Financial Management MCQs with Answers

• by Eguardian India
• Banking and Finance MCQs

Financial Management MCQs with Answers for students of MBA BBA exams &
Preparing for competitive exams of Banking and Finance Institutions.

1. ___ is measured by the variability of expected returns of the project

Ans. Stand-alone risk.

2. Market risk is measured by the effect of the project on the ___ of the firm
Ans. Beta

3. Firms cannot ___ market risk in the normal course of business

Ans. Diversify

4. Impact of U.S sub-prime crisis on certain segments of the Indian economy is the
example of ___
Ans. International risk

5. Risk premium is the ___ that the investors require as compensation for the
assumption of additional risks of the project.
Ans. Additional return

6. RADR is the sum of ___ and ___.

Ans. The risk-free rate, the risk premium

7. Higher the risk ___ the premium.

Ans. Greater

8. CE coefficient is the ___.

Ans. Risk – adjustment factor

9. Discount factor to be used under the CE approach is ___.

Ans. The risk-free rate of interest

10. Because of high ___ CE clears only good projects.

Ans. Conservation

11. ___ is considered to be superior to RADR.

Ans. CE
12. ___ analyse the changes in the project NPV on account of a given change in one
of the input variables of the project
Ans. Sensitivity analysis

13. Examining and defining the mathematical relation between the variable of the
NPV is ___
Ans. One of the steps of sensitivity analysis

14. Forecasts under sensitivity analysis are made under ___

Ans. Different economic conditions

15. Probability distribution approach incorporates the probability of occurrences of

various economic environments, to make the NPV ___.
Ans. More reliable

16. ___ is the likelihood of occurrence of a particular economic environment.

Ans. Probability

17. Decision tree can handle the ___ of complex investment proposals
Ans. Sequential decisions

18. ___ portrays inter-related, sequential and critical multi-dimensional elements of

major project decisions
Ans. Decision tree

19. Adequate attention is given to the ___ in an investment decision under the
decision-tree approach
Ans. Critical aspects

20. ___ are effectively handled by the decision-tree approach

Ans. Complex projects

21. ___ and revenue generation are the two important categories of capital
budgeting.
Ans. Cost reduction

22. ___ examines the project from a social point of view.

Ans. Economic appraisal

23. All technical aspects of the implementation of the project are considered in ___
Ans. Technical appraisal

24. ___ of a project is examined by financial appraisal.

Ans. Financial viability
25. Among the elements that are to be examined under commercial appraisal, the
most crucial one is the ___.
Ans. Demand for the product or service.

26. ___ is the third step in the evaluation of the investment proposal.
Ans. Decision criteria

27. A ___ is not a relevant cost for the project decision.

Ans. Sunk cost

28. Effect of a project on the working of other parts of a firm is known as ___.
Ans. Externalities

29. The essence of the separation principle is the necessity to treat ___ of a project
separately from that of ___.
Ans. Investment element; Financing element

30. Pay-back period ___ time value of money.

Ans. Ignores

31. IRR gives a rate of return that reflects the ___ of the project.
Ans. Profitability of

32. When a firm imposes constraints on the total size of its capital budget, it is
known as ___.
Ans. Capital rationing

33. Internal capital rationing is used by a firm as a ___.

Ans. Means of financial control

34. Rigidities that affect the free flow of capital between firms cause ___.
Ans. External capital rationing

35. Inability of a firm to satisfy the regularity norms for issue of equity shares for
tapping the market for funds causes ___.
Ans. External capital rationing

36. The various internal constraints for capital rationing are ___, ___, ___, ___ and ___.
Ans. The privately-owned company, Divisional constraints, Human resource
limitations, Dilution and Debt constraints

37. Lack of ___ will become a huge failure and also an essential effect of internal
constraint.
Ans. Lack of manpower
38. The reasons for capital rationing are ___ and ___.
Ans. External constraints and internal constraints imposed by the management

