740+ Financial Management Solved MCQs

301.

Risk-Return trade off implies

A. Minimization of Risk,
B. Maximization of Risk,
C. Ignorance of Risk
D. Optimization of Risk
Answer» D. Optimization of Risk
302.

Basic objective of diversification is

A. Increasing Return,
B. Maximising Return,
C. Decreasing Risk,
D. Maximizing Risk.
Answer» C. Decreasing Risk,
303.

Risk-aversion of an investor can be measured by

A. Market Rate of Return
B. Risk-free Rate of Return,
C. Portfolio Return,
D. None of the above.
Answer» D. None of the above.
304.

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
Answer» B. That market is over valuing the shares
305.

According to traditional approach, the average cost of capital

A. Remains constant up to a degree of leverage and rises sharply thereafter with every increase in leverage.
B. Rises constantly with increase in leverage.
C. Deceases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.
D. Decreases at an increasing rate with increase in leverage.
Answer» C. Deceases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.
306.

Equity shares of phonex Ltd are quoted in the market at Rs17. The dividend expected a year hence is Rs1.50. The expected rate of dividend growth is 8%. The cost of equity capital to the company is

A. 11.08%
B. 13.88%
C. 15.46%
D. 16.82%
Answer» D. 16.82%
307.

Which of the following is not a feature of an optimal capital structure?

A. Profitability
B. Safety
C. Flexibility
D. Control
Answer» B. Safety
308.

The cost of debt capital if interest rate is 15% and tax rate is 40% is

A. 6%
B. 8.5%
C. 9%
D. 10.5%
Answer» C. 9%
309.

Which of the following is not a feature of an optimal capital structure?

A. The company should make maximum use of leverage at a minimum cost
B. The capital structure should be flexible to be able to meet the changing condition
C. The company should aim at not using excessive debt in its capital structure
D. The company should make minimum use of leverage at a minimum cost.
Answer» D. The company should make minimum use of leverage at a minimum cost.
310.

Which of the following is not an assumption of Miller and Modigliani approach?

A. There are no corporate or personal income tax
B. Investors are assumed to be rational and behave accordingly
C. There is no corporate tax though there are personal income tax
D. Capital markets are perfect
Answer» C. There is no corporate tax though there are personal income tax
311.

The bond yield plus risk premium approach is a method of finding out the cost of

A. Preference capital
B. Equity capital
C. Debenture capital
D. Term loans
Answer» B. Equity capital
312.

According to net operating income approach

A. The equity capitalization rate remains constant with any increase or decrease in the degree of leverage
B. The overall capitalization rate of the firm remains constant
C. The cost of debt remains constant
D. Both b and c
Answer» D. Both b and c
313.

While calculating the weighted average cost of capital, market value weights are preferred because

A. Book value weights are historical in nature
B. It is vary difficult to estimate book value weights at the time of calculating the weighted average cost
C. This is in conformity with the definition of cost of capital as the investor’s minimum required rate of return
D. Book value weights fluctuate violently.
Answer» C. This is in conformity with the definition of cost of capital as the investor’s minimum required rate of return
314.

Which profit is considered for calculating Average Rate of Return?

A. Earnings before interest, depreciation and tax
B. Average profit after tax and depreciation
C. Average profit after depreciation but before tax
D. Average profit after depreciation but before tax
Answer» B. Average profit after tax and depreciation
315.

A project costs Rs50,000 and will yield annual cash inflows of Rs20,000 for 5years. Calculate its payback period.

A. 2 years
B. 5 years
C. 2.5 years
D. 3 years
Answer» C. 2.5 years
316.

Capital structure decisions should always aim at having debt component in order to

A. Gain tax savings
B. Gain control over the company
C. Balance the capital structure
D. Increase the earnings available for shareholders.
Answer» D. Increase the earnings available for shareholders.
317.

------ refers to a situation where a firm is not in a position to invest in all profitable projects due to the constraints on availability of funds

A. Capital budgeting
B. Over capitalization
C. Capital expenditure control
D. Capital rationing
Answer» D. Capital rationing
318.

------ refers to the minimum return expected by its suppliers

A. Trading on equity
B. Time value of money
C. Cost of capital
D. Capital gearing
Answer» C. Cost of capital
319.

The ratio which is obtained by dividing the present value of future cash inflows by the present value of cash out flows is called

A. Net Present Value
B. IRR
C. Profitability Index
D. Average rate of return
Answer» C. Profitability Index
320.

Capital structure is the proportion of

A. Long term funds and short term funds
B. Debt and equity
C. Current assets and fixed assets
D. Equity and retained earnings
Answer» B. Debt and equity
321.

