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5. State whether each of the following statements is True (T) or False (F):
(i)Investment decisions and capital budgeting are same.
(ii)Capital budgeting decisions are long term decisions.
(iii)Capital budgeting decisions are reversible in nature.
(iv) Capital budgeting decisions do not affect the future Stability of the firm.
(v)There is a time element involved in capital budgeting.
(vi) An expansion decision is not a capital budgeting decision
(vii) In mutually exclusive decision situation, the firm can accept all feasible proposals.
(viii) Capital budgeting and capital rationing are alternative to each other.
(ix) Correct capital budgeting decisions can be taken by comparing the cost with future benefits.
(x) Future expected profits from an investments are taken as returns from the investment for capital budgeting.
(xi) Cash flows are the appropriate measure of costs and benefits from an investment proposal.
(xii) Sunk cost is a relevant cost in capital budgeting.
(xiii) The opportunity cost of an input is always considered, in capital budgeting.
(xiv) Allocated overhead costs are not relevant for capital budgeting.
(xv) Cash flows and accounting profits are different.
(xvi) Cash flows are same as profit before tax.
(xvii) Net cash flow is on after tax basis.
[Answers : (i) F, (ii) T, (iii) F, (iv) F, (v) T, (vi) F, (vii) F, (viii) F, (ix) F, (x) F, (xi) T, (xii) F, (xiii) F, (xiv) T, (xv) T,
(xvi)F, (xvii) T
7. State whether each of the following statement is True (T) or False (F):
(i) Irrespective of the issue involved in a capital budgeting anon, the basic techniques can be used in all cases.
(ii) Capital Rationing as a situation when the Government has imposed a ceiling on investment by a firm.
(iii) A firm should always implement a positive NPV props irrespective of fund requirement.
(iv) Money cash flows should be discounted at nominal discount rate.
(v) Real cash flows should be discounted at normal discount rate.
(vi) EAM is, in a way, an extension of NPV method.
(vii) EAM should be used in accept-reject decision situation.
(viii) Feasibility Set Approach is based on the NPV method of capital budgeting.
(ix) Selection based on PI method gives optimum decision making in case of indivisible projects.
(x) A firm should ignore the replacement timing of an asset.
(xi) There is no need to defer a positive NPV proposal.
(xii) Multi-period and Multi-constraints are one and the same thing.
(xiii) Inflation affects not only the cash flows but also the discount rate.
Answers: (i) F, (ii) F, (iii) F, (iv) T, (v) T, (vi) T, (vii) F (viii) T, (ix) F, (x) F, (xi) F, (xii) F, (xiii) T
19. Write her each of the following statement is True (T) or False (F)
(i) A risky situation is one in which the probability for the occurrence or non-occurrence of an event cannot be
assigned.
(ii) In capital budgeting proposals, risk may arise due to different factors.
(iii) In risky capital budgeting proposals, the discount rate is not known with certainty.
(iv) Risk Adjusted Discount Rate and Certainty Equivalents are on based statistical measures.
(v) In Payback Period method, the risk of the proposal is incorporated by lessening the target payback period.
(vi) In Certainty Equivalents method, both the cashflows and the discount rate are adjusted.
(vii) In Sensitivity Analysis, the NPV of the proposal is adjusted.
(viii) In Sensitivity Analysis, one variable is adjusted at a time to see its effect on the NPV.
(ix) Sensitivity Analysis helps in calculation of NPV of the proposal.
(x) Expected value of cash flows is equal to the arithmetic average of the cash flows.
(xi) In case of capital budgeting, higher the standard deviation better the project is.
(xii) In case of dependent cash flows, the risk is measured with reference to joint probabilities.
(xiii) Coefficient of variation is as good a measure of risk as the standard deviation.
(xiv) Decision Tree Approach is suitable to analyse a multistage decision situation.
(xv) Abandonment evaluation of a project is ma the implementation of a capital budgeting proposal.
[Answers: (i) F, (ii) T, (iii) F, (iv) F, (v) T, (vi) F, (vii F,(viii) F, (ix) F, (x) F, (xi) F, (xii) T, (xiii) F, (xiv) T, (xv) F]
23. State whether each of the following statements is True (T) or False (F)
(i) Operating leverage analyses the relationship between sales level and EPS.
(ii) Financial leverage depends upon the operating leverage.
(iii) Dividend on Pref. shares is a factor of operating leverage.
(iv) Operating leverage may be defined as Contribution ÷ EPS.
(v) Financial leverage depends upon the fixed financial charges.
(vi) Favourable financial leverage and trading on equity are same.
(vii) Combined leverage establishes the relationship between operating leverage and financial leverage.
