(d) none of the above
3. To increase a given present value, the discount rate should be adjusted-

(a) Upward
(b) Downward
(c) Keep as it is
(d) None of the above
4. Long run objective of financial management is to

(a) Maximize earnings per share.
(b) Maximize the value of the firm's common stock.
(c) Maximize return on investment.
(d) Maximize market share.
5. Financial Management is concerned with

(a) Investment Decisions
(b) Finance Decisions
(c) Dividend Decisions
(d) All of the above
6. Procurement of funds inter alia includes

(a) Identification of sources of finance
(b) Determination of finance mix
(c) Raising of funds
(d) Division of profits between dividends and retention of profits of internal
funds generation.
7. The market price of a share of common stock is determined by:

(a) The board of directors of the firm.
(b) The stock exchange on which the stock is listed.
(c) The president of the company.
(d) Individuals buying and selling the stock.
8. Which of the following is/are the basic aspects of financial management?

(1) Procurement of funds.
(2) Appointment of capable financial personnel.
(3) Effective use of funds to achieve business objectives.
(4) Increase the national resources.
(a) (1) & (3)
(b) (2) & (4)
(c) (1) & (4)
(d) (2) & (3)
9. The focal point of financial management in a firm

(a) The number and types of products or services provided by the firm.
(b) The minimization of the amount of taxes paid by the firm.
(c) The creation of value for shareholders.
(d) The profits earned by the firm.
10. A business organization can obtain funds from-

(a) Issue of preference or equity share capital
(b) Issue of debentures
(c) Loan from banks and financial institutions
11. "Shareholder wealth" in a firm is represented by
(a) The number of people employed in the firm.
(b) The book value of the firm's assets less the book value of its liabilities.
(c) The amount of salary paid to its employees.
(d) The market price per share of the firm's common stock.
12. Financial Management is study-

I. Of the process of procuring and judicious use of financial resource
II. Undertaken to maximize the value of the firm/owners.
(a) (I) only
(b) (II) only
(c) Both (I) and (II)
(d) Neither (I) nor (II)
13. A 30-year bond issued by Reliance Ltd in 2007 would now trade in the -
(a) Primary money market
(b) Secondary money market
(c) Primary capital market
(d) Secondary capital market
14. Which of the following is not a function of a finance manager?

(a) Investor relations
(b) Credit & collections
(c) Investments
(d) Appointment of financial personnel
15. Money market mutual funds

(a) Are also known as finance companies
(b) Enable individuals and small businesses to invest indirectly in money-market
instruments.
(c) Are available only to high net-worth individuals.
(d) Are involved in acquiring and placing mortgages.
16. Match the following:
(a) 5,1,2,3
(b) 5,1,4,3
(c) 5,1,3,2
(d) 3,2,1,4
17. The purpose of financial markets is to:

(a) Increase the price of common stocks
(b) Lower the yield on bonds
(c) Allocate savings efficiently
(d) Control inflation
18. Investment decisions are concerned with -

(a) Efficient allocation of funds to specific assets
(b) Determining the proper amount of funds to be employed in the firm.
(c) Determining the composition of liabilities
(d) Short-run projects
19. ______ ensures that the firm utilizes its available resources most efficiently
under conditions of competitive markets.
(a) Wealth Maximization
(b) Profit Maximization
(c) Value Maximization
(d) Relation Maximization
20. For which of the following reasons is the profit maximization concept
criticized?
1. It is vague conceptually.
2. It ignores the timing of returns.
3. It ignores the risk factor.
4. Its emphasis is generally on short-run projects.
(a) 1
(b) 1 & 2
(c) 1, 2, 3 & 4
(d) 1, 2
21. ______ is consistent with the object of maximizing the owner's economic
welfare.
(a) Profit Maximization
(b) Wealth Maximization
(c) Relation Maximization
22. Financial Management is concerned with -

(a) Profit Maximization
(b) Both (a) & (c)
(c) Wealth Maximization
(d) Both (a) & (c) plus Relation Maximization
23. Assertion (A): Profit maximization as an objective does not take into account
the time pattern of returns.
Reason (R): The finance managers will accept highly risky proposals if they give
high profits by applying the profit maximization concept.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not a correct explanation of A.
(c) A is true but R is false
(d) A is false but R is true
24. Profit maximization -
(a) Cannot be the sole objective of a company
(b) Is at best a limited objective.
(c) Has to be attempted with a realization of risks involved
25. Under inflationary conditions, the value of money expressed in terms of its
purchasing power over goods and services
(a) Inclines
(b) Declines
(c) Increases
(d) Remains constant
26. ______ is a condition where a company cannot meet or has difficulty paying
off its financial obligations to its creditors, typically due to high fixed costs, illiquid
assets, or revenues sensitive to economic downturns.
(a) Financial risk
(b) Financial uncertainty
(c) Financial certainty
(d) Financial distress
27. ______ means the organization can no longer meet its financial obligations
with its lender or lenders as debts become due.
(a) Financial certainty
(b) Financial insolvency
(c) Financial risk
(d) Identified risk
28. A permanent chaotic state may lead an organization to ______.

(a) Financial insolvency; financial certainty
(b) Financial distress; identified risk
(c) Identified risk; financial insolvency
(d) Financial distress; financial insolvency
29. Using ______ in the capital structure of a company is called financial gearing.
(a) Borrowed funds or fixed cost funds
(b) Owners' funds or fixed cost funds
(c) Owners' funds
(d) Reserve or balance of profit & loss account
30. High financial gearing will,

(a) Decrease the EPS of the company if earnings before interest and taxes are
rising
(b) Increase the EPS of the company if earnings before interest and taxes are
declining
(c) Decrease the EPS of the company if earnings before interest and taxes are
declining
(d) Increase the EPS of the company if earnings before interest and taxes are
rising
31. Higher the level of financial gearing,

(a) Greater will be the risk.
(b) Lower will be the risk.
(c) Risk will be constant.
32. Financial management is broadly concerned with

(a) Raising of funds
(b) Creating value to the assets of the business enterprise
(c) Efficient allocation of funds
33. Financial Management can be judged by the study of the nature of ______.
(a) Corporate, social & benefit decisions.
(b) Accounting, financing & dividend decisions.
(c) Personnel, human cost & economic decisions
(d) Investment, financing & dividend decisions.
34. Which of the following is/are a major aspect of the investment decision-
making process?
(a) Capital budgeting
(b) Formulation of Functional Strategy
(c) Strategic implementation
35. Investment decisions encompass

(a) Cost of capital
(b) Capital budgeting
(c) Management of liquidity and current assets
36. Optimal investment decisions need to be made taking into consideration such
factors as
(a) Estimation of capital outlays & future earnings of the proposed project
focusing on the task of value engineering and market forecasting;
(b) Availability of capital and considerations of cost of capital focusing attention
on financial analysis
(c) A set of standards by which to select a project for implementation and
maximizing returns therefrom focusing attention on logic and arithmetic.
37. If the 'Profit Maximization' concept is applied then which of the following
product will be selected?
Note: Above table shows projected earnings of the various products for the next 5
years.
(a) Product A
(b) Product B
(c) Product C
(d) Product D
1 2 3 4 5 6 7 8 9 10
B A B B D D D A C d
11 12 13 14 15 16 17 18 19 20
D C D D B A C A b d
21 22 23 24 25 26 27 28 29 30
B B B D B D B D A d
31 32 33 34 35 36 37
A D D A D D b
FM CHAPTER 2
FINANCIAL RATIO ANALYSIS
1. In an organization, the current ratio is 2.5, the liquid ratio 1.5, prepaid expenses
nil, and stock 4,000. The amount of current liabilities is
(a) ₹20,000
(b) ₹40,000
(c) ₹80,000
(d) ₹4,000
2. ... are necessary for the study of trends and direction of movements in the
financial position and operating results of a concern.
(a) Trend ratios
(b) Cash flow statements
(c) Common size statements
(d) Comparative statements
3. From the following information find the value of closing stock:

Stock velocity: 6 months
Gross profit ratio: 25%
Gross profit for the year ended 31st March 2014: ₹
Closing stock for the period was at the beginning of the year 20,000 more than it
(a) ₹1,50,000
(b) ₹1,40,000
(c) ₹1,60,000
(d) ₹70,000
4. The net profit of a company is preference dividend 25,000, and taxes paid
15,000. The number of equity shares is 1,00,000. The earnings per share (EPS) is
(a) ₹1.5
(b) ₹1.6
(c) ₹2
(d) ₹1.75
5. The current ratio of Brave Ltd. is 2:1, while the quick ratio is 1.8:1. If the current
liabilities are 40,000, the value of the stock will be
(a) ₹12,000
(b) ₹6,500
(c) ₹8,000
(d) ₹10,000
6. In an organization, working capital is ₹1,00,000 and current ratio 3:1. The value
of current assets is
(a) ₹1,50,000
(b) ₹1,00,000
(c) ₹50,000
(d) ₹15,000
7. Working capital ratio is also known as:

(a) Quick ratio
(b) Debt-Equity ratio
(c) Current ratio
(d) Liquid ratio
8. Credit sales of Jump Ltd. for the year is 12,00,000 and debtors at the end of the
year 2,40,000. Assuming 360 days in a year, the average collection period will be
(a) 60 Days
(b) 72 Days
(c) 180 Days
(d) 80 Days
9. Opening stock 29,000

Closing stock 31,000
Purchases 2,42,000
Stock turnover ratio will be
(a) 12 Times
(b) 15 Times
(c) 9 Times
(d) 8 Times
10. Which of the following is a method used in analyzing financial statements:
(a) Variance analysis
(b) Trend analysis
(c) Break-even analysis
(d) Budget analysis
11. Current ratio - 2:5

Liquid ratio - 1:5
Prepaid expenses - Nil
Stock - 74,000
The amount of current liabilities is
(a) 20,000
(b) ₹40,000
(c) ₹80,000
(d) ₹4,000
12. In an organization, profit after interest, tax, and dividend on preference shares
is 4,00,000. The number of equity shares is 40,000 and the dividend payout ratio
is 40%. The dividend per share is
(a) ₹4
(b) ₹25
(c) ₹10
(d) ₹6
13. Current ratio is 2.5 and the liquid ratio is 1.5. Working capital is 75,000. The
value of the stock held will be
(a) ₹60,000
(b) ₹1,00,000
(c) ₹50,000
14. Determine a firm's total assets turnover, if its net profit margin is 8%, total
assets are ₹8,00,000 and the return on investment is 14%
(a) 2.05
(b) 4.00
(c) 1.75
(d) 2.00
15. Net income of a company after payment of preference dividend was 63 lakh.
The number of equity shares was 1,40,000. The P/E ratio of the company was 8.50
times. Earnings per share and market value per share would be
(a) ₹45 & ₹382.50 respectively
(b) ₹45 & ₹308.20 respectively
(c) ₹33.16 & ₹281.86 respectively
(d) ₹45 & ₹5.29 respectively
16. In ratio analysis, 'proforma analysis implies

(a) Making a list of all the present ratios of the firm
(b) Comparison of liquidity ratios with another kind of ratios of the firm
(c) Comparison of the ratios of the firm relating to the performance of the firm
(d) Comparison of the firm's past and current ratios with future ratios to
ascertain the relative strengths and weaknesses in the past and future
17. Which of the following pairs is correctly matched

(a) Administrative expenses - Operating expenses
(b) Gross profit x Net sales x 100 = Net profit ratio
(c) Both (A) and (B) above
18. Return on investment depends on two ratios

(a) Net profit ratio and capital turnover ratio
(b) Gross profit ratio and net profit ratio
(c) Capital employed ratio and assets turnover ratio
(d) Earnings per share and net profit ratio
19. Which of the following pairs is not correctly matched

(a) Dividend per equity share/Earnings per share = Payout ratio
(b) [(Operating profit / Capital employed) x 100] = Return on capital employed
(c) [((Cost of goods sold + operating expenses) / net sales) x 100] = Operating
profit ratio
20. Which of the following pairs is correctly matched

(a) Profitability ratios - Expenses ratios
(b) Activity ratios - Total assets turnover ratio
(c) Both (A) and (B) above
21. Return on investment is also known as

(a) Dupont chart
(b) Activity ratio
(c) P/V ratio
(d) Market test ratio
22. Equity share capital: ₹30 lakh (30,000 shares of ₹100 each); 9% preference
shares: ₹10 lakh; profit before tax: ₹24.46 lakh and tax rate 30%. Earnings per
share will be
(a) ₹54.07
(b) ₹81.53
(c) ₹78.53
(d) ₹57.07
23. In financial analysis, 'time-series analysis' refers to

(a) Making a time series of various ratios to assess a firm's profitability
(b) A graphical comparison of a firm's sources of finance
(c) The comparison of financial ratios over a period of time to assess the
direction of change and the financial performance of a firm
(d) A comparison of time values for various ratios of a firm
24. If average collection period is 15 days and average account receivables is

₹45,000, the total amount of credit sales will be (assume 360 days in a year)
(a) ₹10,80,000
(b) ₹16,20,000
(c) ₹6,75,000
(d) ₹1,87,500
25. Cost of goods sold ₹4,00,000

Administration & office expenses ₹35,000
Selling & distribution expenses ₹45,000
Net credit sales ₹4,75,000
Cash sales ₹1,25,000
Operating profit ratio will be
(a) 30%
(b) 35%
(c) 20%
(d) 25%
26. Current liabilities of a firm are ₹1,50,000. Its current ratio is 3:1 and liquid ratio
is 1:1. The value of stock will be
(a) ₹3,00,000
(b) ₹4,50,000
(c) ₹2,50,000
(d) ₹1,50,000
27. Stock turnover: 6 times

Total sales: ₹3,00,000
Gross profit ratio: 20%
Closing stock: 4,000 more than opening stock
The opening stock is
(a) ₹36,000
(b) ₹38,000
(c) ₹40,000
(d) ₹42,000
28. Which one of the following statements is correct

(a) Lower debt-equity ratio means lower financial risk
(b) Increase in net profit ratio means an increase in sales
(c) A higher receivable turnover is not desirable
(d) Interest coverage ratio depends upon the tax rate
29. Which of the following statement(s) is/are true:

(i) Common size balance sheet is a vertical financial analysis
(ii) Financial analysis performed on behalf of shareholders is called internal
analysis
(iii) Trend percentage may be used for both balance sheet and profit and loss
account
Select the correct answer from the options given below
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i) and (iii)
(d) (ii) only
30. From the following financial data, compute stock turnover ratio and stock
velocity (assume 360 days in a year):
Opening stock: ₹58,000
Purchases: ₹5,02,000
Return outwards: ₹18,000
Sales: ₹6,53,000
Return inwards: ₹13,000
Gross profit: 25% on sales
Choose the correct option
(a) 8 times; 45.62 days
(b) 8 times; 45 days
(c) 7.74 times; 46.51 days
(d) 10.67 times; 33.75 days
31. % Preference share capital: ₹3,00,000

Equity share capital (10: 8,00,000 per share)
Profit after 30% tax: ₹2,80,000
The market price of equity share: ₹40
The earnings per share and the price-earnings ratio will be
(a) 3.50 and 11.43
(b) 5 and 8
(c) 4.70 and 8.51
(d) 3.20 and 12.50
32. Return on investment (ROI) is calculated to measure
(a) Long-term solvency of a business
(b) Earning power of net assets of the business
(c) Short-term liquidity position of business
(d) Goods sold and inventory level of business
33. Interest coverage ratio is obtained by dividing EBIT by

(a) Interest
(b) Tax
(c) Income
(d) Sales
34. If the price-earnings ratio is 0.05 and earnings per share is ₹8, the market price
of a share will be
(a) ₹120
(b) ₹100
(c) ₹160
(d) ₹0.40
35. Sun Ltd. has furnished the following relevant data of financial statements as of
31st March 2016:
Equity share capital (1,00,000 equity shares of ₹10 each): ₹10,00,000
General reserve: ₹2,00,000
15% Debentures: ₹2,80,000
Current liabilities: ₹8,00,000
Fixed assets: ₹30,00,000
Current assets: ₹18,00,000
Annual fixed cost excluding interest
Variable cost ratio: 60%
Total assets turnover ratio: 2.5 times
Tax rate: 30%
Earnings per share (EPS) will be
(a) 31.35
(b) 15.80
(c) 20.00
36. The relevant data from financial statements of Ross Ltd. as on 31st March,
2016 is given below:
Cash: ₹1,50,000
Trade receivables: ₹4,00,000
Investment (short-term): ₹3,30,000
Stock: ₹25,00,000
Prepaid expenses: ₹50,000
Current liabilities: ₹10,00,000
The quick ratio will be-
(a) 0.88:1
(b) 0.93:1
(c) 3.43:1
(d) 3.1:1
37. The net profit margin of Rose Ltd. is 8%, its total assets are ₹6,00,000 and the
return on investment is 18%. Total assets turnover will be
(a) 2.05
(b) 3.15
(c) 2.25
38. Which of the following is not a limitation of financial statements

(a) Financial statements are essentially interim reports and therefore, cannot be
final because the final gain or loss can be computed only at the termination of the
business
(b) The values ascribed to the assets presented in the statements depend upon
the standards of the person dealing with them
(c) Financial statements fail to bring out the significance of non-financial factors
(d) Financial statements serve as a useful guide for the stakeholders of the
company
39. A company has annual sales of 150 lakh entirely on credit. It keeps an average
inventory sufficient to meet sales demand for half a month and gives its
customers one month credit. Its average current liabilities are 10 lakh. The
company must maintain cash and bank balance to have a current ratio of 2. The
amount of cash balance will be
(a) ₹1,25,000
(b) ₹3,00,000
(c) ₹13,75,000
(d) ₹7,50,000
1 2 3 4 5 6 7 8 9 10
D A C B C A C B D B
11 12 13 14 15 16 17 18 19 20
A A C C A D D A D b
21 22 23 24 25 26 27 28 29 30
A A C A C A B A C B
31 32 33 34 35 36 37 38 39
D b A D A A C D A
FM CHAPTER 3
WORKING CAPITAL MANAGEMENT
1. Fluctuating Working Capital is also called as -

(a) Reserve Margin Working Capital
(b) Temporary Working Capital
(c) Permanent Working Capital
(d) Variable Working Capital
2. The capital which is needed to meet the seasonal requirements of the business-
(a) Gross Working Capital
(b) Reserve Margin Working Capital
(c) Net working capital
(d) Fluctuating Working Capital
3. Other things remaining constant, if the debtors increase as compared to last

year it means -
(a) Company has a poor credit policy
(b) Company has a positive working capital
(c) Company has a negative working capital
(d) Company has no working capital
4. Contingencies are -
(a) Added to gross working capital
(b) Deducted from gross working capital
(c) Contingencies are not considered in financial management; it is considered in
accounts only
5. For reducing and controlling working capital requirement which of the following
step is required to be taken
(a) Increase in manufacturing cycle
(b) Increase of credit period allowed by creditors to the extent that does not
affect the production.
(c) Increase in credit period given to customers
6. While calculating Working Capital based on cash cost

(a) Depreciation is ignored.
(b) Non-cash items are not considered
(c) Debtors are calculated on the basis of the cost of goods sold and not on sale
price
7. Negative working capital means that -

(a) The company has no current assets at all
(b) The company currently is unable to meet its short-term liabilities
(c) The company has negative earnings before interest and tax
(d) The company currently is able to meet its short- term liabilities
8. Which of the following analyzes the accounts receivable, inventory, and

accounts payable cycles in terms of a number of days?
(a) Operation cycle
(b) Current asset cycle
(c) Operating cycle
(d) Business cycle
9. Which of the following statement is correct?

