FM MCQs

MCQs on 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. (correct)
2. The long-run objective of financial management is to:

a) maximize earnings per share.
b) maximize the value of the firm's common stock. (correct)
c) maximize return on investment.
d) maximize market share.
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 (correct)
d) Rs. 6.50
4. A(n)____________ would be an example of a principal, while a(n)__________would

be an example of an agent.
a) shareholder; manager (correct)
b) manager; owner
c) accountant; bondholder
d) shareholder; bondholder
5. 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. (correct)
6. 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. (correct)
d) the dollars profits earned by the firm.
7. ___________________ of a firm refers to the composition of its long-term funds and

its capital structure.
a) Capitalization (correct)
b) Over-capitalization
c) Under-capitalization
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 (correct)
d) Risk Premium
9. ______________ is the price at which the bond is traded in the stock exchange.
a) Redemption value
b) Face value
c) Market value (correct)
d) Maturity value
10. _____________ enhance the market value of shares and therefore equity capital is not
free of cost.
a) Face value
b) Dividends (correct)
c) Redemption value
d) Book value
11. When __________ is greater than zero the project should be accepted.
a) Internal rate of return (IRR)
b) Profitability index (PI)
c) Net present value (NPV)
d) Modified internal rate of return (MIRR)
12. ____________ is defined as the length of time required to recover the initial cash out-
lay/outflow.
a) Payback-period
b) Inventory conversion period
c) Discounted payback-period
d) Budget period
13. _______________ refers to the amount invested in various components of current

assets.
a) Temporary working capital
b) Net working capital
c) Gross working capital
d) Permanent working capital
14. ____________ 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
15. _______________ 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
16. _______________ 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
17. Amounts due from customers when goods are sold on credit are called ___________.
a) Trade balance
b) Trade debts
c) Trade discount
d) Trade off
18. ____________________ and __________________________ are the two versions of

goals of the financial management of the firm.
a) Profit maximisation, Wealth maximization
b) Production maximisation, Sales maximisation
c) Sales maximisation, Profit maximization
d) Value maximisation, Wealth maximisation
19. ____________ 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
20. Credit policy of every company is largely influenced by _____________ and

_____________.
a) Liquidity, accountability
b) Liquidity, profitability
c) Liability, profitability
d) Liability, liquidity
21. 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.
22. The gross profit margin is unchanged, but the net profit margin declined over the
same period. This could have happened if
a) cost of goods sold increased relative to sales.
b) sales increased relative to expenses.
c) Govt. increased the tax rate.
d) dividends were decreased.
23. 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.
24. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of
1.4. This means that the company
a) will not experience any difficulty with its creditors.
b) has less liquidity than other firms in the industry.
c) will be viewed as having high creditworthiness.
d) has greater than average financial risk when compared to other firms in
its industry.
25. Uses of funds include a (an):

a) decrease in cash.
b) increase in any liability.
c) increase in fixed assets.
d) tax refund.
26. Which of the following would be included in a cash estimation/ budget?

a) depreciation charges.
b) dividends.
c) goodwill.
d) patent amortization.
27. Which of the following is NOT a cash outflow for the firm?
a) depreciation.
b) dividends.
c) interest payments.
d) taxes.
28. A capital investment is one that

a) has the prospect of long-term benefits.
b) has the prospect of short-term benefits.
c) is only undertaken by large corporations.
d) applies only to investment in fixed assets.
29. A profitability index of .85 for a project means that:
a) the present value of benefits is 85% greater than the project's costs.
b) the project's NPV is greater than zero.
c) the project returns 85 cents in present value for each current dollar
invested.
d) the payback period is less than one year.
30. Which of the following statements is correct?

a) If the NPV of a project is greater than 0, its PI will equal 0.
b) If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0,
will be 0.
c) If the PI of a project is less than 1, its NPV should be less than 0.
d) If the IRR of a project is greater than the discount rate, k, its PI will be less
than 1 and its NPV will be greater than 0.
31. 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 to prevent risk of bankruptcy.
a) Investment decision
b) Dividend decision
c) Liquidity decision
d) Finance decision
32. Preferred shareholders' claims on assets and income of a firm come those of creditors
those of common shareholders.
a) before; and also before
b) after; but before
c) after; and also after
d) equal to; and equal to
33. You are considering two mutually exclusive investment proposals, project A and
project B. B's expected value of NPV 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.
34. To increase a given present value, the discount rate should be adjusted
a) upward.
b) downward.
c) No change.
d) constant
35. In finance, "working capital" means the same thing as

a) total assets.
b) fixed assets.
c) current assets.
d) current assets minus current liabilities.
36. 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.
37. 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.
38. 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.
39. Permanent working capital

a) varies with seasonal needs.
b) includes fixed assets.
c) is the amount of current assets required to meet a firm's long-term
minimum needs.
d) includes accounts payable
40. Financing a long-lived asset with short-term financing would be

a) an example of "moderate risk -- moderate (potential) profitability" asset
financing.
b) an example of "low risk -- low (potential) profitability" asset financing.
c) an example of "high risk -- high (potential) profitability" asset financing.
d) an example of the "hedging approach" to financing.
41. In deciding the appropriate level of current assets for the firm, management is
confronted with
a) a trade-off between profitability and risk.
b) a trade-off between liquidity and marketability.
c) a trade-off between equity and debt.
d) a trade-off between short-term versus long-term borrowing.
42. __________varies inversely with profitability.

a) Liquidity.
b) Risk.
c) Financing.
d) Liabilities.
43. Spontaneous financing includes
a) accounts receivable.
b) accounts payable.
c) short-term loans.
d) a line of credit.
44. Net working capital refers to

a) total assets minus fixed assets.
b) current assets minus current liabilities.
c) current assets minus inventories.
d) current assets.
45. Marketable securities are primarily
a) short-term debt instruments.
b) short-term equity securities.
c) long-term debt instruments.
d) long-term equity securities.
46. The basic requirement for a firm's marketable securities.
a) Safety
b) Yield
c) Marketability
d) All of the above.
47. Costs of not carrying enough inventory include:
a) lost sales.
b) customer disappointment.
c) possible worker layoffs.
d) all of these.
48. 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.
49. Current ratio of a concern is 1, its net working capital will be:
a) Positive
b) Negative
c) Nil
d) None of the above
50. If a company issues bonus shares the debt equity ratio will
a) Remain unaffected
b) Will be affected
c) Will improve
d) none of the above.
51. Increasing the credit period from 30 to 60 days, in response to a similar action taken
by all of our competitors, would likely result in:
a) an increase in the average collection period.
b) a decrease in bad debt losses.
c) an increase in sales.
d) higher profits.
52. 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?
a) Lower than the present level.
b) No change from the present level.
c) Higher than the present level.
d) Unable to determine without more information.
53. An increase in the firm's receivable turnover ratio means that:
a) it is collecting credit sales more quickly than before.
b) cash sales have decreased.
c) it has initiated more liberal credit terms.
d) inventories have increased.
54. In calculating the costs of the individual components of a firm's financing, the
corporate tax rate is important to which of the following component cost formulas?
a) common stock.
b) debt.
c) preferred stock.
d) none of the above.
55. The common stock of a company must provide a higher expected return than the debt
of the same company because
a) there is less demand for stock than for bonds.
b) there is greater demand for stock than for bonds.
c) there is more systematic risk involved for the common stock.
d) there is a market premium required for bonds.
56. 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.
57. Reserves & Surplus are which form of financing?
a) Security Financing
b) Internal Financing
c) Loans Financing
d) International Financing
58. 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
59. If the following are balance sheet changes: Rs. 5,005 decrease in accounts receivable
Rs. 7,000 decrease in cash Rs. 12,012 decrease in notes payable Rs. 10,000 increase in
accounts payable a "use" of funds would be the:
a) Rs. 7,000 decrease in cash.
b) Rs. 5,005 decrease in accounts receivable.
c) Rs. 10,000 increase in accounts payable.
d) Rs. 12,012 decrease in notes payable.
60. 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
61. 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 amount of funds is released from or additionally invested in inventory. In fact,
a) $160,000 is released.
b) $100,000 is additionally invested.
c) $60,000 is additionally invested.
d) $60,000 is released.
62. 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.
63. A quick approximation of the typical firm's cost of equity may be calculated by
a) adding a 5 percent risk premium to the firm's before-tax cost of debt.
b) adding a 5 percent risk premium to the firm's after-tax cost of debt.
c) subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
d) subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
64. Market values are often used in computing the weighted average cost of capital
because
a) this is the simplest way to do the calculation.
b) this is consistent with the goal of maximizing shareholder value.
c) this is required in the U.S. by the Securities and Exchange Commission.
d) this is a very common mistake.
65. The ideal quick ratio is

a) 2:1
b) 1:1
c) 5:1
d) None of the above
66. Quick assets do not include

a) Govt.bond
b) Book debts
c) Advance for supply of raw materials
d) Inventories.
67. 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
68. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is

a) Rs.18,000
b) Rs.45,000
c) Rs.(-) 45,000
d) Rs.(-)18000
69. Banks generally prefer Debt Equity Ratio at:

a) 1:1
b) 1:3
c) 2:1
d) 3:1
70. An asset is a-
a. Source of fund
b. Use of fund
c. Inflow of funds
d. none of the above.
71. Which of the following would be considered an application of funds?

a) a decrease in accounts receivable.
b) a decrease in cash.
c) an increase in account payable.
d) an increase in cash.
72. 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.
73. The addition of all current assets investment is known as...

a. Net Working Capital
b. Gross Working capital
c. Temporary Working Capital
d. All of these
76. 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.
77. How are earnings per share calculated?

a) Use the income statement to determine earnings after taxes (net income) and
divide by the previous period's earnings after taxes. Then subtract 1 from the
previously calculated value.
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
78. 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.
79. Debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
a) .20
b) .60
c) .67
d) .33
80. Which of the following is not the responsibility of financial management?

a) allocation of funds to current and capital assets
b) obtaining the best mix of financing alternatives
c) preparation of the firm's accounting statements
d) development of an appropriate dividend policy
81. 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
82. Which of the following marketable securities is the obligation of a commercial bank?
a) Commercial paper
b) Negotiable certificate of deposit
c) Repurchase agreement
d) T-bills
83. The traditional approach towards the valuation of a company assumes:

a) that the overall capitalization rate holds constant with changes in financial
leverage.
b) that there is an optimum capital structure.
c) that total risk is not altered by changes in the capital structure.
d) that markets are perfect.
84. Authorized 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.
85. 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.
86. 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
87. When total current assets exceed total current liabilities it refers to.
a. Gross Working Capital
b. Temporary Working Capital
c. Both a and b
d. Net Working Capital
88. 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
89. 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.
90. Accounting Ratios are important tools used by