A company has earnings before interest and taxes of Rs1,00,000. It expects a return on investment at a rate of 12.5%. What is the total value of the firm according to MM Theory?

A. Rs6,00,000
B. Rs7,00,000
C. Rs8,00,000
D. Rs9,00,000
Answer» C. Rs8,00,000
322.

Optimum capital structure is obtained when

A. Firm earns maximum profits
B. Firm declares reasonable dividend
C. Market value per equity share is the maximum
D. The debt increases
Answer» C. Market value per equity share is the maximum
323.

Axis Ltd is issuing 15% debentures ( face value Rs60). The net amount realized per debenture is Rs54 and they are redeemable at par after 6 years. At a corporate tax rate of 40%, what is the cost of debt?

A. 16.54%
B. 17.54%
C. 10%
D. 14.74%
Answer» C. 10%
324.

Which of the following statement is true according to traditional approach of capital structure?

A. Cost of capital increases with the use of debt after a certain amount of debt and later falls
B. Cost of equity and debt more or less remains constant with the use of debt up to a certain amount of debt
C. Cost of declines and cost of debt remains constant with increase in debt.
D. Cost of equity declines and cost of debt increases with increase in debt
Answer» B. Cost of equity and debt more or less remains constant with the use of debt up to a certain amount of debt
325.

Which of the following is true regarding the measurement of cash inflows and out flows of a project?

A. Depreciation amount should be added to PBT
B. Depreciation amount should be added to PAT
C. Depreciation should neither be added nor be subtracted from PAT
D. Both a and b above
Answer» B. Depreciation amount should be added to PAT
326.

According to rate or return is the ratio of average values of

A. Profit before tax to book value o the investment
B. Profit after tax to salvage value of the investment
C. Profit before tax to present value of the investment
D. Profit after tax to the book value of the investment
Answer» D. Profit after tax to the book value of the investment
327.

Which of the following is/ are the drawbacks of Accounting Rate of Return criterion

A. It gives equal weightage to near flows and distant flows
B. It is calculated using the accounting income and not cash flows
C. The cut off of ARR is arbitrarily fixed
D. All of the above
Answer» D. All of the above
328.

Which of the following is true about NPV?

A. It considers all the cash flows
B. It gives more weightage to distant flows than to near term flows
C. It considers time value of money
D. Both a and c above
Answer» D. Both a and c above
329.

In IRR , the cash inflows are assumed to be reinvested in the project at

A. Internal rate of return
B. Cost of capital
C. Risk free rate
D. Risk adjusted rate
Answer» A. Internal rate of return
330.

For a project, benefit cost ratio is equal to one, then

A. IRR will be greater than one
B. IRR will be greater than discount rate
C. IRR will be less than discount rate
D. IRR will be equal to discount rate
Answer» D. IRR will be equal to discount rate
331.

Which of the following is a non discounting technique for appraising a project?

A. Net present value
B. Pay back period
C. Internal rate of return
D. Cost benefit ratio
Answer» B. Pay back period
332.

If the present value of cash in flows from a project is Rs4.50 crore, initial outlay is Rs3.75 crore then the net benefit cost ratio is

A. 0.17
B. 0.20
C. 0.75
D. 0.83
Answer» B. 0.20
333.

Which of the following is not considered for cost benefit analysis of capital decisions

A. Opportunity cost
B. Incremental cost
C. Sunk cost
D. All of these
Answer» C. Sunk cost
334.

If NPV for a project is negative, then

A. IRR = Cost of capital
B. IRR > Cost of capital
C. BCR = 1
D. IRR < Cost of capital
Answer» D. IRR < Cost of capital
335.

The net cash flows of the project and their present values are as follows Year 1 2 3 4 Net cash flow (Rs) 5100 5100 5100 7100 PVIF @12% 0.893 0.797 0.712 0.636 Present Value (Rs) 4554 4065 3631 4516 The initial investment in the project is Rs12500, What is the NPV of the project?