(viii) Financial leverage is always beneficial to the firm.
(ix) Total risk of a firm is determined by the combined effect of operating and financial leverages.
(x) Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm.
[Answers :(i) F, (ii) F, (iii) F, (iv) F, (v) T, (vi) T, (vii) F,(viii) F, (ix) T, (x) T]
*
29. Which of the following statements is True (T) or False
(i) Dividend is a part of retained earnings.
(ii) Dividend is compulsorily payable to preference shareholders.
(iii) Effective dividend policy is an important tool to achieve the goal of wealth maximization.
(iv) Retained earnings are an easily available source of funds at no explicit cost.
(v) Dividend payout ratio refers to that portion of total earnings which is distributed among shareholders.
(vi) % rate of dividend is also known as dividend payout ratio.
(vii) There is a difference of opinion on relationship between dividend payment and value of the firm.
(viii) Walters model supports the view that dividend is relevant for value of the firm.
(ix) Gordon's model suggests that dividend payment does not affect the market price of the share.
(x) In the Walters model, the DP ratio should depend upon the relationship between r and ke
(xi) Residual theory says that dividend decision is no decision.
(xii) MM model deals with irrelevance of dividend decision
(xiii) MM model is a fool proof model of dividend irrelevance.
(xiv) In the arbitrage process of MM model, the dividends paid by a company are replaced by fresh investment.
(xv) MM model asserts that value of the firm is not affected whether the firm pays dividend or not.
31. State whether each of the following statements is True (T) or False (F).
(i) DP ratio of a firm should be directly related to future growth plans of the firm.
(ii) Dividends are paid out of profit and therefore do not affect the liquidity position of the firm.
(iii) Stability of dividend refers to the fact that the rate of divided must be fixed.
(iv) While designing a dividend policy, the legal provisions may be considered by the firm.
(v) Cash dividend and bonus share issue affect the firm in the same way.
(vi) Capital profits can never be distributed as-4 the shareholders.
(vii) In India, there is a restriction on the rate 4 being paid by a company.
(viii) No company in India, can pay final dividend already paid an interim dividend.
(ix) Dividends, in India, can be paid only out of profits.
[Answers : (i) T, (ii) F, (iii) F, (iv) F, (v) F, (vi) F, vii (F), T (viii) F, (ix) F.]
33. State whether each of the following statements is True (T) or False (F)
(i) Management of cash means management of cash in flows.
(ii) Cash is the most important but least earning current asset.
(iii) Cash management always attempts at minimizing the cash balance.
(iv) Cash cycle is equal to operating cycle for a firm.
(v) Receipts and disbursement method of preparation of cash budget is the most widely used method.
(vi) Concentration banking is a method of controlling cash outflows.
(vii) Baumol's model of cash management assumes a constant rate of use of cash.
(viii) Baumol's model attempts at optimization of cash balance.
(ix) In cash management, expected surplus cash, if any, is not considered at all.
(x) Capital expenditures are not considered in cash budget.
(x i) Issue of share capital or debentures are taken as inflows in cash budget.
(xii) Conversion of debentures into share capital is equal to issue of share capital and hence it is a type of cash
inflow.
[Answers (i) F, (ii) T, (iii) T, (iv) F, (v) T, (vi) F, (vii) T, (viii) T,(ix) F, (x) F, (xi) T, (xii) F].
35. State whether each of the following statements is True (T) or False (F).
(i) Receivables management deals only with the collection of cash from the debtors.
(ii) Receivables management involves a trade off between costs and benefits of receivable.
(iii) The objective of a credit policy is to curtail the credit period allowed to customers.
(iv) Credit period allowed to customers must be equal to credit period allowed by the supplier to the firm.
(v) Delinquency cost refers to bad debt losses to the firm.
(vi) Liberalizing the discount rate means increasing the discount rate for the same period.
(vii) Credit evaluation of a customer is a cost process hence it need not be undertaken by a selling firm
(viii) In order to minimize the level of receivables, a firm should follow a strict and aggressive should follow a
strict and aggressive collection procedures.
(ix) Ageing schedule of receivables is one way or monitoring the receivables.
(x) Services of a factor are always beneficial.
[Answers: (i) F, (ii) T, (iii) F, (iv) F, (v) F, (vi) T, (vii) F, (viii) F, (ix) T, (x) F]
39. State whether each of the following statements is True (T) or False (F):
(i) Same considerations are applicable to short-term sources as well as long-term sources of funds.
(ii) As bank overdraft is availed by business firms on a regular basis, it may be considered as a long-term source
of funds.
(iii) For availing funds from short-term sources, credit rating of borrower is generally not required.
