[Solved] Financial Management MCQ [Free PDF] - Objective Question Answer for Financial Management Quiz - Download Now! (2024)

1. Department of taxation
2. Department of Revenue
3. Department of Expenditure
4. More than one of the above
5. None of the above

The correct answer isDepartment of Expenditure.

Key Points

• The main goal of PFMS today is to help the Government of India implement a strong public financial management system by developing a network for payments and cost accounting and an effective fund flow system.
• As part of the government of India's Digital India effort, PFMS offers a real-time, trustworthy, and useful management information system as well as an efficient decision support system to diverse stakeholders.

Important Points

• The Controller General of Accounts (CGA), Department of Expenditure, Ministry of Finance, Government of India developed and implemented the Public Financial Management System (PFMS), a web-based online software programme.
• In order to track money issued under all Plan programmes of the Government of India and to report expenditures in real time at all stages of programme execution, PFMS was launched in 2009.
• The scope was later broadened to include direct beneficiary payments made under all Schemes.

Mistake PointsThe Department of Expenditure is responsible for formulating policies and guidelines related to public expenditure, budgeting, and financial management in India. PFMS, as a central platform, facilitates the tracking, monitoring, and reporting of financial transactions and outcomes of various government programs and schemes.

Hence, it can be concluded thatDepartment of Expenditure administers the platform for Public Financial Management System

Get Started for Free

Trusted by 5.9 Crore+ Students

1. EBT-EPS
2. EAT-EPS
3. EBIT-EPS
4. EBIT-EBT

The correct answer is EBIT-EPS.

Key PointsThe impact of financial leverage on the profitability of a business can be effectively analyzed through EBIT-EPS analysis.

Here's why:

• EBIT (Earnings Before Interest and Taxes):This metric represents the company's operating profit without considering the impact of financing decisions (interest) and tax implications.
• EPS (Earnings Per Share):This metric represents the amount of profit earned per share of outstanding common stock.

By analyzing the relationship between EBIT and EPS under different levels of debt, we can understand how financial leverage affects a company's profitability:

• Scenario 1: No debt financing(EBIT = EPS)
• Scenario 2: Debt financing introduced(EPS may increase if ROI > cost of debt, decrease if ROI < cost of debt)

If the company introduces debt financing and the ROI on the borrowed funds is higher than the cost of debt, the EPS will increase compared to the scenario with no debt. This demonstrates the positive impact of leverage on profitability.

Conversely, if the ROI on borrowed funds is lower than the cost of debt, the EPS will decrease. This indicates the negative impact of leverage on profitability, as the interest expense outweighs the return on investment.

Therefore, EBIT-EPS analysis provides valuable insights into how financial leverage affects a company's profitability by isolating the impact of financing decisions on the earnings available to shareholders.

Get Started for Free

Trusted by 5.9 Crore+ Students

1. return on investment is lower than the cost of debt
2. ROI is higher than the cost of debt
3. debt is easily available
4. if the degree of existing financial leverage is low

The correct answer isROI is higher than the cost of debt.

Key PointsFinancial leverage is considered favourable when the Return on Investment (ROI) is higher than the cost of debt.

Here's the breakdown:

Return on Investment (ROI): This is the percentage return earned on an investment. It's calculated by dividing the net profit by the total investment cost.
Cost of debt: This is the interest rate an organization pays on borrowed funds, such as loans or bonds.
When the ROI is greater than the cost of debt, it means the organization is earning more on its investments (funded partially with debt) than the cost of borrowing that money. This magnifies the overall return for the shareholders.

However, if the ROI is lower than the cost of debt, the organization is losing money on its investments. This is because the interest expense on the debt is higher than the return generated by the investment, ultimately reducing the return for the shareholders.

Therefore, favourable financial leverage occurs when the organization uses borrowed funds strategically to amplify its returns. However, it's crucial to manage debt carefully, as excessive leverage can also increase financial risk if the ROI falls below the cost of debt

Get Started for Free

Trusted by 5.9 Crore+ Students

1. Total Current Assets
2. The difference between current assets and current liabilities.
3. Total liquid assets
4. Total investment in the firms

The correct answer isTotal Current Assets.

