ANSWER KEY

Financial Management, Chapter 11 (b), 2 (a), 3 (a), 4 (d), 5 (b), 6 (a), 7 (b), 8 (c), 9 (c), 10 (c)

1. Financial Management deals with procurement and of funds for the benefit of its stakeholders.a) Short useb) Effective utilization c) Repaymentd) Least cost

2. is based on cash flows. a) Wealth maximizationb) Profit maximizationc) Wealth Minimization d) Profit Minimization 3. lead to investment in real assets.a) Investment Decisions b) Liquidity Decisionc) Operating Decision d) Financing Decision

4. relate to the acquisition of funds at the least cost.a) Investment Decisions b) Liquidity Decisionc) Operating Decision d) Financing Decision

5. Formulation of inventory policy is an important element of . a) Financingb) Liquidity c) Dividend d) Taxation

6. Obtaining Finance is an important function of _. a) Treasurersb) Controller c) CFOd) Accountant

7. Taxation and Insurance is an important function of _. a) Treasurersb) Controller c) CFOd) Accountant

8. All corporate decisions have implications. a) Productionb) Operational c)Financiald) Secondary

9. Two approaches to financial management are and approaches. a) Traditional, operationalb) Balanced, unbalanced c) Traditional, modernd) Current, future

10. Value is the cardinal rule of efficient financial managers today. a) Minimizationb) Maintenance c) Maximization d) Alteration

Time value, Chapter 21 (a), 2 (a), 3 (a), 4 (b), 5 (c), 6 (a), 7 (c), 8 (a), 9 (d), 10 (d)1. The important factors contributing to time value of money are _, _ , and _. a) Investment opportunities, preference for consumption, risk b) Purchasing power, compounding, discountingc) Investment opportunities, preference for consumption, discounting d) Purchasing power, preference for consumption, risk

2. During periods of inflation, a rupee has a _ than a rupee in future.a) Higher purchasing power b) Lower purchasing power c) Equal purchasing powerd) Different purchasing power

3. As future is characterized by uncertainty, individuals prefer Consumption to consumption.a) Current, future b) Future, current c) Daily, annuald) Past, future

4. There are two methods by which time value of money can be calculated by _ and _ techniques.a) Compounding, annuityb) Compounding, discounting c) Annuity, present valued) Present value, discounting

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

d) Fixed sum

6. The of a future cash flow is the amount of the current cash that is equivalent to the investor.a) Present value b) Current value c) Compounding d) Annuity

7. An annuity for an infinite time period is called . a) Discountingb) Capacityc) Perpetuity d) Capital

8. The reciprocal of the present value annuity factor is called . a) Capital Recovery Factorb) Annual Recovery factor c) Time recovery factord) Preference recovery factor

9. Doubling period rules are, rule of and rule of . a) 71, 96b) 72, 96 c) 71, 69 d) 72, 69

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

Cost of Capital, Chapter 31 (d), 2 (c), 3 (c), 4 (a), 5 (b), 6 (c), 7 (b), 8 (a), 9 (c), 10 (c)

1. is the mix of long term sources of funds like debentures, loans, preference shares, equity shares and retained earnings in different ratios.a) Working capital b) Cost of capitalc) Leveraged) Capital structure

2. The capital structure of a company should generate to the shareholders. a) Working capitalb) Cost of capitalc) Maximum Return d) Leverage

3. The capital structure of the company should be within the . a) Earning capacityb) Maximum limit c) Debt capacityd) Minimum Limit

4.An ideal capital structure should involve minimum risk of to the company. a) loss of controlb) loss of finance c) loss of capital d) loss of equity

5. do not have a fixed rate of return on their investment. a) Preference shareholders b) Equity shareholdersc) Debenture holders d) Banker

6. According to Dividend forecast approach, the intrinsic value of an equity share is the sum of present value of associated with it.a) Share b) Moneyc) Dividend d) Capital