(a) Managers,
(b) Researchers,
(c)Investors,
(d) All of the above
91. Net Profit Ratio Signifies:
(a) Operational Profitability,
(b) Liquidity Position,
(c) Big-term Solvency,
(d)Profit for Lenders.
92. Working Capital Turnover measures the relationship of Working Capital with:
(a)Fixed Assets,
(b)Sales,
(c)Purchases,
(d)Stock.
93. In Ratio Analysis, the term Capital Employed refers to:
(a)Equity Share Capital,
(b)Net worth,
(c)Shareholders' Funds,
(d)None of the above.
94. Dividend Payout Ratio is:
(a)PAT Capital,
(b)Dividend Per share (DPS) ÷ EPS,
(c) Pref. Dividend ÷ PAT,
(d) Pref. Dividend ÷ Equity Dividend.
95. DU PONT Analysis deals with:
(a) Analysis of Current Assets,
(b)Analysis of Profit,
(c)Capital Budgeting,
(d) Analysis of Fixed Assets.
96. In Net Profit Ratio, the denominator is:
(a)Net Purchases,
(b)Net Sales,
(c) Credit Sales,
(d) Cost of goods sold.
97. Inventory Turnover measures the relationship of inventory with:
(a) Average Sales,
(b)Cost of Goods Sold,
(c)Total Purchases,
(d) Total Assets.
98. The term 'EVA' is used for:
(a)Extra Value Analysis,
(b)Economic Value Added,
(c)Expected Value Analysis,
(d)Engineering Value Analysis.
99. Return on Investment (ROI) may be improved by:
(a)Increasing Turnover,
(b) Reducing Expenses,
(c)Increasing Capital Utilization,
(d)All of the above.
100. In Current Ratio, Current Assets are compared with:
(a)Current Profit,
(b)Current Liabilities,
(c)Fixed Assets,
(d)Equity Share Capital.
101. ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5,00,000. What are the
Current Assets?
(a)Rs. 5,00,000,
(b)Rs. 10,00,000,
(c)Rs. 15,00,000,
(d) Rs. 25,00,000
102. There is deterioration in the management of working capital of XYZ Ltd. What does it refer
to?
(a)That the Capital Employed has reduced,
(b)That the Profitability has gone up,
(c)That debtors collection period has increased,
(d)That Sales has decreased.
103. Which of the following does not help to increase Current Ratio?
(a)Issue of Debentures to buy Stock,
(b)Issue of Debentures to pay Creditors,
(c)Sale of Investment to pay Creditors,
(d)Avail Bank Overdraft to buy Machine.
104. Debt to Total Assets Ratio can be improved by:
(a)Borrowing More,
(b)Issue of Debentures,
(c)Issue of Equity Shares,
(d)Redemption of Debt.
105. Ratio of Net Income to Number of Equity Shares known as:
(a)Price Earnings Ratio,
(b) Net Profit Ratio,
(c)Earnings per Share,
(d) Dividend per Share.
106. Trend Analysis helps comparing performance of a firm
(a)With other firms,
(b)Over a period of firm,
(c)With other industries,
(d) None of the above.
107. A Current Ratio of Less than One means:
(a)Current Liabilities < Current Assets,
(b)Fixed Assets > Current Assets,
(c)Current Assets < Current Liabilities,
(d) Share Capital > Current Assets.
108. A firm has Capital of Rs. 10,00,000; Sales of Rs. 5,00,000; Gross Profit of Rs. 2,00,000 and
Expenses of Rs. 1,00,000. What is the Net Profit Ratio?
(a)20%,
(b) 50%,
(c)10%,
(d)40%.
109. XYZ Ltd. has earned 8% Return on Total Assets of Rs. 50,00,000 and has a Net Profit Ratio of
5%. Find out the Sales of the firm.
(a) Rs. 4,00,000,
(b)Rs. 2,50,000,
(c)Rs. 80,00,000,
(d)Rs. 83,33,333.
110. Suppliers and Creditors of a firm are interested in
(a)Profitability Position,
(b)Liquidity Position,
(c)Market Share Position,
(d) Debt Position.
111. Which of the following is a measure of Debt Service capacity of a firm?
(a)Current Ratio,
(b)Acid Test Ratio,
(c) Interest Coverage Ratio,
(d) Debtors Turnover.
112. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason
for such behavior could be:
(a) Increase in Costs of Goods Sold,
(b)If Increase in Expense,
(c) Increase in Dividend,
(d)Decrease in Sales.
113. Which of the following statements is correct?
(a) A Higher Receivable Turnover is not desirable,
(b) Interest Coverage Ratio depends upon Tax Rate,
(c)Increase in Net Profit Ratio means increase in Sales,
(d) Lower Debt-Equity Ratio means lower Financial Risk.
114. Debt to Total Assets of a firm is .2. The Debt to Equity would be:
(a) 0.80,
(b)0.25,
(c) 1.00,
(d)0.75
115. Which of the following helps analyzing return to equity Shareholders?
(a) Return on Assets,
(b) Earnings Per Share,
(c) Net Profit Ratio,
(d)Return on Investment.
116. Return on Assets and Return on Investment Ratios belong to:
(a) Liquidity Ratios,
(b)Profitability Ratios,
(c)Solvency Ratios,
(d)Turnover.
117. XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that
the firm has:
(a) Higher Liquidity,
(b)Higher Financial Risk,
(c)Higher Profitability,
(d)Higher Capital Employed.
118. Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What
does Debt-Equity Ratio help to study?
(a)Solvency,
(b)Liquidity,
(c)Profitability,
(d) Turnover,
119. In Inventory Turnover calculation, what is taken in the numerator?
(a) Sales,
(b)Cost of Goods Sold,
(c)Opening Stock,
(d) Closing Stock.
120. Financial Planning deals with:
(a) Preparation of Financial Statements,
(b)Planning for a Capital Issue,
(c) Preparing Budgets,
121. Financial planning starts with the preparation of:
(a) Master Budget,
(b) Cash Budget,
(c) Balance Sheet,
122. Which of the following is not a part of Master Budget?
(a)Projected Balance Sheet,
(b) Capital Expenditure Budget,
(c)Operating Budgets,
(d) Budget Manual.
123. Which of the following is not shown in Cash Budget?
(a)Proposed Issue of Capital,
(b) Loan Repayment,
(c) Interest on loan,
(d) Depreciation.
124. During year 1, the sales and Cost of goods sold were Rs. 6,00,000 and Rs. 4,30,000
respectively. Next year, the sales are expected to increase by 10%. The Cost of goods sold for next
year would be:
(a) Rs. 4,30,000,
(b) Rs. 4,90,000,
(c) Rs. 4,73,000,
(d) Rs. 4,40,000.
125. In 'Percentage of Sales' method of preparation of Projected Financial Statements, the
Operating Expenses should be projected on the basis of:
(a) % of Profit before tax,
(b) % of Cost of goods Sold,
(c) % of Gross Profit,
(d) % of Sales.
126. In'% of Sales' method, various items of balance sheet are estimated on the basis of.
(a) % of Share Capital,
(b) % of Sales in current year,
(c) % of Fixed Assets,
(d) % of Sales in preceding year.
127. In Projected Balance Sheet, a balancing figure:
(a) May appear on Assets Side,
(b) May appear on Liabilities Side,
(c) Would never appear,
(d) Any of (a) or (&).
128. Procedure for preparation of 'Projected Financial Statements' should start from:
(a) Projection of Fixed Assets,
(b) Projection of Capital,
(c) Projection of Sales,
(d) Projection of Profit.
129. Which of the following is not considered which preparing cash budget?
(a) Accrual Principle,
(b) Difference in Capital, and Revenue items,
(c) Conservation Principle,
(d) All of the above.
130. Which of the following may not be a part of projected Financial Statements?
(a) Projected Income Statement,
(b) Projected Trial Balance,
(c) Projected Cash Flow Statement,
(d) Projected Balance Sheet.
131. Process of Financial Planning ends with:
(a) Preparation of Projected Statements,
(b) Preparation of Actual Statements,
(c) Comparison of Actual with Projected,
(d) Ordering the employees that projected figures m come true.
132. Which of the following is not true for cash Budge?
(a) That shortage or excess of cash would appear in a particular period.
(b) All inflows would arise before outflows for those periods.
(c) Only revenue nature cash flows are shown.
(d) Proposed issue of share capital in shown as an inflow.
133. Capital Budgeting is a part of:
(a) Investment Decision,
(b) Working Capital Management,
(c) Marketing Management,
(d) Capital Structure.
134. Capital Budgeting deals with:
(a) Long-term Decisions,
(b) Short-term Decisions,
(c) Both (a) and (b),
(d) Neither (a) nor (b).
135. Which of the following is not used in Capital Budgeting?
(a) Time Value of Money,
(b) Sensitivity Analysis,
(c) Net Assets Method,
(d) Cash Flows.
136. Capital Budgeting Decisions are:
(a) Reversible,
(b) Irreversible,
(c) Unimportant,
137. Which of the following is not incorporated in Capital Budgeting?
(a) Tax-Effect,
(b) Time Value of Money,
(c) Required Rate of Return,
(d) Rate of Cash Discount.
138. Which of the following is not a capital budgeting decision?
(a) Expansion Programme,
(b) Merger,
(c) Replacement of an Asset,
(d) Inventory Level.
139. A sound Capital Budgeting technique is based on:
(a) Cash Flows,
(b)Accounting Profit,
(c) Interest Rate on Borrowings,
(d) Last Dividend Paid.
140. Which of the following is not a relevant cost in Capital Budgeting?
(a) Sunk Cost,
(b) Opportunity Cost,
(c) Allocated Overheads,
(d) Both (a) and (c) above.
141. Capital Budgeting Decisions are based on:
(a) Incremental Profit,
(b) Incremental Cash Flows,
(c) Incremental Assets,
(d) Incremental Capital.
142. Which of the following does not affect cash flows proposal?
(a) Salvage Value,
(b) Depreciation Amount,
(c) Tax Rate Change,
(d) Method of Project Financing
143. Cash Inflows from a project include:
(a) Tax Shield of Depreciation,
(b) After-tax Operating Profits,
(c) Raising of Funds,
(d) Both (a) and (b).
144. Which of the following is not true with reference capital budgeting?
(a) Capital budgeting is related to asset replacement decisions,
(b) Cost of capital is equal to minimum required return,
(c) Existing investment in a project is not treated as sunk cost,
(d) Timing of cash flows is relevant.
145. Which of the following is not followed in capital budgeting?
(a) Cash flows Principle,
(b) Interest Exclusion Principle,
(c) Accrual Principle,
(d) Post-tax Principle.
146. Depreciation is incorporated in cash flows because it:
(a) Is unavoidable cost,
(b) Is a cash flow,
(c) Reduces Tax liability,
(d) Involves an outflow.
147. Which of the following is not true for capital budgeting?
(a) Sunk costs are ignored,
(b)Opportunity costs are excluded,
(c)Incremental cash flows are considered,
(d) Relevant cash flows are considered.
148. 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.
149. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
(a) Cash Flows are easy to calculate,
(b)Cash Flows are suggested by SEBI,
(c) Cash is more important than profit,
150. Which of the following is not included in incremental A flows?
(a) Opportunity Costs,
(b)Sunk Costs,
(c) Change in Working Capital,
(d) Inflation effect.
151. A proposal is not a Capital Budgeting proposal if it:
(a) is related to Fixed Assets,
(b) brings long-term benefits,
(c) brings short-term benefits only,
(d) has very large investment.
152. In Capital Budgeting, Sunk cost is excluded because it is:
(a) of small amount,
(b) not incremental,
(c) not reversible,
153. Savings in respect of a cost is treated in capital budgeting as:
(a) An Inflow,
(b) An Outflow,
(c) Nil,
154. In capital budgeting, the term Capital Rationing implies:
(a) That no retained earnings available,
(b) That limited funds are available for investment,
(c) That no external funds can be raised,
(d) That no fresh investment is required in current year
155. Feasibility Set Approach to Capital Rationing can be applied in:
(a) Accept-Reject Situations,
(b) Divisible Projects,
(c) Mutually Exclusive Projects,
(d) None of the above
156. In case of divisible projects, which of the following can be used to attain maximum NPV?
(a) Feasibility Set Approach,
(b) Internal Rate of Return,
(c) Profitability Index Approach,
(d) Any of the above
157. In case of the indivisible projects, which of the following may not give the optimum result?
(a) Internal Rate of Return,
(b) Profitability Index,
(c) Feasibility Set Approach,
158. Profitability Index, when applied to Divisible Projects, impliedly assumes that:
(a) Project cannot be taken in parts,
(b) NPV is linearly proportionate to part of the project taken up,
(c) NPV is additive in nature,
(d) Both (b) and (c)
159. If there is no inflation during a period, then the Money Cashflow would be equal to:
(a) Present Value,
(b) Real Cashflow,
(c) Real Cashflow + Present Value ,
(d) Real Cashflow - Present Value
160. The Real Cashflows must be discounted to get the present value at a rate equal to:
(a) Money Discount Rate,
(b) Inflation Rate,
(c) Real Discount Rate,
(d) Risk free rate of interest
161. Real rate of return is equal to:
(a) Nominal Rate × Inflation Rate,
(b) Nominal Rate ÷ Inflation Rate,
(c) Nominal Rate - Inflation Rate,
(d) Nominal Rate + Inflation Rate
162. If the Real rate of return is 10% and Inflation s Money Discount Rate is:
(a) 14.4%,
(b) 2.5%,
(c) 25%,
(d) 14%
163. If the Money Discount Rate is 19% and Inflation Rate is 12%, then the Real Discount Rate is:
(a) 7%,
(b) 5%,
(c) 5.70%,
(d) 6.25%
164. Money Discount Rate if equal to:
(a) (1 + Inflation Rate) (1 + Real Rate)-1,
(b) (1 + Inflation Rate) 4- (1 + Real Rate)-1,
(c) (1 + Real Rate) 4- (1 + Inflation Rate)-1,
(d) (1 + Real Rate) + (1 + Inflation Rate)-1
165. Real Discount Rate is equal to:
(a) (1 + Inf. Rate) (1 + Money D Rate)-1,
(b) (1 + Money D Rate) + (1 + Inf. Rate)-1,
(c) (1 + Money D Rate) 4- (1 + Inf. Rate)-1,
(d) (1 + Money D Rate) - (1 + Inf. Rate)-1
166. Which of the following cannot be true?
(a) Inflation Rate > Money Dis. Rate,
(b) Real Dis. Rate < Money Dis. Rate
(c) Inflation Rate < Real Dis. Rate,
(d) Inflation Rate = Real Dis. Rate
167. Money Cash flows should be adjusted for:
(a) Only Inflation Effect,
(b) Only Time Value of Money,
(c) None of (a) and (b),
(d) Both of (a) and (b)
168. EAV should be used in case of:
(a) Divisible Projects,
(b) Repetitive Projects,
(c) One-off Investments
(d) Indivisible Projects
169. EAV is Equal to:
(a) NPV × PVAF(r,n) ,
(b) NPV + PVAF(r,n),
(c) NPV ÷ PVAF(r,n)
(d), NPV-PVAF(r,n)
170. If a project has positive NPV, its EAV is
(a) Equal to NPV,
(b)More than NPV,
(c) Less than NPV,
(d) Any of the above
171. Two mutually exclusive projects with different economic lives can be compared on the basis
of
(a) Internal Rate of Return,
(b) Profitability Index,
(c) Net Present Value,
(d) Equivalent Annuity Value
172. Risk in Capital budgeting implies that the decision-maker knows___________of the cash
flows.
(a) Variability,
(b)Probability,
(c) Certainty,
173. In Certainty-equivalent approach, adjusted cash flows are discounted at:

