MCQ of Corporate Finance

1. Which of the following is not one of the three fundamental methods of firm valuation?
a) Discounted Cash flow
b) Income or earnings - where the firm is valued on some multiple of accounting income or
earnings.
c) Balance sheet - where the firm is valued in terms of its assets.
d) Market Share

2. What is the value of the firm usually based on?

a) The value of debt and equity.

b) The value of equity.
c) The value of debt.
d) The value of assets plus liabilities.

3. Which of the following defines the market to book value?

a) The ratio of stock market valuation divided by the value of its NAV.
b) The ratio of NAV value divided by stock market valuation.
c) The market value of tangible assets divided by the book value of tangible assets.
d) The market value of intangible assets divided by the book value of intangible assets.

4. Shareholders wealth increases with the increase in ___

a) EPS
b) Market value of the firm
c) Dividend & market value of the firm
d) Market price of the equity share

5. Promotion of welfare of human by corporate is called as_______

a) Social service
b) Philosophy
c) NGO work
d) Corporate philanthropy

6. Leasing of machinery can be categorized as______

a) Fixed asset
b) Investment decision
c) Financing decision
d) Capital budgeting decision

7. A mutually exclusive decision means:

a) Accepting of an alternative, leads to rejecting of other
b) Accepting of both alternatives
c) Rejecting of both alternatives
d) Both c & d

8. Which of the following has Net profit as basis for calculation

a) Net present value
b) Average rate of return
c) Internal rate of return
d) Payback period

9. Internal rate of return is …

a) Rate at which discounted cash inflow is more than discounted cash outflow
b) Rate at which discounted cash inflow is less than discounted cash outflow
c) Rate at which discounted cash inflow is equal to the discounted cash outflow
d) Either a or b

10. Corporate wealth maximization is the value maximization for_____

a) Equity shareholders
b) Stakeholders
c) Employees
d) Debt capital owners

11. Book value of assets includes

a) Fixed assets, current asset
b) Fixed assets, current asset, intangible asset
c) Fixed assets, current asset, fictitious asset
d) Fixed assets, current asset, intangible asset, fictitious asset

12. Listed companies can be valued at

a) Book Value
b) Market value
c) Salvage value
d) Liquidation value
13. Unlisted company can be valued at
a) Net asset Method
b) Market value method
c) Both a & b
d) None of the above
14. Which of the following valuation methods is based on “Going concern concept”
a) Market value method
b) Book value method
c) Liquidation method
d) Salvage value method

15. A company has a profit attributable to ordinary shareholders of £100,000. The number of
ordinary shares of £1 in issue during the year was 300,000. The market value of the
company’s shares at the year end was £6.50. The price/earnings ratio for this company is:
a) 0.05 times
b) 0.33 times
c) 6.5 times
d) 19.5 times

16. What does the price/earnings (PE) ratio measure?

a) The multiple that the stock market places on a company’s earnings
b) The number of times that dividends paid are covered by profits
c) The return received by way of dividends as a percentage of current share price
d) The amount of profits available to ordinary shareholders

17. What does the price-to-earnings ratio (P/E) tell you?

a) How much each of a company's products sells for on average.

b) How much investors are willing to pay per unit of a company's earnings.
c) How much tax per unit investors are willing to pay.
d) None of the above

18. How is the P/E ratio calculated?

a) Market value/quick ratio
b) Earnings per share/market capitalization
c) Market value per share/earnings per share
d) None of the above

19. What is the most important use of the P/E ratio for investors?
a) It helps investors decide how much profit a company is likely to make in future.
b) It helps investors decide whether a company's shares are overpriced or underpriced.
c) It helps investors decide on the most appropriate risk to reward ratio.
d) None of the above

20. What does a high P/E ratio suggest?

 a) A company shares are currently overpriced.
b) A company shares are currently underpriced.
c) No relation
d) None of the above

21. If a company has a share price of $100 and its earnings per share averaged $2, what is its
P/E ratio?
a) 20
b) 50
c) 80
d) 70

22. If a company's earnings per share is $20 and it has a share price of $600, what is the P/E
ratio?
a) 30
b) 40
c) 50
d) 20

23. Making gifts of money, goods, or time to help non-profit organizations, groups or
individuals is:

a) Corporate social marketing

b) Cause marketing
c) Cause-related marketing
d) Corporate philanthropy

24. The term _____ can be used in a broad sense to describe all the policies, procedures,
relationships, and systems in place to oversee the successful and legal operation of the
enterprise.

a) corporate governance
b) corporate policy
c) corporate oversight
d) corporate strategy
25. A profitability index (PI) of .92 for a project means that __________.

a) the project's costs (cash outlay) are (is) less than the present value of the project's benefits
b) the project's NPV is greater than zero
c) the project's NPV is greater than 1
d) the project returns 92 cents in present value for each current dollar invested (cost)

26. The LMN Corporation is considering an investment that will cost $80,000 and have a
useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are
$25,000 per year and for the last two years they are $20,000 per year. What is the
payback period for this investment?

a) 3.2 years.

b) 3.5 years.

c) 4.0 years.

d) Cannot be determined from this information.

