Paper-6: Financial Management: Multiple Choice Questions

CA INTERMEDIATE
PAPER-6 : FINANCIAL MANAGEMENT
MULTIPLE CHOICE QUESTIONS

PAPER-6A : FINANCIAL MANAGEMENT
CONTENTS
1 BASICS OF FINANCIAL MANAGEMENT .............................................. 1-5
2 FINANCIAL RATIO ANALYSIS ......................................................... 6-9
3 WORKING CAPITAL MANAGEMENT ................................................... 10-14
RECEIVABLE MANAGEMENT ........................................................... 15-18
INVENTORY MANAGEMENT ............................................................ 19-24
MANAGEMENT OF CASH & MARKETABLE SECURITIES .................... 25-29
4 RISK AND LEVERAGE ANALYSIS ....................................................... 30-35
5 COST & CAPITAL STRUCTURE .......................................................... 36-41
6 SOURCES OF FINANCE .................................................................. 42-44
7 CAPITAL BUDGETING .................................................................... 45-52
8 DIVIDEND DECISIONS ................................................................... 53-62

CHAPTER-1 BASICS OF FINANCIAL MANAGEMENT
CHAPTER-1
BASICS OF FINANCIAL MANAGEMENT
1. "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.
2. To increase a given present value, the discount rate should be adjusted -
(a) Upward (c) Keep as it is
(b) Downward (d) None of the above
3. 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.
4. Financial Management is concerned with______
(a) Investment Decisions (c) Dividend Decisions
(b) Finance Decisions (d) All of the above
5. 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
(a) (a)&(b) (c) (b)&(c)
(b) (a), (c)&(d) (d) (c), (a), (d)&(b)
6. 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.
7. 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)
CA Intermediate | Paper-6A | Financial Management MCQS 1

8. The focal point of financial management in a firm is_______

(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.
9. 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 institution
(d) All of the above
10. 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
11. The funds raised by the issue of_______are the best from the risk point of view for the
company.
(a) equity shares (c) both(A)&(B)
(b) debentures (d) none of the above
12. 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
13. 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
14. The purpose of financial markets is to:
(a) Increase the price of common stocks (c) Allocate savings efficiently
(b) Lower the yield on bonds (d) Control inflation
15. 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
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16. ________ensures that the firm utilizes its available resources most efficiently under
conditions of competitive markets.
(a) Wealth Maximization (c) Value Maximization
(b) Profit Maximization (d) Relation Maximization
17. For which of the following reason(s) profit maximization concept is 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. Select the correct answer from the
options given below.
(a) 1 (b) 1&2 (c) 1,2&3 (d) 1,2,3 814
18. ________consistent with the object of maximizing the owner's economic welfare.
(a) Profit Maximization (c) Relation Maximization
(b) Wealth Maximization (d) All of the above
19. Financial Management is concerned with -
(a) Profit Maximization (b) Both (A) & (C)
(c) Wealth Maximization
(d) Both (A) & (C) plus Relation Maximization
20. 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
21. Under inflationary conditions, the value of money expressed in terms of its purchasing
power over goods and services
(a) Incline (c) Increases
(b) Declines (d) Remains constant
22. _______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 (c) Financial certainty
(b) Financial uncertainty (d) Financial distress
23. _______means the organization can no longer meet its financial obligations with its lender
or lenders as debts become due.
(a) Financial certainty (c) Financial risk
(b) Financial insolvency (d) Identified risk
24. A permanent____may lead an organization to the chaotic state_______
(a) Financial insolvency; financial certainty

(b) Financial distress; Identified risk

(c) Identified risk; financial insolvency
(d) Financial distress; financial insolvency
25. 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
26. Higher the level of financial gearing_
(a) Greater will be the risk. (c) Risk will be constant.
(b) Lower will be the risk. (d) None of the above
27. 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
28. 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.
29. 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 (d) All of the above
30. Investment decisions encompass__________
(a) Cost of capital (b) Capital budgeting
(c) Management of liquidity and current assets
31. 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.
32. If the 'Profit Maximization' concept is applied then which of the following Product will be
selected?
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YEAR A B C D
1 14,000 6,000 35,000 22,000
2 14,000 8,000 10,000 5,000
3 14,000 10,000 8,000 18,000
4 14,000 18,000 4,000 6,000
5 14,000 34,000 2,000 10,000
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
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12
(d) (b) (b) (d) (d) (d) (a) (c) (d) (b) (a) (d)
13 14 15 16 17 18 19 20 21 22 23 24
(b) (c) (a) (b) (d) (b) (b) (d) (b) (d) (b) (d)
25 26 27 28 29 30 31 32
(a) (a) (d) (d) (a) (d) (d) (b)

CHAPTER-2 FINANCIAL RATIO ANALYSIS
CHAPTER-2
FINANCIAL RATIO ANALYSIS
1. 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
2. From the following information find the value of dosing stock
Stock velocity: 6 months Gross profit ratio: 25% Gross profit for the year ended 31st March
2014: K 1,00,000
Closing stock for the period - ? 20,000 more than it was at the beginning of the year.
(a) ` 1,50,000 (b) ` 1,40,000 (c) ` 1,60,000 (d) ` 70,000
3. The profit before taxes of a company is ` 2,00,000, preference dividend ` 25,000, and taxes
paid K 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
4. 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
5. 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
6. Working capital ratio is also known as:
(a) Quick ratio (c) Current ratio
(b) Debt-Equity ratio (d) Liquid ratio
7. Credit sales of Jump Ltd. for the year is ` 12,00,000 and debtors at the end of 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
8. 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
9. Which of the following is a method used in analyzing financial statements -
(a) Variance analysis (c) Break-even analysis
(b) Trend analysis (d) Budget analysis
10. 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
11. ________ are necessary for the study of trends and direction of movements in the financial
position and operating results of a concern.
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(a) Trend ratios (c) Common size statements

(b) Cash flow statements (d) Comparative statements
12. 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 (d) None
13. Determine a firm's total assets turnover, if its net profits 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
14. 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 (c) ` 33.16 & ` 281.86 respectively
(b) ` 45 & ` 308.20 respectively (d) ` 45 & ` 5.29 respectively
15. Which of the following pairs is correctly matched
(a) Administrative expenses + Selling and distribution expenses = Operating expenses
(b) Gross profit x Net sales x 100 = Net profit ratio
(c) Both (A) and (B) above
(d) None of the above
16. 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
17. Which of the following pairs is not correctly matched
(a) Dividend per equity share / Earnings per share = Payout ratio
(b) [Operating profit/Capital em-ployed] ` 100 = Return on capital employed
(c) [(Cost of goods sold + operating expenses)/net sales] x 100 = Operating profit ratio
18. 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
19. Return on investment is also known as
(a) Dupont chart (c) P/V ratio
(b) Activity ratio (d) Market test ratio
20. 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

21. 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
22. 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
23. 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
24. 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
25. 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
26. 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
27. 8% 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 (c) ` 4.70 and 8.51
(b) ` 5 and 8 (d) ` 3.20 and 12.50
28. 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
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29. Interest coverage ratio is obtained by dividing EBIT by