7. Capital asset pricing model approach is:a) Ke= Rf - b(Rm+Rf) b) Ke= Rf + b(Rm-Rf) c) Ke= Rf + b(Rm+Rf) d) Ke= Rf - b(Rm-Rf)

8. Earnings price ratio approach: Ke =E1/P, Where E1 is- a) Expected EPS one Yr. henceb) Earning price per share c) Earning Ratio per shared) Earning capacity per share

9.Supersonic industries has entered into an agreement with Indian Overseas Bank for a loan of Rs. 10Cr. With an interest rate of 10%. What is the cost of the loan if the tax rate is 45%.a) 7.5% b) 6.5% c) 5.5%d) 4.5%

10.According to dividend forecast approach, the intrinsic value of an equity share is the sum of the present values of associated with it.a) Share

b) Moneyc) Dividend d) Capital

Leverage, Chapter 4

1 (b), 2 (a), 3 (c), 4 (b), 5 (c), 6 (d), 7 (a), 8 (a), 9 (b), 10 (b)

1. arises due to the presence of fixed operating expenses in the firm’s income flows.a) Financial Leverage b) Operating Leverage c) Operating Cycled) Financial Ratio

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

3. Higher operating risks can be taken when of companies are rising. a) Expense levelb) Capital Structure c) Income Leveld) Working Capital

4. Dividend on is a fixed charge. a) Small value sharesb) Preference Sharesc) Equity Shares d) All the shares

5. Financial Leverage is also referred to as trading on _. a) Preferenceb) Shares c) Equityd) Gold

6.There are three measures of leverage – leverage, leverage and leverage.a) Primary, secondary, total b) Combined, current, futurec) Financial, Investment, Dividend d) Financial, operating, combined

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

b) Minusc) Divided bye) Multiplied by

8. Financial leverage refers to the mix of debt and equity in the of the firm.a) Capital structure b) Assetsc) Net profit d) EBIT9.High financial costs are associated with DFL. a) Lowb) Highc) Medium d) None of the above

10. A high DOL is a measure of business risk and vice versa. a) Lowb) Highc) Mediumd) None of the above

Capital Structure, Chapter 5

1 (a), 2 (b), 3 (a), 4 (b), 5 (d), 6 (a)

1.Financing mix decisions have no impact on the of the firm. a) Operating Earningsb) Production c) Operations d) Finance

2. The value of a firm is dependent on its expected future and the required rate of . a) Loss, returnb) Earnings, return c) Projects, lossd) Projects, earnings

3. and are two important sources of long term sources of finance of a firm.a) Equity, debtb) Fixed capital, working capitalc) Short term loan, long term loan d) Income, profit

4. As the ratio of debt to equity increases, the declines and of firm increases. a) Market value, WACCb) WACC, Market value c) Profit, WACCd) WACC, loss

5. As per the NOI approach the overall rate remains constant for all degrees of leverage. a) Net profitb) Dividend c) Marketd) Capitalization

6. is the process of buying a security at lower price in one market and selling it in another market at a higher price bringing about .a) Arbitrage, equilibrium b) Arbitrage, leveragec) Leverage, Arbitraged) Capitalization, Arbitrage

Capital budgeting, Chapter 6

1(a), 2 (b), 3 (a), 4 (b), 5 (a), 6 (d), 7 (d), 8 (a), 9 (a), 10 (b)1. make or mar a business. a) Capital Budgetingb) Capitalc) Fixed capitald) Working capital

2. decisions involve large outlay of funds now in anticipation of cash inflows in future. a) Make or buyb) Capital budgeting c) Fixed capitald) Working capital

3. Social, political, economic and technological forces make capital budgeting decisions _. a) Complex b) Simplec) Analytical d) Easy

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

6. Forcasting of future operating cash flows suffers from because the future is

a) Certainty, highly uncertain b) Certainty, certainc) Uncertainty, certaind) Uncertainty, highly uncertain

