ANSWER KEY Financial Management, Chapter 1 1 (b), 2 (a), 3 (a), 4 (d), 5 (b), 6 (a), 7 (b), 8 (c), 9 (c), 10 (c)

1. a) b) c) d) 2. a) b) c) d) Financial Management deals with procurement and Short use Effective utilization Repayment Least cost is based on cash flows. Wealth maximization Profit maximization Wealth Minimization Profit Minimization of funds for the benefit of its stakeholders.

3. lead to investment in real assets. a) Investment Decisions b) Liquidity Decision c) Operating Decision d) Financing Decision 4. relate to the acquisition of funds at the least cost. a) Investment Decisions b) Liquidity Decision c) Operating Decision d) Financing Decision 5. Formulation of inventory policy is an important element of a) Financing b) Liquidity c) Dividend d) Taxation 6. Obtaining Finance is an important function of a) Treasurers b) Controller c) CFO d) Accountant _. .

7. Taxation and Insurance is an important function of a) Treasurers b) Controller c) CFO d) Accountant

_.

8. All corporate decisions have a) Production b) Operational c)Financial d) Secondary 9. Two approaches to financial management are a) Traditional, operational b) Balanced, unbalanced c) Traditional, modern d) Current, future 10. Value a) Minimization b) Maintenance c) Maximization d) Alteration

implications.

and

approaches.

is the cardinal rule of efficient financial managers today.

Time value, Chapter 2 1 (a), 2 (a), 3 (a), 4 (b), 5 (c), 6 (a), 7 (c), 8 (a), 9 (d), 10 (d) 1. The important factors contributing to time value of money are _, _ a) Investment opportunities, preference for consumption, risk b) Purchasing power, compounding, discounting c) Investment opportunities, preference for consumption, discounting d) Purchasing power, preference for consumption, risk 2. a) b) c) d) 3. a) b) c) d) 4. a) b) c) d) 5. a) b) c) d) During periods of inflation, a rupee has a Higher purchasing power Lower purchasing power Equal purchasing power Different purchasing power _ than a rupee in future.

and _.

As future is characterized by uncertainty, individuals prefer Current, future Future, current Daily, annual Past, future

Consumption to

consumption.

There are two methods by which time value of money can be calculated by _ Compounding, annuity Compounding, discounting Annuity, present value Present value, discounting

and _ techniques.

is created out of fixed payments each period to accumulate to a future sum after a specified period. Annual Sum Fixed fund Sinking fund Fixed sum

6. The of a future cash flow is the amount of the current cash that is equivalent to the investor. a) Present value b) Current value c) Compounding d) Annuity 7. a) b) c) d) 8. a) b) c) d) 9. a) b) c) d) An annuity for an infinite time period is called Discounting Capacity Perpetuity Capital The reciprocal of the present value annuity factor is called Capital Recovery Factor Annual Recovery factor Time recovery factor Preference recovery factor Doubling period rules are, rule of 71, 96 72, 96 71, 69 72, 69 and rule of . .

10. A person deposits Rs.25000 in a bank that pays 6% interest half yearly. Calculate the amount at the end of 3 years. a) 26850 b) 27850 c) 28850 d) 29850

Cost of Capital, Chapter 3 1 (d), 2 (c), 3 (c), 4 (a), 5 (b), 6 (c), 7 (b), 8 (a), 9 (c), 10 (c) 1. is the mix of long term sources of funds like debentures, loans, preference shares, equity shares and retained earnings in different ratios. a) Working capital b) Cost of capital c) Leverage d) Capital structure 2. The capital structure of a company should generate a) Working capital b) Cost of capital c) Maximum Return d) Leverage to the shareholders.