(a) Interest (b) Tax (c) Income (d) Sales
30. 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
31. 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 2,80,000 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 (d) None
32. 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: (d) 3.1: 1
33. 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 (d) None
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
(a) (c) (b) (c) (a) (c) (b ) (d) (b) (d) (a) (c) (c) (a) (d) (a) (d)
18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
(b) (a) (a) (c) (a) (a) (b) (a) (c) (d) (b) (a) (d) (a) (a) (c)
---0---0---

CHAPTER-3 WORKING CAPITAL MANAGEMENT
CHAPTER-3
WORKING CAPITAL MANAGEMENT
1. 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.
2. 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
3. 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
4. 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
5. 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
6. 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
7. Which of the following analyzes the accounts receivable, inventory, and accounts payable
cycles in terms of a number of days?
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(a) Operation cycle (c) Operating cycle

(b) Current asset cycle (d) Business cycle
8. Fluctuating Working Capital is also called as -
(a) Reserve Margin Working Capital (c) Permanent Working Capital
(b) Temporary Working Capital (d) Variable Working Capital
9. A higher current assets/fixed assets ratio indicates -
(a) Hedging Approach (c) Matching/hedging Approach
(b) Conservative Approach (d) Aggressive Approach
10. 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.
11. 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) Overrating (c) Overcoming
(b) Overtrading (d) Overtone
12. Which of the following represents the amount utilized at the time of contingencies?
(a) Reserve Working Capital (c) Extra working capital
(b) Net working capital (d) Fixed working capital
13. Permanent Working Capital is also known as
(a) Fixed working capital (c) Long term funds
(b) Temporary working capital (d) Gross margin working capital
14. A lower current assets/fixed assets ratio means -
(a) Matching/hedging Approach (c) Riskier current assets policy
(b) Aggressive current assets policy (d) Conservative current assets poHcy
15. Any amount over and above the permanent level of working capital is known as working
capital.
(a) Temporary (b) Fluctuating (c) Variable (d) All
16. 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.
17. 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 (c) Fixed working capital
(b) Long term working capital (d) Both (A) and (C)

18. 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)
19. ________varies inversely with profitability.
(a) Liquidity (b) Risk (c) Gross profit (d) None
20. ______refers to the difference between current asset and current liabilities.
(a) Differential working capital (c) Operation working capital
(b) Net working capital (d) None of the above
21. 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.
22. 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.
23. 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
24. 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 (c) ` 1,09,07,550
(b) ` 81/79,313 (d) ` 1,05,09,750
25. Current assets of Z Ltd. are ` 3,70,000 which includes stock ` 1,00,000 and prepaid expense
K 70,000. Its current liability are ` 1,60,000 which includes provision for tax ` 60,OOO.Liquid
Ratio =?
(a) 1.25 (b) 1.52 (c) 1.22 (d) 0.95
26. 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
27. 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
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appear in the working capital statement? Note: 1 Year = 360 days

(a) ` 18,000 (b) ` 20,000 (c) ` 21,600 (d) ` 19,800
28. 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
29. 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
30. Debtors as per working capital statement = ` 3,00,000
Debtors collection period = 45 days
Gross profit ratio = 20%
Cash sales = ` 5,00,000
Note: 1 Year = 360 days Total sales = ?
(a) ` 24,00,000 (b) ` 19,00,000 (c) ` 29,00,000 (d) ` 25,00,000
31. 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
32. 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
33. 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 is -
(a) ` 57,41,813 (b) ` 49,29,313 (c) ` 52,29,813 (d) ` 49,41,813
34. 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
35. 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
36. 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
37. 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
38. 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
39. 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 360 days year.)
(a) ` 2,40,000 (b) ` 2,36,712 (c) ` 2,63,127 (d) ` 2,40,721
40. 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 - Assume 360 Days in a year.
(a) ` 1,17,00,000 (c) ` 2,92,50,000
(b) ` 32,500 (d) ` 1,92,50,000
41. 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
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
(d) (a) (a) (b) (d) (b) (c) (c) (c) (b) (b) (a) (a) (b) (d) (d)
17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
(d) (a) (a) (b) (a) (a) (d) (a) (a) (a) (a) (b) (c) (c) (a) (b)
33 34 35 36 37 38 39 40 41
(a) (c) (d) (b) (c) (b) (a) (a) (c)
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14 Navkar Institute
Receivable Management
1. _______is an arrangement to have debts collected by a third party entity for a fee.
(a) Factoring (b) Aging (c) Forming (d) Crediting
2. 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
3. The goal of receivables management is to maximize the value of the firm by achieving a
trade-off between -
(a) Risk & Profitability (c) Return & Profitability
(b) Liquidity & Profitability (d) Return & Liquidity
4. Which of the following function 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) 296 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) 296 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 due to -
(a) Insolvency (c) Intention of cheating
(b) Liquidity problems (d) All of the above
7. The cash discount is given to customers for:
(a) Early payments (c) Bulk purchase
(b) Good business relations (d) Frequent purchases
8. The accounts receivable that cannot be collected because of their bankruptcy or another
reason are termed as:

(a) Collectible accounts (c) Doubtful accounts

(b) Bad customers (d) Uncollectible accounts
9. Which of the following sentence describes a correct strategy for the proper administration
of receivables?
(a) Most of the 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 (c) At a net realizable value
(b) At a gross value (d) At net credit sales value
11. _______may also be offered for the early payment of dues.
(a) Trade discounts (c) Both (A) and (B)
(b) Special discounts (d) Cash discounts
12. 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)
13. An important means to get an insight into the collection pattern of debtors is the preparation
of their -
(a) List of proposed discount (b) Discount schedule
(c) Schedule of personal formation of debtors
(d) Ageing Schedule
14. 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 inmate, 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
15. 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
16. In________type of factoring the bank/factor takes all the risk and bears all the loss in case
of debts becoming bad debts.
(a) Non-Recourse Factoring (c) Maturity Factoring
(b) Invoice Discounting (d) Recourse Factoring
16 Navkar Institute
17. Which one of the following would help to reduce the number of accounts receivable
delinquencies?
(a) Ease the credit approval process (c) Refuse to extend payments
(b) Know your customer situations (d) Stop sending reminder letters
18. In factoring arrangement the debts as and when fall due is collected by the -
(a) Debtor (b) Seller (c) Factor (d) Agent
19. When net sales for the year are ` 2,50,000 and debtors ` 50,000, the average collection period
is:
20. If credit sales for the year are ` 5,40,000 and Debtors at the end of the year is ` 90,000 the
Average Collection Period will be -
21. 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 (c) 148 days
(b) 157 days (d) 4.43 months
22. 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
23. 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
24. F Ltd. is examining the relaxation of its credit policy. It sells at present 20,000 units at a
price of K 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.
25. 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 change of credit policy?
(a) 15.79% (c) 0.79%
(b) No incremental return (d) 1.58%

ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13
(a) (b) (a) (a) (d) (d) (a) (d) (d) (c) (d) (c) (d)
14 15 16 17 18 19 20 21 22 23 24 25
(b) (d) (a) (b) (c) (d) (b) (c) (d) (c) (a) (a)
18 Navkar Institute
Inventory Management
1. Which type of material is classified as 'A' type in ABC analysis