39. The two steps involved in capital rationing are ___ and ___.
Ans. Ranking the project, selection of the most profitable investment proposal

40. Project indivisibility can lead to sub-optimal result when ___ is used for capital
rationing.
Ans. Profitability index

41. Objective function under the linear programming approach is ___.

Ans. Maximisation of the sum of NPVs of the projects

42. When the project is not divisible ___ can be employed to avoid the changes in
accepting a fraction of a project.
Ans. Integer programming

43. The programming techniques of capital rationing are ___ and ___.
Ans. Linear programming and integer programming

44. The selection is done mainly in the view that which investment proposal earns
___than compared to the other proposals.
Ans. More profits

45. The proposal should have the potentiality of making large ___.
Ans. Anticipated profits

46. Maintaining adequate working capital at a satisfactory level is very crucial for the
___ and ___ of a firm.
Ans. Maintaining, Competitiveness.

47. Pre-paid expenses are ___.

Ans. Current assets.

48. Provision for tax is___.

Ans. Current Liabilities

49. A firm must have ___ neither excess nor shortage.

Ans. Adequate working capital

50. List any two components of current assets.

Ans. Inventories
51. List any two components of current liabilities.
Ans. Sundry debtors

52. ___ refers to the amounts invested in current assets.

Ans. Gross working capital

53. To ___ and monitor the utilisation of funds of a firm ___ is to be given top priority.
Ans. Plan, working capital management as applied.

54. When current assets exceed current liabilities the net working capital is ___.
Ans. Positive

55. Permanent working is called ___ working capital.

Ans. Fixed

56. Objective of working capital management is to achieve a trade-off between ___

and___.
Ans. Liquidity, Profitability.

57. Credit obtained by a firm from its suppliers is known as ___.

Ans. Spontaneous finance.

58. An aggressive policy of working capital management means depending on ___ to

the maximum extent.
Ans. Spontaneous finance.

59. To prevent the competitors from snatching any market for their products the firm
may have ___ a policy of holding ___ of current assets.
Ans. Conservative, Large quantum.

60. To finance the operations in ___ of firm working capital is required.

Ans. Operating cycle

61. To finance operations during the time gap between ___ and ___ time gap is
required.
Ans. Sale of goods on credit, the realisation of money from customers.

62. The time gap between the acquisition of resources from suppliers and the
collection of cash from customers is known as ___.
Ans. Operating cycle

63. ___ is the average length of time required to produce and sell the product.
Ans. Inventory conversion period
64. ___ is the average length of time required to convert the firms’ receivables into
cash.
Ans. Receivables conversion period

65. ___ conversion cycle is the length of time between firms’ actual cash expenditure
and its own receipt.
Ans. Cash Conversion cycle

66. Capital intensive industries require ___ amount of working capital.

Ans. Higher

67. There is a ___ between the volume of sales and the size of the working capital of a
firm.
Ans. Positive direct correlation.

68. Under inflationary conditions the same level of inventory will require ___
investment in working capital.
Ans. Increased

69. Longer the manufacturing cycle, ___ the investment in working capital.
Ans. Larger

70. ___ is used to estimate the working capital requirements of a firm.

Ans. Operating cycle

71. Operating cycle approach is based on the assumption that production and sales
occur on a ___.
Ans. Continuous bases

72. The factors involved in the estimation of the current liabilities are ___, ___ and ___.
Ans. Trade creditors, Direct wages and Overheads

73. Management of cash balances can be done by ___ and ___.

Ans. Deficit financing or investing surplus cash

74. The four motives for holding cash are ___, ___, ___ and ___.
Ans. The transaction, speculative, precautionary and compensating

75. The greater the creditworthiness of the firm in the market lesser is the need for
___ balances.
Ans. Precautionary
Financial Management Multiple Choice Questions and Answers
1. A company can also obtain equity funds by retaining earnings available for
shareholders. (True/False)
Ans. True

2. ___ shareholders receive a dividend at a fixed rate.

