Question Bank - Multiple Choice Questions (MCQS) : Unit I - Business Finance

DNYANSAGAR ARTS AND COMMERCE COLLEGE, BALEWADI, PUNE – 45
Subject: Cases in Finance (606 A) CLASS: TYBBA (Sem-VI) (2013 PATTERN)
Question Bank - Multiple Choice Questions (MCQs)

UNIT I - Business Finance
1. Business finance refers to ...... and ........ employed in a business.

A. money
B. credit
C. both a & b
D. none of the above
2. Business finance includes ........

A. procurement of funds and utilization of funds
B. management of funds
C. allocation
D. Insurance
3. Funds are required for the ..........

A. purchase of land & building
B. purchase of machinery
C. purchase of another fixed asset
D. all of the above
4. Business finances is concerned with _________ funds and _______ funds from different sources.
A. estimation of funds
B. raising of funds
C. short term finance
D. both a & b
5. __________ is concerned with the acquisition, financing, and management of assets with some overall goal
in mind.
A. Financial management
B. Profit maximization
C. Agency theory
D. Social responsibility
6. __________ is concerned with the maximization of a firm's earnings after taxes.

A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization
PROF. KAVITA PAREEK www.dacc.edu.in

D. EPS maximization
7. ___________________is the most appropriate goal of the firm.

A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
8. Financial planning objectives is very effective in reduction of financial losses. In these objectives signifies
________________.
A. not determining capital requirement for non-trading activity.
B. not determining capital structure for non-trading activity.
C. framing financial policies for trading activity.
D. framing rules and regulation for trading activity.
9. Financial planning is the process of framing _______________.

A. objectives & policies
B. procedures & program
C. program and budget.
D. all the above
10. Financial advisor and financial planner which implies same meaning
A. false
B. true
C. none of these
D. neither a nor b
11. Basic objective of Financial Management is ________________.

A. Maximization of profit.
B. Maximization of shareholder’s wealth
C. Ensuring Financial discipline in the firm.
D. All of these.
12. Which of the following statements is correct regarding profit maximization as the primary goal of the firm?
A. Profit maximization considers the firm's risk level.
B. Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future
profits.
C. Profit maximization does consider the impact on individual shareholder's EPS.
D. Profit maximization is concerned more with maximizing net income than the stock price.

13. The __________ decision involves determining the appropriate make-up of the right-hand side of the
balance sheet.
A. asset management.
B. financing.
C. investment.
D. capital budgeting.
14. The __________ decision involves a determination of the total amount of assets needed, the
composition of the assets, and whether any assets need to be reduced, eliminated, or replaced.
B. financing.
C. investment.
D. accounting.
15. According to the text's authors, ___________ is the most important of the three financial management
decisions.
A. asset management decision.
B. financing decision.
C. investment decision.
D. accounting decision.
16. The __________ decision involves efficiently managing the assets on the balance sheet on a day-today
basis, especially current assets.
B. financing.
C. investment.
D. accounting.
17. __________ is concerned with the maximization of a firm's stock price.

A. Shareholder wealth maximization.
C. Stakeholder welfare maximization.
D. EPS maximization.
18. The long-run objective of financial management is to _____________.

A. maximize earnings per share.
B. maximize the value of the firm's common stock.
C. maximize return on investment.
D. maximize market share.

19. The long-run objective of financial management is to ___________.

A. maximize earnings per share.
B. maximize the value of the firm's common stock.
C. maximize return on investment.
D. maximize market share.
20. Which of the following are not among the daily activities of financial management?
A. Sale of shares and bonds.
B. Credit management.
C. Inventory control.
D. The receipt and disbursement of funds.
21. Shareholder wealth" in a firm is represented by____________.

A. the number of people employed in the firm.
B. the book value of the firm's assets less the book value of its liabilities.
C. the amount of salary paid to its employees.
D. the market price per share of the firm's common stock.
22. Financial management helps in

A. Short-term planning of company’s activities
B. Estimating the total funds requirement and their proper utilization in fixed assets and working capital
C. Profit planning of the firm
D. All of these
23. Financial management is mainly concerned with

A. Efficient management of every activity of business
B. Arrangement of funds required to the firm
C. Obtaining required funds in the appropriate mix and utilizing them efficiently
D. All of these
24. Which of the following is not a function of finance manager?

A. Mobilization of funds
B. Deployment of funds
C. Control over use of funds
D. Manipulate share price of the Company
25. Which is the following main decision taken by the financial manager in a company?
A. Income decision
B. Financing decision
C. Appraisal decision
D. Budget decision

26. Which of the following is an example of a financial objective that a company might choose to pursue?
A. Dealing honestly and fairly with customers on all occasions
B. Provision of good working conditions and industrial relations
C. Producing environmentally friendly products
D. Restricting the level of gearing to below a specified target level
27. Which of the following is LEAST likely to fall within financial management?
A. The dividend payment to shareholders is increased
B. Funds are raised to finance an investment project
C. Surplus asset are sold off
D. Non-executive directors are appointed to the remuneration committee
28. Which of the following would you expect to be the responsibility of financial management?
A. Producing annual reports
B. Producing monthly management accounts
C. Advising on investment in non-current assets
D. Deciding pay rates for staff
29. In his traditional role the financial manager was responsible for
A. Arrangement and efficient utilization of funds
B. Arrangement of financial resources
C. Acquiring capital assets for the organization
D. All the above
30. The term ----- refers to the part of the profits of a company which is distributed amongst its
Shareholders.
A. Dividend
B. Interest
C. Capital
D. Profit
31. The dividend decision of the firm is taken by ----