(a) High price, more quantity (c) Low price, more quantity
(b) High price, less quantity (d) Low price, less quantity
2. Which of the following is recorded by bin card
(a) Quantity. (c) Value
(b) Quantity and value (d) Quality
3. If the minimum stock level and average stock level of raw material 'A' are 4,000 & 9,000
emits respectively, what is its reorder quantity
(a) 8,000 units (c) 10,000 units
(b) 11,000 units (d) 9,000 units
4. The method of regular physical verification of material throughout the year is known as
(a) Periodic stock taking (c) Continuous stock taking
(b) Bin card system (d) Stock ledger system
5. In an inflationary situation, which system of inventory valuation shows higher profits
(a) UFO (c) HIFO
(b) FIFO (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. A store ledger is a record of receipts, issues, and closing balances of material by entering
(a) Quantity only (c) Value only
(b) Quantity and value (d) Quality only
8. 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 (c) Accounts department
(b) The Production department (d) q Stores department
9. 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 (c) Highest-in-first-out method
(b) UFO method (d) `Weighted average method
10. 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

11. 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
12. 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
13. FIFO method of valuing material issues is suitable in times of__________
(a) Rising prices (c) Price fluctuation
(b) Falling prices (d) Boom period
14. 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
15. 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 (d) None
16. In a situation of rising prices, profit and tax liability would be lower under method than
under method of material issue pricing
(a) FIFO; UFO (c) UFO; Average
(b) UFO; FIFO (d) FIFO; Average
17. The technique of economic order quantity is losing significance since the development of
(a) Perpetual inventory (c) First-in-first-out
(b) Just-in-time (d) ABC analysis
18. 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
19. 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 (c) 500 kg and 12 orders
(b) 500 kg and 4 orders (d) 400 kg and 6 orders
20. 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
20 Navkar Institute
(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
21. ______account does not record the balance of stores ledger control account.
(a) Manufacturing (c) Profit and loss
(b) Trading (d) Work-in-progress
22. 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
23. 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 (c) Purchase requisition
(b) Bill of material (d) Bin card
24. 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
25. 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
26. Which of the following is considered as normal loss of material
(a) Pilferage (c) Loss due to accident
(b) Loss due to flood (d) None of the above
27. 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
28. 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

29. 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
30. When prices fluctuate widely, which of the following method will even out the effect of
fluctuations?
(a) Weighted average (c) UFO
(b) FIFO (d) Simple average
31. In which of the following methods, material issues are priced at a predetermined rate?
(a) Replacement price method (c) Inflated price method
(b) Specific price method (d) Standard price method
32. Which of the following does not normally appear on a material requisition form?
(a) Job number (c) Supplier's name
(b) Unit cost (d) Quantity requisitioned
33. 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
34. This type of loss is connected with both input and output:
(a) Waste (b) Scarp (c) Defectives (d) All
35. Decision regarding the centralized purchase of material has to be taken on the basis of:
(a) Geographical separation of plant (c) Type of material to be purchased
(b) Homogeneity of products (d) All of the above
36. 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
37. 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 (c) 5,000 units
(b) 4,000 units (d) 6,000 units
38. 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
22 Navkar Institute
39. ________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
40. 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
41. If EOQ is 200 units, ordering cost is ` 20per order and total purchases are 4,000 units. The
carrying cost per unit will be:
(a) `4 (b) `6 (c) `8 (d) `2
42. 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 (c) Order Cycling System
(b) Two-bin System (d) Perpetual Inventory System
43. 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
44. _______ 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 (c) Highest in First Out
(b) Base Stock (d) Standard Price
45. 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 (c) 577.35 units
(b) 4,000 units (d) 1,825.74 units
46. 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 (c) Highest in first out method
(b) Last in first out method (d) Standard pricing method
47. The following information is given: 10,0 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
48. 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

49. Smoke, dust, gases, and loss of weight due to seasoning are examples of
(a) Scrap (b) Spoilage (c) Defectives (d) Waste
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(b) (a) (c) (c) (b) (a) (b) (b) (c) (b) (a) (b) (b) (c)
15 16 17 18 19 20 21 22 23 24 25 26 27 28
(c) (b) (b) (d) (b) (a) (b) (c) (b) (a) (c) (d) (a) (c)
29 30 31 32 33 34 35 36 37 38 39 40 41 42
(a) (a) (d) (c) (d) (a) (d) (a) (d) (b) (c) (c) (a) (c)
43 44 45 46 47 48 49
(d) (c) (a) (b) (b) (d) (d)
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24 Navkar Institute
Management of Cash & Marketable Securities
1. 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
2. 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
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 (c) Office salaries
(b) Commission paid to agents (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 (c) Lower depreciation charge
(b) Reduced materials costs (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 (c) Free cash
(b) Controllable 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 (c) Depreciation
(b) Provision for doubtful debts (d) Accrued expenditure
11. 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.
12. 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
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.
26 Navkar Institute
(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 (c) Out of cash
(b) Cashflow (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 (c) All the Current Liabilities
(b) All the Current Assets (d) None of the above
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 (c) 20,00,000;480
(b) 2,00,000; 48 (d) 2,00,00,000;4,800
22. 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
23. 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

24. 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
25. 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 earn a 5% annual yield on its securities.
Optimal cash balance = ? and No. of transactions =?
(a) 1,00,000; 5 (c) 2,00,000; 5
(b) 4,00,000; 10 (d) 2,00,000; 10
26. 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
27. Estimated wages for January is ` 4,000 and for February ` 4,400. If the delay in payment of
wages is 112 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) ` 4,20
28. 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) (c) (1), (4), and (5)
(b) (1), (2), (4), and (5) (d) (2), (3), and (4)
29. Which of the following involves a movement of cash?
(a) A bonus issue (c) Depreciation of fixed assets
(b) A right issue (d) Provision for taxes
30. Working capital will not change if there is:
(a) Increase in current assets (c) Decrease in current liabilities
(b) Payment to the creditors (d) Decrease in current assets
31. 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.
28 Navkar Institute
32. 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 (d) None
33. 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
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(b) d) (a) (a) (a) (c) (a) (b) (c) (c) (a) (c) (d) (b) (c)
16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
(b) (c) (a) (d) (a) (b) (c) (c) (b) (c) (d) (d) (c) (b) (b)
31 32 33
(d) (d) (a)

CHAPTER-4 Risk and Leverage Analysis
CHAPTER-4
RISK AND LEVERAGE ANALYSIS
1. 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
2. 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
3. Which of the following are not commonly used measures of leverage in financial analysis?
(a) Operating Leverage (c) Combined Leverage
(b) Financial 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 (c) Operation Leverage
(b) Operating 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 (c) Working Capital Leverage
(b) Combined Leverage (d) Financial Leverage
6. EBIT is usually the same thing as:
(a) Funds provided by operations (c) Net income
(b) Earnings before taxes (d) Operating profit
7. Which of the following, is the correct formula to calculate Operating Leverage?
(a) Contribution (b) EBIT
OperationLeverage = OperationLeverage =
EBIT Contribution
(c) EBIT (d) EBT
OperationLeverage = OperationLeverage =
Contribution EBIT
8. 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
30 Navkar Institute
9. Which of the following is the correct formula to calculate Operating Leverage?

