Financial Management Set 13
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This set of Financial Management Multiple Choice Questions & Answers (MCQs) focuses on Financial Management Set 13
Q1 | Risk-Return trade off implies
- Minimization of Risk,
- Maximization of Risk,
- Ignorance of Risk
- Optimization of Risk
Q2 | Basic objective of diversification is
- Increasing Return,
- Maximising Return,
- Decreasing Risk,
- Maximizing Risk.
Q3 | Risk-aversion of an investor can be measured by
- Market Rate of Return
- Risk-free Rate of Return,
- Portfolio Return,
- None of the above.
Q4 | If the intrinsic value of a share is less than the market price, which of the mostreasonable?
- That shares have lesser degree of risk
- That market is over valuing the shares
- That the company is high dividend paying,
- That market is undervaluing the share
Q5 | According to traditional approach, the average cost of capital
- Remains constant up to a degree of leverage and rises sharply thereafter with every increase in leverage.
- Rises constantly with increase in leverage.
- Deceases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.
- Decreases at an increasing rate with increase in leverage.
Q6 | Equity shares of phonex Ltd are quoted in the market at Rs17. The dividend expected ayear hence is Rs1.50. The expected rate of dividend growth is 8%. The cost of equity capital to the company is
- 11.08%
- 13.88%
- 15.46%
- 16.82%
Q7 | Which of the following is not a feature of an optimal capital structure?
- Profitability
- Safety
- Flexibility
- Control
Q8 | The cost of debt capital if interest rate is 15% and tax rate is 40% is
- 6%
- 8.5%
- 9%
- 10.5%
Q9 | Which of the following is not a feature of an optimal capital structure?
- The company should make maximum use of leverage at a minimum cost
- The capital structure should be flexible to be able to meet the changing condition
- The company should aim at not using excessive debt in its capital structure
- The company should make minimum use of leverage at a minimum cost.
Q10 | Which of the following is not an assumption of Miller and Modigliani approach?
- There are no corporate or personal income tax
- Investors are assumed to be rational and behave accordingly
- There is no corporate tax though there are personal income tax
- Capital markets are perfect
Q11 | The bond yield plus risk premium approach is a method of finding out the cost of
- Preference capital
- Equity capital
- Debenture capital
- Term loans
Q12 | According to net operating income approach
- The equity capitalization rate remains constant with any increase or decrease in the degree of leverage
- The overall capitalization rate of the firm remains constant
- The cost of debt remains constant
- Both b and c
Q13 | While calculating the weighted average cost of capital, market value weights are preferredbecause
- Book value weights are historical in nature
- It is vary difficult to estimate book value weights at the time of calculating the weighted average cost
- This is in conformity with the definition of cost of capital as the investor’s minimum required rate of return
- Book value weights fluctuate violently.
Q14 | Which profit is considered for calculating Average Rate of Return?
- Earnings before interest, depreciation and tax
- Average profit after tax and depreciation
- Average profit after depreciation but before tax
- Average profit after depreciation but before tax
Q15 | A project costs Rs50,000 and will yield annual cash inflows of Rs20,000 for 5years.Calculate its payback period.
- 2 years
- 5 years
- 2.5 years
- 3 years
Q16 | Capital structure decisions should always aim at having debt component in order to
- Gain tax savings
- Gain control over the company
- Balance the capital structure
- Increase the earnings available for shareholders.
Q17 | ------ refers to a situation where a firm is not in a position to invest in all profitableprojects due to the constraints on availability of funds
- Capital budgeting
- Over capitalization
- Capital expenditure control
- Capital rationing
Q18 | ------ refers to the minimum return expected by its suppliers
- Trading on equity
- Time value of money
- Cost of capital
- Capital gearing
Q19 | The ratio which is obtained by dividing the present value of future cash inflows by thepresent value of cash out flows is called
- Net Present Value
- IRR
- Profitability Index
- Average rate of return
Q20 | Capital structure is the proportion of
- Long term funds and short term funds
- Debt and equity
- Current assets and fixed assets
- Equity and retained earnings
Q21 | A company has earnings before interest and taxes of Rs1,00,000. It expects a return oninvestment at a rate of 12.5%. What is the total value of the firm according to MM Theory?
- Rs6,00,000
- Rs7,00,000
- Rs8,00,000
- Rs9,00,000
Q22 | Optimum capital structure is obtained when
- Firm earns maximum profits
- Firm declares reasonable dividend
- Market value per equity share is the maximum
- The debt increases
Q23 | Axis Ltd is issuing 15% debentures ( face value Rs60). The net amount realized perdebenture is Rs54 and they are redeemable at par after 6 years. At a corporate tax rate of 40%, what is the cost of debt?
- 16.54%
- 17.54%
- 10%
- 14.74%
Q24 | Which of the following statement is true according to traditional approach of capitalstructure?
- Cost of capital increases with the use of debt after a certain amount of debt and later falls
- Cost of equity and debt more or less remains constant with the use of debt up to a certain amount of debt
- Cost of declines and cost of debt remains constant with increase in debt.
- Cost of equity declines and cost of debt increases with increase in debt
Q25 | Which of the following is true regarding the measurement of cash inflows and out flows ofa project?
- Depreciation amount should be added to PBT
- Depreciation amount should be added to PAT
- Depreciation should neither be added nor be subtracted from PAT
- Both a and b above