(a) Accounting Rate of Return,
(b) Internal Rate of Return,
(c) Hurdle Rate,
(d) Risk-free Rate
174. Risk in Capital budgeting is same as:

(a) Uncertainty of Cash flows,
(b) Probability of Cash flows,
(c) Certainty of Cash flows,
(d) Variability of Cash flows
175. Which of the following is a risk factor in capital budgeting?

(a) Industry specific risk factors,
(b) Competition risk factors,
(c) Project specific risk factors,
176. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
(a) Increased,
(b) Decreased,
(c) Unchanged,
177. In Risk-Adjusted Discount Rate method, which one is adjusted?

(a) Cash flows,
(b) Life of the proposal,
(c) Rate of discount,
(d) Salvage value
178. NPV of a proposal, as calculated by RADR real CE Approach will be:

(a) Same,
(b) Unequal,
(d) None of (a) and (b)
179. Risk of a Capital budgeting can be incorporated

(a) Adjusting the Cash flows,
(b) Adjusting the Discount Rate,
(c) Adjusting the life,
180. Which element of the basic NPV equation is adjusted by the RADR?
(a) Denominator,
(b) Numerator,
(c) Both,
(d) None
181. In CE Approach, the CE Factors for different years are:

(a) Generally increasing,
(b) Generally decreasing,
(c) Generally same,
182. Which of the following is correct for RADR?

(a) Accept a project if NPV at RADR is negative,
(b) Accept a project if IRR is more than RADR
(c) RADR is overall cost of capital plus risk-premium
183. In Playback Period approach to risk the target payback period is

(a)Not adjusted,
(b)Adjusted upward,
(c) Adjusted downward,
(d) (b) or c
184. In Sensitivity Analysis, the emphasis is on assessment of sensitivity of

(a) Net Economic Life,
(b) Net Present Value,
(d)None of (a) and (b)
185. Most Sensitive variable as given by the Sensitivity Analysis should be:
(a) Ignored,
(b) Given Least important,
(c) Given the maximum importance,
186. Expected Value of Cashflow, EVCF, is:

(a) Certain to occur,
(b) Most likely Cashflows,
(c) Arithmetic Average Cashflow,
(d) Geometric Average Cashflow
187. Concept of joint probability is used in case of:

(a) Independent Cashflows,
(b) Uncertain Cashflows,
(c) Dependent Cashflows,
(d) Certain Cashflows
188. Decision-tree approach is used in:

(a) Proposals with longer life,
(b) Sequential decisions,
(c) Independent Cashflows,
(d) Accept-Reject Proposal
189. Cash Budget does not include

(a) Dividend Payable,
(b)Postal Expenditure,
(c) Issue of Capital,
(d)Total Sales Figure.
190. Which of the following is not a motive to hold cash?

(a) Transactionary Motive,
(b)Pre-scautionary Motive,
(c) Capital Investment,
191. Cheques deposited in bank may not be available for immediate use due to
(a) Payment Float,
(b)Recceipt Float,
(c) Net Float,
(d)Playing the Float.
192. Difference between the bank balance as per Cash Book and Pass Book may be due to:
(a) Overdraft,
(b) Float,
(c) Factoring,
193. Concentration Banking helps in

(a) Reducing Idle Bank Balance,
(b)Increasing Collection,
(c)Increasing Creditors,
(d)Reducing Bank Transactions.
194. The Transaction Motive for holding cash is for

(a) Safety Cushion
(b)Daily Operations
(c)Purchase of Assets,
(d)Payment of Dividends
195. Miller-Orr Model deals with

(a)Optimum Cash Balance,
(b)Optimum Finished goods,
(c)Optimum Receivables,
196. Float management is related to

(a)Cash Management
(b)Inventory Management,
(c)Receivables Management,
(d)Raw Materials Management.
197. Which of the following is not an objective of cash management ?

(a)Maximization of cash balance,
(b)Minimization of cash balance,
(c)Optimization of cash balance,
(d)Zero cash balance.
198. Which of the following is not true of cash budget ?

(a)Cash budget indicates timings of short-term borrowing,
(b)Cash budget is based on accrual concept,
(c)Cash budget is based on cash flow concept,
(d)Repayment of principal amount of law is shown in cash budget.
199. Baumol's Model of Cash Management attempts to:

(a) Minimise the holding cost,
(b)Minimization of transaction cost,
(c)Minimization of total cost,
(d)Minimization of cash balance
200. Which of the following is not considered by Miller-Orr Model?