(a) %Change in EPS (c) %Change in EBIT
%Change inSales %Change inSales
(b) %Change in EBIT (d) %Change inSales
%Change inEPS %Change inEBIT
10. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree
of financial leverage (DFL).
(a) Plus (c) Divided by
(b) Minus (d) Multiplied by
11. If operating leverage is 4, this means that
(a) 4% change in sales will cause a 1% change in EBU.
(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.
12. 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
13. If the fixed costs are high, the operating leverage will also be
(a) Low (b) High (c) Zero (d) Negative
14. The measure of business risk is
(a) Operating leverage (c) Combines leverage
(b) Financial leverage (d) Working capital leverage
15. The presence of fixed costs in the total cost structure of firm results into
(a) Financial Leverage (c) Super Leverage
(b) Operating Leverage (d) Progressive leverage
16. High operating leverage indicates
(a) Highly favorable situation as it consists of low fixed costs.
(b) The Highly risky situation as it consists of large interest costs.
(c) Highly favorable situation as it consists of higher EPS.
(d) The Highly risky situation as it consists of large fixed costs.
17. Which of the following is the correct formula to calculate Financial Leverage?
(a) EBT (b) EPS
Financial Leverage = Financial Leverage =
EBIT EBT
EBIT EBIT
(c) Financial Leverage = (d) Financial Leverage =
EBT EPS

18. 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%
19. Operating leverage is directly_____ to business risk.
(a) Proportional (c) Unrelated
(b) Not proportional (d) Not related
20. 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%.
21. More operating leverage leads to
(a) Less financial risk (c) More business risk
(b) More financial risk (d) Less business risk
22. Which of the following is the correct formula to calculate Financial Leverage?
(a) % Change in EPS (b) %Change in EBIT
% Change in EBIT %Change in EPS
(c) %Change in EBT (d) %Change in Contribution
%Change in EPS %Change in EPS
23. Higher operating leverage is related to the use of additional
(a) Fixed costs (c) Debt financing
(b) Variable costs (d) Common equity financing
24. 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).
25. Lower financial leverage is related to the use of additional
(a) Fixed costs (c) Debt financing
(b) Variable costs (d) Common equity financing
26. The operating leverage indicates the impact of changes in sales on
(a) Operating income (c) Operating profit after tax
(b) Operating cost (d) Operating sales
27. If financial leverage is 2.5, this means that
(a) 2.5% change in EBIT will cause a 1% change in EBIT
32 Navkar Institute
(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
28. Where a company has a large number of fixed interest charges, the financial leverage will be
(a) High (b) Low (c) Negative (d) Unreliable
29. The maximum amount of debt (and other fixed-charge financings) that a firm can adequately
service is referred to as the_______
(a) Debt capacity (c) Adequacy capacity
(b) Debt-service burden (d) Fixed-charge burden
30. High financial leverage is not good as it indicates the large content of
(a) Fixed cost (c) Variable cost charges
(b) Fixed interest charges (d) Contribution
31. Cash required during a specific period to meet interest expenses and principal payments is
referred to as the:
(a) Debt capacity (c) Adequacy capacity
(b) Debt service burden (d) Fixed charge burden
32. Earnings to equity shareholders (EPS) will fluctuate violently if
(a) Financial leverage is very high
(b) Operating leverage is very high
(c) Working capita! leverage is very high
(d) Operating leverage is very low
33. If the Return on Investment (ROI) exceeds the rate of interest on debt, it is financial leverage..
(a) Unfavourable (c) A favorable
(b) Adverse (d) Negative
34. High operating leverage combined with high financial leverage will constitute
(a) Favourable situation (c) Less risky situation
(b) Positive situation (d) Risky situation
35. 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 below.
(d) Operating & financial leverage both should be high.
36. 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.
37. Degree of_______is the ratio of percentage change in gaming per share to the percentage
change in sales.
(a) Financial leverage (c) Combined leverage
(b) Operating leverage (d) Working leverage
38. If operating leverage is, 2.1429 and financial leverage is 1.0699 then combined leverage will
be
(a) 2.2927 (c) 0.4993
(b) 2.0029 (d) Data given is not sufficient
39. If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be
(a) 0.625 (c) 1.60
40. If combined leverage is 2.2926 and operating leverage is 2.1429 then financial leverage will
be
(a) 1.0699 (c) 4.9128
41. 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
42. Operating leverage is 4. This means a 10% change in sales will cause
(a) 4% change in variable cost (c) 4% change in EBIT
(b) 40% change in EPS (d) 40% change in EBIT
43. Financial leverage is 2.5. This means a 10% change in EBIT will cause
(a) 2.5% change in EBIT (c) 25% change in sales
(b) 2.5% change in EPS (d) 25% change in EBT and EPS
44. The combined leverage is 3.125. This means a 10% change in Sales will cause
(a) 31.25% change in PAT (c) 31.25% change in capital employed
(b) 31.25% change in EPS (d) Both (A) and (B)
45. 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
46. 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
34 Navkar Institute
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(c) (b) (d) (b) (d) (d) (a) (a) (c) (d) (b) (c) (b) (a)
15 16 17 18 19 20 21 22 23 24 25 26 27 28
(b) (d) (d) (d) (a) (c) (c) (a) (a) (d) (d) (a) (d) (a)
29 30 31 32 33 34 35 36 37 38 39 40 41 42
(a) (b) (b) (a) (a) (d) (c) (c) (c) (a) (c) (a) (c) (d)
43 44 45 46
(d) (d) (b) (d)
---0---0---

CHAPTER-5 COST & CAPITAL STRUCTURE
1. In which of the cost 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 (c) Adjusted Dividend Method
(b) Adjusted Price Method (d) Dividend Yield Method
2. Which of the following is the correct formula to calculate the cost of equity under the
dividend yield method?
(a) D (b) Ke = Rf+ β (Rm - Rf)
Ke =
p0
D EPS
Ke = 1 + g
(c) (d) Ke =
NP P0
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 (c) Implicit Cost
(b) Future Cost (d) Specific Cost
4. Which of the following model/ method makes use of Beta (3) in the calculation of the cost
of equity?
(a) Risk-Adjusted Discount Model (c) MM Model
(b) Capital Assets Pricing Method (d) Price Earning Method
5. 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.
6. 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 (c) Overall cost of capital
(b) Internal rate of return (d) Accounting rate of return
7. 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 (c) Cost of equity
(b) Risk premium (d) WACCof the firm
8. For each component of capital, a required rate of return is considered as:
(a) Component cost (c) Asset cost
(b) Evaluating cost (d) Asset depreciation value
36 Navkar Institute
9. _______ is the rate that the firm pays to procure financing.