Ans. Preference

3. The exact organization structure for financial management will not be different
across firms. (True/False)
Ans. False

4. The main function of the ___ is to manage the firm’s funds.

Ans. Treasurer

5. The involvement of the financial manager in finance management is recent.

(True/False)
Ans. True

6. The finance manager in modern enterprises is mainly involved in ___ finance

functions.
Ans. Managerial

7. The finance manager has always been in the dynamic role of decisionmaking.
(True/False)
Ans. False

8. Capital markets bring investors and ___ together.

Ans. Firms

9. Price system is the most important aspect of a market economy indicating what
goods and services society wants. (True/False)
Ans. True

10. An alternative to profit maximization is the objective of ___.

Ans. Wealth maximization

11. A budget must plan for and quantify ___ and ___ related to a specific operation.
Ans. Revenues, expenses

12. A ___ is the likelihood of events happening, given the past data and expected
changes.
Ans. Forecast
13. The three important components of the master budget are: ___, ___ and ___.
Ans. Operating, financial and capital

14. Choose the correct option:

A comprehensive budgetary system will generally include:
(a) pro forma statements
(b) bank statements
(c) trial balance
(d) profit and loss accounts
Ans. (a) Pro forma statements

15. Budgeting improves the quality of___.

Ans. Communication

16. Budgeting is a way of managing the management. (True/False)

Ans. False

17. The central figure in responsibility accounting is ___.

Ans. People

18. Responsibility centres for planning and control purposes are classified into ___, ___
and ___ centres.
Ans. Cost, profit and investment

19. Time preference for money or ___ is an individual’s preference for possession of a
given amount of money now, rather than the same amount at some future date.
Ans. Time value of money

20. ___ and ___ are two ways of accounting for the time value of money.
Ans. Compounding, discounting

21. The debt policy of a firm is significantly influenced by the cost consideration.
(True/False)
Ans. True

22. The cost of the capital framework can be used to evaluate the ___of top
management.
Ans. Financial performance

23. The before-tax cost of debt is the rate of return not required by lenders.
(True/False)
Ans. False
24. The interest paid on debt is ___ deductible.
Ans. Tax

25. The measurement of the cost of preference capital poses some conceptual
difficulty. (True/False)
Ans. True

26. The preference share may be treated as perpetual security if it is ___.

Ans. Irredeemable

27. External equity will not cost more to the firm than internal equity. (True/False)
Ans. False

28. The required rate of return of shareholders can be determined from the ___
valuation model.
Ans. Dividend

29. We can distinguish between systematic and unsystematic risk. (True/False)

Ans. True

30. Higher the risk, higher the risk ___ required.

Ans. Premium

31. In financial decision-making the cost of capital should be calculated on an after-

tax basis. (True/False)
Ans. True

32. Market-value weights are theoretically ___to book-value weights.

Ans. Superior

33. Financial decisions incur a different degree of ___.

Ans. Risk

34. A proper balance between return and risk should be maintained to maximize the
market value of a firm’s shares. (True/False)
Ans. True

35. The reciprocal of the present value annuity factor is called the ___.
Ans. CRF

36. CRF is useful in determining the income to be earned to recover an investment at

a given rate of interest. (True/False)
Ans. True
37. A fund created out of fixed payments each year for a specified time is called ___.
Ans. Sinking fund

38. The phenomenon of compounding interest more than once in a year is called
multiperiod compounding. (True/False)
Ans. True

39. The rate of the equity dividend is not fixed and depends on the dividend policy of
a company. (True/False)
Ans. True

40. The rate of interest on debt is fixed irrespective of the company’s rate of return
on ___.
Ans. Assets

41. The expenditure incurred in acquiring a ___ or brand is also capital investment.
Ans. Patent

42. The contribution of the board in idea generation is relatively significant.

(True/False)
Ans. False

43. A number of investment criteria (or capital budgeting techniques) are in practice.
(True/False)
Ans. True

44. The essential property of a sound technique is that it should ___ the shareholder’s
wealth.
Ans. Maximize

45. Capital rationing may arise due to external factors or internal constraints imposed
by the management. (True/False)
Ans. True

46. ___ rationing is caused by self-imposed restrictions by the management.