27. Bulging Stomach Restaurants, Inc., has estimated that a proposed project's 8-year net
cash benefit will be $4,000 per year for years 1 through 8, with an additional terminal
benefit of $8,000 at the end of the eighth year. Assuming that these cash inflows
satisfy exactly Bulging's required rate of return of 8 percent, the project's initial cash
outflow is closest to which of the following four possible answers?

a) $27,309
b) $25,149
c) $14,851
d) $40,000
28. Which of the following statements is incorrect regarding a normal project?

a) If the NPV of a project is greater than 0, then its PI will exceed 1.

b) If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be
less than 0.
c) If the PI of a project equals 0, then the project's initial cash outflow equals the PV
of its cash flows.
d) If the IRR of a project is greater than the discount rate, k, then its PI will be greater
than 1.

29. Assume that a firm has accurately calculated the net cash flows relating to two mutually
exclusive investment proposals. If the net present value of both proposals exceed zero
and the firm is not under the constraint of capital rationing, then the firm should
__________.

a) calculate the IRRs of these investments to be certain that the IRRs are greater than the
cost of capital
b) compare the profitability index of these investments to those of other possible
investments
c) calculate the payback periods to make certain that the initial cash outlays can be
recovered within a appropriate period of time
d) accept the proposal that has the largest NPV since the goal of the firm is to
maximize shareholder wealth and, since the projects are mutually exclusive, we
can only take one

30. A project whose acceptance does not prevent or require the acceptance of one or more
alternative projects is referred to as __________.

a) a mutually exclusive project

b) an independent project
c) a dependent project
d) a contingent project
31. When operating under a single-period capital-rationing constraint, you may first want to
try selecting projects by descending order of their __________ in order to give yourself
the best chance to select the mix of projects that adds most to firm value.

a) profitability index (PI)

b) net present value (NPV)
c) internal rate of return (IRR)
d) payback period (PBP)

32. Which of the following statements is correct regarding the internal rate of return (IRR)
method?

a) Each project has a unique internal rate of return.

b) As long as you are not dealing with mutually exclusive projects, capital rationing,
or unusual projects having multiple sign changes in the cash-flow stream, the
internal rate of return method can be used with reasonable confidence.
c) The internal rate of return does not consider the time value of money.
d) The internal rate of return is rarely used by firms today because of the ease at which
net present value is calculated.

33. Which of the following is not a potential for a ranking problem between two mutually
exclusive projects?

a) The projects have unequal lives that differ by several years.

b) The costs of the two projects differ by nearly 30%.
c) The two projects have cash flow patterns that differ dramatically.
d) One of the mutually exclusive projects involves replacement while the other
involves expansion.
34. A project whose acceptance precludes the acceptance of one or more alternative projects
is referred to as __________.

a) a mutually exclusive project.

b) an independent project.
c) a dependent project.
d) a contingent project.

35. Two mutually exclusive projects are being considered. Neither project will be repeated
again in the future after their current lives are complete. There exists a potential problem
though -- the expected life of the first project is one year and the expected life of the
second project is three years. This has caused the NPV and IRR methods to suggest
different project preferences. What technique can be used to help make a better decision
in this scenario?

a) Rely on the NPV method and make your choice as it will tell you which one is
best.
b) Use the common-life technique to replicate the one-year project three times and
recalculate the NPV and IRR for the one-year project.
c) Ignore the NPV technique and simply choose the highest IRR since managers are
concerned about maximizing returns.
d) In this situation, we need to rely on the profitability index (PI) method and choose the
one with the highest PI.

36. High P/E ratios tend to indicate that a company will _______
a) grow quickly
b) grow at the same speed as the average company
c) grow slowly
d) not grow
37. _________ is equal to (common shareholders' equity/common shares outstanding).

a) Book value per share

b) Liquidation value per share
c) Market value per share
d) Tobin's Q

38. The _______ is defined as the present value of all cash proceeds to the investor in the
stock.

a) dividend payout ratio

b) intrinsic value
c) market capitalization rate
d) plowback ratio

39. Historically, P/E ratios have tended to be _________.

a) higher when inflation has been high

b) lower when inflation has been high
c) uncorrelated with inflation rates but correlated with other macroeconomic
variables
d) uncorrelated with any macroeconomic variables including inflation rates

40. 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

41. A capital investment is one that

a) Has the prospect of long term benefit

b) Has the prospect of short term benefit
c) Is only undertaken by large corporations
d) Applies only to investment in fixed assets
42. Companies may adopt an aggressive or a conservative working capital policy. An
aggressive policy means that a company

a) holds high levels of cash and inventories

b) expects a lower level of profitability
c) has a low level of flexibility
d) faces a low level of risk

43. 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.

