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CHAPTER 1 SCOPE & OBJECTIVES OF FINANCIAL MANAGEMENT MULTIPLE CHOICE QUESTIONS 1. Focus of financial management is mainly concerned with the decision related to: (a) Financing (b) Investing (c) Dividend (d) All of above. 2. The m...

CHAPTER 1 SCOPE & OBJECTIVES OF FINANCIAL MANAGEMENT MULTIPLE CHOICE QUESTIONS 1. Focus of financial management is mainly concerned with the decision related to: (a) Financing (b) Investing (c) Dividend (d) All of above. 2. The main objective of financial management is to: (a) Secure profitability (b) Maximise shareholder wealth (c) Enhancing the cost of debt (d) None of above. 3. The shareholder value maximisation model holds that the primary goal of the firm is to maximise its: (a) Accounting profit (b) Liquidity (c) Market value (d) Working capital. 4. Wealth maximisation approach is based on the concept of: (a) Cost benefit analysis (b) Cash flow approach (c) Time value of money (d) All of the above. 5. Management of all matters related to an organisation’s finances is called: (a) Cash inflows and outflows (b) Allocation of resources (c) Financial management (d) Finance. 6. Which of the following is the disadvantage of having shareholders wealth maximisation goals? (a) Emphasizes the short-term gains. (b) Ignores the timing of returns. (c) Requires immediate resources. (d) Offers no clear relationship between financial decisions and share price. 7. The most important goal of financial management is: (a) Profit maximisation (b) Matching income and expenditure (c) Using business assets effectively (d) Wealth maximisation. 1.7  SCOPE & OBJECTIVES OF FINANCIAL MANAGEMENT CHAPTER 1 8. To achieve wealth maximization, the finance manager has to take careful decision in respect of: (a) Investment (b) Financing (c) Dividend (d) All the above. 9. Early in the history of finance, an important issue was: (a) Liquidity (b) Technology (c) Capital structure (d) Financing options. 10. Which of the following are microeconomic variables that help define and explain the discipline of finance? (a) Risk and return (b) Capital structure (c) Inflation (d) All of the above. 11. Financial Management is mainly concerned with the- (a) Acquiring and developing assets to forfeit its overall benefit. (b) Acquiring, financing and managing assets to accomplish the overall goal of a business enterprise. (c) Efficient management of the business. (d) Sole objective of profit maximisation. 12. Which of the following need not be followed by the finance manager for measuring and maximising shareholders' wealth? (a) Accounting profit analysis. (b) Cash Flow approach. (c) Cost benefit analysis. (d) Application of time value of money. ANSWERS 1. (d) 2. (b) 3. (c) 4. (d) 5. (c) 6. (d) 7. (d) 8. (d) 9. (a) 10. (d) 11. (b) 12. (a) 1.8  TYPES OF FINANCING CHAPTER 2 MULTIPLE CHOICE QUESTIONS 1. Equity shares: (a) Have an unlimited life, and voting rights and receive dividends (b) Have a limited life, with no voting rights but receive dividends (c) Have a limited life, and voting rights and receive dividends (d) Have an unlimited life, and voting rights but receive no dividends 2. External sources of finance do not include: (a) Debentures (b) Retained earnings (c) Overdrafts (d) Leasing 3. Internal sources of finance do not include: (a) Better management of working capital (b) Ordinary shares (c) Retained earnings (d) Reserve and Surplus 4. In preference shares: (a) Dividends are not available (b) Limited voting rights are available (c) Are not part of a company’s share capital (d) Interest can be received 5. A debenture: (a) Is a long-term loan (b) Does not require security (c) Is a short-term loan (d) Receives dividend payments 6. Debt capital refers to: (a) Money raised through the sale of shares. (b) Funds raised by borrowing that must be repaid. (c) Factoring accounts receivable. (d) Inventory loans. 7. The most popular source of short-term funding is: (a) Factoring. (b) Trade credit. (c) Family and friends. (d) Commercial banks. 2.14  CHAPTER 2 TYPES OF FINANCING 8. Marketable securities are primarily: (a) Short-term debt instruments. (b) Short-term equity securities. (c) Long-term debt instruments. (d) Long-term equity securities. 