(a)Variability in cash requirement,
(b)Cost of transaction,
(c)Holding cost,
(d)Total annual requirement of cash
201. Basic characteristic of short-term marketable*

(a)High Return,
(b)High Risk,
(c)High Marketability,
(d)High Safety

(a) Equity shares,'
(b) Preference shares,
(c)Fixed deposits with companies
(d)Short-term debt investments.
203. Cost of Capital refers to:

(a) Flotation Cost,
(b) Dividend,
(c) Required Rate of Return,
204. Which of the following sources of funds has an Implicit Cost of Capital?
(a) Equity Share Capital,
(b) Preference Share Capital,
(c) Debentures,
(d) Retained earnings.
205. Which of the following has the highest cost of capital?

(a) Equity shares,
(b) Loans,
(c) Bonds,
(d) Preference shares.
206. Cost of Capital for Government securities is also known as:

(a) Risk-free Rate of Interest,
(b) Maximum Rate of Return,
(c) Rate of Interest on Fixed Deposits,
207. Cost of Capital for Bonds and Debentures is calculated on:

(a) Before Tax basis,
(b) After Tax basis,
(c) Risk-free Rate of Interest basis,
208. Weighted Average Cost of Capital is generally denoted by:

(a) kA,
(b) kw,
(c) k0,
(d) kc,
209. Which of the following cost of capital require tax adjustment?

(a) Cost of Equity Shares,
(b) Cost of Preference Shares,
(c) Cost of Debentures,
(d) Cost of Retained Earnings.
210. Which is the most expensive source of funds?

(a) New Equity Shares,
(b) New Preference Shares,
(c) New Debts,
(d) Retained Earnings.
211. Marginal cost of capital is the cost of:

(a) Additional Sales,
(b) Additional Funds,
(c) Additional Interests,
212. In case the firm is all-equity financed, WACC would be equal to:
(a) Cost of Debt,
(b) Cost of Equity,
(c) Neither (a) nor (b),
(d) Both (a) and (b).
213. In case of partially debt-financed firm, k0 is less

(a) Kd ,
(b) Ke,
214. In order to calculate Weighted Average Cost of weights may be based on:
(a) Market Values,
(b) Target Values,
(c) Book Values,
215. Firm's Cost of Capital is the average cost of:

(a) All sources,
(b) All borrowings,
(c) Share capital,
(d) Share Bonds & Debentures.
216. An implicit cost of increasing proportion of debt is:

(a) Tax should would not be available on new debt,
(b) P.E. Ratio would increase,
(c) Equity shareholders would demand higher return,
(d) Rate of Return of the company would decrease.
217. Cost of Redeemable Preference Share Capital is:

(a) Rate of Dividend,
(b) After Tax Rate of Dividend,
(c) Discount Rate that equates PV of inflows and out-flows relating to capital,
218. Which of the following is true?

(a) Retained earnings are cost free,
(b) External Equity is cheaper than Internal Equity,
(c) Retained Earnings are cheaper than External Equity,
(d) Retained Earnings are costlier than External Equity.
219. Cost of capital may be defined as:

(a)Weighted Average cost of all debts,
(b) Rate of Return expected by Equity Shareholders,
(c) Average IRR of the Projects of the firm,
(d)Minimum Rate of Return that the firm should earn.
220. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known
as:
(a) Average Return on Investment,
(b)Weighted Average Cost of Capital,
(d) Average Cost of borrowing.
221. Cost Capital for Equity Share Capital does not imply that:
(a)Market Price is equal to Book Value of share,
(b)Shareholders are ready to subscribe to right issue,
(c).Market Price is more than Issue Price,
(d) AC of the three above.
222. In order to calculate the proportion of equity financing used by the company, the following
should be used:
(a) Authorized Share Capital,
(b)Equity Share Capital plus Reserves and Surplus,
(c)Equity Share Capital plus Preference Share Capital,
(d) Equity Share Capital plus Long-term Debt.
223. The term capital structure denotes:

(a) Total of Liability side of Balance Sheet,
(b)Equity Funds, Preference Capital and Long term Debt,
(c) Total Shareholders’ Equity,
(d) Types of Capital Issued by a Company.
224. Debt Financing is a cheaper source of finance because of:

(a) Time Value of Money,
(b) Rate of Interest,
(c) Tax-deductibility of Interest,
(d) Dividends not Payable to lenders.
225. In order to find out cost of equity capital under CAPM, which of the following is not
required:
(a) Beta Factor,
(b) Market Rate of Return,
(c) Market Price of Equity Share,
(d) Risk-free Rate of Interest.
226. Tax-rate is relevant and important for calculation of specific cost of capital of:
(a) Equity Share Capital,
(b) Preference Share Capital,
(c) Debentures or Bonds
(d) (a) and (b) above.
227. Advantage of Debt financing is:

(a) Interest is tax-deductible,
(b) It reduces WACC,
(c) Does not dilute owners control,
228. Cost of issuing new shares to the public is known as:

(a) Cost of Equity,
(b) Cost of Capital,
(c) Flotation Cost,
(d) Marginal Cost of Capital.
229. Cost of Equity Share Capital is more than cost of debt because:
(a) Face value of debentures is more than face value of shares,
(b) Equity shares have higher risk than debt,
(c) Equity shares are easily saleable,
(d) All of the three above.
230. Which of the following is not a generally accepted approach for Calculation of Cost of
Equity?
(a) CAPM,
(b) Dividend Discount Model,
(c) Rate of Pref. Dividend Plus Risk,
(d) Price-Earnings Ratio.
231. Operating leverage helps in analysis of:

(a) Business Risk,
(b) Financing Risk,
(c) Production Risk,
(d) Credit Risk
232. Which of the following is studied with the help of financial leverage?
(a) Marketing Risk,
(b) Interest Rate Risk,
(c) Foreign Exchange Risk
(d) Financing risk
233. Combined Leverage (Total Leverage) is obtained from OL and FL by their:

(a) Addition,
(b) Subtraction
(c) Multiplication,
(d) Any of these
234. High degree of financial leverage means:

(a) High debt proportion
(b) Lower debt proportion,
(c) Equal debt and equity,
(d) No debt
235. Operating leverage arises because of:

(a) Fixed Cost of Production,
(b) Fixed Interest Cost,
(c) Variable Cost,
236. Financial Leverage arises because of:
(a) Fixed cost of production,
(b) Variable Cost
(c) Interest Cost,
237. Operating Leverage is calculated as:

(a) Contribution ÷ EBIT,
(b) EBIT÷PBT,
(c) EBIT ÷Interest,
(d) EBIT ÷Tax
238. Financial Leverage is calculated as:

(a) EBIT÷ Contribution,
(b) EBIT÷ PBT,
(c) EBIT÷ Sales,
(d) EBIT ÷ Variable Cost
239. Which combination is generally good for firms

(a) High OL, High FL
(b) Low OL, Low FL,
(c) High OL, Low FL,
(d) None of these
240. Combined leverage can be used to measure the relationship between:

(a) EBIT and EPS,
(b) PAT and EPS,
(c) Sales and EPS,
(d) Sales and EBIT
241. Financial Leverage is zero if:

(a) EBIT = Interest,
(b) EBIT = Zero,
(c) EBIT = Fixed Cost,
(d) EBIT = Pref. Dividend
242. Business risk can be measured by:

(a) Financial leverage
(b) Operating leverage,
(c) Combined leverage,
243. Financial Leverage measures relationship between

(a) EBIT and PBT,
(b) EBIT and EPS,
(c) Sales and PBT,
(d) Sales and EPS
244. Use of Preference Share Capital in Capital structure

(a) Increases OL,
(b) Increases FL,
(c) Decreases OL,
(d) Decreases FL
245. Relationship between change in sales and change m is measured by:

(a) Financial leverage,
(b) Combined leverage
(c) Operating leverage,
246. Operating leverage works when:

(a) Sales Increases,
(b) Sales Decreases,
247. Which of the following is correct?

(a) CL= OL + FL,
(b) CL=OL-FL,
(c) TL= OL × FL,
(d) OL=OL÷FL
248. If the fixed cost of production is zero, which one of the following is correct?
(a) OL is zero,
(b) FL is zero,
(c) CL is zero,
249. If a firm has no debt, which one is correct?

(a) OL is one,
(b) FL is one,
(c) OL is zero,
(d)FL is zero
250. If a company issues new share capital to redeem debentures, then:

(a) OL will increase,
(b) FL will increase,
(c) OL will decrease,
(d) FL will decrease
251. If a firm has a DOL of 2.8, it means:

(a) If sales increase by 2.8%, the EBIT will increase by 1%,
(b) If EBIT increase by 2.896, the EPS will increase by 1 %,
(c) If sales rise by 1%, EBIT will rise by 2.8%,
252. Higher OL is related to the use of higher:

(a) Debt,
(b) Equity,
(c) Fixed Cost,
(d) Variable Cost
253. Higher FL is related the use of:

(a) Higher Equity,
(b) Higher Debt,
(c) Lower Debt,
254. In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:
(a) MP of Equity Shares,
(b) Number of Equity Shares,
(c) Face Value of Equity Shares,
255. Trading on Equity is :

(a) Always beneficial
(b) May be beneficial,
(c) Never beneficial,
256. Benefit of 'Trading on Equity' is available only if:

(a) Rate of Interest < Rate of Return,
(b) Rate of Interest > Rate of Return,
(d) None of (d) and (b).
257. Financial Break-even level of EBIT is one at which:

(a) EPS is one,
(b) EPS is zero,
(c) EPS is Infinite,
(d) EPS is Negative.
258. Relationship between change in Sales and Operating Profit is known as:
(a) Financial Leverage,
(b) Operating Leverage,
(d) Gross Profit Ratio.
259. If a firm has no Preference share capital, Financial Break even level is defined as equal to -
(a) EBIT
(b) Interest liability
(c) Equity Dividend
(d) Tax Liability
260. At Indifference level of EBIT, different capital have:

(a) Same EBIT,
(b) Same EPS,
(c) Same PAT,
(d) Same PBT
261. For a constant EBIT, if the debt level is further increased then
(a) EPS will always increase
(b) EPS may increase
(c)EPS will never increase
262. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then
(a) Both plans be rejected,
(b)Both plans are good,
(c) One is better than other
263. Financial break-even level of EBIT is:

(a) Intercept at Y-axis,
(b) Intercept at X-axis,
(c) Slope of EBIT-EPS line
264. Which of the following is true for Net Income Approach?

(a) Higher Equity is better,
(b) Higher Debt is better,
(c) Debt Ratio is irrelevant,
265. In case of Net Income Approach, the Cost of equity is:

(a) Constant,
(b) Increasing,
(c) Decreasing,
266. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:
(a) Increases,
(b) Decreases,
(c) Constant,
267. Which of the following is true of Net Income Approach?