3. The capital structure of the company should be within the a) Earning capacity b) Maximum limit c) Debt capacity d) Minimum Limit 4.An ideal capital structure should involve minimum risk of a) loss of control b) loss of finance c) loss of capital d) loss of equity 5. do not have a fixed rate of return on their investment.

to the company.

a) Preference shareholders b) Equity shareholders c) Debenture holders d) Banker 6. According to Dividend forecast approach, the intrinsic value of an equity share is the sum of present value of associated with it. a) Share b) Money c) Dividend d) Capital 7. Capital asset pricing model approach is: a) Ke= Rf - b(Rm+Rf) b) Ke= Rf + b(Rm-Rf) c) Ke= Rf + b(Rm+Rf) d) Ke= Rf - b(Rm-Rf) 8. Earnings price ratio approach: Ke =E1/P, Where E1 isa) Expected EPS one Yr. hence b) Earning price per share c) Earning Ratio per share d) Earning capacity per share 9.Supersonic industries has entered into an agreement with Indian Overseas Bank for a loan of Rs. 10Cr. With an interest rate of 10%. What is the cost of the loan if the tax rate is 45%. a) 7.5% b) 6.5% c) 5.5% d) 4.5% 10.According to dividend forecast approach, the intrinsic value of an equity share is the sum of the present values of associated with it. a) Share b) Money

c) Dividend d) Capital Leverage, Chapter 4 1 (b), 2 (a), 3 (c), 4 (b), 5 (c), 6 (d), 7 (a), 8 (a), 9 (b), 10 (b) 1. a) b) c) d) arises due to the presence of fixed operating expenses in the firms income flows. Financial Leverage Operating Leverage Operating Cycle Financial Ratio _.

2. EBIT is calculated as a)Q(S-V)-F b)F(S-V)-Q c)Q(V-S)-F d)S(Q-V)-F

3. Higher operating risks can be taken when a) Expense level b) Capital Structure c) Income Level d) Working Capital 4. Dividend on a) Small value shares b) Preference Shares c) Equity Shares d) All the shares is a fixed charge.

of companies are rising.

5. Financial Leverage is also referred to as trading on a) Preference b) Shares c) Equity d) Gold 6.There are three measures of leverage leverage. a) Primary, secondary, total b) Combined, current, future c) Financial, Investment, Dividend d) Financial, operating, combined leverage,

_.

leverage and

7. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL). a) Plus b) Minus c) Divided by

e) Multiplied by 8. Financial leverage refers to the mix of debt and equity in the a) Capital structure b) Assets c) Net profit d) EBIT 9.High financial costs are associated with DFL. a) Low b) High c) Medium d) None of the above 10. A high DOL is a measure of a) Low b) High c) Medium d) None of the above Capital Structure, Chapter 5 1 (a), 2 (b), 3 (a), 4 (b), 5 (d), 6 (a) 1.Financing mix decisions have no impact on the a) Operating Earnings b) Production c) Operations d) Finance 2. The value of a firm is dependent on its expected future a) Loss, return b) Earnings, return c) Projects, loss d) Projects, earnings of the firm. business risk and vice versa. of the firm.

and the required rate of

3. and are two important sources of long term sources of finance of a firm. a) Equity, debt b) Fixed capital, working capital c) Short term loan, long term loan d) Income, profit 4. As the ratio of debt to equity increases, the a) Market value, WACC b) WACC, Market value c) Profit, WACC d) WACC, loss 5. As per the NOI approach the overall a) Net profit declines and of firm increases.

rate remains constant for all degrees of leverage.

b) Dividend c) Market d) Capitalization 6. is the process of buying a security at lower price in one market and selling it in another market at a higher price bringing about . a) Arbitrage, equilibrium b) Arbitrage, leverage c) Leverage, Arbitrage d) Capitalization, Arbitrage Capital budgeting, Chapter 6 1(a), 2 (b), 3 (a), 4 (b), 5 (a), 6 (d), 7 (d), 8 (a), 9 (a), 10 (b) 1. make or mar a business. a) Capital Budgeting b) Capital c) Fixed capital d) Working capital 2. decisions involve large outlay of funds now in anticipation of cash inflows in future. a) Make or buy b) Capital budgeting c) Fixed capital d) Working capital 3. Social, political, economic and technological forces make capital budgeting decisions _. a) Complex b) Simple c) Analytical d) Easy

4. _decisions are very expensive. a) Make or buy b) Capital budgeting c) Fixed capital d) Working capital 5. Capital expenditure decisions are a) Irreversible b) Reversible c) Very simple d) Middle level .