44. 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 a 50 percent equity, 50 percent long-term debt mixture.

45. 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.

46. 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
47. When economic value added is used as the performance measure, value is only created if
the after-tax operating income exceeds
a) cost of investing capital
b) investment
c) working capital
d) sales

48. Which of the performance evaluation methods takes into consideration tax effects?
a) Economic value added
b) Return on sales
c) Residual income
d) Return on investment

49. Which of the following best describes "Market Value Added"?

a) The value added to the product the firm produces above and beyond the costs of
the inputs.
b) The difference between the book value of equity and debt versus the market value
of the firm.
c) The difference between the market value of the firm and the amount of
contributed capital.
d) None of the above accurately describes Market Value Added.

50. Market price per share of a firm having equity capital of Rs. 100000 consisting of shares
of Rs. 10 each, profit after tax of Rs. 82000, & P/E ratio of 8 is

a) Rs. 65.70
b) Rs.10.25
c) Rs.65.60
d) Rs.1.025
 Corporate finance
1. Financial Management is mainly concerned with ____________.
A. arrangement of funds
B. all aspects of acquiring and utilizing financial resources for firms
activities
C. efficient Management of every business.
D. profit maximization
ANSWER: B
2. In his traditional role the finance manager is responsible for ____________.
A. arrange of utilization of funds.
B. arrangement of financial resources.
C. acquiring capital assets of the organization.
D. effective management of capital.
ANSWER: D
3. The primary goal of the financial management is ____________.
A. to maximize the return
B. to minimize the risk.
C. to maximize the wealth of owners.
D. to maximize profit..
ANSWER: D
4. Capital budgeting is related to ____________.
A. long terms assets.
B. short term assets.
C. . long terms and short terms assets.
D. fixed assets.
ANSWER: A
5. A way to analyze whether debt or lease financing would be preferable is
to:
A. compare the net present values under each alternative, using the cost
of capital as the discount rate.
B. compare the net present values under each alternative, using the after-
tax cost of borrowing as the
discount rate.
C. compare the payback periods for each alternative.
D. compare the effective interest costs involved for each alternative
ANSWER: B
6. The type of lease that includes a third party, a lender, is called a(n)
A. sale and leaseback.
B. direct leasing arrangement.
C. leveraged lease.
D. operating lease.
ANSWER: C
7. Future value interest factor takes ____________.
A. Compounding rate
B. Discounting rate.
C. Inflation rate.
D. Deflation rate.
ANSWER: A
8. Present value takes ____________.
A. Compounding rate.
B. Discounting rate.
C. Inflation rate.
D. Deflation rate.
ANSWER: B
9. Financial decisions involve ____________.
A. Investment, financing and dividend decisions.
B. Investment sales decisions.
C. Financing cash decisions.
D. Investment dividend decisions.
ANSWER: C
10. Traditional approach confines finance function only to ____________.
A. raising
B. mobilizing
C. utilizing
D. financing
ANSWER: A
11. The company’s cost of capital is called ____________.
A. Leverage rate
B. Hurdle rate.
C. Risk rate.
D. Return rate.
ANSWER: A
12. Market value of the shares are decided by ____________.
A. the respective companies.
B. the investment market.
C. the government.
D. shareholders.
ANSWER: D
13. Cost of retained earnings is equal to ____________.
A. Cost of equity.
B. Cost of debt.
C. Cost of term loans.
D. Cost of bank loan.
ANSWER: C
14. Beta measures the ____________.
A. Financial risk.
B. Investment risk rate.
C. Market risk.
D. Market and finance risk.
ANSWER: B
15. The expansion of CAPM is ____________.
A. Capital amount pricing model.
B. Capital asset pricing model.
C. Capital asset printing model.
D. a. Capital amount printing model.
ANSWER: B
16. Medium-term notes (MTNs) have maturities that range up to
A. one year (but no more)
B. two years (but no more).
C. ten years (but no more).
D. thirty years (or more)
ANSWER: D
17. Which one of the following is the main objective of Unit Trust of India?
A. To mobilize the savings of high-income groups.
B. To mobilize the savings to low and high-income groups.
C. To mobilize the savings of corporate.
D. To mobilize the savings of low and middle-income groups.
ANSWER: D
18. The first development financial institution in India that has got merged
with a bank
A. IDBI
B. ICICI
C. UTI
D. SFC
ANSWER: B
19. The most difficult to calculate is ____________.
A. the cost of equity capital.
B. the cost of preferred capital.
C. the cost of retained earnings.
D. the cost of equity and preference capital.
ANSWER: B
20. The required rate of return for an investment project should