A. Risk manager
B. Marketing manager
C. Purchase manager
D. Finance manager
32. Who strongly supports the doctrine that dividend policy almost always affects the value of the
enterprise?
A. Myron Gordon
B. John Linter

C. James Walter
D. Modigliani and Miller
33. Which of the following external factors affect the dividend policy?
A. General state of economy
B. State of capital market
C. Legal restrictions
D. All of the above
34. Financial management process deals with

A. Investments
B. Financing decisions
C. Both a and b
D. None of the above
35. Finance Function comprises

A. Safe custody of funds only
B. Expenditure of funds only
C. Procurement of finance only
D. Procurement & effective use of funds
36. The objective of wealth maximization considers

A. Amount of returns expected
B. Timing of anticipated returns
C. Risk associated with uncertainty of returns
D. All of the above
37. Financial management mainly focuses on

A. Efficient management of every business
B. Brand dimension
C. Arrangement of funds
D. All elements of acquiring and using means of financial resources for financial activities
38. Investment can be defined.

A. Person’s dedication to purchasing a house or flat
B. Use of capital on assets to receive returns
C. Usage of money on a production process of products and services
D. Net additions made to the nation’s capital stocks

39. The finance manager is accountable for.

A. Earning capital assets of the company
B. Effective management of a fund
C. Arrangement of financial resources
D. Proper utilization of funds
40. The focal point of financial management in a firm is:

A. The number and types of products or services provided by the firm.
B. The minimization of the amount of taxes paid by the firm.
C. The creation of value for shareholders.
D. The dollars profits earned by the firm.
Answer Key:
1 2 3 4 5 6 7 8 9 10
C A D D A B A C D B
11 12 13 14 15 16 17 18 19 20
B D B C C A A B A A
21 22 23 24 25 26 27 28 29 30
D B C D B D D C B A
31 32 33 34 35 36 37 38 39 40
D C D B D D D B C C

Unit 2: - Techniques of Financial Statement Analysis

1. The term financial statement refers to…
A. Income statement
B. Cash flow and Fund Flow
C. Balance sheet
D. All
2. Which of the following is the main objective of a financial statement?

A. to know the solvency
B. to know the debt capacity
C. to know the earning capacity
D. All
3. In financial statements, the fixed assets are shown at …

A. Market price
B. Cost price
C. Replacement price
D. None
4. What is followed while preparing the financial statements?

A. Accounting conventions
B. Accounting principles
C. Accounting concepts
D. All
5. In financial statement the stock is valued at cost or market price whichever is less on the basis of…
A. Accounting concepts
B. Accounting conventions
C. Accounting principles
D. None
6. Which of the following statement is true?

Statement (I): Financial statements are prepared on the basis of accounting principles.
Statement (II): Any changes in the accounting principles or method will affect the utility of the financial
statements.

A. I is true but not II

B. II is true but not I
C. Both are true
D. Both are false
7. The balance sheet shows …

A. the source of working capital
B. the change in working capital
C. Both
D. None
8. The analysis and interpretations of the financial statement will reveal …

A. the financial position
B. the profitability
C. None
D. Both
9. The process of explaining the meaning, significance and relationship between two financial factors is called
…
A. Summarization
B. Analysis
C. Interpretation
D. None
10. The process of comparing various financial factors of a company over a period of time is known as …
A. Inter‐firm comparison
B. Ratio Analysis
C. Intra‐firm comparison
D. Inter‐industry comparison
11. Which of the following is technique of financial statement analysis?

A. Common‐size statement
B. Comparative statement
C. Trend analysis
D. All

12. Which technique used for figures of two or more periods are placed side by side to facilitate easy and
meaningful comparisons?
A. Comparative statement
B. Common‐size statement
C. Trend Analysis
D. None
13. ________is a simply the amount of cash coming in to a business.

A. cash flow
B. inflow
C. both a and b
D. none of the above.
14. If value of opening inventories increases, what happens to the value of gross profit?
A. decreases
B. increases
C. stays the same
D. gets closer to net profit
15. Which of these is NOT a limitation of ratio analysis:

A. They are calculated on past data and there is may not be a true reflection of the business current performance
B. Financial records may have been manipulated and there are the ratios calculated could be based on
potentially mis leaked
C. Ratios only consider qualitative matters, making than hard to calculate
D. inter-firm comparisons can be difficult to not firms report their performance/ generate accounts in the Way
16. Incorrect cash flow planning can lead to ________

A. solvency
B. insolvency
C. bankruptcy
D. failure
17. The 3 Ps, i.e. the three objectives of analysis and interpretation of financial statements are : Progress,
Position and Prospects.
A. True
B. False

18. Comparison of financial statements highlights the trend of the _________ of the business.
A. Financial position
B. Performance
C. Profitability
D. All of the above
19. Analysis of any financial Statement comprises