(a) A desire to maintain an established dividend policy may affect the volume of
working capital.
(b) Changes in working capital may bring about an adjustment of dividend policy.
(c) Payment of dividend may reduce cash in current assets consider-ably which
in turn may reduce the available working capital for the company.
10. Regular Working Capital:

(a) Supplies the funds necessary to meet the current working expenses le. for
purchasing raw material and supplies, payment of wages, salaries, and other
sundry expenses.
(b) Refers to the firm's investment in current assets.
(c) Is amount over and above the permanent level of working capital
(d) Refers to the difference between current asset and Current liabilities
11. Working capital is also known as
(a) Operation capital
(b) Operating capital
(c) Current assets capital
(d) Capital relating to main projects of the company
12. Positive working capital means that

(a) The company is able to pay off its long-term liabilities.
(b) The company is able to select profitable projects.
(c) The company is unable to meet its short-term liabilities.
(d) The company is able to pay off its short-term liabilities.
13. A higher current assets/fixed assets ratio indicates -

(a) Hedging Approach
(b) Conservative Approach
(c) Matching/hedging Approach
(d) Aggressive Approach
14. The aggressive approach covers those policies-

(a) Where the firm relies heavily on short term bank finance
(b) Seeks to increase dependence on long-term financing.
(c) Both (A) and (B)
(d) Neither (A) nor (B)
15. Gross working capital refers to -
(a) Amount utilized at the time of contingencies.
(b) The firm's investment in current assets.
(c) The capital which is required at the time of the commencement of business.
(d) The working capital which is necessary on a continuous and uninterrupted
basis
16. A conservative policy implies -

(a) Greater liquidity and lower risk
(b) Greater risk and lower liquidity
(c) Negligible risk
(d) No risk at all with low liquidity
17. If a firm has insufficient working capital and tries to increase sales, it can easily
over-stretch the financial resources of the business. This is called -
(a) Over rating
(b) Overtrading
(c) Overcoming
(d) Overtone
18. Which of the following represents the amount utilized at the time of
contingencies?
(a) Reserve Working Capital
(b) Net working capital
(c) Extra working capital
(d) Fixed working capital
19. Permanent Working Capital is also known as

(a) Fixed working capital
(b) Temporary working capital
(c) Long term funds
(d) Gross margin working capital
20. A lower current assets/fixed assets ratio means

(b) Aggressive current assets policy
(c) Riskier current assets policy
(d) Conservative current assets pol-icy
21. Any amount over and above the permanent level of working capital is known
as working capital.
(a) Temporary
(b) Fluctuating
(c) Variable
22. Current assets are those assets-

(a) Which can be sold by the companies.
(b) Which are less important from a production angle.
(c) Which are held by the companies to pay off current liabilities.
(d) Which are converted into cash within a period of one year.
23. Current assets are usually financed through -
(a) equity capital, preference capital, debentures, bonds, and long-term bank
loans.
(b) (A) and (C)
(c) made of the overdraft, cash credit, public deposits, etc.
(d) money market instrument and long-term securities.
24. To carry on a business, a certain minimum level of working capital is necessary

on a continuous and uninterrupted basis. This requirement is referred to as-
(a) Permanent working capital
(b) Long term working capital
(c) Fixed working capital
(d) Both (A) and (C)
25. Which of the following is/are methods of maximum permissible bank finance
as recommended by the Tandon Committee?
(a) 75% of (Current Assets - Current Liabilities)
(b) 50% of (Current Assets - Current Liabilities)
(c) 75% of (Core Current Assets - Current Liabilities)
(d) 50% of (Core Current Assets- Current Liabilities)
26. varies inversely with profitability.

(a) Liquidity
(b) Risk
(c) Gross profit
27. refers to the difference between current asset and current liabilities.
(a) Differential working capital
(b) Net working capital
(c) Operation working capital
28. Permanent working capital -

(a) Varies with seasonal needs.
(b) Includes fixed assets.
(c) is the number of current assets required to meet a firm's long-term
minimum needs.
(d) Includes accounts payable.
29. Which of the following is not correct with the matching strategy?
(a) All assets should be financed with permanent long-term capital.
(b) Temporary current assets should be financed with temporary working
capital.
(c) Long-term assets should be Financed from long-term capital.
(d) Permanent current assets should be financed with permanent working
capital.
30. The paucity of working capital may lead to a situation where-

(a) The firm may not be able to its long term finance
(b) The firm may not be able to meet its liabilities
(c) The firm may not be able to achieve its sale target
(d) The firm may take on some different projects with a low internal rate of
return.
31. What is the difference between the current ratio and the quick ratio?
(a) The current ratio includes inventory and the quick ratio does not
(b) The current ratio does not include inventory and the quick ratio does.
(c) The current ratio includes physical capital and the quick ratio does not.
(d) The current ratio does not include physical capital and the quick ratio does.
32. It is understood that a current ratio of for a manufacturing firm implies that
the firm has an optimum amount of working capital.
(a) 1 (one)
(b) 2 (two)
(c) 3 (three)
(d) 2.5 (two and half)
33. Financial statement of A Ltd. shows the following data: Opening stock
1,75,000, Total purchase 10,75,000 including cash purchase 1,75,000, total sales
15,00,000 out of which 2096 are on cash basis. Closing stock is 1,50,000. Stock
turnover ratio =?
(a) 7.67
(b) 6.77
(c) 7.76
(d) 7.66
34. WIP Conversion Period 18 days Raw Material Consumed = 8,42,000 Stock of
WIP 72,000, Cost of Production?
(a) 14,00,000
(b) 22,67,000
(c) 5,83,000
(d) 14,60,000
35. Maximum permissible bank finance as per the first method of Tandon
Committee norms was 57,41,813 while current liabilities are reported at
32,50,000. Current assets =?
(a) 1,09,05,750
(b) 81/79,313
(c) 1,09,07,550
(d) 1,05,09,750
36. Current assets of Z Ltd. are 3,70,000 which includes stock 1,00,000 and
prepaid expense 70,000. Its current liability are 1,60,000 which includes provision
for tax 60,000. Liquid Ratio =?
(a) 1.25
(b) 1.52
(c) 1.22
(d) 0.95
37. KT Ltd.'s opening stock was 2,50,000 and the closing stock was 3,75,000. Sales
during the year were 13,00,000 and the gross profit ratio was 25% on sales.
Average accounts payable are 80,000. Creditors Turnover Ratio =?
(a) 13.75
(b) 14.33
(c) 13.33
(d) 14.44
38. The raw material conversion period is 36 days. Raw material consumed and
cost of goods sold in the year is ₹ 1,80,000 ₹ 2,16,000 respectively. How much raw
material stock will appear in the working capital statement? Note: 1 Year 360 days
(a) 18,000
(b) 20,000
(c) ₹21,600
(d) 19,800
39. N Ltd. gives the following information: Current Ratio 2.8 Total assets 60,00,00
Fixed assets 32,00,000 Current liabilities =?
(a) 28,00,000
(b) 10,00,000
(c) 18,00,000
(d) 12,00,000
40. S Ltd. gives the following information: Networking capital 2,80,000 Current
ratio 2.4 Liquid ratio 1.6 Current Assets?
(a) 2,00,000
(b) 2,80,000
(c) 4,80,000
(d) 3,60,000
41. Debtors as per working capital statement= Rs.3,00,000, Debtors collection

period = 45 days Gross profit ratio 20% Cash sales Note: 1 Year 365 days Total
sales?
(a) 24,00,000
(b) 19,00,000
(c) 29,00,000
(d) 25,00,000
42. Operating cost is 18,90,000. Current assets are 5,20,000, Current liabilities are
1,00,000, Operating cycle days? (Assume a 360 day year.)
(a) 80 days
(b) 99 days
(c) 19 days
(d) 70 days
43. NS Ltd. gives the following information: Current Ratio 2.4 Quick Ratio=1.0
Stock = 5,60,000 Current Assets?
(a) 9,60,000
(b) 6,90,000
(c) 4,00,000
(d) 4,60,000
44. No, of operating cycle in a year=4.5 No. of days in year = 360 days Working
capital 8,40,000 Operating cost =?
(a) 35,00,000
(b) 37,80,000
(c) 36,40,000
(d) 38,80,000
45. If current assets are 1,09,05,750 and current liabilities are 32,50,000 then
maximum permissible bank finance as per first method of Tandon Committee
norms -
(a) 57,41,813
(b) 49,29,313
(c) 52,29,813
(d) 49,41,813
46. Debtors velocity = 3 months Sales = 25,00,000 Bills receivable & Bills payable
were 60,000 and 36,667 respectively. Sundry debtors?
(a) 6,25,000
(b) 5,25,000
(c) 5,65,000
(d) 6,65,000
47. Creditors velocity = 2 months. Cost of goods sold = 20,00,000 Opening stock =
9,90,000 Closing stock = 10,10,000 Bills receivable & Bills payable were 60,000 and
36,667 respectively. Creditors?
(a) 3,36,667
(b) 3,66,333
(c) 3,30,367
(d) 3,00,000
48. If current assets are ₹ 1,09,05,750 and current liabilities are 32,50,000 then
maximum permissible bank finance as per second method of Tandon Committee
norms is
(a) ₹57,41,813
(b) 49,29,313
(c) 52,29,813
(d) 49,41,813
49. When the current ratio is 2:5, and the amount of current liabilities is 25,000,
what is the amount of current assets?
(a) ₹62,500
(b) ₹12,500
(c) 10,000
(d) None of these
50. If credit sales for the year are 5,40,000 and Debtors at the end of the year are
90,000 the Average Collection Period will be? Note: 1 year 365 days
(a) 30 days
(b) 61 days
(c) 90 days
(d) 120 days
51. K Ltd. had sales last year of 26,50,000, including cash sales of 2,50,000. If its
average collection period was 36 days, its ending accounts receivable balance is
closest to (Assume a 365 days year.)
(a) 2,40,000
(b) 2,36,712
(c) 2,63,127
(d) 2,40,721
52. Outstanding overheads appearing in the balance sheet are 9,75,000, Lag in
payment of overheads is 30 days. Overheads accrue evenly throughout the year.
Total overheads incurred by the company are-
(a) 1,17,00,000
(b) 32,500
(c) 2,92,50,000
(d) 1,92,50,000
53. If a firm has 100 in inventories, a current ratio equal to 1.2, and a quick ratio
equal to 1.1, what is the firm's Net Working Capital?
(a) ₹10
(b) 100
(c) 200
(d) 1,200
1 2 3 4 5 6 7 8 9 10
C B B A B C A B C B
11 12 13 14 15 16 17 18 19 20
B B C D C D B A A b
21 22 23 24 25 26 27 28 29 30
D D C D A A B A A B
31 32 33 34 35 36 37 38 39 40
A B B D A A a A B c
41 42 43 44 45 46 47 48 49 50
C A A B A C D B C B
51 52 53
A A C
FM CHAPTER 4
RECEIVABLE MANAGEMENT
1. Discounts may also be offered for the early payment of:

(a) Trade discounts
(b) Special discounts
(d) Cash discounts
2. Increasing the credit period from 30 to 60 days, in response to a similar action

taken by all of our competitors, would likely result in:
(a) An increase in the average collection period.
(b) A decrease in bad debt losses.
(c) An increase in sales.
(d) Higher profits.
3. The goal of receivables management is to maximize the value of the firm by

achieving a trade-off between
(a) Risk & Profitability
(b) Liquidity & Profitability
(c) Return & Profitability
(d) Return & Liquidity
4. Which of the following functions is required to be performed by the finance

manager in relation to proper management of receivables?
(a) To obtain the optimum (not maximum) value of sales.
(b) To adopt a relaxed policy for administrative expense.
(c) To increase the opportunity cost of funds blocked in the receivables.
(d) To make more purchases at bigger discounts.
5. The payment terms 2/10, Net 30 tell us that:

(a) A 2% discount will be awarded if the payment is made within 10 days of the
invoice date; otherwise, the full amount is payable within the next 10 days of the
invoice date.
(b) A 10% discount will be awarded if the payment is made within 20 days of the
invoice date; otherwise, the full amount is payable within 30 days of the invoice
date.
(c) 2% discount will be awarded if the payment is made within 30 days of the
invoice date; otherwise, the full amount is payable within the next 10 days of the
invoice date.
(d) 2% discount will be awarded if the payment is made within 10 days of the
invoice date; otherwise, the full amount is payable within 30 days of the invoice
date.
6. Risk of non-payment may be due to

(a) Insolvency
(b) Liquidity problems
(c) Intention of cheating
7. The cash discount is given to customers for:

(a) Early payments
(b) Good business relations
(c) Bulk purchase
(d) Frequent purchases
8. The accounts receivable that cannot be collected because of their bankruptcy

or another reason are termed as:
(a) Collectible accounts
(b) Bad customers
(c) Doubtful accounts
(d) Uncollectible accounts
9. Which of the following sentences describes a correct strategy for the proper
administration of receivables?
(a) Most firms dissuade credit sales to first-time customers.
(b) Promoting cash sales
(c) Firms must have special staff earmarked for recovery efforts.
(d) (A) and (C)
10. Accounts receivable are reported in the balance sheet:

(a) At face value
(b) At a gross value
(c) At a net realizable value
(d) At net credit sales value
11. is an arrangement to have debts collected by a third-party entity for a fee.

(a) Factoring
(b) Aging
(c) Forming
(d) Crediting
12. A decrease in the firm's receivables turnover ratio means that-

(a) it is collecting credit sales more quickly than before
(b) it is collecting credit sales more slowly than before
(c) sales have gone down
(d) inventories have gone up
13. An exercise of credit rating involves:

(a) Doing it internally by a team within the firm
(b) Doing it through external special agencies.
(c) (A) or (B)
14. An important means to get an insight into the collection pattern of debtors is
the preparation of their:
(a) List of proposed discounts
(b) Discount schedule
(c) Schedule of personal information of debtors
(d) Aging Schedule
15. Which of the following may be a reason why you would choose a policy with a
higher Average Collection Period (ACP)?
(a) A lower percentage of collections in late dates.
(b) Higher percentage of collections in early dates.
(c) A lower percentage of collections in early dates.
(d) Higher percentage of collections in middle dates
16. Selling accounts receivable to a third party at a reduced price is part of the
collection process known as:
(a) Settling
(b) Writing off
(c) Suing
(d) Factoring
17. In which type of factoring does the bank/factor take all the risk and bears all
the loss in case of debts becoming bad debts?
(a) Non-Recourse Factoring
(b) Invoice Discounting
(c) Maturity Factoring
(d) Recourse Factoring
18. Which one of the following would help to reduce the number of accounts
receivable delinquencies?
(a) Ease the credit approval process
(b) Know your customer situations
(c) Refuse to extend payments
(d) Stop sending reminder letters
19. In a factoring arrangement, the debts as and when fall due are collected by
the:
(a) Debtor
(b) Seller
(c) Factor
(d) Agent
20. When net sales for the year are 2,50,000 and debtors are 50,000, the average
collection period is:
(a) 60 days
(b) 45 days
(c) 42 days
(d) 73 days
21. If credit sales for the year are 5,40,000 and debtors at the end of the year are
90,000, the Average Collection Period will be:
(a) 30 days
(b) 61 days
(c) 90 days
(d) 120 days
22. Romaji Ltd. has sales of 1,18,00,000 and its debtor turnover ratio is 4.2. The
cost of goods sold is 82,60,000. Debtors =?
(a) 19,66,725
(b) 19,67,333
(c) ₹19,66,263
(d) 19,66,667
23. X Ltd. cash sales and credit sales are 5,67,500 & 87,50,000 respectively. Cost of
goods sold is 61,25,000. Debtors are 8,20,833 and bills receivable are 2,00,000.
Debtors turnover ratio =?
(a) 6.00
(b) 7.46
(c) 10.66
(d) 5.38
24. Total sales of LMN Ltd. are 31,248 out of which 25% are cash sales. The closing
balance of debtors is 9,468. Debtors velocity =?
(a) 4.2 months
(b) 157 days
(c) 148 days
(d) 4.43 months
25. Debtors velocity = 3 months Sales = 25,00,000 Bills receivable & Bills payable
were 60,000 and 36,667 respectively. Sundry debtors =?
(a) ₹6,25,000
(b) ₹5,25,000
(c) ₹6,65,000
(d) ₹5,65,000
26. K Ltd. had sales last year of 26,50,000, including cash sales of 2,50,000. If its
average collection period was 36 days, its ending accounts receivable balance is
closest to (Assume a 365-day year.)
(a) ₹2,63,127
(b) ₹2,40,000
(c) ₹2,36,712
(d) ₹2,40,721
27. Apollo Ltd. sells its products allowing a credit period of 15 days only. The
average variable cost is 60% of sales value, and current sales amount to 100 lakhs.
(a) Incremental profit 3.50 lakh

(b) Incremental loss 3.50 lakh
(c) Incremental profit 4.20 lakh
(d) Incremental loss 4.20 lakh
28. F Ltd. is examining the relaxation of its credit policy. It sells at present 20,000
units at a price of 100 per unit, the variable cost per unit is 88, and the average
cost per unit at the current sales volume is 92. All the sales are on credit, the
average collection period being 36 days. A relaxed credit policy is expected to
increase sales by 10% and the average age of receivables to 60 days. Assuming a
15% return, should F Ltd. relax its credit policy? Note: 1 Year = 360 days
(a) Yes, F Ltd. can change its policy as it leads to a 15.79% increase in profit
(b) No, F Ltd. need not change its policy as there is no incremental return.
(c) Yes, F Ltd. can change its policy as it leads to the incremental return of 2,400.
(d) None of the above options is correct.
29. Average cost increases from 88 to 92. Incremental profit & incremental
debtors are 48,000 & ₹3,04,000 respectively. The cost of capital is 15%. What is
the rate of incremental return on the change of credit policy?
(a) 15.79%
(b) No incremental return
(c) 0.79%
(d) 1.58%
1 2 3 4 5 6 7 8 9 10
D A A A D D A D D C
11 12 13 14 15 16 17 18 19 20
A B C D B D A B C D
21 22 23 24 25 26 27 28 29
B D A C D A A A A
FM CHAPTER 5
INVENTORY MANAGEMENT
1. For a product-X, the following information is available: Maximum consumption
per week: 300 units Normal consumption per week: 200 units Re-order period: 2
to 4 weeks The re-order level will be
(a) 400 units
(b) 200 units
(c) 600 units
(d) 800 units
2. A company requires 1,500 units of an item per month. The cost of each unit is
Rs. 30. The cost of placing an order is Rs. 200 and the material carrying charges
work out to be 20% of the average material. The economic order quantity (EOQ) is
(a) 1,095 units
(b) 316 units
(c) 490 units
(d) 33 units
3. If the minimum stock level and average stock level of raw material 'A' are 4,000
& 9,000 units respectively, what is its reorder quantity
(a) 8,000 units
(b) 11,000 units
(c) 10,000 units
(d) 9,000 units
4. The method of regular physical verification of material throughout the year is
known as
(a) Periodic stock taking
(b) Bin card system
(c) Continuous stock taking
(d) Stock ledger system
5. In an inflationary situation, which system of inventory valuation shows higher
profits
(a) LIFO
(b) FIFO
(c) HIFO
(d) Weighted average
6. A company manufactures 5,000 units of a product per month. The cost of
placing an order is 100. The purchase price of the raw material is 10 per kg. The
average consumption of raw material is 275 kg per week. The carrying cost of
inventory is 20% per annum. The economic order quantity is
(a) 1,196 kg
(b) 707 kg
(c) 2,449 kg
(d) 2,400 kg
7. Under which of the following inventory control techniques, two piles or bundles
are maintained for each item of stock
(a) Min-max plan
(b) Order cycling system
(c) Two-bin system
(d) ABC analysis
8. A store ledger is a record of receipts, issues, and closing balances of material by
entering
(a) Quantity only
(b) Quantity and value
(c) Value only
(d) Quality only
9. Bill of material acts as an authorization to the store's department in procuring
the material and all the materials listed on the bill is sent to the
(a) Sales department
(b) The Production department
(c) Accounts department
(d) Stores department
10. Which of the following method is based on the assumption that the costliest
materials are issued first and inventory is valued at the lowest possible price
(a) FIFO method
(b) UFO method
(c) Highest-in-first-out method
(d) Weighted average method
11. Which type of material is classified as 'A' type in ABC analysis