____________.
A. leave the market price of the stock unchanged
B. increase the market price.
C. reduce the market price.
D. constant market price.
ANSWER: A
21. ICICI was formed in _______:
A. 1955
B. 1665
C. 1965
D. 1954
ANSWER: A
22. The principal objective to form ICICI was:
A. To create a development financial institution
B. To create a financial institution for providing medium-term and long
term project financing
C. Create a financial institution for providing medium-term and long term
project financing to Indian businesses
D. All of The Above
ANSWER: D
23. Headquarter of ICICI Bank is located at:
A. Mumbai
B. Hyderabad
C. Mysore
D. Bangalore
ANSWER: A
24. Fixed cost per unit ____________.
A. changes according to the volume of production
B. be flexible according to the rate of interest.
C. does not change with the volume of production.
D. remains constant.
ANSWER: C
25. The principal objective was to create a development financial
institution for providing ______project
financing to Indian businesses:
A. Medium Term
B. Long Term
C. Medium Term and Long Term
D. short term
ANSWER: C
26. Variable cost per unit ____________.
A. varies with the level of output.
B. remains constant irrespective of the level of output.
C. changes with the growth of the firm.
D. does not change with the volume of production
ANSWER: A
27. Financial leverage measures ____________.
A. sensitivity of EBIT with respect of 1% change with respect to output
B. 1% variation in the level of production
C. sensitivity of EPS with respect to 1% change in level of EBIT.
D. no change with EBIT and EPS.
ANSWER: A
28. Operating leverage measures ____________.
A. the business risk.
B. financial risk.
C. both risks.
D. production risk.
ANSWER: D
29. Financial leverage helps one to estimate ____________.
A. the business risk
B. the financial risk.
C. both risks
D. production risk.
ANSWER: C
30. Financial leverage is also known as ____________.
A. Trading on equity
B. Trading on debt.
C. Interest on equity.
D. Interest on debt.
ANSWER: A
31. lndustrial Development Bank of India is
A. Wholly-owned Government of India undertaking
B. Wholly-owned subsidiary of Reserve Bank of India
C. A corporation and owned by the Government of India and public sector
banks.
D. Public Limited Company
ANSWER: A
32. Operating leverage x financial leverage= _____.
A. composite leverage.
B. financial composite leverage.
C. operating composite leverage.
D. fixed leverage
ANSWER: C
33. Operating leverage = ______.
A. contribution less profit.
B. contribution less sales.
C. contribution less total expenses
D. contribution less operating profit.
ANSWER: B
34. The IDBI was established in
A. 964
B. 1965
C. 1966
D. 1967
ANSWER: A
35. The financial institute IFCI established in
A. 1947
B. 1948
C. 1949
D. 1950
ANSWER: B
36. In his traditional role the finance manager is responsible for
___________.
A. proper utilisation of funds
B. arrangement of financial resources
C. acquiring capital assets of the organization
D. Efficient management of capital
ANSWER: D
37. Shares having no face value are known as ____.
A. no-par stock.
B. at par stock.
C. equal stock.
D. debt-equity stock.
ANSWER: D
38. A fixed rate of ____________is payable on debentures.
A. dividend
B. commission
C. . interest
D. brokerage
ANSWER: D
39. Effective cost of debentures is ____________as compared to shares
A. higher
B. lower
C. equal
D. medium
ANSWER: C
40. Ownership securities are represented by ____________.
A. securities.
B. equities
C. debt
D. debentures.
ANSWER: A
41. Corporation is not a part of ____________finance .
A. Public.
B. Private.
C. Public & private
D. Organization.
ANSWER: C
42. ____________management is the important task of the finance manager.
A. Debt
B. Equity.
C. Profit
D. Cash.
ANSWER: D
43. Finance function is one of the most important functions of ____________.
A. business.
B. marketing.
C. financial.
D. debt.
ANSWER: C
44. Which one of the following is not a money market securities?
A. treasury bills
B. National savings certificate
C. Certificate of deposit
D. Commercial paper
ANSWER: B
45. The expansion of EAR is ____.
A. equivalent annual rate.
B. equivalent annuity rate
C. equally applied rate.
D. equal advance rate
ANSWER: B
46. Working capital management is managing ____________.
A. short term assets and liabilities
B. long term assets
C. long terms liabilities
D. only short term assets
ANSWER: A
47. Future value interest factor takes ____________.
A. Compounding rate
B. Discounting rate
C. Inflation rate
D. Deflation rate
ANSWER: A
48. Financial security with low degree risk and investment held by
businesses is classified as
A. treasury bills
B. commercial paper
C. negotiable certificate of deposit
D. money market mutual funds
ANSWER: D
49. Future value interest factor takes ____________.
A. Compounding rate
B. Discounting rate
C. Inflation rate
D. Deflation rate
ANSWER: A
50. ___________ are financial assets.
A. Bonds
B. Machines
C. Stocks
D. A and C
ANSWER: C

