Shareholderwealth in a firm is

represented by

a) The number of people employed in the

firm.
b) The book value of the firm's assets less
the book value of its liabilities
c) The amount of salary paid to its
employees.
d) The market price per share of the firm's
 Mohan Ltd. Issues 10000 10%
debentures of Rs 100 each at a
discount of 5%. The cost of
floatation are 2%. Tax rate is
50%.Compute the cost of capital
before tax and after tax.
 Rama & Co. wishes to issue 1000 debentures
(10%) of Rs.100 each for which the company will
be required to incur following expenses:

Underwriting Commission 2%
Brokerage .5%
Printing and other expenses 15000
Calculate Cost of debt to be issued
At par
At 10% discount
At 10% premium
Tax rate 50%
 The
long-run objective of financial
management is to

a) Maximize earnings per share.

b) Maximize the value of the firm's
common stock.
c) Maximize return on investment.
d) Maximize market share.
 The
market price of a share of
common stock is determined by

a) The board of directors of the firm.

b) The stock exchange on which the
stock is listed.
c) The president of the company.
d) Individuals buying and selling the
stock
 ____________ 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
 The
focal point of financial
management in a firm is:

a) The number and types of products

or services provided by the firm.
b) The minimization of the amount of
taxes paid by the firm.
c) The creation of value for
shareholders.
d) The Rupees profits earned by the
 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
 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
 Which of the following is NOT a cash
outflow for the firm?

a) Depreciation.
b) Dividends.
c) Interest payments.
d) Taxes.
 Preferredshareholders' claims on
assets and income of a firm come
those of ..creditors ..those of
common shareholders.

a) Before; and also before

b) After; but before
c) After; and also after
d) Equal to; and equal to
 An asset is a

a. Source of fund
b. Use of fund
c. Inflow of funds
d. none of the above.
 _____and ____ are the two versions of goals
of the financial management of the firm.

a) Profit maximisation, Wealth

maximization
b) Production maximisation, Sales
maximisation
c) Sales maximisation, Profit maximization
d) Value maximisation, Wealth
maximization
 Reserves & Surplus are which form
of financing?

a) Security Financing
b) Internal Financing
c) Loans Financing
d) International Financing
 Which of the following are not
among the daily activities of
financial management?

a) sale of shares and bonds

b) credit management
c) inventory control
d) the receipt and disbursement of
funds
 The
basic requirement for a firm's
marketable securities is/are

a) Safety
b) Yield
c) Marketability
d) All of the above.
 Inthe _______________, 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
 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
 Toincrease a given present value,
the discount rate should be adjusted

a) upward.
b) downward.
c) No change.
d) constant
 In2 years you are to receive 10,000. If
the interest rate were to suddenly
decrease, the present value of that
future amount to you would __________.

Fall
Rise
Remain unchanged
The correct answer cannot be determined
without more information.
 Interestpaid (earned) on both the
original principal borrowed (lent) and
previous interest earned is often
referred to as __________.
Present value
Simple interest
Future value
Compound interest
 Ifinterest is paid at the rate of 5
percent Per year compounded
quarterly, What is the Annual
Percentage rate?

5percent
5.09 percent
20 percent
5.25 percent
 What is the present value of a 1,000
ordinary annuity that earns 8%
annually for an infinite number of
periods?
80
800
1,000
12,500
Rule of 72

The 'Rule of 72' is a simplified way

to determine how long an
investment will take to double, given
a fixed annual rate of interest.

By dividing72by the annual rate of

return, investors can get a rough
estimate of how many years it will
take for the initial investment to
duplicate itself.
 Iffrequency of compounding is annual
compounding

Effective interest rate equals annual

percentage rate
Effective interest rate is higher than
annual percentage rate
Effective interest rate is lower than
annual percentage rate
None of these
 _____________ 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
 Future value of an amount allowed to
grow at a given interest rate over a
period of time is known as the:
a) future value - single amount
b) present value - single amount
c) future value - annuity
d) present value annuity
A series of consecutive cash flows of
equal amounts is known as:

a) a present value
b) a compound sum
c) a present sum
d) an annuity
 Financial Leverage deals with

a) The relationship of fixed and

variable costs
b) The relationship of debt and equity
in the capital structure
c) The entire income statement
d) The entire balance sheet
A highly automated plant would
generally have

a) More variable than fixed costs

b) More fixed than variable costs
c) All fixed costs
d) All variable costs
 If frequency of compounding is annual
compounding

a) Effective interest rate equals annual

percentage rate
b) Effective interest rate is higher than
annual percentage rate
c) Effective interest rate is lower than
annual percentage rate
d) None of these
 The term "capital structure" refers to

a) Long-term debt, preferred stock,

and common stock equity.
b) Current assets and current
liabilities.
c) Total assets minus liabilities.
d) Shareholders' equity.
 Thetraditional approach towards the
valuation of a company assumes

a) That the overall capitalization rate

holds constant with changes in
financial leverage.
b) That there is an optimum capital
structure.
c) That total risk is not altered by
changes in the capital structure.
 EBIT is usually the same thing as

a) Funds provided by operations.