6. Forcasting of future operating cash flows suffers from a) Certainty, highly uncertain b) Certainty, certain c) Uncertainty, certain

because the future is

d) Uncertainty, highly uncertain 7. Post completion audit is a) First Step b) Third step c) Fifth step d) Final step in the phases of capital budgeting decisions.

8. Identification of investment opportunity is a) First Step b) Third step c) Fifth step d) Final step

in the phases of capital budgeting decisions.

9. Analyzing the demand and supply condition of the market for the companys products could be a potential investment proposal. a) Fertile b) Futile c) Primary d) Secondary 10. Generation of ideas for capital budgets and screening the same can be considered the most capital budgeting decision. a) Useless b) Crucial c) Beneficial d) None of the above

source of

phase of

Risk analysis in capital budgeting, Chapter 7 1 (b), 2 (d), 3 (a), 4 (c), 5 (b), 6 (a), 7 (b), 8 (c), 9 (a), 10 (c) 1. is measured by the variability of expected returns of the project. a) Stand alone profit b) Stand alone risk c) Net profit d) Dividend paying capacity 2. Market risk is measured by the effect of the project on the a) Theta b) PI c) IRR d) Beta 3. Firms cannot of the firm.

market risk in the normal course of business.

a) Diversify b) Ignore c) Multiply d) Generate 4. Impact of U.S. sub prime crisis on certain segments of Indian Economy is an example of risk. a) National b) Regional c) International d) Industrial 5. The RADR for appraisal of projects has two components i,e, a) Rate, free premium b) Rate, risk free premium c) Risk free rate, risk premium d) Premium rate, return 6. Risk premium is the _ for assumption of additional risk of project. a) Additional return b) Risk free return c) Discounted Inflow d) None of the above _and

7. Higher the risk a) Lower b) Higher 8. CE coefficient is the a) Return adjusted factor b) Risk premium c) Risk adjusted factor d) Certain Earning

the premium.

_.

9. Discount factors to be used under CE approach is a) Risk free rate b) Risk adjusted rate c) Sensitivity rate d) Risk premium rate 10. Because of high a) Outflow b) Turnover c) Conservation d) Rating Working Capital, Chapter- 8 CE clears only good projects.

_.

1 (a), 2 (b), 3 (a), 4 (c), 5 (a), 6 (b), 7 (b), 8 (a), 9 (c), 10 (b) 1.Maintaining adequate working capital at the satisfactory level is crucial for the of a firm a) Maintaining, competitiveness b) Maintaining, profitability c) Maintaining, capital structure d) Maintaining, investment 2.Prepaid expenses are a) Current liability b) Current asset c) Term loan d) Provision 3.Provision for tax is a) Current liability b) Current asset c) Term loan d) Provision 4.A firm must have a) b) c) d) As much possible As low as possible Adequate None of the above . _.

working capital.

5. refers to the amount invested in current assets. a) Gross working capital b) Net working capital c) Investment d) Current investment 6. When current assets exceed current liabilities the net working capital is a) Negative b) Positive c) None of the above 7 Permanent working capital is called a) Current b) Fixed c) Invested d) Capitalized working capital. .

8. Objective of working capital management is achieving a trade off between and . a) Liquidity, profitability b ) Assets, liabilities c) Cash, inventory

d) Fixed assets, current assets 9. To finance the operations in a) Factory b) Office work c) Operating cycle d) None of the above of a firm, working capital is required.

10. To finance operations during the time gap between working capital is required. a) Credit sale, cash sale b) Credit sale, realization of money c) Sale, purchase d) Credit purchase, cash purchase Cash Management, Chapter- 9 1 (b), 2 (a), 3 (c), 4 (c), 5 (d), 6 (a), 7 (a), 8 (b), 9 (c), 10 (b) 1. Management of cash balances can be done by a) Trade credit, investing surplus cash b) Deficit financing, investing surplus cash c) Deficit financing, trade credit d) Cash budget, control 2. The four motives of holding cash are _, a) Transaction, speculative, precautionary, compensating b) Budgetary, speculative, precautionary, compensating c) Investment, Transaction, speculative, precautionary d) Investment, budgetary, speculative, precautionary and

and

and

3. The greater the creditworthiness of the firm in the market lesser is the need for a) Transaction b) Speculative c) Precautionary d) Compensating

balances.