A. Balance sheet
B. P&L Account
C. Trading account
D. All of the above
20. Which of the following are techniques, tools or methods of analysis and interpretation of financial
statements?
A. Ratio Analysis
B. Average Analysis
C. Trend Analysis
D. All of the above
21. Interpretation of accounts is the

A. Art and science of translating the figures
B. To know financial strengths and weaknesses of a business
C. To know the causes for the prevailing performance of business
D. All of the above
22. The major device for measuring the profitability of a firm over a defined period of time is the
A. income statement.
B. balance sheet.
C. statement of cash flow.
23. The ________ does not represent continuing operations in any way, but is simply a snapshot of the total
worth of a firm at a given point in time.
A. income statement
B. balance sheet
C. sources and uses of funds statement
D. none of the above

24. The statement of cash inflows and outflows shows all of the following except.
A. How the firm's balance sheet changed from one period to another.
B. How funds from operations were used to finance the company's assets.
C. How the firm has matched short-term and long-term sources of funds with short-term and long-term uses of
funds.
D. The firms cost of new borrowing.
25. Cash inflows arise from _____ assets, ________ liabilities, and ___________ stockholders' equity.
A. increasing; increasing; decreasing
B. increasing; decreasing; decreasing
C. decreasing; increasing; increasing
D. decreasing; increasing; decreasing
26. Which of the following is NOT a key ratio in the prediction of bankruptcy as developed by Edward Altman?
A. debt to equity
B. current ratio
C. retained earnings as a percent of total assets
D. total assets
27. ________________ ratios measure the ability of a firm to earn an adequate return on sales, total assets and
invested capital.
A. Asset utilization
B. Liquidity
C. Profitability
D. Debt utilization
28. The primary purpose of the liquidity ratios is to determine

A. how much working capital is tied up in inventory.
B. the relative level of short-term debt.
C. how well a firm is able to pay off short-term obligations.
D. more than one of the above.
29. Which of the following statements about liquidity ratios is true?
29. Which of the following statements about liquidity ratios is true?
A. The higher the current ratio, the more likely a firm is able to pay its short-term obligations.
B. The lower the quick ratios relative to the current ratio, the safer a firm is in terms of liquidity.
C. The ratio of net working capital to total assets always lies between 0 and 1.

D. Relatively high current ratios are usually a sign of efficient working capital management.
30. The ________ ratios help determines the degree of financial risk and earnings volatility present in a firm.
A. profitability
B. asset utilization
C. liquidity
31. Which of the following statements are true?

A. Debt to equity and debt to asset ratios measure capital structure and vary widely among industries.
B. Debt utilization ratios alone do not measure a firm's ability to meet its cash obligations.
C. DuPont analysis considers the impact of debt on the profitability of the firm.
D. Two of the above are true.
32. __________ analysis is the process of studying a series of ratios for a company and/or industry over time.
A. DuPont
B. Trend
C. Common size
D. All of the above.
33. The statement of cash flows tells us

A. accounting profit or loss
B. how cash was created
C. actual profit or loss
D. two of the above
34. An analyst can judge a company's level of debt by comparing these ratios:
A. return-on-equity to total debt-to-assets
B. return-on-equity to total asset turnover
C. return-on-equity to debt turnover
D. return-on-equity to return-on-assets
35. The primary sections of a statement of cash flows are:

A. cash flows from investing, operating, and financing activities.
B. cash flows from investing and operating activities plus investments.
C. cash flows from investing, financing, and accounting activities.
D. cash flows from investing, operating, financing, and accounting activities.

36. Financial ratios are used to weigh and evaluate:

A. the operating performance and capital structure of the firm.
B. which stocks are the "gold mine" stocks when investing in the market.
C. which stocks are about to file for bankruptcy.
D. the net present value of the company.
37. The type of ratio that allows the analyst to measure the ability of the firm to earn an adequate return on
sales, total assets, and invested capital is:
A. liquidity ratios.
B. profitability ratios.
C. asset-utilization ratios.
D. debt-utilization ratios.
38. While calculating Earnings per share, if both equity and preference share capitals are there, then
A. Preference share is deducted from the net profit
B. Equity share capital is deducted from the net profit
C. Both A and B
39. Overall Profitability ratios are based on

A. Investments
B. Sales
C. A & B
40. The ideal level of current ratio is

A. 4:2
B. 2:1
C. Both A and B
41. Debt-equity ratio is a sub-part of

A. Short-term solvency ratio
B. Long-term solvency ratio
C. Debtors turnover ratio

42. The most precise test of liquidity is

A. Quick ratio
B. Current ratio
C. Absolute Liquid ratio
43. Quick ratio is 1.8:1, current ratio is 2.7:1 and current liabilities are Rs 60,000. Determine value of stock.
A. Rs 54,000
B. Rs 60,000
C. Rs 1, 62,000
44. In the context of Funds Flow Analysis, the word “funds” is used to define
A. Net Working capital
B. Total current assets-Total current liabilities
C. Both A and B
D. None of the above.
45. Which of the following are Non-current assets?