b) Earnings before taxes.
c) Net income.
d) Operating profit.
 Morefrequent compounding results
in ..future values

a) Lower
b) Higher
c) Same
d) Depends on other parameters
 InNet Income Approach the
following remains constant:

a) Cost of equity
b) Cost of debt
c) WACC
d) Both A and B
 Costassociated with issuance of new
share to the public is known as:

a) Flotation cost
b) Cost of debt
c) WACC
d) Cost of equity
 The Firm cost of capital is

a) Cost of preference share

b) Cost of debt
c) WACC
d) Cost of equity
 Textile
Mills borrows money at a rate
of 13.5 percent. This interest rate is
referred to as the:

a) compound rate.
b) current yield.
c) cost of debt.
d) capital gains yield.
 Theaverage of a firm's cost of equity
and after tax cost of debt that is
weighted based on the firm's capital
structure is called the:

a) reward to risk ratio.

b) structured cost of capital.
c) subjective cost of capital.
d) weighted average cost of capital.
A firm's cost of capital:

a) will decrease as the risk level of the

firm increases.
b) is independent of the firm's capital
structure.
c) should be applied as the discount rate
for any project considered by the firm.
d) depends upon how the funds raised are
going to be spent.
 Chelsea Fashions is expected to pay an
annual dividend of 0.80 a share next
year. The market price of the stock is
22.40 and the growth rate is 5 percent.
What is the firm's cost of equity?

a) 7.58 percent
b) 7.91 percent
c) 8.24 percent
d) 8.57 percent
 Sweet Treats common stock is currently priced
at 19.06 a share. The company just paid 1.15
per share as its annual dividend. The dividends
have been increasing by 2.5 percent annually
and are expected to continue doing the same.
What is this firm's cost of equity?

a) 6.03 percent
b) 8.47 percent
c) 8.68 percent
d) 8.82 percent
 Grill Works and More has 8 percent preferred
stock outstanding having face value of 100
that is currently selling for 49 a share. The
market rate of return is 14 percent and the
firm's tax rate is 37 percent. What is the
firm's cost of preferred stock?

a) 14.77 percent
b) 15.29 percent
c) 15.67 percent
d) 16.33 percent
 Electronics Galore has 950,00 shares of common
stock outstanding at a market price of 38 a
share. The company also has 40,000 bonds
outstanding that are quoted at 106 percent of
face value. What weight should be given to the
debt when the firm computes its weighted
average cost of capital?

a) 42 percent
b) 54 percent
c) 50 percent
d) 46 percent
 Capital structure weights are based
on the:

a) Market values of a firm's debt and

equity.
b) Market value of a firm's equity and
the face value of its debt.
c) Initial issue values of a firm's debt
and equity.
d) Book value of a firm's debt and
A firm's overall cost of capital:

a) is unaffected by changes in the tax

rate.
b) is another term for the firm s
internal rate of return.
c) is the same as the firm s return on
equity.
d) is the required return on the total
assets of a firm.
 The rate of return on its existing
assets that a firm must earn to
maintain the current value of the
firm stock is called the:

a) Return on equity.
b) Weighted average cost of capital.
c) Weighted average cost of equity.
d) Current yield.
 Financial management mainly
focuses on

a) Efficient management of every

business
b) Brand dimension
c) Arrangement of funds
d) All elements of acquiring and
using means of financial resources
for financial activities
 The
objective of wealth
maximization takes into account

a) Amount of returns expected

b) Timing of anticipated returns
c) Risk associated with uncertainty of
returns
d) All of the above
 Finance Function comprises

a) Safe custody of funds only

b) Expenditure of funds only
c) Procurement of finance only
d) Procurement & effective use of
funds
 Financial
management process
deals with

a) Investments
b) Financing decisions
c) Both a and b
d) None of the above
 Theonly feasible purpose of
financial management is

a) Wealth Maximization
b) Sales Maximization
c) Profit Maximization
d) Assets maximization
Finance functions are

A. Planning for funds

B. Raising of funds
C. Allocation of Resources
D. All of the above
 Which of the following is as EBIT?

a) Funds provided by operations

b) Earnings before taxes
c) Net income
d) Operating profit
 Time value of money supports the
comparison of cash flows recorded at
different time period by

a) Discounting all cash flows to a

common point of time
b) Compounding all cash flows to a
common point of time
c) Using either a or b
d) None of the above.
 Ifthe nominal rate of interest is 10%
per annum and there is quarterly
compounding, the effective rate of
interest will be:

a) 10% per annum

b) 10.10 per annum
c) 10.25%per annum
d) 10.38% per annum
 Time value of money indicates that

a) A unit of money obtained today is worth more

than a unit of money obtained in future

b) A unit of money obtained today is worth less

than a unit of money obtained in future

c) There is no difference in the value of money

obtained today and tomorrow

d) None of the above

 Concept of present value and future
value are:

Proportionately related
Inversely related
Directly related
Not related
 Equalannual amounts occurring in
the beginning of certain years are
known as:

Annuity
Perpetuity
Annuity due
Deferred payments
A student deposits some amount daily to
accumulate Rs 5000 to pay his tuition
fees after one year. Which of the
following compounding methods of
interest should be opted by him:

Compounded quarterly
Compounded daily
Compounded half yearly
Compounded annually
 Futurevalue of one rupee invested
today is:

More than one rupee

Equal to one rupee
Equal to present value
Less than one rupee
A series of constant cash flows
occurring at regular intervals forever
is known as:

Growing annuity
Perpetuity
Growing perpetuity
Annuity
 Whichof the following is called an
annuity:

A lump sum after few years

A series of equal and regular
amounts
A series of unequal amounts
A series of equal and irregular
amounts
 Objective of Financial management
is:

Management of liquidity
Maximisation of profit
Maximisation of shareholders wealth
Management of fixed assets
 What is ignored in principle of profit
maximisation

Time value of money

Risk
Wealth creation
All of the above
 Which of the following is included in
financial decision making?

Investment decision
Financing decision
Dividend decision
All of the above
 Dividend decision is related to:

Right issue of share

Reinvestment requirement
Cash flow statement
None of the above
 Financial management refers to:

Management of current assets

Management of all assets
Financial decision making
Management of liabilities
 Whichof the following is considered
as complimentary to financial
management?

Cost accounting
Management accounting
Financial accounting
Corporate accounting
.Which one of the following is NOT a
source of long-term financing?

Preference shares
Equity shares
Commercial papers
Debentures
 If a company raises money to
finance short-term needs by selling
its accounts receivable to another
party, this is called ___________.

Pledging
Warehousing
Factoring
None of the above
A debenture:

Long term loan

Receives dividend payments
Is a short term loan
Does not require security
 _______________would be considered
to be a cash equivalent.

commercial paper
common stock
corporate bonds
real estate
 Financialinstruments with maturities
of less than one year are traded in
the

equity market
capital market.
money market.
fixed-income market.
 .Whichof the following is a money
market instrument?

A Treasury bill
A federal funds loan.
A corporate bond.
A mortgage loan
 Cost of capital refers to:

Floatation cost
Dividend
Required rate ofreturn
None of the above
 Whichof the following has the
highest cost of capital?

Equity shares
Loans
Bonds
Preference shares
 Cost
of capital for bonds and
debentures is calculated on:

Before tax basis

After tax basis
Risk free rate of interest basis
None of the above
 Marginal cost of capital is cost of:

Additionalsales
Additionalfunds
Additionalinterests
None of the above
 Incase the firm is all-equity
financed, WACC would be equal to:

Cost of debt
Cost of equity
Neither A nor B
Both A and B
 Firmscost of capital is the average
cost of :

All the sources

All borrowings
All share capital
All bonds and debentures
 NOIapproach advocates that degree
of debt financing is:

Relevant
May be relevant
Irrelevant
May be irrelevant
 Which of the following argues that
value of levered firm is higher than
that of unlevered firm?

Net income approach

Net operating income approach
MM model with taxes,
Both A and C
A company with a tax rate of 30% has the following
capital structure:
Weight Instrument Pre-tax cost of capital
40% Bonds 6%
50% Ordinary shares 12%
10% Preference shares 8%
What is the companys weighted average cost of capital?

A 10.2%
B 7%
C 6.2%
D 8.5%
A company has 10% perpetual
debt of Rs 100,000. The tax rate is
35%. Determine the cost of capital
assuming the debt is issued at 10%
premium.

Cost of debt= 5.91%

Cost of debt=7.26%
Cost of debt=8.62%
Cost if debt= 8.91%
 Which of the following sources of
funds for capital investment involves
a tax adjustment to determine the
cost of capital?

Retained profits
Issuing debt
Issuing common stock
All of the above involve a tax
adjustment
 In
case of net income approach, the
cost of equity is:

Constant
Increasing
Decreasing
None of the above
 Judicious
use of leverage is
suggested by:

Net income approach

Net operating income approach
Traditional approach
All of the above
 The traditional approach to value of the
firm assumes that:

There is no optimal capital structure

Value can be increased by judicious use
of leverage
Cost of capital and capital structure are
independent
Risk of the firm is independent of capital
structure