Subject: Financial Management

Subject Code: BBA502

Book ID: B1850
Model Question Paper Answer Keys
Time: 2 hours

Max. Marks: 140

Part A 1 Mark Questions

Answer all questions. Each question carries 1 mark.

50 * 1= 50 Marks

1. ________ system is the most important aspect of a market economy indicating what
goods and services society wants.
a. Price
b. Value
c. Quality
d. Market

2. An alternative to __________ is the objective of wealth maximization.

a. Profit minimization
b. Market maximization
c. Quality maximization
d. Profit maximization

3. Financial decisions incur different degree of risk.

a. True
b. False

4. A proper balance between return and _________ should be maintained to maximize

the market value of a firms shares.
a. Value
b. Risk
c. Price
d. Investment

5. The rate of the equity dividend is __________ and depends on the dividend policy of
a company.
a. Fixed
b. Stable
c. Not fixed
d. High

6. The rate of interest on debt is fixed irrespective of the companys rate of return on
assets.
a. True
b. False

7. The most commonly used measures of financial leverage are debt ratio, debt-equity
ratio and interest coverage
a. True
b. False

8. The ___________ of the shareholders investment can also be measured in many

other ways.
a. Value
b. Cost
c. Benefits
d. Profitability

9. A contract between a lessor and a lessee is known as a __________.

a. Rent
b. Lease
c. Loan
d. Purchase

10. Leasing does not provide 100% financing.

a. True

b. False

11. Under the hire purchase system, the _____ takes possession of the goods
immediately.
a. Seller
b. Mediator
c. Buyer
d. Lender

12. The risk of damage and loss is borne by the seller under the hire purchase system.
a. True
b. False

13. What is the traditional form of financing known as?

a. Corporate financing
b. Management financing
c. Individual financing
d. International financing

14. The credit policy of the firm affects the ____________ by influencing the level of
debtors.
a. Cost of production
b. Working capital
c. Quality
d. Manufacturing timeline

15. Who may administer the credit policy of a firm?

a. HR manager
b. Admin manager
c. Financial manager
d. Investment manager

16. A company cannot obtain equity funds by retaining earnings available for
shareholders.
a. True
b. False

17. ___________ shareholders receive dividend at a fixed rate.

a. Preference
b. Non-preference
c. Common
d. None of the above

18. The exact organisation structure for financial management will be different across
firms.
a. True
b. False

19. The main function of the ____________ is to manage the firms funds.
a. Team leader
b. Investment banker
c. Treasurer
d. Quality manager

20. The involvement of the financial manager in the finance management is not recent.
a. True
b. False

21. The ___________ of a firm is significantly influenced by the cost consideration.

a. Debt policy
b. Equity policy
c. Financial policy
d. Purchase policy

22. The ___________ framework can be used to evaluate the financial performance of
top management.
a. Management
b. Investment
c. Involvement
d. Cost of capital

23. The interest paid on ________ is tax deductible.

a. Purchases
b. Sales
c. Debts
d. Credits

24. The measurement of the cost of preference capital does not pose any conceptual
difficulty.
a. True
b. False

25. A firm can draw funds from its bank within the maximum credit limit sanctioned.
a. Investors
b. Bank
c. Customers
d. Employees

26. ___________ is the transfer of a legal or equitable interest in a specific immovable

property for the payment of a debt.
a. Loan
b. Purchase
c. Sale
d. Mortgage

27. Which of these involves selling of ordinary shares to the existing shareholders of a
company?
a. Rights issue
b. Sales issue
c. Lending
d. Hire-purchase

28. It is necessary to underwrite a public and a rights issue.

a. True
b. False

29. Which of these is a long-term fixed income financial security.

a. Debenture
b. Shares
c. Vehicles
d. None of the above

30. There are several modes through which a company can borrow funds for its
____________ working capital requirements.
a. Fixed
b. Short-term
c. Long-term
d. None of the above