Key PointsThe gross working capital refers to the total current assets of the firm. Net working capital refers to the difference between the current assets and current liabilities.

Important Points

Working Capital:

Working capital is also known as the net working capital.It is the difference between the company's current assets and current liabilities. Working capital measures thecompany's liquidity and short-term financial status.A negative working shows that the current liabilities of the company are more than the current assets. A positive working capital of a company shows that the company can fund its current liabilities and make investments in future activities.

Gross Working Capital:

Gross working capital refers to thecompany's total assets.It includes all the current assets like accounts receivable, inventory, and marketable securities. It does not provide a full picture of the company's liquidity position.Gross working capitalhas more value when a company tracks its changes over time.It is the sum of all the current assets of the firm including the following:

• Cash and cash equivalents:This includes all the cash in hand and certain other investments that have low risk and low investment terms.
• Marketable securities: These are financial instruments that can quickly be converted into cash.
• Interest receivable: This refers to the interest to be received during the year for the investments, loans, or overdue invoices.
• Account receivable: This refers to all the claims for cash to be received during the year for the inventory of goods sold.
• Inventory:Inventories are the unsold goods and raw materials.

Hence, the correct answer is total current assets.

Get Started for Free

Trusted by 5.9 Crore+ Students

1. 10%
2. 20%
3. 30%
4. 25%

The correct answer is 10%.

Key Points

P/VRatio = ChangeinSales / ChangeinProfit ​× 100

ChangeinProfit = ProfitinPeriodII − ProfitinPeriodI = 10000 −(−10000) = 20000

ChangeinSales = SalesinPeriodII − SalesinPeriodI = 900000 − 700000 = 200000

P/VRatio = 20000/ 200000​ × 100 = 10%.

Hence, the correct answer is 10%.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 6

1. Equity capital
2. Debt capital
3. Capital structure
4. EPS

Financial Management Question 6 Detailed Solution

The correct answer isEPS.

Leverage refers to the use of debt (borrowed funds) to amplify returns from an investment or project.
Key PointsCombined Leverage:

The termcombined leveragerefers to the potential use of fixed costs, both operating and financial, which multiplies the effect of changes in sales volume on the earning per share of the company.

Combined leverage (CL) = Operating leverage (OL)× Financial leverage (FL)

OR

= \(\frac {Contribution}{EBIT} \times \frac {EBIT}{EBT}\)

Combined leverage is the total effect of both operating and financial leverage on a company's EPS. It considers how changes in sales impact operating income and how changes in operating income, in turn, impact net income and EPS.

Important PointsOthertypes of Leverage-

Financial Leverage-Financial leverage is the utilization of funds with a fixed cost to raise earnings per share.

Operating Leverage-Operating leverage is the use of of a fixed-cost asset in order to create sufficient income to pay all fixed and variable expenses.

Additional InformationEquity Capital-

• The fund that is raised by issuing equity shares of a company is known as equity capital.
• Investors pay money for regular or preferred stock. In the event of a corporate liquidation, investors will not be refunded until all other creditors have been paid.

Debt Capital-

• A corporation can raise debt capital by borrowing funds from individuals or institutions, for a particular time period after which they must pay back the entire sum.
• Term Loans, Debentures, and Bonds are examples of debt capital.

Capital Structure-

• The distribution of various long-term sources of financing is referred to as the capital structure, which is a component of the financial structure.
• Debt and equity capitalconstitute a corporation's capital structure.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 7

1. To negotiate with bankers for a loan.
2. To analyse variance between standard costs and actual costs.
3. To estimate the future cash flows from a proposed project.
4. To advertise the public issue of the firm.

Financial Management Question 7 Detailed Solution

The correct answer istoanalyse variance between standard costs and actual costs.

Key Points

• A financial manager is aprofessional who is responsible for overseeing the financial health of an organization.
• They are responsible for creating financial reports, developing and implementing financial strategies, and managing investments.

And, Control refersto thecomparison of actual cost with the standard cost and working for removing the deviations, if any.

