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CBSE Questions for Class 12 Commerce Business Studies Financial Management Quiz 4 - MCQExams.com
CBSE
Class 12 Commerce Business Studies
Financial Management
Quiz 4
The rate of discount at which NPV of a project becomes zero is also known as___________.
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0%
Average Rate of Return
0%
Internal Rate of Return
0%
Alternate Rate of Return
0%
None of the above
Explanation
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.
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?
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(i), (ii),
(iii)
and (iv)
0%
(ii), (iii) and (iv)
0%
(iii), (iv) and (i)
0%
(i), (ii) and (iv)
Which formula is used to measure the degree of Operating leverage?
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0%
$$\displaystyle\frac{EBIT}{Sales}$$
0%
$$\displaystyle\frac{C}{EBIT}$$
0%
$$\displaystyle\frac{EBIT}{EBT}$$
0%
$$\displaystyle\frac{EBIT}{C}$$
Explanation
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
Which one is not an important objective of Financial Management?
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Profit Maximisation
0%
Wealth Maximisation
0%
Value Maximisation
0%
Maximisation of social benefits
Explanation
Important objectives of Financial Management are:
Wealth maximization
Profit maximization
Value maximization
Determining capital structure
Availability of adequate finance is ___________ for the survival and growth of a business.
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0%
optional
0%
very crucial
0%
secondary
0%
none of the above
Explanation
Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business. A hallmark of good business management is the ability to manage the working capital requirements to maintain a solid balance between growth, profitability and liquidity.
According to which of the following, the firm's market value is not affected by capital structure?
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M-M Hypothesis
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Net Income approach
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The Traditional view
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None of the above
Explanation
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.
Combined leverage is calculated as ______________.
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0%
Operating Leverage + Financial Leverage
0%
Operating Leverage - Financial Leverage
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Operating Leverage X Financial Leverage
0%
Operating Leverage/ Financial Leverage
Explanation
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.
Under the lease agreement, the lessee gets the right to _________.
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Share profits earned by the lessor
0%
Participate in the management of the organisation
0%
Use the asset for a specified period
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Sell the assets
Explanation
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.
Debentures represent ____________.
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0%
Fixed capital of the company
0%
Permanent capital of the company
0%
Fluctuating capital of the company
0%
Loan capital of the company
Explanation
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.
American Depositary Receipts (ADRs) are issued in _______.
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Canada
0%
China
0%
India
0%
USA
Explanation
ADR stands for American Depositary Receipts. American Depositary Receipts are the Depositary receipts issued by banks in USA. It is a certificate which represents a specified number of shares by a foreign stock traded on the USA exchange.
Which of the following formulae is related to operating leverage?
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$$\frac {Contribution} {Operating\, profit}$$
0%
$$\frac {Sales-Variable\, Cost} {Earnings\, before\, Interest\, and\, tax}$$
0%
$$\frac {Percentage\, change\, in\, EBIT} {Percentage\, change\, in\, sales}$$
0%
All of the above
The term 'redeemable' is used for _______.
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Preference share
0%
Commercial paper
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Equity shares
0%
Public deposits
Explanation
Commercial paper is issued by a firm to raise funds for a short period of time, the time can be ranging from 90 days to 364 days after which it has to be redeemed. Commercial paper is an unsecured promissory note.
The term 'capital structure' implies ____________.
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Share capital+Reserves+Long-Term Debts
0%
Share Capital+Long and Short-Term Debts
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Share Capital+Long-Term Debts
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Equity and Preference Share Capital
Explanation
“Capital structure of a company refers to the composition or makeup of its capitalization and it includes all long-term capital resources viz., loans, reserves, shares and bonds.” The capital structure is made up of debt and equity securities and refers to permanent financing of a firm.
Its composed of long-term debt, preference share capital and shareholders funds. For raising long-term finances, a company can issue three type of securities viz., equity shares, preference shares and debentures. A decision about the proportions among these types of securities refers to the capital structure of an enterprise.
Funds required for purchasing current assets is an example of _________.
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0%
Fixed Capital Requirement
0%
Ploughing Back of Profits
0%
Working Capital Requirement
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Lease Financing
Explanation
Working capital of an enterprise or a company are the funds which are used for holding current assets such as bills receivables, stock of materials and for meeting current expenses like taxes, wages, salaries and rent.
Degree of financial leverage is measured by :
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0%
$$\frac{EBIT}{EAT}$$
0%
$$\frac{EBIT}{EBT}$$
0%
$$\frac{EAIT}{EBT}$$
0%
$$\frac{C}{EBIT}$$
Explanation
Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt financing a company uses, the higher its financial leverage. A high degree of financial leverage means high interest payments, which negatively affect the company's bottom-line earnings per share.
The formula for calculating a company's degree of financial leverage$$(DFL)$$ measures the percentage change in earnings per share over the percentage change in $$EBIT$$. $$DFL$$ is the measure of the sensitivity of $$EPS$$ to changes in $$EBIT$$ as a result of changes in debt.
Formula:
$$DFL$$ = $$EBIT$$ /$$EBT$$
Internal sources of capital are those which are _______.
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0%
Generated through outsiders such as suppliers
0%
Generated through loans from commercial banks
0%
Generated through issue of shares
0%
Generated from within the business
Explanation
Internal sources of capital are those that are generated from within the business mainly through reinvestment of profits it is also referred as owner's investment.Retained profit, sale of fixed assets, debt collection are some of the internal sources of finance or capital.
If the average collection period of a company is higher than the credit period extended by it,the firm is supposed to have a ___________.