(a) Average Cost of Capital (c) Economic Cost
(b) Combine Cost (d) Explicit Cost
10. Which of the following method of cost of equity is similar to the dividend price approach?
(a) Discounted cash flow (DCF) method (c) Price earning method
(b) Capital asset pricing model (d) After-tax equity method
11. How you will calculate expected dividend i.e. dividend at the end of year one?
(a) D1 = [Do(l + g)] (c) D1 = [D0× (l-g)]
(b) D1=[D0(1-t)] (d) D1=[D0+(1-g)](1-t)
12. n WACC, rising in interest rate leads to -
(a) Increase in cost of debt (c) Decrease in cost of debt
(b) Increase the capital structure (d) Decrease the capital structure
13. In weighted average cost of capital, capital components are funds that are usually offered
by:
(a) Stock market (c) Capitalist
(b) Investors (d) Exchange index
14. The overall cost of capital is called as -
(a) Composite cost of capital (c) Both (A) and (B)
(b) Combined cost of capital (d) Neither (A) nor (B)
15. 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 (c) Current risk premium
(b) Expected premium (d) Beta premium
16. Which of the following figure is irrelevant while calculating the cost of redeemable preference
shares?
(a) Flotation cost (c) EPS
(b) Discount (d) Net proceeds
17. An interest rate that is paid by a firm as soon as it issues debt is classified as pre-tax -
(a) Term structure (c) Risk premium
(b) Market premium (d) Cost of debt
18. Which of the following is a controllable factor affecting the cost of capital of the firm?
(a) Dividend policy (c) Tax rates
(b) Level of interest rates (d) All of the above
19. Which of the following is an uncontrollable factor affecting the cost of capital of the firm?
(a) Investment Policy (c) Debt service charges
(b) Capital Structure Policy (d) None of the above
20. Type of cost which is used to raise common equity by reinvesting internal earnings is
classified as

(a) Cost of common equity (c) Cost of stocks

(b) Cost of mortgage (d) Cost of reserve assets
21. Which of the following factor affects the determination of the cost of capital of the firm?
(a) General economic conditions (c) Operating and financing decisions
(b) Market conditions (d) All of the above
22. The cost of equity which is raised by reinvesting earnings internally must be higher than
the -
(a) Cost of the initial offering (c) Cost of preferred equity
(b) Cost of new common equity (d) Cost of floatation
23. During the planning period, marginal cost to raise new debt is classified as_______
(a) Debt cost (c) Relevant cost
(b) Borrowing cost (d) Embedded cost
24. The after-tax cost of debentures not redeemable during the lifetime of the company is -
(a) [Interest ÷ Net proceeds] × (1 -1) (c) Interest × (l + t) ÷ Net proceeds
(b) Interest × (l -1) ÷ Net proceeds (d) [Interest ÷ Net proceeds] × (1 + t)
25. The risk-free rate is subtracted from the expected market return is considered as:
(a) Country risk (c) Equity risk premium
(b) Diversifiable risk (d) Market risk premium
26. 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 firm's internal rate of return.
(d) is required return on the total assets of a firm.
27. 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
28. Which of the following is the correct formula to calculate the cost of redeemable debentures?
(a)   Rv - Sv  
1 (1 - t ) -  N  
  
Ke =
 Rv + Sv 
 2 
 
(b)   Rv + Sv  
1 (1 - t ) +  N  
 
Kd = 
 Rv - Sv 
 2 
 
(c)   Rv - Sv  
1 (1 - t ) +  N  
  
Kd =
 Rv - Sv 
 2 
 
38 Navkar Institute
(d)   Rv - Sv  
1 (1 - t ) +  N  
 
Kd = 
 Rv + Sv 
 2 
 
29. 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 do not show any change and tend to remain the same.
30. 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
31. 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)
32. Which of the following formula you will use while calculating the value of the firm?
(a) NOPAT÷ Ko (c) NOPAT ÷ KO (l-t)
(b) NOPAT × K (d) None of the above
33. For which of the following costs is it generally necessary to apply a tax adjustment to a
yield measure?
(a) Cost of debt (c) Cost of common equity
(b) Cost of preferred stock (d) Cost of retained earnings
34. 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 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.
35. 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

36. CAPM describes the between risk and returns for securities.
(a) Linear relationship (c) No relationship
(b) Hypothetical relationship (d) Diagonal relationship.
37. 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 percent (c) 8.24 percent
(b) 7.91 percent (d) 8.57 percent
38. Ramola Ltd. report its NOPAT ` 25,00,000. Its capital employed and economic value added is
` 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%
39. Raelian Ltd. has 1096 Preference Share Capital of ` 4,50,000. Face value is ` 10. 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%
40. Debt as a percentage of the total capital of Kinara Ltd. is 20%. Its cost of equity is 16% and
the pretax 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%
41. 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% (c) 17.6%
(b) 13.6% (d) 15.6%
42. The preferred stock of ISO Ltd. pays an annual dividend of ` 6.50 a share and sells for ` 48 a
share. What is 150's cost of preferred stock?
(a) 9.19% (b) 7.38% (c) 13.54% (d) 9.46%
43. 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 (c) 9.72 per cent
(b) 11.48 per cent (d) 10.11 percent
44. 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%
40 Navkar Institute
45. 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.
46. 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%
47. JKL 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. K =?
(a) 15% (b) 11% (c) 12% (d) 13%
48. 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. Kd =?
(a) .59% (b) 6.87% (c) 7.86% (d) 8.67%
49. 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%
50. 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 996 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
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13
(d) (a) (c) (b) (d) (c) (c) (a) (d) (c) (a) (a) (b)
14 15 16 17 18 19 20 21 22 23 24 25 26
(c) (c) (c) (d) (a) (d) (a) (d) (b) (c) (b) (c) (d)
27 28 29 30 31 32 33 34 35 36 37 38 39
(d) (d) (a) (d) (b) (a) (a) (c) (b) (a) (d) (c) (a)
40 41 42 43 44 45 46 47 48 49 50
(b) (d) (c) (d) (a) (c) (a) (a) (b) (a) (b)
---0---0---

CHAPTER-6 SOURCES OF FINANCE
CHAPTER-6
SOURCES OF FINANCE
1. Which of the following is an internal source of funds for a company?

(a) Bank loan (c) Retained earnings
(b) Issuing bonds (d) Venture capital
2. External sources of funds are typically obtained from:
(a) Equity shareholders (c) Both a and b
(b) Long-term loans (d) Only banks
3. Which source of funds is considered the most expensive due to interest payments?
(a) Equity financing (c) Retained earnings
(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) (c) ROI (Return on Investment)
(b) M&A (Mergers and Acquisitions) (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 (c) Venture capital
(b) Private equity (d) Retained earnings
6. When a company borrows money and promises to repay the principal along with interest, it
is obtaining funds through:
(a) Equity financing (c) Venture capital
(b) Debt financing (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 (c) Microloans
(b) Factoring (d) Invoice discounting
8. Which of the following is not a source of short-term funds for a business?
(a) Trade credit (c) Bank overdraft
(b) Commercial paper (d) Venture capital
9. Which of the following is a non-current liability that represents the obligation to repay
borrowed funds?
(a) Accounts payable (c) Long-term debt
(b) Accrued expenses (d) Prepaid expenses
10. Companies can raise funds by selling their accounts receivable to a third party at a discount.
This process is called:
(a) Equity financing (c) Treasury stock
(b) Debt factoring (d) Seed funding
42 Navkar Institute
11. The process of pooling funds from multiple investors to finance a project or business is
known as:
(a) Crowd funding (c) Asset securitization
(b) Leverage buyout (d) Angel investing
12. Which of the following is a common source of funds for startups and early-stage companies?
(a) Initial public offering (IPO) (c) Trade credit
(b) Private equity (d) Venture, capital
13. When a company issues new shares to its existing shareholders in proportion to their current
holdings, it is known as:
(a) Rights issue (c) Convertible bond
(b) Follow-on offering (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 (c) Bridge loan
(b) Mezzanine financing (d) Trade credit
15. Which of the following is an example of an external source of long-term funds?
(a) Trade credit (c) Commercial paper
(b) Bank overdraft (d) Venture capital
16. What source of funds involves the issuance of a certificate representing a sum of money
lent to a government or company?
(a) Treasury bill (c) Equity share
(b) Corporate bond (d) Invoice discounting
17. Which source of funds does not require repayment since it represents the owner's investment
in the business?
(a) Long-term debt (c) Trade credit
(b) Equity financing (d) Factoring
18. Which of the following is a government-backed source of funds designed to support small
businesses?
(a) Angel investing (c) Mezzanine financing
(b) Microloans (d) Bridge loan
19. What type of financing involves a financial institution purchasing a company's account
receivables at a discount?
(a) Factoring (c) Micro loans
(b) Trade credit (d) Crowd funding
20. Which source of funds provides temporary financial assistance to businesses to meet short-
term cash flow needs?
(a) Microloans (c) Bridge loan
(b) Trade credit (d) Equity financing