9. Which of the following marketable securities is the obligation of a commercial bank? (a) Commercial paper (b) Negotiable certificate of deposit (c) Repurchase agreement (d) T-bills 10. Reserves & Surplus are which form of financing? (a) Security Financing (b) Internal Financing (c) Loans Financing (d) International Financing 11. With reference to `IFC Masala Bonds’, which of the statements given below is/are correct? 1. The International Finance Corporation, which offered these bonds, is an arm of the World Bank. 2. They are rupee-denominated bonds and are a source of debt financing for the public and private sector. (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 12. External Commercial Borrowings can be accessed through.............. (a) only automatic route (b) only approval route (c) both automatic and approval route (d) neither automatic nor approval route ANSWERS 1. (a) 2. (b) 3. (b) 4. (b) 5. (a) 6. (b) 7. (b) 8. (a) 9. (b) 10. (b) 11. (c) 12. (c) 2.15  CHAPTER 3 RATIO ANALYSIS MULTIPLE CHOICE QUESTIONS 1. Ratio of Net sales to Net working capital is a: (a) Profitability ratio (b) Liquidity ratio (c) Current ratio (d) Working capital turnover ratio 2. Long-term solvency is indicated by: (a) Debt/equity ratio (b) Current Ratio (c) Operating ratio (d) Net profit ratio 3. Ratio of net profit before interest and tax to sales is: (a) Gross profit ratio (b) Net profit ratio (c) Operating profit ratio (d) Interest coverage ratio. 4. Observing changes in the financial variables across the years is: (a) Vertical analysis (b) Horizontal Analysis (c) Peer-firm Analysis (d) Industry Analysis. 5. The Receivable-Turnover ratio helps management to: (a) Managing resources (b) Managing inventory (c) Managing customer relationship (d) Managing working capital 6. Which of the following is a liquidity ratio? (a) Equity ratio (b) Proprietary ratio (c) Net Working Capital (d) Capital Gearing ratio 7. Which of the following is not a part of Quick Assets? (a) Disposable investments (b) Receivables (c) Cash and Cash equivalents (d) Prepaid expenses 3.5  RATIO ANALYSIS CHAPTER 3 8. Capital Gearing ratio is the fraction of: (a) Preference Share Capital and Debentures to Equity Share Capital and Reserve & Surplus. (b) Equity Share Capital and Reserve & Surplus to Preference Share Capital and Debentures. (c) Equity Share Capital to Total Assets. (d) Total Assets to Equity Share Capital. 9. From the following information, calculate P/E ratio: Equity share capital of `10 each `8,00,000 9% Preference share capital of `10 each `3,00,000 Profit (after 35% tax) `2,67,000 Depreciation `67,000 Market price of equity share `48 (a) 15 times (b) 16 times (c) 17 times (d) 18 times 10. Equity multiplier allows the investor to see: (a) What portion of interest on debt can be covered from earnings available to equity shareholders? (b) How many times preference share interest be paid from earnings available to equity shareholders? (c) What portion of return on equity is the result of debt? (d) How many times equity is multiplied to get the value of debt? 11. A company has average accounts receivable of ` 10,00,000 and annual credit sales of ` 60,00,000. Its average collection period would be: (a) 60.83 days (b) 6.00 days (c) 1.67 days (d) 0.67 days 12. 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: (a) 1.6 (b) 1.7 (c) 1.8 (d) 1.9 13. What does Q ratio measures? (a) Relationship between market value and book value per equity share. (b) Proportion of profit available per equity share. (c) Overall earnings on average total assets. (d) Market value of equity as well as debt in comparison to all assets at their replacement cost. 3.6  CHAPTER 3 RATIO ANALYSIS 14. Calculate operating expenses from the information given below: Sales `75,00,000 Rate of income tax 50% Net profit to sales 5% Cost of goods sold `32,90,000 Interest on debentures `60,000 (a) `41,00,000 (b) `8,10,000 (c) `34,00,000 (d) `33,90,000 15. Which of the following is not a profitability ratio? (a) P/E ratio (b) Return on capital employed (ROCE) (c) Q Ratio (d) Preference Dividend Coverage Ratio ANSWERS 1. (d) 2. (a) 3. (c) 4. (b) 5. (d) 6. (c) 7. (d) 8. (a) 9. (b) 10. (c) 11. (a) 12. (c) 13. (d) 14. (c) 15. (d) 3.7  COST OF CAPITAL CHAPTER 4 MULTIPLE CHOICE QUESTIONS 1. Which of the following is not an assumption of the capital asset pricing model (CAPM)? (a) The capital market is efficient. (b) Investors lend or borrow at a risk-free rate of return. (c) Investors do not have the same expectations about the risk and return. (d) Investor’s decisions are based on a single-time period. 