Ans. Internal Capital

47. Interest coverage ratio measures capital gearing. (True/False)

Ans. False

48. The most commonly used measures of financial leverage are ___,___ and ___.
Ans. Debt ratio, debt-equity ratio and interest coverage
49. ROE does not indicate how well the firm has used the resources of owners.
(True/False)
Ans. False

50. The profitability of the shareholders’ ___ can also be measured in many other
ways.
Ans. Investment

51. The traditional theory implies that investors value levered firms more than
unlevered firm. (True/False)
Ans. True

52. The ___ has emerged as a compromise to the extreme position taken by the NI
approach.
Ans. Traditional approach

53. Financial leverage does not affect a firm’s net operating income, but it does affect
___ return.
Ans. Shareholder’s

54. The arbitrary process is the behavioural foundation for MM’s hypothesis.
(True/False)
Ans. True

55. A firm can draw funds from its bank within the maximum___ sanctioned.
Ans. Credit limit

56. There are several modes through which a company can borrow funds for its
short-term working capital requirements. (True/False)
Ans. True

57. Debenture holders are creditors of a firm. (True/False)

Ans. False

58. Ordinary shareholders have ___ ownership claim.

Ans. Residual

59. Operating leverage affects a firm’s ___ ___.

Ans. Operating profit

60. Operating and financial leverage cause too wide fluctuation in ___.
Ans. EPS
61. A contract between a lessor and a lessee is known as a ___.
Ans. Lease

62. Leasing provides 100 per cent financing. (True/False)

Ans. False

63. Under the hire purchase system, the buyer takes ___ of the goods immediately.
Ans. Possession

64. The risk of damage and loss is borne by the buyer under the hire purchase
system. (True/False)
Ans. True

65. When dividend policy is treated as a financing decision the payment of cash
dividends is a passive residual. (True/False)
Ans. True

66. Project financing is most appropriate for those projects which require a large
amount of capital expenditure and involve high risk. (True/False)
Ans. True

67. Mortgage is the transfer of a legal or equitable interest in a specific immovable

property for the payment of a debt. (True/False)
Ans. True

68. A ___involves selling ordinary shares to the existing shareholders of a company.

Ans. Rights issue

69. It is not necessary to underwrite a public and a rights issue. (True/False)

Ans. False

70. A ___ is a long-term fixed-income financial security.

Ans. Debenture

71. Shareholders’ returns consist of two components: ___ and ___.

Ans. Dividends, capital gains

72. A firm’s dividend policy has the effect of dividing its net earnings into ___ and ___.
Ans. Retained earnings, dividends

73. Dividend policy of a firm affects both the ___ financing and the wealth of
shareholders.
Ans. Long-term
74. Capital profits should always be distributed as dividend. (True/False)
Ans. False

75. Firms that expand rapidly because of ample investment yielding high returns than
the opportunity cost of capital care are known as ___.
Ans. Growth firms

Multiple Choice Questions and Answers on Financial Management

1. What has changed the profile of Indian finance managers?
Ana. Effective utilisation

2. Finance management is considered a branch of knowledge with a focus on the ___.

Ana. Liberalisation and globalisation of the Indian economy

3. Under perfect competition, allocation of resources shall be based on the goal of

___.
Ana. Procurement of funds

4. ___ is based on cash flows.

Ana. Profit maximisation.

5. ___ consider rime value of money.

Ana. Wealth maximisation

6. What are the main goals of financial management?

Ana. Wealth maximisation

7. ___ lead to investment in real assets.