(a) VF = VE+VD,
(b) VE = VF+VD,
(c) VD = VF+VE,
(d) VF = VE-VE,
268. Net Operating Income Approach, which one of the lowing is constant?
(a) Cost of Equity,
(b) Cost of Debt,
(c) WACC & kd,
(d)Ke and Kd
269. NOI Approach advocates that the degree of debt financing is:
(a) Relevant,
(b) May be relevant,
(c) Irrelevant,
(d) May be irrelevant.
270. 'Judicious use of leverage' is suggested by:

(a) Net Income Approach,
(b) Net Operating Income Approach,
(c) Traditional Approach,
271. Which one is true for Net Operating Income Approach?

(a) VD = VF - VE,
(b) VE = VF + VD,
(c) VE = VF - VD,
(d) VD = VF + VE.
272. In the Traditional Approach, which one of the following remains constant?
(a) Cost of Equity,
(b) Cost of Debt,
(c) WACC,
273. In MM-Model, irrelevance of capital structure is based on:

(a) Cost of Debt and Equity,
(b) Arbitrage Process,
(c) Decreasing k0,
274. 'That there is no corporate tax' is assumed by:

(d) All of these.
275. 'That personal leverage can replace corporate leverage' is assumed by:
(a) Traditional Approach,
(b) MM Model,
(c) Net Income Approach,
(d) Net Operating Income Approach.
276. Which of the following argues that the value of levered firm is higher than that of the
unlevered firm?
(c) MM Model with taxes,
(d) Both (a) and (c).
277. In Traditional Approach, which one is correct?

(a) ke rises constantly,
(b) kd decreases constantly,
(c) k0 decreases constantly,
278. Which of the following assumes constant kd and ke?

(a) Net Income Approach
(d) MM Model.

(a) Under Traditional Approach, overall cost of capital remains same,
(b) Under NI Approach, overall cost of capital remains same,
(c) Under NOI Approach, overall cost of capital remains same,
280. The Traditional Approach to Value of the firm that:

(a) There is no optimal capital structure,
(b) Value can be increased by judicious use of leverage
(c) Cost of Capital and Capital structure are m dent,
(d) Risk of the firm is independent of capital structure
281. A firm has EBIT of Rs. 50,000. Market value of debt is Rs. 80,000 and overall capitalization
rate is 20%. Market value of firm under NOI Approach is:
(a) Rs. 2,50,000,
(b) Rs. 1,70,000,
(c) Rs. 30,000,
(d) Rs. 1,30,000.
282. Which of the following is incorrect for NOI?

(a) k0 is constant,
(b) kd is constant,
(c) ke is constant,
(d) kd & k0 are constant.
283. Which of the following is incorrect for value of the firm?

(a) In the initial preposition, MM Model argues that value is independent of the financing
mix.
(b) Total value of levered and unlevered firms is otherwise arbitrage will take place.
(c) Total value incorporates borrowings by firm but excludes personal borrowing.
(d) Total value does not change because underlying does not change with financing mix.
284. Which of the following appearing in the balance! generates tax advantage and hence affects
the c, structure decision ?
(a) Reserves and Surplus
(b) Long-term debt,
(c) Preference Share Capital,
(d) Equity Share Capital.
285. In MM Model with taxes, where 'r' is the interest rate, ‘D’ is the total debt and 't' is tax rate,
then present valued shields would be:
(a) r×D×t,
(b) r×D,
(c) D×t,
(d) (D× r)/(l-t).
286. ‘Bird in hand' argument is given by

(a) Walker's Model,
(b) Gordon's Model,
(c)MM Mode,
(d) Residuals Theory
287. Residuals Theory argues that dividend is a

(a) Relevant Decision ,
(b) Active Decision,
(c) Passive Decision,
(d) Irrelevant Decision
288. Dividend irrelevance argument of MM Model is based on:

(a) Issue of Debentures,
(b) Issue of Bonus Share,
(c) Abitrage ,
(d) Hedging
289. Which of the following is not true for MM Model?

(a) Share price goes up if dividend is paid ,
(b) Share price goes down if dividend is not paid,
(c) Market value is unaffected by Dividend policy,
290. Which of the following stresses on investor's preference reorient dividend than higher future
capital gains?
(a)Walter's Model,
(b) Residuals Theory,
(c) Gordon's Model,
(d) MM Model.
291. MM Model of Dividend irrelevance uses arbitrage between

(a)Dividend and Bonus,
(b)Dividend and Capital Issue,
(c)Profit and Investment,
(d)None of the above
292. If ke = r, then under Walter's Model, which of the following is irrelevant?

(a)Earnings per share,
(b)Dividend per share,
(c)DP Ratio,
293. MM Model argues that dividend is irrelevant as

(a)the value of the firm depends upon earning power,
(b)the investors buy shares for capital gain,
(c)dividend is payable after deciding the retained earnings,
(d)dividend is a small amount
294. Which of the following represents passive dividend policy?

(a)that dividend is paid as a % of EPS,
(b)that dividend is paid as a constant amount,
(c)that dividend is paid after retaining profits for reinvestment,
(d)all of the above
295. In case of Gordon's Model, the MP for zero payout is zero. It means that
(a)Shares are not traded,
(b)Shares available free of cost,
(c)Investors are not ready to offer any price,
296. Gordon's Model of dividend relevance is same as

(a) No-growth Model of equity valuation,
(b)Constant growth Model of equity valuation,
(c)Price-Earning Ratio
(d) Inverse of Price Earnings Ratio
297. If 'r' = 'ke', than MP by Walter's Model and Gordon's Model for different payout ratios would
be
(a) Unequal,
(b)Zero
(c)Equal,
(d)Negative
298. Cash Budget does not include

(a) Dividend Payable,
(b)Postal Expenditure,
(c) Issue of Capital,
(d)Total Sales Figure.
299. Which of the following is not a motive to hold cash?

(a) Transactionary Motive,
(b)Pre-scautionary Motive,
(c) Capital Investment,
300. Cheques deposited in bank may not be available for immediate use due to
(a) Payment Float,
(b)Recceipt Float,
(c) Net Float,
(d)Playing the Float.
301. Difference between the bank balance as per Cash Book and Pass Book may be due to:
(a) Overdraft,
(b) Float,
(c) Factoring,
302. Concentration Banking helps in

(a) Reducing Idle Bank Balance,
(b)Increasing Collection,
(c)Increasing Creditors,
(d)Reducing Bank Transactions.
303. The Transaction Motive for holding cash is for

(a) Safety Cushion
(b)Daily Operations
(c)Purchase of Assets,
(d)Payment of Dividends
304. Miller-Orr Model deals with

(a)Optimum Cash Balance,
(b)Optimum Finished goods,
(c)Optimum Receivables,
305. Float management is related to

(a)Cash Management
(b)Inventory Management,
(c)Receivables Management,
(d)Raw Materials Management.
306. Which of the following is not an objective of cash management ?

(a)Maximization of cash balance,
(b)Minimization of cash balance,
(c)Optimization of cash balance,
(d)Zero cash balance.
307. Which of the following is not true of cash budget ?

(a)Cash budget indicates timings of short-term borrowing,
(b)Cash budget is based on accrual concept,
(c)Cash budget is based on cash flow concept,
(d)Repayment of principal amount of law is shown in cash budget.
308. Baumol's Model of Cash Management attempts to:

(a) Minimise the holding cost,
(b)Minimization of transaction cost,
(c)Minimization of total cost,
(d)Minimization of cash balance
309. Which of the following is not considered by Miller-Orr Model?

(a)Variability in cash requirement,
(b)Cost of transaction,
(c)Holding cost,
(d)Total annual requirement of cash
310. Basic characteristic of short-term marketable*

(a)High Return,
(b)High Risk,
(c)High Marketability,
(d)High Safety

(a) Equity shares,'
(b) Preference shares,
(c)Fixed deposits with companies
(d)Short-term debt investments.
312. Dividend Payout Ratio is

(a) PAT÷ Capital,
(b) DPS* ÷ EPS,
(c)Pref. Dividend ÷ PAT,
(d)Pref. Dividend ÷ Equity Dividend
* DPS=Dividend Per Share
313. Dividend declared by a company must be paid in

(a)20 days,
(b)30 days,
(c)32 days,
(d)42 days
314. Shares of face value of Rs. 10 are 80% paid up. The company declares a dividend of 50%.
Amount of dividend per share is:
(a)Rs. 5,
(b)Rs.4,
(c)Rs. 80,
(d) Rs. 50
315. Which of the following generally not result in increase in total dividend liability?
(a)Share-split,
(b)Right Issue,
(c)Bonus Issue,
(d)All of the above
316. Dividends are paid out of

(a)Accumulated Profits,
(b)Gross Profit,
(c)Profit after Tax,
(d)General Reserve
317. Every company should follow

(a)High Dividend Payment,
(b)Low Dividend Payment,
(c)Stable Dividend Payment,
(d)Fixed Dividend Payment
318. 'Constant Dividend Per Share' Policy is considered as:

(a) Increasing Dividend Policy,
(b) Decreasing Dividend Policy,
(c)Stable Dividend Policy,
319. Which of the following is not a type of dividend payment?

(a) Bonus Issue,
(b) Right Issue,
(c) Share Split,
(d) Both (b) and (c)
320. If the following is an element of dividend policy?

(a) Production capacity,
(b) Change in Management,
(c) Informational content,
(d) Debt service capacity
321. Stock split is a form of

(a) Dividend Payment,
(b)Bonus Issue,
(c) Financial restructuring,
(d) Dividend in kind
322. In stock dividend:

(a)Authorized capital always increases,
(b)Paid up capital always increases,
(c) Face value per share decreases,
(d) Market price for share decreases
323. Which of the following is not relevant for dividend payment for a year?
(a)Cash flow position,
(b)Profit position,
(c)Paid up capital,
(d) Retained Earnings
324. 5Cs of the credit does not include

(a) Collateral,
(b)Character,
(c) Conditions,
325. Which of the following is not an element of credit policy?

(a)Credit Terms,
(b)Collection Policy,
(c)Cash Discount Terms,
(d)Sales Price.
326. Ageing schedule incorporates the relationship between

(a)Creditors and Days Outstanding,
(b)Debtors and Days Outstanding,
(c)Average Age of Directors,
(d)Average Age of All Employees.
327. Bad debt cost is not borne by factor in case of

(a) Pure Factoring,
(b) Without Recourse Factoring,
(c) With Recourse Factoring,
328. Which of the following is not a technique of receivables Management?