7. Post completion audit is in the phases of capital budgeting decisions.a) First Stepb) Third step c) Fifth step d) Final step

8. Identification of investment opportunity is in the phases of capital budgeting decisions. a) First Stepb) Third step c) Fifth step d) Final step 9. Analyzing the demand and supply condition of the market for the company’s products could be a source of potential investment proposal. a) Fertileb) Futilec) Primaryd) Secondary

10. Generation of ideas for capital budgets and screening the same can be considered the most phase of capital budgeting decision. a) Uselessb) Crucialc) Beneficiald) None of the above

Risk analysis in capital budgeting, Chapter 7

1 (b), 2 (d), 3 (a), 4 (c), 5 (b), 6 (a), 7 (b), 8 (c), 9 (a), 10 (c)

1. is measured by the variability of expected returns of the project. a) Stand alone profitb) Stand alone risk c) Net profitd) Dividend paying capacity

2. Market risk is measured by the effect of the project on the of the firm. a) Thetab) PI c) IRR

d) Beta

3. Firms cannot market risk in the normal course of business. a) Diversifyb) Ignorec) Multiply d) Generate

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

7. Higher the risk the premium. a) Lowerb) Higher

8. CE coefficient is the _. a) Return adjusted factorb) Risk premiumc) Risk adjusted factor d) Certain Earning

9. Discount factors to be used under CE approach is _. a) Risk free rate b) Risk adjusted rate c) Sensitivity rated) Risk premium rate

10. Because of high CE clears only good projects. a) Outflowb) Turnover

c) Conservation d) Rating

Working Capital, Chapter- 8

1 (a), 2 (b), 3 (a), 4 (c), 5 (a), 6 (b), 7 (b), 8 (a), 9 (c), 10 (b)1.Maintaining adequate working capital at the satisfactory level is crucial for the of a firm a) Maintaining, competitiveness b) Maintaining, profitabilityc) Maintaining, capital structure d) Maintaining, investment

2.Prepaid expenses are _.a) Current liabilityb) Current assetc) Term loand) Provision

3.Provision for tax is .a) Current liability b) Current assetc) Term loan d) Provision4.A firm must have working capital.

a) As much possible b) As low as possible c) Adequated) None of the above

5. refers to the amount invested in current assets. a) Gross working capitalb) Net working capital c) Investmentd) Current investment

6. When current assets exceed current liabilities the net working capital is . a) Negative b) Positivec) None of the above

7 Permanent working capital is called working capital. a) Currentb) Fixedc) Investedd) Capitalized

8. Objective of working capital management is achieving a trade off between and . a) Liquidity, profitability b) Assets, liabilitiesc) Cash, inventoryd) Fixed assets, current assets

9. To finance the operations in of a firm, working capital is required.a) Factoryb) Office workc) Operating cycled) None of the above

10. To finance operations during the time gap between and working capital is required.a) Credit sale, cash saleb) Credit sale, realization of money c) Sale, purchased) Credit purchase, cash purchase

Cash Management, Chapter- 9

1 (b), 2 (a), 3 (c), 4 (c), 5 (d), 6 (a), 7 (a), 8 (b), 9 (c), 10 (b)

1. Management of cash balances can be done by and . a) Trade credit, investing surplus cashb) Deficit financing, investing surplus cash c) Deficit financing, trade creditd) Cash budget, control

2. The four motives of holding cash are _, , and . a) Transaction, speculative, precautionary, compensatingb) Budgetary, speculative, precautionary, compensating c) Investment, Transaction, speculative, precautionary d) Investment, budgetary, speculative, precautionary

3. The greater the creditworthiness of the firm in the market lesser is the need for balances. a) Transactionb) Speculativec) Precautionary d) Compensating

4. refers to the credit extended by the supplier of goods and services in the normal course of business transactions.a) Transactionb) Credit worthiness c) Trade creditd) Holding cash

