Classification: Internal Use

Exam Question FM

1. A venture capital fund that is the subsidiary of a financial institution is called a(n)
Angel capitalist / Corporate venture capital fund / Institutional venture capital fund / Financial venture capital fund
2. Which of the following was not suggested by John Maynard Keynes as a reason for holding cash?
Speculative motive. / Investment motive. / Precautionary motive. / Transaction motive.
3. Which of the following is not a standard method of transferring funds when using concentration banking?
Depository transfer check. / Automated clearinghouse electronic transfer. / Wire transfer. / Payable through draft
(PTD).
4. Earning before interest and tax is -------
Sales - variable cost / Sales - variable cost - fixed cost / Sales - variable cost - fixed cost + depreciation / Variable
cost + fixed cost + depreciation
5. Your bank account pays an 8 percent nominal rate of interest. The interest is compounded quarterly. Which of the
following statements is most correct?
The periodic rate of interest is 2 percent and the effective rate of interest is 4 percent
The periodic rate of interest is 8 percent and the effective rate of interest is greater than 8 percent
The periodic rate of interest is 4 percent and the effective rate of interest is 8 percent
The periodic rate of interest is 2 percent and the effective rate of interest is greater than 8 percent
6. Mr. Kazmi, an investor, expects a perpetual amount of Rs. 1000 annually from his investment. What is his present
value of this perpetuity if the interest rate is 8 per cent?
125 / 8000 / 12500 / None
7. Under capital budgeting decisions ranking of the proposals in done in ------- order of their Profitability Index
Ascending / Descending / Random / Trial and error method / Depends on company's choice
8. A finance lease is a full-payout, non-cancellable agreement, in which the lessee is responsible for maintenance,
taxes and insurance
T /F
9. The marginal cost of capital is the weighted average cost of new capital using the marginal weights
T/F
10. In ------- factoring, the factor makes no advance on the purchased accounts; rather
Maturity / Advance / Both I and 2 / None of above
11. The judgments of investment analysts are important for the firm to consider since they understand and influence the
financial markets.
T/F
12. Which of the following is least likely to be considered a short-term marketable security?
An original issue 30-year corporate bond with one-year remaining until final maturity.
An original issue 30-year government bond with one-year remaining until final maturity.
A 90-day Treasury bill.
Short-term corporate debt instruments with a 9-month original maturity.
13. In order to diversify project risk and thereby reduce the firm's overall risk, the projects that are best combined or
added to the existing portfolio of projects are those that have a ------- correlation with existing projects
Perfect positive / Positive / Negative / 0
14. Which of the following is likely to encourage a company to use more debt in its capital structure?
An increase in the corporate tax rate
An increase in the personal tax rate
A decrease in the company’s degree of operating leverage
Statements a and c are correct
15. Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring
receivables. However, they can provide erroneous signals to credit managers when
Customers’ payments patterns are changing
Classification: Internal Use