(a) High price, more quantity
(b) High price, less quantity
(c) Low price, more quantity
(d) Low price, less quantity
12. Which of the following is recorded by bin card
(a) Quantity.
(b) Quantity and value
(c) Value
(d) Quality
13. In case of rising prices, the FIFO method will provide

(a) Lowest value of closing stock and profit
(b) Highest value of closing stock and profit
(c) Highest value of the closing stock but the lowest value of profit
(d) Lowest value of the closing stock but highest value of profit
14. FIFO method of valuing material issues is suitable in times of
(a) Rising prices
(b) Falling prices
(c) Price fluctuation
(d) Boom period
15. About 50 units are required every day for a machine. A fixed cost of 50 is
incurred for placing an order. The inventory carrying cost per unit amounts to 0.02
per day. The lead period is 32 days. Economic Order Quantity is
(a) 200 Units
(b) 300 Units
(c) 500 Units
(d) 100 Units
16. EOQ is 200 units, ordering cost Rs. 20 per order, and total purchases 4,000
units. The carrying cost per unit will be
(a) 2
(b) ₹6
(c) ₹4
17. Which one of the following statements is true in ABC classification of materials
(a) Items of material have moderate cost and high quantity
(b) 'A' items of material have high cost and low quantity
(c) 'A' items of material have high cost and high quantity
(d) 'B' items of material have moderate cost and low quantity
18. In a situation of rising prices, profit and tax liability would be lower under FIFO
method than under LIFO method of material issue pricing
(a) FIFO; LIFO
(b) LIFO, FIFO
(c) LIFO; Average
(d) FIFO; Average
19. The technique of economic order quantity is losing significance since the
development of
(a) Perpetual inventory
(b) Just-in-time
(c) First-in-first-out
(d) ABC analysis
20. The following information is given for Component "A": Normal usage 50 units
per week, maximum usage 75 units per week, reorder period 4 to 6 weeks. The
minimum level of stock will be
(a) 250 Units
(b) 150 Units
(c) 450 Units
(d) 200 Units
21. Quarterly consumption of materials: 2,000 kg; Cost of placing an order: Rs. 50;
Cost per unit: Rs. 40; Storage and other carrying costs: 8% of average inventory.
The economic order quantity and number of orders to be placed per quarter of
the year will be
(a) 400 kg and 5 orders
(b) 500 kg and 4 orders
(c) 500 kg and 12 orders
(d) 400 kg and 6 orders
22. Which one of the following is the correct sequence of the purchase procedure
of inventory
(a) Indenting for material, issuing tenders, receiving quotations, and placing
order
(b) Issuing tenders and receiving quotations, Indenting for material, and placing
order
(c) Placing order, issuing tenders and receiving quotations, and indenting for
material
(d) Indenting for material and placing order
23. Account does not record the balance of stores ledger control account.
(a) Manufacturing
(b) Trading
(c) Profit and loss
(d) Work-in-progress
24. A firm requires 12,800 units of a certain component which it buys @ Rs. 60
each. The cost of placing an order and following it up is Rs. 150 and annual storage
charges work out to 10% of the cost of items. The number of units to be ordered
to get maximum benefit to the firm are
(a) 1,000
(b) 900
(c) 800
(d) 320
25. A written comprehensive order, with specification, material code, and quantity
sent to inform the purchasing department, of a need for material is called
(a) Purchase order
(b) Bill of material
(c) Purchase requisition
(d) Bin card
26. Amaze Ltd. had an opening inventory of 5,000 units costing 5 per unit on 1st
April. Following receipts and issues took place in April:
- 5th April: Purchased 800 units @ 8 per unit
- 12th April: Purchased 200 units @ 8 per unit
- 15th April: Issued 3,000 units
- 25th April: Purchased 1,000 units @ 9 per unit
Cost of inventory as of 30th April under weighted average basis will be:
(a) ₹25,500
(b) ₹27,000
(c) ₹20,000
(d) ₹23,500
27. A company produces a single product for which the following data is available:
Average production per week: 200 units Usage per unit: 10 kg Re-order level:
8,000 kg Delivery time required: 2 weeks
The minimum level of stock required will be
(a) 3,000 kg
(b) 5,000 kg
(c) 4,000 kg
(d) 2,500 kg
28. Which of the following is considered as normal loss of material
(a) Pilferage
(b) Loss due to flood
(c) Loss due to accident
29. The maximum and minimum lead time is 4 weeks and 3 weeks, respectively. If
the maximum and minimum weekly consumption is 25 units and 20 units
respectively, the re-ordering level will be
(a) 100 Units
(b) 110 Units
(c) 120 Units
(d) 140 Units
30. A, B, C analysis is
(a) a system of profit planning
(b) a technique of financial analysis
(c) a technique of inventory control
(d) a technique of profit determination
31. Two avoidable reasons for the difference between bin card and physical
quantity of material may be and wrong posting in the bin card.
(a) Pilferage
(b) Normal
(c) Abnormal
(d) Reasonable
32. When prices fluctuate widely, which of the following method will even out the
effect of fluctuations?
(a) Weighted average
(b) FIFO
(c) LIFO
(d) Simple average
33. In which of the following methods, material issues are priced at a
predetermined rate?
(a) Replacement price method
(b) Specific price method
(c) Inflated price method
(d) Standard price method
34. Which of the following does not normally appear on a material requisition
form?
(a) Job number
(b) Unit cost
(c) Supplier's name
(d) Quantity requisitioned
35. Which of the following difference in material stock adjusted by considering as
part of the material cost?
(a) Apparent differences
(b) Differences due to abnormal causes
(c) Differences due to avoidable causes
(d) Differences due to unavoidable causes
36. This type of loss is connected with both input and output:
(a) Waste
(b) Scrap
(c) Defectives
37. Decision regarding the centralized purchase of material has to be taken on the
basis of:
(a) Geographical separation of plant
(b) Homogeneity of products
(c) Type of material to be purchased
38. Rate per kg of material P, Q, R & S are respectively 12, 15, ₹ 18 & 21. Input-
output ratios of the material are 140%, 130%, 120% & 110% respectively. Most
economical material for production
(a) P
(b) Q
(c) R
(d) S
39. If the annual carrying cost of Material Z is ₹ 4 per unit and its total carrying
cost is ₹ 12,000 p.a., the economic order quantity of material is:
(a) 3,000 units
(b) 4,000 units
(c) 5,000 units
(d) 6,000 units
40. Which of the following is not correct for the calculation of the re-ordering level
of inventory?
(a) Maximum consumption x Maximum re-order period
(b) (Maximum consumption x Lead time) + Safety stock
(c) Minimum level + Consumption during time lag period
(d) (Maximum consumption x Lead time) - Safety stock
41.____ is a value-based system of inventory control, in which materials are

analyzed according to their value so that costly and more valuable materials are
given greater attention.
(a) MAX-MIN plan
(b) Review of slow and non-moving items
(c) ABC Analysis
(d) Order cycling system
42. Opening stock 29,000 Closing stock 31,000 Cost of goods sold ₹ 2,40,000. The
stock turnover ratio will be:
(a) 12 times
(b) 10 times
(c) 8 times
(d) 9 times
43. If EOQ is 200 units, ordering cost is ₹ 20 per order and total purchases are
4,000 units. The carrying cost per unit will be:
(a) ₹ 2
(b) ₹ 6
(c) ₹ 4
44. In the technique of inventory control, quantities in the hand of each item or
class of stock are reviewed periodically say 30, 45, or 60 days.
(a) ABC Analysis
(b) Two-bin System
(c) Order Cycling System
(d) Perpetual Inventory System
45. If the Minimum Stock Level is 2,500 units, Normal Consumption is 150 units,
Maximum Re-order Period is 10 days and Normal Re-order Period is 8 days, then
Reorder Level will be:
(a) 1,500 units
(b) 4,000 units
(c) 1,200 units
(d) 3,700 units
46. method of pricing of material issues is not popular as it always undervalues
the stock and leads to the creation of the secret reserve.
(a) Weighted Average Price
(b) Base Stock
(c) Highest in First Out
(d) Standard Price
47. The monthly requirement of a component is 4,000 units. The cost per order is
₹ 1,000 and the carrying cost per unit per annum is 24%. The Economic Ordering
Quantity is:
(a) 2,000 units
(b) 4,000 units
(c) 577.35 units
(d) 1,825.74 units
48. During the time of inflation, which method of pricing of material issues leads
to higher material costs for a job?
(a) First in first out method
(b) Last in first out method
(c) Highest in first out method
(d) Standard pricing method
49. The following information is given: 10,000 units of material are consumed per
year; per-unit cost is ₹ 20; cost of processing an order is ₹ 50; Annual interest rate
is 5%; Annual carrying cost of material per unit is 15% (other than interest). What
would be the Economic Order Quantity (EOQ)?
(a) 200 units
(b) 500 units
(c) 400 units
(d) 100 units
50. Which of the following is the objective of inventory management?
(a) To ensure timely delivery of inventory for production
(b) To avoid under or overproduction
(c) To maintain investment in inventories at the lowest level
51. V Ltd. is the manufacturer of picture tubes for TV. The following are details of
their operation. Minimum usage 50 tubes per week, Maximum usage 200 tubes
per week; Normal usage 100 tubes per week; lead time to supply 4-6 weeks; and
Re-order quantity 400 tubes. What would be the maximum and minimum level of
stock?
(a) 1,400 units and 700 units
(b) 1,200 units and 700 units
(c) 1,300 units and 600 units
(d) 1,100 units and 600 units
52. Smoke, dust, gases, and loss of weight due to seasoning are examples of:
(a) Scrap
(b) Spoilage
(c) Defectives
(d) Waste
1 2 3 4 5 6 7 8 9 10
B A C C B A C B B C
11 12 13 14 15 16 17 18 19 20
B A B B C C B B D B
21 22 23 24 25 26 27 28 29 30
B A B C B A C D A C
31 32 33 34 35 36 37 38 39 40
A A D C D A D A D B
41 42 43 44 45 46 47 48 49 50
C C A C D C A B B D
51 52
A D
FM CHAPTER 6
MANAGEMENT OF CASH AND MARKETABLE SECURITIES
1. Collection float is the

(a) Total time between the mailing of the cheque by the customer and the
availability of cash to the receiving firm.
(b) Time consumed in clearing the cheque through the banking system.
(c) Time the cheque is in the mail.
(d) Time during which the cheque received by the firm remains uncollected.
2. Which of the following will not affect the preparation of the cash budget?
(a) Loan is taken by the firm
(b) Proceeds from asset disposal
(c) Reduction in provision for doubtful debts
(d) Cash sales
3. Of the four costs shown below, which would not be included in the cash budget
of an insurance firm?
(a) Depreciation of a fixed asset
(b) Commission paid to agents
(c) Office salaries
(d) Capital cost of a new computer
4. NSZ Ltd. cash budget forewarns of a short-term surplus. Which of the following
would be the appropriate action to be taken in such a situation?
(a) Increase debtors and stock to boost sales
(b) Purchase new fixed assets
(c) Repay long term loans
5. Which of the following is least likely to be considered short-term marketable
security?
(a) An original issue 30 years corporate bond with 1 year remaining until final
maturity.
(b) An original issue 30 years government bond with 1 year remaining until final
maturity.
(c) 90 days Treasury bill.
(d) Short-term corporate debt instruments with 9 months original maturity.
6. Which of the following would NOT lead to an increase in net cash flow?
(a) Larger sales volume
(b) Reduced materials costs
(c) Lower depreciation charge
(d) Higher selling price
7. The optimal balance of marketable securities held to take care of probable
deficiencies in the firm's cash account is referred to as the segment in the firm's
portfolio of short-term marketable securities.
(a) Ready cash
(b) Controllable cash
(c) Free cash
(d) Cash and cash equivalent
8. Advantages of maintaining cash budgets would not include one of the
following:
(a) Surplus cash can be put to more profitable uses if expected to occur
(b) Debtors can be paid more quickly
(c) Time is available to investigate the possible future sources of finance
(d) Overdrafts can be negotiated in advance of when they are needed
9. Which of the following statements most accurately describes the modern
approach to cash management?
(a) Cash Management involves the efficient disbursement of cash.
(b) Cash management involves the efficient collection and disbursement of cash.
(c) Cash management involves the efficient processing, collection, and
depositing of cash.
10. Which of the following would be found in a cash budget?
(a) Capital expenditure
(b) Provision for doubtful debts
(c) Depreciation
(d) Accrued expenditure
11. Which of the following will NOT appear in a Cash Budget?
(a) Machinery bought on hire purchase
(b) Depreciation of machinery
(c) Sales revenue
(d) Wages
12. Which of the following is not true about a cash budget?
(a) Cash budget sets out all cash receipts and payments that a business expects
to make over a period of time.
(b) Cash budgets are usually prepared on a month- to-month basis.
(c) Cash budgets show the expected bank balance at the end of the month.
(d) Cash budgets include personal cash receipts and expenses
13. Deposit float is the

14. Availability float is the
15. Cash management is a broad term used for collecting and managing cash. The
speculative motive of holding cash refers to-
(a) Holding the cash to utilize it in internal projects.
(b) Holding the cash for any future loss the company is expecting.
(c) Holding the cash to avail of any future investment opportunity.
(d) Holding the cash to utilize it for an international project.
16. Non-cash transactions
(a) Form part of cash budget
(b) Do not form part of cash budget
(c) May or may not form part of cash budget
(d) I cannot say whether they are part of the cash budget
17. The statement of cash flows tells us
(a) The financial position of the business at a point in time.
(b) The forecast cash movements over a period of time.
(c) How much cash has been received and paid during an accounting period.
(d) How much profit the business has made during an accounting period.
18. Net profit + Non-cash expenditure
(a) Cash profit
(b) Cash flow
(c) Out of cash
(d) Cash gross profit
19. Cash flow is-
(a) Linked only to the balance sheet.
(b) Linked only to the income statement.
(c) Not linked to the balance sheet or income statement.
(d) Linked to the balance sheet and income statement.
20. The term cash includes
(a) Cash and Bank Balances
(b) All the Current Assets
(c) All the Current Liabilities
21. Z Ltd. has an estimated cash payment of 8,00,000 for a one-month period and
the payments are expected to steady over the period. The fixed cost per
transaction is 250 and the interest rate on marketable securities is 12% p.a.
Optimal cash balance ?and No. of transaction ?
(a) 20,000; 4.8
(b) 2,00,000; 498
(c) 20,00,000; 480
(d) 2,00,00,000,4,800
22. The budgeted sales for the next four quarters are 1,92,000, 2,88,000, 2,88,000
& 3,36,000, respectively. It is estimated that sales will be paid as follows:75% of
the total will be paid in the quarter that the sales were made. Of the balance, 50%
will be paid in the quarter after the sale was made. The remaining 50% will be
paid in the quarter after this. The amount of cash received in quarter 3 will be-
(a) ₹ 2,76,000
(b) ₹1,44,000
(c) ₹3,24,000
(d) ₹2,40,000
23. If the beginning balance of cash is ₹ 5,000 and the desired closing cash
balance is 10,000, with the only other cash-related items being sales/revenue
15,00,000, direct materials purchases 10,45,000, and cost of direct labor 4,68,000,
what would be the surplus or deficit of cash at the end of the period?
(a) Deficit of 8,000
(b) Surplus of 18,000
(c) Deficit of 18,000
24. The annual cash requirement of A Ltd. is 10,00,000. The company has
marketable securities in lot size of ₹ 1,00,000. The cost of conversion of
marketable securities per lot is 1,000. The company can earn a 5% annual yield on
its securities. Calculate the total cost.
(a) 10,500
(b) 10,450
(c) 12,500
(d) 14,500
25. Z Ltd. has a separate account for cash disbursement. Estimated cash payments
of 6,56,250 for a one- month period and the payments are expected to steady
over the period. The fixed cost per transaction is 20 and the interest rate on
marketable securities yields 10% p.a.
(a) 57,283
(b) 56,125
(c) 57,125
(d) 56,283
26. The annual cash requirement of A Ltd. is 10,00,000. The cost of conversion of
marketable securities per lot is ₹ 1,000. The company can eam a 5% annual yield
on its securities. Optimal cash balance ?and No. of transactions =?
(a) 1,00,000; 5
(b) 4,00,000; 10
(c) 2,00,000; 5
(d) 2,00,000; 10
27. The following information is available:
Wages for January: 20,000 Wages for February: 22,000 Delay in payment of
wages: 1/2 month The amount of wages paid during the month of February is
(a) 11,000
(b) 22,000
(c) 20,000
(d) 21,000
28. Estimated wages for January is 4,000 and for February 4,400. If the delay in
payment of wages is 1/2 month, the number of wages to be considered in the
cash budget for the month of February will be
(a) ₹4,000
(b) ₹4,400
(c) ₹4,600
(d) 4,200
29. While preparing the cash budget, which of the following items would not be
included
(a) Interest paid to debenture holders
(b) Salaries and wages
(c) Bonus shares issued
(d) Income-tax paid
30. Consider the following statements:
(1) Depreciation reduces tax liability, hence it is a source of funds.
(2) Decrease in current liabilities during the year results in an increase in
working capital.
(3) The term cash equivalents include short-term marketable investments.
(4) Conversion of debentures into equity shares appears in the fund's flow
statement.
(5) Only non-cash expenses are added to net profit to find out funds from
operation.
Select the incorrect statements from the options given below:
(a) 1), (3), (4), and (5)
(b) (1), (2), (4), and (5)
(c) (1), (4), and (5)
(d) (2), (3), and (4)
31. Which of the following involves a movement of cash?
(a) A bonus issue
(b) A right issue
(c) Depreciation of fixed assets
(d) Provision for taxes
32. Working capital will not change if there is:
(a) Increase in current assets
(b) Payment to the creditors
(c) Decrease in current liabilities
(d) Decrease in current assets
33. Which one of the following is false?
(a) If cash outflows exceed cash inflows on an ongoing basis, the business will
eventually run out of cash.
(b) Rapidly expanding companies can sometimes face a cash shortage.
(c) Cash is the lifeblood of a business and without it, the business will die..
(d) A profitable company will never run out of cash.
34. The following information extracted from the records of P Ltd. Sales for
October, November and December, 2018 are 90,000,11,10,000 and 80,000
respectively. 40% of its sales are expected to be for cash. Of its credit sales, 70%
are expected to pay in the month after-sales and take 2% discount on it. Balance is
expected to pay in second-month after-sales and 3% of it is expected to bad debts.
What are the sales receipts to be shown in the cash budget for the month of
December?
(a) 92,990
(b) ₹1,23,174
(c) 95,609
35. The following information is given: Depreciation provided during the year:
Furniture 15,000, Building 14,000. The statement of P&L for the year:Opening
balance 38,500 Add Profit for the year 40,300, Less: Goodwill wrote off 15,000,
Closing balance 3,800. What will be the amount of cash from operations?
(a) 69,300
(b) 54,300
(c) 78,800
(d) 25,300
1 2 3 4 5 6 7 8 9 10
a c A A A C A B C C
11 12 13 14 15 16 17 18 19 20
b d D B C B C A D A
21 22 23 24 25 26 27 28 29 30
B A C C B C D D C C
31 32 33 34 35
B B D D A
FM CHAPTER 7
RISK AND LEVERAGE ANALYSIS
1. A firm's degree of total leverage (DTL) is equal to its degree of operating

leverage (DOL) multiplied by its degree of financial leverage (DFL).
(a) Plus
(b) Minus
(c) Divided by
(d) Multiplied by
2. If operating leverage is 4, this means that