Additional Information

Variance analysisis the procedure of computing the differences between standard costs and actual costs and recognizing the causes of those differences.

• With the help of above explanation control function of financial manager include variance between standard costsand actual cost.
• Hence the correct answer istoanalyse variance between standard costs and actual costs.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 8

1. Profitmaximization
2. Wealthmaximization
3. Dischargingsocialresponsibilities
4. Buildingassetsforthebusiness

Financial Management Question 8 Detailed Solution

The correct answer isWealthmaximization.

Key Points

BasicobjectiveoffinancialmanagementisWealthmaximization.

• Financial Management
  • It is concerned with optimal procurement as well as the usage of finance.
  • Itaims at reducing the cost of funds procured, keeping the risk undercontrol and achieving effective deployment of such funds.
  • It also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance.
  • Thefuture of a business depends a great deal on the quality of its financial management.
  • The financial statements, such as Balance Sheet and Profit and Loss Account, reflect a firm’s financial position and its financial health.
  • Almost all items in the financial statements of a business are affected directly or indirectly through some financial management decisions.

Important Points

The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept.

• The primary objective of financial management is to maximise the current price of equity shares of the company or to maximise the wealth of owners of the company.
• The market price of a company’s shares is linked to the three basic financial decisions.
• The Financial decisions are
  • Investment Decision
  • Financing Decision
  • Dividend Decision

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 9

1. Total assets minus (-) fixed assets
2. Current assets minus (-) current liabilities
3. Current assets minus (-) inventories
4. Current assets

Financial Management Question 9 Detailed Solution

The correct answer isCurrent assets minus (-) current liabilities.

Key Points

Net working capital refers toCurrent assets minus (-) current liabilities.

Working capital

• It is the difference between current assets and current liabilities.
• It is the part of the company’s total capital.
• It is the measure of the company’s efficiency to pay its short-term dues as well as manage operational expenses.
• It indicates cashrequired for managing day to day activities of the business.
• Net working capital=Current assets minus (-) current liabilities

Important Points

There are different sources of Working Capital based on the time period of loan-

Spontaneous Source of Finance (For 1-3 months)

• Trade Credit
• Bills Payable
• Notes Payable
• Accrued Expenses

Short-Term Source of Finance (For 1-12 months)

• Bank
• Overdrafts
• Cash Credits
• Trade Deposits
• Bills Discounting
• Commercial Paper
• Inter-Corporate Loans
• Short-term Loans

Long-term loans (1-5 or more years)

• Retained Earnings
• Share Capital
• Long-term
• Loans Debentures

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 10

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

Financial Management Question 10 Detailed Solution

The correct answer isD, B, A, E, C.

Key Points

• Securitization is the process of pooling various types of financial assets, such as mortgages, auto loans, or credit card debt obligations, and Selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs).

Important Points

• The process of securitization involves the originator creating a pool of assets, selling them to an SPV, which then raises funds by issuing securities.
• The SPV uses these funds to pay the originator, and subsequently collects and distributes cash flows from the assets to the investors holding the securities.
• The originator may continue to handle the collection process on behalf of the SPV.

The steps in the process of securitization, in the correct sequence are as follows -

Step D - Originator makes a pool of assets and sells it to the SPV

• The process begins with the originator (often a financial institution like a bank) creating a pool of assets.
• These assets are typically loans, like mortgages or auto loans.
• The originator then sells these assets to a Special Purpose Vehicle (SPV).

Step A-SPV issues tradable securities to fund the purchase of the pool of assets

• The SPV issues securities (often in the form of bonds) that are backed by the cash flows from the pool of assets it has acquired.
• These securities are then sold to investors to raise funds for the purchase of the assets from the originator.

Step E - SPV pays the funds to the originator for the pool of assets

• The funds raised from selling the securities are used by the SPV to pay the originator for the pool of assets.
• At this point, the originator no longer owns these assets, and the SPV is now responsible for managing and distributing the cash flows generated by the assets.

Step B -SPV subcontracts (outsources) the originator for collection of interest and principalpayments on the pool ofassets.