51. Arbitrage is the level processing technique introduced in ____________.

A. Net income approach
B. MM approach.
C. Operating approach
D. Traditional approach.
ANSWER: A
52. Operating incomes and the discount rate of a particular risk class are
the 2 factors determining ____________.
A. Dependence hypothesis
B. Traditional view.
C. Modern view.
D. Independence hypothesis.
ANSWER: D
53. Financial leverage measures ____________.
A. sensitivity of EBIT with respect of % change with respect to output
B. % variation in the level of production
C. sensitivity of EPS with respect to % change in level of EBIT
D. No change with EBIT and EPS
ANSWER: C
54. The probability of bankrupt is higher ____________.
A. for a levered firm than an unlevered firm.
B. for a unlevered firm than an levered firm
C. . only levered firm
D. only unlevered firm
ANSWER: C
55. The decision to invest a substantial sum in any business venture
expecting to earn a minimum return is called ____________.
A. working capital decision
B. an investment decision
C. a production decision.
D. a sales decision.
ANSWER: D
56. The available capital funds are to be carefully allocated among
competing projects by careful prioritization. This is called ____________.
A. capital positioning.
B. capital structuring.
C. capital rationing.
D. capital budgeting.
ANSWER: D
57. Capital budgeting decisions in India cannot be reversed due to ____.
A. economic conditions.
B. ill-organized market for second-hand capital goods.
C. government regulations.
D. policy of the management
ANSWER: C
58. Payback period is superior to other methods, if the objective of the
investor is to ____________.
A. consider cash flow in its entirety
B. consider the present value of future cash flows
C. consider the liquidity.
D. consider the inflows in its entirety.
ANSWER: A
59. If the payback is a bad rule, the average returns on book value is
____________.
A. worse.
B. better
C. the best
D. equal.
ANSWER: C
60. Net present value is a popular method which falls ____________.
A. Within non- discount cash flow method.
B. Within discount cash flow method
C. Equal Within non- discount cash flow method.
D. No discount cash flow
ANSWER: C
61. A demerit of IRR method is that it does not distinguish between
____________.
A. lending & borrowing
B. . discounting & non- discounting.
C. cash flow & non- cash flow.
D. inflow & outflow.
ANSWER: C
62. Net working capital is the excess of current asset over ____________.
A. Current liability.
B. Net liability.
C. . Total payable.
D. . Total liability.
ANSWER: C
63. 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.
ANSWER: B
64. The gross working capital is a _____ concern concept.
A. Going.
B. money measurement
C. revenue concept.
D. cost concept
ANSWER: B
65. The rate of return on investment ____ with the shortage of working
capital
A. falls.
B. going.
C. constant.
D. change.
ANSWER: A
66. Greater the size of a business unit ____ will be the requirements of
working capital.
A. lower.
B. no change.
C. larger.
D. fixed
ANSWER: A
67. The fixed proportion of working capital should be generally financed
from the ____ capital sources
A. fixed.
B. variable.
C. semi-variable.
D. borrowed.
ANSWER: D
68. The volume of sales is influenced by ____ of a firm
A. finance policy.
B. credit policy.
C. profit policy.
D. fund policy.
ANSWER: D
69. Factoring is a form of financing ___.
A. payable.
B. receivables.
C. borrowings.
D. debts
ANSWER: C
70. The formula for cost of debt is __________.
A. kd=(1/2+f-p)/f+p
B. f+p
C. f-P
D. f*p
ANSWER: A
71. Traditional theorists believe that.
A. there exists an optimal capital structure
B. no optimal capital structure
C. equal optimal capital structure
D. 100% debt financial organizations
ANSWER: A
72. Ordering cost is the cost of ____________materials.
A. selling.
B. purchasing.
C. stocking.
D. financing.
ANSWER: A
73. The policy concerning quarters of profit to be distributed as dividend
is termed as ____________.
A. Profit policy.
B. Dividend policy.
C. Credit policy.
D. Reserving policy.
ANSWER: C
74. The company must implement the bonus issues decision within
____________ of the director approval.
A. 6 months.
B. 3 months.
C. 2 months.
D. 1 month.
ANSWER: B
75. The most appropriate dividend policy is the payment of
