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WorksheetsFinancial Management Multiple Choice Questions
Total questions: 94
Worksheet time: 2hrs 34mins
The main objective of financial management is:
Maximizing sales
Minimizing cost
Maximizing shareholder wealth
Increasing market share
Finance deals primarily with:
Money and investment decisions
Product design
Human resources
Advertising and promotion
Investment, financing, and dividend decisions are:
Accounting functions
Marketing functions
Core financial decisions
HR decisions
Working capital is defined as:
Total assets minus total liabilities
Fixed assets minus current assets
Current assets minus current liabilities
Current liabilities minus current assets
Capital structure refers to:
Mix of debt and equity financing
Inventory control
Dividend policy
Fixed assets investment
Cost of capital represents:
Minimum rate of return required by investors
Interest rate on short-term loans
Tax rate
Depreciation rate
Liquidity refers to a firm’s ability to:
Meet short-term obligations
Increase profitability
Expand operations
Reduce expenses
Leverage means:
Use of fixed costs to magnify returns
Reduction of debt
Increase in equity
Financial planning ensures:
Adequate funds at the right time
Increased production
Market share growth
Reduction of taxes
Risk and return are:
Directly related
Inversely related
Unrelated
Negatively correlated
Which ratio measures liquidity?
Current ratio
Debt-equity ratio
Return on equity
Price-earnings ratio
The formula for current ratio is:
Current Assets / Current Liabilities
Total Assets / Total Liabilities
Fixed Assets / Shareholders’ Equity
Equity / Liabilities
Debt-Equity ratio indicates:
Financial leverage of the company
Liquidity position
Profitability
Solvency only
Depreciation is classified as:
Non-cash expense
Cash inflow
Operating income
Capital receipt
Time value of money means:
A. A rupee today is worth more than a rupee tomorrow
B. A rupee today is worth less than tomorrow
C. Value of money is constant
D. Depends only on inflation
NPV stands for:
If NPV > 0, then the project is:
Acceptable
Rejectable
Risky
Neutral
IRR represents:
Discount rate where NPV = 0
Highest profit rate
Accounting rate of return
Depreciation rate
Payback period measures:
Time taken to recover initial investment
Profit after tax
Return on assets
Cash flow per share
Beta measures:
Market risk
Credit risk
Operational risk
Inflation risk
WACC is calculated as:
Weighted average of cost of debt and equity
Average profit of all projects
Weighted cost of liabilities only
Weighted average of current assets
EBIT stands for:
Earnings Before Interest and Taxes
Expenses Before Interest and Taxes
Earnings Before Income and Taxes
Expenditure Before Investment Turnover
Capital budgeting relates to:
Long-term investment decisions
Short-term borrowing
Payroll management
Inventory purchase
Equity shares represent:
Ownership in a company
Short-term liability
Debt instrument
Preference capital
Retained earnings are:
Internal source of finance
External source of finance
Borrowed funds
Dividend payout
A debenture is:
A long-term debt instrument
A share certificate
A government bond
A current liability
Preference shareholders receive:
Fixed dividends before equity shareholders
Variable dividends after equity holders
No dividends
Interest payments
Commercial paper is:
A short-term unsecured debt instrument
A stock certificate
A long-term bond
Treasury bond
A company’s dividend policy affects:
Retained earnings and shareholder wealth
Production cost
Inventory management
Asset depreciation
A highly leveraged firm means:
High proportion of debt in its capital structure
Low equity base
High profit margin
No dividend policy
The primary market deals in:
New issue of securities
Trading of existing shares
The secondary market deals in:
Existing securities
Foreign exchange only
Futures contracts
Primary shares
The capital market deals with:
Long-term funds
Short-term funds
Medium-term loans
Commodity trade
The money market deals with:
Short-term financial instruments
Fixed deposits
Long-term investments
Real estate
SEBI regulates:
Securities market in India
Banking system
Mutual funds only
Insurance companies
Stock exchanges are part of:
Secondary market
Primary market
Money market
Forex market
BSE stands for:
Bombay Stock Exchange
Bharat Securities Exchange
Banking Securities Entity
Business Stock Environment
NSE stands for:
National Stock Exchange
National Savings Entity
New Securities Exchange
National Sector Exchange
Mutual funds pool money from:
Multiple investors to invest in diversified securities
Government only
Banks only
Foreign institutions
NAV in mutual funds means:
Net Asset Value
Net Annual Value
Nominal Asset Value
Normalized Account Value
Derivatives derive their value from:
Underlying assets
Real estate prices
Market interest rates
Company profits
Examples of derivatives include:
Futures and Options
Stocks and Bonds
Cash and Deposits
Notes and Bills
Bonds pay:
Fixed interest periodically
Variable dividends
Profits only
Commission
A credit rating agency evaluates:
Borrower’s creditworthiness
Employee performance
Company marketing strategy
Tax compliance
Dividend yield =
Dividend per share / Market price per share
Profit / Share capital
Earnings per share / Dividend
Net profit / Total assets
P/E ratio =
Market price per share / Earnings per share
Market capitalization / Total revenue
Earnings / Price
Systematic risk is:
Market-related and non-diversifiable