(a) 4% change in sales will cause a 1% change in EBIT.
(b) 1% change in sales will cause a 4% change in EBIT.
(c) 1% change in sales will cause a 4% change in EPS.
(d) 4% change in sales will cause a 1% change in EPS.
3. Which of the following are not commonly used measures of leverage in
financial analysis?
(a) Operating Leverage
(b) Financial Leverage
(c) Combined Leverage
(d) Matrix Leverage
4. is the ratio of net operating income before fixed charges to net operating
income after fixed charges.
(a) Financial Leverage
(b) Operating Leverage
(c) Operation Leverage
(d) Fiscal Leverage
5. Degree of is the ratio of the percentage increase in earnings per share (EPS) to
the percentage increase in earnings before interest and taxes (EBIT).
(a) Operating Leverage
(b) Combined Leverage
(c) Working Capital Leverage
(d) Financial Leverage
6. There is no operating leverage if there is no

(a) Profit
(b) Sales
(c) Fixed cost
(d) EPS
7. EBIT is usually the same thing as:

(a) Funds provided by operations
(b) Earnings before taxes
(c) Net income
(d) Operating profit
8. Which of the following, is the correct formula to calculate Operating Leverage?
9. In the context of operating leverage break-even analysis, if the selling price per
unit rises and all other variables remain constant, the operating break even point
in units will:
(a) Fall
(b) Rise
(c) Stay the same
(d) Still be indeterminate until interest and preferred dividends paid are known
10. Which of the following is the correct formula to calculate Operating Leverage?
11. The term Leverage in general refers to a
(a) Relationship between fixed cost and profit.
(b) Relationship between sales and fixed cost.
(c) Relationship between two inter-related variables.
(d) Relationship between two unrelated variables
12. In financial analysis, Leverage represents the influence of one over some other
related
(a) Non-financial variable; financial variable
(b) Financial variable; financial variable
(c) Financial variable; non-financial variable
(d) Variable relating to revenue; financial variable
13. The degree of total leverage can be applied in measuring the change in
(a) EBIT to a percentage change in sales
(b) EPS to a percentage change in EBIT
(c) CEPS to a percentage change in sales
(d) Sales to a percentage change in EBIT
14. If the fixed costs are high, the operating leverage will also be
(a) Low
(b) High
(c) Zero
(d) Negative
15. The measure of business risk is
(a) Operating leverage
(b) Financial leverage
(c) Combined leverage
(d) Working capital leverage
16. The presence of fixed costs in the total cost structure of a firm results in
(a) Financial Leverage
(b) Operating Leverage
(c) Super Leverage
(d) Progressive leverage
17. High operating leverage indicates

(a) A highly favorable situation as it consists of low fixed costs.
(b) A highly risky situation as it consists of large interest costs.
(c) A highly favorable situation as it consists of higher EPS.
(d) A highly risky situation as it consists of large fixed costs.
18. Which of the following is the correct formula to calculate Financial Leverage?
(a) Financial Leverage = EBT / EBIT
(b) Financial Leverage = EBIT / EPS
(c) Financial Leverage = EBIT / EBIT
(d) Financial Leverage = EBT / EBT
19. A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(a) If sales rise by 4.5%, then EBIT will rise by 1%.
(b) If EBIT rises by 4.5%, then EPS will rise by 1%.
(c) If EBIT rises by 1%, then EPS will rise by 4.5%,
(d) If sales rise by 1%, then EBIT will rise by 4.5%
20. High operating leverage shows

(a) Higher burden of fixed cost and high EBIT.
(b) Low burden of fixed cost and high EBIT.
(c) Higher burden of fixed cost and low EBIT.
(d) Low burden of fixed cost and low EBIT.
21. Operating leverage is directly related to business risk.

(a) Proportional
(b) Not proportional
(c) Unrelated
(d) Not related
22. A firm has a DFL of 5.5. What does this tell us about the firm?
(a) If sales rise by 5.5%, then EBIT will rise by 1%.
(b) If EBIT rises by 5.5%, then EPS will rise by 1%.
(c) If EBIT rises by 1%, then EPS will rise by 5.5%.
(d) If sales rise by 1%, then EBIT will rise by 5.5%.
23. More operating leverage leads to
(a) Less financial risk
(b) More financial risk
(c) More business risk
(d) Less business risk
24. Which of the following is the correct formula to calculate Financial Leverage?
25. Higher operating leverage is related to the use of additional

(a) Fixed costs
(b) Variable costs
(c) Debt financing
(d) Common equity financing
26. Financial leverage indicates

(a) The tendency of profit before tax (PBT) to vary disproportionately with sales.
(b) The tendency of sales to vary disproportionately with the fixed cost.
(c) The tendency of profit after tax (PAT) to vary disproportionately with the
fixed cost.
(d) The tendency of profit before tax (PBT) to vary disproportionately with
operating profit (EBIT).
27. Lower financial leverage is related to the use of additional

(a) Fixed costs
(b) Variable costs
(c) Debt financing
(d) Common equity financing
28. The operating leverage indicates the impact of changes in sales on

(a) Operating income
(b) Operating cost
(c) Operating profit after tax
(d) Operating sales
29. If financial leverage is 2.5, this means that

(a) 2.5% change in EBIT will cause a 1% change in EBIT
(b) 1% change in sales will cause a 2.5% change in EBIT
(c) 2.5% change in sales will cause a 1% change in EBIT
(d) 1% change in EBIT will cause a 2.5% change in EBIT
30. Where a company has a large number of fixed interest charges, the financial
leverage will be
(a) High
(b) Low
(c) Negative
(d) Unreliable
31. The maximum amount of debt (and other fixed-charge financings) that a firm
can adequately service is referred to as the
(a) Debt capacity
(b) Debt-service burden
(c) Adequacy capacity
(d) Fixed-charge burden
32. High financial leverage is not good as it indicates the large content of
(a) Fixed cost
(b) Fixed interest charges
(c) Variable cost charges
(d) Contribution
33. Cash required during a specific period to meet interest expenses and principal
payments is referred to as the
(a) Debt capacity
(b) Debt service burden
(c) Adequacy capacity
(d) Fixed charge burden
34. Earnings to equity shareholders (EPS) will fluctuate violently if

(a) Financial leverage is very high
(b) Operating leverage is very high
(c) Working capital leverage is very high
(d) Operating leverage is very low
35. If the Return on Investment (ROI) exceeds the rate of interest on debt, it is
financial leverage..
(a) Unfavourable
(b) Adverse
(c) A favorable
(d) Negative
36. High operating leverage combined with high financial leverage will constitute
(a) Favourable situation
(b) Positive situation
(c) Less risky situation
(d) Risky situation
37. Which of the following can be treated as "Ideal Situation"?

(a) High operating cost and low financial leverage
(b) Low operating leverage and high financial leverage
(c) Operating & financial leverage both should be low.
(d) Operating & financial leverage both should be high.
38. Which of the following statement is correct?

(a) If a business firm has a lot of variable costs as compared to fixed costs, then
the firm is said to have high operating leverage.
(b) Combined Leverage % change in EPS multiplied by % change in Sales
(c) If a business firm has a lot of fixed costs as compared to variable costs, then
the firm is said to have high operating leverage.
(d) If contribution is less than fixed cost, operating leverage will be favorable
and vice versa.
39. Operating leverage may be defined as:

(a) The degree to which debt is used in financing the firm
(b) The difference between price and variable costs
(c) The extent to which capital assets and fixed costs are utilized
(d) The difference between fixed costs and the contribution margin
40. Degree of is the ratio of percentage change in earnings per share to the
percentage change in sales.
(a) Financial leverage
(b) Operating leverage
(c) Combined leverage
(d) Working leverage
41. If operating leverage is 2.21429 and financial leverage is 1.0699 then

combined leverage will be
(a) 2.2927
(b) 2.0029
(c) 0.4993
(d) Data given is not sufficient
42. If combined leverage is 2 and financial leverage is 1.25 then operating leverage
will be
(a) 0.625
(b) 2.50
(c) 1.60
43. If combined leverage is 2.2926 and operating leverage is 2.1429 then financial
leverage will be
(a) 1.0699
(b) 0.9347
(c) 4.9128
44. A company has sales of 1 lakh. The variable costs are 40% of the sales while
the fixed operating costs amount to 30,000. The amount of interest on long-term
debts is 10,000. You are required to calculate the combined leverage.
(a) 4
(b) 2
(c) 3
(d) 5
45. Operating leverage is 4. This means a 10% change in sales will cause
(a) 4% change in variable cost
(b) 40% change in EPS
(c) 4% change in EBIT
(d) 40% change in EBIT
46. Financial leverage is 2.5. This means a 10% change in EBIT will cause
(a) 2.5% change in EBIT
(b) 2.5% change in EPS
(c) 25% change in sales
(d) 25% change in EBT and EPS
47. The combined leverage is 3.125. This means a 10% change in Sales will cause
(a) 31.25% change in PAT
(b) 31.25% change in EPS
(c) 31.25% change in capital employed
(d) Both (A) and (B)
48. If there is a 10% increase in sales, EBIT increases by 35% and if sales increase
by 6%, taxable income will increase by 24%. Operating leverage must be
(a) 1.15
(b) 3.50
(c) 4.00
(d) 2.67
49. If EBIT increases by 696, taxable income increases by 6.9%. If sales increase by
6%, taxable income will increase by 24%. Financial leverage must be
(a) 1.19
(b) 1.13
(c) 1.12
(d) 1.15
1 2 3 4 5 6 7 8 9 10
D B D B D C D A A C
11 12 13 14 15 16 17 18 19 20
C B C B A B D D D c
21 22 23 24 25 26 27 28 29 30
A C C A A D D A D A
31 32 33 34 35 36 37 38 39 40
A B B A A D C C C C
41 42 43 44 45 46 47 48 49
A C A C D D D B D
FM CHAPTER 8
RISK AND LEVERAGE ANALYSIS
1. Which of the following methods of cost of equity is similar to the dividend price
approach?
(a) Discounted cash flow (DCF) method
(b) Capital asset pricing model (CAPM)
(c) Price earning method
(d) After-tax equity method
2. How will you calculate expected dividend i.e., dividend at the end of year one?
(a) D₁ = D₀ (1 + g)
(b) D₁ = D₀ (1 - t)
(c) D₁ = D₀ × (1 - g)
(d) D₁ = D₀ × (1 + g)
3. is the rate of return associated with the best investment opportunity for the
firm and its shareholders that will be forgone if the projects presently under
consideration by the firm were accepted.
(a) Explicit Cost
(b) Future Cost
(c) Implicit Cost
(d) Specific Cost
4. Cost of capital is equal to the required return rate on equity in case if investors
are only.
(a) Valuation Manager
(b) Common Stockholders
(c) Asset Seller
(d) Equity Dealer
5. Which of the following model/method makes use of Beta (B) in the calculation
of the cost of equity?
(a) Risk-Adjusted Discount Model
(b) Capital Assets Pricing Method
(c) MM Model
(d) Price Earning Method
6. Marginal cost
(a) is the weighted average cost of new finance raised by the company.
(b) is the additional cost of capital when the company goes for further raising of
finance.
(c) is the cost of raising an additional rupee of capital.
7. The cost of equity share or debt is called the specific cost of capital. When
specific costs are combined, then we arrive at
(a) Maximum rate of return
(b) Internal rate of return
(c) Overall cost of capital
(d) Accounting rate of return
8. If we deduct 'risk-free return' from 'market return' and multiply it with 'beta
factor' and again add risk-free return', the resultant figure will be-
(a) Nil
(b) Risk premium
(c) Cost of equity
(d) WACC of the firm
9. For each component of capital, a required rate of return is considered as:

(a) Component cost
(b) Evaluating cost
(c) Asset cost
(d) Asset depreciation value
10. is the rate that the firm pays to procure financing.

(a) Average Cost of Capital
(b) Combine Cost
(c) Economic Cost
(d) Explicit Cost
11. In which of the following method of equity capital is computed by dividing the
dividend by market price per share or net proceeds per share?
(a) Price Earning Method
(b) Adjusted Price Method
(c) Adjusted Dividend Method
(d) Dividend Yield Method
12. Which of the following is the correct formula to calculate the cost of equity
under the dividend yield method?
(a) K = D / P₀
(b) K = (D₁ / P₀) + g
(c) K = D₁ / NP
(d) K = EPS / P₀
13. In WACC, a rise in interest rates leads to -

(a) Increase in cost of debt
(b) Increase in the capital structure
(c) Decrease in cost of debt
(d) Decrease in the capital structure
14. is the cost that has already been incurred for financing a particular project.
(a) Future Cost
(b) Historical Cost
(c) Implicit Cost
(d) Opportunity Cost
15. In weighted average cost of capital, capital components are funds that are
usually offered by:
(a) Stock market
(b) Investors
(c) Capitalists
(d) Exchange index
16. The overall cost of capital is called as-

(a) Composite cost of capital
(b) Combined cost of capital
17. Premium which is considered as the difference of expected return on common

stock and the current yield on Treasury bonds is called-
(a) Past risk premium
(b) Expected premium
(c) Current risk premium
(d) Beta premium
18. Which of the following figures is irrelevant while calculating the cost of
redeemable preference shares?
(a) Flotation cost
(b) Discount
(c) EPS
(d) Net proceeds
19. An interest rate that is paid by a firm as soon as it issues debt is classified as
pre-tax-
(a) Term structure
(b) Market premium
(c) Risk premium
(d) Cost of debt
20. Which of the following is a controllable factor affecting the cost of capital of
the firm?
(a) Dividend policy
(b) Level of interest rates
(c) Tax rates
21. Which of the following is an uncontrollable factor affecting the cost of capital
of the firm?
(a) Investment Policy
(b) Capital Structure Policy
(c) Debt service charges
22. The type of cost used to raise common equity by reinvesting internal earnings
is classified as
(a) Cost of common equity
(b) Cost of mortgage
(c) Cost of stocks
(d) Cost of reserve assets
23. Which of the following factors affects the determination of the cost of capital
of the firm?
(a) General economic conditions
(b) Market conditions
(c) Operating and financing decisions
24. The cost of equity which is raised by reinvesting earnings internally must be
higher than the-
(a) Cost of the initial offering
(b) Cost of new common equity
(c) Cost of preferred equity
(d) Cost of flotation
25. During the planning period, the marginal cost to raise new debt is classified as
(a) Debt cost
(b) Borrowing cost
(c) Relevant cost
(d) Embedded cost
26. The after-tax cost of debentures not redeemable during the lifetime of the
company is-
(a) (Interest - Net proceeds) × (1 - t)
(b) Interest × (1 - t) + Net proceeds
(c) Interest × (1 + t) + Net proceeds
(d) (Interest - Net proceeds) × (1 + t)
27. The risk-free rate subtracted from the expected market return is considered
as:
(a) Country risk
(b) Diversifiable risk
(c) Equity risk premium
(d) Market risk premium
28. A firm's overall cost of capital:

(a) varies inversely with its cost of debt.
(b) is unaffected by changes in the tax rate.
(c) is another term for the firm's internal rate of return.
(d) is the required return on the total assets of a firm.
29. Key sources of value (earning an excess return) for a company can be
attributed primarily to
(a) competitive advantage and access to capital
(b) quality management and industry attractiveness
(c) access to capital and quality management
(d) industry attractiveness and competitive advantage
30. Which of the following is the correct formula to calculate the cost of
redeemable debentures?
31. The weighted average cost of capital (Ko) results from a weighted average of
the firm's debt and equity capital costs. At a debt ratio of zero, the firm is 100%
equity financed. As debt is substituted for equity and as the debt ratio increases,
the -
(a) Ko declines because the after-tax debt cost is less than the equity cost (Kd <
Ke).
(b) Ko increases because the after-tax debt cost is less than the equity cost (Kd <
Ke).
(c) Ko does not show any change and tends to remain the same.
32. Overall WACC is composed of a weighted average of

(a) the cost of common equity and the cost of debt
(b) the cost of common equity and the cost of preferred stock
(c) the cost of preferred stock and the cost of debt
(d) the cost of common equity, the cost of preferred stock, and the cost of debt
33. While calculating the WACC, the cost of each component of the capital is
weighted -
(a) In the ratio of 1:2:3:4
(b) by the relative proportion of that type of funds in the capital structure.
(c) by the relative proportion of that type of funds to total assets in the company
(d) Both (A) and (C)
34. Which of the following formulas will you use while calculating the value of the
firm?
(a) NOPAT + Ko
(b) NOPAT / Ko
(c) NOPAT + Ko * (1 - t)
35. For which of the following costs is it generally necessary to apply a tax
adjustment to a yield measure?
(a) Cost of debt
(b) Cost of preferred stock
(c) Cost of common equity
(d) Cost of retained earnings
36. The cost of preference share capital is calculated -

