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RAJANARAYANAN SAMBANDAM 1
FINANCIAL MANAGEMENT
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FINANCIAL MANAGEMENT
12. ___________________ of a firm refers to the composition of its long-term funds and its
capital structure.
a) Capitalisation
b) Over-capitalisation
c) Under-capitalisation
d) Market capitalization
ANSWER (a)
13. In the _______________, the future value of all cash inflow at the end of time horizon at
a particular rate of interest is calculated.
a) Risk-free rate
b) Compounding technique
c) Discounting technique
d) Risk Premium
ANSWER (c)
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16. The type of stock that gets its dividend before the common stock gets its dividend is
called
a) Preference Share
b) Equity Share
c) Debenture
d) Common stock
ANSWER (A)
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c) Debenture
d) Private source
ANSWER (d)
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24 .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.
ANSWER (c)
26.Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm's strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing
firms that use different accounting practices.
d. Some of a firm's weaknesses can be identified through the usage of ratios.
ANSWER (C)
27. Which of the following relationships is true, regarding the costs of issuing the below
securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds
ANSWER (d)
28. According to the SEC, the correct sequence of events for a security issue is:
a. red herring, final prospectus, SEC registration.
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29. What is the most important ingredient in developing a firm's financial plan?
a. A forecast of sales revenues
b. Determining the amount of dividends to pay shareholders
c. Projecting the rate of interest on proposed new debt
d. Deciding upon which method of depreciation a firm should utilize
ANSWER (a)
31. Which one of the following will increase the operating cycle?
a. increasing the inventory period
b. decreasing the cash cycle
c. decreasing the accounts payable period
d. increasing the accounts payable period
ANSWER (d)
32. Which one of the following actions should a manager take if he or she wants to decrease
the operating cycle?
a. decrease the period of time for which credit is granted to customers
b. decrease the rate at which the average inventory is sold
c. delay payments to suppliers to decrease the cash cycle
d. increase the inventory level while maintaining constant sales
ANSWER (a)
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33. All else equal, which one of the following will decrease the cash cycle?
a. increasing the operating cycle
b. decreasing the accounts receivable turnover rate
c. decreasing the accounts payable period
d. increasing the inventory turnover rate
a. increasing the credit period granted to a customer
ANSWER (b)
34. Baker Industries offers credit terms of 2/20, net 60 to Charlie Co. Charlie Co. has an
inventory period of 15 days and an operating cycle of 45 days. Given this, which of the
following statements are correct?
I. The credit terms of Baker Industries are too restrictive;
II. II. If Charlie Co. forgoes the discount on its purchases, it will have a negative cash
cycle;
III. Baker Industries is financing the accounts receivable of Charlie Co;
IV. If Charlie Co. is delinquent in its payment, Baker Industries should be concerned
a. III and IV only
b. I and II only
c. I, III, and IV only
d. II, III, and IV only
ANSWER (a)
35. Assume a company's current ratio is less than one. If the company pays current liabilities
with cash, the new current ratio will:
a. Decrease.
b. Remain the same.
c. Cannot be determined with the information given
d. Increase
ANSWER (a)
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37.The discount rate used to determine the present value of a stream of expected future cash
flows is referred to as the __________.
a. net operating income
b. capitalization rate
c. capital structure
d. yield on the company's market value of common equity
ANSWER (b)
38.The traditional approach towards the valuation of a company assumes that __________.
a. the cost of capital is independent of the capital structure of the firm
b. the firm maintains constant risk regardless of the type of financing employed
c. there exists no optimal capital structure
d. that management can increase the total value of the firm through the judicious use of
financial leverage
ANSWER (d)
39. The presence of which one of the following costs is not used as a major argument against
the M&M arbitrage process?
a. Bankruptcy costs.
b. Agency costs.
c. Transactions costs.
d. Insurance costs.
ANSWER (d)
40. What is the market value of common equity under the NOI approach? The firm has an
expected net operating income of Rs. 5,000 with Rs 4,000 of debt (market value). Assume
that the overall capitalization rate is 20%.
a. Rs 5,000
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b. Rs 20,000
c. Rs 21,000
d. Rs 25,000
ANSWER (c)
41. Which of the following statements regarding the net operating income approach is
incorrect?
a. The overall capitalization rate, kO, is constant.
b. The cost of debt funds, ki, is constant.
c. The required return on equity, ke, is constant.
d. The total value of the firm is unaffected by changes in financial leverage.
ANSWER (c)
42. Which of the following statements regarding the total value principle is incorrect?
a. The total value principle allows for corporate borrowing and excludes personal
borrowings via arbitrage.
b. The total value principle must hold or else arbitrage will take place and then its
presence will cause the value to remain constant regardless of the capital structure.
c. The total value does not change because the underlying profit and risk of the firm are
with its operations, which do not change when the financing changes.
d. Modigliani and Miller, in their original position, advocate that the total value of the
firm is identical regardless of the financing mix.
ANSWER (a)
43. Allowing for bankruptcy costs and an increasing probability of bankruptcy with
increasing financial leverage, we should expect __________ than would be the case without
bankruptcy costs.
a. the premium for business risk to be higher
b. the premium for business risk to be lower
c. the premium for financial risk should rise by less
d. the premium for financial risk should rise by more
ANSWER (d)
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44. The existence of __________ on the balance sheet generates tax advantages that directly
influence the capital structure of the firm.
a. a large proportion of fixed assets
b. long-term debt
c. retained earnings
d. All of the above answers are
ANSWER (b)
46. When the manager of a firm uses capital structure changes to convey information about
the profitability and risk of the firm, then the manager is engaging in __________.
a. financial signaling
b. informational symmetry
c. the net operating income approach to capital structure
d. the traditional approach to capital structure
ANSWER (a)
47. __________ costs are those associated with engaging in various business transactions that
may cause the firm to not have the exact optimal capital structure.
a. Agency
b. Transaction
c. Bankruptcy
d. Managerial
ANSWER (b)
48. Assume that the market imperfection of taxes exists. If the corporate tax rate were
increased under new legislation, the use of debt would __________.