31. The _________ motive relates to the holding of cash for investing in profitmaking
opportunities as and when they arise.
a. Speculative
b. Precautionary
c. Comprehensive
d. Judiciary

32. The precautionary motive is the need to hold cash to meet contingencies in the
future.
a. True
b. False

33. Ideal cash management systems depend on the organization structure and
competition of the firm.
a. True
b. False

34. Which of these is a technique to plan and control the use of cash?
a. Investing
b. Cash planning
c. Financial control
d. Cash flow

35. Time preference for money or time value of money is an individuals preference for
possession of a given amount of money now, rather than the same amount at some
future date.
a. True
b. False

36. Which of these refers to a fund created out of fixed payments each year for a
specified time?
a. Floating fund
b. Fixed cash
c. Budget
d. Sinking fund

37. The phenomenon of compounding interest more than once in a year is called
_______________.
a. Single compounding

b. Multiperiod compounding
c. Double compounding
d. Many compounding

38. The ____________ theory implies that investors value levered firms more than
unlevered firm.
a. Comprehensive
b. Modern
c. Traditional
d. Superlative

39. The traditional approach has emerged as a compromise to the extreme position
taken by the NI approach.
a. True
b. False

40. Financial leverage affects a firms net operating income, as well as shareholders
return.
a. True
b. False

41. The arbitrary process is the behavioural foundation for ______________.

a. MMs hypothesis
b. NI approach
c. NNs hypothesis
d. AB approach

42. The difference between current assets and current liabilities is known as
______________.
a. Gross capital
b. Budget
c. Principal investment

d. Net working capital

43. The operating efficiency of a firm relates to the optimum utilization of all its
resources at minimum cost.
a. Maximum cost
b. Minimum cost
c. Quality
d. Minimum time

44. Which of these is involved in the conversion of sales into cash?

a. Operating cycle
b. Manufacturing cycle
c. Cash flow cycle
d. None of the above

45. Which of these is the likelihood of events happening, given the past data and
expected changes?
a. Anticipation
b. Budgeting
c. Expectation
d. Forecast

46. A comprehensive budgetary system will generally include:

a. Pro forma statements
b. Bank statements
c. Trial balance
d. Profit and loss accounts

47. The expenditure incurred in acquiring a patent or brand is also a ___________.

a. Capital expenditure
b. Capital investment
c. Sales income

d. Profit

48. There are only two investment criteria (or capital budgeting techniques) in practice.
a. True
b. False

49. The essential property of a sound technique is that it should maximize the
shareholders wealth.
a. True
b. False

50. Dividend policy of a firm affects both the long-term financing and the wealth of
shareholders.
a. True
b. False

Part B 2 Mark Questions

Answer all questions. Each question carries 2 marks

20 * 2 = 40 Marks

51. ____________ has been criticized since it assumes ____________, and in the face of
imperfect market, it cannot be a legitimate objective.
a. Profit maximization, perfect competition
b. Profit minimization, imperfect competition
c. Share balancing, profitability
d. Perfect competition, profit minimization

52. Which of these are the measures of financial leverage?

a. Cash planning, cash outflow
b. Debt ratio, debt-equity ratio
c. Profit ratio, debt ratio
d. Cash flow, cash control

53. ___________ and _____________ are two ways of accounting for the time value of
money.
a. Active, passive
b. Regular, special
c. Compounding, discounting
d. Direct, indirect

54. A budget must plan for and quantify __________ and __________ related to a
specific operation.
a. Revenue, expenses
b. Inflow, outflow
c. Risk, return
d. Profit, loss

55. The three important components of the master budget are: operating, _________
and __________.
a. Cost of manufacture, cost of sales
b. Financial, capital
c. Expenses, inflow
d. Profit, expenses

56. Shareholders returns consist of two components: ___________ and _______

a. Income, expenses
b. Profits, income
c. Dividends, capital gains
d. Assets, liabilities