Exam Question FM

Sales fluctuate seasonally

Sales are relatively constant, either seasonally or cyclically
Some customers take the discount and others do not
16. A machine is leased, and the present value of the minimum lease payments amounts to substantially all of the fair
value of the leased asset. In the lessee’s books this would be shown
In the balance sheet as a fixed asset only
In the balance sheet as a fixed asset, with the liability to the lessor shown, and the periodic finance charge shown in
the profit and loss account
The lease payments shown in the profit and loss account with no balance sheet entries
In the balance sheet as a fixed asset, with the liability to the lessor shown, and no profit and loss account entries
17. Which of the following statements is most correct
An investment that compounds interest semiannually, and has a nominal rate of 10 percent, will have an effective
rate less than 10 percent.
The present value of a 3-year $100 annuity due is less than the present value of a 3-year $100 ordinary annuity
The proportion of the payment of a fully amortized loan that goes toward interest declines over time
Statements a and c are correct
18. The rights, of a factor, being the assignee of the debts, are governed by -------
Transfer of property act
Transfer of factor act
Partnership act
None of the above
19. Chad Ltd negotiated a lease on the following terms: the term of the lease was 5 years; the estimated useful life of
the leased equipment was 10 years; the purchase price was €60,000; and the annual lease payment was €5,000. the
lease should be classified as -------
Operating lease
Finance lease
20. Bill discounting and endorsing bill to the third party, which the firm has to pay, will ------- the size of investment in
receivables.
Reduce / Increase / Have not impact / Cannot say
21. Ploughing back of profits depend on the ------- of a firm.
Capital / Current assets / Dividend policy / Retained earnings
22. State whether the given statement is true or false: EPS can be improved without corresponding improvement in
performance simply by issuing further equity at a premium.
T/F
23. Which one of the following is not a disadvantage of credit policy
Liquidity problem / Loss of bad debts / Increase in sales / None
24. Inadequate working capital leads to inefficient utilisation of fixed assets
T/F
25. Depreciation charges do not involve any cash outflow. The effect of depreciation policy on working capital is,
therefore, direct.
T/F
26. Which of the following is the discounted cash flow method
Payback period method
Accounting rate of return method
The net present value of method / Internal rate of return / Profitability index or benfit cost ratio.
All of the above
First 2 are Traditional Methods
Classification: Internal Use

Exam Question FM

27. Which among the following is not a carrying cost of inventory

Cost of requisitioning the items
Capital cost / Insurance / Obsolescence cost and deterioration
28. Cash payback is calculated using the following formula
Cost of capital investment less net annual cash inflow
Cost of capital investment plus net annual cash inflow
Cost of capital investment plus net annual cash outflow
Cost of capital investment less net annual cash outflow
29. Economic Order Quantity (EOQ) is the order size for some particular inventory item that results in highest total
inventory cost for the period.
T/F
30. Under ------- lease, the lessee maintains and insures the leased asset rather than the lessor in a full-service lease.
Financial / Operating / Net /None
31. The optimum credit policy occurs at point where there is a trade off between liquidity and risk
T / F (T is liquidity and Profitibility)
32. State whether the given statement is true or false: Secured debentures are also known as naked debentures
T / F (Unsecured debentures = Naked debentures)
33. A short-term unsecured promissory note issued by firms that have a fairly high credit (standing) rating is:
Commercial paper / Certificate of deposite / Bill of exchange / Cheque
34. State whether the given statement is true or false: Current consumption is one of the reasons for time preference of
money.
T/F
35. What if the beta is less than one?
It is more sensitive to the market risk.
It is not as sensitive to systematic risk as the average investment.
It has the same risk profile as the market as a whole.
It is more sensitive to the unsystematic risk.
36. The Factor provides finance to the client only after notification to the debtors (customers) to make payment to the
Factor is called:
Credit factoring / Bulk factoring / Agency factoring / Credit protection
37. Which ratio might you be the most concerned with in analyzing a firm's financial leverage position?
Return on equity / Debt-to-total assets / Acid-test / Inventory turnover
38. It is the payment of fixed rate of interest for the use for the fixed interest bearing securities, to magnify the rate of
return as equity shares.
Operating Risk / Leverage / Operating Leverage / Financial Leverage
39. State whether the given statement is true or false:
Economic value added is calculated by dividing the net profits after interest, depreciation and taxation by the
number of equity shares issued by the company to find out the profits earned per share.
T / F (Earning per Share – EPS)
40. Which of the following statement is correct?
Total risk = General risk + Specific risk
Total risk = Systematic risk + Non-systematic risk
Total risk = Market risk + Issuer risk
All of the above
41. State whether the given statement is true or false: EVA facilitates communication and cooperation among divisions
and departments.
T/F
Classification: Internal Use