(iv)Credit purchase can be a good source of short-term finance.
(v)Cash discount should always be availed by the purchasing firm irrespective of the rate of discount.
(viii) Commercial Papers can be issued only if minimum credit rating is procured by the issuer company.
(ix) Bill Discounting is a good source of short term finance to all firms.
(x) In India, all types of short-term financing from banks must be secured.
(xi) Short-term unsecured debentures are not popular among Indian corporates.
(xii) Reserve Bank of India constituted Tandon Committee to suggest the norms for long-term credit facility
from banks to borrowers.
(xiii) One of the objective of Tandon Committee m suggest inventory norms for different industries.
(xix) Tandon Committee has suggested different method for calculation of Maximum Permissible Bank Finance.
(xv) Kannan Committee suggested for full discretion banks for determining borrowing limits of borrowers.
[Answers (i) F, (ii) F, (iii) T, (iv) T, (v) F, (vi) F, (vii) F, (viii) T, (ix) F, (x) T, (xi) T, (xii) F, (xiii) T, (xiv) T, (xv) T]
41. State whether each of the following statements is True (T) or False (F)
(i) A lease is a temporary transfer of title of an asset in return for a rental income.
(ii) Lease transactions in India are governed by the Lease Act.
(iii) Technically, the lessee becomes the owner of the asset or the lease period.
(iv) Operating lease and Sale and lease-back are different types of transactions.
(v) Sale and Lease-back and Leveraged lease are types of finance lease.
(vi) Treatment of Operating lease in AS-19 is almost same as required by tax laws in India.
(vii) As per AS-19, in case of Finance lease, the asset is shown in the balance sheet of the lessee.
(viii) Lease financing is a type of capital budgeting decision from the point of view of the lessee.
(ix) Tax-shield on depreciation and interest is an important variable both for the lessor and the lessee.
(x) A lessee should evaluate the lease options as against the buying option.
(xi) Net benefit of leasing is the NPV of lease option from the point of view of lessor.
(xii) While evaluating lease as a source of long- term finance, the lessee should give more emphasis on AS-19.
(xiii) Lease outflows should be discounted at the interest rate to find out the present values.
(xiv) A Finance lease has more financial implications mar. in Operating lease from the point of view or both ;he
lessor and the lessee.
[Answers (i) F, (ii) F, (in) F, (iv) T, (v) T, (vi) T, (vii)T, (viii) F, (ix) T, (x) T, (xi) F, (xii) F, (xiii) F, (xiv) T]
43. State whether each of the following is True (T) or False (F)
(i) Financial services refer to facilities relating to capital market.
(ii) Non-banking finance companies are engaged in financial services.
(iii) NBFCs provide financial services to corporate sector only.
(iv) All NBFCs operating in India must be registered with SEBI.
(v) Regulatory framework for NBFCs is provided by RBI.
(vi)Any NBFC can borrow funds on mutually agreed terms.
(vii) Prudential norms for Assets and Investments by NBFCs were framed on the recommendations of
Narasimhan Committee.
(viii) Assets of NBFCs are also classified as Standard, Non-Standard, Doubtful and Lost.
(ix) NBFCs are not allowed to operate in Insurance sector.
(x) A merchant banker helps in procuring overdraft from a commercial bank.
(xi) All merchant bankers have to be registered with RBI.
(xii) A lead manager has post-issue responsibilities also.
(xiii) Merchant bankers should follow the prescribed code or conduct.
(xiv) Share capital issued by a company for the first time is known as venture capital.
(xv) A mutual fund can operate as a venture capital fund.
(xvi) A venture capital firm deals with a new, risky and untested product.
(xvii) All venture capital funds in India have been promoted by Government.
(xviii) Portfolio managers are not required to be registered.
(xix) A portfolio manager has to operate as per the code of conduct prescribed by SEBI.
(xx) Credit rating is an authoritative guarantee regarding; the credit position of a person.
xxi) RBI has prescribed guidelines for the operations of credit rating agencies in India.
xxii) Securitisation and Factoring are two sides of the same coin.
(xxiii) Securitization in India is regulated by RBI.
[Answers (i)F,(ii)T,(iii)F,(iv)F,(v)T,(vi) F,(vii) T, (viii) T, (ix) F, (x) F (xi) F, (xii) T, (xiii) T, (xiv) F, (xv) T ,(xvi) T,
(xvii) F, (xviii) F, (xix) T, (xx)F, (xxi) F, (xxii) F, (xxiii)T]
44. State whether each of the following statements is True (T) or False (F)
(i) Valuation of bonds and of equity shares can be made by the same valuation model.