Ana. Investment decisions.

8. ___ relate to the acquisition of funds at the least cost.

Ana. Financing decisions

9. Formulation of inventory policy is an important element of ___.

Ana. Liquidity

10. Obtaining finance is an important function of ___.

Ana. Treasurers

11. What are the two critical issues to be considered under-investment decisions?
Ana. The two critical issues are –
• evaluation of expected profitability of the new investment
• rate of return required on the project

12. Define the rate of return.

Ana. Rate of return is normally defined as the hurdle rate or cut-off rate or
opportunity cost of the capital

13. The most important decision made by a finance manager is ___.

Ana. Dividend decision

14. Corporate objectives could be group into ___ and ___.

Ans. Qualitative, Quantitative

15. Control mechanism is developed for ___ and their effective use.
Ans. Allocation of funds

16. Seasonal peak requirements to be met from ___ from banks.

Ans. Short term borrowings

17. ___ has a major impact on the total assets that the firm owns.
Ans. Nature of the industry

18. Sources of finance could be grouped into ___ and ___.

Ans. Debt, Equity

19. ___ of any good financial plan is to match the term of the source with the term of
the investment.
Ans. The product policy

20. ___ refers to the ability to ___ whenever needed.

Ans. Flexibility in capital structure, effect changes in the composites of capital
structure

21. Capital requirement of a firm could be grouped into ___ and ___.
Ans. Fixed capital, working capital

22. Variable working capital will have to be financed only by ___.

Ans. Short term sources

23. ___ of a firm refers to the composition of its long – term funds.
Ans. Capitalisation

24. Two theories of capitalisation for new companies are ___ and earnings theory.
Ans. Cost theory
25. A company is said to be ___ when its total capital exceeds the true value of its
assets.
Ans. Over-capitalised

26. A company is considered to be ___ when its actual capitalisation is lower than its
proper capitalisation as warranted by its earning capacity.
Ans. Under-capitalised

27. The important factors contributing to the time value of money are ___, ___ and ___.
Ans. Investment opportunities, preference for consumption, risk

28. During periods of inflation, a rupee has a ___than a rupee in future.

Ans. Higher purchasing power

29. As the future is characterised by uncertainty, individuals prefer ___ consumption

to ___ consumption.
Ans. Current and future

30. There are two methods by which the time value of money can be calculated by
___ and ___ techniques.
Ans. Compounding and discounting

31. ___ is created out of fixed payments each period to accumulate for a future sum
after a specified period.
Ans. Sinking fund

32. The ___ of a future cash flow is the amount of the current cash that is equivalent
to the investor.
Ans. Present Value

33. An annuity for an infinite time period is called ___.

Ans. Perpetuity

34. The reciprocal of the present value annuity factor is called ___.
Ans. Capital Recovery Factor

35. ___ is the minimum value the company accepts if it sold its business.
Ans. Liquidation value

36. ___ per share is generally higher than the book value per share for profitable and
growing firms.
Ans. Market value
37. Bonds issued by ___ are secured and those issued by private sector companies
may be ___ or ___.
Ans. Government agencies, secured or unsecured

38. ___ is the rate earned by an investor who purchases a bond and holds it till its
maturity.
Ans. Yield to Maturity

39. When Kd is lesser than the coupon rate, the value of the bond is ___ than its face
value.
Ans. Greater

40. ___of a share is associated with the earnings (past) and profitability (future) of the
company, dividends paid and expected and future definite prospects of the
company.
Ans. Intrinsic value

41. The ___ is the net worth of the company divided by the number of outstanding
equity shares.
Ans. Book value per share (BVPS)

42. ___ is the mix of long-term sources of funds like debentures, loans, preference
shares, equity shares and retained earnings in different ratios.
Ans. Capital structure

43. The capital structure of the company should generate ___ to the shareholders.
Ans. Maximum returns

44. The capital structure of the company should be within the ___.
Ans. Debt capacity

45. An ideal capital structure should involve ___ to the company.

Ans. Minimum risk of loss of control

46. ___ do not have a fixed rate of return on their investment.