2. Given: risk-free rate of return = 5 %; market return = 10%; cost of equity = 15%; value of beta (β) is: (a) 1.9 (b) 1.8 (c) 2.0 (d) 2.2 3. ……………. may be defined as the cost of raising an additional rupee of capital: (a) Marginal cost of capital (b) Weighted Average cost of capital (c) Simple Average cost of capital (d) Liquid cost of capital 4. Which of the following cost of capital requires to adjust taxes? (a) Cost of Equity Share (b) Cost of Preference Shares, (c) Cost of Debentures (d) Cost of Retained Earnings 5. Marginal Cost of capital is the cost of: (a) Additional Revenue (b) Additional Funds (c) Additional Interests (d) None of the above 6. In order to calculate Weighted Average Cost of Capital, weights may be based on: (a) Market Values (b) Target Values (c) Book Values (d) Anyone of the above 7. Firm’s Cost of Capital is the average cost of: (a) All sources of finance (b) All Borrowings (c) All share capital (d) All Bonds & Debentures 4.2  CHAPTER 4 COST OF CAPITAL 8. 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)? (a) 7.55% (b) 7.80% (c) 8.70% (d) 8.05% 9. The cost of equity capital is all of the following except: (a) The minimum rate that a firm should earn on the equity-financed part of an investment. (b) A return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged. (c) By far, the most difficult component cost to estimate. (d) Generally, lower than the before-tax cost of debt. 10. 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. (a) 7.60% (b) 6.90% (c) 7.30% (d) 8.90% ANSWERS 1. (c) 2. (c) 3. (a) 4. (c) 5. (b) 6. (d) 7. (a) 8. (d) 9. (d) 10. (d) 4.3  FINANCING DECISIONS – CAPITAL STRUCTURE CHAPTER 5 MULTIPLE CHOICE QUESTIONS 1. The assumptions of MM hypothesis of capital structure do not include the following: (a) Capital markets are imperfect (b) Investors have homogeneous expectations (c) All firms can be classified into homogeneous risk classes (d) The dividend-payout ratio is cent percent, and there is no corporate tax 2. Which of the following is irrelevant for optimal capital structure? (a) Flexibility (b) Solvency (c) Liquidity (d) Control 3. Financial Structure refers to: (a) All financial resources (b) Short-term funds (c) Long-term funds (d) None of these 4. An EBIT-EPS indifference analysis chart is used for: (a) Evaluating the effects of business risk on EPS (b) Examining EPS results for alternative financial plans at varying EBIT levels (c) Determining the impact of a change in sales on EBIT (d) Showing the changes in EPS quality over time 5. The term "capital structure" means: (a) Long-term debt, preferred stock, and equity shares (b) Current assets and current liabilities (c) Net working capital (d) Shareholder’s equity 6. The cost of monitoring management is considered to be a (an): (a) Bankruptcy cost (b) Transaction cost (c) Agency cost (d) Institutional cost 7. The traditional approach towards the valuation of a firm assumes: (a) That the overall capitalization rate changes in financial leverage. (b) That there is an optimum capital structure. (c) That the total risk is not changed with the changes in the capital structure. (d) That the markets are perfect. 5.6  CHAPTER 5 FINANCING DECISIONS – CAPITAL STRUCTURE 8. Market values are often used in computing the weighted average cost of capital because: (a) This is the simplest way to do the calculation. (b) This is consistent with the goal of maximizing shareholder value. (c) This is required by SEBI. (d) This is a very common mistake. 