(ii) Equity shares cannot be valued because equity shares have no redemption.
(iii)Intrinsic value and market price of equity shares are always equal.
(iv) BV of an equity share is the best measure of valuation.
(v) In Dividend Discount Model, the valuation of equity shares is based on expected stream of dividends.
(vi) No-growth Dividend model, only next years' dividend is capitalised.
(vii)No-growth dividend model does not involve present value concept.
(viii)Gordon's Model and Constant Growth Model are one and same.
(ix) In Constant Growth model, the value of equity share ii sensitive to growth rate.
(x) In Constant Growth model, the value of equity share not sensitive to required rate of return.
(xi) For companies which are not expected to pay dividends equity shares cannot be valued.
(xii) In Walter's Model, the value of equity share depends upon the DP ratio.
(xiii) P factor is a measure of value of share.
(xiv) CAPM helps in determining required rate of return.
(xv) Face Value, Issue Price and Market Value of bond must be same.
(xvi) Market Value of debt instruments depends upon the market value of collateral.
(xvii) Basic or Current yield on a bond is calculated with reference to the face value or issue price of a
debenture.
(xviii) YTM of a bond is the same as the IRR of the bond investment.
(xix) Bond valuation depends upon the discounted cash flow technique.
(xx) Bond Valuation is sensitive to both the interest rate and the required rate of return of the investor.
(xxi) Required rate of return and bond valuation are inversely related.
[Answers: (i) F, (ii) F, (iii) F, (iv) F, (v) T, (vi) T, (vii), E,(viii) T, (ix) T, (x) F, (xi) F, (xii) T, (xiii) F, (xiv) T, (xv)
F, , (xvi) F, (xvii) F, (xviii) T, (xix) T, (xx) F, (xxi) T]
46. State whether each of the following statements is True (T) or False (F).
(i) Principal objective of making investment is return, hence, risk can be ignored by an investor.
(ii) Return includes only the interest or dividend received from an investment.
(iii) Holding period return includes the capital gain as well as revenue return.
(iv) If more than one value of return is expected, then expected return can be ascertained with the help of
probabilities.
(v) Risk refers to possibility of loss from an investment.
(vi) Business risk arises because of competition in the market.
(vii) Financial risk of a firm depends upon composition of capital structure.
(viii) Systematic risk is diversifiable.
(ix) Systematic risk remains fixed irrespective of number of securities in portfolio.
48. State whether each of the following statements is True (T) or False (F)
(i) Derivatives are securities similar to shares and debentures.
(ii) Underlying assets of a derivative must be a physical asset.
(iii) Standardised forward contracts may be called futures.
(iv) Forward contracts are traded only at computerised stock exchanges.
(v) All futures contract must be settled by delivery of the asset.
(vi) In case of futures, the counterparty guarantee provided by the exchange.
(vii) Futures contracts do have a theoretical price.
(viii) Seller of a futures contract incurs a loss when the future price increases.
(ix) Option premium is the price for getting a right against other party.
(x) In options, the option writer has a right against the option holder.
(xi) Options contract is only an extended version of a futures contract.
(xii) Call options and put options are inverse of each other.
(xiii) American options can be exercised only on the strike date.
(xiv) There is no fixed strike date in European options.
(xv) Option premium is one time non-refundable amount.
(xvi) Expiry date of an option contract is mutually decided by the parties.
(xvii) Loss of the call options holder is always limited.
(xviii) Loss of the put option holder is always limited.
(xix) Excess of call option market price over the strike price is called intrinsic value.
(xx) Intrinsic value of an option is non-negative.
(xxi) Swap deals with the delivery of a physical asset.
(xxii) Swap arrangements are always standardised.
(xxiii) All derivatives contracts on NSE are cash settled.
(xxiv) Futures and Options are available on the shares in India.
[Answers (i) F, (ii) F, (iii) T, (iv) F, (v) F, (vi) T, (vii) T, (viii T, (ix) T, (x) F, (xi) F, (xii) F, (xiii) F, (xiv) F, (xv) T,
(xvi) F, (xvii) T, (xviii) T, (xix) T, (xx) T, (xxi) F, (xxii) F, (xxiii) T, (xxiv) 2]
50. State whether each of the following statement is True (T) or False (F)
(i) The terms mergers and takeovers refer to same type of situation.
(ii) Accounting Standard 14 (AS -14) classifies mergers as Vertical and Horizontal.
(iii) A conglomerate merger is a situation when all firms of a group are amalgamated into one.
(iv)'Poisson Pill' and 'White knight' are types of mergers.
(v) Increasing profit and lessening competition are the only objectives of mergers.
