Financial Management Multiple Choice Questions and Answers pdf for the preparation of MBA, BBA, Mcom, Bcom, Banking & Finance Exams.
Financial Management Multiple Choice Questions and Answers
1. A company can also obtain equity funds by retaining earnings available for shareholders.
Answer: True
2. ___ shareholders receive a dividend at a fixed rate.
Answer: Preference
3. The exact organization structure for financial management will not be different across firms.
Answer: False
4. The main function of the ___ is to manage the firm’s funds.
Answer: Treasurer
5. The involvement of the financial manager in finance management is recent.
Answer: True
6. The finance manager in modern enterprises is mainly involved in ___ finance functions.
Answer: Managerial
7. The finance manager has always been in the dynamic role of decision making.
Answer: False
8. Capital markets bring investors and ___ together.
Answer: Firms
9. Price system is the most important aspect of a market economy indicating what goods and services society wants.
Answer: True
10. An alternative to profit maximization is the objective of ___.
Answer: Wealth maximization
11. A budget must plan for and quantify ___ and ___ related to a specific operation.
Answer: Revenues, expenses
12. A ___ is the likelihood of events happening, given the past data and expected changes.
Answer: Forecast
13. The three important components of the master budget are: ___, ___ and ___.
Answer: Operating, financial and capital
14. Choose the correct option:
A comprehensive budgetary system will generally include:
(a) pro forma statements
(b) bank statements
(c) trial balance
(d) profit and loss accounts
Answer: (a)
15. Budgeting improves the quality of ___.
Answer: Communication
16. Budgeting is a way of managing the management.
Answer: False
17. The central figure in responsibility accounting is ___.
Answer: People
18. Responsibility centres for planning and control purposes are classified into ___, ___ and ___ centres.
Answer: Cost, profit and investment
19. Time preference for money or ___ is an individual’s preference for possession of a given amount of money now, rather than the same amount at some future date.
Answer: Time value of money
20. ___ and ___ are two ways of accounting for the time value of money.
Answer: Compounding, discounting
21. The debt policy of a firm is significantly influenced by the cost consideration.
Answer: True
22. The cost of the capital framework can be used to evaluate the ___ of top management.
Answer: Financial performance
23. The before-tax cost of debt is the rate of return not required by lenders.
Answer: False
24. The interest paid on debt is ___ deductible.
Answer: Tax
25. The measurement of the cost of preference capital poses some conceptual difficulty.
Answer: True
26. The preference share may be treated as perpetual security if it is ___.
Answer: Irredeemable
27. External equity will not cost more to the firm than internal equity.
Answer: False
28. The required rate of return of shareholders can be determined from the ___ valuation model.
Answer: Dividend
29. We can distinguish between systematic and unsystematic risk.
Answer: True
30. Higher the risk, higher the risk ___ required.
Answer: Premium
31. In financial decision-making the cost of capital should be calculated on an after-tax basis.
Answer: True
32. Market-value weights are theoretically ___ to book-value weights.
Answer: Superior
33. Financial decisions incur a different degree of ___.
Answer: Risk
34. A proper balance between return and risk should be maintained to maximize the market value of a firm’s shares.
Answer: True
35. The reciprocal of the present value annuity factor is called the ___.
Answer: CRF
36. CRF is useful in determining the income to be earned to recover an investment at a given rate of interest.
Answer: True
37. A fund created out of fixed payments each year for a specified time is called ___.
Answer: Sinking fund
38. The phenomenon of compounding interest more than once in a year is called multiperiod compounding.
Answer: True
39. The rate of the equity dividend is not fixed and depends on the dividend policy of a company.
Answer: True
40. The rate of interest on debt is fixed irrespective of the company’s rate of return on ___.
Answer: Assets
41. The expenditure incurred in acquiring a ___ or brand is also capital investment.
Answer: Patent
42. The contribution of the board in idea generation is relatively significant.
Answer: False
43. A number of investment criteria (or capital budgeting techniques) are in practice.
Answer: True
44. The essential property of a sound technique is that it should ___ the shareholder’s wealth.
Answer: Maximize
45. Capital rationing may arise due to external factors or internal constraints imposed by the management.
Answer: True
46. ___ rationing is caused by self-imposed restrictions by the management.
Answer: Internal Capital
47. Interest coverage ratio measures capital gearing.
Answer: False
48. The most commonly used measures of financial leverage are ___, ___ and ___.
Answer: Debt ratio, debt-equity ratio and interest coverage
49. ROE does not indicate how well the firm has used the resources of owners.
Answer: False
50. The profitability of the shareholders’ ___ can also be measured in many other ways.
Answer: Investment
51. The traditional theory implies that investors value levered firms more than unlevered firm.
Answer: True
52. The ___ has emerged as a compromise to the extreme position taken by the NI approach.
Answer: Traditional approach
53. Financial leverage does not affect a firm’s net operating income, but it does affect ___ return.
Answer: Shareholder’s
54. The arbitrary process is the behavioural foundation for MM’s hypothesis.
Answer: True
55. A firm can draw funds from its bank within the maximum ___ sanctioned.
Answer: Credit limit
56. There are several modes through which a company can borrow funds for its short-term working capital requirements.
Answer: True
57. Debenture holders are creditors of a firm.
Answer: False
58. Ordinary shareholders have ___ ownership claim.
Answer: Residual
59. Operating leverage affects a firm’s ___ ___.
Answer: Operating profit
60. Operating and financial leverage cause too wide fluctuation in ___.
Answer: EPS
61. A contract between a lessor and a lessee is known as a ___.
Answer: Lease
62. Leasing provides 100 per cent financing.
Answer: False
63. Under the hire purchase system, the buyer takes ___ of the goods immediately.
Answer: Possession
64. The risk of damage and loss is borne by the buyer under the hire purchase system.
Answer: True
65. When dividend policy is treated as a financing decision the payment of cash dividends is a passive residual.
Answer: True
66. Project financing is most appropriate for those projects which require a large amount of capital expenditure and involve high risk.
Answer: True
67. Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt.
Answer: True
68. A ___ involves selling ordinary shares to the existing shareholders of a company.
Answer: Rights issue
69. It is not necessary to underwrite a public and a rights issue.
Answer: False
70. A ___ is a long-term fixed-income financial security.
Answer: Debenture
71. Shareholders’ returns consist of two components: ___ and ___.
Answer: Dividends, capital gains
72. A firm’s dividend policy has the effect of dividing its net earnings into ___ and ___.
Answer: Retained earnings, dividends
73. Dividend policy of a firm affects both the ___ financing and the wealth of shareholders.
Answer: Long-term
74. Capital profits should always be distributed as dividends.
Answer: False
75. Firms that expand rapidly because of ample investment yielding high returns than the opportunity cost of capital care are known as ___.
Answer: Growth firms
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