A. Land, Building and plant
B. Leasehold property
C. Computer software
D. All of the above
46. Funds flow statements are prepared so as to

A. To identify the changes in working capital
B. To identify reasons behind change in working capital
C. To know the item-wise outflow of funds during given period
D. All of the above
47. Net Profit ratio is calculated by

A. (Gross Profit/Gross sales) *100
B. (Gross Profit/Net sales) *100
C. (Net Profit/Net sales) *100

48. If sales is Rs 5, 00,000 and net profit is Rs 1, 20,000 Net Profit ratio is
A. 24%
B. 41%
C. 60%
49. Operating ratio is calculated by

A. (Operating Cost/Gross sales) *100
B. (Operating Cost/Gross sales) *100
C. (Operating cost/Net sales) *100
50. Determine Operating ratio, if operating expenses is Rs 60,000, Sales is Rs 9,40,000, Sales Return is Rs
40,000 and Cost of net goods sold is Rs 6,60,000.
A. 80%
B. 15%
C. 25%
D. 11%
51. Financial statements are ____________.

A. Anticipated facts
B. recorded facts
C. Estimated of facts
D. unknown facts
52. Trend analysis is significant for ____________.

A. Forecasting and budgeting
B. profit planning
C. Capital rationing
D. working capital management

53. In common size income statement analysis, which is taken as 100 percent?
A. sales
B. cost of goods sold
C. purchases
D. total assets
54. The statement which shows the net result of business is ___________.
A. income statement
B. balance sheet
C. fund flow statement
D. cash flow statement
55. Comparative statement analysis sheet is __________.

A. vertical analysis
B. horizontal analysis
C. either vertical or horizontal analysis
D. neither vertical nor horizontal analysis
56. Financial statements are meaningful and useful only when they are ___________.
A. Verified
B. Presented to owners
C. Analyzed and interpreted
D. Published
57. Vertical analysis is made on the basis of __________.

A. Single set of financial statements
B. Multiple sets of financial statements
C. Different schedules attached to financial statements
D. Similar set of financial statements
58. Horizontal analysis is done by analyzing ____________.

A. Quarterly statement
B. Half yearly statement
C. Financial statements of several years
D. Financial statements of a particular year

59. __________ analysis is done by outsiders who do not have any access to internal accounting records of the
business firm.
A. Internal
B. External
C. Formal
D. Secret
60. The analysis conducted by persons who have access to the internal accounting records of the business firm
is known as __________.
A. Internal
B. External
C. Formal
D. Secret
Answer Key:
1 2 3 4 5 6 7 8 9 10
D D A D B C D D C C
11 12 13 14 15 16 17 18 19 20
D A A A C C A D D D
21 22 23 24 25 26 27 28 29 30
D A B D C A C C A D
31 32 33 34 35 36 37 38 39 40
D B B D A A B A A C
41 42 43 44 45 46 47 48 49 50
B C A C D D C A C A
51 52 53 54 55 56 57 58 59 60
B A A A B C A D B A

Unit 3: Working Capital Management

1.The financial decision making that relates to current assets or short term asset is known as
__________________.
A. working capital
B. non-working capital
C. venture capital
D. all of the above
2. In what order should current assets be present on a statement of financial position?

A. cash, bank, trade receivables, inventories
B. trade receivables, bank, cash, inventories
C. inventories, cash, bank, trade receivables
D. inventories, trade receivables, bank, cash
3. If value of opening inventories increases, what happens to the value of gross profit?
A. decreases
B. increases
C. stays the same
D. gets closer to net profit
4. What does the statement of comprehensive income show?

A. The liquidity position of a business at a point in time
B. The value of assets bought by a business over a period point in time
C. The profit or loss made by a business over a period of time
D. The value of a business at a point in time
5. Depreciation is applied to non-current assets in the statement of financial position in order to

A. Show a profitability valuation of the non-current assets
B. Show a true and fair value of the non-current assets
C. Show how the non-current assets are affected by inflation
D. Show what the non-current assets could make if leased out
6. What would be the most likely impact on trade receivables days if invoice discounting was offered to and
accepted by a large customer of a business?
A. Trade receivables days would no longer exist
B. Trade receivables days would reduce

C. Trade receivables days would increase

D. Trade receivable days would not be affected
7. ___________in accounting, is when the costs to acquire an asset are expensed over the life of that asset rather
than in the period it was incurred?
A. Purchasing.
B. Capitalization.
C. Selling.
D. Financing
8. Capitalization is the sum of a corporation’s stock, long term debts &________?

A. Liquid Liability
B. Retained earnings
C. Fixed asset.
D. Short term debts.
9. __________ is a situation in which actual profits of a company are not sufficient enough to pay interest on
debentures, on loans and pay dividends on shares over a period of time?
A. Under capitalization
B. Over capitalization
C. Market capitalization
10. Asset structure = _________+__________.

A. current asset+fixed asset
B. tangible asset+fixed asset
C. fixed asset+current asset
D. intangible asset+current asset
11. In finance, "working capital" means the same thing as __________.

A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current liabilities.

12. In deciding the appropriate level of current assets for the firm, management is confronted with
_____________.
A. a trade-off between profitability and risk.
B. a trade-off between liquidity and marketability.
C. a trade-off between equity and debt.
D. a trade-off between current assets and profitability.
13. ___________ varies inversely with profitability.

A. Liquidity.
B. Risk.
C. Accounts.
D. Trade.
14. 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.
15. 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.
16. To financial analysts, "gross working capital" means the same thing as ________.
A. fixed assets.
B. current assets.
C. working capital.
D. cost of capital.
17. An example of fixed asset is________.

