Financial Management Quiz

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Questions and Answers

Focus of financial management is mainly concerned with the decision related to:

Financing

All of above (correct)

Dividend

Investing

The main objective of financial management is to:

Secure profitability

Enhancing the cost of debt

None of above

Maximize shareholder wealth (correct)

The shareholder value maximisation model holds that the primary goal of the firm is to maximise its:

Market value (correct)

Liquidity

Working capital

Accounting profit

Wealth maximisation approach is based on the concept of:

All of the above Signup and view all the answers

Management of all matters related to an organisation's finances is called:

Financial management Signup and view all the answers

Which of the following is the disadvantage of having shareholders wealth maximisation goals?

Offers no clear relationship between financial decisions and share price Signup and view all the answers

The most important goal of financial management is:

Wealth maximisation Signup and view all the answers

To achieve wealth maximization, the finance manager has to take careful decision in respect of:

All the above Signup and view all the answers

Early in the history of finance, an important issue was:

Liquidity Signup and view all the answers

Which of the following are microeconomic variables that help define and explain the discipline of finance?

All of the above Signup and view all the answers

Financial Management is mainly concerned with the-

Acquiring, financing and managing assets to accomplish the overall goal of a business enterprise Signup and view all the answers

Which of the following need not be followed by the finance manager for measuring and maximising shareholders' wealth?

Accounting profit analysis Signup and view all the answers

Equity shares:

Have an unlimited life, and voting rights and receive dividends Signup and view all the answers

External sources of finance do not include:

Retained earnings Signup and view all the answers

In preference shares:

Limited voting rights are available Signup and view all the answers

A debenture:

Is a long-term loan Signup and view all the answers

Debt capital refers to:

Funds raised by borrowing that must be repaid Signup and view all the answers

The most popular source of short-term funding is:

Commercial banks Signup and view all the answers

Marketable securities are primarily:

Short-term debt instruments Signup and view all the answers

Which of the following marketable securities is the obligation of a commercial bank?

Negotiable certificate of deposit Signup and view all the answers

Reserves & Surplus are which form of financing?

Internal Financing Signup and view all the answers

With reference to `IFC Masala Bonds', which of the statements given below is/are correct?

The International Finance Corporation, which offered these bonds, is an arm of the World Bank.

They are rupee-denominated bonds and are a source of debt financing for the public and private sector.

Both 1 and 2 Signup and view all the answers

External Commercial Borrowings can be accessed through ...............

both automatic and approval route Signup and view all the answers

Ratio of Net sales to Net working capital is a:

Working capital turnover ratio Signup and view all the answers

Long-term solvency is indicated by:

Debt/equity ratio Signup and view all the answers

Ratio of net profit before interest and tax to sales is:

Operating profit ratio Signup and view all the answers

Observing changes in the financial variables across the years is:

Horizontal Analysis Signup and view all the answers

The Receivable-Turnover ratio helps management to:

Managing working capital Signup and view all the answers

Which of the following is a liquidity ratio?

Net Working Capital Signup and view all the answers

Which of the following is not a part of Quick Assets?

Disposable investments Signup and view all the answers

Capital Gearing ratio is the fraction of:

Preference Share Capital and Debentures to Equity Share Capital and Reserve & Surplus Signup and view all the answers

From the following information, calculate P/E ratio: Equity share capital of ₹10 each 9% Preference share capital of ₹10 each Profit (after 35% tax) Depreciation Market price of equity share

Equity multiplier allows the investor to see:

How many times equity is multiplied to get the value of debt? Signup and view all the answers

A company has average accounts receivable of ₹10,00,000 and annual credit sales of ₹60,00,000. Its average collection period would be:

60.83 days Signup and view all the answers

A company has net profit margin of 5%, total assets of ₹90,00,000 and return on assets of 9%. Its total asset turnover ratio would be:

1.8 Signup and view all the answers

What does Q ratio measures?

Market value of equity as well as debt in comparison to all assets at their replacement cost Signup and view all the answers

Calculate operating expenses from the information given below: Sales Rate of income tax Net profit to sales Cost of goods sold Interest on debentures

₹34,00,000 Signup and view all the answers

Which of the following is not a profitability ratio?

Preference Dividend Coverage Ratio Signup and view all the answers

Which of the following is not an assumption of the capital asset pricing model (CAPM)?

Investors do not have the same expectations about the risk and return Signup and view all the answers

Given: risk-free rate of return = 5 %; market return = 10%; cost of equity = 15%; value of beta (β) is:

2.0 Signup and view all the answers

... may be defined as the cost of raising an additional rupee of capital:

Marginal cost of capital Signup and view all the answers

Which of the following cost of capital requires to adjust taxes?

Cost of Debentures Signup and view all the answers

Marginal Cost of capital is the cost of:

Additional Funds Signup and view all the answers

In order to calculate Weighted Average Cost of Capital, weights may be based on:

Anyone of the above Signup and view all the answers

Firm's Cost of Capital is the average cost of:

All sources of finance Signup and view all the answers

A company has a financial structure where equity is 70% of its total debt plus equity. Its cost of equity is 10% and gross loan interest is 5%. Corporation tax is paid at 30%. What is the company's weighted average cost of capital (WACC)?