Exam Question FM

42. The borrower takes which type of deposits for tiding over a short-term cash inadequacy.
Call deposits / Term deposit / 3 months deposits / 6 months deposits
43. The term cost of capital for a project depends on
Company's cost of capital
Industry cost of capital
Use to which the capital is put,
All of the above
44. Which of the following is likely to encourage a firm’s managers to make decisions that are in the best interest of
shareholders?
Executive compensation comes primarily in the form of stock options
The state legislature recently passed a law that makes it more difficult to successfully complete a hostile takeover
Institutional investors such as mutual funds and pension funds hold large amounts of the firm’s stock
Statements a and c are correct
45. The costs that arise when there is a conflict of interest among owners, debenture holders and the management.
Inflation cost
Opportunity Cost
Agency Cost
Agent Cost
46. Which of the following is the characteristics of efficient inventory management?
Minimize the carrying costs and time
Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes
Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service
All of the above
47. Which value of money figuring in a given amount of interest earned or inflation accrued over a given amount of
time?
Time value of money
Future value of money
Present value of money
Perpetuity
48. Under which of the following conditions operating leverage is said to be good
When revenues are rising
When revenues are falling
When there is a high financial risk
None
49. Financial Leverage is the ability of the firm to use fixed financial charges to magnify the effects of changes in EBIT
on the firm's earnings per share.
T/F
50. State whether the given statement is true or false
Long-term financial needs generally refer to funds for a period exceeding 15-20 years.
T / F (More than 5 years)
51. An unconditional order issued by the seller asking the buyer to pay the amount maintained on it as per demand at a
certain future date
Bill of exchange / Treasury Bill / Cheque / Import export bill
52. Under the overdraft facility, customers are allowed to withdraw in excess of credit advance standing to their current
deposit account
T/F
53. Under ------- arrangement, the Factor provides prepayment facility and protection against bad debts
Classification: Internal Use

Exam Question FM

Credit factoring
Bulk factoring
Agency factoring
Credit protection
54. The time value of money implies that:
A person will have to pay in future more, for a rupee received today
A person may accept less today, for a rupee to be received in the future
A person may accept more today, for a rupee to be received in the future
Both 1 and 2
Both 1 and 3
55. The degree of operating leverage can be defined as -------
The change in percentage of sales revenue for change in the percentage of operating income
The percentage of operating income, for the change in percentage of sales revenue
EBIT/Contribution
Contribution / EPS
56. State whether the given statement is true or false: Rule of 72 may not give the exact doubling period, but rule of 69
gives a more accurate doubling period.
F/T
57. State whether the given statement is true or false: Given the nature of equity financing, venture capital investors are
exposed to the risk of the company failing.
T/F
58. The cost of retained earnings may be defined as ------- in terms of dividend foregone by/ withheld from the equity
shareholders
Sunk cost / Average cost / Inflationary cost / Opportunity cost
59. A statistical measure that indicates the relationship, if any, between series of numbers representing anything from
cash flows to test data.
Mode / Correlation / Quartiles / All
60. This measure is flawed because it does not consider the equity cost of capital employed
EVA / EPS / EAV / EBIT
61. The major difference between hire purchase (HP) and leasing is:
In HP the payments are made annually, whereas with leasing monthly payments are more common
With HP, the user of the equipment generally owns it eventually after a set number of payments, whereas
with leasing the user never owns the equipment
The effective rate is much higher on HP than on leasing
HP is easy to arrange at point of sale, whereas leasing involves a prolonged legal process
62. In leverage operating cost (Fixed cost) or financial cost (fixed return) remains constant irrespective of the level of
output
T/F
F, Because both can never be same
Misleading
63. It is known as capitalization of profits or issue of bonus shares.
Share capital
Sweat equity
Retained earnings
Preference share

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Classification: Internal Use