9. A firm's optimal capital structure: (a) Is the debt-equity ratio that results in the minimum possible weighted average cost of capital (b) 40 percent debt and 60 percent equity (c) When the debt-equity ratio is 0.50 (d) When Cost of equity is minimum 10. Capital structure of a firm influences the: (a) Risk (b) Return (c) Both Risk and Return (d) Return but not Risk 11. Consider the below mentioned statements: 1. A company is considered to be over-capitalised when its actual capitalisation is lower than the proper capitalisation as warranted by the earning capacity..551. 5 1 2. Both over-capitalisation and under-capitalisation are detrimental to the interests of the society. State True or False: (a) 1-True, 2-True (b) 1-False, 2-True (c) 1-False, 2-False (d) 1-True, 2-False 12. A critical assumption of the Net Operating Income (NOI) approach to valuation is: (a) That debt and equity levels remain unchanged. (b) That dividends increase at a constant rate. (c) That ko remains constant regardless of changes in leverage. (d) That interest expense and taxes are included in the calculation. 13. Which of the following steps may be adopted to avoid the negative consequences of over-capitalisation? (a) The shares of the company should be split up. This will reduce dividend per share, though EPS shall remain unchanged. (b) Issue of Bonus Shares. (c) Revising upward the par value of shares in exchange of the existing shares held by them. (d) Reduction in claims of debenture-holders and creditors. 1. (a) 2. (b) 3. (a) 4. (b) 5. (a) 6. (c) 7. (b) 8. (b) 9. (a) 10. (c) 11. (b) 12. (c) 13. (d) 5.7  FINANCING DECISIONS – LEVERAGES CHAPTER 6 MULTIPLE CHOICE QUESTIONS 1. Given Operating fixed costs `20,000 Sales `1,00,000 P/ V ratio 40% The operating leverage is: (a) 2.00 (b) 2.50 (c) 2.67 (d) 2.47 2. If EBIT is `15,00,000, interest is `2,50,000, corporate tax is 40%, degree of financial leverage is; (a) 1.11 (b) 1.20 (c) 1.31 (d) 1.41 3. If DOL is 1.24 and DFL is 1.99, DCL would be: (a) 2.14 (b) 2.18 (c) 2.31 (d) 2.47 4. Operating Leverage is calculated as: (a) Contribution ÷ EBIT (b) EBIT ÷ PBT (c) EBIT ÷ Interest (d) EBIT ÷ Tax 5. Financial Leverage is calculated as: (a) EBIT ÷ Contribution (b) EBIT ÷ PBT (c) EBIT ÷ Sales (d) EBIT ÷ Variables Cost.29 6. Which of the following is correct? (a) CL = OL + FL (b) CL = OL – FL (c) CL = OL x FL (d) OL = OL ÷ FL 7. Which of the following indicates business risk? (a) Operating leverage 6.2  CHAPTER 6 FINANCING DECISIONS – LEVERAGES (b) Financial leverage (c) Combined leverage (d) Total leverage 8. Degree of combined leverage is the fraction of: (a) Percentage change in EBIT on Percentage change in Sales. (b) Percentage change in EPS on Percentage change in Sales. (c) Percentage change in Sales on Percentage change in EPS. (d) Percentage change in EPS on Percentage change in EBIT. 9. From the following information, calculate combined leverage: Sales `20,00,000 Variable Cost 40% Fixed Cost `10,00,000 Borrowings `10,00,000 @ 8% p.a. (a) 10 times (b) 6 times (c) 1.667 times (d) 0.10 times 10. Operating leverage is a function of which of the following factors? (a) Amount of variable cost. (b) Variable contribution margin. (c) Volume of purchases. (d) Amount of semi-variable cost. 11. Financial leverage may be defined as: (a) Use of funds with a product cost in order to increase earnings per share. (b) Use of funds with a contribution cost in order to increase earnings before interest and taxes. (c) Use of funds with a fixed cost in order to increase earnings per share. (d) Use of funds with a fixed cost in order to increase earnings before interest and taxes. 12. If Margin of Safety is 0.25 and there is 8% increase in output, then EBIT will be: (a) Decrease by 2% (b) Increase by 32% (c) Increase by 2% (d) Decrease by 32% 13. If degree of financial leverage is 3 and there is 15% increase in Earning per share (EPS), then EBIT will be: (a) Decrease by 15% (b) Increase by 45% (c) Decrease by 45% (d) Increase by 5% 6.3  FINANCING DECISIONS – LEVERAGES CHAPTER 6 14. When EBIT is much higher than Financial break-even point, then degree of financial leverage will be slightly: (a) Less than 1 (b) Equals to 1 (c) More than 1 (d) Equals to 0 15. Firm with high operating leverage will