(a) By dividing the fixed dividend per share by the price per preference share and
then adding risk premium.
(b) By dividing the fixed dividend per share by the price per preference share
and then adding the growth rate.
(c) By dividing the fixed dividend per share by the price per preference share.
(d) By dividing the fixed dividend per share by the book value per preference
share.
37. Which of the following is not a recognized approach for determining the cost
of equity?
(a) Dividend discount model approach
(b) Before-tax cost of preferred stock plus risk premium approach
(c) Capital-asset pricing model approach
(d) Before-tax cost of debt plus risk premium approach
38. While calculating WACC on a market value basis which of the following is not
considered -
(a) After-tax cost of debt
(b) Reserve and surplus
(c) Weight of each fund in the capital structure
(d) Cost of term loan
39. CAPM describes the relationship between risk and returns for securities.
(a) Linear relationship
(b) Hypothetical relationship
(c) No relationship
(d) Diagonal relationship.
40. Chetna Fashions is expected to pay an annual dividend of 0.80 a share next
year. The market price of the stock is 22.40, and the growth rate is 5%. What is the
firm's cost of equity?
(a) 7.58 per cent
(b) 7.91 per cent
(c) 8.24 per cent
(d) 8.57 per cent
41. Ramola Ltd. reports its NOPAT as 25,00,000. Its capital employed and
economic value added are 60,00,000 & 19,00,000 respectively. What is the overall
cost of capital of Ramola Ltd?
(a) 10.9%
(b) 11%
(c) 10%
(d) 9.8%
42. Raelian Ltd. has 1096 Preference Share Capital of 4,50,000. Face value is 10.
The issue price of preference share is 100 per share; flotation cost 2 per share.
What is the cost of preference shares to Raman Ltd.?
(a) 10.20%
(b) 9.10%
(c) 12.50%
(d) 11.22%
43. Debt as a percentage of the total capital of Kinara Ltd. is 20%. Its cost of equity
is 16% and the pre-tax cost of debt is 12%. The tax rate is 50%. What is the overall
cost of capital of Kinara Ltd.?
(a) 16%
(b) 14%
(c) 15%
(d) 16.6%
44. Debt as a percentage of the total capital of Tiger Ltd. is 60%. Its cost of equity
is 24% and the pre-tax cost of debt is 20%. The tax rate is 50%. What is the overall
cost of capital of Tiger Ltd.?
(a) 14.6%
(b) 13.6%
(c) 17.6%
(d) 15.6%
45. The preferred stock of ISO Ltd. pays an annual dividend of 6.50 a share and
sells for 48 a share. What is ISO's cost of preferred stock?
(a) 9.19%
(b) 7.38%
(c) 13.54%
(d) 9.46%
46. Nikon Enterprises just paid an annual dividend of 1.56 per share. This dividend
is expected to increase by 3 percent annually. Currently, the firm has a beta of
1.13 and a stock price of 28 a share. The risk-free rate is 3 percent, and the market
rate of return is 10.5 percent. What is your best estimate of Nikon's cost of
equity?
(a) 8.74 per cent
(b) 11.48 per cent
(c) 9.72 per cent
(d) 10.11 percent
47. Jackson Ltd. has 12,000 bonds outstanding at a quoted price of 98% of face
value. The bonds mature in 11 years and carry a 9% annual coupon, What is your
best estimate of Jackson's after-tax cost of debt if the applicable tax rate is 35%?
(a) 6.03%
(b) 5.77%
(c) 8.33%
(d) 7.04%
48. Mona Industries has a capital structure of 55% common stock, 10% preferred
stock, and 45% debt. The firm has a 60% dividend payout ratio, a beta of 0.89, and
a tax rate of 38%. Given this, which one of the following statements is correct?
(a) The after-tax cost of debt will be greater than the current yield-to-maturity
on the firm's bonds.
(b) The firm's cost of preferred is most likely less than the firm's actual cost of
debt.
(c) The firm's cost of equity is unaffected by a change in the firm's tax rate.
(d) The cost of equity can only be estimated using the SML approach.
49. Baba Ltd. has a cost of equity of 12%, a pre-tax cost of debt of 7%, and a tax
rate of 35%. What is the firm's weighted average cost of capital if the debt-equity
ratio is 0.60?
(a) 9.21%
(b) 10.01%
(c) 10.13%
(d) 11.11%
50. 3KL Ltd. has 10 equity shares amounting to 15 Crore. The current market price
per equity share is 60. The prevailing default risk-free interest rate on 10-year GOI
Treasury bonds is 5.5%. The average market risk premium is 8%. The beta of the
company is 1.1875.
(a) 15%
(b) 11%
(c) 12%
(d) 13%
51. PWA Ltd. has 1,000, 9.5% debentures amounting to 1,500 Million. The
debentures of PWA Ltd. are redeemable after 3 years and are quoting at 981.05
per debenture. The beta of the company is 1.1785. The applicable income tax rate
for the company is 3596.
(a) 1.59%
(b) 6.87%
(c) 7.86%
(d) 8.67%
52. G Ltd. has 10,000 shares of common stock outstanding at a price per share of
46 and a rate of return of 14%. The Company has 5,000 shares of 7% preferred
stock outstanding at a price of 58 a share. The outstanding debt has a total face
value of 2,00,000 and a market price equal to 98% of face value. Yield-to-maturity
(YTM) on the debt is 8.0396. What is the firm's weighted average cost of capital?
(a) 10.62%
(b) 12.65%
(c) 8.62%
(d) 9.99%
53. Black & White Ltd. has a cost of equity of 11% and a pre-tax cost of debt of
8.5%. The firm's target weighted average cost of capital is 9.96% and its tax rate is
35%. What is the firm's target debt-equity ratio?
(a) 0.6203
(b) 0.5756
(c) 0.5572
(d) 0.5113
54. The Company can issue a 14% new debenture. The company's debenture is
currently selling at 98. The face value of the debenture is 100. The company's
marginal tax rate is 50%. What is the cost of debenture (i) based on book value; (a)
based on market value?
(a) 14% & 14.28%
(b) 6% & 6.12%
(c) 7% & 7.14%
(d) 8% & 8.16%
1 2 3 4 5 6 7 8 9 10
c A C B B D C C A D
11 12 13 14 15 16 17 18 19 20
d A A B B C C C D A
21 22 23 24 25 26 27 28 29 30
D A D B C B C D D D
31 32 33 34 35 36 37 38 39 40
A D B A A C B B A D
41 42 43 44 45 46 47 48 49 50
C A B D C D A C A A
51 52 53 54
B A B C
FM CHAPTER 9
CAPITAL STRUCTURE DECISIONS
1. Which of the following statements is incorrect?

(1) High debt funds in capital structure increase EPS.
(2) High debt funds increase the operating or business risk.
Select the correct answer from below.
(a) Both Statement 1 and Statement 2 are correct.
(b) Statement 1 is correct while Statement 2 is incorrect.
(c) Statement 2 is correct while Statement 1 is incorrect.
(d) Both Statement 1 and Statement 2 are incorrect.
2. Financial structure is a concept while the capital structure is a concept.

(a) Inappropriate; appropriate
(b) Appropriate; inappropriate
(c) Narrow; border
(d) Border; narrow
3. The decisions regarding the forms of financing, their requirements, and their
relative proportions in total capitalization are known as -
(a) Equity decisions
(b) Equilibrium decisions
(c) Outright decisions
(d) Capital structure decisions
4. While designing a capital structure a finance manager should choose a pattern

of capital which -
(a) Minimizes cost of capital
(b) Maximizes the owner's return.
(c) Maximizes the cost of capital and minimizes the owner's return.
5. Which of the following changes in capital structure would you recommend for
growth at a faster rate?
(a) Incorporate more retained earnings out of profit and loss accounts.
(b) Incorporate debt into its capital structure to a greater extent.
(c) Merge with other companies.
(d) Pay more dividends to equity shareholders.
6. The manner in which an organization's assets are financed is referred to as its -

(a) Capital structure
(b) Financial structure
(c) Asset structure
(d) Owners structure
7. The optimal capital structure consists of -

(a) Appropriate mix of fixed assets and current assets.
(b) Appropriate mix of long-term debts and fixed assets.
(c) Appropriate mix of sales and profit.
(d) Appropriate mix of debt and equity.
8. Which of the following is not included in the capital structure?

(a) Long-term debt
(b) Preferred stock,
(c) Current assets
(d) Retained earnings
9. Which of the following shows the significance of capital structure?

(a) Capital structure reflects the overall strategy of the firm.
(b) One can get a reasonably accurate broad idea about the risk profile of the
firm from its capital structure.
(c) Capital structure acts as a tax management tool.
10. The financial structure involves the creation of

(1) Long-term assets
(2) Short-term assets
Select the correct answer from below.
(a) (2) only
(b) Neither (1) nor (2)
(c) (1) only
(d) Both (1) and (2)
11. refers to the mix of a firm's capitalization and includes long-term sources of
funds.
(a) Leverage
(b) Capital structure
(c) Debt mix
(d) Owner's equity
12. The term "capital structure" refers to:

(a) Current assets & current liabilities
(b) Long-term debt, preferred stock, and common stock equity
(c) Total assets minus liabilities
(d) Shareholders' equity
13. Which of the following capital structures consist of zero-debt components in

the structure mix?
(a) Pyramid Shaped Capital Structure
(b) Inverted Pyramid Shaped Capital Structure
(c) Horizontal Capital Structure
(d) Vertical Capital Structure
14. Which of the following statements is false?

(a) The use of excessive debt threatens the solvency of the company.
(b) A firm having an operating loss would find it worthwhile to incorporate debt
into the capital structure to a greater measure.
(c) The capital structure should be flexible.
15. One can get a reasonably accurate broad idea about the risk profile of the firm
from its -
(a) Dividend policy
(b) Capital structure
(c) Debt service ratio
(d) Earning yield
16. A critical assumption of the net operating income (NOI) approach to valuation
is that:
(a) Debt and equity levels remain unchanged.
(b) Dividends increase at a constant rate.
(c) Ko remains constant regardless of changes in leverage.
(d) Interest expense and taxes are included in the calculation.
17. If the debt component in the capital structure is predominant -

(a) The fixed interest cost of the firm will be minimum thereby decreasing its
risk.
(b) Earnings per share (EPS) will be very low.
(c) Dividend expectations of equity shareholders are also and P/E Ratio may
decrease.
(d) The fixed interest cost of the firm increases thereby increasing its risk.
18. Capital structure relates to capital deployment for the creation of assets.
(a) Long term; long term
(b) Long term; short term
(c) Short term; long term
(d) Short term; short term
19. One can design a capital structure with proper proportions of equity,
preference, and debt mix. The choice of the combination of these sources is called
-
(a) Structural mix.
(b) Policy mix
(c) Capital structure mix
(d) Finance mix
20. In a horizontal capital structure -

(a) Expansion of the firm takes place by the issuance of debt securities.
(b) Expansion of the firm takes place by the issuance of debt securities and
preferred stocks.
(c) Expansion of the firm takes place in a lateral manner, i.e. through equity or
retained earnings only.
(d) Expansion of the firm takes place by the issuance of short-term and
marketable securities.
21. According to the Cost Principle, an ideal pattern or capital structure is one that
-
(a) Minimizes the cost of the capital structure
(b) Maximizes earnings per share (EPS).
22. Which term would most likely be associated with the phrase "actions speak
louder than words"?
(a) Incentive signaling
(b) Shareholder wealth maximization
(c) Financial signaling
(d) Optimal capital structure
23. External sources of finance do not include:

(a) Overdrafts
(b) Leasing
(c) Retained earnings
(d) Debentures
24. Internal sources of finance do not include:

(a) Retained earnings
(b) Ordinary shares
(c) Better management of working capital
(d) Trade credit
25. A firm's optimal capital structure:

(a) Is the debt-equity ratio that exists at the point where the firm's weighted
after-tax cost of debt is minimized.
(b) Is generally a mix of 40% debt and 60% equity
(c) Is the debt-equity ratio that results in the lowest possible weighted average
cost of capital.
(d) Is found by locating the mix of debt and equity which causes the earnings
per share to equal exactly 1.
26. M & M Proposition I, without taxes, states that:

(a) Firms should borrow to the point where the tax benefit from debt is equal to
the cost of the increased probability of financial distress.
(b) Financial risk is determined by the debt-equity ratio.
(c) The cost of equity rises when financial leverage rises.
(d) It is completely irrelevant how a firm arranges its finances.
27. Market values are often used in computing the weighted average cost of
capital because
(a) This is the simplest way to do the calculation.
(b) This is consistent with the goal of maximizing shareholder value.
(c) This is required in India by the Securities and Exchange Board of India.
(d) This is a very common mistake
28. Two firms that are virtually identical except for their capital structure are
selling in the market at different values. According to M & M:
(a) One will be at greater risk of bankruptcy.
(b) The firm with greater financial leverage will have the higher value.
(c) This proves that markets cannot be efficient.
(d) This will not continue because arbitrage will eventually cause the firms to
sell at the same value
29. An EBIT-EPS indifference analysis chart is used for -

(a) Evaluating the effects of business risk on EPS.
(b) Examining EPS results for alternative financing plans at varying EBIT levels.
(c) Determining the impact of a change in sales on EBIT.
(d) Showing the changes in EPS quality over time.
30. EBIT of NS Ltd. is ₹4,50,000. Debt in the capital structure is ₹9,00,000. Cost of
debt (Kd) = 12%. Cost of equity (Ke) = 15%. Ignore taxation.
The total market value of NS Ltd. = ?
(a) ₹22,80,000
(b) ₹31,80,000
(c) ₹21,80,000
(d) ₹30,80,000
31. EBIT of R Ltd. is ₹5,00,000. The company has 10%, ₹20,00,000 debentures. The
equity capitalization rate i.e. Ke is 16%. Calculate the market value of the firm as
per the Net Income (NI) Approach. Ignore taxation.
(a) ₹20,00,000
(b) ₹38,75,000
(c) ₹38,57,000
(d) ₹20,75,000
32. Take the data of the above question and calculate the overall cost of capital.
(a) 12.90%
(b) 11.90%
(c) 10.90%
(d) 9.90%
33. EBIT of NS Ltd. is ₹4,50,000. Debt in the capital structure is ₹6,00,000. Cost of
debt (Kd) = 10%. Cost of equity (Ke) = 12.5%. Ignore taxation.
The total market value of NS Ltd. = ?
(a) ₹37,20,000
(b) ₹34,72,222
(c) ₹32,70,000
(d) ₹34,70,000
1 2 3 4 5 6 7 8 9 10
D D D D B B D C D D
11 12 13 14 15 16 17 18 19 20
B B C B B C D A C C
21 22 23 24 25 26 27 28 29 30
C C C B C D B D B B
31 32 33 34 35 36 37 38 39 40
B A B
FM CHAPTER 10
SOURCES OF FINANCE
1. The process of pooling funds from multiple investors to finance a project or

business is known as:
(a) Crowd funding
(b) Leverage buyout
(c) Asset securitization
(d) Angel investing
2. Which of the following is a common source of funds for startups and early-stage
companies?
(a) Initial public offering (IPO)
(b) Private equity
(c) Trade credit
(d) Venture capital
3. Which source of funds is considered the most expensive due to interest

payments?
(a) Equity financing
(b) Debt financing
(d) Angel investors
4. A company can raise funds by issuing shares in the stock market. This process is
known as:
(a) IPO (Initial Public Offering)
(b) M&A (Mergers and Acquisitions)
(c) ROI (Return on Investment)
(d) DPO (Direct Public Offering)
5. Which source of funds is associated with the highest level of ownership dilution
for existing shareholders?
(a) Bank loans
(b) Private equity
(c) Venture capital
(d) Retained earnings
6. When a company borrows money and promises to repay the principal along
with interest, it is obtaining funds through:
(b) Debt financing
(c) Venture capital
(d) Internal accruals
7. What type of financing involves selling a portion of future revenue to investors

in exchange for Immediate funds?
(a) Mezzanine financing
(b) Factoring
(c) Microloans
(d) Invoice discounting
8. Which of the following is not a source of short-term funds for a business?

(a) Trade credit
(b) Commercial paper
(c) Bank overdraft
(d) Venture capital
9. Which of the following is a non-current liability that represents the obligation to

repay borrowed funds?
(a) Accounts payable
(b) Accrued expenses
(c) Long-term debt
(d) Prepaid expenses
10. Companies can raise funds by selling their accounts receivable to a third party
at a discount. This process is called:
(b) Debt factoring
(c) Treasury stock
(d) Seed funding
11. Which of the following is an internal source of funds for a company?

(a) Bank loan
(b) Issuing bonds
(d) Venture capital
2. External sources of funds are typically obtained from:

(a) Equity shareholders
(b) Long-term loans
(c) Both a and b
(d) Only banks
13. When a company issues new shares to its existing shareholders in proportion
to their current holdings, it is known as:
(a) Rights issue
(b) Follow-on offering
(c) Convertible bond
(d) Initial public offering (IPO)
14. What type of financing involves obtaining funds from family and friends to
support a business venture?
(a) Seed funding
(b) Mezzanine financing
(c) Bridge loan
(d) Trade credit
15. Which of the following is an example of an external source of long-term
funds?
(a) Trade credit
(b) Bank overdraft
(c) Commercial paper
(d) Venture capital
16. A company can raise funds by selling a portion of its ownership to an investor.
This process is known as:
(a) Debt financing
(b) Equity financing
(c) Mezzanine financing
(d) Factoring
17. What source of funds involves the issuance of a certificate representing a sum
of money lent to a government or company?
(a) Treasury bill
(b) Corporate bond
(c) Equity share
(d) Invoice discounting
18. Which source of funds does not require repayment since it represents the
owner's investment in the business?
(a) Long-term debt
(b) Equity financing
(c) Trade credit
(d) Factoring
19. Which of the following is a government-backed source of funds designed to

support small businesses?
(a) Angel investing
(b) Microloans
(c) Mezzanine financing
(d) Bridge loan
20. What type of financing involves a financial institution purchasing a company's

account receivables at a discount?
(a) Factoring
(b) Trade credit
(c) Micro loans
(d) Crowd funding
21. Which source of funds provides temporary financial assistance to businesses

to meet short-term cash flow needs?
(a) Microloans
(b) Trade credit
(c) Bridge loan
(d) Equity financing
22. When a company raises funds through a private placement to a select group of
investors, it is called:
(a) Initial public offering (IPO)
(b) Follow-on offering
(c) Private equity
(d) Seed funding
23. Which of the following is a source of funds that allows a company to borrow
against its outstanding invoices?
(a) Venture capital
(b) Mezzanine financing
(c) Invoice discounting
(d) Trade credit
24. A company can raise funds by pledging its assets as collateral for a loan. This
process is known as:
(a) Factoring
(b) Leverage buyout
(c) Secured lending
(d) Treasury stock
25. Which source of funds involves selling a stake in the company to an investor
with the right to convert it into common shares?
(a) Convertible bond
(b) Commercial paper
(c) Bridge loan
(d) Treasury bill
1 2 3 4 5 6 7 8 9 10
A D B A B B A D C B
11 12 13 14 15 16 17 18 19 20
C C A A A D B B B A
21 22 23 24 25
C C C C A
FM CHAPTER 11
TIME VALUE OF MONEY
1. ₹2,000 is invested at an annual rate of interest of 10%. What is the amount

after 2 years if the compounding is done monthly?
(a) ₹2,420.00
(b) ₹2,431.00
(c) ₹2,440.58
(d) ₹2,442.70
2. Determine the compound interest on ₹1,000 at 6% compounded semiannually

for 6 years. Given that
(a) ₹1,425.76
(b) ₹425.76
(c) ₹1,452.76
(d) ₹542.67
3. Find out the present value of projects cash flow from the following data if the
cost of capital of the firm is 12%:
(a) ₹51,112
(b) ₹51,221
(c) ₹51,211
(d) ₹52,112
4. Find out the present value of projects cash flow from the following data if the
cost of capital of the firm is 12%:
(a) ₹1200
(b) 2001
(c) ₹2,430
(d) ₹2,100
5. If you invest ₹10,000 in a bank at simple interest of 7% p.a., what will be the
amount at the end of 3 years? Note: Use simple interest rate method
(a) ₹12,100
(b) ₹15,400
(c) ₹17,500
(d) ₹20,600
6. ₹2,000 is deposited in a bank for 2 years at a simple interest of 6%. How much
will be the balance at the end of 2 years? Note: Use a simple interest rate method.
(a) ₹2,000
(b) ₹2,240
(c) ₹2,420
(d) ₹2,640
7. Find the rate of interest if the amount owed after 6 months is ₹1,050, the
borrowed amount being ₹1,000. Note: Use a simple interest rate method.
(a) 5%
(b) 10%
(c) 4%
(d) 20%
8. Determine the compound interest for an investment of ₹7,500 at 6%

compounded half-yearly. Given that (1+i)^n for i = 0.03 and n = 12 is 1.42576.
(a) ₹3,193.20
(b) ₹3,913.20
(c) ₹3,319.20
(d) ₹3,139.20

after 2 years if the compounding is done annually?
(a) ₹2,420.00
(b) ₹2,431.00
(c) ₹2,440.58
(d) ₹2,442.70
after 2 years if the compounding is done semi-annually?
(a) ₹2,420.00
(b) ₹2,431.00
(c) ₹2,440.58
(d) ₹2,442.70
11. What is the present value factor for 10% at 6 years?