Exam Question FM

1. Which of the following formulae is used for calculation of cash conversion cycle
Operating Cycle + Accounts Payable Period
Operating Cycle - Accounts Payable Period
Operating Cycle / Accounts Payable Period
Average Age of Inventory + Account Receivables Period
2. The amount of money that is lent or invested is called -------
Annuity
Rent
Principle
Perpetuity
3. Investment decisions relate to:
Selection of assets / Financing assets / Dividend declaration / All
4. A method which makes adjustment against risk in the estimates of future cash inflows for a risky capital investment
project
Sensitivity Analysis
Risk adjusted discount rate method
Capital Structure
Certainty equivalent co-efficient method
5. A company's after-tax operating profit for all investors, including shareholders and debt holders
Weighted average cost of capital
Economic value added
Market value added
Non-operating profit after tax (NOPAT)
6. In India, VCFs charge royalty ranging between:
2 to 3 percent / 2 to 15 percent / 2 to 4 percent/ 10 to 15 percent
7. Inadequate working capital leads to inefficient utilisation of fixed assets
T/F
8. The decisions of financial management can be divided into:
Investment / Financing / Dividend / All of the above / Only I and 2
9. State whether the given statement is true or false: The compensation for waiting is the time value of money, called
interest.
F/T
10. Wealth-Maximization takes care of:
Creditors / Employees / Society / All
11. Investment in current assets is popularly termed as
Cost of capital / Dividend policy / Capital structure / Working capital management
12. The amount of current assets that varies with seasonal requirements is referred to as -------- working capital
Permanent / Net / Temporary / Gross
13. Which hybrid security combines the features of both conventional loan and conditional loan?
Income Note / Equity / Debentures / All
14. Capital budgeting method that takes into consideration the time value of money is the
Annual rate of return method
Return on shareholders' equity method
Cash payback technique
Internal rate of return method
15. Which financial service covering the financing and collection of book debts and receivables arising from credit sale
of goods and services?
Classification: Internal Use

Exam Question FM

Factoring / Leasing / Hire purchase / Merchant bank

16. The capital budgeting decision depends in part on the
Availability of funds
Relationships among proposed projects
Risk associated with a particular project
Company’s basic decision making approach
All of the above
17. Which of the following is the characteristics of efficient inventory management?
Minimize the carrying costs and time
Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes
Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service
All of the above
18. Public offering should be made at a time when
State of the economy as well as capital market is ideal to provide the funds.
Only capital market is ideal to provide the funds.
Only primary market is ideal to provide the funds.
Only when the state of economy is ideal to provide funds
19. The borrower takes which type of deposits for tiding over a short-term cash inadequacy
Call deposits / Term Deposit / Three months deposits / 6 months deposits
20. The degree of operating leverage can be defined as -------
The change in percentage of sales revenue for change in the percentage of operating income
The percentage of operating income, for the change in percentage of sales revenue
EBIT / Sales
EBIT/Contribution
Contribution / EPS
21. The explicit cost of debt is the interest rate as per contract adjusted for tax and the cost of raising the debt.
T/F
22. A lockbox plan is
A method for safe-keeping of marketable securities
Used to identify inventory safety stocks
A system for slowing down the collection of checks written by a firm
A system for speeding up a firm’s collections of checks received
23. Capital Budgeting decisions are ------- without -------
Irreversible, loss;
Loss, irreversible;
Unreversable, loss
None of the above
24. Cash flow should be differentiated with accounting profits.
T/F
25. The inter-corporate deposits are made for a maximum period of ------- months
2 / 6 / 9 / 12
26. According to the ------- approach, the term financial management provides a conceptual and analytical framework
for financial decision-making
Modern / Traditional / Profitability / Management
27. By combining ------- correlated projects, the overall variability of returns or risk can be reduced.
Positive / Scattered / Negative / 0
Classification: Internal Use