Ans. Equity shareholders

47. According to the dividend forecast approach, the intrinsic value of an equity
share is the sum of ___ associated with it.
Ans. Present values of dividends

48. ___ arises due to the presence of fixed operating expenses in the firm’s income
flows
Ans. Operating leverage
49. EBIT is calculated as ___.
Ans. Q(S—V)—F

50. Higher operating risks can be taken when ___ of companies are rising.
Ans. Income levels

51. Dividend on ___ is a fixed charge.

Ans. Preference shares

52. Financial leverage is also referred to as ___.

Ans. Trading on Equity

53. Operating leverage is categorised into ___, ___ and ___.

Ans. Fixed costs, variable costs and semi-variable costs.

54. The three types of leverage a company faces are ___, ___ and ___.
Ans. Operating leverage, financial leverage and combined leverage.

55. Financing decisions are ___ and have no impact on the ___ of the firm.
Ans. Investment decisions, operating earnings

56. The value of the firm is dependent on its ___ and the ___.
Ans. Expected future earnings, required rate of return

57. ___ and ___ are two important sources of long-term sources of finance of a firm.
Ans. Equity debt

58. As the ratio of debt to equity increases, the ___ declines and ___ of the firm
increases.
Ans. WACC, market value

59. As per the NOI approach the ___ remains constant for all degrees of leverage.
Ans. Overall capitalisation rate

60. ___ is the process of buying a security at a lower in one market and selling it in
another market at a higher price bringing about ___.
Ans. Arbitrage, equilibrium

61. The criticisms over Miller and Modigliani approach are ___, ___, ___, ___, ___.
Ans. Risk perception, convenience, transaction costs, taxes and Agency costs.

62. Define Arbitrage.

Ans. Arbitrage is the process of buying a security at a lower price in one market and
selling it in another market at a higher price bringing about equilibrium. Thus
arbitrage process is a balancing act.

63. The features of an ideal capital structure are ___, ___, ___, ___.
Ans. Profitability, flexibility, control and solvency.

64. The Miller and Modigliani approach fails to explain ___ decisions and ___ value.
Ans. Financing, firms’

65. ___ make or mar a business.

Ans. Capital budgeting

66. ___ decisions involve a large outlay of funds in anticipation of cash inflows in
future.
Ans. Capital budgeting

67. Social, political, economical and technological forces make capital budgeting
decisions ___.
Ans. Highly complex

68. ___ are very expensive.

Ans. Capital budgeting decisions

69. Capital expenditure decisions are ___.

Ans. Irreversible

70. Forecasting of future operating cash flows from ___ because the future is___.
Ans. Uncertainty, highly uncertain.

71. Post-completion audit is ___ in the phases of capital budgeting decisions.

Ans. Final step

72. Identification of investment opportunities is the ___ in the phases of capital

budgeting decisions.
Ans. First step

73. Analysing the demand and supply conditions of the market for the company’s
products could be ___ of the potential investment proposal.
Ans. A fertile source

74. Generation of ideas for capital budgets and screening the same can be
considered ___ of capital budgetary decisions.
Ans. The most crucial phase
75. ___ decisions could be grouped into two categories.
Ans. Capital budgeting

MCQ on Financial Management for UGC NET with Answers.