(a)Funds Flow Analysis,
(b)Ageing Schedule,
(c)Days sales outstanding,
(d)Collection Matrix.
329. Which of the following is not a part of credit policy?

(a)Collection Effort,
(b) Cash Discount,
(c)Credit Standard,
(d) Paying Practices of debtors.
330. Which is not a service of a factor?

(a)Administrating Sales Ledger,
(b)Advancing against Credit Sales,
(c) Assuming bad debt losses,
331. Credit Policy of a firm should involve a trade-off between increased:

(a) Sales and Increased Profit,
(b) Profit and Increased Costs of Receivables,
(c) Sales and Cost of goods sold,
332. Out of the following, what is not true in respect of factoring?

(a)Continuous Arrangement between Factor and Seller,
(b)Sale of Receivables to the factor,
(c)Factor provides cost free finance to seller,
333. Payment to creditors is a manifestation of cash held for:

(a)Transactionery Motive,
(b)Precautionary Motive,
(c)Speculative Motive,
334. If the closing balance of receivables is less than the opening balance for a month then which
one is true out of:
(a)Collections>Current Purchases,
(b)Collections>Current Sales,
(c)Collections<Current Purchases,
(d) Collections < Current Sales.
335. If the average balance of debtors has increased, which of the following might not show a
change in general?
(a)Total Sales,
(b)Average Payables,
(c)Current Ratio,
(d)Bad Debt loss.
336. Securitization is related to conversion of

(a)Receivables,
(b)Stock,
(c)Investments,
(d)Creditors.
337. 80% of sales of Rs. 10,00,000 of a firm are on credit. It has a Receivable Turnover of 8. What is
the Average collection period (360 days a year) and Average Debtors of the firm?
(a)45 days and Rs. 1,00,000,
(b)360 days and Rs. 1,00,000,
(c)45 days and Rs. 8,00,000,
(d)360 days and Rs. 1,25,000.
338. In response to market expectations, the credit period has been increased from 45 days to 60
days. This would result in
(a)Decrease in Sales,
(b)Decrease in Debtors,
(c)Increase in Bad Debts,
(d)Increase in Average Collection Period.
339. If a company sells its receivable to another party to raise funds, it is known as
(a)Securitization,
(b)Factoring,
(c)Pledging,
340. Cash Discount term 3/15, net 40 means:

(a) 3% Discount if payment in 15 days, otherwise full payment in 40 days,
(b) 15% Discount if payment in 3 days, otherwise full payment 40 days,
(c) 3% Interest if payment made in 40 days and 15%, interest thereafter,
341. If the sales of the firm are Rs. 60,00,000 and the average debtors are Rs. 15,00,000 then the
receivables turnover is:
(a) 4 times,
(b) 25%,
(c)400%,
(d)0.25 times
342. If cash discount is offered to customers, then which of the following would increase?
(a)Sales,
(b)Debtors,
(c)Debt collection period,
(d)All of the above
343. Receivables Management deals with

(a)Receipts of raw materials,
(b)Debtors collection,
(c)Creditors Management,
(d)Inventory Management
344. Which of the following is related to Receivables Management?

(a) Cash Budget,
(b)Economic Order Quantity,
(c)Ageing schedule,
345. EOQ is the quantity that minimizes

(a)Total Ordering Cost,
(b)Total Inventory Cost,
(c)Total Interest Cost,
(d)Safety Stock Level.
346. ABC Analysis is used in

(a)Inventory Management,
(b)Receivables Management,
(c)Accounting Policies,
(d)Corporate Governance.
347. If no information is available, the General Rule for valuation of stock for balance sheet is
(a)Replacement Cost,
(b)Realizable Value,
(c)Historical Cost,
(d)Standard Cost.
348. In ABC inventory management system, class A items may require

(a)Higher Safety Stock,
(b)Frequent Deliveries,
(c)Periodic Inventory system,
(d)Updating of inventory records.
349. Use of safety stock by a firm would

(a)Increase Inventory Cost,
(b)Decrease Inventory Cost,
(c)No effect on cost,
350. Which of the following is true for a company which uses continuous review inventory
system
(a)Order Interval is fixed,
(b)Order Interval varies,
(c) Order Quantity is fixed,
(d) Both (a) and (c).
351. EOQ determines the order size when

(a)Total Order cost is Minimum,
(b)Total Number of order is least,
(c)Total inventory costs are minimum,
352. ABC Analysis is useful for analyzing the inventories:

(a)Based on their Quality,
(b)Based on their Usage and value,
(c)Based on Physical Volume,
353. If A = Annual Requirement, O = Order Cost and C = Carrying Cost per unit per annum, then
EOQ
(a) (2AO/C) 2 ,
(b) 2AO/C
(c) 2A÷OC,
(d)2AOC.
354. Inventory is generally valued as lower of

(a)Market Price and Replacement Cost,
(b)Cost and Net Realizable Value,
(c)Cost and Sales Value,
(d)Sales Value and Profit.
355. Which of the following is not included in cost of inventory?

(a)Purchase cost,,
(b)Transport in Cost,
(c)Import Duty,
(d)Selling Costs.
356. Cost of not carrying sufficient inventory is known as

(a)Carrying Cost,
(b)Holding Cost,
(c)Total Cost,
(d) Stock-out Cost
357. Which of the following is not a benefit of carrying inventories?

(a) Reduction in ordering cost,
(b)Avoiding lost sales,
(c)Reducing carrying cost,
(d)Avoiding Production Shortages.
358. Which of the following is not a standard method of inventory valuation?

(a)First in First out,
(b)Standard Cost,
(c)Average Pricing,
(d)Realizable Value.
359. System of procuring goods when required, is known as,

(a)Free on Board (FOB),
(b) always Butter Control (ABC),
(c) Jest in Time (JIT),
(d)Economic Order Quantity.
360. A firm has inventory turnover of 6 and cost of goods sold is Rs. 7,50,000. With better
inventory management, the inventory turnover is increased to 10. This would result in:
(a)Increase in inventory by Rs. 50,000,
(b)Decrease in inventory by Rs. 50,000,
(c)Decrease in cost of goods sold,
(d)Increase in cost of goods sold.
361. What is Economic Order Quantity?

(a)Cost of an Order,
(b)Cost of Stock,
(c)Reorder level,
(d)Optimum order size.
362. The type of collateral (security) used for short-term loan is

(a) Real estate,
(b)Plant & Machinery,
(c)Stock of good,
(d)Equity share capital
363. Which of the following is a liability of a bank?
(a)Treasury Bills,
(b)Commercial papers,
(c)Certificate of Deposits,
(d)Junk Bonds.
364. Commercial paper is a type of

(a)Fixed coupon Bond,
(b)Unsecured short-term debt,
(c)Equity share capital,
(d) Government Bond
365.Which of the following is not a spontaneous source of short-term funds ?

(a)Trade credit,
(b)Accrued expenses,
(c)Provision for dividend,
366. In India, Commercial Papers are issued as per the lines issued by
(a) Securities and Exchange Board of India,
(b)Reserve Bank of India,
(c)Forward Market Commission,
367. Commercial paper are generally issued at a pries

(a)Equal to face value,
(b)More than face value,
(c)Less than face value,
(d)Equal to redemption value
368. Which of the following is not applicable to commercial papers:

(a)Face Value,
(b)Issue Price,
(c)Coupon Rate,
369. Cash discount terms offered by trade creditors never be accepted because
(a)Benefit in very small,
(b)Cost is very high,
(c)No sense to pay earlier,
370. In lease system, interest is calculated on

(a)Cash down payment,
(b)Cash price outstanding,
(c)Hire purchase price,
371. A short-term lease which is often cancellable is known as

(a)Finance Lease,
(b)Net Lease,
(c)Operating Lease,
(d)Leverage Lease
372. Which of the following is not a usual type of lease arrangement?

(a)Sale & leaseback,
(b)Goods on Approval,
(c)Leverage Lease,
(d)Direct Lease
373. Under income-tax provisions, depreciation on lease asset is allowed to

(a) Lessor,
(b)Lessee
(c) Any of the two,
(d)None of the two
374. Under the provisions of AS-19 'Leases', a leased asset is shown is the balance sheet of
(a)Manufacturer,
(b)Lessor,
(c)Lessee,
(d) Financing bank
375. For a lessor, a lease is a

(a)Investment decision,
(b)Financing decision,
(c)Dividend decision,
376. A lease which is generally not cancellable and covers full economic life of the asset is known
as
(a) Sale and leaseback,
(b)Operating Lease,
(c)Finance Lease,
(d)Economic Lease
377. Lease which includes a third party (a lender) is known as

(a)Sale and leaseback,
(b)Direct Lease,
(c)Inverse Lease,
(d) Leveraged Lease
378. One difference between Operating and Financial lease is:

(a)There is often an option to buy in operating lease.
(b)There is often a call option in financial lease.
(c)An operating lease is generally cancelable by lease.
(d) A financial lease in generally cancellable by lease.
379. From the point of view of the lessee, a lease is a:

(a)Working capital decision,
(b)Financing decision,
(c)Buy or make decision,
(d)Investment decision
380. Which of the following is not true for a "Lease decision for the lessee?
(a) Helps in project selection
(b)Helps in project financing
(c)Helps in project location
381. Deep Discount Bonds are issued at

(a)Face Value,
(b)Maturity Value,
(c)Premium to Face Value,
(d)Discount to Face Value.
382. Principal value of a bond is called the

(a)Maturity Value,
(b)Issue Price,
(c)Par Value,
(d)Market Price.
3. If the required rate of return of a particular bond is less than coupon rate, it is known as
(a)Discount Bond,
(b)Premium Bond,
(c)Par Bond,
(d)Junk Bond.
4. Market interest rate and bond price have

(a)Positive relationship,
(b)Inverse relation,
(c)No relationship,
(d)Same relationship
5. If a coupon bond is selling at discount, then which of the following is true?

