Master of Business Administration

Semester 2
Subject Code: MB0045
Subject: Financial Management
Marks: 140
Model Question Paper
Q. Part A - 1 marks question ( Question 1 to 40)
No.
Thea.measurement of funds in accounting is always based on the ____________________ concept.
1.
a. Accrual
b. Statistic
c. Fund
d. Investment
2. _____________________ management is crucial for successful operation management.

a. Finance
b. Marketing
c. Production
d. Inventory
3. Which among the following is an implicit cost?

a. Opportunity cost
b. Wages paid to employees
c. Rent paid to land hired
d. Interest paid on capital
4. _____________ of an industrial concern is invested in assets like plant, building, and land.

a. Working capital
b. Variable capital
c. Fixed capital
d. Operating capital
5. On the _____________, costs are expressed as a percentage of sales.

a. Balance sheet
b. Income statement
c. Sales budget
d. Cash budget

6. ___________________ of a firm refers to the composition of its long-term funds and its capital structure.

a. Capitalisation
b. Over-capitalisation
c. Under-capitalisation
d. Market capitalisation
7. During inflation, a rupee has _____________ than a rupee in the future.

a. Higher purchasing power

b. Lower purchasing power
c. Higher market value
d. Lower market value

8. One gets more interest if compounding is done _____________.

a. Annually
b. Half-yearly
c. Quarterly
d. Semi-annually

9. In the _______________, the future value of all cash inflow at the end of time horizon at a particular rate of interest
is calculated.

a. Risk-free rate
b. Compounding technique
c. Discounting technique
d. Risk Premium
10. The value of _____________ is determined by capitalising the future dividend stream at an appropriate rate of
interest.

a. Deferred share
b. Bonus share
c. Equity share
d. Preference share
11. Which among the following bonds generate only one future cash flow at the time of maturity?

a. Convertible bonds
b. Irredeemable bonds
c. Redeemable bonds
d. Deep discount bonds

12. _______________ is the price at which the bond is traded in the stock exchange.

a. Redemption value
b. Face value
c. Market value
d. Maturity value
13. _____________ enhance the market value of shares and therefore equity capital is not free of cost.

a. Face value
b. Dividends
c. Redemption value
d. Book value
14. ____________ of companies with high-growth prospects utilising funds for reinvestment activities have to be
compensated for parting with their earnings.

a. Equity holders
b. Shareholders
c. Employees
d. Stockholders
15. The _______________ is the minimum rate of return of a company which it must earn to meet the expenses of the
various categories of investors.

a. Capital gain
b. Cost of capital
c. Capital budgeting
d. Capital Market
16. _____________ are those which do not vary with an increase in production or sales activities for a particular period
of time.

a. Fixed costs
b. Variable costs
c. Semi-variable costs
d. Total costs
17. _____________ is considered to be favourable till time that the rate of return exceeds the rate of return obtained
when no debt is used.

a. Degree of total leverage

b. Financial leverage
c. Operating leverage
d. Combined leverage
18. _______________ is used to measure the variability of Earnings Per Share.

a. EBIT
b. Degree of total leverage
c. Degree of operating leverage
d. Degree of financial leverage

19. _____________ capital structure means an ideal combination of borrowed and owned capital that may attain the
marginal goal.

a. Preference share
b. Optimum
c. Equity
d. Debt
20. _____________ insist on a debt-equity ratio of 2:1 for medium-sized and large-sized companies.

a. Equity holders
b. Share holders
c. Creditors
d. Debtors
21. In _______________ approach, the capital structure decision is relevant to the valuation of the firm.

a. Net income
b. Net operating income
c. Traditional
d. Miller and Modigliani

22. __________ principle says that the cash flows of a project are to be considered in incremental terms.

a. Post tax
b. Separation
c. Incremental
d. Consistency

23. When __________ is greater than zero the project should be accepted.

a. Internal rate of return

b. Profitability index
c. Net present value
d. Modified internal rate of return
24. __________ appraisal examines the impact of the project on the environment.

a. Technical
b. Economic
c. Investment
d. Financial
25. The reliability of the_____________ depends on the reliability of cash flows.

a. Future value
b. Net present value
c. Time value
d. Expected value

26. The basic principle of _____________ is that there should be adequate reward in the form of return to the firms
which decide to execute risky business projects.

a. Risk-free rate
b. Risk premium
c. Risk adjusted discount rate
d. Risk analysis
27. _______________ is defined as the length of time required to recover the initial cash out-lay.

a. Payback-period
b. Inventory conversion period
c. Discounted payback-period
d. Budget period
28. Ranking of different investment proposals means that various investment proposals should be ranked on the basis
of their _____________.

a. Internal rate of return

b. Future value
c. Net present value
d. Profitability
29. _____________ may give an optimal mix of projects in which there may be a need to accept the fraction of a
project.