1. ___ system is the most important aspect of a market economy indicating what
goods and services society wants.
a. Price
b. Value
c. Quality
d. Market

2. An alternative to ___ is the objective of wealth maximization.

a. Profit minimization
b. Market maximization
c. Quality maximization
d. Profit maximization

3. Financial decisions incur a different degree of risk.

a. True
b. False

4. A proper balance between return and ___ should be maintained to maximize the
market value of a firm’s shares.
a. Value
b. Risk
c. Price
d. Investment

5. The rate of the equity dividend is ___ and depends on the dividend policy of a
company.
a. Fixed
b. Stable
c. Not fixed
d. High

6. The rate of interest on debt is fixed irrespective of the company’s rate of return on
assets.
a. True
b. False
7. The most commonly used measures of financial leverage are debt ratio, debt-
equity ratio and interest coverage
a. True
b. False

8. The ___ of the shareholders’ investment can also be measured in many other ways.
a. Value
b. Cost
c. Benefits
d. Profitability

9. A contract between a lessor and a lessee is known as a ___.

a. Rent
b. Lease
c. Loan
d. Purchase

10. Leasing does not provide 100% financing.

a. True
b. False

11. Under the hire purchase system, the ___ takes possession of the goods
immediately.
a. Seller
b. Mediator
c. Buyer
d. Lender

12. The risk of damage and loss is borne by the seller under the hire purchase
system.
a. True
b. False

13. What is the traditional form of financing known as?

a. Corporate financing
b. Management financing
c. Individual financing
d. International financing

14. The credit policy of the firm affects the ___ by influencing the level of debtors.
a. Cost of production
b. Working capital
c. Quality
d. Manufacturing timeline
15. Who may administer the credit policy of a firm?
a. HR manager
b. Admin manager
c. Financial manager
d. Investment manager

16. A company cannot obtain equity funds by retaining earnings available for
shareholders.
a. True
b. False

17. ___ shareholders receive a dividend at a fixed rate.

a. Preference
b. Non-preference
c. Common
d. None of the above

18. The exact organisation structure for financial management will be different across
firms.
a. True
b. False

19. The main function of the ___ is to manage the firm’s funds.
a. Team leader
b. Investment banker
c. Treasurer
d. Quality manager

20. The involvement of the financial manager in finance management is not recent.
a. True
b. False

21. The ___ of a firm is significantly influenced by the cost consideration.

a. Debt policy
b. Equity policy
c. Financial policy
d. Purchase policy

22. The ___ framework can be used to evaluate the financial performance of top
management.
a. Management
b. Investment
c. Involvement
d. Cost of capital
23. The interest paid on ___ is tax-deductible.
a. Purchases
b. Sales
c. Debts
d. Credits

24. The measurement of the cost of preference capital does not pose any conceptual
difficulty.
a. True
b. False

25. A firm can draw funds from its bank within the maximum credit limit sanctioned.
a. Investors
b. Bank
c. Customers
d. Employees

26. ___ is the transfer of a legal or equitable interest in a specific immovable property
for the payment of a debt.
a. Loan
b. Purchase
c. Sale
d. Mortgage

27. Which of these involves selling ordinary shares to the existing shareholders of a
company?
a. Rights issue
b. Sales issue
c. Lending
d. Hire-purchase

28. It is necessary to underwrite a public and a rights issue.

a. True
b. False

29. Which of these is a long-term fixed-income financial security.

a. Debenture
b. Shares
c. Vehicles
d. None of the above

30. There are several modes through which a company can borrow funds for its ___
working capital requirements.
a. Fixed
b. Short-term
c. Long-term
d. None of the above

31. The ___ motive relates to the holding of cash for investing in profit-making
opportunities as and when they arise.
a. Speculative
b. Precautionary
c. Comprehensive
d. Judiciary

32. The precautionary motive is the need to hold cash to meet contingencies in the
future.
a. True
b. False

33. Ideal cash management systems depend on the organization structure and
competition of the firm.
a. True
b. False

34. Which of these is a technique to plan and control the use of cash?
a. Investing
b. Cash planning
c. Financial control
d. Cash flow

35. Time preference for money or time value of money is an individual’s preference
for possession of a given amount of money now, rather than the same amount at
some future date.
a. True
b. False