____________dividend per share consent.
A. constant.
B. variable.
C. higher.
D. lower.
ANSWER: B
76. A company having easy access to the capital markets can follow a
____________. dividend policy
A. liberal.
B. formal.
C. strict.
D. Varying.
ANSWER: C
77. ____________ dividend promises to pay shareholders at future date.
A. Scrip.
B. Cash.
C. Stock.
D. Property.
ANSWER: B
78. ____________ dividend is the usual method of paying dividend .
A. Scrip.
B. Cash
C. Stock.
D. Property.
ANSWER: B
79. Which of the following is/are assumption(s) underlying the Miller and
Modigliani analysis?
A. Capital markets are perfect
B. Investors are assumed to be rational and behave accordingly
C. There is no corporate or personal income tax
D. All of the above.
ANSWER: D
80. . The cash management refers to management of ___.
A. cash only
B. cash and bank balances.
C. cash and near-cash assets
D. fixed assets.
ANSWER: B
81. Offering cash discount to customers result is ____________.
A. reducing the average collection period.
B. increasing the average collection period
C. increasing sales.
D. decreasing sales.
ANSWER: D
82. Good inventory management is good _____ management
A. financial.
B. marketing.
C. stock.
D. purchasing.
ANSWER: D
83. Setup cost is a type of ____ cost.
A. fixed.
B. variable.
C. semi-variable.
D. carrying.
ANSWER: D
84. Re-order level is ____________than safety cash level .
A. higher.
B. lower.
C. medium.
D. fixed.
ANSWER: D
85. MM approach assumes that ____________markets are perfect.
A. Receivable.
B. Capital.
C. Stock.
D. Exchange.
ANSWER: D
86. The amount of the temporary working capital ____________.
A. keeps on fluctuating from time t o time.
B. remains constant for all times
C. financed through long term services
D. financed short term sources.
ANSWER: C
87. While evaluating capital investment proposal the time value of money
is considered in case of
____________.
A. Payback method.
B. Accounting rate.
C. Internal rate.
D. Discounted cash flow.
ANSWER: C
88. The return after the pay off period is not considered in case of
____________.
A. Payback period method.
B. Interest rate method.
C. Present value method
D. Discounted cash flow method.
ANSWER: C
89. Depreciation is include in costs in case of ____________.
A. Payback method.
B. Accounting rate.
C. Discounted cash flow.
D. Present value method.
ANSWER: A
90. The arbitrary process is the behavioral foundation for the ____________.
A. MM approach.
B. XX approach.
C. Gorder approach.
D. Miller approach.
ANSWER: B
91. The notice to Accept right share should not be less than ____________.
days
A. 15.
B. 20.
C. 10.
D. 30.
ANSWER: D
92. The bonus issue is permitted to be made out of ____________ and
premium collected in cash
A. free reserves.
B. free interest
C. free bonus.
D. free cash dividend.
ANSWER: A
93. The bonus issue is made to make the nominal value and the
____________ value of the shares of the
company.
A. Face.
B. Market
C. Stock.
D. Real
ANSWER: B
94. Premium received in cash is a source of ____________ issue .
A. Right.
B. Bonus.
C. Cash.
D. Résumés .
ANSWER: C
95. Bonus share are not permitted unless the ____________paid shares ,if
any made fully paid .
A. partly.
B. semi.
C. fully.
D. not.
ANSWER: B
96. Dividend policy of a firm affects both the long time financing
and____________. wealth.
A. Owners.
B. Creditors.
C. Debtor
D. Shareholders
ANSWER: C
97. ___________is the distribution of the profits of a company among its
shareholders
A. Shares.
B. Interest.
C. Dividend.
D. Commission.
ANSWER: C
98. Which of the following is not an objective of financial management?
A. Maximization of wealth of shareholders
B. Maximization of profits
C. Mobilization of funds at an acceptable cost.
D. Ensuring discipline in the organization.
ANSWER: D
99. The market value of the firm is the result of ____________.
A. dividend decisions.
B. working capital decisions.
C. capital budgeting decisions
D. trade-off between cost and risk.
ANSWER: D
100. The objective of financial management is to ______________.
A. generate the maximum net profit.
B. generate the maximum retained earnings.
C. generate the maximum wealth for its shareholders
D. generate maximum funds for the firm at the least cost.
ANSWER: C