(a) Po < Par and YTM < coupon,
(b) Po < Par and YTM > coupon
(c)Po > Par and YTM < coupon,
(d) Po > Par and YTM > coupon
6. In the formula ke (D1/P0) + g, D1/P0 refers to

(a)Capital gain yield,
(b)Dividend yield,
(c)Interest yield,
7. The rate of interest payable on a bond is also called

(a)Effective Rate of Interest,
(b)Yield to Maturity,
(c)Coupon Rate,
(d)Internal Rate of Return.
8. A long-term bond issued with collateral is called

(a)Junk Bond,
(b)Treasury Bills,
(c)Debenture,
(d)Preference Share.
9. A company may call the bonds when

(a) Interest rates have dropped,
(b) Interest rates have increased,
(c)It is not earning profits,
10. Rate of Interest on convertible debenture is generally________the rate on non-convertible

debentures
(a)Lower than,
(b)Higher than,
(c)Same as,
11. A 16% bond with a face value of Rs. 250 is available for Rs. 200 in the market. They yield on
the bond is
(a)16%,
(b)20%,
(c)80%,
(d)32%
12. At time to maturity comes closer, than market price of a bond approaches
(a)Face Value,
(b)Redemption Value,
(c)Issue Price,
(d)Zero Value
13. Market Price of Bond and Market Rate of Interest

(a) Inverse relationship,
(b)Positive relationship,
(c)No relationship,
14. Which of the following is a feature of zero-coupon bonds?

(a)Sold at Par,
(b)Sold at premium,
(c)Pays no Interest,
(d)Not Redeemable.
15. Bonds that are covered by specific collaterals are called

(a)Junk Bond,
(b)Floating Rate Bonds,
(c)Secured Bonds,
(d)Deep Discount Bonds.
16.Which of the following will cause an increase in bond values?

(a)Decrease in Redemption Amount,
(b)Decrease in Coupon Rate,
(c)Increase in Redemption Amount,
(d) Increase in Redemption Period.
17. Which of the following is always true for Bonds?
(a)FV of a Bond = Issue Price,
(b)Redemption Value = Amount received by bondholder at maturity,
(c)Bonds are redeemable at market value,
18. In a 3 years Bond purchased and held till maturity, the rate earned is called
(a) Coupon Rate,
(b)Yield to Maturity,
(c) Current Yield,
(d) Holding Period Return.
19. An investor should buy a bond if

(a)Intrinsic Value < Market Value,
(b)Intrinsic Value > Market Value,
(c)Market Value < Redemption Value,
(d)Market Value = Redemption Value.
20. In case the maturity period of a bond increases, the volatility

(a) Increases,
(b)Decreases,
(c)Remains same,
(d)Both (a) and (b).
21. Current Market Price of a Bond is equal to its Par Value if

(a)Face Value is Rs. 1000,
(b)Coupon is paid half yearly,
(c)Coupon Rate = Current Yield,
(d) It is a Government Bond.
22. If the coupon rate and required rate of return are equal, the value of the bond is equal to
(a) Market Value,
(b) Par Value,
(c)Redemption Value,
23. YTM of a Bond is not affected by

(a) Coupon Rate,
(b)Issue Price,
(c)Redemption Value,
(d) Interest Amount.
24. If Coupon rate is less than Required Rate of Return; as the maturity approaches the discount
on bond
(a)Increases,
(b)Decreases,
(c)Remains Constant,
25. An investor buys a bond today and sells after 3 months the rate of return realised is known as
(a)Yield to Maturity,
(b)Current yield,
(c)Holding Period Return,
(d) Required Rate of Return.
47. Multiple Choice Questions

1. Beta, β, of risk-free investment is
(a)Zero,
(b)1,
(c)-1,
(d)None of these.
2. Return of a portfolio is
(a)Total Return of all elements,
(b)Average Return of all elements,
(c)Highest Return
(d) Lowest Return
3. Which of the following is diversifiable risk?

(a)Inflation Risk,
(b)Interest Rate Risk,
(c)Seasonal Risk,
4. Which of the following is not a non-diversification

(a)Industrial recession,
(b)Lock-out in a company,
(c)Political Instability,
(d)Both (a) and (c).

(a)Risk can never be reduced to zero,
(b)Diversification always reduces risk to zero,
(c)Diversification does not affect risk,
6. Standard deviation can be used to measure

(a)Risk of an investment,
(b)Return of an investment,
(c)Both(a)&(b) and
(d) None of (a) and (b).

(a) Higher the Beta, lower the risk,
(b)Higher the Beta, higher the risk,
(c)Risk is constant,
(d)Beta is constant.
8. Amount of risk-reduction in a portfolio depends upon

(a)Market movement,
(b)Degree of correlation,
(c)No. of shares,
(d) Both (b) and (c).
9. In a diversified portfolio, a new security adds
(a) Systematic Risk,
(b) Unsystematic Risk,
(c) Liquidity Risk,
10. Risk-Return trade off implies

(a) Minimization of Risk,
(b) Maximization of Risk,
(c)Ignorance of Risk
(d) Optimization of Risk
11. Basic objective of diversification is

(a) Increasing Return,
(b) Maximising Return,
(c) Decreasing Risk,
(f) Maximizing Risk.
12. Risk-aversion of an investor can be measured by

(a) Market Rate of Return,
(b) Risk-free Rate of Return,
(c) Portfolio Return,
13.Risk of a portfolio depends on

(a) Risk of elements,
(b) Correlation of return
(c) Proportion of elements,
14. Which of the following will increase the required rate of return?
(a)Increase in Interest Rates,
(b) Increase in Risk-free Rate,
(c)Increase in Degree of Risk-Aversion
15. Systematic risk of a security can be measured by

(a)Coefficient of variation,
(b)Standard Deviation,
(c)Beta,
(d)Range.
16. Which of the following is unsystematic risk to a firm?

(a)Inflation,
(b)Surcharge of Income-tax,
(c)Interest Rate,
(d) Scarcity of Raw Material.
17. Total portfolio risk is equal to systematic plus

(a)Non-diversifiable,
(b)Diversifiable,
(c)Unavoidable,
18. Which of the following is diversifiable through diversification?

(a)Systematic,
(b)Unsystematic,
(c)Both of the above,
19. Which of the following is the variability of the return from a share associated with the market
as a whole?
(a)Unsystematic,
(b)Avoidable,
(c)Systematic,
20. Which of the following describes the relationship between expected rate of return and the
standard deviation?
(a)Characteristic Line,
(b)Capital Market Line,
(c)Security Market Line,
21. Which of the following describe the relationship between expected rate of return and the P?
(a)Security Market Line,
(b)characteristic Line,
(c)Capital Market Line,
22. Which of the following describes the relationship between systematic risk and return?
(a)Arbitrage Pricing Theory,
(b)Capital Assets Pricing Model,
(c)Harry Marketing Model,
(d) Capital Market Line
23. In CAPM, β (Beta) factor measures

(a) Return of an asset,
(b) Risk of an asset,
(c) Life of an asset,
(d) Capital investment
24. Which is the beta for a treasury stock?

(a) Zero,
(b) One,
(c) Greater than one,
(d) Less than one
25.Stock beta measures

(a) EPS,
(b)Debt Equity Ratio,
(c)Dividend,
(d) Stock Volatility
26. Risk avoidable through proper diversification is known as
(a) Portfolio Risk,
(b) Unsystematic Risk,
(c) Systematic Risk,
(d) Total Risk
2 7. Expected Return on the market in 16% and Risk free rate is 6%, which of the following
projects be accepted.
(a) A:β = 0.50, Return = 11.5%
(b) B: β = 1.25, Return = 18.0%
(c) C: β = 1, Return = 15.5%
(d) D: β = 2, return = 25.0%
28. If the intrinsic value of a share is less than the market price, which of the most reasonable?
(a) That shares have lesser degree of risk,
(b)That market is over valuing the shares
(c)That the company is high dividend paying,
(d) That market is undervaluing the share
29. An aggressive share would have a beta

(a)Equal to Zero,
(b) Greater than one,
(c)Less than Zero,
(d)Equal to one
1. A Futures contract is standardized version of a

(a)Put option,(b)Call option,(c)Call + Put,(d)Forward contract
2. Margins are imposed on options sellers to safeguard the interest of

(a)Exchange,(b)Brokers, (c)Buyers,(d) d) All of the above
3. In Futures trading, the margin in payable to the broker by

(a)Buyer of Futures,(b)Sellers of Futures,(c)None of (a) and (b),(d)Both of (a) and (b)
4. A contract which gives the holder a right to buy a particular asset at a particular rate on or
before a specified date is known as (a) European Option, (b) Straddle,(c) American Option, (d)
Strangle
5. In India, derivatives in interest rates are regulated by (a) Securities and Exchange Board of
India,(b) Forward Market Commission,(c) Reserve Bank of India,(d) Ministry of Finance
6. The maximum loss of a call option holder is equal to

(a) Strike-Spot Price,(b) Spot Price,(c) Premium,(d)So + Premium
7. The maximum loss of a put option writer is equal to

(a)Strike Price – Premium,(b)Strike Price,(c)Spot Price,(d)Strike Price plus premium
8. Intrinsic Value of a 'out of money' call option is equal to (a)Premium,(b)Zero,(c)Spot

Price,(d)Strike Price
9. Holder of an American call option can (a)Buy the asset only on expiration,(b)Sell the asset on or
before expiration,(c)Buy the asset on or before expiration, (d)Sell the asset only on expiration
10. How the increase in volatility in asset price, will affect the value of the option?
(a)Increase the value,(b)Decrease the value,(c)May not affect,(d)Any of the above
11. Holder of European put option can

(a) Sell the asset on or before expiry,(b)Sell the asset on or after expiry,(c)Sell the asset on expiry
only (d) Sell the asset before expiry only
l.(d), 2. (d), 3. (d), 4 (c), 5. (c), 6. (c), 7(a), 8(b), 9. (c), 10. (a), 11. (c), 12. (d), 13. (a), 14. (b), 15 (c),
16(d)
12. Maximum gain of a put option holder is restricted to

(a)Strike Price,(b)Spot Price,(c)Spot Price – Premium,(d)Strike Price - Premium
13. Break-even of a call option occurs when spot price is equal to

(a)Strike Price + Premium,(b)Strike Price – Premium,(c)Premium, (d)None of the above
14. Break-even of a Put option occurs when spot price is equal to

(a)Strike price + Premium,(b)Strike Price – Premium, (c)Premium,(d)None of the above
15. Before expiry date, the time value of a call option is