(a) 0.564
(b) 0.683
(c) 0.621
(d) 0.513
12. What is the annuity factor for 13% at 5 years?

(a) 2.974
(b) 3.998
(c) 3.517
(d) 3.402
13. Ram has taken a 20-month car loan of ₹6,00,000. The rate of interest is 12%
p.a. What will be the amount of monthly loan amortization?
(a) ₹33,294.1
(b) ₹33,249.1
(c) ₹33,924.1
(d) ₹32,349.1
14. What is the present value of ₹11 to be received after 2 years compounded
annually at 10%?
(a) 0.83
(b) 0.91
(c) 0.75
(d) 0.68
15. Find out the present value of ₹12,000 received after 10 years, if the discount
rate is 8%.
(a) ₹926
(b) ₹1,000
(c) ₹858
(d) ₹905
16. Find the amount of an annuity if a payment of ₹500 is made annually for 7
years at an interest rate of 14% compounded annually.
(a) ₹5,356.25
(b) ₹15,563.52
(c) ₹5,365.25
(d) ₹5,635.52
17. A person is required to pay 4 equal annual payments of ₹5,000 each in his
deposit account that pays 8% interest per year. Find out the future value of the
annuity at the end of 4 years.
(a) ₹22,535
(b) ₹22,553
(c) ₹22,355
(d) ₹23,255
18. Assume that the interest rate is greater than zero. Which of the following cash-
inflow streams should you prefer?
(a) I only
(b) II only
(c) I and III
(d) II and III
19. If 18% is the best risk-free return available, then you would be indifferent to
receiving ₹100 now or ₹118 in one year's time.
(a) Expressed another way the present value of ₹100 receivable one year hence
is ₹118
(b) Expressed another way the present value of ₹118 receivable one year hence
is ₹100
(c) Both are correct
(d) Data given is insufficient
20. ₹200 is invested at the end of each month in an account paying interest of 6%
per year compounded monthly. What is the amount of this annuity after the 10th
payment? Given that (1.005)^10 - 1.0511
(a) ₹2,404
(b) ₹2,044
(c) ₹2,440
(d) ₹2,004
21. Y bought a TV costing ₹13,000 by making a down payment of ₹3,000 and

agreeing to make an equal annual payment for 4 years. How much would be each
payment if the interest on the unpaid amount is 14% compounded annually?
(a) ₹3,431.71
(b) ₹3,413.17
(c) ₹3,134.17
(d) ₹3,341.71
22. Determine the present value of ₹700 each paid at the end of each of the next
6 years. Assume an 8% interest.
(a) ₹3,263.10
(b) ₹3,632.01
(c) ₹3,326.01
(d) ₹3,236.10
23. Ramu wants to retire and receive ₹3,000 a month. He wants to pass this
monthly payment to future generations after his death. He can earn an interest of
8% compounded annually. How much will he need to set aside to achieve his
perpetuity goal?
(a) ₹4,94,775
(b) ₹4,49,775
(c) ₹4,49,577
(d) ₹4,47,975
24. Assuming that the discount rate is 7% per annum, how much would you pay to
receive ₹50, growing at 5% annually, forever?
(a) ₹2,500
(b) ₹5,200
(c) ₹2,200
(d) ₹5,500
25. ABCL Company has issued debentures of ₹50 lakhs to be repaid after 7 years.
How much should the company invest in a sinking fund earning 12% in order to be
able to repay debentures?
(a) ₹4.96 lakhs
(b) ₹4.92 lakhs
(c) ₹4.98 lakhs
(d) ₹5.00 lakhs
26. The time value of money (TVM) concept is based on the principle that:
(a) Money should be invested for long periods only
(b) Money has the same value at all points in time
(c) Money has a greater value in the future than in the present
(d) Money loses its value over time
27. Which of the following factors is NOT considered in time value of money
calculations?
(a) Inflation
(b) Interest rates
(c) Risk premium
(d) Currency exchange rates
28. When comparing two investment options with different cash flows over time,
which financial concept helps determine the better choice?
(a) Present value (PV)
(b) Future value (FV)
(c) Discount rate
(d) Compound interest
29. The process of discounting future cash flows to their present value is known
as:
(a) Capital budgeting
(b) Discounted cash flow (DCF) analysis
(c) Financial leverage
(d) Depreciation
30. The concept that a specific sum of money today has the same value as a
different sum of money in the future is known as:
(a) Present value equivalence
(b) Future value parity
(c) Compound interest equivalence
(d) Opportunity cost principle
31. Annuities refer to a series of:

(a) Unequal cash flows occurring at regular intervals
(b) Equal cash flows occurring at irregular intervals
(c) Unequal cash flows occurring at irregular intervals
(d) Equal cash flows occurring at regular intervals
32. Which of the following is an example of an annuity?

(a) A lottery winning of ₹1 million paid in a single lump sum
(b) Monthly rent payments for an apartment
(c) A one-time inheritance of ₹50,000
(d) A random gift of ₹500 from a friend
33. As the discount rate increases, the present value of future cash flows:
(a) Increases
(b) Decreases
(c) Remains constant
(d) Becomes zero
1 2 3 4 5 6 7 8 9 10
C B A D A B B A A B
11 12 13 14 15 16 17 18 19 20
A C B A A C A A B B
21 22 23 24 25 26 27 28 29 30
A D B A A C D A B A
31 32 33
B B B
FM CHAPTER 12
CAPITAL BUDGETING
1. When choosing among mutually exclusive projects, the project with -

(a) Longest payback is preferred
(b) Higher NPV get selected
(c) Quickest payback is preferred
(d) Lower cost of capital will be selected
2. With limited finance and a number of project proposals at hand, select that
package of projects which has:
(a) The maximum net present value
(b) IRR is greater than cost of capital
(c) Profitability index is greater them unity
(d) Any of the above
3. The decision to accept or reject a capital budgeting project depends on -

(a) An analysis of the cash flows generated by the project
(b) Cost of capital that is invested in business/project.
4. Internal Rate of Return (IRR) criterion for project acceptance, under
theoretically infinite funds, is:
Accept all projects which have -
(a) IRR equal to the cost of capital (b) IRR greater than the cost of capital
(c) IRR less than the cost of capital
5. is a project whose cash flows are not affected by the accept/reject decision for
other projects.
(a) Mutually exclusive project
(b) Independent project
(c) Low-cost project
(d) Risk-free project
6. Where capital availability is unlimited and the projects are riot mutually
exclusive, for the same cost of capital, following criterion is used?
(a) Net present value
(b) Internal Rate of Return
(c) Profitability Index
7. is the discount rate that should be used in capital budgeting.

(a) Cost of capital (Ko)
(b) Risk-free rate (Rf)
(c) Risk premium (Rm)
(d) Beta rate (B)
8. Which of the following represents the amount of time that it takes for a capital
budgeting project to recover its initial cost?
(a) Maturity period
(b) Payback period
(c) Redemption period
(d) Investment period
9. Incorporating flotation costs into the analysis of a project will:

(a) Have no effect on the present value of the project.
(b) Increase the NPV of the project.
(c) Increase the project's rate of return.
(d) Increase the initial cash outflow of the project.
10. A project is accepted when:

(a) Net present value is greater than zero
(b) Internal Rate of Return will be greater than the cost of capital
(c) Profitability index will be greater than unity
11. Capital budgeting is the process,

(a) This helps to make the master bud-get of the organization.
(b) By which the firm decides how much capital to Invest in business
(c) By which the firm decides which long-term investments to make.
(d) Undertaken to analyze how to make available various finance to the business.
12. The values of the future net incomes discounted by the cost of capital are
called
(a) Average capital cost
(b) Discounted capital cost
(c) Net capital cost
(d) Net present values
13. Profitability Index of 0.92 for a project means that

(a) The project's costs (cash outlay) are (is) less than the present value of the
project's benefits.
(b) The project's NPV is greater than zero.
(c) The project's NPV is greater than 1.
(d) The project returns 92 cents in present value for tach rupee invested.
14. The shorter the payback period-

(a) The riskier is the project.
(b) The less risky is the project.
(c) Less will the NPV of the project.
(d) More will the NPV of the project
15. Ranking projects according to their ability to repay quickly may be useful to
firms:
(a) When experiencing liquidity constraints.
(b) When careful control over cash is required.
(c) To indicate the prospective investors specifying when their funds are likely to
be repaid.
16. Capital budgeting decisions are analyzed with help of a weighted average and
for this purpose-
(a) Component cost is used
(b) Common stock value is used
(c) Cost of capital is used
(d) Asset valuation is used
17. Which of the following is a demerit of the payback period?

(a) It is difficult to calculate as well as understand it as compared to the
accounting rate of retum method.
(b) This method disregards the initial investment involved.
(c) It fals to take into account the timing of returns and the cost of capital.
18. A project whose acceptance does not prevent or require the acceptance of
one or more alternative projects is referred to as
(c) Dependent project
(d) Contingent project
19. When operating under a single-period capital- rationing constraint, you may
first want to try selecting projects by descending order of their in order to give
yourself the best chance to select the
mix of projects that adds most to the firm value.
(a) Profitability Index (PI)
(b) Net Present Value (NPV)
(c) Intermal Rate of Return (IRR)
(d) Payback Period (PBP)
20. A project whose acceptance precludes the acceptance of one or more

alternative projects is referred to as
(c) Dependent project
(d) Contingent project
21. Which of the following is correct formula to calculate payback period

reciprocal?
(a) (1/payback period) x 100
(b) (100/payback period) x 10
(c) (100/payback period) x β
(d) [(1/payback period) x β+ 100
22. How ARR is calculated?

(a) (Average PAT/Initial Investment) x 100
(b) (Average NPV/Investment) x 100
(c) (Average PAT/Initial Investment)+100
(d) (Initial Investment/Average PAT) x 100
23. Some projects that a firm accepts will undoubtedly result in zero or negative
returns. In light of this fact, it is best if the firm:
(a) Adjusts its hurdie rate (le cost of capital) upward to compensate for this fact.
(b) Adjusts its hurdle rate (le cost of capital) downward to compensate for this
fact
(c) Does not adjust its hurdle rate up or down regardless of this fact
(d) Raises its prices to compensate for this fact.
24. If we add depreciation and other non cash expenses in profit after tax, the
resulting figure is-
(a) Profit available for equity shareholder
(b) CFAT
(c) Net cash flow
(d) Free cash flow
25. Which of the following is demerit of accounting rate of return (ARR) method?
(a) It does not take into accounting time value of money.
(b) It fails to measure properly the rates of return on a project even if the cash
flows are even over the project life.
(c) It is biased against short-term projects in the same way that payback is
biased against longer term ones.
26. NPV?
(a) Project's cash inflows-Project's cash outflows.
(b) Project's cash inflows after tax minus the project's cash outflows.
(c) Present value of the project's cash inflows minus the present value of the
project's cash outflows.
(d) Present value of the project's cash inflows minus the present value of the
project's cash outflows in initial year ignoring the present value of cash flows in
subsequent years.
27 is an investment appraisal technique calculated by dividing the present value of

future cash flows of a project by the initial investment required for the project.
(a) Indexed cost method
(b) Profitability index
(c) Cost benefit ratio
(d) Both (B) and (C)
28. Accept a project if the profitability index is:

(a) less than 1
(b) positive
(c) greater than 1
(d) negative
29. Profitability index is actually a modification of the

(a) Payback period method
(b) IRR Method
(c) Net present value method
(d) Risk premium method
30 of a capital budgeting project is the discount rate at which the Net Present
Value (NPV) of a project equals zero.
(a) External Rate of Return (ERR)
(b) Risk Free Rate of Return (RFRR)
(c) Price Cost Method (PCM)
(d) Internal Rate of Return (IRR)
31. Which of the following capital budgeting techniques takes into account the
incremental accounting income rather than cash flows?
(b) Internal rate of retum
(c) Accounting/simple rate of retum
(d) Cash payback period
32. The IRR decision rule specifies that all independent projects-
(a) with positive NPV should be selected.
(b) with an IRR greater than the cost of capital should be accepted.
(c) having IRR greater economic value added should be selected.
(d) with an IRR greater than the cost of capital should be accepted though it
have negative NPV
33. Which of the following techniques does not take into account the time value
of money?
(a) Internal rate of retum method
(b) Simple cash payback method
(c) Net present value method
(d) Discounted cash payback method
34. If you are considering two projects namely, Project X & Project Y; NPV of X is
higher than Y but IRR of Y is greoter than X then you will select-
(a) Project Y
(b) Project X
(c) Some other project
35. The current worth of a sum of money to be received at a future date is called:
(a) Real value
(b) Future value
(c) Present value
(d) Salvage value
36. The difference between the present value of cash inflows and the present
value of cash outflows associated with a project is known as:
(a) Net present value of the project
(b) Net future value of the project
(c) Net historical value of the project
(d) Net salvage value of the project
37. Capital rationing refers to a situation-

(a) where a company cannot undertake projects as the cost of capital is less
than required rate of return on projects.
(b) where company is confused in selection of more than one projects.
(c) where a company cannot undertake all positive NPV projects, it has
identified because of shortage of capital.
(d) where cost of the projects is equal to present value leading NPV to zero.
38. If present value of cash outflow is equal to present value of cash inflow, the
net present value will be:
(a) Positive
(b) Negative
(c) Zero
(d) Infinite
39. Generally, a project is considered acceptable if its net present value is

(a) Negative or zero
(b) Negative or positive
(c) Positive or zero
(d) Negative
40. An increase in the discount rate will:

(a) Reduce the present value of future cash flows.
(b) Increase the present value of future cash flows.
(c) Have no effect on net present value
(d) Compensate for reduced risk.
41. Using profitability index, the preference rule for ranking projects is:
(a) the lower the profitability index, the more desirable the project.
(b) the higher the profitability index, the more desirable the project.
(c) the lower the sunk cost, the more desirable the project.
(d) the higher the sunk cost, the more desirable the project.
42. A project whose cash flows are more than capital invested for rate of return
then net present value will be
(a) Positive
(b) Independent
(c) Negative
(d) Zero
43. In mutually exclusive projects, project which is selected for comparison with
others must have-
(a) Higher net present value
(b) Lower net present value
(c) Zero net present value
44. Relationship between Economic Value Added (EVA) and Net Present Value
(NPV) is considered as
(a) Valued relationship
(b) Economic relationship
(c) Direct relationship
(d) Inverse relationship
45. In capital budgeting, positive net present value results

(a) Negative economic value added
(b) Positive economic value added
(c) Zero economic value added
(d) Percent economic value added
46. Cash inflows are revenues of project and are represented by-
(a) Hurdle number
(b) Relative number
(c) Negative numbers
(d) Positive numbers
47. The process of planning expenditures that wil influence the operation of a firm
over a number of years is called-
(a) Investment
(c) Net present valuation
(d) Dividend valuation
48. Which of the following is an example of a capital Investment project?

(a) Replacement of worn-out equipment
(b) Expansion of production facilities
(c) Development of employee training programs
(d) All of the above are examples of capital investment projects.
49. The term mutually exclusive investments mean:

(a) Choose only the best investments
(b) Selection of one investment precludes the selection of an alternative
(c) Elite investment opportunities will get chosen.
(d) There are no investment options available.
50. Which method provides more confidence, the payback method or the net
present value method?
(a) Payback because it provides a good timetable.
(b) Payback because it tells you when you break
even.
(c) Net present value because it considers all inflows and outflows and the time
value of money.
(d) Net present value because it does not need to use cost of capital.
51. To estimate an unknown number that lies between two known numbers is
knows as-
(a) Capital rationing
(c) Interpolation
(d) Amortization
52. Capital budgeting is the process of identifying analyzing and selecting

investments project whose returns are expected to extend beyond-
(a) 3 years
(b) 2 years
(c) 1 year
(d) Months
53. Criterion for IRR (Internal Rate of Return)?

(a) Accept, if IRR > Cost of capital
(b) Accept, if IRR < Cost of capital
(c) Accept, if IRR = Cost of capital
54. The categories of cash flows includes -

(a) Net initial investment
(b) Cash flow from operations after paying taxes
(c) Cash flow from terminal disposal after paying taxes
55. The concept which explains that a money received in present time is more
valuable than money received in future is classified as-
(a) Lead value of money
(b) Storage value of money
(c) Time value of money
(d) Cash value of money
56. The method which calculates the time to recoup initial investment of project
in form of expected cash flows is classified as-
(a) Net value cash flow method
(b) Payback method
(c) Single cash flow method
(d) Lean cash flows method
57. The rate of return to cover risk of investment and decrease in purchasing
power as a result of inflation is classified as-
(a) Nominal rate of retum
(b) Accrual accounting rate of return
(c) Real rate of return
(d) Required rate of return
58. The payback period is multiplied to constant increase in yearly future cash
flows to calculate-
(a) Cash value of money
(b) Net initial investment
(c) Net future value
(d) Time value of money
59. Why are projects with negative net present values (NPVs) unacceptable to a
firm?
(a) Returns lower than the cost of capital result in firm failure.
(b) Returns with negative NPVs cause an equal profit ratio.
(c) Returns with negative NPVs are acceptable to a firm.
(d) Returns lower than the cost of capital result in higher profit ratios
60. What are the two drawbacks associated with the payback period?
(a) The time value of money is ignored. It ignores cash flows beyond the
payback period.
(b) The time value of money is considered. It ignores cash flows beyond the
payback period.
(c) The time value of money is considered. It includes cash flows beyond the
payback period.
(d) The time value of money is ignored. It includes cash flows beyond the
payback period.
61. Which of the following cash flows should not be considered relevant in
calculating project cash flows?
(a) Opportunity costs
(b) Any effects caused by cannibalization
(c) Investments in net working capital as a result of making the investment
(d) Sunk costs
62. Which of the following is not used in capital budgeting?