101. Which of the following statements represents the financing decision

of a company?
A. Procuring new machineries for the R&D activities.
B. Spending heavily for the advertisement of the product of the company
C. Adopting state of the art technology to reduce the cost of production.
D. Purchasing a new building at Delhi to open a regional office.
ANSWER: D
102. . Financial risk arises due to the ____________.
A. variability of returns due to fluctuations in the securities market.
B. changes in prevailing interest rates in the market.
C. leverage used by the company
D. . liquidity of the assets of the company.
ANSWER: D
103. The factor(s) which affect(s) P/E ratio is/are _____________.
A. Growth rate
B. Debt proportion
C. Retention ratio
D. All of the above.
ANSWER: D
104. . Long -term solvency is indicated by _____________.
A. Liquidity ratio
B. Debt-equity ratio
C. Return coverage ratio
D. Both a and b
ANSWER: B
105. Which of the following is/are the problem(s) encountered in financial
statement analysis?
A. Development of benchmarks
B. Window dressing.
C. Interpretation of results
D. All of the above.
ANSWER: D
106. Earnings Per Share (EPS) is equal to ____________
A. Profit before tax/No. of outstanding shares.
B. Profit after tax/No. of outstanding shares
C. Profit after tax/Amount of equity share capital.
D. Profit after tax less equity dividends/No. of outstanding shares.
ANSWER: B
107. Degree of total leverage can be applied in measuring change in
_____________
A. EBIT to a percentage change in quantity.
B. EPS to a percentage change in EBIT.
C. EPS to a percentage change in quantity.
D. Quantity to a percentage change in EBIT.
ANSWER: C
108. The measure of business risk is_____________.
A. operating leverage.
B. financial leverage.
C. total leverage.
D. working capital leverage.
ANSWER: A
109. The value of EBIT at which EPS is equal to zero is known as ___________
A. Break even point.
B. Financial break even point.
C. Operating break even point
D. Overall break even point.
ANSWER: B
110. operating Leverage is the response of changes in _____________.
A. EBIT to the changes in sales..
B. EPS to the changes in EBIT
C. Production to the changes in sales.
D. None of the above.
ANSWER: A
111. Operating Leverage Measures the responsiveness of earnings per
share to variability in _______
A. earnings before interest
B. taxesIs undefined at the operating break even point
C. All of the above.
D. None of the above.
ANSWER: C
112. The use of preference share capital as against debt finance
_____________.
A. Reduces DFL.
B. Increases DFL.
C. Increases financial risk.
D. Both a and b.
ANSWER: B
113. The Degree of Financial Leverage (DFL) ______________.
A. Measures financial risk of the firm.
B. Is zero at financial break even point.
C. Increases as EBIT increases.
D. Both a and b.
ANSWER: A
114. The objective of financial management is to ______________.
A. Maximize the return on investment.
B. Minimize the risk.
C. Maximize the wealth of the owners by increasing the value of the firm.
D. All the above.
ANSWER: D
115. Which of the following characteristics are true, with reference to
preference capital?
A. Preference dividend is tax deductible.
B. The claim of preference shareholders is prior to the claim of equity
shareholders.
C. Preference share holders are not the owners of the concern.
D. All of the above
ANSWER: D
116. What are the factors which make debentures attractive to investors?
A. They enjoy a high order of priority in the event of liquidation.
B. Stable rate of return.
C. No risk.
D. All of the above.
ANSWER: D
117. The method of raising equity capital from existing members by
offering securities on pro rata basis is
referred to as ______________.
A. Public issue.
B. Bonus issue.
C. Private placement.
D. Bought-Out-Deal.
ANSWER: B
118. Which of the following is not a source of long-term finance?
A. Equity shares.
B. Preference shares.
C. Commercial papers
D. . Reserves and surplus.
ANSWER: D
119. For which of the following factors are the debentures more attractive
to the investors?
A. The principal is redeemable at maturity.
B. A debenture-holder enjoys prior claim on the assets of the company
over its shareholders in the event of
liquidation
C. trustee is appointed to preserve the interest of the debenture holders.
D. All the above.
ANSWER: D
120. If debentures are issued by a company, ____________.
A. The interest of the debentures holders is assured by SEBI.
B. Debenture redemption reserve should be at least 75 percent of the
issue amount prior to the
commencement of the redemption process
C. Call option on debentures allows the issuer to redeem the debentures
at a certain price before maturity
D. Put option on debentures allows the issuer to redeem the debentures
at a certain price before maturity.
ANSWER: D
121. A company may rise capital from the primary market through
_____________.
A. Public issue
B. . Rights issue
C. Bought out deals.
D. All of the above.
ANSWER: D
122. 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. . Decrease up to certain point, remains unchanged for moderate
increase in leverage and rises beyond a
certain point
D. Decrease at an increasing rate with increase in leverage
ANSWER: C
123. The cost of capital of a firm is ______________.
A. The dividend paid on the equity capital.
B. The weighted average of the cost of various long-term and short-term
sources of finance.
C. The average rate of return it must earn on its investments to satisfy the
various investors