(vi) Financial evaluation of the target firm is a compulsory step in the merger process.
(vii) Assets and Earnings of the target firm can be used for evaluation of that firm.
(viii) Operating Cash flows to Firm (OCFF) are always more than Operating Cash Flows to Equity (OCFE).
(ix) Economic Value Added (EVA) of a firm is always positive.
(x) Swap Ratio and Share Exchange Ratio are one and the same thing.
(xi) In case the swap ratio is calculated on the basis of EPS, the market value of holding of equity shareholders
would be protected.
(xii) In order to protect the earnings available to shareholders, the swap ratio should be based on EPS.
(xiii) In hostile Takeover bid, the price of the merger depends upon the mutual consent.
(xiv) In tender offer method, every shareholder has to sell his shares to the acquiring firm.
(xv) The aim of the new Takeover Code announced by SEBI is to make the process of takeover more
transparent.
(xvi) Offer once made to acquire shares cannot be revoked.
(xvii) No competitive bid can be made for takeover of shares of other company
(xviii) Can a merger proposal be evaluated as a capital budgeting decision.
[Answers (i) F, (ii) F, (iii) F, (iv) F, (v) (F), (vi) T, (vii) T, (viii) T, (ix) F, (x) T, (xi) F, (xii) T, (xiii) F, (xiv) F, (xv) T,
(xvi) F, (xvii) F, (xviii) T ]
54. State whether each of the following statement is True (T) or s(F)
(i) Capital market includes money market and foreign exchange market.
55. State whether each of the following statement is True (T) or False (F)
(i) SEBI has been constituted under the Securities (Contracts and Regulation) Act, 1956.
(ii) SEBI is constituted from amongst the directors of various stock exchange.
(iii) The purpose of issuing different types of Rules and Regulation by SEBI is to bring monetary gains to the
investors.
(iv) Government need not bother about the protection of the investors.
(v) SEBI has issued various guidelines to educate investors.
(vi) Mutual Fund is a pool of money belonging to various investors.
(vii) Money Market Mutual Funds are also traded at Stock Exchange.
(viii) Every Mutual Fund has to calculate the NAV as per the procedure given in the SEBI Guidelines.
(ix) Options and Futures Contracts in India are settled on calendar month basis.
(x) In Green Shoe Option, the investors are allotted as many shares as applied.
(xi) Demutualisation refers to separation of trading and ownership right of stock exchange.
(xii) GSO is available only in case of issue of shares by book building process.
(xiii) In Depository system, a shareholder is a beneficial owner.
(xiv) Depository participant is an agent of an investor.
(xv) In book-building process, the price of the security is announced by the company.
(xvi) Rolling Settlement is a system of settlement of accounts of brokers.
(xvii) Sensex is an index number of 50 shares.
(xviii) NSE and BSE are the only stock exchanges in India.
(xix) The oldest stock exchange in India is NSE.
(xx) Futures and Options in shares are traded only at BSE and NSE.
[Answer (i) F, (ii) F, (iii) F, (iv) F, (v) F, (vi) T, (vii) T, (viii) T, (ix) T, (x) F, (xi) T, (xii) T, (xiii)T, (xiv) F, (xv) F,
(xvi) F, (xvii) F, (xviii) F, (xix) F, (xx) T]
1|Page
MCQ on Financial Management
3. What are the earnings per share (EPS) for a company that earned Rs. 100,000
last year in
after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in
retained
earning at the year end?
a) Rs. 100,000
b) Rs. 6.00
c) Rs. 0.50
d) Rs. 6.50
an agent.
a) shareholder; manager
b) manager; owner
c) accountant; bondholder
d) shareholder; bondholder
2|Page
5. The market price of a share of common stock is determined by:
a) Capitalisation
b) Over-capitalisation
c) Under-
capitalisation
d) Market
capitalization
8. In the , the future value of all cash inflow at the end of time
horizon at
a particular rate of interest is calculated.
a) Risk-free rate
b) Compounding technique
c) Discounting technique
d) Risk Premium
3|Page
9. is the price at which the bond is traded in the stock exchange.
a) Redemption value
b) Face value
c) Market value
d) Maturity value
10. enhance the market value of shares and therefore equity capital is
not free of cost.
a) Face value
b) Dividends
c) Redemption value
d) Book value
13. is defined as the length of time required to recover the initial cash out-lay.
a) Payback-period
b) Inventory conversion period
c) Discounted payback-period
d) Budget period
4|Page
14. refers to the amount invested in various components of current assets.
