UNIT 3 FINANCIAL MANAGEMENT

Financial Management: Nature – Scope of Firm – Role and Responsibilities of

Finance Manager – Goals of Financial Management – Capital Budgeting – Methods of
Evaluating Capital Investment Projects – Working Capital Management – Dividend Decision
Policy – Cost of Capital – Meaning and Importance – Capital Structure – Operating
Leverage, Financial Leverage, Complained Leverage – Ebit – Eps Analysis.

1) Which of the following is not ignored Traditional Approach of Financial?

a) Non-Corporate Enterprise b) Working Capital Financing
c) Investment Decision d) Allocation of Funds
Ans: c) Investment Decision
2. State the word finance comes from which of the following Latin word?
a) Finis
b) final
c) finals
d) fines
Ans: a) Finis
3) Which of the following is not a direct function of Finance Manager?
a) Forecasting of cash flow b) Raising funds
c) To facilitate cost control d) To arrange board meeting
Ans: d) To arrange board meeting
3. Which of the following finance manager is accountable?
a) Earning capital assets of the company
b) Effective management of a fund
c) Arrangement of financial resources
d)Proper utilization of funds
Ans: c) Arrangement of financial resources
4. Which of the following is known as capitalization of a company is arrived at according to
any of the cost or earning theory?
a) Proper Capitalization b) Actual Capitalization
c) Over Capitalization d) Under Capitalization
Ans: a) Proper Capitalization
5) The situation where a company has raised funds more than its requirements,which is
known as?
a)Over-Capitalization b) Under-Capitalization
c) Proper-Capitalization d) Excess Capital
Ans: a) Over-Capitalization
5) Which is varies inversely with profitability?
a)Liquidity
b) Risk
c) Account
d) Trade
Ans: a) Liquidity
6. Which of the following finance manager is accountable?
a)Earning capital assets of the company b) Effective management of a fund
c) Arrangement of financial resources d)Proper utilization of funds
Ans: c) Arrangement of financial resources
6. Which is varies inversely with profitability?
a)Liquidity b) Risk
c) Account d) Trade
Ans: a) Liquidity

7. Which of the following finance manager is accountable?

a)Earning capital assets of the company b) Effective management of a fund
c) Arrangement of financial resources d)Proper utilization of funds
Ans: c) Arrangement of financial resources
8. Which is known as marketability of an investment?
a) Reserve b) Risk
c) Return d) Liquidity
Ans: d) Liquidity
9. Which of the following is not a correct statement?
a) Profit maximization is vague conceptually.
b) Profit maximization ignores timing of returns
c) Profit maximization emphasis is generally on short run projects.
d) Profit maximization considers timing of returns.
Ans: d) Profit maximization considers timing of returns.
10.Which is concerned with the acquisition, financing, and management of assets with some
overall goal in mind?
a)financial management b)Profit maximization
c)Wealth maximization d)Social responsibility
Ans: a) Financial management
11) Name the process that enables the management to foresee the fund requirements, both the
quantum as well as the timing.
a)financial management
b) Capital budgeting decisions
c) Dividend decision
d) Financial planning
Ans: d) Financial planning
12) Which of these is not a part of Capital Structure?
a) Equity Shares b) Debentures
c) Short-term borrowings d) Bonds
Ans: c) Short-term borrowings
13. What is the main aim of capital structure?
a) Maximise owner’s return and minimise the cost of capital
b) Maximise owner’s return and maximise the cost of capital
c) Minimise owner’s return and minimise the cost of capital
d)Minimise owner’s return and maximise the cost of capital
Ans: a) Maximise owner’s return and minimise the cost of capital

14Which of the following is not the capital structure theories / approach?