Exam Question FM

28. State whether the given statement is true or false: EVA facilitates communication and cooperation among divisions
and departments
F/T
29. The term cost of capital for a project depends on
Company's cost of capital
Industry cost of capital
Use to which the capital is put,
All
30. VCFs promoted by the Central Government include(s):
Indus Venture Fund
Canfina
Andhra Pradesh Venture Capital Limited
TDICI
ALL
31. A deposit made by one firm with another firm is known as -------
Term deposit
Commercial paper
Certificate of deposite
Inter-corporate deposits
32. Which of the following is not an assumption of capital structure theories
There are only two sources of funds i .e. debt and equity
The total financing remains constant.
The total assets of the company are given and changes over period of time
Operating profits (EBIT) are not expected to grow
Dividend payout ratio = 100%.
33. Stock A and Stock B both have an expected return of 10 percent and a standard deviation of 25 percent. Stock A has
a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P
is a portfolio with 50 percent invested in Stock A and 50 percent invested in Stock B. Which of the following
statements is most correct?
Portfolio P has a coefficient of variation equal to 2.5
Portfolio P has more market risk than Stock A but less market risk than Stock B
Portfolio P has a standard deviation of 25 percent and a beta of 1.0
All of the statements above are correct
34. Pyramid Properties entered a lease that contains a bargain purchase option. When calculating the amount to
capitalize as a leased asset at the inception of the lease term, the payment called for by the bargain purchase option
should be
Subtracted at its exercise price
Subtracted at its present value
Added at its present value
Excluded from the calculation
35. Which of the following statements is most correct?
When a company increases its debt ratio, the costs of equity and debt capital both increase. Therefore, the weighted
average cost of capital (WACC) must also increase
The capital structure that maximizes stock price is generally the capital structure that also maximizes earnings per
share
All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio
Statements a and b are correct
Classification: Internal Use

Exam Question FM

36. Which of the following statements is correct for an aggressive financing policy for a firm relative to a former
conservative policy?
The firm will use long-term financing to finance all fixed and current assets
The firm will see an increase in its expected profits
The firm will see a decline in its risk profile
The firm will need to issue additional common stock this period to finance the assets
37. If a firm is unlevered and has a cost of equity capital 9% what would the cost of equity be if the firms became
levered at 1.75? The expected cost of debt would be 7%.
15.75 / 0.16 / 0.125 / 0.145 / None
rs = 9 + 1.75(9 - 7) = 12.5
38. You observe the following information regarding Company X and Company Y: • Company X has a higher expected
mean return than Company Y. • Company X has a lower standard deviation than Company Y. • Company X has a
higher beta than Company Y. Given this information, which of the following statements is most correct?
Company X has a lower coefficient of variation than Company Y.
Company X has more company-specific risk than Company Y
Company X is a better stock to buy than Company Y.
Statements a and b are correct.
39. Intangible benefits in capital budgeting would include all of the following except increased
Product quality / Employee loyalty / Salvage value / Product safety
40. Which of the following statements best describes the likely impact that an abandonment option will have on a
project’s expected cash flow and risk?
Expected cash flow increases and risk decreases
Expected cash flow increases and risk increases
Expected cash flow decreases and risk decreases
Commodore Corporation is deciding whether it makes sense to invest in a project today, or to postpone this decision
for one year
41. The minimum investment kept in the form of inventory of raw materials, work-in-process, finished goods, stores
and spares, and book debts to facilitate uninterrupted operation in a firm.
Permanent working Capital
Temporary working capital
Gross working Capital
Net working Capital
42. Which of the following was not suggested by John Maynard Keynes as a reason for holding cash
Speculative motive.
Investment motive.
Precautionary motive.
Transactions motive.
43. These costs can be reduced to some extent, if the firm properly evaluates customer before granting credit
Total cost
Collection
Opportunity
Bad debt
44. In which of the following ways a venture may exit?
Initial Public Offerings
Acquisition by another company
Purchase of the venture capitalist's shares by the promoter
Purchase of the venture capitalist's share by an outsider
Classification: Internal Use