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0%
Satisfactory liquidity position
0%
Liquidity crunch
0%
High liquidity
0%
Collection period has no affect on liquidity
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Either (A) or (C) above
Explanation
If the average collection period is found to be consistently higher than the net credit period extended by the company to its customers, then the firm is supposed to have a liquidity crunch. In such a situation the collection efforts has to be made more effective as cash is locked up for a period more than what is warranted by the credit terms extended.
The total risk of company can be broken down into
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Business risk
0%
Financial risk
0%
Both
0%
None
Higher working capital usually results in _____________.
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Higher Current Ratio, Higher Risk and Higher Profits
0%
Lower Current Ratio, Higher Risk and Profits
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Higher Equity, Lower Risk and Lower Profits.
0%
Lower Equity, Lower Risk and Higher Profits.
Explanation
Higher working capital usually results in
Higher Current Ratio, Higher Risk and Higher Profits.
Working capital should neither be less or more than what is required. The amount of working capital should be optimum , so that neither profitability nor liquidity is affected.
The 'BAUMOL MODEL' is related with _________________.
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0%
Bank Loan
0%
Receivables Management
0%
Return on investment
0%
Cash management
Explanation
Perpetual preference shares are non-existence in India. After commencement of the companies amendment act, 2000, companies are allowed to issue equity shares with differential rights.
Companies with higher growth pattern are likely to __________.
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0%
Pay lower dividends
0%
Pay higher dividends
0%
Dividends are not affected by growth considerations
0%
None of the Above
Explanation
Companies with higher growth rate are likely to pay lower rate of dividend. Companies with higher growth rate would prefer to plough back its profit for the growth of the company which would result in long term benefits rather than distributing dividends which is temporary.
Other things remaining the same, an increase in the tax rate on corporate profits will ____________.
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0%
make debt relatively cheaper
0%
make debt relatively less cheap domestically
0%
no impact on the cost of debt
0%
can't be determined
Explanation
The interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.
Higher dividends per share is associated with ______________.
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0%
High Earning, High Cash Flows, Unusable Earnings and Growth Opportunities
0%
High Earning, High Cash Flows, Stable Earnings and Growth Opportunities
0%
High Earning, High Cash Flows, Stable Earnings and Lower Growth Opportunities
0%
High Earning, Low Cash Flows, Stable Earnings and Lower Growth Opportunities
Explanation
There are two primary causes for increases in a company’s dividend per share payout.
The first is simply an increase in the company's net profits out of which dividends are paid.
The second is a shift in the company’s growth strategy that leads the company to decide to expend less of its earnings in seeking growth and expansion, thus leaving a larger share of profits available to be returned to equity
investors in the form of dividends.
If DFL of a firm is 1.61 EBIT is Rs.25,000 and the interest component is Rs.7,000 the dividend on preference shares that the firm paid assuming a tax rate of $$30\%$$ is ____________.
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0%
Rs.1,730
0%
Rs.2,013
0%
Rs.2,595
0%
Rs.6,631
0%
Rs.9,945
Explanation
DFL = $$\frac{EBIT}{EBIT - 1 - \frac{D_p}{(1-t)}}$$
DFL = $$\frac{25,000}{25,000 - 7000 - \frac{D_p}{(1-0.30)}}$$
$$D_p$$ = 1,730.
Given the fixed cost = Rs.20,000 the operating BEP in units = 2,500 and financial BEP - Rs.4,000, the overall BEP in units is __________.
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0%
3000
0%
4000
0%
5000
0%
6000
0%
8000
Explanation
Over all BEP = Operating BEP + Financial BEP
Operating BEP = 20,000/2,500
= 8 [contribution per unit]
Overall BEP = (20,000 + 4,000)/8
= 3000.
The policy that insures all other risks which are not covered under any other policy is the ______________.
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General insurance policy
0%
Umbrella policy
0%
Residual insurance policy
0%
Both (A) and (C) above
0%
None of the above
Explanation
Blankets (umbrella) policies also called excess liability coverage, insure all other riskd which are not covered under any policy.
Direct plan can be made for which one of the following.
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0%
Sales message
0%
Request refusal letters
0%
Claims letters
0%
None of the above.
Explanation
Direct plans can only be made for events which is sure to happen in a manner as foreseen and predicted by the planners. Therefore, it cannot be made for sales messages, request refusal letters, and claim letters which are unpredictable in nature.
Hence, option (D) is the correct answer.
American Depository Receipts (ADRs) are divided into __________ number of levels.
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0%
1
0%
2
0%
3
0%
4
0%
None of the above
Explanation
ADR is a dollar-denominated negotiable certificate, it represents non-US company;'s Publicly traded equity. ADRs are divided into three levels based on the regulations and privileges of each company's issue.
Hence, option (C) is the correct answer.
_______comprises two decisions, viz., (i) Financial Planning; and (ii) Capital structure decision.
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Investment decisions
0%
Financing decisions.
0%
Dividend decisions
0%
All of above
Explanation
Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital structure.
A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds.
A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.
"Business finance includes those business activities which are concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise." This definition is given by _____________.
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0%
B.O. Wheeler
0%
Howard and Upton
0%
ICSI
0%
ICAI
Explanation
According to the Wheeler, “Business finance is that business activity which concerns with the acquisition and
conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”. According
to the Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with
planning, raising, controlling, administering of the funds used in the business”.
Corporate finance is concerned with budgeting, financial forecasting, cash management, credit administration,
investment analysis and fund procurement of the business concern and the business concern needs to adopt
modern technology and application suitable to the global environment.
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