A. Live stock.
B. Value stock.
C. Income stock.
D. All of the above.

18. Which one of the following is not the determinant of the working capital?
A. size of the firm
B. operating cycle
C. terms of credit
D. competitors
19. Permanent working capital ___

A. will vary at all times
B. will vary with volumes
C. fixed at all times
D. fluctuates according to the season
20. Which one of the following is not a method to find working capital requirement?
A. percent of sales method
B. working capital components method
C. operating cycle method
D. physical method
21. The Capital used for meeting routine and repetitive expenses of day to day business operations is
called____.
A. Reserve capital
B. Working capital
C. Fixed capital
D. Regular capital
22. Gross working capital represents __________.

A. total current liabilities
B. the excess of current assets over current liabilities
C. total current assets
D. total liquid assets
23. Net working capital is the excess of current assets over ________.
A. Current liabilities
B. Long term liabilities
C. Contingent liabilities
D. Fixed liabilities

24. A positive (net) working capital will arise when current assets exceed _________.
A. Fixed liabilities
B. Contingent liabilities
C. Long term liabilities
D. Current liabilities
25. The net working capital, being the difference between current assets and current liabilities is a _______.
A. Misleading concept
B. Quantitative concept
C. Qualitative concept
26. The Funds required by way of permanent working capital should be provided by __________.
A. Indigenous banks
B. Commercial banks
C. RBI
D. Proprietors
27. Service and Financial concerns may have _____.

A. Longest operating cycle
B. Shortest operating cycle
C. Manufacturing phase
D. None of these
28. _____ is that minimum amount which should always be present in the business to carry out the activities
without a break.
A. Net working capital
B. Gross working capital
C. Permanent working capital
D. Temporary working capital
29. Working capital over and above the fixed working capital would be termed as _______.
A. Temporary working capital
B. Permanent working capital
C. Net working capital
D. Gross working capital

30. __________ denotes a situation of too much or excessive working capital.

A. Gross working capital
B. Redundant working capital
C. Permanent working capital
D. Temporary working capital
31. _________ being the life blood of a business requires to be maintained in reasonably adequate quantity to
run business successfully.
A. Working capital
B. Proper documents
C. Assets
D. Petty cash
32. According to ________ working capital refers to the company’s total investment in current assets.
A. Net concept
B. Gross concept
C. Equal concept
D. Accounting concept
33. According to ________ working capital refers to the difference between current assets and current
liabilities.
A. Equal concept
B. Accounting concept
C. Net concept
D. Gross concept
34. ___________ refers to all stages involved from raw materials to realization of cash.
A. Loan
B. Operating cycle
C. Business cycle
D. Cash flow cycle
35. The funds required for running an organisation are generally called as ____________.
A. Overdraft
B. Cash credit
C. Working capital
D. Operating profit

36. The __________ is required to ensure circulation of operating cycle.

A. Regular working capital
B. Fixed working capital
C. Reserve working capital
D. Variable working capital
37. ________ is the excess amount over the requirement for regular working capital.
A. Variable working capital
B. Fixed working capital
D. Regular working capital
38. The working capital required to meet the seasonal need of the business is called _______.
A. Fixed working capital
B. Variable working capital
C. Special working capital
D. Seasonal working capital
39. ___________ is required to meet special exigencies such as launching of extensive marketing campaigns for
conducting research.
A. Seasonal working capital
B. Special working capital
D. Regular working capital
40. The statement of changes in financial position prepared to determine only the sources and uses of working
capital between two dates of balance sheet is known as __________.
A. Cash flow statement
B. Memorandum Balance sheet
C. Fund Flow statement
D. Profit and loss account.

Answer Key:
1 2 3 4 5 6 7 8 9 10
A D A C B B B B B C
11 12 13 14 15 16 17 18 19 20
C A A C B B A D C D
21 22 23 24 25 26 27 28 29 30
B C A D C D B C A B
31 32 33 34 35 36 37 38 39 40
A B C B C A C D B C

Unit 4: Capital Structure

1. Financial structure refers to
A. Short term resources
B. All the financial resources
C. Long term resources
D. All of these
2. Real ownership of a company rests with

A. Board of directors
B. Equity shareholders
C. Preference shareholders
D. All of these
3. Preference share is a __________security compared to equity share

A. Senior
B. Junior
C. Equal
D. None of these
4. Which of the following features of preference shares are similar to those of equity shares?
A. Redeemability
B. No obligation to pay dividend
C. Voting rights
D. Charge over assets
5. Which one of the following is not a source of long-term finance?