21. When a company raises funds through a private placement to a select group of investors, it
is called:
(a) Initial public offering (IPO) (c) Private equity
(b) Follow-on offering (d) Seed funding
22. Which of the following is a source of funds that allows a company to borrow against its
outstanding invoices?
(a) Venture capital (c) Invoice discounting
(b) Mezzanine financing (d) Trade credit
23. A company can raise funds by pledging its assets as collateral for a loan. This process is
known as:
(a) Factoring (c) Secured lending
(b) Leverage buyout (d) Treasury stock
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(c) (c) (b) (a) (b) (b) (a) (d) (c) (b) (a) (d) (a) (a)
15 16 17 18 19 20 21 22 23
(a) (b) (b) (b) (a) (c) (c) (c) (c)
---0---0---
44 Navkar Institute
CHAPTER-7 CAPITAL BUDGETING
CHAPTER-7
CAPITAL BUDGETING
1. 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.
2. The values of the future net incomes discounted by the cost of capital are called -
(a) Average capital cost (c) Net capital cost
(b) Discounted capital cost (d) Net present values
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.
(c) Both (A) and (B)
(d) Neither (A) nor (B)
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. 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 (c) Profitability Index
(b) Internal Rate of Return (d) Any of the above
6. __________is the discount rate that should be used in capital budgeting.
(a) Cost of capital (Ko) (c) Risk premium (Rm)
(b) Risk-free rate (Rf ) (d) Beta rate (P)
7. 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 (c) Redemption period
(b) Payback period (d) Investment period
8. 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.

9. 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
(d) Any of the above
10. 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
11. 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
12. 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 projects NPV is greater than 1.
(d) The project returns 92 cents in present value for each rupee invested.
13. The shorter the payback period -
(a) The riskier is the project. (c) Less will the NPV of the project.
(b) The less risky is the project. (d) More will the NPV of the project
14. 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.
15. Capital budgeting decisions are analyzed with help of a weighted average and for this
purpose -
(a) Component cost is used (c) Cost of capital is used
(b) Common stock value is used (d) Asset valuation is used
16. 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 return method.
(b) This method disregards the initial investment involved.
(c) It fails to take into account the timing of returns and the cost of capital.
46 Navkar Institute
17. A project whose acceptance does not prevent or require the acceptance of one or more
alternative projects is referred to as
(a) Mutually exclusive project (c) Dependent project
(b) Independent project (d) Contingent project
18. 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) (c) Internal Rate of Return (IRR)
(b) Net Present Value (NPV) (d) Payback Period (PBP)
19. Which of the following is correct formula to calculate payback period reciprocal?
(a) (1/payback period) × 100 (c) (100/payback period) x β
(b) (100/payback period) × 10 (d) [(1/payback period) × β]÷ 100
20. How ARR is calculated?
(a) (Average PAT/Initial Investment) x 100 (b) (Average NPV/Investment) x 100
(c) (Average PAT/Initial Investment) x 100 (d) (Initial Investment/Average PAT) x 100
21. 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 hurdle rate (ie. cost of capital) upward to compensate for this fact.
(b) Adjusts its hurdle rate (ie. 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.
22. 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
23. 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. (d) All of the above
24. 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.
25. ................ 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 (c) Cost benefit ratio
(b) Profitability index (d) Both (B) and (C)
26. Accept a project if the profitability index is:
(a) less than 1 (c) greater than 1
(b) positive (d) negative
27. Profitability index is actually a modification of the -
(a) Payback period method (c) Net present value method
(b) IRR Method (d) Risk premium method
28. Which of the following capital budgeting techniques takes into account the incremental
accounting income rather than cash flows?
(a) Net present value (c) Accounting/simple rate of return
(b) Internal rate of return (d) Cash payback period
29. 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.
30. Which of the following techniques does not take into account the time value of money?
(a) Internal rate of return method (c) Net present value method
(b) Simple cash payback method (d) Discounted cash payback method
31. If you are considering two projects namely. Project X & Project Y; NPV of X is higher than Y
but IRR of Y is greater than X then you will select -
(a) Project Y (c) Some other project
(b) Project X (d) None of the above
32. The current worth of a sum of money to be received at a future date is called:
(a) Real value (c) Present value
(b) Future value (d) Salvage value
33. 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 (c) Net historical value of the project
(b) Net future value of the project (d) Net salvage value of the project
34. 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.
48 Navkar Institute
(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.
35. 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
36. Generally, a project is considered acceptable if its net present value is:
(a) Negative or zero (c) Positive or zero
(b) Negative or positive (d) Negative
37. 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.
38. 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.
39. A project whose cash flows are more than capital invested for rate of return then net
present value will be
(a) Positive (c) Negative
(b) Independent (d) Zero
40. In mutually exclusive projects, project which is selected for comparison with others must
have -
(a) Higher net present value (c) Zero net present value
(b) Lower net present value (d) All of the above
41. Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is considered
as
(a) Valued relationship (c) Direct relationship
(b) Economic relationship (d) Inverse relationship
42. In capital budgeting, positive net present value results in -
(a) Negative economic value added (c) Zero economic value added
(b) Positive economic value added (d) Percent economic value added
43. Cash inflows are revenues of project and are represented by -
(a) Hurdle number (c) Negative numbers
(b) Relative number (d) Positive numbers

44. The process of planning expenditures that will influence the operation of a firm over a
number of years is called -
(a) Investment (c) Net present valuation
(b) Capital budgeting (d) Dividend valuation
45. 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.
46. 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.
47. 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.
48. To estimate an unknown number that lies between two known numbers is knows as -
(a) Capital rationing (c) Interpolation
(b) Capital budgeting (d) Amortization
49. 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
50. Criterion for IRR (Internal Rate of Return)?
(a) Accept, if IRR > Cost of capital (c) Accept, if IRR = Cost of capital
(b) Accept, if IRR < Cost of capital (d) None of the above
51. 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
52. 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 (c) Time value of money
(b) Storage value of money (d) Cash value of money
50 Navkar Institute
53. 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 return (c) Real rate of return
(b) Accrual accounting rate of return (d) Required rate of return
54. The payback period is multiplied to constant increase in yearly future cash flows to calculate
(a) Cash value of money (c) Net future value
(b) Net initial investment (d) Time value of money
55. 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
56. 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.
57. 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
58. Which of the following is not used in capital budgeting?
(a) Time value of money (c) Net assets method
(b) Sensitivity analysis (d) Cashflows
59. Which of the following is not incorporated in Capital Budgeting?
(a) Tax Effect (c) Required Rate of Return
(b) Time Value of Money (d) Rate of Cash Discount
60. 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
61. A proposal is not a capital budgeting proposal if it:
(a) is related to Fixed Assets (c) brings short-term benefits only
(b) brings long-term benefits (d) has very large investment

ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(c) (d) (c) (b) (d) (a) (b) (d) (d) (c) (a) (d) (b) (d)
15 16 17 18 19 20 21 22 23 24 25 26 27 28
(c) (c) (b) (a) (a) (a) (c) (b) (d) (c) (d) (b) (c) (c)
29 30 31 32 33 34 35 36 37 38 39 40 41 42
(b) (b) (b) (c) (a) (c) (c) (c) (a) (b) (a) (a) (c) (b)
43 44 45 46 47 48 49 50 51 52 53 54 55 56
(d) (b) (d) (b) (c) (c) (c) (a) (d) (c) (a) (b) (a) (a)
57 58 59 60 61
(d) (c) (d) (a) (c)
52 Navkar Institute
CHAPTER-8 DIVIDEND DECISIONS
CHAPTER-8
DIVIDEND DECISIONS
1. 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.
2. The values of the future net incomes discounted by the cost of capital are called -
(a) Average capital cost (c) Net capital cost
(b) Discounted capital cost (d) Net present values
3. 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 (c) IRR less than the cost of capital
(b) IRR greater than the cost of capital (d) None of the above
4. _________ is a project whose cash flows are not affected by the accept/reject decision for
other projects.
(a) Mutually exclusive project (c) Low-cost project
(b) Independent project (d) Risk-free project
5. 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 (c) Profitability Index
(b) Internal Rate of Return (d) Any of the above
6. __________is the discount rate that should be used in capital budgeting.
(a) Cost of capital (Ko) (c) Risk premium (Rm)
(b) Risk-free rate (Rf ) (d) Beta rate (|3)
7. 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 (c) Redemption period
(b) Payback period (d) Investment period
8. 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.
9. 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

10. When choosing among mutually exclusive projects, the project with -
(a) Longest payback is preferred (c) Quickest payback is preferred
(b) Higher NPV get selected (d) Lower cost of capital will be selected
11. 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) Internal rate of return is greater than the cost of capital
(c) Profitability index is greater them unity
12. A Profitability Index (PI) 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 each rupee invested.
13. The shorter the payback period -
(a) The riskier is the project. (c) Less will the NPV of the project.
(b) The less risky is the project. (d) More will the NPV of the project
14. Which of the following statements is incorrect regarding a normal project?
(a) the NPV of a project is greater than 0, then its PI will exceed 1.
(b) If the IRR of a project is 8%, its NPV, using a discount rate, K0, greater than 8%, will
be less than 0.
(c) If the PI of a project equals 0, then the project's initial cash outflow equals the PV of
its cash flows.
(d) If the IRR of a project is greater than the discount rate, K0, then its PI will be greater
than 1.
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 (c) Cost of capital is used
(b) Common stock value is used (d) Asset valuation is used
54 Navkar Institute
17. What is the difference between economic profit and accounting profit?
(a) Economic profit includes a charge for all providers of capital while accounting profit
includes only a charge for debt.
(b) Economic profit covers the profit over the life of the firm, while accounting profit
only covers the most recent accounting period.
(c) Accounting profit is based on currently accepted accounting rules while economic
profit is based on cash flows. (d) All of the above are correct.
(a) It is difficult to calculate as well as understand it as compared to the accounting rate
of return method.
(b) This method disregards the initial investment involved.
(c) It fails to take into account the timing of returns and the cost of capital.
19. A project whose acceptance does not prevent or require the acceptance of one or more
alternative projects is referred to as
(a) It does not indicate whether an investment should be accepted or rejected unless the
payback period is compared with an arbitrary managerial target.
(b) The method ignores cash gene-ration beyond the payback period and this can be seen
as more as a measure of liquidity than of profitability.
(c) This method makes no attempt to measure a percentage return on the capital invested
and is often used in conjunction with other methods.
21. 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) (c) Internal Rate of Return (IRR)
(b) Net Present Value (NPV) (d) Payback Period (PBP)
22. What is the idea behind project-specific required rates of return for a firm or division?
(a) Different projects should have different required rates of return because they are not
alike with respect to risk.
(b) Each firm should have a different required rate of return because firms are not alike
with respect to risk and have been created historically by projects taken that differ
with regards to risk.
(c) A division of the firm will always have a required rate of return different from the
firm's overall weighted average cost of capital because the risk of the division always
differs from that of the firm.

23. A single, overall cost of capital is often used to evaluate projects because:
(a) it avoids the problem of computing the required rate of return for each investment
proposal.
(b) it is the only way to measure a firm's required return.
(c) it acknowledges that most new investment projects have about the same degree of
risk.
(d) it acknowledges that most new investment projects offer about the same expected
return.
24. A project whose acceptance precludes the acceptance of one or more alternative projects is
referred to as..............
25. How ARR is calculated?
(a) (Average PAT/Initial Investment) × 100
(b) (Average NPV/Investment) × 100
(c) (Average PAT/Initial Investment) ÷ 100
(d) (Initial Investment/Average PAT) × 100
26. 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 hurdle rate (ie. cost of capital) upward to compensate for this fact.
(b) Adjusts its hurdle rate (ie. 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.
27. 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
28. Lotus Corporation is trying to determine how to assign discount rates to the various projects
proposed by its numerous international divisions. The company should put the greatest
emphasis on which one of the following when assigning the discount rates?
(a) the geographic location where the project will be undertaken
(b) the currency exchange rate that will apply to the project
(c) the various types of risk associated with the project
(d) the experience of the managers of the division which is proposing the project
29. 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.
56 Navkar Institute
(c) It is biased against short-term projects in the same way that payback is biased
against longer term ones.
30. NPV = ?
(a) Project's cash inflows minus the 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.
31. ................ 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 (c) Cost benefit ratio
(b) Profitability index (d) Both (B) and (C)
32. Accept a project if the profitability index is:
(a) less than 1 (c) greater than 1
(b) positive (d) negative
33. Profitability index is actually a modification of the
(a) Payback period method (c) Net present value method
(b) IRR Method (d) Risk premium method
34. .............. 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) (c) Price Cost Method (PCM)
(b) Risk Free Rate of Return (RFRR) (d) Internal Rate of Return (IRR)
35. Which of the following capital budgeting techniques takes into account the incremental
accounting income rather than cash flows?
(a) Net present value (c) Accounting/simple rate of return
(b) Internal rate of return (d) Cash payback period
36. 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.
37. Which of the following techniques does not take into account the time value of money?
(a) Internal rate of return method (c) Net present value method
(b) Simple cash payback method (d) Discounted cash payback method