A. 4066
B. 4166
C. 4266
D. 4566
Answer» C. 4266
336.

Higher the risk involved in a firm, ------- is the cost of capital

A. High
B. Low
C. Medium
D. None of these
Answer» A. High
337.

The composition of a company’s capitalization is called

A. Capital Structure
B. Financial structure
C. Long term source
D. Short term source
Answer» A. Capital Structure
338.

The entire items on the liability side of a balance sheet is called

A. Capital structure
B. Financial structure
C. Long term source
D. Short term source
Answer» B. Financial structure
339.

Net operating income approach was suggested by

A. Modigliani and Miller
B. Durand
C. Walter
D. None of these
Answer» B. Durand
340.

Overall cost of capital, according to ------ approach, decreases up to a certain point, remains unchanged for moderate increase in debt thereafter, and increase beyond a certain point

A. Net income
B. Net operating income
C. Traditional
D. MM approach
Answer» C. Traditional
341.

According to MM approach, two identical firms in all respects except their capital structure can not have different market values or cost of capital because of-----

A. Leverage
B. Trading on equity
C. Arbitrage process
D. None of these
Answer» C. Arbitrage process
342.

If funds are required for productive purpose ------- finance is suitable

A. Debt
B. Equity
C. Retained earnings
D. None of these
Answer» A. Debt
343.

If funds are required for unproductive purpose or general development on permanent basis ------- finance is suitable

A. Debt
B. Equity
C. Bank overdraft
D. None of these
Answer» B. Equity
344.

According to ------ method it is assumed that each of the future cash flows is immediately reinvested in another project at a certain rate of return until the termination of the project

A. NPV
B. IRR
C. Pay back method
D. Terminal value method
Answer» D. Terminal value method
345.

When the cost of the project differ significantly which method of capital budgeting is used

A. NPV
B. IRR
C. Pay back method
D. Profitability index
Answer» D. Profitability index
346.

To judge the comparative risk of projects having same cost and different NPV which method is used

A. Certainty equivalent method
B. Sensitivity technique
C. Standard deviation method
D. Coefficient of variation method
Answer» D. Coefficient of variation method
347.

Under ----- method more than one forecast of the future cash inflows ie. Optimistic, pessimistic and most likely are made

A. Certainty equivalent method
B. Sensitivity technique
C. Standard deviation method
D. Coefficient of variation method
Answer» B. Sensitivity technique
348.

------- is a graphical representation of the relationship between a present decision and future events, future decisions and their consequences.

A. Certainty equivalent method
B. Sensitivity technique
C. Standard deviation method
D. Decision tree analysis
Answer» D. Decision tree analysis
349.

The return after the pay off period is not considered in case of

A. Pay back method
B. NPV
C. Present value index
D. IRR
Answer» A. Pay back method
350.

The cash inflows on account of operations are presumed to have been reinvested at the cut off rate in case of

A. Pay back method
B. NPV
C. Accounting rate of return
D. IRR
Answer» B. NPV
351.

The cost of each component of capital is known as

A. Specific cost
B. Combined cost
C. Average cost
D. Implicit cost
Answer» A. Specific cost
352.

------ refers to that EBIT level at which EPS remains the same irrespective of the debt- equity mix.

A. Profit point
B. Cut off point
C. Point of indifference
D. None of these
Answer» C. Point of indifference
353.

The use of long term fixed interest bearing debt and preference share capital along with equity shares is called

A. Operating leverage
B. Financial leverage
C. Trading on equity
D. Both b and c
Answer» D. Both b and c
354.

Which of the following factors are considered when a capital structure decision is taken?

A. Cost of capital
B. Dilution of control
C. Floatation cost
D. All of the above
Answer» D. All of the above
355.

The combination of debt and equity that leads to the maximum value of the firm is called

A. Financial structure
B. Capital structure
C. Optimal capital structure
D. None of these
Answer» C. Optimal capital structure
356.

In optimal capital structure the company’s cost of capital will be

A. Minimum
B. Maximum
C. Medium
D. None of these
Answer» A. Minimum
357.

The value of a firm on the basis of net operating income approach can be determined by dividing the earnings before interest and taxes by

A. Cost of equity
B. Cost of debt
C. Overall cost of capital
D. None of the above
Answer» C. Overall cost of capital
358.

A company should follow the policy of ----- gear during deflation or depression period

A. High gear
B. Low gear
C. Medium gear
D. Any of the above
Answer» B. Low gear
359.

Which of the following is not a disadvantage of rate of return method of capital budgeting?

A. It ignores the time value of money
B. It uses the earnings of a project up to the payback period only
C. It does not take into consideration cash flows
D. This method can not be applied to a situation where investment in a project is to be made in parts.
Answer» B. It uses the earnings of a project up to the payback period only
360.