have: (a) Higher breakeven point (b) Lower business risk (c) Higher margin of safety (d) All of above 16. When sales are at breakeven point, the degree of operating leverage will be: (a) Zero (b) Infinite (c) One (d) None of above 17. If degree of combined leverage is 3 and margin of safety is 0.50, then degree of financial leverage is: (a) 6.00 (b) 3.00 (c) 0.50 (d) 1.50 ANSWERS 1. (a) 2. (b) 3. (d) 4. (a) 5. (b) 6. (c) 7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (b) 13. (d) 14. (c) 15. (a) 16. (b) 17. (d) 6.4  CHAPTER 7 INVESTMENT DECISIONS OR CAPITAL BUDGETING MULTIPLE CHOICE QUESTIONS 1. A capital budgeting technique which does not require the computation of cost of capital for decision making purposes is: (a) Net Present Value method (b) Internal Rate of Return method (c) Modified Internal Rate of Return method (d) Payback Period method 2. If two alternative proposals are such that the acceptance of one shall exclude the possibility of the acceptance of another then such decision making will lead to: (a) Mutually exclusive decisions (b) Accept reject decisions (c) Contingent decisions (d) None of the above 3. In case a company considers a discounting factor higher than the cost of capital for arriving at present values, the present values of cash inflows will be: (a) Less than those computed on the basis of cost of capital (b) More than those computed on the basis of cost of capital (c) Equal to those computed on the basis of the cost of capital (d) None of the above 4. If the cut off rate of a project is greater than IRR, we may: (a) Accept the proposal (b) Reject the proposal (c) Be neutral about it (d) Wait for the IRR to increase and match the cut off rate 5. While evaluating capital investment proposals, time value of money is used in which of the following techniques: (a) Payback Period method (b) Accounting rate of return (c) Net present value (d) None of the above 6. IRR would favour project proposals which have: (a) Heavy cash inflows in the early stages of the project. (b) Evenly distributed cash inflows throughout the project. (c) Heavy cash inflows at the later stages of the project. (d) None of the above. 7. The re-investment assumption in the case of the IRR technique assumes that: (a) Cash flows can be re-invested at the projects IRR. 7.5  INVESTMENT DECISIONS OR CAPITAL BUDGETING CHAPTER 7 (b) Cash flows can be re-invested at the weighted cost of capital. (c) Cash flows can be re-invested at the marginal cost of capital. (d) None of the above 8. Multiple IRRs are obtained when: (a) Cash flows in the early stages of the project exceed cash flows during the later stages. (b) Cash flows reverse their signs during the project. (c) Cash flows are uneven. (d) None of the above. 9. Depreciation is included as a cost in which of the following techniques: (a) Accounting rate of return (b) Net present value (c) Internal rate of return (d) None of the above 10. Management is considering a `1,00,000 investment in a project with a 5 year life and no residual value. If the total income from the project is expected to be `60,000 and recognition is given to the effect of straight line depreciation on the investment, the average rate of return is: (a) 12% (b) 24% (c) 60% (d) 75% 11. Assume cash outflow equals `1,20,000 followed by cash inflows of `25,000 per year for 8 years and a cost of capital of 11%. What is the Net present value? (a) (`38,214) (b) `9,653 (c) `8,653 (d) `38,214 12. What is the Internal rate of return for a project having cash flows of ` 40,000 per year for 10 years and a cost of `2,26,009? (a) 8% (b) 9% (c) 10% (d) 12% 13. While evaluating investments, the release of working capital at the end of the project's life should be considered as: (a) Cash inflow (b) Cash outflow (c) Having no effect upon the capital budgeting decision (d) None of the above 7.6  CHAPTER 7 INVESTMENT DECISIONS OR CAPITAL BUDGETING 14. Capital rationing refers to a situation where: (a) Funds are restricted and the management has to choose from amongst available alternative investments. (b) Funds are unlimited and the management has to decide how to allocate them to suitable projects. (c) Very few feasible investment proposals are available with the management. (d) None of the above. 