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CBSE Questions for Class 12 Commerce Business Studies Financial Management Quiz 9 - MCQExams.com
CBSE
Class 12 Commerce Business Studies
Financial Management
Quiz 9
Higher debt equity ratio $$\left(\dfrac{Debt}{Equity}\right)$$ results in ____________.
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Lower financial risk
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High degree of operating risk
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High degree of financial risk
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High EPS
Explanation
A high debt
/
equity ratio
is often associated with high risk; it means that a company has been aggressive in financing its growth with
debt
. If a lot of
debt
is used to finance growth, a company could potentially generate more earnings than it would have without that financing.
Krishna Limited is a company dealing in ready-to-eat food products. Over the years, the earning potential of the company has gone up and it enjoys a good reputation. The Financial Manager is confident of the fact that not just the earnings of the current year, but of our future years are likely to be high. Identify the related factor of dividend decision being described in the given lines.
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0%
Growth prospects
0%
Stability of dividends
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Stability of earnings
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Earnings
Explanation
Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay a
smaller dividend.
Hence, C is the correct option.
__________ is the relation between various elements of financial statements expressed in mathematical terms.
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Ratio analysis
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Management audit
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Internal audit
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PERT
Explanation
Under this technique, a comparison of the financial statements (profit & loss a/c and balance sheet) is done to find the trends of change in profits, assets, liabilities etc. Ratio analysis is the relation between various elements of financial statements expressed in mathematical terms.
Ratio Analysis refers to analysis of financial statements through computation of ratios.
A security which has a solid record of dividend payments and offer the dividend higher than the common stock is ______
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Hedge
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Holding period
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Index
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Income stock
Explanation
Consider A.
Hedge:
" A hedge is pooled investment fund that trades in relatively liquid assets and able to make extensive use of more complex trading".
Consider B.
Index:
"In economics and finance, an Index is a statistical measure of change in a representative group of individual data points."
Consider C.
Holding Period:
A holding period is the amount of time the investment is held by an investor or the period between the purchase and sale of a security.
Consider D.
Income Stock:
An income stock is an equity security that pays regular, often steadily increasing dividends usually offer a high yield that may generates the majority of security's overall returns.
So, from the above discussion A security which has a solid record of dividend payments and offer the dividend higher than the common stock is Income Stock.
$$\therefore $$ Option D. Income Stock is correct answer.
Amber Limited has been experiencing a downfall in its popularity, due to growing competition. Also the company doesnt see any forthcoming viable business expansion opportunities in the near future. So the management of the company has decided to declare high dividends for the current financial year. Identify the factor related to dividend decision being described above.
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0%
Stability of dividends
0%
Stability of earnings
0%
Growth opportunities
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Cash flow position
Explanation
Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller than that in non-
growth companies.
Hence, C is the correct option.
A company must adhere to the provisions of the Companies Act while taking the dividend decision. Identify the related factor of dividend decision being mentioned in the above line.
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Preferences of shareholders
0%
Access to capital market
0%
Contractual constraints
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Legal constraints
Explanation
Certain provisions of the Companies Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the
dividend. Law and regulations play an important role while taking dividend decision.
Rohit, an experienced stock broker advised his client Prabhu to invest in the shares of Blue Angel Limited, as the company has declared high dividends since an increase in dividend is perceived as a good news and stock prices react positively to it. Identify the related factor of dividend decision being described in the above lines.
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0%
Growth prospects
0%
Stock market reactions
0%
Access to capital markets
0%
Tax rate
Explanation
Investors view an increase in dividends as good news and stock prices react positively to it. Similarly, a decrease in dividends may have a negative impact on the share prices in the stock market. Thus, the possible impact of dividend policy on the equity share price is one of the important factors considered by the management
while taking a decision about it.
Hence, B is the correct option.
Which of the following statements is not true with regard to use of fixed capital?
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It affects the long term growth of the business.
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The business risk involved is low.
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Large amount of funds are involved.
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The investment decisions are irreversible.
Explanation
Fixed Capital decisions have bearing on the long-term growth as these funds are invested in long-term assets. They result in a substantial portion of capital funds being blocked in long-term projects. They influence the overall business risk complexion of the firm. These decisions once taken, are not reversible without incurring heavy
losses.
Under which of the following situations a company is not likely to issue equity capital?
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When the interest coverage ratio is high.
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When the cost of debt capital is low.
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When the debt service coverage ratio is high.
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All of the above
Explanation
1. The higher the Interest Coverage Ratio, lower shall be the risk of company failing to
meet its interest payment obligations in debt financing.
2.
A firms ability to
borrow at a lower rate increases its
capacity to employ higher debt.
3.
A higher DSCR indicates better ability to meet cash commitments and consequently, the companys potential to increase debt component in its capital structure.
The working capital requirement of a business is not likely to be high when?
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The rate of inflation is low
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It is difficult to procure raw material
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Scale of operation of business is small
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The nature of business is trading
Explanation
If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may
be required.
While taking a loan from a financial institution, Ritu Enterprises signed an agreement that they shall not pay dividend to its shareholder more than 15% until the loan is repaid, or dividend shall not be declared if the liquidity ratio is found to be less than 1:Identify the factor related to dividend decision being described in the above case.
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0%
Legal constraints
0%
Contractual constraints
0%
Preferences of shareholders
0%
Access to capital market
Explanation
While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in the future. The companies are required to ensure that the dividend does not violate the terms of the loan agreement in
this regard.
Hence, B is the correct option.
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