15. is the length of time between the firm’s actual cash expenditure and its own cash
receipt.
a) Net operating cycle
b) Cash conversion cycle
c) Working capital cycle
d) Gross operating cycle
16. refers to a firm holding some cash to meet its routine expenses
that are incurred in the ordinary course of business.
a) Speculative motive
b) Transaction motive
c) Precautionary motive
d) Compensating motive
17. refers to the length of time allowed by a firm for its customers to make payment
for their purchases.
a) Holding period
b) Pay-back period
c) Average collection period
d) Credit period
5|Page
18. Amounts due from customers when goods are sold on credit are called .
a) Trade balance
b) Trade debits
c) Trade discount
d) Trade off
20. Consider the below mentioned statements: 1. A company is considered to be over- capitalised
when its actual capitalisation is lower than the proper capitalisation as warranted by the earning
capacity 2. Both over-capitalisation and under-capitalisation are detrimental to the interests of
the society. State True or False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
21. Consider the below mentioned statements: 1. The dividends are not cumulative for equity
shareholders, that is, they cannot be accumulated and distributed in the later years. 2. Dividends
are taxable. State True or False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
6|Page
22. and carry a fixed rate of interest and are to be paid off
irrespective of the firm’s revenues.
a) Debentures, Dividends
b) Debentures, Bonds
c) Dividends, Bonds
d) Dividends, Treasury notes
23. Consider the below mentioned statements: 1. A debt-equity ratio of 2:1 indicates
that for every 1 unit of equity, the company can raise 2 units of debt. 2. The cost
of floating a debt is greater than the cost of floating an equity issue. State True or
False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
24. Credit policy of every company is largely influenced by and
.
a) Liquidity, accountability
b) Liquidity, profitability
c) Liability, profitability
d) Liability, liquidity
25. XYZ is an oil based business company, which does not have adequate working
capital. It fails to meet its current obligation, which leads to bankruptcy. Identify
the type of
decision involved
a) Investment decision to prevent risk of bankruptcy.
b) Dividend decision
c) Liquidity decision
d) Finance decision
7|Page
26. The rate of interest offered by the fixed deposit scheme of a bank for 365 days and above is 12%.
What will be the status of Rs. 20000, after two years if it is invested at this point of time?
a) Rs. 28032
b) Rs. 24048
c) Rs. 22056
d) Rs. 25088
b) Use the income statement to determine earnings after taxes (net income) and divide by the
number of common shares outstanding.
c) Use the income statement to determine earnings after taxes (net income) and divide by the
number of common and preferred shares outstanding.
d) Use the income statement to determine earnings after taxes (net income) and divide by the
forecasted period's earnings after taxes. Then subtract 1 from the previously calculated value
28. Which of the following would NOT improve the current ratio?
a) Borrow short term to finance additional fixed assets.
b) Issue long-term debt to buy inventory.
c) Sell common stock to reduce current liabilities.
d) Sell fixed assets to reduce accounts payable.
8|Page
29. The gross profit margin is unchanged, but the net profit margin declined over the same period.
This could have happened if
30. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry
average
of 1.4. This means that the company
31. Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs.
25
million. If its average collection period was 36 days, its ending accounts
receivable
balance is closest to . (Assume a 365-day year.)
32. A company can improve (lower) its debt-to-total assets ratio by doing which of
the
following?
a) Borrow more.
b) Shift short-term to long-term debt.
c) Shift long-term to short-term debt.
d) Sell common stock.
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33. Which of the following statements (in general) is correct?
34. Debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
a) .2
b) .6
c) .667
d) .333
35. A firm's operating cycle is equal to its inventory turnover in days (ITD)
a) plus its receivable turnover in days (RTD).
b) minus its RTD.
c) plus its RTD minus its payable turnover in days (PTD).
d) minus its RTD minus its PTD.
39. Which of the following is NOT a cash outflow for the firm?
a) depreciation.
b) dividends.
c) interest payments.
d) taxes.
41. All of the following influence capital budgeting cash flows EXCEPT:
a) accelerated depreciation.
b) salvage value.
c) tax rate changes.
d) method of project financing used.
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42. The estimated benefits from a project are expressed as cash flows instead of income flows
because:
a) it is simpler to calculate cash flows than income flows.
b) it is cash, not accounting income, that is central to the firm's capital budgeting decision.
c) this is required by the Internal Revenue Service.
d) this is required by the Securities and Exchange Commission.
