Financial Management Test

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Financial Management Test - 16

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Question 1
1 / -0

With the cash-reserve ratio of 20%, if a bank receives Rs. 5000 deposits, then the multiple expansion of credit would be?

A
Rs. 2000

B
Rs. 4000

C
Rs. 40,000

D
Rs. 20,000
Question 2
1 / -0

Which one refers to cash inflow under payback period method?

A
Cash flow before depreciation and taxes

B
Cash flow after depreciation and taxes

C
Cash flow after depreciation but before taxes

D
Cash flow before depreciation and after taxes

Solution

Payback period is the period required to recover the original cash outflow invested in a project. It calculates the minimum number of years that a project will take to pay back the investment.
Cash flow after taxes are used to compute the payback period. Depreciation is not considered for calculating cash flows (i.e. depreciation will not be deducted)
Question 3
1 / -0

The rate of discount at which NPV of a project becomes zero is also known as___________.

A
Average Rate of Return

B
Internal Rate of Return

C
Alternate Rate of Return

D
None of the above

Solution

The IRR is the discount rate which, when applied to the cash flows of a project, produces a net present value (NPV) of Zero.
In other words, the interest rate that equates the present value of cash inflow with the present value of cash outflow of any project is called as Internal Rate of Return.
If the IRR is greater than expected rate of interest, the project is accepted. If the IRR is less than the expected rate of return, the project is rejected.
Question 4
1 / -0

Which formula is used to measure the degree of Operating leverage?

A
$$\displaystyle\frac{EBIT}{Sales}$$

B
$$\displaystyle\frac{C}{EBIT}$$

C
$$\displaystyle\frac{EBIT}{EBT}$$

D
$$\displaystyle\frac{EBIT}{C}$$

Solution

Operating leverage is a financial efficiency ratio used to measure what percentage of total costs are made up of fixed costs and variable costs in an effort to calculate how well a company uses its fixed costs to generate profits.
operating leverage to calculate a firm’s break-even point and estimate the effectiveness of pricing structure.
Therefore $$DOL = \cfrac {Contribution}{earning}$$ before interest and tax
Question 5
1 / -0

Read the following statements:
i. "The rate of return on investments decreases with the excess of working capital."
ii. 'Net working capital is the excess of current assets over current liabilities."
iii. "Greater the size of the business unit, larger will be the requirement of working capital."
iv. "Working capital is also known as circulating capital."
Which one of the following consists of the correct statements?

A
(i), (ii), (iii) and (iv)

B
(ii), (iii) and (iv)

C
(iii), (iv) and (i)

D
(i), (ii) and (iv)
Question 6
1 / -0

Which one is not an important objective of Financial Management?

A
Profit Maximisation

B
Wealth Maximisation

C
Value Maximisation

D
Maximisation of social benefits
Solution
Important objectives of Financial Management are:
Wealth maximization
Profit maximization
Value maximization
Determining capital structure
Question 7
1 / -0

According to which of the following, the firm's market value is not affected by capital structure?

A
M-M Hypothesis

B
Net Income approach

C
The Traditional view

D
None of the above

Solution

The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.
Question 8
1 / -0

Combined leverage is calculated as ______________.

A
Operating Leverage + Financial Leverage

B
Operating Leverage - Financial Leverage

C
Operating Leverage X Financial Leverage

D
Operating Leverage/ Financial Leverage

Solution

Combined leverage is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Competitive firms choose high level of degree of combined leverage whereas conservative firms choose lower level of degree of combined leverage. Degree of combined leverage indicates benefits and risks involved in this particular leverage.
Degree of combined leverage = Degree of operating leverage * Degree of financial leverage.
Question 9
1 / -0

Under the lease agreement, the lessee gets the right to _________.

A
Share profits earned by the lessor

B
Participate in the management of the organisation

C
Use the asset for a specified period

D
Sell the assets

Solution

A lease refers to a contractual agreement whereby the owner of the asset grants the lessee the right to use the asset for a specified period of time in return of a periodic payment. It can be simplified as an agreement between a landlord and a tenant.
Question 10
1 / -0

Debentures represent ____________.

A
Fixed capital of the company

B
Permanent capital of the company

C
Fluctuating capital of the company

D
Loan capital of the company

Solution

A debenture represents the loan capital of a company because a debenture issued by a company is an acknowledgement that the company had borrowed a certain amount of money, which it promises to repay at a future date.

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Financial Management Test - 16

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Financial Management Test - 16

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Question 1

Rs. 2000

Rs. 4000

Rs. 40,000

Rs. 20,000

Question 2

Cash flow before depreciation and taxes

Cash flow after depreciation and taxes

Cash flow after depreciation but before taxes

Cash flow before depreciation and after taxes

Solution

Question 3

Average Rate of Return

Internal Rate of Return

Alternate Rate of Return

None of the above

Solution

Question 4

$$\displaystyle\frac{EBIT}{Sales}$$

$$\displaystyle\frac{C}{EBIT}$$

$$\displaystyle\frac{EBIT}{EBT}$$

$$\displaystyle\frac{EBIT}{C}$$

Solution

Question 5

(i), (ii), (iii) and (iv)

(ii), (iii) and (iv)

(iii), (iv) and (i)

(i), (ii) and (iv)

Question 6

Profit Maximisation

Wealth Maximisation

Value Maximisation

Maximisation of social benefits

Solution

Question 7

M-M Hypothesis

Net Income approach

The Traditional view

None of the above

Solution

Question 8

Operating Leverage + Financial Leverage

Operating Leverage - Financial Leverage

Operating Leverage X Financial Leverage

Operating Leverage/ Financial Leverage

Solution

Question 9

Share profits earned by the lessor

Participate in the management of the organisation

Use the asset for a specified period

Sell the assets

Solution

Question 10

Fixed capital of the company

Permanent capital of the company

Fluctuating capital of the company

Loan capital of the company

Solution

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