a. Linear programming
b. Integer programming
c. Non-linear programming
d. Goal programming
30. _______________ is defined as the capital rationing that cannot be violated under any circumstances.

a. External capital rationing

b. Hard capital rationing
c. Soft capital rationing
d. Internal capital rationing

31. _______________ refers to the amount invested in various components of current assets.

a. Temporary working capital

b. Net working capital
c. Gross working capital
d. Permanent working capital

32. ____________ is the length of time between the firms actual cash expenditure and its own cash receipt.

a. Net operating cycle

b. Cash conversion cycle
c. Working capital cycle
d. Gross operating cycle
33. _____________ model of cash management trades off between opportunity cost or carrying cost or holding cost
and the transaction cost.

a. Miller-Orr (MO)
b. Baumol
c. Decision tree
d. Hertz
34. _______________ refers to a firm holding some cash to meet its routine expenses that are incurred in the ordinary
course of business.

a. Speculative motive
b. Transaction motive
c. Precautionary motive
d. Compensating motive
35. Costs incurred for maintaining the inventory in warehouses are called _______________.

a. Ordering costs
b. Material costs
c. Carrying costs
d. Shortage costs

36. _____________ is that inventory level at which an order should be placed to replenish the inventory

a. Ordering level
b. Minimum level
c. Maximum level
d. Re-order point
37. _______________ refers to the length of time allowed by a firm for its customers to make payment for their
purchases.

a. Holding period
b. Pay-back period
c. Average collection period
d. Credit period
38. Amounts due from customers when goods are sold on credit are called _____________.

a. Trade balance
b. Trade debits
c. Trade discount
d. Trade off
39. _____________ affects the balancing nature of retained earnings and external financing.

a. Selling cost
b. Transaction cost
c. Floatation cost
d. Purchase cost
40. _______________ is a method to increase the number of outstanding shares by proportionately reducing the face
value of a share.

a. Inventory valuation
b. Stock valuation
c. Share split
d. Stock split

Part B - 2 marks question ( Question 41 to 60)

41. Consider the below mentioned statements:

1. Financial management is closely associated with human resource management.
2. The most important goal of financial management is maximisation of net wealth of the company.
State True or False:

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False
42. ____________________ and __________________________ are the two versions of goals of the financial
management of the firm.

a. Profit maximisation, Wealth maximisation

b. Production maximisation, Sales maximisation
c. Sales maximisation, Profit maximisation
d. Value maximisation, Wealth maximisation
43. Consider the below mentioned statements:
1. A company is considered to be over-capitalised when its actual capitalisation is lower than the proper
capitalisation as warranted by the earning capacity
2. Both over-capitalisation and under-capitalisation are detrimental to the interests of the society.

State True or False:

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False

44. Which among the following statements are related to percent of sales method?
1. It determines the equity and debt mix on the basis of fund requirements and the companys policy on capital
structure.
2. The most basic method of forecasting a financial statement.
3. It is done taking into account the expected business environment while some other expenses could be based on
their relationship with the sales revenue expected to be earned
4. It assumes that future relationship between various elements of cost to sales will be similar to their historical
relationships.

a. Options 1 & 2
b. Options 2 & 4
c. Options 2 & 3
d. Options 1 & 3

45. Calculate the effective rate of interest if the nominal rate of interest is 10% and interest is compounded quarterly.
a. 10.8%
b. 11.2%
c. 10.3%
d. 10.7%
46. Identify which among the following comes under future value of single flow.
1. Doubling period
2. Increased frequency of compounding
3. Capital recovery factor
4. Uneven periodic sum

a. Options 2 & 3
b. Options 1 & 2
c. Options 3 & 4
d. Options 1 & 4
47. If a zero coupon bond is issued with a maturity value of Rs. 200000 and is issued for a price of Rs. 4500 maturing
after 25 years, then realised yield is __________________.

a. 15.54%
b. 16.38%
c. 17.48%
d. 18.53%
48. Consider the below mentioned statements:
1. The dividends are not cumulative for equity shareholders, that is, they cannot be accumulated and distributed in
the later years.
2. Dividends are taxable.
State True or False:

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False
49. A combination of ____________and ____________ is used to fund the activities of a company.
a. Debt, Equity
b. Debt , Debentures
c. Loan, Equity
d. Loan, Debentures

50. Which among the following statements are related to cost of capital?
1. It is a key component for the Capital Asset Pricing Model.
2. It is a measure of a stock's volatility in relation to the market.
3. It is the average cost of different components of capital of all long-term sources of finance.
4. It represents the discount rate used to arrive at the present value of a company's future cash flows.

a. Option 1 & 3
b. Option 2 & 4
c. Option 1 & 2
d. Option 3 & 4
51. ____________ and____________ carry a fixed rate of interest and are to be paid off irrespective of the firms
revenues.

