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This set of Financial Management Multiple Choice Questions & Answers (MCQs) focuses on Financial Management Set 15

Q1 | The cost of each component of capital is known as
  • Specific cost
  • Combined cost
  • Average cost
  • Implicit cost
Q2 | ------ refers to that EBIT level at which EPS remains the same irrespective of the debt- equity mix.
  • Profit point
  • Cut off point
  • Point of indifference
  • None of these
Q3 | The use of long term fixed interest bearing debt and preference share capital along with equity shares is called
  • Operating leverage
  • Financial leverage
  • Trading on equity
  • Both b and c
Q4 | Which of the following factors are considered when a capital structure decision is taken?
  • Cost of capital
  • Dilution of control
  • Floatation cost
  • All of the above
Q5 | The combination of debt and equity that leads to the maximum value of the firm is called
  • Financial structure
  • Capital structure
  • Optimal capital structure
  • None of these
Q6 | In optimal capital structure the company’s cost of capital will be
  • Minimum
  • Maximum
  • Medium
  • None of these
Q7 | The value of a firm on the basis of net operating income approach can be determined bydividing the earnings before interest and taxes by
  • Cost of equity
  • Cost of debt
  • Overall cost of capital
  • None of the above
Q8 | A company should follow the policy of ----- gear during deflation or depression period
  • High gear
  • Low gear
  • Medium gear
  • Any of the above
Q9 | Which of the following is not a disadvantage of rate of return method of capital budgeting?
  • It ignores the time value of money
  • It uses the earnings of a project up to the payback period only
  • It does not take into consideration cash flows
  • This method can not be applied to a situation where investment in a project is to be made in parts.
Q10 | A project having a profitability index of ------ is accepted
  • PI<1
  • PI>1
  • PI=1
  • None of these
Q11 | The type of debt whose rate of interest changes according to the changes in the rate of interest payable on gilt edged securities or the prime lending rate of the bank is called
  • Floating rate debt
  • Variable rate debt
  • Fixed rate debt
  • Both a or b
Q12 | .Earnings yield method is applied when the dividend pay out ratio is
  • Zero per cent
  • 100 per cent
  • 50 per cent
  • 20 percent
Q13 | ----- is the rate of return that the company must earn on the net funds raised, in order to satisfy the equity shareholders’ demand for return
  • Cost of retained earnings
  • Cost of external equity
  • Weighted average cost of capital
  • Marginal cost of capital
Q14 | A project requires an investment of Rs500000and has scrape value of Rs.20000 after five years. It is expected to yield profits after depreciation and taxes during the five years amounting to Rs.40000,Rs60000, Rs.50000,Rs70000 and Rs20000.What is the average rate of return on the investment?
  • 10%
  • 11%
  • 12%
  • 13%
Q15 | Which of the following quantitative aspect of financial planning?
  • Capitalization
  • Capital structure
  • Organization structure
  • None of these
Q16 | Which of the following qualitative aspect of financial planning?
  • Capitalization
  • Capital structure
  • Organization structure
  • None of these
Q17 | Which of the following is/ are the assumptions of net income approach?
  • The cost of debt is less than the cost of equity
  • There are no taxes
  • The risk perception of investors is not changes by the use of the debt.
  • All of these
Q18 | The overall cost of capital, according to which theory, decreases up to a certain point,remains more or less unchanged for moderate increase in debt thereafter and increases a certain point
  • Net income approach
  • Net operating income approach
  • Traditional theory
  • MM approach
Q19 | According to which theory two identical firms in all respect except their capital structure can not have different market value or cost of capital because of arbitrage process
  • Net income approach
  • Net operating income approach
  • Traditional theory
  • MM approach
Q20 | XLtd has taken a term loan of Rs12 lakhs at an interest rate of 15% p.a. If the tax rate applicable to the company is 40%, the cost of term loan is
  • 4.8%
  • 6%
  • 7.2%
  • 9%
Q21 | Agency cost arises due to
  • Cost over run in implementing new projects
  • Failure of budget cost
  • Restrictions imposed by the supplier of debt capital
  • Rise in the cost of production
Q22 | What do you mean by NPV?
  • Excess of cash inflows over cash outflows
  • Excess of cash outflows over cash inflows
  • Excess of the present value of cash out flows over the present value of cash inflows
  • Excess of the present value of cash inflows over the present value of cash outflows
Q23 | Under NPV method, cash flows are assured to be reinvested at
  • Risk free rate of return
  • Cost of debt
  • IRR
  • Discount rate at which NPV is computed
Q24 | The pay back period shows
  • Recovery period of original investment outlay
  • The time value of money
  • The cash inflows
  • None of the above
Q25 | Capital rationing is applied in a situation where
  • It is difficult to bring in required amount of capital
  • Financial institutions are doubtful or not sure of the validity of the project
  • A large number of investment proposals compete for limited funds
  • The dividend is converted into capital for completion of a new project