4. refers to the credit extended by the supplier of goods and services in the normal course of business transactions. a) Transaction b) Credit worthiness c) Trade credit d) Holding cash 5. When cheques are deposited in a bank, credit balance increases in the firms books but not in banks books until the cheque is cleared and money realized. This is called as . a) Transaction float b) Credit worthiness c) Trade credit

d) Collection float

6. According to Baumol model, the total cost associated with cash management has two elements and . a) Cost of conversion of marketable securities into cash, opportunity cost b) Marketable securities, conversion expense c) Forecasting expense, opportunity cost d) None of the above 7. The MO model assumes that cash balances randomly fluctuate between a _ a) Upper bound, lower bound b) Trade credit, investing surplus cash b) Deficit financing, investing surplus cash c) Deficit financing, trade credit d) Cash budget, control 8. Cash management is concerned with determination of relevant and their efficient use. a) Fixed asset balances, current asset balances b) levels of cash balances, near cash assets c) Upper bound, lower bound b) Trade credit, surplus cash 9. Baumol model assumes that cash flow does not a) Increase b) Decrease c) Fluctuate d) None of the above 10.The Miller-Orr model a) Does not consider b) Considers Inventory Management, Chapter-10 1 (a), 2 (b), 3 (c), 4 (b), 5 (d), 6 (c), 7 (a), 8 (d), 9 (a), 10 (b) 1. Lead time is the time required to a) Obtain new inventory b) Sell finished stock c) Obtain new order d) Make the product _. daily cash fluctuations. . balances and and a _ .

2. Costs of not carrying enough inventory is

_.

a) lost sales. b) Customer disappointment. c) Possible worker layoffs d) All of these. 3. EOQ is the order quantity that a) Minimizes total ordering costs b) Minimizes total carrying costs c) Minimizes total inventory costs d) The required safety stock 4. a) LIFO b) FIFO c) HIFO d) NIFO .

assumes that the raw materials (goods) received first are used first.

5. Maximum level is that level above which stock of inventory should a) Always b) Sometimes c) Yearly d) Never 6.Both excess and shortage of inventory affect the firms a) Reputation b) Capacity to work c) Profitability d) None of the above .

rise.

7.Precautionary motive of holding inventory is for guarding against the risk of a) Change in demand b) Change in capital structure c) Change in production d) None of the above 8. Costs incurred for maintaining the inventory in warehouse are called a) Setting up cost b) Ordering cost c) Labour cost d) Carrying cost 9. A items are value but in numbers. a) High, small b) Small, high c) Small, medium d) Medium, high 10. C items are a) High, small b) Small, high value but in numbers. .

and supply.

c) Small, medium d) Medium, high

Receivables Management, Chapter-11 1 (a), 2 (a), 3 (a), 4 (d), 5 (b), 6 (b), 7 (c), 8 (d), 9 (c), 10 (a) 1. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in: a) An increase in the average collection period. b) A decrease in bad debt losses. c) An increase in sales. d) Higher profits. 2. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount? a) Lower than the present level. b) No change from the present level. c) Higher than the present level. d) Unable to determine without more information. 3. An increase in the firm's receivable turnover ratio means that: a) It is collecting credit sales more quickly than before. b) Cash sales have decreased. c) It has initiated more liberal credit terms. d) Inventories have increased. 4.Costs of maintaining receivables are , and costs. a) Capital, works , delinquency b) Administration, delinquency, works c) Capital, administration, works d) Capital, administration, delinquency 5.To accelerate the turnover of receivables, a firm may either shorten the discount period or increase the discount offered a) False b) True 6. A period of Net 30 means that it allows to its customers 30 days of credit with a) No inducement, late payment b) No inducement, early payment c) Inducement, Late payment d) Inducement, early payment 7. refer to the criteria for extending credit to customers. a) Debit standard b) Capital structure c) Credit standards for .