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a. rise
b. fall
c. not be impacted
d. There is not sufficient information provided to determine the impact.
ANSWER (a)
49. In general, what would happen to the debt ratio of a firm if it always kept an optimal
capital structure and if: 1) the government changed tax laws that allowed the deduction of
dividend financing and 2) excluded the deduction of interest expense?
a. The debt ratio would fall.
b. The debt ratio would rise.
c. The debt ratio would not change.
d. None
ANSWER (a)
50. Which term would most likely be associated with the phrase "actions speak louder than
words?"
a. Incentive signaling.
b. Shareholder wealth maximization.
c. Financial planing
d. Optimal capital structure.
ANSWER (a)
51. Which of the following is not something that you would consider when evaluating the
optimal capital structure?
a. EBIT-EPS Analysis.
b. Taxes.
c. Security Rating.
d. All of the above are considered when determining the optimal capital structure
ANSWER (d)
52. The only purpose of financial reporting is to keep the managers informed
about the progress of operations.
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a) True
b) False
c) Neither true nor false
d) None of the above
ANSWER (B)
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A. 30 days
B. 36 days
C. 47 days
D. 57 days
ANSWER C,
68. are especially interested in the average payment period, since it provides
them with a sense of the bill-paying patterns of the firm.
A. Customers
B. Stockholders
C. Lenders and suppliers
D. Borrowers and buyers
ANSWER C,
69. The ratios provide the information critical to the long-run operation of the firm
A. liquidity B.
activity C.
solvency
D. profitability
ANSWER C
70. ________are especially interested in the average payment period, since it provides them
with a sense of the bill-paying patterns of the firm.
A. Customers
B. Stockholders
C. Lenders and suppliers
D. Borrowers and buyers
ANSWER (B)
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c. Both A and B
d. None of the above
ANSWER (C)
72. As per accounting standard AS3, provision for taxation should be treated as
a. As a current liability
b. As an appropriation of profits
c. Either a or b
d. None of the above
ANSWER (b)
73. The _______ratios provide the information critical to the long-run operation of the firm
A. liquidity
B. activity
C. solvency
D. profitability
ANSWER (D)
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FINANCIAL MANAGEMENT
76. The balance of fixed assets of Y Ltd. at cost at the end of 2013 and 2014 were Rs 5,70,800
and Rs 6,15,300. During the year 2014 a machinery costing Rs 60,000 was sold. Determine the
purchase of fixed assets.
a. Rs 1,04,500
b. Rs 1,40,500
c. Rs 1,64,500
d. None of the above
ANSWER (A)
79. If reserve for bad and doubtful debts is mentioned in the question of Funds Flow Statement
Preparation, it can be shown as
a. In the schedule by deducting from total debtors under current assets
b. In the schedule separately under the heading of capital liabilities
c. Both a and b
d. None of the above
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ANSWER (c)
80. Which of the following rules stands true while preparation of Schedule of changes in
working capital?
A) An increase in current assets increases working capital.
B) An increase in current assets decreases working capital.
C) An increase in current liabilities decreases working capital.
D) An increase in current liabilities increases working capital.
a. A and C
b. A and D
c. B and D
d. A, B, C and D
ANSWER (A)
81. Funds Flow Statement is prepared on the basis of data of P&L statement and two
consecutive balance sheets.
a. True
b. False
c. Value delivery
d. None of the above
ANSWER (a)
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86. 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
ANSWER (B)
87. 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
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ANSWER (D)
88. A risk associated with project and way considered by well diversified stockholder is
classified as
A. expected risk
B. beta risk
C. industry risk
D. returning risk
ANSWER (B)
89. Variability for expected returns for projects is classified as
A. expected risk
B. stand-alone risk
C. variable risk
D. returning risk
ANSWER (B)
90. 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
ANSWER (B)
91. 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
ANSWER (C)
92. For each component of capital, a required rate of return is considered as
A. component cost
B. evaluating cost
C. asset cost
D. asset depreciation value
ANSWER (A)
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93. In retention growth model, percent of net income firms usually pay out as
shareholders dividends, is classified as
A. payout ratio
B. payback ratio
C. growth retention ratio
D. present value of ratio
ANSWER (A)
94. In weighted average cost of capital, rising in interest rate leads to
A. increase in cost of debt
B. increase the capital structure
C. decrease in cost of debt
D. decrease the capital structure
ANSWER (A)
95. In primary markets, first time issued shares to be publicly traded, in stock markets is
considered as
A. traded offering
B. public markets
C. issuance offering
D. initial public offering
ANSWER (D)
96. Stocks or shares that are sold to investors without transacting through financial
institutions are classified as
A. direct transfer
B. indirect transfer
C. global transfer
D. pension transfer
ANSWER (A)
97. Money market where debt and stocks are traded and maturity period is more than a
year is classified as
A. shorter term markets
B. capital markets
C. counter markets
D. long-term markets
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ANSWER (B)
98. Type of market in which securities with less than one year maturity are traded, is
classified as
A. money market
B. capital market
C. transaction market
D. global market
ANSWER (A)
99. In capital markets, major suppliers of trading instruments are
A. government and corporations
B. liquid corporations
C. instrumental corporations
D. manufacturing corporations
ANSWER (A)
100. Saving banks, insurance companies, mutual funds and commercial banks are
all examples of
A. non-financial institutions
B. derivative institutions
C. financial institutions
D. payable institutions
ANSWER (C)
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