(a) Time value of money
(b) Sensitivity analysis
(c) Net assets method
(d) Cashflows
63. Which of the following is not incorporated in Capital Budgeting?

(a) Tax Effect
(b) Time Value of Money
(c) Required Rate of Return
(d) Rate of Cash Discount
64. Which of the following is not applied in capital budgeting?

(a) Cash flows be calculated in incremental terms
(b) All costs and benefits are measured on cash basis
(c) All accrued costs and revenues be incorporated
(d) All benefits are measured on after tax basis
65. A proposal is not a capital budgeting proposal if

(a) is related to Fixed Assets
(b) brings long-term benefits
(c) brings short-term benefits only
(d) has very large investment
1 2 3 4 5 6 7 8 9 10
C A C B D D A B D D
11 12 13 14 15 16 17 18 19 20
C D D B D C C B A A
21 22 23 24 25 26 27 28 29 30
A A C B D C D B C D
31 32 33 34 35 36 37 38 39 40
C B B B C A C C C A
41 42 43 44 45 46 47 48 49 50
B A A C B D B D B C
51 52 53 54 55 56 57 58 59 60
C C A D C B A B A A
61 62 63 64 65
D C D C C
FM CHAPTER 13
RISK AND UNCERTAINITY IN CAPITAL BUDGETING
1. is the ratio of assured cash flows to uncertain cash flows.

(a) Beta Factor (BF)
(b) Contingency Equivalent Factor
(c) Risk Premium Factor (RPF)
(d) Certainty Equivalent Factor (CEF)
2. is a technique used to determine how different values of an independent

variable impact a particular dependent variable under a given set of assumptions.
(a) Simulation Analysis
(b) Single Variable Analysis
(c) Sensitivity Analysis
(d) Sensex Analysis
3. The situation in which the company replaces existing assets with new assets is
classified as
(a) Replacement projects
(b) New projects
(c) Existing projects
(d) Internal projects
4. The probability-tree analysis is best used when cash. flows are expected to be:
(a) Independent over time.
(b) Risk-free.
(c) Related to the cash flows in previous periods.
(d) Known with certainty.
5. Which of the following statements is correct regarding the risk-adjusted

discount rate (RADR) approach?
(a) Under RADR approach, we should accept a project if NPV calculated using
RADR is positive.
(b) Adjusting the firm's overall cost of capital upward is required if the project or
group is of higher than average risk.
(c) Under the RADR approach, we would still compare a project's interned rate
of return (IRR) to the firm's overall weighted-average cost of capital in order to
decide acceptance/rejection.
(d) Adjusting the firm's overall cost of capital downward is required if the project
or group is of lower than average risk
6. Which one of the following projects A, B, C, or D- should be accepted? The

expected return on the market is 16% and the risk-free rate is 6%.
(a) Project A, which has a beta of 0.50 and an expected return of 11.2%.
(b) Project B, which has a beta of 2.50 and expected to return 25.4%.
(c) Project C, which has a beta of 1.25 and expected to return 18.2%.
(d) Project D, which has abetaofl.00 and an expected return of 15.8%.
7. Which of the following is the correct formula to calculate the risk-adjusted
discount rate?
(a) Rf+ β(Rm-Rf)
(b) Ke x β(Rm-Rf)
(c) (Rm-Rf) + (Ke-Rf)
(d) SD (σ)/NPV
8. The coefficient of variation of net present value measures the

(a) Total risk of the project
(b) Relative risk of the project
(c) Highest expected value of net present value
(d) Market'risk of the project
9. An approach to examining project risk occurs when the manager applies a

probability distribution to factors such as market size, selling price, fixed and
variable costs, and the useful life of the project. The manager then runs a
computer program to determine the project worth by randomly selecting values
for each variable, within the limits assigned. This is done numerous times to
generate a complete risk-return analysis.
(a) Simulation
(b) Probability-tree
(c) Firm-portfolio
(d) Market risk
10. Lower standard deviation indicates-

(a) lower risk
(b) higher risk
(c) no risk at all
(d) highly favorable situation
11. Concept of joint probability is used in the case of:

(a) Independent cash flows
(b) Uncertain cash flows
(c) Dependent cash flows
(d) Certain cash flows
12. The decision-tree approach is used in:

(a) Proposals with longer life
(b) Sequential decisions
(c) Independent Cash flows
(d) Accept-Reject Proposal
13. The beta coefficient is associated with-

(a) Capital asset pricing model
(b) Dividend valuation model
(c) Risk-free rate plus premium model
(d) Tax-adjusted cost of debt
14. Indifference criteria when BCR (Benefit Cost Ratio)?

(a) BCR > 1
(b) BCR = 1
(c) BCR < 1
15. Risk of a capital budgeting can be incorporated:

(a) Adjusting the Cash flows
(b) Adjusting the Discount Rate
(c) Adjusting the life
16. In Certainty Equivalent Approach, the CE Factors for different years are:
(a) Generally increasing
(b) Generally decreasing
(c) Generally same
17. Which of the following is correct for RADR?

(a) Accept a project if NPV at RADR is negative
(b) Accept a project if IRR is more than RADR
(c) RADR is overall cost of capital plus risk-premium
18. Concept of joint probability is used in case of:

(a) Independent cash flows
(b) Uncertain cash flows
(c) Dependent cash flows
(d) Certain cash flows
19. Nominal interest rates and nominal cash flows are usually reflected the
(a) Inflation effects
(b) Opportunity effects
(c) Equity effects
(d) Debt effects
20. In cash flow estimation and risk analysis, real rate will be equal to nominal rate
if there is-
(a) No inflation
(b) High inflation
(c) No acceleration
(d) No transactions
21. Real interest rate and real cash flows do not include-
(a) Equity effects
(b) Debt effects
(c) Inflation effects
(d) Opportunity effects
22. The rate of return which is made up of risk-free element and business risk
element is classified as -
(a) Nominal rate of return
(b) Accrual accounting rate of return
(c) Real rate of return
(d) Required rate of return
23. The project's expected monetary loss or monetary gain by discounting all cash
outflows and inflows using required rate of return is classified as-
(b) Net future value
(c) Net discounted value
(d) Net recorded cash value
24. The decrease in purchasing power of any monetary unit such as euro, dollars
etc. is classified as.....
(a) Net investment parity
(b) Inflation
(c) Purchasing parity
(d) Buying parity
25. When using the expected value criterion, it is assumed that the individual
wants to
(a) Maximize return for a given level of risk
(b) Maximize return for maximum level of risk
(c) Maximize return irrespective of the level of risk
26. The investment proposal with the greatest relative risk would have:
(a) Highest standard deviation of net present value.
(b) Highest coefficient of variation of net present value.
(c) Highest expected value of net present value.
(d) Lowest opportunity loss.
27. You are considering two mutually exclusive investment proposals, project A
and project. B. B's expected value of net present value is $1,000 less than that for
A and A has less dispersion. On the basis of risk and return, you would say that:
(a) Project A dominates project B.
(b) Project B dominates project A.
(c) Project A is riskier and should offer greater expected value.
(d) Each project is high on one variable, so the two are basically equal.
28. If two projects are completely independent (or unrelated), the measure of the
correlation between them is:
(a) 0
(b) 0.5
(c) 1.0
(d) -1.0
29. Assume that a firm has accurately calculated the net cash flows relating to two
mutually exclusive investment proposals. If the net present value of both
proposals exceed zero and the firm is not under the constraint of capital rationing,
then the firm should
(a) Calculate IRRS of these investments to be certain that IRRs are greater than
the cost of capital.
(b) Compare profitability index of these investments to those of other possible
investments.
(c) Calculate the payback periods to make certain that the initial cash outlays
can be recovered within an appropriate period of time.
(d) Accept the proposal that has the largest NPV since the goal of the firm is to
maximize shareholder wealth and since the projects are mutually exclusive, we
can only take one.
30. Damodhar is evaluating two conventional, independent capital budgeting

projects (X & Y) by making use of RADR method of analysis. X & Y have internal
rates of return of 16% & 12% respectively. RADR appropriate to X is 18%, while Y's
RADR is only 10%. The company's overall, weighted-average cost of capital is 14%.
Damodhar should-
(a) Accept Project X and accept Project Y
(b) Accept Project X and reject Project Y
(c) Reject Project X and accept Project Y
(d) Reject Project X and reject Project Y
31. Two mutually exclusive projects are being considered. Neither project will be
repeated again in the future after their current lives are complete. There exists a
potential problem though the expected life of the first project is one year and the
expected life of the second project is three years. This has caused the NPV and IRR
methods to suggest different project preferences. What technique can be used to
help make a better decision in this scenario?
(a) Rely on the NPV method and make your choice as it will tell you which one is
best.
(b) Use the common-life technique to replicate the one-year project three times
and recalculate the NPV and IRR for the one-year project.
(c) Ignore the NPV technique and simply choose the highest IRR since managers
are concerned about maximizing returns.
(d) In this situation, we need to rely on the profitability index (PI) method and
choose the one with the highest PI.
32. In the Certainty Equivalent Approach, the first step is to Convert uncertain
cash flows to certain cash flows by multiplying it with the CE Factor, and step two
is-
(a) Discount the certain cash flows at the IRR to arrive at NP.
(b) Discount the certain cash flows at WACC rate to arrive at NP.
(c) Discount the certain cash flows at the risk-free rate to arrive at NP.
(d) Discount the certain cash flows at the market rate of return to arrive at NP
33. You are considering two projects namely Project X and Project Y. Project X has
a low standard deviation but a high coefficient of variation as compared to Project
Y. Project Y has a high standard deviation but a low coefficient of variation as
compared to Project X. Which project will you select?
(a) Project X only
(b) Both Project X & Project Y
(c) Neither Project X nor & Project Y
(d) Project Y only
34. Vayu Ltd. uses the Net Present Value (NPV) method, the Internal Rate of
Return (IRR) method, and Discounted Payback Period (DPP) to appraise its new
investment. An investment opportunity was recently appraised using each of
these methods and was estimated to provide a positive NPV of 1.5 million, an IRR
of 15%, and a DPP of 3 years. Later, it was discovered that the cost of capital of the
company was lower than had been previously estimated. What would be the
effect on the figures provided by each investment appraisal method of taking
account of the lower cost of capital?
35. Which of the following is not a potential for a ranking problem between two
mutually exclusive projects?
(a) The projects have unequal lives that differ by several years.
(b) The costs of the two projects differ by nearly 30%.
(c) The two projects have cash flow patterns that differ dramatically.
(d) One of the mutually exclusive projects involves replacement while the other
involves expansion.
36. As per discounted payback period method, a project with-

(a) more discounted payback period will be selected.
(b) higher NPV will be preferred.
(c) low NPV will be preferred.
(d) less discounted payback period will be selected.
37. What is sensitivity analysis primarily used for in decision-making?
(a) Evaluating the impact of uncertain variables on the outcome
(b) Assessing the historical performance of a business
(c) Predicting future market trends
(d) Analyzing financial ratios
38. Sensitivity analysis helps in identifying:

(a) The best decision with absolute certainty
(b) The worst-case scenario for decision outcomes
(c) The optimal decision without considering risk
(d). The least important factors affecting a decision
39. Which of the following best describes sensitivity analysis?

(a) A statistical technique for hypothesis testing
(b) A method to analyze the sensitivity of employees to company policies
(c) A way to measure the responsiveness of a model to parameter changes
(d) A process to evaluate the sensitivity of customer preferences
40. When conducting sensitivity analysis, what happens to one variable while
others remain constant?
(a) All variables are increased simultaneously
(b) All variables are decreased simultaneously
(c) One variable is changed while others remain constant
(d) All variables are randomly changed.
41. Which of the following is true about sensitivity analysis?
(a) It is used only in financial analysis
(b) It provides a single definitive outcome for decision-making
(c) It does not consider the impact of uncertainty on decision outcomes
(d) It helps identify critical variables and their effect on results
1 2 3 4 5 6 7 8 9 10
D C A C A A A B A A
11 12 13 14 15 16 17 18 19 20
C B A B D B C C A A
21 22 23 24 25 26 27 28 29 30
C C A B B B A A D C
31 32 33 34 35 36 37 38 39 40
A C D C D D A B C C
41
D
FM CHAPTER 14
DIVIDEND DECISIONS
1. Historical growth rates, analysis forecasts, and retention growth model are
approaches to estimate:
(a) the Net present value of gain
(b) Growth rate
(c) Growth gain
(d) Discounted gain
2. The primary goal of a publicly-owned firm interested in serving its stockholders

should be to
(a) Maximize expected total corporate profit
(b) Maximize expected EPS
(c) Maximize the stock price per share
(d) Maximize expected net income.
3. Retained earnings are -

(a) An indication of a company's liquidity.
(b) The same as cash in the bank.
(c) Not important when determining dividends.
(d) The cumulative earnings of the company after dividends.
4. In retention growth model, percent of net income firms usually payout as
shareholders dividends, is classified as -
(a) Payout ratio
(b) Payback ratio
(c) Growth retention ratio
(d) Present value of the ratio
5. Which of the following is an argument for the relevance of dividends?

(a) Informational content.
(b) Reduction of uncertainty.
(c) Some investor's preferences for current income.
(d) All of the above.
6. All of the following are true of stock splits except:

(a) Market price per share is reduced after the split.
(b) The number of outstanding shares is increased.
(c) Retained earnings are changed.
(d) Proportional ownership is unchanged.
7. Which of the following techniques does not reward shareholders for investing
in a company?
(a) Repurchasing company shares
(b) Offering non-pecuniary benefits
(c) Making a rights issue
(d) Offering a scrip dividend
8. Forecast by analysts, retention growth model and historical growth rates are
methods used for an-
(a) Estimate future growth
(b) Estimate option future value
(c) Estimate growth ratio
(d) Estimate option present value
9. The repurchase of stock is considered a decision

rather than a decision.
(a) An investment; a financing
(b) Financing; an investment
(c) An investment; a dividend
(d) A dividend; a financing
10. If OML Corporation buyback 10% of its outstanding common stock from the
secondary market, the result would be -
(a) A decline in EPS.
(b) An increase in cash.
(c) A decrease in total assets.
(d) An increase in the number of stockholders.
11. Dividend policy determines

(a) What portion of earnings will be paid out to stockholders
(b) What portion will be retained in the business to finance long-term growth.
(c) only (A) not (B)
12. Dividend constitutes the cash flow that accrues to-

(a) Holders
(b) Equity holders
(c) Bondholders
13. A decrease in a firm's willingness to pay dividends is likely to result from an

increase in its
(a) Earnings stability
(b) Access to capital markets
(c) Profitable investment opportunities
(d) Collection of accounts receivable.
14. The payout ratio is subtracted from one to calculate-

(a) Growth ratio
(b) Present value ratio
(c) Retention ratio
(d) Future value ratio
15. Which of the following would not have an influence on the optimal dividend
policy?
(a) The possibility of accelerating or delaying investment projects.
(b) A strong shareholders' preference for current income versus capital gains.
(c) The costs associated with selling new common stock.
(d) All of the statements above can have an effect on dividend policy.
16. A stock split will cause a change in the total amounts shown in which of the
following balance sheet accounts?
(a) Cash
(b) Common stock
(c) Paid-in capital
17. You currently own 100 shares of stock in Baba Ltd. Does the stock currently
trade at 120 a share? The company is contemplating a 2:1 stock split. Which of the
following best describes your position after the proposed stock split takes place?
(a) You will have 200 shares of stock, and the stock will trade at or near 120 a
share.
(b) You will have 200 shares of stock, and the stock will trade at or near 60 a
share.
(c) You will have 100 shares of stock, and the stock will trade at or near 60 a
share.
(d) You will have 50 shares of stock, and the stock will trade at or near 60 a
share.
18. If markets are in equilibrium, which of the following will occur:

(a) Each investment's expected return should equal its realized return.
(b) Each investment's expected return should equal its required return.
(c) Each investment should have the same realized return.
(d) All of the statements above are correct.
19. Regular Dividend Policy means

(a) Investors get dividends at the usual rate.
(b) Reserve fund is created to pay a fixed amount of dividend.
(c) Payment of low dividend per share constantly plus extra dividend in the year
when the company earns a high profit.
20. Which of the following examples best represents a passive dividend policy?
(a) The firm sets a policy such that the proportion of dividends paid from net
income remains constant.
(b) The firm pays dividends with what remains of net income after taking
acceptable investment projects.
(c) The firm sets a policy such that the quantity (dollar amount per share) of
dividends paid from net income remains constant.
(d) All of the above are examples of various types of passive dividend policies
21. Modigliani and Miller argue that the dividend decision

(a) Is irrelevant as the value of the firm is based on the eaming power of its
assets.
(b) Is relevant as the value of the firm is not based just on the eaming power of
its assets.
(c) Is irrelevant as dividends represent cash leaving the firm to shareholders,
who own the firm anyway.
(d) Is relevant as cash outflow always influences other firm decisions
22. If you are calculating market price by using Gordon's Model, increasing payout
ratio other things remaining the same will -
(a) Increase the price per share
(b) Decrease the price per share
(c) Will not have any effect on the price of the share
(d) Price will remain constant.
23. As per Gordon's Model, whether the company adopts 50%, 80%, or any other
payout ratio, the market price will remain the same when
(a) Ke>r
(b) Ke=r
(c) Ke = r
(d) Ke>Rf
24. Company A and Company B both calculate their market price by using Walter's
formula, Both companies will have the same market price if -
(a) Ra Rc and retention ratio of Company A is more than retention ratio of
Company B.
(b) Ra <Rc and retention ratio of Company B is more than retention ratio of
Company A.
(c) Ra Rc whether retention ratio is same or different for both the companies.
25. As per Walter's Model when Ra <Rc increase in dividend payout ratio will lead
to -
(a) Increase in market price
(b) Decrease in market price
(c) No change in market price
26. As per Walter's Model when Ra <Rc decrease in retention ratio will lead to -
27. As per Walter's Model when RR market price will remain the same when -
(a) Retention ratio increases
(b) Retention ratio decreases
(c) Retention ratio increase or decreases
28. As per Walter's Model when Ra Rc increase in dividend payout ratio will lead
to -
(d) No change in market price
29. As per Walter's Model when Ra Rc decrease in retention ratio will lead to -
(d) No change in market price
30. As per the MM Model total value of the firm remains the same whether it
declares dividends or not. You are required to state if the dividend is declared the
market price per share as per MM Model -
(a) Increase
(b) Decreases
(c) Remain constant
31. Which one of the following is a non-cash payment made by a firm to its
shareholders that dilute the value of each share of stock outstanding?
(a) Reverse stock split
(b) Cash distribution
(c) Stock dividend
(d) Regular dividend
32. Market price?