5. When cheques are deposited in a bank, credit balance increases in the firm’s books but not in bank’s books until the cheque is cleared and money realized. This is called as .a) Transaction float b) Credit worthiness c) Trade creditd) Collection float

6. According to Baumol model, the total cost associated with cash management has two elements and .a) Cost of conversion of marketable securities into cash, opportunity cost b) Marketable securities, conversion expensec) Forecasting expense, opportunity costd) None of the above

7. The MO model assumes that cash balances randomly fluctuate between a _ and a _ .a) Upper bound, lower boundb) Trade credit, investing surplus cashb) Deficit financing, investing surplus cash c) Deficit financing, trade creditd) Cash budget, control

8. Cash management is concerned with determination of relevant balances and and their efficient use.a) Fixed asset balances, current asset balances b) levels of cash balances, near cash assetsc) Upper bound, lower bound b) Trade credit, surplus cash

9. Baumol model assumes that cash flow does not . a) Increase b) Decrease c) Fluctuated) None of the above

10.The Miller-Orr model daily cash fluctuations. a) Does not considerb) Considers

Inventory Management, Chapter-10

1 (a), 2 (b), 3 (c), 4 (b), 5 (d), 6 (c), 7 (a), 8 (d), 9 (a), 10 (b)

1. Lead time is the time required to _. a) Obtain new inventoryb) Sell finished stock c) Obtain new order

d) Make the product

2. Costs of not carrying enough inventory is _. a) lost sales.b) Customer disappointment. c) Possible worker layoffsd) All of these.

3. EOQ is the order quantity that . a) Minimizes total ordering costsb) Minimizes total carrying costs c) Minimizes total inventory costs d) The required safety stock

4. assumes that the raw materials (goods) received first are used first. a) LIFOb) FIFO c) HIFO d) NIFO 5. Maximum level is that level above which stock of inventory should rise. a) Alwaysb) Sometimes c) Yearlyd) Never

6.Both excess and shortage of inventory affect the firm’s . a) Reputationb) Capacity to work c) Profitabilityd) None of the above

7.Precautionary motive of holding inventory is for guarding against the risk of and supply. a) Change in demandb) Change in capital structure c) Change in productiond) None of the above

8. Costs incurred for maintaining the inventory in warehouse are called . a) Setting up costb) Ordering cost c) Labour costd) Carrying cost9. ‘A’ items are value but in numbers.a) High, small b) Small, high

c) Small, medium d) Medium, high

10. ‘C’ items are value but in numbers. a) High, smallb) Small, highc) Small, medium d) Medium, high

Receivables Management, Chapter-11

1 (a), 2 (a), 3 (a), 4 (d), 5 (b), 6 (b), 7 (c), 8 (d), 9 (c), 10 (a)

1. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:a) An increase in the average collection period. b) A decrease in bad debt losses.c) An increase in sales. d) Higher profits.

2. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?a) Lower than the present level.b) No change from the present level. c) Higher than the present level.d) Unable to determine without more information.

3. An increase in the firm's receivable turnover ratio means that:a) It is collecting credit sales more quickly than before. b) Cash sales have decreased.c) It has initiated more liberal credit terms. d) Inventories have increased.

4.Costs of maintaining receivables are , and costs. a) Capital, works , delinquencyb) Administration, delinquency, works c) Capital, administration, works d) Capital, administration, delinquency5.To accelerate the turnover of receivables, a firm may either shorten the discount period or increase the discount offereda) False b) True

6. A period of “Net 30” means that it allows to its customers 30 days of credit with for .a) No inducement, late payment b) No inducement, early payment c) Inducement, Late payment

d) Inducement, early payment

7. refer to the criteria for extending credit to customers. a) Debit standardb) Capital structure c) Credit standardsd) None of the above