D. The minimum rate of return it must earn on its investments to keep its
investors satisfied.
ANSWER: C
124. The constant growth model of equity valuation assumes that
_____________.
A. the dividends paid by the company remain constant.
B. the dividends paid by the company grow at a constant rate of growth.
C. the cost of equity may be less than or equal to the growth rate.
D. the growth rate is less than the cost of equity.
ANSWER: D
125. Cost of equity capital is ____________.
A. lesser than the cost of debt capital.
B. equal to the last dividend paid to the equity share holders
C. equal to the dividend expectations of equity share holders for the
coming year
D. none of the above
ANSWER: D
126. Which of the following is not a feature of an optimal capital structure?
A. Safety.
B. Flexibility.
C. Control.
D. Solvency.
ANSWER: B
127. The overall capitalization rate and the cost of debt remain constant
for all degrees of leverage. This is
pronounced by ______________.
A. Traditional approach
B. Net operating income approach
C. Net income approach
D. MM approach
ANSWER: C
128. While calculating weighted average cost of capital _________.
A. Retained earnings are excluded.
B. Cost of issues are included.
C. Weights are based on market value or on book value
D. Equity shares are given more weights.
ANSWER: D
129. The formula for cost of debt is
A. kd=(1/2+f-p)/f+p
B. f+p
C. f-P
D. f*p
ANSWER: A
130. Which of the following is/are assumption behind the realized yield
approach?
A. The yield earned by investors has been, on average, in conformity with
their expectations.
B. The dividends will continue growing at a constant rate forever.
C. The market price will continue growing at a constant rate forever.
D. Both a and b.
ANSWER: D
131. Which of the following is not an assumption in the Miller & Modigliani
approach?
A. There are no transaction costs.
B. Securities are infinitely divisible.
C. Investors have homogeneous expectations
D. All the firms pay tax on their income at the same rate.
ANSWER: D
132. Which of the following is/are true regarding the cost of capital?
A. It is a measure of the returns required by all the suppliers of long-term
finance.
B. It is equal to the Internal Rate of Return of a project if the projects Net
Present Value is Zero.
C. It is the weighted arithmetic average of the cost of the various sources
of long-term finance used.
D. Both b and c
ANSWER: D
133. While calculating the weighted average cost of capital, market value
weights are preferred because _________________.
A. Book value weights are historical in nature.
B. This is in conformity with the definition of cost of capital as the
investors minimum required rate of return.
C. Book value weights fluctuate violently.
D. Market value weights are fairly consistent over a period of time.
ANSWER: C
134. While calculating weighted average cost of capital _____________.
A. Preference shares are given more weightage.
B. Cost of issue is considered
C. Tax factor is ignored.
D. Risk factor is ignored.
ANSWER: B
135. Which of the following ratios is not affected by the financial structure
and the tax rate of a company?
A. Net profit margin.
B. Earning power.
C. Earnings per share.
D. Capitalization rate
ANSWER: C
136. Which of the following factors influence(s) the capital structure of a
business entity?
A. Bargaining power with the suppliers
B. Demand for the product of the company
C. Technology adopted
D. Adequate of the assets to meet any sudden spurt in demand.
ANSWER: C
137. Which of the following factors does not affect the capital structure of
a company?
A. Cost of capital.
B. Composition of the current assets.
C. Size of the company
D. Expected nature of cash flows
ANSWER: B
138. Which of the following methods does a firm resort to avoid dividend
payments?
A. Share splitting.
B. Declaring bonus shares.
C. Rights issue.
D. New issue.
ANSWER: B
139. 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. Low turnover of working capital.
ANSWER: D
140. Cost of capital is the ______ rate of return expected by the investor.
A. maximum.
B. average.
C. marginal.
D. minimum.
ANSWER: A
141. Effective cost of debentures is _________________-as compared to
shares.
A. higher.
B. lower.
C. equal.
D. medium.
ANSWER: C
142. Corporation is not a part of __________ finance
A. Public.
B. Private.
C. Public & private.
D. Organization.
ANSWER: D
143. Financial analysts,working capital means the same thing as __________.
A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current Liabilities.
ANSWER: D
144. __________ is concerned with the maximization of a firms earnings
after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: B
145. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: A
146. The long-run objective of financial management is to _________________.
A. maximize earnings per share.
B. maximize the value of the firms common stock.
C. maximize return on investment
D. maximize market share.
ANSWER: B
147. This type of risk is avoidable through proper
diversification_______________.
A. portfolio risk.
B. systematic risk.
C. unsystematic risk.
D. total risk.
ANSWER: A
148. .In proper capital budgeting analysis we evaluate incremental
____________.
A. accounting income.
B. cash flow.
C. earnings.
D. operating profit.
ANSWER: B
149. The term _____________ means mathematical relationship between
two figures.
A. Income.
B. Expense.
C. Profit
D. Ratio.
ANSWER: D
150. EBIT is usually the same thing as_____________
A. funds provided by operations
B. earnings before taxes
C. net income
D. operating profit.
ANSWER: D