A project having a profitability index of ------ is accepted

A. PI<1
B. PI>1
C. PI=1
D. None of these
Answer» B. PI>1
361.

The type of debt whose rate of interest changes according to the changes in the rate of interest payable on gilt edged securities or the prime lending rate of the bank is called

A. Floating rate debt
B. Variable rate debt
C. Fixed rate debt
D. Both a or b
Answer» D. Both a or b
362.

.Earnings yield method is applied when the dividend pay out ratio is

A. Zero per cent
B. 100 per cent
C. 50 per cent
D. 20 percent
Answer» B. 100 per cent
363.

----- is the rate of return that the company must earn on the net funds raised, in order to satisfy the equity shareholders’ demand for return

A. Cost of retained earnings
B. Cost of external equity
C. Weighted average cost of capital
D. Marginal cost of capital
Answer» B. Cost of external equity
364.

A project requires an investment of Rs500000and has scrape value of Rs.20000 after five years. It is expected to yield profits after depreciation and taxes during the five years amounting to Rs.40000,Rs60000, Rs.50000,Rs70000 and Rs20000.What is the average rate of return on the investment?

A. 10%
B. 11%
C. 12%
D. 13%
Answer» A. 10%
365.

Which of the following quantitative aspect of financial planning?

A. Capitalization
B. Capital structure
C. Organization structure
D. None of these
Answer» A. Capitalization
366.

Which of the following qualitative aspect of financial planning?

A. Capitalization
B. Capital structure
C. Organization structure
D. None of these
Answer» B. Capital structure
367.

Which of the following is/ are the assumptions of net income approach?

A. The cost of debt is less than the cost of equity
B. There are no taxes
C. The risk perception of investors is not changes by the use of the debt.
D. All of these
Answer» D. All of these
368.

The overall cost of capital, according to which theory, decreases up to a certain point, remains more or less unchanged for moderate increase in debt thereafter and increases a certain point

A. Net income approach
B. Net operating income approach
C. Traditional theory
D. MM approach
Answer» C. Traditional theory
369.

According to which theory two identical firms in all respect except their capital structure can not have different market value or cost of capital because of arbitrage process

A. Net income approach
B. Net operating income approach
C. Traditional theory
D. MM approach
Answer» D. MM approach
370.

XLtd has taken a term loan of Rs12 lakhs at an interest rate of 15% p.a. If the tax rate applicable to the company is 40%, the cost of term loan is

A. 4.8%
B. 6%
C. 7.2%
D. 9%
Answer» D. 9%
371.

Agency cost arises due to

A. Cost over run in implementing new projects
B. Failure of budget cost
C. Restrictions imposed by the supplier of debt capital
D. Rise in the cost of production
Answer» C. Restrictions imposed by the supplier of debt capital
372.

What do you mean by NPV?

A. Excess of cash inflows over cash outflows
B. Excess of cash outflows over cash inflows
C. Excess of the present value of cash out flows over the present value of cash inflows
D. Excess of the present value of cash inflows over the present value of cash outflows
Answer» D. Excess of the present value of cash inflows over the present value of cash outflows
373.

Under NPV method, cash flows are assured to be reinvested at

A. Risk free rate of return
B. Cost of debt
C. IRR
D. Discount rate at which NPV is computed
Answer» D. Discount rate at which NPV is computed
374.

The pay back period shows

A. Recovery period of original investment outlay
B. The time value of money
C. The cash inflows
D. None of the above
Answer» A. Recovery period of original investment outlay
375.

Capital rationing is applied in a situation where

A. It is difficult to bring in required amount of capital
B. Financial institutions are doubtful or not sure of the validity of the project
C. A large number of investment proposals compete for limited funds
D. The dividend is converted into capital for completion of a new project
Answer» C. A large number of investment proposals compete for limited funds
376.

If risk free rate of return is 8%, Return on market portfolio is 12%, beta = 1.5, then the expected rate of return according to CAPM is equal to

A. 10%
B. 14%
C. 18%
D. 24%
Answer» B. 14%
377.

Net salvage value of a fixed asset is

A. Excess of salvage value over book value
B. Excess of book value over salvage value
C. Scrape value
D. Salvage value of fixed assets less any income tax payable on the excess of salvage value over book value
Answer» D. Salvage value of fixed assets less any income tax payable on the excess of salvage value over book value
378.

The discount rate which equates the present value of cash inflows with the present value of cash out flows is called -------

A. Opportunity cost
B. Sunk cost
C. explicit cost
D. Direct cost
Answer» C. explicit cost
379.

A company can increase its value and reduce the overall cost of capital by increasing the proportion of debt in its capital structure according to ----- approach

A. Net income approach
B. Net operating income approach
C. Traditional approach
D. None of these
Answer» A. Net income approach
380.