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46. A project's profitability index is equal to the ratio of the of a project's future cash
flows to the project's .
a) present value; initial cash outlay
b) net present value; initial cash outlay
c) present value; depreciable basis
d) net present value; depreciable basis
47. The discount rate at which two projects have identical is referred to as Fisher's rate
intersection. of
a) present values
b) net present values
c) IRRs
d) profitability indexes
48. Two mutually exclusive investment proposals have "scale differences" (i.e., the
cost of
the projects differ). Ranking these projects on the basis of IRR, NPV, and PI
methods give contradictory results.
a) will never
b) will always
c) may
d) will generally
49. Preferred shareholders' claims on assets and income of a firm come those of
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50. You are considering two mutually exclusive investment proposals, project A and project
B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion. On the
basis of risk and return, you would say that
a) Project A dominates project B.
b) Project B dominates project A.
c) Project A is more risky and should offer greater expected value.
d) Each project is high on one variable, so the two are basically equal.
51. To increase a given present value, the discount rate should be adjusted
a) upward.
b) downward.
c) No change.
d) constant
53. Which of the following would be consistent with a more aggressive approach to
financing working capital?
a) Financing short-term needs with short-term funds.
b) Financing permanent inventory buildup with long-term debt.
c) Financing seasonal needs with short-term funds.
d) Financing some long-term needs with short-term funds.
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54. Which asset-liability combination would most likely result in the firm's having the
greatest risk of technical insolvency?
a) Increasing current assets while lowering current liabilities.
b) Increasing current assets while incurring more current liabilities.
c) Reducing current assets, increasing current liabilities, and reducing long-term debt.
d) Replacing short-term debt with equity.
55. Which of the following illustrates the use of a hedging (or matching) approach to
financing?
a) Short-term assets financed with long-term liabilities.
b) Permanent working capital financed with long-term liabilities.
c) Short-term assets financed with equity.
d) All assets financed with 50 percent equity, 50 percent long-term debt mixture.
56. In deciding the appropriate level of current assets for the firm, management is
with confronted
a) Liquidity.
b) Risk.
c) Financing.
d) Liabilities.
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58. Spontaneous financing includes
a) accounts receivable.
b) accounts payable.
c) short-term loans.
d) a line of credit.
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63. Which would be an appropriate investment for temporarily idle corporate cash that will be
used to pay quarterly dividends three months from now?
a) A long-term AAA-rated corporate bond with a current annual yield of 9.4 percent.
b) A 30-year Treasury bond with a current annual yield of 8.7 percent.
c) Ninety-day commercial paper with a current annual yield of 6.2 percent.
d) Common stock that has been appreciating in price 8 percent annually, on average, and paying
a quarterly dividend that is the equivalent of a 5 percent annual yield.
66. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of
$800,000.
If the IT is improved to 8 times while the COGS remains the same, a substantial
of funds amount
is released from or additionally invested in inventory. In fact,
a) $160,000 is released.
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67. Ninety-percent of X company's total sales of $600,000 is on credit. If its year-end receivables
turnover is 5, the average collection period (based on a 365-day year) and the year-end
receivables are, respectively:
a) 365 days and $108,000. b)
73 days and $120,000. c) 73
days and $108,000. d) 81
days and $108,000.
69. Which of the following relationships hold true for safety stock?
a) the greater the risk of running out of stock, the smaller the safety of stock.
b) the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
c) the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
d) the higher the profit margin per unit, the higher the safety stock necessary.
70. Increasing the credit period from 30 to 60 days, in response to a similar action
taken by
all of our competitors, would likely
result in:
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71. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers
take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice.
What would receivables be if all customers took the cash discount?
73. 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.
a) the minimum rate that a firm should earn on the equity-financed part of an investment.
b) a return on the equity-financed portion of an investment that, at worst, leaves the
market price of the stock unchanged.
c) by far the most difficult component cost to estimate.
d) generally lower than the before-tax cost of debt.
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75. In calculating the proportional amount of equity financing employed by a firm, we should use:
a) the common stock equity account on the firm's balance sheet.
b) the sum of common stock and preferred stock on the balance sheet.
c) the book value of the firm.
d) the current market price per share of common stock times the number of shares
outstanding.
76. In calculating the costs of the individual components of a firm's financing, the
tax rate iscorporate
important to which of the following component cost formulas?
a) common stock.
b) debt.
c) preferred stock.
d) none of the above.
77. The common stock of a company must provide a higher expected return than
the samethe debt of
company because
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79. Market values are often used in computing the weighted average cost of capital because
80. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax
component costs of a Company's long-term financing.
81. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual
dividend. The preferred stock has a current market price of $96 a share. The firm's
marginal tax rate (combined federal and state) is 40 percent, and the firm plans to
maintain its current capital structure relationship into the future. The
component
preferred stockcost of
to Lei-Feng, Inc. would be closest to .
a) 6 percent
b) 6.25 percent
c) 10 percent
d) 10.4 percent
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82. The term "capital structure" refers to:
a) long-term debt, preferred stock, and common stock equity.
b) current assets and current liabilities.
c) total assets minus liabilities.
d) shareholders' equity.