a. Debentures, Dividends
b. Debentures, Bonds
c. Dividends, Bonds
d. Dividends, Treasury notes
52. Consider the below mentioned statements:
1. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity, the company can raise 2 units of debt.
2. The cost of floating a debt is greater than the cost of floating an equity issue.
State True or False:

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False
53. Which of the following options are traditional methods of appraising an investment proposal?
1. Payback method
2. Accounting rate of return
3. Discounted cash flow method
4. Profitability index

a. Option 1 & 3
b. Option 1 & 2
c. Option 2 & 4
d. Option 3 & 4
54. The techniques for incorporation of risk factor in capital budgeting decisions could be grouped into ____________
and ____________ techniques.

a. Statistical, Decision tree

b. Conventional, Probability distribution
c. Conventional, Statistical
d. Probability distribution, Decision tree
55. Which among the following are the steps involved in capital rationing?
1. Identification of the problem and alternatives
2. Specification of probabilities and momentary outcomes
3. Ranking of different investment proposals
4. Selection of the most profitable investment proposal

a. Option 1 & 3
b. Option 2 & 4
c. Option 1 & 2
d. Option 3 & 4
56. Consider the below mentioned statements:
1. Cash outflows occur after the occurrences of cash inflows in operating cycle.
2. The cash conversion cycle is the average length of time for which a rupee is tied up in current assets.
State True or False:

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False
57. Which among the following are the elements of total cost associated with cash management?
1. Cost of conversion of marketable securities into cash
2. Holding cost
3. Optimum cash balance
4. Opportunity cost

a. Option 1 & 3
b. Option 1 & 4
c. Option 2 & 3
d. Option 3 & 4
58. Consider the below mentioned statements:
1. Current assets are those assets which are expected to be realised in cash or sold or consumed during the
normal operating cycle of the business.
2. Time lag is the time required to procure fresh supplies of inventory.
State true or false.

a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False

59. Credit policy of every company is largely influenced by _____________ and _____________.
a. Liquidity, accountability
b. Liquidity, profitability
c. Liability, profitability
d. Liability, liquidity

60. Which among the following are the two transactions which the arbitrate process refers to?
1. Paying out dividends
2. Utilising the retained earnings
3. Assuming no external financing
4. Raising external funds to finance additional investment programmes

a. Option 1 & 3
b. Option 1 & 4
c. Option 2 & 3
d. Option 3 & 4
Part C - 4 marks question ( Question 61 to 75)
61. XYZ is an oil based business company, which does not have adequate working capital. It fails to meet its current
obligation, which leads to bankruptcy. Identify the type of decision involved to prevent risk of bankruptcy.

a. Investment decision
b. Dividend decision
c. Liquidity decision
d. Finance decision
62. Consider the below mentioned statements:
1. All corporate forecasts use computerised forecasting models.
2. Under-capitalisation often results in a company becoming sick.
3. The accounts which generally vary closely with sales are cash accounts, receivable, inventory, and accounts
payable.
4. Legal constraints in obtaining funds on the basis of covenants of borrowings are given due weightage.
State True or False:

a. Statements 1, 2 and 4 are true

b. Statements 1, 2 and 3 are true
c. Statements 2, 3 and 4 are true
d. Statements 1, 3 and 4 are true
63. The rate of interest offered by the fixed deposit scheme of a bank for 365 days and above is 12%. What will be the
status of Rs. 20000, after two years if it is invested at this point of time?

a. Rs. 28032
b. Rs. 24048
c. Rs. 22056
d. Rs. 25088
64. Match the following sets:
Part A
1. Redeemable bonds
2. Irredeemable bonds
3. Zero coupon bonds
4. Yield to maturity

Part B
A. The discount rate equalling the present values of cash flow
to the current market price.
B. There is no intermediate payment between the date of
issue and the maturity date.
C. The maturity value does not exist.
D. The bond with annual interest payments.

a. 1D, 2C, 3B, 4A

b. 1A, 2D, 3B, 4C
c. 1B, 2A, 3D, 4C
d. 1B, 2C, 3A, 4D

65. Consider the following statements:

1. Retained earnings also have opportunity cost which can be computed.
2. The dividend forgone by the equity shareholders is opportunity cost.
3. If the entire earning is not distributed and the firm retains a part, then
these retained earnings are available within the firm.
4. Companies are required to pay any dividend on retained earnings.
State True or False:

a. Statements 1, 2 and 4 are true

b. Statements 1, 2 and 3 are true
c. Statements 2, 3 and 4 are true
d. Statement 1, 3 and 4 are true
66. Calculate the Degree of Total Leverage of Sania Enterprises Ltd. The information regarding the expenses, shares,
and sales of the company is 10,000 units, variable cost per unit is Rs. 300 per unit, selling price per unit is Rs. 500,
fixed expenses is Rs. 10,00,000, number of equity shares is 1,00,00, debt is 10,00,000 at 10% interest, preference
shares dividend is 10,000 shares of Rs.100 each at 5% and tax rate 40%.