(a)Strike Price - Spot Price,(b)Spot Price - Strike Price,(c)Market Premium - Intrinsic Value,(d)
Intrinsic Value
16. Out of 4 factors i.e.,(i) Dividend Yield, (ii) Market Interest, Rates, (iii) Time to Expiry, and (iv)
Price volatility, which affect the premium of an option?(a) (i), (ii), and (iv),(b), (ii),(iii)and (iv),(c)
(ii) and (iv),(d) (i), (iii) and (iv)
17. In Futures, the terms and conditions are standards with reference to
(a)Rate and Date only,
(b)Quantity only,
(c)Place of delivery only,
(d)All of the above
18. In call options, which of the following has an m relation with its value?
(a)Volatility,
(b)Time to Expiry,
(c)Strike Price,
(d)Spot Price
19. If Strike price is more than the spot price of the asset, the call option is known as
(a)American Option,
(b)European Option,
(c)Out of Money Option,
(d)In the Money Option
1. A firm can acquire target firm by

(a) Purchasing assets of Target,
(b) Purchasing shares of Target,
(c)Purchasing Assets or Shares
2. ABC Ltd acquires substantial number of equity shares in XYZ Ltd. It is a case of
(a)Merger,
(b)Acquisition,
(c)Amalgamation,
(d)Absorption
3. PQR Ltd. is a profit making company. It is absorbed into another group company XYZ Ltd.
which is a loss company. This is a case of
(a)Hostile takeover bid,
(b)Horizontal Merger,
(c)Reverse Merger,
(d)Takeover
4. Under AS 14, and amalgamation in the nature of merger is a case where________of

shareholders of transferor company have agreed to become shareholders of transferee company.
(a) More than 50%,
(b) 100%,
(c) At least 90%,
(d) 25% or more
5. Merger of two companies under BIFR supervision is known as

(a) Reverse Merger,
(b) Negotiated Merger,
(c) Offer for Sale,
(d) Arranged Merger
6. Which of the following is not a usual method of calculation of Share Swap Ratio?
(a)Profit before Tax,
(b)Market Turnover,
(c)Economic Value Added,
(d)All of the above
7. An acquirer offer to buy shares directly from the share holders is known as
(a)Poison Rell,
(b)White Knight,
(c)Tender offer,
(d)Takeover
8. Shares of A Ltd. and T Ltd. are currently traded at Rs. 100 and Rs. 25 respectively. The share
swap ratio based on Market Price would be
(a)1.00,
(b)2.50,
(c).40,
(d).80
9. If a swap ratio is calculated on the basis of EPS, then which of the following would be
protected for two groups of shareholders?
(a)Total Market Value,
(b)Total Earnings,
(c)Total Assets,
(d)All of the above
10. If the Price-Earnings Ratio of two companies are same and they merge on the basis of share
swap ratio (EPS based), which of the following will be protected for two groups of shareholders?
(a)Market Value and Earnings,
(b)Earnings and Assets,
(c)Paid-up Capital and Earnings,
(d)Paid-up Capital and Market Values
11. ABC Ltd. acquires 100% of Preference Share Capital of PQR Ltd. It would result in
(a) Hostile Takeover bid,
(b)Vertical Merger,
(c)Holding-subsidiary relationship,
(d)No relationship
12. Which of the following is a case of 'Spin off?

(a)Assets sold in the market,
(b)A division converted into a company,
(c) Assets transferred to lenders
1. Spot exchange rate is the rate of exchange between two currencies

(a) for immediate delivery,
(b)for future delivery,
(c)for delivery at a particular spot in future,
2. Price of one currency in terms of another currency is knows as

(a)Exchange Rate,
(b)Direct Route,
(c)Ask Price,
(d)Any of the above
3. No. of units of domestic currency required to buy one unit of a foreign currency is known as
(a)Indirect Route,
(b)Cross-Rate,
(c)Direct Route,
(d)Spot Rate
4. Normally, direct ask price is_________ than the direct bid price.
(a)equal,
(b)greater,
(c)lesser,
5. If the spot rate of $ in Mumbai is Rs. 45.50 and 1 month forward rate is ? 45.65, then which is
correct for forward market?
(a)That $ is at premium,
(b)That $ is at discount,
(c)Rupee is at premium,
6. If the Spot Rate of $ in Mumbai is Rs. 46.70 and the 3 months rate is Rs. 46.45, then which is
correct for the forward market?
(a)That Rupee is at premium,
(b)That Rupee is at discount,
(c)$ is at premium,
7. Foreign Currency Exchange Rate risk can be hedged in

(a)Options Market,
(b)Futures Market,
(c)Money Market,
8. An Indian exporter has despatched goods worth $ 1,00,000 receivable in 2 months time. He can
hedge exchange rate risk by:
(a)Buying a $ Call Option,
(b)Selling a $ Call Option,
(c)Buying a $ Put Option,
(d)Selling a $ Put Option
9. Mr. X has to pay $ 5,00,000 in three months time for the imports made by him. Correct hedging
policy for him would be to
(a)Buy a $ Call Option,
(b)Sell a $ Call Option,
(c)Buy a $ Put Option,
(d) Sell a $ Put Option
10. Relationship between Spot and Forward Exchange Rate s is referred to as

(a)Interest Rate Parity,
(b)Purchasing Power Parity,
(c)Exchange Power Parity,
(d)One-price rule
11. Adjustment in Exchange Rates due to different inflation rates in two countries is known as
(a)On Price Rate,
(b)Interest Rate Parity,
(c)Purchasing Power Parity,
(d)Exchange Power Parity
12. Annual nominal Interest rates in country X and country Y are 6% and 12% respectively.
Current exchange rate is 5 units of X per unit of Y. 3 months forward rate would be
(a)4.756,
(b)4.927,
(c)5.295,
(d)5.085
13. Purchasing Power Parity refers to that –

(a)Interest rates across countries will eventually be same,
(b)There is a relationship between spot and forward rates,
(c)Goods should sell at the same price across countries after exchange rate considered.
14. Forward exchange rate is the rate of exchange between two currencies
(a) prevailing today for future delivery,
(b) would prevail at a future date,
(c)prevailing today for immediate delivery,
1. Assets Management company is formed

(a) To manage bank's assets,
(b) To manage mutual funds investments,
(c) To construct infrastructure projects
(d) To run a stock exchange
2. Prime duty of a merchant banker is

(a) Maintaining records of clients,
(b) Giving loans to clients,
(c) Working as a Capital Market Intermediary
3. Basic objective of a money market mutual fund is

(a) Guaranteed rate of return,
(b) Investment in short-term securities,
(c)Both (a) and (b),
4. Short selling refers to

(a) Buying shares and then selling them on the same day,
(b) Selling shares without owning them,
(c) Selling some shares out of a large holding,
(d) Continuously selling shares in lots.
8. Which of the following is the benefit of Depositories?

a) Reduction in the share transfer time to the buyer,
b) Reduced Risk of stolen, fake, forged shares,
c) No Stamp duty on transfer of shares in dematerialized form
d) All of the above
9. Credit Rating of a debt security is

(a)Guarantee of Repayment,
(b)Merely opinion,
(c)Positive suggestion ,
12. Which of the following derivative is not traded on Indian Stock Market?
(a)Index Options,
(b)Stock Futures,
(c)Index Futures,
(d)Forward Rate Agreements
14. The amount in unpaid dividend accounts of companies shall be transferred to the
(a)Dividend Equalisation Reserve of the company,
(b)Investor Education and Protection fund,
(c) Investor Protection Fund,
(d) General Revenue Account of the Central Government
16. …..funds do not have a fixed date of redemption.

(a) Open ended funds,
(b)Close ended funds,
(c)Diversified funds,
(d) Both A and B.

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MCQs on Financial Management

1. "Shareholder wealth" in a firm is represented by:

2. The long-run objective of financial management is to:

4. A(n)____________ would be an example of a principal, while a(n)__________would

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

6. The focal point of financial management in a firm is:

7. ___________________ of a firm refers to the composition of its long-term funds and

13. _______________ refers to the amount invested in various components of current

18. ____________________ and __________________________ are the two versions of

20. Credit policy of every company is largely influenced by _____________ and

25. Uses of funds include a (an):

26. Which of the following would be included in a cash estimation/ budget?

28. A capital investment is one that

30. Which of the following statements is correct?

35. In finance, "working capital" means the same thing as

39. Permanent working capital

40. Financing a long-lived asset with short-term financing would be

42. __________varies inversely with profitability.

44. Net working capital refers to

62. Ninety-percent of X company's total sales of $600,000 is on credit. If its year-end

65. The ideal quick ratio is

66. Quick assets do not include

68. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is

69. Banks generally prefer Debt Equity Ratio at:

71. Which of the following would be considered an application of funds?

73. The addition of all current assets investment is known as...

77. How are earnings per share calculated?

80. Which of the following is not the responsibility of financial management?

83. The traditional approach towards the valuation of a company assumes:

90. Accounting Ratios are important tools used by

173. In Certainty-equivalent approach, adjusted cash flows are discounted at:

174. Risk in Capital budgeting is same as:

175. Which of the following is a risk factor in capital budgeting?

177. In Risk-Adjusted Discount Rate method, which one is adjusted?

178. NPV of a proposal, as calculated by RADR real CE Approach will be:

179. Risk of a Capital budgeting can be incorporated

181. In CE Approach, the CE Factors for different years are:

182. Which of the following is correct for RADR?

183. In Playback Period approach to risk the target payback period is

184. In Sensitivity Analysis, the emphasis is on assessment of sensitivity of

186. Expected Value of Cashflow, EVCF, is:

187. Concept of joint probability is used in case of:

188. Decision-tree approach is used in:

189. Cash Budget does not include

190. Which of the following is not a motive to hold cash?

193. Concentration Banking helps in

194. The Transaction Motive for holding cash is for

195. Miller-Orr Model deals with

196. Float management is related to

197. Which of the following is not an objective of cash management ?

198. Which of the following is not true of cash budget ?

199. Baumol's Model of Cash Management attempts to:

200. Which of the following is not considered by Miller-Orr Model?

201. Basic characteristic of short-term marketable*

202. Marketable securities are primarily

203. Cost of Capital refers to:

205. Which of the following has the highest cost of capital?

206. Cost of Capital for Government securities is also known as:

207. Cost of Capital for Bonds and Debentures is calculated on:

208. Weighted Average Cost of Capital is generally denoted by:

209. Which of the following cost of capital require tax adjustment?

210. Which is the most expensive source of funds?

211. Marginal cost of capital is the cost of:

213. In case of partially debt-financed firm, k0 is less

4. A(n)__ would be an example of a principal, while a(n)would

18. and ______ are the two versions of