57. A firms dividend policy has the effect of dividing its net earnings into __________
and ___________.
a. Retained earnings, dividends
b. Incurred expenses, cash inflows

c. Purchase costs, dividends

d. Income, inflow

58. Project financing is most appropriate for those projects which require _______
amount of capital expenditure and involve _____ risk.
a. Small, low
b. Large, high
c. No, low
d. Small, no

59. Identify the following statements as true or false.

a. Lease is a contract between a lessor, the owner of the asset, and a lessee, the
user of the asset.
b. Both hire purchase financing and lease financing are a form of secured loan.
i. a. True, b. True
ii. a. True, b. False
iii. a. False, b. True
iv. a. False, b. False

60. Which of these are the various forms in which inventories exist in a manufacturing
company?
a. Raw materials, quality
b. Work-in-process, finished goods
c. Cost of manufacture, labour cost
d. None of the above

61. A finance manager is responsible for which of the following?

a. Purchasing raw materials, hiring labour
b. Finance planning, marketing
c. Investment decisions, capital raising
d. Advertising, sales

62. Identify the following the statements as true or false.

a. It is not possible to distinguish between systematic and unsystematic risk.
b. Higher the risk, lower the risk premium required.
i. a. True, b. True
ii. a. True, b. False
iii. a. False, b. True
iv. a. False, b. False

63. Identify the following statements as true or false.

a. A debenture is a short-term promissory note for raising capital.
b. A company may also obtain fixed deposits from public/shareholders to meet
its short-term fund requirements.
i. a. True, b. True
ii. a. True, b. False
iii. a. False, b. True
iv. a. False, b. False

64. ___________ is a techniques to plan and control the use of cash. ___________ is the
most significant device to plan for and control cash receipts and payments.
a. NI approach, MM method
b. Cash planning, cash budget
c. Cash inflow method, cash outflow method
d. AB approach, cash planning

65. Which of these are the features that a firm should examine while choosing among
alternative investment?
a. Safety, quality
b. Maturity, cost effectiveness
c. Marketability, safety
d. None of the above

66. Identify the following statements as true or false.

a. The reciprocal of the present value annuity factor is called the CRF.
b. CRF cannot be used for determining the income to be earned to recover an
investment at a given rate of interest.
i. a. True, b. True
ii. a. True, b. False
iii. a. False, b. True
iv. a. False, b. False

67. The various aspects of working capital management which make it an important
function of the financial manager are ________, investment, _______ and growth.
a. Time, criticality
b. Expenses, quality
c. Maturity, market
d. Budgeting, Cost

68. Responsibility centres for planning and control purposes are classified into cost,
_______ and __________ centres.
a. Market, sales
b. Investment, expenses
c. Profit, investment
d. Risk, return

69. Identify the following statements as true or false.

a. A budget is not the same thing as a forecast.
b. A forecast is the likelihood of events happening given the past data and
expected changes.
i. a. True, b. True
ii. a. True, b. False
iii. a. False, b. True
iv. a. False, b. False

70. ______ method is the classic economic method of evaluating the investment
proposals. ______ is another method of discounted cash flow technique which takes
into account the magnitude and timing of the cash flow.
a. IRR, NPV
b. NPV, IRR
c. MM, NN
d. NPC, RRV

Part C 10 Mark Questions

Answer all the questions. Each question carries 10 marks.

5 * 10 = 50

71. Explain financial leverage and its measures. (Refer Unit 6)

72. Illustrate the cash flow consequences of lease and list out the myths and advantages
associated with it. (Refer Unit 10)
73. Briefly explain:
a. Average collection period
b. Aging schedules
c. Nature of inventory
(Refer Unit 14)
74. Explain the weighted average cost of capital and weighted marginal cost of capital,
with an example for each. (Refer Unit 5)
75. Explain Net Income approach and compare it with other traditional theories of
capital structure. (Refer Unit 8)