d) None of the above 8. A cash discount of 2/10 net 20 means that a a) Cash discount of 20%, 20th day b) Cash discount of 2%, 20th day c) Cash discount of 20%, 10th day d) Cash discount of 2%, 10th day 9. Optimum credit policy maximizes the a) Number of debtors of the firm b) Number of creditors of the firm c) Value of the firm d) Taxes of the firm is offered if the payment is made

10. Credit policy to be adopted by a firm is influenced by strategies pursued by its competitors. a) True b) False

Dividend decision, Chapter-12 1 (d), 2 (d), 3 (c), 4 (b), 5 (a), 6 (b), 7 (a), 8 (d), 9 (c),10 (b) 1. Retained earning are a) An indication of a company's liquidity. b) The same as cash in the bank. c) Not important when determining dividends. d) The cumulative earnings of the company after dividends. 2. Which of the following is an argument for the relevance of dividends? a) Informational content. b) Reduction of uncertainty. c) Some investors' preference for current income. d) All of the above 3. All of the following are true of stock splits except : a) Market price per share is reduced after the split. b) The number of outstanding shares is increased. c) Retained earnings are changed. d) Proportional ownership is unchanged. 4. The dividend-payout ratio is equal to

a) The dividend yield plus the capital gains yield. b) Dividends per share divided by earnings per share. c) Dividends per share divided by par value per share. d)Dividends per share divided by current price per share. 5.Gordon's model assumes investors are a) Rational b) Irrational c) Ignorant d) None of the above and risk-averse.

6. Miller and Modigliani explain that a firm's dividend policy is a) Relevant b) Irrelevant c) Important d) None of the above

and has no effect on the share prices of the firm.

7. Dividends can be paid out in various forms such as a) Cash, scrip, bond, bonus shares b) Cash, scrip, bond, interest c) Gift, scrip, bond, bonus shares d) Gift, scrip, bond, interest

dividend,

dividend, dividend and

_.

8. uses the Dividend Capitalization Model to study the effect of the firm's dividend policy on the stock price. a) James b) Walter c) Miller and Modigliani d) Gordon 9. This is another assumption made by market. a) James b) Walter c) Miller and Modigliani d) Gordon that there are no transaction costs like brokerage involved in capital

10. As per approach, there is a direct relationship between P/E ratios and dividend pay-out ratio. a) Dividend Relevance b) Traditional c) MM d) None of the above

Assignment 3 (40 MCQs)

1. We all live under conditions of and .

a) Risk, return b) Risk, uncertainty c) Return, premium d) Uncertainty, premium

2. Find the present value of Rs.1,00,000 receivable after 10 yrs.if 10% is time preference for money. a) 38400 b) 38500 c) 38600 d) 38700 3 What is the future value of a regular annuity of Re.1 earning a rate of 12% interest p.a. for 5 Years? a) 5.353 b) 6.353 c) 7.353 d) 7.153 4.If a borrower promises to pay Rs.20000 eight years from now in return for a loan of Rs.12550 today, what is the annual interest being offered? a) 6% approx b) 7% approx c) 8% approx d) 9% approx 5.A loan of Rs.5,00,000 is to be repaid in 10 equal instalments. If the loan carries 12% interest p.a.. What is the value of one installment? a) 68492 b) 78492 c) 88492 d) 98492 6 If you deposit Rs.10,000 today in a bank that offers 8% interest, in how many years will this amount double by 72 rule? a) 9 b) 8 c) 7 d) 6 7 An employee of a bank deposits Rs.30,000 into his FD A/c at the end of each year for 20 yrs. What is the amount he will accumulate in his FD at the end of 20 years, if the rate of interest is 9%. a) 1534800 b) 1535000 c) 1535200 d) 1535400

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a) b) c) d)