Net income approach was suggested by

A. Modigliani and Miller
B. Durand
C. Walter
D. None of these
Answer» B. Durand
381.

To judge the comparative risk of projects having same cost and same NPV which method is used

A. Certainty equivalent method
B. Sensitivity technique
C. Standard deviation method
D. Coefficient of variation method
Answer» C. Standard deviation method
382.

While evaluating capital investment proposals, the time value of money is considered in case of

A. Pay back method
B. NPV
C. Accounting rate of return
D. None of these
Answer» B. NPV
383.

Depreciation is included in cost in case of

A. Pay back method
B. NPV
C. Accounting rate of return
D. Present value index
Answer» C. Accounting rate of return
384.

Which of the following is/ are the assumptions of net income approach?

A. The cost of debt is less than the cost of equity
B. There are no taxes
C. The risk perception of investors is not changed by the use of debt
D. All of the above
Answer» D. All of the above
385.

Capital gearing refers to the relationship between equity capital and-----

A. Long term debt
B. Short term debt
C. Preference capital
D. None of these
Answer» A. Long term debt
386.

A company should follow the policy of ----- gear during inflation or boom period

A. High gear
B. Low gear
C. Medium gear
D. Any of the above
Answer» A. High gear
387.

Which of the following factors is/ are considered when a capital structure decision is taken?

A. Cost of capital
B. Dilution control
C. Floatation cost
D. All of the above
Answer» D. All of the above
388.

Which of the following is not a source of long term finance?

A. Equity capital
B. Preference capital
C. Commercial paper
D. Debenture capital
Answer» C. Commercial paper
389.

A cumulative preference share is one

A. In which all the unpaid dividends are carried forward and payable.
B. Which can be converted into equity shares
C. Which can be redeemed
D. Which entitle the preference shareholders to participate in surplus profits and assets.
Answer» A. In which all the unpaid dividends are carried forward and payable.
390.

Which of the following g is a determinant of working capital of a firm?

A. Depreciation policy
B. Taxes payable by the company
C. Production policy
D. All of the above
Answer» D. All of the above
391.

Under trading means

A. Having low amount of working capital
B. High turnover of working capital
C. Sales are less compared to assets employed
D. Assets are less compared to sales generated
Answer» C. Sales are less compared to assets employed
392.

which of the following was set up based on the recommendations of Vaghul Committee?

A. National Stock Exchange
B. Stock Holding Corporation of India Ltd
C. Discount and Finance House of India Ltd
D. National Securities Depository Ltd
Answer» C. Discount and Finance House of India Ltd
393.

Shelf stock refers to

A. Perishable goods
B. Items that are to be packaged and sold
C. Stocks which is to be stored in the shelf
D. Items that are stored by the firm and sold with little or no modification
Answer» D. Items that are stored by the firm and sold with little or no modification
394.

Which of the following is not an assumption of EOQ model?

A. Cost of carrying is a fixed proportion of the average value of inventory
B. The demand is even throughout the year
C. The usage for one year can be anticipated
D. Cost per order is proportional to the size of the order
Answer» D. Cost per order is proportional to the size of the order
395.

Which of the following costs is not associated with inventories?

A. Material cost
B. Ordering cost
C. Carrying cost
D. Cost of long term debt locked in inventories
Answer» D. Cost of long term debt locked in inventories
396.

When a company liberalizes its cash discount policy

A. It increases the cost of discount
B. It leads to an increase in the average collection period
C. The discount period may be lengthened
D. All of the above
Answer» D. All of the above
397.

Which of the following is not associated with cash management of a firm?

A. Stretching accounts payable without affecting the credit of the firm
B. Speedy collection of receivables
C. Investing surplus funds in long term securities
D. Maintaining liquidity
Answer» C. Investing surplus funds in long term securities
398.

Which of the following is not a motive for holding cash?

A. Transaction purpose
B. Precaution against unexpected expenses
C. Extending loans to group companies
D. Speculation purpose
Answer» C. Extending loans to group companies
399.

Cash management does not call for

A. Lengthening creditor’s period
B. Lengthening debtor’s period
C. Investing surplus funds
D. Nullifying idle funds
Answer» B. Lengthening debtor’s period
400.

Which of the following is not a function of a finance manager?

A. Mobilization of funds
B. Manipulate share price of the company
C. Deployment of funds
D. Control over use of funds
Answer» B. Manipulate share price of the company
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