A. Equity capital
B. Preference capital
C. Debenture capital
D. Commercial paper

6. A cumulative preference share is one

A. In which all the unpaid dividends are carried forward and payable
B. Which allows the issuing company the right to call the preference shares wholly or partly at a certain price
C. Which can be converted into redeemed shares
D. Which can be redeemed
7. Which of the following, from the firm’s point of view, can be considered as the advantage of using equity
capital as a source of long-term funds
A. If does not involve any fixed obligation for payment of dividends
B. Equity dividends are payable from post-tax earnings. They are not tax-deductible expenses
C. It enhances the creditworthiness of the Company
D. Both A and C
8. Long term finance is required for

A. Current assets
B. Fixed assets
C. Intangible assets
D. None of these
9. Long term sources of finance are also required for

A. Permanent part
B. Temporary part
C. Both A and B
D. None of these
10. Cost of equity capital is

A. Lesser than the cost of debt capital
B. Equal to the last dividend paid to the equity shareholders
C. Equal to the dividend expectations of equity shareholders for the coming year

11. While calculating weighted average cost of capital

A. Retained earnings are excluded
B. Bank borrowings for working capital are included
C. Cost of issues are included
D. Weights are always based on market value or on book value
12. Which of the following is not an advantage of using book value weights for computing the cost of capital?
A. The calculation of the weights is very simple
B. Book value weights are likely to fluctuate less over a period as these as not affected by the
fluctuations in market prices
C. Book value weights are the only usable basis when market values are not obtainable or reliable
D. Book value weights are consistent with the concept of cost of capital
13. Cost of equity capital

A. Is lesser than the cost of debt capital
B. Is equal to the dividend rate expectations of equity shareholders for the coming year
C. Is equal to the discounting factor which equates the market price from the equity issue to the present
value of future dividend payments
D. Is equal to the dividend rate declared on equity shares
14. The optimum capital structure is obtained when the market value per equity share is at
A. Maximum
B. Minimum
C. Zero
D. None of these
15. Which of the following is not a feature of an optimal capital structure?

A. Profitability
B. Safety
C. Flexibility
D. Control

16. Which of the following does NOT directly affect a company’s cost of equity?
A. Return of assets
B. Expected market return
C. Risk free rate of return
D. The company’s beta
17. Cost of capital comprises premium both for business and --------------- risks.
A. Financial
B. Business
C. Capital
D. Overwriting
18. Cost of each component of capital is termed as ------ cost.

A. Opportunity
B. Fixed
C. Specific
D. Explicit
19. According to traditional approach, cost of capital is affected by

A. Debt equity mix
B. Liquidity solvency mix
C. Capital gearing mix
20. In case of ----- weights method, weights are assigned to each source of funds in proportion of financing
inputs the firm intends to employ
A. Marginal
B. Average
C. High
D. Low

21. The capital structure is how a firm ______ its overall operation.
A. finance
B. assets and liabilities
C. capital
D. none of these.
22. Debt comes in form of _______.

A. debentures
B. shares
C. bond issues
D. both b and c.
23. Capital structure can be mixtures of firm ______, ________ and _____.
A. long term debt, short term debt
B. common equity, preferred equity
C. both a and b
D. only b.
24. The term capital structure should not be confused with _________ and _______.
A. asset structure
B. financial structure
C. both a and b
25. According to ______ principle, ideal pattern of capital structure tends to minimize cost of financing and
maximize the earnings per share.
A. cost principle
B. risk principle
C. control principle
D. flexibility principle.

26. According to _______and _______, financial leverage affects both the magnitude and the variability of
earnings per share and return on equity.
A. Ezra Solomon and John Prigle
B. Modigiliani and Miller
C. Krause and Litzenberger
D. Baron and Scott.
27. In trading on equity when the borrowed amount is relatively large compared to the equity, it is termed as
_____.
A. trading on thick quality
B. trading on thin equity
C. neither a nor b
D. both a and b
28. Which of the following is not advantage in trading on equity?

A. enhance earning
B. high interest rate than earning
C. favourable tax treatment
D. all the above
29. Trading on equity have an advantage of ______

A. enhance earning
B. favourable tax treatment
C. neither a nor b
D. both a and b
30. Many companies use trading on equity to improve their______

A. to improve company liquidity
B. reduce dept
C. earnings per share
D. to forecast financial plan

31. In capital structure decision, debt-to equity (D/E) ratio is used to analysis_____
A. company turnover position
B. how risky a company is
C. neither a and b
D. both a and b
32. Debt and equity capital are use to fund______

A. business operations
B. capital expenditures
C. business acquisitions
D. all the above.
33. Capital structure is how a firm _______ its overall operation and growth by using different sources.
A. finances
B. fund
C. none of these.
D. both a and b
34. Calculation of composite cost of capital involves multiplying the _____ of each capital component.
A. cost
B. capital investment
C. capital
D. both a and b
35. Which principle deals with the ideal capital structure and that minimize cost of financing?
A. cost principle
B. management principle
C. risk principle
D. none of these

36. What are the merit of equity shares?

A. provision of long term finance
B. payment of profit
C. rate of dividend
D. all of the above
37. ___________ is one of the important sources of medium- and long-term financing where the owner of an
asset gives another person, the right to use that asset against periodical payments.
A. Lease financing
B. Internal financing
C. External financing
38. ________ finance is the finance or capital which is generated internally by the business unlike
finances such as loan which is externally arranged by bank or financial institutions
A. External sources
B. Internal sources
C. Both a & b
39. Neither dividend nor interest is payable on _________ profit

A. Retained
B. Convertible
C. Non-convertible
D. Reversible
40. ________ is a share which entitles the holder to a fixed dividend, whose payment takes priority over that
of ordinary share dividends
A. Equity shares
B. Preference shares
C. Nominal shares
D. Ordinary shares

41. Return paid on debenture is _______

A. Interest
B. Dividend
C. Commission
D. Tax
42. Business finances are classified based on time period, ownership & control
A. Time period
B. Ownership
C. Control
D. All of the above
43. Internal sources & external sources are the two sources of generation of _______.
A. Capital
B. Loan
C. Investment
D. Shares
44. Financial leverage can be measured in ___________________.