a) Net Income approach
b) Net Operating Income approach
c) Modigliani Miller (MM) approach
d) Sensitivity Analysis approach
Ans: d) Sensitivity Analysis approach
15. Which is known as the decisions regarding the forms of financing, their requirements, and
their relative proportions in total capitalization?
a) Equity decisions b) Equilibrium decisions
c) Outright decisions d) Capital structure decisions
16. Which of the following is not included in the capital structure?
a) long term debt b) Preferred stock,
c) Current assets d) Retained earningsWhich of the following
Ans: c) Current assets
17.appearing in the balancesheet, generates tax advantage and hence affects thecapital
structure decision?
a) Reserves and Surplus b) Long-term debt
c)Preference Share Capital d) Equity Share Capital
Ans: b) Long-term debt
18. Which of the following assumes constant Kid and Ke?
a) Net Income Approach
b) Net Operating Income Approach
c) Traditional Approach
d) MM Model
Ans:
19. Which is the most expensive source of funds?
a) New Equity Shares
b)New Preference Shares
c)New Debts
d) Retained Earnings
Ans: a) New Equity Shares
20. Which is refers to that EBIT level at which EPS remains the same irrespective of the
debt-equity mix?
a) Financial Break Even Point
b) Point of Indifference
c) Optimum Capital Structure
d) Trading on Equity
Ans: b) Point of Indifference
21. What is a critical assumption of the net operating income (NOI) approach to valuation?
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.
Ans: c) Ko remains constant regardless of changes in leverage.
22. Which is a point where earnings before income tax (EBIT) is equal to financial cost of a
firm (or) earnings per share (EPS) is equal to zero?
a) Point of Indifference
b) Financial Breakeven Point
c) Optimum Capital Structure
d) Trading on Equity
Ans: b) Financial Breakeven Point
23. Which is the rate that the firm pays to procure financing?
a) Average Cost of Capital
b) Combine Cost
c) Economic Cost
d) Explicit Cost
Ans: d) Explicit Cost
24. Which is the cost which has already been incurred for financing a particular project?
a) Future Cost
b) Historical Cost
c) Implicit Cost
d) Opportunity Cost
Ans: b) Historical Cost
25Which of the following figure is irrelevant while calculating cost of redeemable preference
shares?
a) Floatation cost
b) Discount
c) EPS
d) Net proceeds
Ans: c) EPS
26) Which of the following is controllable factor affecting the cost of capital of the firm?
a) Dividend policy b) Level of interest rates
c) Tax rates d) Market Price
Ans: a) Dividend policy
27. 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
Ans: a) Cost of debt
28. While calculating WACC on 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 capital structure d) Cost of term loan
Ans: b) Reserve and surplus
29. Under which of the following situations a company should not issue debt capital?
a)When the cash flow condition of the company is strong.
b) When the rate of tax is low.
c) When the return on investment is high.
d) When the interest coverage ratio is high.
Ans: b) When the rate of tax is low.
30. Which technique estimates the time required by the project to recover, through cash
inflows, the firm’s initial outlay?
a)Net Present Value (NPV) Method
b)Internal Rate of Return (IRR) Method
c)Average Rate of Return (ARR) Method
d)Pay back Method
Ans: d) Pay back Method
31. Situation in which company replaces existing assets with new assets?
a)Existing projects
b)New projects
c)Replacement projects
d)Internal projects
Ans: c) Replacement projects
32. Which is referred to as A project whose acceptance does not prevent or require the
acceptance of one or more alternative projects?
a)Mutually exclusive project b)Independent project
c)Dependent project d)Contingent project.
Ans: b) Independent project
33. Which of the following is not followed in capital budgeting?
a)Cash flows Principle,
b)Interest Exclusion Principle,
c)Accrual Principal
d)Post-tax Principle.
Ans: c) Accrual Principle
34. Which of the following does not affect cash flows proposal?
a)Salvage Value,
b) Depreciation Amount,
c)Tax Rate Change,
d)Method of Project Financing.
Ans : d)Method of Project Financing.

35Which 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.
Ans: d) Rate of Cash Discount.
36. Which of the following is not a capital budgeting decision?
a)Expansion Programmed,
b) Merger,
c)Replacement of an Asset,
d) Inventory Level.
Ans: d) Inventory Level.
37. Which of the following is not used in Capital Budgeting?
a)Time Value of Money, b)Sensitivity Analysis,
c)Net Assets Method, d)Cash Flows.
Ans: b) Sensitivity Analysis,
38. Which of the following cannot be true?
a) Inflation Rate > Money Discount Rate
b) Real Discount Rate < Money Discount Rate
c)Inflation Rate < Real Discount Rate
d)Inflation Rate = Real Discount Rate
Ans: a) Inflation Rate > Money Discount Rate
39. Which of the following is traditional/non- discounted cash flow technique?
a)Net Present Value (NPV) Method b)Internal Rate of Return (IRR) Method
c)Profitability Index (PI) d)Pay back method
Ans: d) Pay back method
40. Working capital,which is also known as?
a)Operation capital b)Operating capital
c)Current assets capital d) Current liability capital
Ans: b) Operating capital
41. Which is also called Fluctuating Working Capital?
a) Initial Working Capital
b)Temporary Working Capital
c)Permanent Working Capital
d)Variable working capital
Ans: d) Variable working capital
42. Which of the following represents the amount utilized at the time of contingencies?
a) Net working capital b)Reserve Working Capita
c) Permanent Working Capital d) Gross Working Capital
Ans: b) Reserve Working Capita
43) Name the financial decision which relates to disposal of profits.
a)Investment decision
b)Financing decision
c)Dividend decision
d)Capital budgeting decision
Ans: c) Dividend decision
44. Capital which is needed to meet the seasonal requirements of the business – Identify the
below.
a)Gross Working Capital b)Reserve Margin Working Capital
c)Net working capital d)Fluctuating Working Capital
Ans: d) Fluctuating Working Capital
45. Identify 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
Ans: a) Reserve Working Capital
46) Gross working capital refers to – complete the sentence.
a)The 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.
Ans: b) The firm’s investment in current assets.

47. Which of the following represents the amount utilized at the time of contingencies?
a) Net working capital b)Reserve Working Capita
c) Permanent Working Capital d) Gross Working Capital
Ans: b) The firm’s investment in current assets.
48. Which of the following is not followed in capital budgeting?
a)Cash flows Principle,
b)Interest Exclusion Principle,
c)Accrual Principal
d)Post-tax Principle.
Ans: c) Accrual Principle
49) Under which of the following situations a company should not issue debt capital?
a)When the cash flow condition of the company is strong.
b) When the rate of tax is low.
c) When the return on investment is high.
d) When the interest coverage ratio is high.
Ans: b) When the rate of tax is low.
50. Which is the cost which has already been incurred for financing a particular project?
a) Future Cost
b) Historical Cost
c) Implicit Cost
d) Opportunity Cost
Ans: b) Historical Cost