Exam Question FM

All of the above

45. When there is capital rationing, a firm will not be able to undertake all the profitable investment proposals.
T/F
46. The firm's cash flow is subtracted from the required profits, based on the rate of return, to give economic profits
T/F
47. An example of capitalizing debt/equity equivalents is
To convert operating to capital leases
convert capital leases to operating
To convert financial to capital leases
To convert financial to operating leases
48. As the degree of leverage ------- the proportion of a cheaper source of funds (debt) in the capital structure increases
Increases / Decreases / Falls to 0 / None
49. Your bank account pays an 8 percent nominal rate of interest. The interest is compounded quarterly. Which of the
following statements is most correct?
The periodic rate of interest is 2 percent and the effective rate of interest is 4 percent
The periodic rate of interest is 8 percent and the effective rate of interest is greater than 8 percent
The periodic rate of interest is 4 percent and the effective rate of interest is 8 percent
The periodic rate of interest is 2 percent and the effective rate of interest is greater than 8 percent
50. The additional cost incurred to obtain additional funds required by a firm
Opportunity
Incremental
Break even
Marginal cost of capital
51. The main contents of the modern approach are
Arrangement of funds through financial instruments like share, bonds, etc.
Arrangement of funds from financial institutions
What specific assets should an enterprise acquire?
What is the total volume of funds, an enterprise should commit?
52. Commercial paper securities
Are issued only by the largest and most creditworthy corporations, as they are unsecured.
Carry an interest rate that varies according to the firm’s level of risk
Never have a term to maturity that exceeds 270 days
All of the above
only (1) and (2) of the above
53. At present, which of the following instruments are non-existent in India?
Partly convertible debentures
Non-voting share
Perpetual share
Both (b) and (c) above
54. Which of the following is a common feature of Preference share capital and debenture capital?
Both carries a fixed rate of dividend
None of them have voting rights.
Redeemable in nature
All of the above
55. The marketable securities available for unassigned purposes at the current time is referred to as the ------- segment
in the firm's portfolio of short-term marketable securities.
Ready cash
Classification: Internal Use

Exam Question FM

Controllable cash
Free cash
Cash and cash equivalents
---------------------------------------------------------------------------------------------------------------------
01. Which of the following investments will have the highest future value at the end of 5 years? Assume that the
effective annual raA pays $50 at the end of every 6-month period for the next 5 years (a total of 10 payments).e for
all investments is the same
A pays $50 at the end of every 6-month period for the next 5 years (a total of 10 payments).
B pays $50 at the beginning of every 6-month period for the next 5 years (a total of 10 payments)
C pays $500 at the end of 5 years (a total of one payment)
D pays $100 at the end of every year for the next 5 years (a total of 5 payments)
02. VC companies may specialise in order to reduce
Administrative costs
Search costs
Marketing costs
Information costs
03. What is the main reason for a firm to engage in a refunding of an existing 30-year bond issue that still has 25 years
until maturity when it has no sinking fund requirements?
To raise additional funds for the firm to use with new capital budgeting projects.
To raise additional funds for the firm to use with new capital budgeting projects.
To lower the interest cost of long-term debt.
All of the above answers are
04. Business angels are an example of this
Formal Venture Capital
Classic Venture Capital
Corporate Venture Capital
Informal Venture Capital
05. A project has the following cash inflows $34,444; $39,877; $25,000; and $52,800 for years 1 through 4,
respectively. The initial cash outflow is $104,000. Which of the following four statements is correct concerning the
project internal rate of return (IRR)?
The IRR is less than 10%.
The IRR is greater than or equal to 10%, but less than 14%.
The IRR is greater than or equal to 14%, but less than 18%.
The IRR is greater than or equal to 18%.
104,000 = $34,444/(1 + IRR)1 + $39,877/(1 + IRR)2 + $25,000/(1 + IRR)3 + $52,800/(1 + IRR)4. Thus, the IRR =
16.23%.
06. There are two mutually exclusive projects that have different lives. Project A has a 4-year life and Project B has a 5-
year life. In replacement chain analysis, the earliest common life will occur when Project A is replicated -------
times and Project B is replicated ------- times.
5,4
4,5
20,20
It is not possible to determine the answers for this problem.
Replicating 5 and 4 times respectively will provide a 20-year common life.
07. Which of the following statements is correct for an aggressive financing policy for a firm relative to a former
conservative policy?
Classification: Internal Use