A. Stock term.
B. Flow term.
C. Both (a) and (b).
D. None of these.
45. ______________ is the price at which the bond is traded in the stock exchange.
A. Redemption value.
B. Face value.
C. Market value.
D. Maturity value.

46. __________ is the employment of an asset is sources of fund for which the firm has to pay a fixed cost or
fixed return.
A. Financial management.
C. Asset management.
D. Leverage.
47. _____________ is the minimum required rate of earnings or the cut off rate of capital expenditure.
A. Cost of capital.
B. Working capital
C. Equity capital.
D. None of the above.
48. X ltd issues rupees 50,000 8% debentures at a discount of 5%. The tax rate is 50% the cost of debt capital
is __________.
A. 4%.
B. 4.2%.
C. 4.6%.
D. 5%.
49. Financial leverage refers to the rate of change in earnings per share for a given change in earnings
___________________.
A. before tax.
B. before interest.
C. before interest and tax.
D. after interest and tax.
50. Financial risk perception is an influencing factor of _____________.

A. equity structure.
B. preference structure.
C. debt structure.
D. capital structure.

Answer Key:
1 2 3 4 5 6 7 8 9 10
B B A B D A D B A D
11 12 13 14 15 16 17 18 19 20
D D C A B A A C A A
21 22 23 24 25 26 27 28 29 30
A C C C A A B B D C
31 32 33 34 35 36 37 38 39 40
B C A A A D A B A B
41 42 43 44 45 46 47 48 49 50
A D A C C D A B C D

Unit 5: Capital Budgeting

1. Capital Budgeting is a part of _____________.
A. Investment Decision
B. Working Capital Management
C. Marketing Management
D. Capital Structure
2. Capital Budgeting deals with ______________.

A. Short-term Decisions
B. Long-term Decisions
C. Both (a) and (b)
D. Neither (a) nor (b)
3. Which of the following is not used in Capital Budgeting?

A. Time Value of Money
B. Sensitivity Analysis
C. Net Assets Method
D. Cash Flows
4. Capital Budgeting Decisions are _________________.

A. Reversible
B. Irreversible
C. Unimportant
D. All of the above
5. Which of the following is not incorporated in Capital Budgeting?

A. Tax-Effect
B. Time Value of Money
C. Required Rate of Return
D. Rate of Cash Discount
6. A sound Capital Budgeting technique is based on ___________________.

A. Cash Flows
B. Accounting Profit
C. Interest Rate on Borrowings
D. Last Dividend Paid
7. Capital Budgeting Decisions are based on ______________.

A. Incremental Profit
B. Incremental Cash Flows
C. Incremental Assets
D. Incremental Capital
8. Which of the following does not affect cash flows proposal?

A. Salvage Value
B. Depreciation Amount
C. Tax Rate Chang
D. Method of Project Financing
9. Cost of the project is 6,00,000, life of the project is 5 years annual cash flow is 2,00,000 cut off rate is 10%
the discounted payback period is ______________.
A. 2 yrs.
B. 2 yrs. 6 months.
C. 3 yrs.
D. 3 yrs. 9 months.
10. Cash Inflows from a project includes ______________.

A. Tax Shield of Depreciation
B. After-tax Operating Profits
C. Raising of Funds
D. Both (a) and (b)
11. In case of divisible projects, which of the following can be used to attain maximum NPV?
A. Feasibility Set Approach
B. Internal Rate of Return
C. Profitability Index Approach
D. Mean
12. Profitability Index, when applied to Divisible Projects, impliedly assumes that ____________.
A. Project cannot be taken in parts
B. NPV is linearly proportionate to part of the project taken up
C. NPV is additive in nature
D. Both (b)and (c)
13. Which of the following is a risk factor in capital budgeting?

A. Industry specific risk factors
B. Competition risk factors
C. Project specific risk factors
D. All of the above
14. Net present value is a popular method which falls __________.

A. Within non- discount cash flow method
B. Within discount cash flow method
C. Equal With in non- discount cash flow method
D. No discount cash flow

15. 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 & out flow
16. While evaluating capital investment proposal the time value of money is considered in case of _______.
A. Pay back method
B. Accounting rate
C. Internal rate
D. Discounted cash flow
17. 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
18. _______ method takes into consideration the time value of money and attempts to calculate the return on
investments by introducing the factor of time element.
A. Net Present Value
B. Internal Rate of Return
C. Payback period
D. Profitability index
19. Under _______ method the discount rate is determined internally.

A. Profitability index
B. Net Present Value
C. Internal Rate of Return
D. Sensitivity Analysis
20. Internal Rate of Return method is also known as _______.

A. Time adjusted rate of return
B. Profitability index method
C. Net Profit Value
D. Sensitivity Analysis
21. Profitability index is also called as _________.

A. Sensitivity Analysis
B. Net Profit Value
C. Benefit Cost Ratio
D. Internal Rate of Return

22. ________ is the relationship between present value of cash inflows and the present value of cash outflows.
A. Internal Rate of Return
C. Payback period
D. Profitability index
23. The proposal is accepted if the profitability index is _______.