15. Capital budgeting is done for: (a) Evaluating short term investment decisions. (b) Evaluating medium term investment decisions. (c) Evaluating long term investment decisions. (d) None of the above. ANSWERS 1. (d) 2. (a) 3. (a) 4. (b) 5. (c) 6. (a) 7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (d) 13. (a) 14. (a) 15. (c) 7.7  CHAPTER 8 DIVIDEND DECISIONS MULTIPLE CHOICE QUESTIONS 1. Which one of the following is the assumption of Gordon’s Model: (a) Ke > g (b) Retention ratio, (b), once decide upon, is constant (c) Firm is an all equity firm (d) All of the above 2. What should be the optimum Dividend pay-out ratio, when r = 15% & Ke = 12%: (a) 100% (b) 50% (c) Zero (d) None of the above. 3. Which of the following is the irrelevance theory? (a) Walter model (b) Gordon model (c) M.M. hypothesis (d) Linter’s model 4. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growth rate? (a) 5% (b) 7% (c) 6.4% (d) 9.6% 5. If the shareholders prefer regular income, how does this affect the dividend decision? (a) It will lead to payment of dividend (b) It is the indicator to retain more earnings (c) It has no impact on dividend decision (d) Can’t say 6. Mature companies having few investment opportunities will show high pay-out ratios, this statement is: (a) False (b) True (c) Partial true (d) None of these 8.41 7. Which of the following is the limitation of Linter’s model? (a) This model does not offer a market price for the shares. (b) The adjustment factor is an arbitrary number and not based on any scientific criterion or methods. (c) Both (a) & (b) (d) None of the above. 8.5  DIVIDEND DECISIONS CHAPTER 8 8. What are the different options other than cash used for distributing profits to shareholders? (a) Bonus shares (b) Stock split (c) Both (a) and (b) (d) None of the above 9. Which of the following statement is correct with respect to Gordon’s model? (a) When IRR is greater than cost of capital, the price per share increases and dividend pay-out decreases. (b) When IRR is greater than cost of capital, the price per share decreases and dividend pay-out increases. (c) When IRR is equal to cost of capital, the price per share increases and dividend pay-out decreases. (d) When IRR is lower than cost of capital, the price per share increases and dividend pay-out decreases. 10. Compute EPS according to Graham & Dodd approach from the given information: Market price `56 Dividend pay-out ratio 60% Multiplier 2 (a) `30 (b) `56 (c) `28 (d) `84 11. Which among the following is not an assumption of Walter’s Model? (a) Rate of return and cost of capital are constant (b) Information is freely available to all (c) There is discrimination in taxes (d) The firm has perpetual life ANSWERS 1. (d) 2. (c) 3. (c) 4. (c) 5. (a) 6. (b) 7. (c) 8. (a) 9. (a) 10. (a) 11. (c) 8.6  MANAGEMENT OF WORKING CAPITAL CHAPTER 9 MULTIPLE CHOICE QUESTIONS 1. The credit terms may be expressed as “3/15 net 60”. This means that a 3% discount will be granted if the customer pays within 15 days, if he does not avail the offer, he must make payment within 60 days. (a) I agree with the statement (b) I do not agree with the statement (c) I cannot say. 2. The term ‘net 50’ implies that the customer will make payment: (a) Exactly on 50th day (b) Before 50th day (c) Not later than 50th day (d) None of the above. 3. Trade credit is a source of: (a) Long-term finance (b) Medium term finance (c) Spontaneous source of finance (d) None of the above. 4. The term float is used in: (a) Inventory Management (b) Receivable Management (c) Cash Management (d) Marketable securities. 5. William J Baumol’s model of Cash Management determines optimum cash level where the carrying cost and transaction cost are: (a) Maximum (b) Minimum (c) Medium (d) None of the above. 6. In Miller – ORR Model of Cash Management: (a) The lower, upper limit, and return point of Cash Balances are set out (b) Only upper limit and return point are decided (c) Only lower limit and return point are decided (d) None of the above are decided. 