Exam Question FM

The firm will use long-term financing to finance all fixed and current assets
The firm will see an increase in its expected profits
The firm will see a decline in its risk profile
The firm will need to issue additional common stock this period to finance the assets
An aggressive policy involves using short-term financing to finance temporary and some proportion of
permanent current assets and/or fixed assets.
08. Vanderheiden Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S
has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and
will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the
shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is
expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if Vanderheiden’s cost
of capital is 10 percent, by what amount will the better project increase Vanderheiden’s value?
677.69
1098.89
1179.46
1237.76
09. To achieve higher ------- efficiency and profitability of a firm, it is very essential to reduce the amount of capital
locked up in inventories.
Seasonal
Operational
Technical
Functional
10. Investment in current assets is popularly termed as -------
Cost of capital
Dividend policy
Capital structure
Working capital management
11. A ------- are the one type of debentures on which the payment of interest and principle amount is guaranteed by
third party at the time of their issue.
Callable bonds
Guaranteed debentures
Floating rate bonds
All
12. Which one is the movement of cash into or out of a business, a project, or a financial product?
Present value
Interest
Annuity
Cash flow
13. The right term used for the consideration for the lease is:
Instalment
Payment
Rent
Loan
14. According to this approach, the cost of debt and the cost of equity do not change with a change in the leverage ratio.
Net Income Approach (NI)
Net Operating Income approach
Traditional approach
Classification: Internal Use

Exam Question FM

Modigliani-Miller approach
15. There is no need to manage cash balance, if there is perfect match between cash inflows and cash outflows
T/F
16. Company should create ------- equivalent to at least 50 per cent of the amount of issue before commencement of
repayment.
Dividend Redemption Reserve (DRR)
Debenture Redemption Reserve (DRR)
Dividend policy
None
17. Which of the following statement is correct?
Total risk = General risk + Specific risk
Total risk = Systematic risk + Non-systematic risk
Total risk = Market risk + Issuer risk
All of the above
18. The time value of money implies that:
A person will have to pay in future more, for a rupee received today
A person may accept less today, for a rupee to be received in the future
person may accept more today, for a rupee to be received in the future
Both 1 and 2
Both 1 and 3
19. Which inventory consists of basic materials that have not been committed to production in a manufacturing firm?
Raw material
Finished goods
Holding
Carry
20. Which among the following is a drawback of stringent credit policy
A firm that adopts stringent credit policy will have maximum bad debt losses
The firm that follows stringent credit policy will have sound liquidity position
Stringent credit policy restricts sales
None of the above
21. The market risk affecting securities:
Structural changes in the economy
Tax law changes
Changes in consumer preferences
All of the above
22. Synchronization of cash flows arises only when there is ------- balance between the expected cash inflows and cash
outflows
Positive / Negative / No / Minimum
23. In deciding the optimal level of current assets for the firm, management is confronted with
Trade-off between profitability and risk
Trade-off between liquidity and risk
Trade-off between equity and debt
Trade-off between short-term versus long-term borrowing
24. The ------- that do not enjoy the option of converting their holdings into equity.
Non-cumulative preference shares
Convertible preference shares
Non-convertible preference shares
Classification: Internal Use