(a) D1/(Ke-g)
(b) EPS x P/E Ratio
(c) (D1+P1)/(1+Ke)
33. The date by which a shareholder must be recorded as the shareowner in order
to receive a declared dividend is called the:
(a) Ex-rights date
(b) Ex-dividend date
(c) Date of record
(d) Date of payment
34. The target payout ratio is:

(a) A firm's preferred rate of dividend growth.
(b) The inverse of a firm's equity multiplier.
(c) The preferred number of dividend payments per year divided by 12.
(d) A firm's long-term desired dividend-to-earnings ratio.
35. Which one of the following statements concerning cash dividends is correct?
(a) The chief financial officer of a corporation determines whether or not a
dividend will be paid
(b) A dividend is not a liability of a firm until it has been declared.
(c) If a firm has paid regular quarterly dividends in the past it is legally obligated
to continue doing so.
(d) Cash dividends always reduce the paid-in capital account balance
36. The fact that flotation costs can be significant is justification for:
(a) A firm to issue larger dividends than their closest competitors.
(b) Maintaining a constant dividend policy even when profits decline
significantly.
(c) Maintaining a high dividend policy.
(d) Maintaining a low dividend policy and rarely issuing extra dividends.
37. When a firm is short of cash yet it wishes to distribute something to

shareholders, it should consider-
(a) Cash dividend.
(b) Liquidating dividend
(c) Stock dividend
38. A company wants to buy back stock. How will this impact the company and its
stock?
(a) The company makes more money because management owns more stock.
(b) Other investors make less money because management can pay more
dividends to interned shareholders before external shareholders
(c) Because there are fewer shares in the open market, the price of the shares
goes up.
(d) The net income of the company will go up because of the increase in stocks
39. Which of the following would ultimately give the greatest benefit to
stockholders?
(a) A stock buyback
(b) The issuance of a bond
(c) A stock split
(d) The issuance of new stock
40. Required return Retention Ratio?

(a) K (Cost of equity)
(b) WACC
(c) B(Beta)
(d) g (Growth Rate)
41. A share of common stock has just paid a dividend of 2.00. If the expected long-
run growth rate for this stock is 15 percent, and if investors require a 19 percent
rate of return, what is the price of the stock?
(a) 57.50
(b) 62.25
(c) 71.86
(d) 64.00
42. Retention ratio is 0.60 and return on equity is 15.5% then growth retention
model would be-
(a) 14.9%
(b) 25.84%
(c) 16.1%
(d) 9.3%
43. If the payout ratio is 0.45 then the retention ratio will be:
(a) 55%
(b) 1.45
(c) 0.055
(d) 100%
44. Retention ratio is 0.55 and return on equity is 12.5% then the growth retention
model would be-
(a) 0.1195
(b) 0.06875
(c) 0.1305
(d) 0.2272
45. The market price of Jhakas Ltd. is 200 per share as per Gordon Model. EPS is
20 per share. The cost of capital is 11%. The rate of return on investment is 12%.
What is the retention ratio?
(a) 80%
(b) 75%
(c) 100%
(d) 50%
46. The market price of Sara Ltd. is 1,000 per share. EPS is 20 per share. The cost
of capital is 11%. The rate of return on investment is 12%. What is the dividend
per share?
(a) ₹2
(b) ₹3
(c) ₹4
(d) ₹5
47. Take the data above question and calculate the market value of the company
after giving effect to the proposal as stated above.
(a) 8,80,00,000
(b) 15,50,00,000
(c) 18,50,00,000
(d) 19,90,00,000
48. An equity share of an annual dividend of 100 is expected to earn 10% and this
share can be sold at a price of 180 at the end of the year. If the required rate of
return is 12%, calculate the value of the equity share.
(a) 196.46
(b) 169.64
(c) ₹149.66
(d) 170.05
49. Take the data of the above question and calculate the total market value of the
company.
(a) 05,40,000
(b) 02,90,000
(c) 03,60,000
(d) 04,30,000
50. Small Events Incorporation has recently paid dividends of 3.50 per share. The
dividends are growing at 10% pa. and the equity capitalization rate applicable to
the company is 12%. Find out the implicit P/E Ratio if the EPS of the company is 7.
(a) 27.50
(b) 28.50
(c) 30.00
(d) 32.50
51. The current price of the share of X. Ltd. is 60 and the just-paid dividend per
share is 4. If the capitalization rate is 12%, what is the dividend growth rate?
(a) 3%
(b) 5%
(c) 4%
(d) 6%
52. The market price is 30 per share. Dividends are growing at 2%. The cost of
equity is 10.5%. How much dividend must have been paid by the company at the
beginning of the year or last year?
(a) 2.55
(b) 2.00
(c) 2.50
(d) 2.60
1 2 3 4 5 6 7 8 9 10
B C D A D C C A B C
11 12 13 14 15 16 17 18 19 20
D B C C D D B B A B
21 22 23 24 25 26 27 28 29 30
A A C C A A C B B A
31 32 33 34 35 36 37 38 39 40
C D C D B D C C A D
41 42 43 44 45 46 47 48 49 50
A D A B D A A B C A
51 52
B C
(C) 20%
(D) 10%
4) A process through which loans

and other receivables are
FINANCIAL MANAGEMENT underwritten and sold in a form of
-MISCELLANEOUS asset is known as:
(A) Factoring
1) Which of the following is the (B) Forfeiting
main objective of financial (C) Securitisation
management? (D) Bill Discounting
(A) Revenue Maximisation
(B) Profit Maximisation 5) In Net Profit Ratio, the
(C) Wealth Maximisation denominator is:
(D) Cost Minimisation (A) Credit Sales
(B) Net Sales
2)Which one of the following (C) Cost of Sales
activities is outside the purview of (D) Cost of Goods Sold
financing decision in financial
management?
(A) Identification of the source of 6) Current Assets Rs. 20,00,000;
funds Current Liabilities Rs. 10,00,000 and
(B) Measurement of the cost of Stock Rs. 2,00,000, then what is
funds liquid ratio?
(C) Deciding on the time of raising (A) 2 times
the funds (B) 1.8 times
(D) Deciding on the utilization of the (C) 1.4 times
funds (D) None of these
3) A firm has a capital of Rs. 10 7) Annual credit sales Rs. 4,00,000;

lakhs, sales of Rs. 5 lakhs, gross Average collection period 45 days
profit of Rs. 2 lakhs and expenses of (assume 360 days in a year). What is
Rs. 1 lakh. The Net Profit Ratio is: Average debtors?
(A) 50% (A) Rs. 60,000
(B) 40% (B) Rs. 74,000
(C) Rs. 50,000 (C) unit price
(D) Rs. 4,00,000 (D) bundle price
8) PAT of a company Rs. 100 lakhs 12) Cash Flow Statement is also
and number of equity shares of Rs. known as
10 each with a capital of Rs. 50 (A) Statement of Changes in
lakhs, then EPS is: Financial Position on Cash basis
(A) Rs. 2 (B) Statement accounting for
(B) Rs. 1 variation in cash
(C) Rs. 10 (C) Both a and b
(D) None of these (D) None of the above
9) Cost of goods sold is Rs. 8000 and 13) Which of the following is not a
gross margin is Rs. 5000 then characteristic of GDR?
revenue will be (A) Is a negotiable instrument
(A) Rs. 3,000 (B) Carry voting rights
(B) Rs. 5,000 (C) Freely tradable in International
(C) Rs. 8,000 Market
(D) Rs. 13,000 (D) Denominated in US Dollars
10) Cash & Bank Rs. 20,000; Debtors 14) Which of the following is a
Rs. 2,00,000; Stock Rs. 2,80,000 and feature of Factoring?
Current Liabilities: (A)Tool of short term borrowing
Creditors Rs. 1,00,000; Bills Payable (B)Purchase of export bill only
Rs. 50,000. Then the working capital (C)Used in Export business only
is: (D)Done without recourse to the
(A) Rs. 4,00,000 client
(B) Rs. 3,80,000
(C) Rs. 3,50,000 15) Which of the following is a
(D) Rs. 70,000 Profitability Ratio?
(A)Proprietary Ratio
11) Gross margin is added to cost of (B) Debt –equity Ratio
sold goods for calculating (C)Price Earnings Ratio
(A) revenues (D)Fixed Asset Ratio
(B) selling price
16) GP Margin=20%, GP= Rs. 54000, (D) Considering issue of bonus
Sales= shares to equity shareholders
(A) Rs. 300000
(B) Rs. 270000 20) Which of the following does not
(C) Rs. 280000 help to increase Current Ratio?
(D) Rs. 290000 (A) Issue of Debentures to buy Stock
(B) Issue of Debentures to pay
17) Determinants of credit policy Creditors
relates to: (C) Sale of Investment to pay
(A) Credit standards Creditors
(B) Credit terms (D) Avail Bank Overdraft to buy
(C) Collection Procedures Machine
(D) All of the above
21) Which of the following
statements is correct?
18) ROI (Return on Investment) can
be decomposed into the following (A) A higher Receivable Turnover is
ratios: not desirable.
(A) Overall Turnover Ratio and (B) Interest Coverage Ratio depends
Current Ratio upon Tax Rate.
(B) Net Profit Ratio and Fixed Assets (C) Increase in Net Profit Ratio
Turnover means increase in Sales
(C) Working Capital Turnover Ratio (D) Lower Debt Equity Ratio means
and Net Profit Ratio lower Financial Risk
(D) Net Profit Ratio and Overall
Turnover Ratio 22) “Shareholders Wealth” in a firm
is reflected by:
19) Which one of the following (A) the number of people employed
activities is outside the purview of in the firm
dividend decision in financial (B) the book value of the firm’s
management? assets less the book value of its
(A) Identification of the profit after liabilities
taxes (C) the amount of salary paid to its
(B) Measurement of the cost of employees
funds (D) the market price per share of the
(C) Deciding on the pay-out ratio firm
23)The excess of Current Assets 27) The lease period in such a
over Current Liabilities is called: contract is less than the useful life of
(A) Net Current Assets asset. Here we are talking about
(B) Net Working Capital _______.
(C) Working Capital (A) Operating or Service Lease
(D) All of the above (B) Service Lease
(C) Financial Lease
24) Profit Maximization is the main (D) None of the above
objective of business because:
(A) Profit acts as a measure of 28) Which one is the Benefit(s) of
efficiency and Factoring?
(B) It serves as a protection against (A) Better Cash Flows
risk (B) Better Assets Management
(C) Both (C) Better Working Capital
(D) none Management
(D) All of the above
25) Stock holder’s wealth =
____________ 29) Collateralized borrowing and
(A) No. of shares owned x Current lending obligation (CBLO) is a
stock price per share discounted instrument available in
(B) No. of shares owned x Current electronic book entry for the
stock price per share maturity period ranging from
(C) No. of shares owned x Current __________.
stock price per share (A) 1 day to 19 days
(D) none (B) 1 day to 15 days
(C) 1 day to 30 days
26) Working Capital Management (D) None of the above
refers to a Trade-off between
_____________and 30) IPO refers to ____________; the
Profitability. first time a company comes to
(A) Liquidity public to raise money.
(B) Risk (A) Immediate Public Offer
(C) Both of the above (B) Immediate Public Offering
(D) None of the above (C) Initial Public Offer
(D) Initial Public Offering 35) The persons interested in the
analysis of financial statements can
31) SPO refers to ________, the be grouped as
second and subsequent time a _________.
company raises money (A) Owners or investors
from the public directly. (B) Creditors
(A) Second Public Offering (C) Financial executives
(B) Subsequent Public Offering (D) All of the above
(C) Subsequent Public Offer
(D) Seasonal Public Offering 36) The term “Operating Profit”
means profit before
32) Liquid Liability = Current Liability __________________.
– Bank Overdraft – ___________ (A) interest
(A) Cash Credit (B) tax
(B) Trade Credit (C) interest and tax
(C) Both of the above (D) interest or tax
(D) None of the above
37) Debt- equity Ratio is an example
33) Ratio analysis is the process of of ________________.
determining and interpreting (A) Short term solvency Ratio
numerical relationships (B) Long term solvency Ratio
based on _______. (C) Profitability Ratio
(A) Financial values (D) None of the above
(B) Financial statements
(C) Financial numerical information 38) The treatment of interest and
(D) All of the above dividends received and paid
depends upon the nature
34) Ratio analysis is based on of the enterprise. For this purpose,
__________ measure. the enterprises are classified as
(A) relative ____________.
(B) absolute (A) (i) Financial enterprises, and (ii)
Operating enterprises
(C) Both of the above
(B) (i) Financial enterprises, and (ii)
(D) None of the above
Other enterprises
(C) (i) Financial enterprises, and (ii) (D) Financing some long-term needs
Non-Financial enterprises with short-term fund
(D) (i) Trading enterprises, and (ii)
Non - Trading enterprises 42) To financial analysts, "net
working capital" means the same
39) Funds Flow Statement reveals thing as __________.
the change in _______________ (A) total assets
between two Balance (B) fixed assets
Sheet dates. (C) current assets
(A) Working capital (D) current assets minus current
(B) Internal capital liabilities
(C) Share capital
(D) Both (A) & (C) 43) Baumol's Model of Cash
Management attempts to:
40) A firm following an aggressive (A) Minimise the holding cost
working capital strategy would: (B) Minimization of transaction cost
(A) Hold substantial amount of fixed (C) Minimization of total cost
assets (D) Minimization of cash balance
(B) Minimize the amount of short
term borrowing 44) Which of the following is not
(C) Finance fluctuating assets with considered by Miller-Orr Model?
long term financing (A) Variability in cash requirement
(D) Minimize the amount of fund in (B) Cost of transaction
very liquid assets (C) Holding cost
(D) Total annual requirement of cash
41) Which of the following would be
consistent with a conservative
45) A firm is said to be financially
approach to financing
unlevered firm if the firm has ……….
working capital?
(A) only external equity in its capital
(A) Financing short-term needs with structure
short-term funds
(B) only owner‘s equity in its capital
(B) Financing short-term needs with structure
long-term debt
(C) both external equity and owner‘s
(C) Financing seasonal needs with equity in its capital structure
short-term funds
(D) only equity share capital in its (B) capital structure decision
capital structure (C) dividend decision
(D) liquidity decision
46) The term optimal capital
structure‘ implies that combination 50) Which of the following is a
of external equity and Profitability Ratio?
internal equity at which ……… (A) Proprietary Ratio
(A) the overall cost of capital is (B) Debt-Equity Ratio
minimised (C) Price-Earning Ratio
(B) the overall cost of capital is D) Fixed Asset Ratio
maximised
(C) the market value of the firm is
51) Which of the following is not a
minimised
source of fund?
(D) the market value of firm is
(A) Issue of Capital
greater than the overall cost of
(B) Issue of Debenture
capital
(C) Decrease in Working Capital
(D) Increase in Working Capital
47) Net Income Approach to capital
structure decision was proposed by
……. 52) The 'Dividend-Payout Ratio' is
(A) J. E. Walter equal to
(B) M.H. Miller and D.Orr (A) The Dividend yield plus the
capital gains yield
(C) E. Solomon
(B) Dividends per share divided by
(D) D. Durand
Earning per Equity Share
(C) Dividends per share divided by
48) There is a reciprocal relationship
par value per share
between ……………….
(D) Dividends per share divided by
(A) DOL and DFL
current price per share
(B) DOL and margin of safety ratio
(C) DFL and margin of safety ratio
53) Which of the following is not
(D) DOL and break-even-point considered while preparing cash
budget?
49) The genesis of financial risk lies (A) Accrual Principal
in ……………. (B) Difference in Capital and
(A) capital budgeting decision Revenue items
(C) Conservation Principle 58) A firm determines the
(D) All of the above shareholders’ wealth by taking
(A) the number of people employed
54) ABC Analysis is used in in the firm
(A) Inventory Management (B) the book value of the firm’s
(B) Receivables Management assets less the book value of its
liabilities
(C) Accounting Policies
(C) the amount of salary paid to its
(D) Corporate Governance
employees
(D) the market price per share of the
55) Objective of Financial
firm
Management is
(A) Management of Liquidity
59) The term Float is used in
(B) Maximization of Profit
(A) Receivable Management
(C) Maximization of Shareholders’
(B) Cash Management
Wealth
(C) Marketable Management
(D) Management of Fixed Assets
(D) Inventory Management
56) Working Capital Management

involves financing and management
of
(A) All Assets
(B) All Current Assets
(C) Cash and Bank Balance
(D) Receivables and Payables
57) Ratio Analysis can be used to

study liquidity, turnover, profitability
etc., of a firm. What
does Debt-Equity Ratio help to
study?
(A) Solvency
(B) Liquidity
(C) Profitability
(D) Turnover
ANSWER KEY:
1 2 3 4 5 6 7 8 9 10
C d c c b b c d d c
11 12 13 14 15 16 17 18 19 20
a c b a c b d d b d
21 22 23 24 25 26 27 28 29 30
d d d c a c a d a d
31 32 33 34 35 36 37 38 39 40
b a d a d c b b a d
41 42 43 44 45 46 47 48 49 50
b d c d b a d b b c
51 52 53 54 55 56 57 58 59
d b d a c b a b b

Financial Management

Uploaded by

Copyright:

Available Formats

Financial Management

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Management

Uploaded by

Copyright:

Available Formats

FINANCIAL MANAGEMENT

BASICS OF FINANCIAL MANAGEMENT

1. The decision function of financial management can be broken down into

3. To increase a given present value, the discount rate should be adjusted-

4. Long run objective of financial management is to

5. Financial Management is concerned with

6. Procurement of funds inter alia includes

7. The market price of a share of common stock is determined by:

8. Which of the following is/are the basic aspects of financial management?

9. The focal point of financial management in a firm

10. A business organization can obtain funds from-

12. Financial Management is study-

14. Which of the following is not a function of a finance manager?

15. Money market mutual funds

16. Match the following:

17. The purpose of financial markets is to:

18. Investment decisions are concerned with -

22. Financial Management is concerned with -

28. A permanent chaotic state may lead an organization to ______.

30. High financial gearing will,

31. Higher the level of financial gearing,

32. Financial management is broadly concerned with

35. Investment decisions encompass

3. From the following information find the value of closing stock:

7. Working capital ratio is also known as:

9. Opening stock 29,000

11. Current ratio - 2:5

16. In ratio analysis, 'proforma analysis implies

17. Which of the following pairs is correctly matched

18. Return on investment depends on two ratios

19. Which of the following pairs is not correctly matched

20. Which of the following pairs is correctly matched

21. Return on investment is also known as

23. In financial analysis, 'time-series analysis' refers to

24. If average collection period is 15 days and average account receivables is

25. Cost of goods sold ₹4,00,000

27. Stock turnover: 6 times

28. Which one of the following statements is correct

29. Which of the following statement(s) is/are true:

31. % Preference share capital: ₹3,00,000

33. Interest coverage ratio is obtained by dividing EBIT by

38. Which of the following is not a limitation of financial statements

1. Fluctuating Working Capital is also called as -

3. Other things remaining constant, if the debtors increase as compared to last

6. While calculating Working Capital based on cash cost

7. Negative working capital means that -

8. Which of the following analyzes the accounts receivable, inventory, and

9. Which of the following statement is correct?

10. Regular Working Capital:

12. Positive working capital means that

13. A higher current assets/fixed assets ratio indicates -

14. The aggressive approach covers those policies-

16. A conservative policy implies -

19. Permanent Working Capital is also known as

20. A lower current assets/fixed assets ratio means

22. Current assets are those assets-

24. To carry on a business, a certain minimum level of working capital is necessary

26. varies inversely with profitability.

28. Permanent working capital -