85. Two firms that are virtually identical except for their capital structure are
market atselling invalues.
different the According to M&M
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86. What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered
would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?
a) $140,000
b) $220,000
c) $360,000
d) $580,000
88. What are the different options other than cash used for distributing profits to shareholders?
a) Bonus shares
b) Stock split
c) Stock purchase
d) All of these
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b. Miller and M.Khan
c. Modigiliani and M.Khan
d. Miller and Modigliani
92. When total current assets exceeds total current liabilities it refers to.
a. Gross Working Capital
b. Temporary Working Capital
c. Both a and b
d. Net Working Capital
93. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15% that
of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital
(WACC)?
a) 10.533%
b) 7.533%
c) 9.533%
d) 11.350%
94. Which of the following would not be financed from working capital?
a) Cash float.
b) Accounts receivable.
c) Credit sales.
d) A new personal computer for the office.
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95. What is the difference between the current ratio and the quick ratio?
a) The current ratio includes inventories and the quick ratio does not.
b) The current ratio does not include inventories 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.
96. Which of the following working capital strategies is the most aggressive?
a) Making greater use of short term finance and maximizing net short term asset.
b) Making greater use of long term finance and minimizing net short term asset.
c) Making greater use of short term finance and minimizing net short term asset.
d) Making greater use of long term finance and maximizing net short term asset.
97. Which of the following is not a metric to use for measuring the length of the cash cycle?
a) Acid test days.
b) Accounts receivable days.
c) Accounts payable days.
d) Inventory days.
99. Which of the following are not among the daily activities of financial management?
a) sale of shares and bonds
b) credit management
c) inventory control
d) the receipt and disbursement of funds
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100. Debt Equity Ratio is 3:1,the amount of total assets Rs.20 lac,current ratio is 1.5:1 and
owned funds Rs.3 lac.What is the amount of current asset?
a) Rs.5 lac
b) Rs.3 lac
c) Rs.12 lac
d) d) none of the above.
102. An asset is a-
a. Source of fund
b. Use of fund
c. Inflow of funds
d. none of the above.
103. If a company issues bonus shares the debt equity ratio will
a) Remain unaffected
b) Will be affected
c) Will improve
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104. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac &
capital & reserves are Rs.2 lac .What is the debt equity ratio?
a) a)1;1
b) 1.5:1
c) c)2:1
d) none of the above.
105. In last year the current ratio was 3:1 and quick ratio was 2:1.Presently current ratio is 3:1
but quick ratio is 1:1.This indicates comparably
a. high liquidity
b. higher stock
c. lower stock
d. low liquidity
106. Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred during the
year is Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a
Tangible Net Worth of
a. Nil
b. Rs.2.50 lac c.
(-)Rs.50,000
d. Rs.1 lac.
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108. Current ratio of a concern is 1,its net working capital will be
a) Positive
b) Negative
c) Nil
109. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of current Assets.
a) Rs.10,000 b)
Rs.40,000 c)
Rs.24,000 d) Rs.6,000
b) Rs.45,000
c) Rs.(-) 45,000
d) Rs.(-)18000
a) Govt.bond
b) Book debts
d) Inventories.
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112. The ideal quick ratio is a) 2:1
b) 1:1
c) 5:1
Answer
Keys
1 d 21 d 41 d 61 b 81 d 101 c
2 b 22 b 42 b 62 a 82 a 102 b
3 c 23 d 43 a 63 c 83 c 103 c
4 a 24 b 44 c 64 b 84 b 104 d
5 d 25 c 45 c 65 d 85 d 105 b
6 c 26 d 46 a 66 d 86 d 106 c
7 a 27 b 47 b 67 c 87 b 107 d
8 c 28 a 48 c 68 d 88 d 108 c
9 c 29 c 49 b 69 d 89 a 109 b
10 b 30 d 50 a 70 a 90 d 110 d
11 a 31 b 51 b 71 a 91 b 111 d
12 c 32 d 52 c 72 a 92 d 112 b
13 a 33 b 53 d 73 a 93 c
14 c 34 c 54 c 74 d 94 d
15 a 35 a 55 b 75 d 95 a
16 b 36 d 56 a 76 b 96 c
17 d 37 c 57 a 77 c 97 a
18 b 38 b 58 b 78 a 98 c
19 a 39 a 59 c 79 b 99 a
20 b 40 d 60 c 8 b 10 c
0 0
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