7. Working Capital is defined as: (a) Excess of current assets over current liabilities (b) Excess of current liabilities over current assets (c) Excess of Fixed Assets over long-term liabilities (d) None of the above. 9.8  CHAPTER 9 MANAGEMENT OF WORKING CAPITAL 8. Working Capital is also known as “Circulating Capital, fluctuating Capital and revolving capital”. The aforesaid statement is; (a) Correct (b) Incorrect (c) Cannot say. 9. The basic objectives of Working Capital Management are: (a) Optimum utilization of resources for profitability (b) To meet day-to-day current obligations (c) Ensuring marginal return on current assets is always more than cost of capital (d) Select any one of the above statements. 10. The term Gross Working Capital is known as: (a) The investment in current liabilities (b) The investment in long-term liability (c) The investment in current assets (d) None of the above. 11. The term net working capital refers to the difference between the current assets minus current liabilities. (a) The statement is correct (b) The statement is incorrect (c) I cannot say. 12. The term “Core current assets’ was coined by: (a) Chore Committee (b) Tandon Committee (c) Jilani Committee (d) None of the above. 13. The concept operating cycle refers to the average time which elapses between the acquisition of raw materials and the final cash realization. This statement is: (a) Correct (b) Incorrect (c) Partially True (d) I cannot say. 14. As a matter of self-imposed financial discipline can there be a situation of zero working capital now-a- days in some of the professionally managed organizations. (a) Yes (b) No (c) Impossible (d) Cannot say. 9.1 1 3 9.9  MANAGEMENT OF WORKING CAPITAL CHAPTER 9 15. Over trading arises when a business expands beyond the level of funds available. The statement is: (a) Incorrect (b) Correct (c) Partially correct (d) I cannot say. 16. A Conservative Working Capital strategy calls for high levels of current assets in relation to sales. (a) I agree (b) Do not agree (c) I cannot say. 17. The term Working Capital leverage refer to the impact of level of working capital on company’s profitability. This measures the responsiveness of ROCE for changes in current assets. (a) I agree (b) Do not agree (c) The statement is partially true. 18. The term spontaneous source of finance refers to the finance which naturally arise in the course of business operations. The statement is: (a) Correct (b) Incorrect (c) Partially Correct (d) I cannot say. 19. Under hedging approach to financing of working capital requirements of a firm, each asset in the balance sheet assets side would be offset with a financing instrument of the same approximate maturity. This statement is: (a) Incorrect (b) Correct (c) Partially correct (d) I cannot say. 20. Trade credit is a: (a) Negotiated source of finance (b) Hybrid source of finance (c) Spontaneous source of finance (d) None of the above. 21. Factoring is a method of financing whereby a firm sells its trade debts at a discount to a financial institution. The statement is: (a) Correct (b) Incorrect (c) Partially correct (d) I cannot say. 9.10  CHAPTER 9 MANAGEMENT OF WORKING CAPITAL 22. A factoring arrangement can be both with recourse as well as without recourse: (a) True (b) False (c) Partially correct (d) Cannot say. 23. The Bank financing of working capital will generally be in the following form. Cash Credit, Overdraft, bills discounting, bills acceptance, line of credit; Letter of credit and bank guarantee. (a) I agree (b) I do not agree (c) I cannot say. 9.1 24. When the items of inventory are classified according to value of usage, the technique is known as: (a) XYZ Analysis (b) ABC Analysis (c) DEF Analysis (d) None of the above. 25. When a firm advises its customers to mail their payments to special Post Office collection centers, the system is known as. (a) Concentration banking (b) Lock Box system (c) Playing the float (d) None of the above. ANSWERS 1. (a) 2. (c) 3. (c) 4. (c) 5. (b) 6. (a) 7. (a) 8. (a) 9. (b) 10. (c) 11. (a) 12. (b) 13. (a) 14. (a) 15. (b) 16. (a) 17. (a) 18. (a) 19. (b) 20. (c) 21. (a) 22. (a) 23. (a) 24. (b) 25. (b) 9.11