Exam Question FM

Non-participatory preference shares

25. Operating leverage occurs when the firm earns more on the assets purchased with the funds, than the fixed cost of
their use and vice versa.
T/F
26. Which of the following is typically part of the cash budget?
Payments lag
Payment for plant construction
Cumulative cash
All
27. The combined leverage can be defined as -------
Contribution / EBIT
Contribution / EBIT
EBIT/Contribution
% change in sales/% change in Eps
28. Under ------- arrangement, the Factor provides prepayment facility and protection against bad debts.
Credit factoring
Bulk factoring
Agency factoring
Credit protection
29. Wealth-Maximization takes care of:
Creditors
Employees
Society
All
30. The allocation of the limited funds available for financing the capital projects to only some of the profitable projects
in such a manner that the long-term returns are maximized.
Cost of Capital
Capital Rationing
Capital Budgeting
Capital Structure
31. State whether the given statement is true or false: The debt policy of a firm is significantly influenced by the cost
consideration.
T/F
32. State whether the given statement is true or false: In an efficient capital market, the important principle to consider
is that, investors should hold all their eggs in one basket.
F/T
33. There is uncertainly regarding the future estimation of cash inflows from capital project.
T/F
34. Cash flow should be differentiated with accounting profits.
T/F
35. A cheapest source of long-term finance is:
Equity share
Preference share
Debentures
All of the above
36. When the financial leverage is increased, the overall cost of capital will increase and the value of the firm will
increase.
Classification: Internal Use

Exam Question FM

F/T
37. In theory, when making capital budgeting decisions, all projects with positive NPVs should be
Rejected
Recalculated
Voided
Accepted
38. The optimum credit policy occurs at point where there is a trade off between liquidity and risk (Profitability)
T/F
39. In "2/10, net 30", 10 denotes credit period
T/F
40. A capital budgeting method that takes into consideration the time value of money is the
Annual rate of return method
Return on shareholders' equity method
Cash payback technique
Internal rate of return method
41. In the ------- method, an investment project is accepted, if the present value of cash inflows is greater than the
present value of cash outflow.
NPV (Net Present Valve)
IRR
financial leverage
ARR
42. Which of the following comprise the risk of holding inventories?
Price decline
Product deterioration
Product obsolescence
All of the above
43. Given a positive interest rate, the future value of a given sum will always be ------- the present value of the sum.
Less than
Equal to
Greater that
Less that or equal to
44. Cash discount reduces the investment in receivables because it encourages early payments.
T/F
45. EBIT Earning before interest and tax is -------
Sales - variable cost / Sales - variable cost - fixed cost / Sales - variable cost - fixed cost + depreciation / Variable
cost + fixed cost + depreciation
46. In order to diversify project risk and thereby reduce the firm's overall risk, the projects that are best combined or
added to the existing portfolio of projects are those that have a ------- correlation with existing projects.
Positive
Perfect positive
Negative
0
47. Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to
as
Present value
Simple interest
Classification: Internal Use

Exam Question FM

Future value
compound interest
With compound interest, the money that is borrowed (lent) pays (earns) interest on both the principal and interest.

48. Which of the following is a common feature of Preference share capital and debenture capital?
Both carries a fixed rate of dividend
None of them have voting rights.
Redeemable in nature
All of the above
49. If the firm maintains small inventory levels, then the number of orders will increase, there by ordering cost will
increase and vice versa.
T/F
50. Funds raised by any form of financing have implicit capital costs once they are invested.
Cost of carry
Implicit Cost
Explicit Cost
Opportunity
51. The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as
the
Debt capacity
Debt-service burden
Adequacy capacity
Fixed charge burden
52. The time that elapses to convert raw materials into cash is known as
Operating Cycle
Financial cycle
Business life cycle
Industry life cycle
53. The overall cost of capital will be minimum when the proportion of debt in the capital structure is minimum
T / F (Maximum)
54. When there is capital rationing, it will be possible for the firm to maximize the wealth of the owners and to
maximize the market value per share.
T/F
55. It is akin to the original factoring charges levied on all trade debts, outstanding beyond 60-90 days after due date
Recourse Factoring
Refactoring Charges
Factoring Charges
Maturity charges
56. If calculated pay back period is less than standard pay back period, then the project is -------
Accepted
Rejected
Considered
Cant Say
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