8. A cash discount of 2/10 net 20 means that a is offered if the payment is madea) Cash discount of 20%, 20th day b) Cash discount of 2%, 20th day c) Cash discount of 20%, 10th day d) Cash discount of 2%, 10th day 9. Optimum credit policy maximizes the . a) Number of debtors of the firmb) Number of creditors of the firm c) Value of the firmd) Taxes of the firm

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

Dividend decision, Chapter-12

1 (d), 2 (d), 3 (c), 4 (b), 5 (a), 6 (b), 7 (a), 8 (d), 9 (c),10 (b)

1. Retained earning are a) An indication of a company's liquidity. b) The same as cash in the bank.c) Not important when determining dividends.d) The cumulative earnings of the company after dividends.

2. Which of the following is an argument for the relevance of dividends?a) Informational content.b) Reduction of uncertainty.c) Some investors' preference for current income. d) All of the above

3. All of the following are true of stock splits except :a) Market price per share is reduced after the split. b) The number of outstanding shares is increased. c) Retained earnings are changed. d) Proportional ownership is unchanged.

4. The dividend-payout ratio is equal to a) The dividend yield plus the capital gains yield.b) Dividends per share divided by earnings per share. c) Dividends per share divided by par value per share. d)Dividends per share divided by current price per share.

5.Gordon's model assumes investors are and risk-averse. a) Rationalb) Irrational c) Ignorantd) None of the above

6. Miller and Modigliani explain that a firm's dividend policy is and has no effect on the share prices of the firm.a) Relevant b) Irrelevant c) Importantd) None of the above

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

8. uses the Dividend Capitalization Model to study the effect of the firm's dividend policy on the stock price.a) James b) Walterc) Miller and Modigliani d) Gordon

9. This is another assumption made by that there are no transaction costs like brokerage involved in capital market.a) James b) Walterc) Miller and Modigliani d) Gordon

10. As per approach, there is a direct relationship between P/E ratios and dividend pay-out ratio.a) Dividend Relevance b) Traditional

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c) MMd) None of the above

Assi g n men t 3 (40 M CQs)

1. We all live under conditions of and . a) Risk, returnb) Risk, uncertaintyc) Return, premiumd) Uncertainty, premium

2. Find the present value of Rs.1,00,000 receivable after 10 yrs.if 10% is time preference for money.a) 38400b) 38500c) 38600d) 38700

3 What is the future value of a regular annuity of Re.1 earning a rate of 12% interest p.a. for 5 Years?a) 5.353b) 6.353c) 7.353d) 7.153

4.If a borrower promises to pay Rs.20000 eight years from now in return for a loan of Rs.12550 today, what is the annual interest being offered?

a) 6% approxb) 7% approx c) 8% approx d) 9% approx

5.A loan of Rs.5,00,000 is to be repaid in 10 equal instalments. If the loan carries12% interest p.a.. What is the value of one installment?

a) 68492b) 78492c) 88492d) 98492

6 If you deposit Rs.10,000 today in a bank that offers 8% interest, in how many years will this amount double by 72 rule?

7 An employee of a bank deposits Rs.30,000 into his FD A/c at the end of each year for 20 yrs. What is the amount he will accumulate in his FD at the end of 20 years, if the rate of interest is 9%. a) 1534800b) 1535000

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c) 1535200d) 1535400

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8a) Make or buy

decisions could be grouped into two categories.

b) Capi tal bud geti n gc) Fixed capitald) Working capital

9.a) Co st r edu cti onb) Productionc) Investmentd) dividend

10.a) Financialb) Costc) Ec on omicd) Technical

and revenue generation are the two important categories of capital budgeting.

appraisal examines the project from the social point of view.

11. A11 technical aspects of the implementation of the project are considered ina) Financialb) Costc) Economicd) T echn ical

appraisal.

12a) Fin an ci al viabi li tyb) Cost viabilityc) Economic viabilityd) Technical viability

of a project is examined by financial appraisal.