Company-specific and diversifiable
Avoidable through diversification
Always constant
Unsystematic risk is:
Company-specific and diversifiable
Market-related
Inflation-based
Uncontrollable
Portfolio diversification helps to:
Reduce unsystematic risk
Increase systematic risk
Guarantee profits
Eliminate all risks
Portfolio management aims at:
Balancing risk and return
Eliminating all losses
Reducing market volatility completely
Maximizing debt
Dividend policy determines:
How much profit is retained vs. distributed
How interest is paid on debt
Tax rates on profit
Employee incentives
The Modigliani–Miller (MM) theory of capital structure assumes:
Perfect capital markets with no taxes or transaction costs
Market imperfections
Dividend taxes
Changing interest rates
EPS stands for:
Earnings Per Share
Equity Profit Share
Earnings Per Stock
Equity Price System
EPS is calculated as:
(Net profit – Preference dividend) / No. of equity shares
Net profit / Total shares
Dividend / Share price
Profit after tax / Total assets
A bond’s price moves:
Inversely with market interest rates
Directly with inflation
Parallel to stock prices
With government expenditure
The CAPM model gives:
Expected return on an asset
Actual profit margin
Accounting rate of return
Operating leverage
In CAPM, Beta =
Measure of systematic risk
Return on equity
Measure of total risk
Alpha coefficient
If NPV = 0, it means:
The project earns exactly the cost of capital
The project is unprofitable
IRR < Discount rate
Cash flow is negative
Cash Flow Statement shows:
Inflows and outflows of cash during a period
Income and expenditure
Balance sheet transactions
Equity fluctuations only
Operating activities in cash flow include:
Day-to-day business transactions
Purchase of fixed assets
Share issue
Loan repayment
Return on Investment (ROI) =
(Net Profit / Investment) × 100
Investment / Net Profit
Sales / Assets
A company’s cost of equity can be estimated by:
CAPM
P/E ratio
Bond yield
Dividend yield
ROI measures:
Profitability of total investments
Liquidity
Solvency
Market valuation
A leveraged firm means:
The firm uses debt in its capital structure
The firm is debt-free
It holds only equity
It has high liquidity
Zero coupon bonds:
Do not pay periodic interest
Pay high annual interest
Pay dividends
Are redeemable at discount
Dividend payout ratio =
Dividend per share / Earnings per share
EPS / DPS
Dividend / Net profit × 100
Profit / Dividend
Retention ratio =
1 – Dividend payout ratio
EPS / DPS
Dividend / Profit after tax
Return / Equity
Market capitalization =
Market price per share × Number of outstanding shares
Total assets / Liabilities
Profit × Sales
Equity / Reserves
If Beta > 1, the stock is:
Stock split results in:
Increase in number of shares, same total value
Increase in company value
Decrease in equity
Reduction in profit
Rights issue means:
Offering new shares to existing shareholders
Offering shares to the public
Issuing debentures
Bonus shares issue
Book value per share =
Shareholders’ equity / Number of equity shares
Total assets / Current liabilities
Market price / Earnings
Profit / Net worth
EBIT-EPS analysis helps to:
Determine optimal capital structure
Calculate dividend policy
Measure liquidity ratio
Evaluate profitability
Financial breakeven occurs when:
A. EBIT = Interest + Preference Dividend
B. Sales = Cost
C. EPS = 0
D. Profit = Tax
Operating leverage measures:
Effect of fixed costs on EBIT
Financial risk
Market volatility
Dividend ratio
The DuPont analysis decomposes:
Return on Equity (ROE)
Net Profit Margin
Current Ratio
Debt-Equity Ratio
Price-to-Book (P/B) ratio =
Market price per share / Book value per share
Earnings / Dividend
Market cap / Revenue
Profit / Equity
Economic Value Added (EVA) =
NOPAT – (Capital × Cost of capital)
Profit + Taxes
Sales – Cost of goods sold
Revenue / Assets
A firm’s credit policy influences:
Receivables and working capital cycle
Tax liability
Shareholding pattern
Profit and loss appropriation
Financial risk increases with:
Higher proportion of debt financing
Higher equity
Increased reserves
Decreased leverage
The primary goal of financial management is to:
Maximize shareholder wealth
Maximize sales
Minimize cost
Maximize market share
When a firm issues new shares to the public for the first time, it is called:
Initial Public Offering (IPO)
Follow-on Public Offer (FPO)
Private Placement
Rights Issue
Which of the following is a non-current liability?
Debentures
Creditors
Bills payable
Outstanding expenses
A higher current ratio generally indicates:
Better short-term liquidity
Poor working capital
High leverage
Cost of preference share capital is computed as:
Dividend / Net proceeds × 100
Dividend × Market price
Earnings / Equity × 100
Dividend + Interest
Payback period method ignores:
A. Time value of money
B. Cash inflows
C. Initial investment
D. Project life
In the context of risk, diversification helps to:
Reduce unsystematic risk
Eliminate systematic risk
Increase volatility
Increase beta
Working capital is the difference between:
Current Assets and Current Liabilities
Fixed Assets and Current Liabilities
Total Assets and Liabilities
Capital and Reserves
A company’s capital budgeting decisions are based on:
A. Long-term investments
B. Short-term financing
C. Daily cash management
D. Payroll processing
Financial leverage reflects:
The use of debt to finance assets
The efficiency of operations
Sales volume changes
Dividend payout levels
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