36. Which of these refers to a fund created out of fixed payments each year for a
specified time?
a. Floating fund
b. Fixed cash
c. Budget
d. Sinking fund

37. The phenomenon of compounding interest more than once in a year is called
____.
a. Single compounding
b. Multiperiod compounding
c. Double compounding
d. Many compounding

38. The ___ theory implies that investors value levered firms more than unlevered
firm.
a. Comprehensive
b. Modern
c. Traditional
d. Superlative

39. The traditional approach has emerged as a compromise to the extreme position
taken by the NI approach.
a. True
b. False

40. Financial leverage affects a firm’s net operating income, as well as the
shareholder’s return.
a. True
b. False

41. The arbitrary process is the behavioural foundation for _____.

a. MM’s hypothesis
b. NI approach
c. NN’s hypothesis
d. AB approach

42. The difference between current assets and current liabilities is known as _____.
a. Gross capital
b. Budget
c. Principal investment
d. Net working capital

43. The operating efficiency of a firm relates to the optimum utilization of all its
resources at minimum cost.
a. Maximum cost
b. Minimum cost
c. Quality
d. Minimum time

44. Which of these is involved in the conversion of sales into cash?

a. Operating cycle
b. Manufacturing cycle
c. Cash flow cycle
d. None of the above
45. Which of these is the likelihood of events happening, given the past data and
expected changes?
a. Anticipation
b. Budgeting
c. Expectation
d. Forecast

46. A comprehensive budgetary system will generally include:

a. Pro forma statements
b. Bank statements
c. Trial balance
d. Profit and loss accounts

47. The expenditure incurred in acquiring a patent or brand is also a ___.

a. Capital expenditure
b. Capital investment
c. Sales income
d. Profit

48. There are only two investment criteria (or capital budgeting techniques) in
practice.
a. True
b. False

49. The essential property of a sound technique is that it should maximize the
shareholder’s wealth.
a. True
b. False

50. Dividend policy of a firm affects both the long-term financing and the wealth of
shareholders.
a. True
b. False

51. ___ has been criticized since it assumes ___, and in the face of an imperfect
market, it cannot be a legitimate objective.
a. Profit maximization, perfect competition
b. Profit minimization, imperfect competition
c. Share balancing, profitability
d. Perfect competition, profit minimization

52. Which of these are the measures of financial leverage?

a. Cash planning, cash outflow
b. Debt ratio, debt-equity ratio
c. Profit ratio, debt ratio
d. Cash flow, cash control

53. ___ and ____ are two ways of accounting for the time value of money.
a. Active, passive
b. Regular, special
c. Compounding, discounting
d. Direct, indirect

54. A budget must plan for and quantify ___ and ___ related to a specific operation.
a. Revenue, expenses
b. Inflow, outflow
c. Risk, return
d. Profit, loss

55. The three important components of the master budget are: operating, ___ and
___.
a. Cost of manufacture, cost of sales
b. Financial, capital
c. Expenses, inflow
d. Profit, expenses

56. Shareholders’ returns consist of two components: ___ and ___

a. Income, expenses
b. Profits, income
c. Dividends, capital gains
d. Assets, liabilities

57. A firm’s dividend policy has the effect of dividing its net earnings into ___ and ___.
a. Retained earnings, dividends
b. Incurred expenses, cash inflows
c. Purchase costs, dividends
d. Income, inflow

58. Project financing is most appropriate for those projects which require ___ amount
of capital expenditure and involve ___ risk.
a. Small, low
b. Large, high
c. No, low
d. Small, no

59. Which of these are the various forms in which inventories exist in a
manufacturing company?
a. Raw materials, quality
b. Work-in-process, finished goods
c. Cost of manufacture, labour cost
d. None of the above

60. A finance manager is responsible for which of the following?

a. Purchasing raw materials, hiring labour
b. Finance planning, marketing
c. Investment decisions, capital raising
d. Advertising, sales