A. Less than 100
B. Less than 10
C. more than 1
D. More than 5
24. The proposal is rejected in case the profitability index is ______.

A. Less than 1
B. More than 10
C. More than 5
D. More than 25
25. _________ method is the slight modification of the Net Present Value method.
A. Internal Rate of Return
B. Profitability index
C. Accounting Rate of Return
D. Sensitivity analysis
26. Cash flow analysis is based on the ______.

A. capital
B. fixed assets
C. cash concept of funds
D. working capital
27. NPV Stands for ___________.

A. Net Profit Value
C. Net Probable Value
D. Net Public Value
28. ERI Stands for ___________.

A. Expected Return on Interest
B. Express Request Information
C. Effective Rate of Interest
D. Effective Request of Income

29. FV Stands for _______.

A. Future Value
B. Forecast Value
C. Forum Value
D. Fourth Value
30. PV Stands for _____________.

A. Press Value
B. Present Value
C. Perfect Value
D. Principal Value
31. While evaluating capital investment proposals, the time value of money is considered in case of _______.
A. Payback period Method
B. Discounted Cash Flow Method
C. Internal Rate of Return Method
D. Accounting Rate of Return Method
32. Depreciation is included in the case of _______.

A. Payback period Method
C. Discounted Cash Flow Method
33. The Cash inflows on account of operations are presumed to have been reinvested at a the cut off rate in case
of _________.
A. Discounted Cash Flow Method
B. Accounting Rate of Return Method
C. Net Present Value
D. Payback period Method
34. ______ is the rate which equates the present value of expected future cash flows with the cost of the
investment.
A. Net present Value Method
B. Internal Rate of Return Method
C. Payback period Method
D. Discounted Cash Flow Method
35. _________ is the annual average yield on a project.

A. Discounted Cash Flow Method
B. Net present Value Method
C. Payback period Method

36. Capital Budgeting is also known as _______.

A. Investment Decision making
B. Planning capital expenditure
C. Capital Expenditure decision
D. All the above
37. Internal Rate of Return and ________ are the same.

A. Time Adjusted Rate of Return
B. Net present Value Method
C. Investment Management
D. Payback Period Method
38. While evaluating capital investment proposals time value of money is used in which of the following
technique __________.
A. Payback Period Method
B. Accounting Rate of Return Method
C. Internal Rate of Return Method
D. Net present Value Method
39. IRR would favour project proposals which have _______.

A. Heavy cash inflows in the early stages of the project
B. Evenly distributed cash inflows throughout the project
C. Heavy cash inflows at the later stages of the project
40. IRR Stands for _________.

A. Import Rate of Return
B. Impact Rate of Return
C. Internal Rate of Return
D. Improved Rate of Return
41. ARR Stands for ___________.

A. Average Rate of Return
B. Appropriate Rate of Return
C. Approved Rate of Return
D. Applicable Rate of Return
42. When NPV is positive ________.

A. NPV=Zero
B. NPV<Zero
C. NPV >Zero
D. None of these

43. When NPV is negative __________.

A. NPV >Zero
B. NPV<Zero
C. NPV=Zero
D. None of these
44. In Profitability Index (PI) method accept the project if _________.

A. PI = 1.0
B. PI < 1.0
C. PI = 2.0
D. PI > 1.0
45. _________________ is a long-term planning for financing proposed capital outlay.

A. Capital Budgeting.
B. Budgeting.
C. Cash Budget.
D. Sales Budget.
46. Which of the following is the first step in capital budgeting process?
A. Final approval.
B. Screening the proposal.
C. Implementing proposal.
D. Identification of investment proposal.
47. The term _________________ refers to the period in which the project will generate the necessary cash
flow to recoup the initial investment.
A. internal return.
B. payback period.
C. discounting return.
D. accounting return.
48. A mutually exclusive project can be selected as per payback period when it is _________.
A. less.
B. more.
C. more than 5 years.
49. Initial outlay 50,000, life of the asset 5 yrs., estimated annual cash flow 12,500, IRR = ____________.
A. 5%
B. 6%
C. 8%
D. 10%

50. A project costs Rs, 1,00,000 annual cash flow of Rs. 20,000 for 8 years. It’s payback period is
______________.
A. 1 year.
B. 2 years.
C. 3 years.
D. 5 years.
Answer Key:
1 2 3 4 5 6 7 8 9 10
A B D B D A B D D D
11 12 13 14 15 16 17 18 19 20
C D D C C C C A C A
21 22 23 24 25 26 27 28 29 30
C D C A B C B C A B
31 32 33 34 35 36 37 38 39 40
B D A B D D A D A C
41 42 43 44 45 46 47 48 49 50
…………………….Thank You………………………

Question Bank - Multiple Choice Questions (MCQS) : Unit I - Business Finance

Uploaded by

Copyright:

Available Formats

Question Bank - Multiple Choice Questions (MCQS) : Unit I - Business Finance

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Question Bank - Multiple Choice Questions (MCQS) : Unit I - Business Finance

Uploaded by

Copyright:

Available Formats

DNYANSAGAR ARTS AND COMMERCE COLLEGE, BALEWADI, PUNE – 45

Subject: Cases in Finance (606 A) CLASS: TYBBA (Sem-VI) (2013 PATTERN)