a. 3.15
b. 2.44
c. 2.95
d. 2.86
67. Consider the below mentioned statements:
1. K0 and Kd remain constant for all degrees of leverage.
2. Optimal capital structure which minimises the cost of capital
3. The real marginal cost of debt and equity is the same
4. K0 decreases till a certain level, remains constant for moderate
increases in leverage thereafter and rises beyond a certain point.
State True or False:
a. Statement 1, 2 and 3
b. Statement 2 , 3 and 4
c. Statement 1, 3 and 4
d. Only statement 4 is true
68. Assume that you are a business analyst in a software company and your company has received many projects like
project A with pay-back period of 3 years, project B with pay-back period of 4 years, project C with pay-back period
of 5 years and project D with pay-back period of 1 year. The standard set up by the management for pay-back
period is 2.5 years. Which project would you choose?

a. Project A
b. Project B
c. Project C
d. Project D
69. Match the following sets:
Part A
1. Risk
2. Risk adjustment factor
3. Dispersion
4. Simulation analysis

Part B
A. It is termed as degree of uncertainty
B. It is computed by variance or standard deviation
C. It forces the decision maker to explicitly consider the interdependencies
and uncertainties lining the project.
D. It is denoted by (Alpha)

a. 1D, 2A, 3B, 4C

b. 1A, 2D, 3B, 4C
c. 1B, 2A, 3D, 4C
d. 1B, 2C, 3A, 4D

70. Assume that a firm XYZ Ltd. has decided to manufacture tyres of different types for which they should know all the
requirements. Many constraints arise during the manufacturing process. The firm uses a programming approach to
overcome these constraints and achieve maximum net present value. Which among the following programming
approach is used by the firm?

a. Goal programming approach

b. Linear programming approach
c. Non-linear programming approach
d. Integer programming approach
71. Consider the below mentioned statements:
1. Under inflationary conditions, the same levels of inventory will require
decreased investment.
2. The cash conversion cycle shows the time interval over which additional
non-spontaneous sources of working capital financing must be obtained to
carry out firms activities.
3. During boom, expansion of business can be achieved only by
augmenting investment in various assets that constitute working capital of a
firm.
4. Investing heavily in current assets will drain the firms earnings and
inadequate investment in current assets will reduce the firms credibility as
it affects the firms liquidity.
State True or False:

a. Statements 1, 2 and 4 are true

b. Statements 1, 2 and 3 are true
c. Statements 2, 3 and 4 are true
d. Statement 1, 3 and 4 are true
72. Which among the following statements are the assumptions of Baumol
model?
1. The opportunity cost of holding cash is known and does not change with
time.
2. The firm is able to forecast its cash requirements in an accurate way.
3. The firm should keep sufficient cash at all times.
4. The firms payouts are uniform over a period of time.

a. Statements 1, 2 and 4
b. Statements 1, 2 and 3
c. Statements 2, 3 and 4
d. Statement 1, 3 and 4
73. Annual demand of a company is 40,000 units. The ordering cost per order is Rs. 30(fixed) along with a carrying
cost of Rs. 15 per unit per annum. The purchase cost per unit i.e. price per unit is Rs. 35 per unit. Determine EOQ,
total number of orders in a year and the time-gap between two orders.

a. 300 units, 200 orders, 4 days

b. 400 units, 200 orders, 4 days
c. 350 units, 150 orders, 2 days
d. 400 units, 100 orders, 4 days
74. Consider the below mentioned statements:
1. Optimum credit policy is one which would maximise the value of the firm.
2. Decreasing the credit period will bring in additional sales from existing customers and new sales from new
customers.
3. The credit policy to be adopted by a firm is influenced by the strategies pursued by its competitors.
4. The important variables of credit policy should be identified before establishing an optimum credit policy and
then they should be evaluated.
State True or False:

a. Statements 1, 2 and 4 are true

b. Statements 1, 2 and 3 are true
c. Statements 2, 3 and 4 are true
d. Statement 1, 3 and 4 are true
75. Consider the below mentioned statements:
1. As per constant dividend per share, the firm pays a constant percentage of net earnings to the shareholders.
2. Investors use dividend policy as a measure of evaluating the firms profitability.
3. The market price of shares varies with the stability in dividend rates.
4. Stable dividend policy avoids sale of securities and inconvenience to investors.
State True or False:

a. Statements 1, 2 and 3 are true

b. Statements 1, 2 and 4 are true
c. Statements 2, 3 and 4 are true
d. Only statement 2 is false