13.Among the elements that are to be examined under commercial appraisal, the most crucial one is the

a) Supply of the productb) Deman d f or th e pr odu ctc) Cost of the productd) Elements of cost

14. Formulating is the third step in the evaluation of investment proposala) Nob )Y e s

15. A is not a relevant cost for the project decision.a) Sun k co stb) Direct costc) Indirect costd) Works cost

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16. Effect of a project on the working of other parts of a firm is known as .a) Separation principalb) Formulationc) Ext ern al iti esd) After effects

17.The essence of separation principal is the necessity to treat elements of a project

separately from that ofa) Production, operationsb) Financing, productionc) In vest men t, fin an cin gd) Investment, production

elements.

18. Payback perioda) I gn or esb) Considersc) None of the above

19.IRR gives a rate of return that reflects thea) Costb) Prof itabi li tyc) Cash inflowsd) Cash outflows

tine value of money.

of the project.

20.The methods of appraising an investment proposal can be grouped into methods.

a) Tr ad iti on al, mod ernb) Primary, secondaryc) First, secondd) old, new

methods and

21. The time gap between acquisition of resources from suppliers and collection of cash from customers is known asa) Financial yearb) Calendar yearc) Op er ati n g cycl ed) Current cycle

22. is the average length of time required to produce and sell the product.a) Inventory periodb) Stock cyclec) In ven tor y con ver sion p eri odd) None of the above

23. is the average length of time required to convert the firm's receivables into cash.a) Receivables period

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b) Receivables cyclec) Receivabl es con ver si on p eri odd) None of the above

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24. is length of time between firm's actual cash expenditure and its own receipt.a) Cash conversion periodb) Cash cyclec) Cash periodd) Cash and bank cycle

25. Capital intensive industries require working capital.a) Lowerb) Mediumc) Higherd) Non e of th e ab ove

amount of

26. There is a firm.a) Posi ti ve dir ect corr el ati onb) Negative direct correlationc) Negative indirect correlationd) Positive indirect correlation

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

27. Under inflationing conditions same level of inventory will require working capital.a) Decreased b ) In c r ea sed c) Samed) zero

investment in

28. Longer the manufacturing cyclea) Lar gerb) smaller

the investment in working capital.

29. is used to estimate working capital requirement of a firm.a) Trend analysisb) Risk analysisc) Capital rationingd) Op er ati n g cycl e

30. Operating cycle approach is based on the assumption that production and sales occur ona) Con tinuou s b asi sb) Alternate basisc) Alternate & Continuous basisd) None of the above

31.a) IRR b) NPV c ) C E D) PI

is considered to be superior to RADR.

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32. analyse the changes in the project NPV on account of a given change in one of the

input variables of the project.a) Sen si ti vit y an al ysi sb) Profitability Indexc) Project evaluationd) Risk analysis

33. Examining and defining the mathematical relation between the variable of the NPV is one of thesteps of _.a) Sen si ti vit y an al ysi sb) Profitability Indexc) Project evaluationd) Risk analysis

34. Forecasts under Sensitivity analysis are made under differenta) Political conditionsb) Ec on omic co ndi ti on sc) Industry conditionsd) Regional conditions

35. Receiving a required inventory item at the exact time needed, is a) ABCb ) J I T c) FOB d) PERT

36. Post completion audit is budgeting decisions.a) First Stepb) Last st epc) Middle stepd) None of the above

37. Why is a discount rate used to calculate net present value?a) Money has valueb) Money has enhancing valuec) Mon ey h as di mi ni sh in g valu ed) Money has constant value

38. What does net present value give?a) future values of present cash flowsb) present value of present cash flowc) pr esent valu e of fu tur e cash fl ow sd) future values of future cash flows

39. Of what is sinking fund an example of ?a) Perpetuity

b) Ann ui tyc) Gratuityd) None of the above

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in the phases of capital

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40. What stream of cash flows continues indefinitely?a) Perp etui tyb) Annuityc) Futurityd) None of the above