38. If you are considering two projects namely. Project X & Project Y; NPV of the Project X is
higher than Project Y but IRR of Project Y is greater than Project X then you will select -
(a) Project Y (c) Some other project
(b) Project X (d) None of the above
39. The current worth of a sum of money to be received at a future date is called:
(a) Real value (c) Present value
(b) Future value (d) Salvage value
40. 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 (c) Net historical value of the project
(b) Net future value of the project (d) Net salvage value of the project
41. 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.
42. 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
43. Generally, a project is considered acceptable if its net present value is:
(a) Negative or zero (c) Positive or zero
(b) Negative or positive (d) Negative
44. 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.
45. 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.
46. A project whose cash flows are more than capital invested for rate of return then net
present value will be
(a) Positive (c) Negative
(b) Independent (d) Zero
58 Navkar Institute
47. In mutually exclusive projects, project which is selected for comparison with others must
have -
(a) Higher net present value (c) Zero net present value
(b) Lower net present value (d) All of the above
48. In capital budgeting, positive net present value results in -
(a) Negative economic value added (c) Zero economic value added
(b) Positive economic value added (d) Percent economic value added
49. Cash inflows are revenues of project and are represented by -
(a) Hurdle number (c) Negative numbers
(b) Relative number (d) Positive numbers
50. The process of planning expenditures that will influence the operation of a firm over a
number of years is called -
(a) Investment (c) Net present valuation
(b) Capital budgeting (d) Dividend valuation
51. 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.
52. The term mutually exclusive investments mean:
(a) Choose only the best investments
(b) Selection of one investment precludes the selection of an alternative
(c) The elite investment opportunities will get chosen.
(d) There are no investment options available.
53. 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.
54. To estimate an unknown number that lies between two known numbers is knows as -
(a) Capital rationing (c) Interpolation
(b) Capital budgeting (d) Amortization
55. 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

56. Criterion for IRR (Internal Rate of Return)?

(a) Accept, if IRR > Cost of capital (c) Accept, if IRR = Cost of capital
(b) Accept, if IRR < Cost of capital (d) None of the above
57. 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
58. 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 (c) Time value of money
(b) Storage value of money (d) Cash value of money
59. 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 (c) Single cash flow method
(b) Payback method (d) Lean cash flows method
60. he 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 return (c) Real rate of return
(b) Accrual accounting rate of return (d) Required rate of return
61. The payback period is multiplied to constant increase in yearly future cash flows to calculate
(a) Cash value of money (c) Net future value
(b) Net initial investment (d) Time value of money
62. Which of the following statements is true about mutually exclusive projects?
(a) They are not in direct competition with each other.
(b) They are in direct competition with each other.
(c) They are not evaluated based on shareholder wealth.
(d) They are never evaluated.
63. 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
64. Internal Rate of Return is defined as -
(a) The discount rate which causes the payback to equal one year.
(b) The discount rate which causes the NPV to equal zero.
(c) The ROE when the NPV equals 0.
(d) The ROE associated with project maximization.
60 Navkar Institute
65. 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.
66. 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
67. Which of the following is not used in capital budgeting?
(a) Time value of money (c) Net assets method
(b) Sensitivity analysis (d) Cash flows
68. Which of the following is not incorporated in Capital Budgeting?
(a) Tax Effect (c) Required Rate of Return
(b) Time Value of Money (d) Rate of Cash Discount
69. 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
70. A proposal is not a capital budgeting proposal if it:
(a) is related to Fixed Assets (c) brings short-term benefits only
(b) brings long-term benefits (d) has very large investment
ANSWERS
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(c) (d) (b) (b) (d) (a) (b) (d) (d) (c) (a) (d) (b) (c)
15 16 17 18 19 20 21 22 23 24 25 26 27 28
(d) (c) (a) (c) (b) (d) (a) (a) (a) (a) (a) (c) (b) (c)
29 30 31 32 33 34 35 36 37 38 39 40 41 42
(d) (c) (d) (b) (c) (d) (c) (b) (b) (b) (c) (a) (c) (c)
43 44 45 46 47 48 49 50 51 52 53 54 55 56
(c) (a) (b) (a) (a) (c) (d) (b) (d) (b) (c) (c) (c) (a)
57 58 59 60 61 62 63 64 65 66 67 68 69 70
(d) (c) (b) (a) (b) (b) (a) (b) (a) (d) (c) (d) (c) (c)
---0---0---

62 Navkar Institute
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Paper-6: Financial Management: Multiple Choice Questions

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CA INTERMEDIATE

PAPER-6 : FINANCIAL MANAGEMENT

MULTIPLE CHOICE QUESTIONS

1 BASICS OF FINANCIAL MANAGEMENT .............................................. 1-5

2 FINANCIAL RATIO ANALYSIS ......................................................... 6-9

3 WORKING CAPITAL MANAGEMENT ................................................... 10-14

RECEIVABLE MANAGEMENT ........................................................... 15-18

INVENTORY MANAGEMENT ............................................................ 19-24

MANAGEMENT OF CASH & MARKETABLE SECURITIES .................... 25-29

4 RISK AND LEVERAGE ANALYSIS ....................................................... 30-35

5 COST & CAPITAL STRUCTURE .......................................................... 36-41

6 SOURCES OF FINANCE .................................................................. 42-44

7 CAPITAL BUDGETING .................................................................... 45-52

8 DIVIDEND DECISIONS ................................................................... 53-62

1. "Shareholder wealth" in a firm is represented by__________

CA Intermediate | Paper-6A | Financial Management MCQS 1

8. The focal point of financial management in a firm is_______

CA Intermediate | Paper-6A | Financial Management MCQS 3

(b) Financial distress; Identified risk

(a) (a) (d) (d) (a) (d) (d) (b)

CA Intermediate | Paper-6A | Financial Management MCQS 5

(a) Trend ratios (c) Common size statements

CA Intermediate | Paper-6A | Financial Management MCQS 7

(a) ` 54.07 (b) ` 81.53 (c) ` 78.53 (d) ` 57.07

29. Interest coverage ratio is obtained by dividing EBIT by

CA Intermediate | Paper-6A | Financial Management MCQS 9

1. Positive working capital means that_______

(a) Operation cycle (c) Operating cycle

CA Intermediate | Paper-6A | Financial Management MCQS 11

appear in the working capital statement? Note: 1 Year = 360 days

CA Intermediate | Paper-6A | Financial Management MCQS 13

Opening stock = ` 9,90,000

(a) (c) (d) (b) (c) (b) (a) (a) (c)

CA Intermediate | Paper-6A | Financial Management MCQS 15

(a) Collectible accounts (c) Doubtful accounts

CA Intermediate | Paper-6A | Financial Management MCQS 17

1. Which type of material is classified as 'A' type in ABC analysis

CA Intermediate | Paper-6A | Financial Management MCQS 19

CA Intermediate | Paper-6A | Financial Management MCQS 21

CA Intermediate | Paper-6A | Financial Management MCQS 23

(c) To maintain investment in inventories at the lowest level

(d) (c) (a) (b) (b) (d) (d)

Management of Cash & Marketable Securities

1. Which of the following will NOT appear in a Cash Budget?

CA Intermediate | Paper-6A | Financial Management MCQS 25

(b) Debtors can be paid more quickly

CA Intermediate | Paper-6A | Financial Management MCQS 27

32. The following information extracted from the records of P Ltd.

(d) (d) (a)

CA Intermediate | Paper-6A | Financial Management MCQS 29

1. The term Leverage in general refers to a

9. Which of the following is the correct formula to calculate Operating Leverage?

CA Intermediate | Paper-6A | Financial Management MCQS 31

(b) 1% change in sales will cause a 2.5% change in EBIT

CA Intermediate | Paper-6A | Financial Management MCQS 33

(d) (d) (b) (d)

CA Intermediate | Paper-6A | Financial Management MCQS 35

CHAPTER-5 COST & CAPITAL STRUCTURE

9. _______ is the rate that the firm pays to procure financing.