FINANCIAL MANAGEMENT UNIT-3

1. For accounting purposes, which of the following conditions would automatically cause a
lease to be a capital lease?

a. The lessee can purchase the asset below fair market value at the end of the lease.
b. The lease term is more than 75% of the asset's economic life.
c. The present value of the lease payments is more than 90% of the asset's market value at lease
inception.
d. All of the above would lead to the lease being considered a capital lease.

2. A lease is likely to be most beneficial to both parties when:

a. the lessor's tax rate is lower than the lessee's.

b. the lessor's tax rate is higher than the lessee's.
c. the lessor's tax rate is equal to the lessee's.
d. a lease cannot be beneficial to both parties.

3. Debt displacement is associated with leases because:

a. all assets not purchased with equity use debt financing.

b. debt is always a cheaper source of financing and preferred to equity financing.
c. FAS 13 and the IRS mandate debt displacement.
d. lease financing is all debt and causes an imbalance in the optimal debt to equity ratio
which reduces future debt financing.
4. During planning period, a marginal cost for raising a new debt is classified as

a. debt cost
b. relevant cost
c. borrowing cost
d. embedded cost

5.In weighted average cost of capital, a company can affect its capital cost through

a. policy of capital structure

b. policy of dividends
c. policy of investment
d. all of the above

6.Cost of capital is equal to required return rate on equity in case if investors are only

a. valuation manager
b. common stockholders
c. asset seller
d. equity dealer

7.In weighted average capital, capital structure weights estimation does not rely on value of

a. investors equity
b. market value of equity
c. book value of equity
d. stock equity

8.Cost of new debt or marginal debt is also classified as

a. historical rate
b. embedded rate
 c. marginal rate
d. Both A and B

9.Preferred dividend is divided by preferred stock price multiply by (1-floatation cost) is used to
calculate

a. transaction cost of preferred stock

b. financing of preferred stock
c. weighted cost of capital
d. component cost of preferred stock

10.Method uses for an estimation of cost of equity is classified as

a. market cash flow

b. future cash flow method
c. discounted cash flow method
d. present cash flow method

11. Which of the following question is true?

a. As compared to financial lease, operating lease is usually for a longer period of time.
b. Lessee can claim depreciation on asset acquired through lease arrangements.
c. A lease agreement grants the right to use the asset.
d. Leasing and hire purchase are synonymous.

12. ______ theory of capitalization is preferred by an existing firm.

a. Social cost
b. Cost of capital
c. Watered stock
d. Earning
13. If desired rate of return is minimum by actual rate of return then it is classified as

a. Future cash flow

b. Present cash flow
c. Positive cash flow
d. Negative cash flow

14. Process of translating lent dollars cash flow into equivalent dollars at common base period is
considered as

a. Semiannual cash flow

b. Discounted cash flow
c. Annual cash flow
d. Compounded cash flow

15. Cost of capital is the _________ rate of return expected by its investors.

a. Maximum
b. Minimum
c. Equal
d. Zero

16. According to traditional approach, cost of capital is affected by _______.

a. Debt-equity mix
b. Retained Earning
c. Zero Coupon bonds
d. Cost of Debt
17. Which among the following is true?

a. Capital structure is the mix of preference and equity share capital.

b. Capitalisation, capital structure and financial structure do not mean the same.
c. Increased use of debt increases the financial risk of equity of shareholders.
d. According to M & M theory the total value of firm is static.

18. Cost of Capital is the minimum required rate of earnings or the cut-off rate of ___________.

a. Capital expenditure
b. Revenue expenditure
c. Investment
d. Income

19. In a lease arrangement, the owner of the asset is:

a. the lesser.

b. the lessee.

c. the lessor.

d. the leaser.

20. _______ lease is a lease where the lessee maintains and insures the leased asset rather than
the lessor in a full- service lease.

a. A financial

b. An operating

c. A net

d. None of the above