8 decisions could be grouped into two categories. Make or buy Capital budgeting Fixed capital Working capital 9. Cost reduction Production Investment dividend 10. Financial Cost Economic Technical and revenue generation are the two important categories of capital budgeting.

a) b) c) d)

appraisal examines the project from the social point of view.

a) b) c) d)

a) b) c) d)

11. A11 technical aspects of the implementation of the project are considered in Financial Cost Economic Technical 12 Financial viability Cost viability Economic viability Technical viability of a project is examined by financial appraisal.

apprais al.

a) b) c) d)

a) b) c) d)

13.Among the elements that are to be examined under commercial appraisal, the most crucial one is the Supply of the product Demand for the product Cost of the product Elements of cost 14. Formulating is the third step in the evaluation of investment proposal a) No b)Yes 15. A a) Sunk cost b) Direct cost c) Indirect cost d) Works cost is not a relevant cost for the project decision.

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16. Effect of a project on the working of other parts of a firm is known as a) Separation principal b) Formulation c) Externalities d) After effects 17.The essence of separation principal is the necessity to treat separately from that of a) Production, operations b) Financing, production c) Investment, financing d) Investment, production 18. a) Ignores b) Considers c) None of the above Payback period elements.

elements of a project

tine value of money.

19.IRR gives a rate of return that reflects the a) Cost b) Profitability c) Cash inflows d) Cash outflows

of the project.

20.The methods of appraising an investment proposal can be grouped into methods. a) Traditional, modern b) Primary, secondary c) First, second d) old, new

methods and

21. The time gap between acquisition of resources from suppliers and collection of cash from customers is known as a) Financial year b) Calendar year c) Operating cycle d) Current cycle

22. is the average length of time required to produce and sell the product. a) Inventory period b) Stock cycle c) Inventory conversion period d) None of the above 23. is the average length of time required to convert the firm's receivables into cash. a) Receivables period

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b) Receivables cycle c) Receivables conversion period d) None of the above

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24. is length of time between firm's actual cash expenditure and its own receipt. a) Cash conversion period b) Cash cycle c) Cash period d) Cash and bank cycle 25. working capital. a) Lower b) Medium c) Higher d) None of the above 26. There is a firm. a) Positive direct correlation b) Negative direct correlation c) Negative indirect correlation d) Positive indirect correlation Capital intensive industries require amount of

between volume of sales and the size of working capital of a

27. Under inflationing conditions same level of inventory will require working capital. a) Decreased b) Increased c) Same d) zero 28. Longer the manufacturing cycle a) Larger b) smaller the investment in working capital.

investment in

29. is used to estimate working capital requirement of a firm. a) Trend analysis b) Risk analysis c) Capital rationing d) Operating cycle 30. Operating cycle approach is based on the assumption that production and sales occur on a) Continuous basis b) Alternate basis c) Alternate & Continuous basis d) None of the above 31. a) IRR b) NPV c) CE D) PI is considered to be superior to RADR.

Page

32.

analyse the changes in the project NPV on account of a given change in one of the input variables of the project. a) Sensitivity analysis b) Profitability Index c) Project evaluation d) Risk analysis 33. Examining and defining the mathematical relation between the variable of the NPV is one of the steps of _. a) Sensitivity analysis b) Profitability Index c) Project evaluation d) Risk analysis 34. Forecasts under Sensitivity analysis are made under different a) Political conditions b) Economic conditions c) Industry conditions d) Regional conditions 35. Receiving a required inventory item at the exact time needed, is a) ABC b) JIT c) FOB d) PERT 36. budgeting decisions. a) First Step b) Last step c) Middle step d) None of the above Post completion audit is b) Annuity c) Gratuity d) None of the above

37. Why is a discount rate used to calculate net present value? a) Money has value b) Money has enhancing value c) Money has diminishing value d) Money has constant value 38. What does net present value give? a) future values of present cash flows b) present value of present cash flow c) present value of future cash flows d) future values of future cash flows 39. Of what is sinking fund an example of ? a) Perpetuity

1
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in the phases of capital

40. What stream of cash flows continues indefinitely? a) Perpetuity b) Annuity c) Futurity d) None of the above

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