8.05% Signup and view all the answers

The cost of equity capital is all of the following except:

Generally, lower than the before-tax cost of debt Signup and view all the answers

What is the overall (weighted average) cost of capital when the firm has ₹20 crores in long-term debt, ₹4 crores in preferred stock, and ₹16 crores in equity shares? The before-tax cost for debt, preferred stock, and equity capital are 8%, 9%, and 15%, respectively. Assume a 50% tax rate.

7.30% Signup and view all the answers

The assumptions of MM hypothesis of capital structure do not include the following:

Capital markets are imperfect Signup and view all the answers

Which of the following is irrelevant for optimal capital structure?

Control Signup and view all the answers

Financial Structure refers to:

All financial resources Signup and view all the answers

An EBIT-EPS indifference analysis chart is used for:

Examining EPS results for alternative financial plans at varying EBIT levels Signup and view all the answers

The term "capital structure" means:

Long-term debt, preferred stock, and equity shares Signup and view all the answers

The cost of monitoring management is considered to be a (an):

Agency cost Signup and view all the answers

The traditional approach towards the valuation of a firm assumes:

That there is an optimum capital structure Signup and view all the answers

Market values are often used in computing the weighted average cost of capital because:

This is consistent with the goal of maximizing shareholder value Signup and view all the answers

A firm's optimal capital structure:

Is the debt-equity ratio that results in the minimum possible weighted average cost of capital Signup and view all the answers

Capital structure of a firm influences the:

Both Risk and Return Signup and view all the answers

Study Notes

Financial Management - Multiple Choice Questions

Focus of financial management: Primarily concerned with financing and investing decisions.
Main objective of financial management: Maximizing shareholder wealth.
Shareholder value maximization: Aims to maximize the market value of the firm.
Wealth maximization approach: Based on the concept of time value of money.
Financial management: The process of managing a company's finances.
Shareholder wealth maximization disadvantages: Emphasizes short-term gains and ignores the timing of returns.

Types of Financing - Multiple Choice Questions

Equity shares: Have an unlimited life and voting rights, but may or may not receive dividends.
External financing: Does not include retained earnings.
Preference shares: Dividends may not be available, but have limited voting rights.
Debentures: Long-term loans that don't require security.
Debt capital: Money raised through borrowing, which needs to be repaid.
Short-term funding: Primarily obtained from factoring, trade credit, and commercial banks.

Ratio Analysis - Multiple Choice Questions

Ratios of net sales to net working capital: Indicates working capital turnover.
Long-term solvency is indicated by: Debt-to-equity ratio.
Ratio of net profit before interest and tax to sales: Reflects the profitability.
Observing changes in financial variables: Part of horizontal analysis.
Receivable turnover ratio: Helps in managing accounts receivable.
Liquidity ratio: Helps in evaluating the company's short-term ability to pay off its obligations.

Cost of Capital - Multiple Choice Questions

Capital Asset Pricing Model (CAPM) assumptions: Capital markets are efficient and investors have the same expectations of risk and profits.
Cost of capital: Represents the minimum rate of return a company needs to earn on an investment to maintain its market value.
Weighted Average Cost of Capital (WACC): Cost of all capital sources weighted by their proportion in the company's capital structure.
Marginal cost of capital: The cost of raising additional capital.
Cost of Capital calculation: Requires considering market values, or target values, of the capital sources, and involves tax adjustments for debt sources.

Financing Decisions - Capital Structure - Multiple Choice Questions

Assumptions of MM hypothesis: Implies that capital markets are imperfect and investors have homogeneous expectations.
Optimal capital structure: Achieved when the weighted average cost of capital is at its minimum.
Financial leverage: The impact of debt financing on the return to equity shareholders.
Overcapitalization: When a company's actual capitalisation is less than needed for its business capacity.
Approaches to capital structure valuation: Net operating income (NOI) approach.

Dividend Decisions - Multiple Choice Questions

Gordon's Model (Dividend Discount Model): Assumes that the cost of equity (ke) is greater than the growth rate (g).
Optimal dividend payout ratio: Varies with the firm's cost of equity and growth rate.
Irrelevance theory: Suggests dividend policy has no impact on a firm's market value.
Walter model: Suggests that dividend policy affects a firm's market value.
Mature companies: Typically have high payout ratios.

Management of Working Capital - Multiple Choice Questions

Credit terms: Express payment terms (e.g., 3/15 net 60), reflecting discount for prompt payment.
Trade credit: Short-term financing based on credit agreements between vendors and customers.
Working capital management: The process of managing a firm's current assets to ensure smooth operations.
Conservative working capital strategy: Characterized by high levels of current assets.

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Description

Test your knowledge on key concepts of financial management, including financing types, shareholder wealth maximization, and the time value of money. This quiz covers crucial objectives and methods essential for effective financial decision-making.