• TheSPV often contracts the originator to continue collecting interest and principal payments from the borrowers whose loans are part of the pool.
• The originator acts as a servicer in this capacity.

Step C -SPV repays the funds to the investor as cash flows arise from the pool ofassets.

• As the borrowers make their interest and principal payments, the SPV collects these funds and distributes them to the investors who hold the securities.
• This provides a return on investment to the securities' holders.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 11

1. Cash required for managing day to day activities of the business
2. Funds required to buy inventory
3. Funds required to pay for loans
4. Cash required to buy assets

Financial Management Question 11 Detailed Solution

The correct answer isCash required for managing day to day activities of the business.

Key Points

Working capital:

• It is the difference between current assets and current liabilities.
• It is the part of the company’s total capital.
• It is the measure of the company’s efficiency to pay its short-term dues as well as manage operational expenses.
• It indicates cashrequired for managing day to day activities of the business.

Important Points

There are different sources of Working Capital based on the time period of loan-

Spontaneous Source of Finance (For 1-3 months)

• Trade Credit
• Bills Payable
• Notes Payable
• Accrued Expenses

Short-Term Source of Finance (For 1-12 months)

• Bank
• Overdrafts
• Cash Credits
• Trade Deposits
• Bills Discounting
• Commercial Paper
• Inter-Corporate Loans
• Short-term Loans

Long-term loans (1-5 or more years)

• Retained Earnings
• Share Capital
• Long-term
• Loans Debentures

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 12

1. (A) - (II), (B) - (I), (C) - (IV), (D) - (III)
2. (A) - (III), (B) - (IV), (C) - (I), (D) - (II)
3. (A) - (I), (B) - (III), (C) - (IV), (D) - (II)
4. (A) - (II), (B) - (IV), (C) - (I), (D) - (III)

Financial Management Question 12 Detailed Solution

The correct answer is(A) - (II), (B) - (IV), (C) - (I), (D) - (III).

Key Points

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 13

1. Bondisafixedincomesecurity
2. Itpromisesfixedamounttotheholder
3. Ithasamaturityperiod
4. Whenthecompanymakeslosses,payinginterestonthebondisnotmandatorytothebond holders

Financial Management Question 13 Detailed Solution

Key PointsBonds

• Bonds are fixed-income securities that simulate loans made by investors to borrowers.
• High-security debt instruments.
• Issued by the government, states, municipalities, and other bodies.
• These bonds have a maturity date, after which the issuer must return the principal amountand a portion of the profit to the investor.
• The interest on the investment is paid to the investors.

Important PointsStatement 1:Bondisafixedincomesecurity.

• Investors of Bonds get fixed interest monthly on regular basis.

​Therefore, the statement is true.

Statement 2: Itpromisesfixedamounttotheholder.

• It is pre-decided that on maturity investor will get full principal amount alongwith a part of profit whatever rate is decided.

​​Therefore, this statement is true.

Statement 3:It has a maturity period

• Bonds have fix maturity period such as 5 years, 10 years and so on.

Therefore, this statement is also true.

Statement 4: When the company makes losses, paying interest on the bond is not mandatory to the bond holders.

• Issuer of bonds has fixed obligation to pay interest to investors regularly irrespective of having loss.

​Therefore, this statement is false.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 14

1. Operating leverage
2. Financial leverage
3. Combined leverage
4. Accounting rate of return

Financial Management Question 14 Detailed Solution

The correct answer is Financial leverage.

Key Points

Leverage:

• Leverage is the process of using debt (borrowed money) to increase the profits of an investment or enterprise.
• Leverage allows investors to increase their purchasing power in the market.
• Leverage is the financing of assets by businesses; rather than selling shares to obtain capital, businesses can use debt to invest in their operations in an effort to boost shareholder value.

Important Points

Financial leverage

• It is relationship between the firms EBIT and earnings available for shareholders.​
• The proportion of debt in the overall capital is also called financial leverage.
• Financial leverage is computed as D/E or D/(D + E) where D is the Debt and E is the Equity.
• As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.

Operating leverage

• It measures the effect of change in Sales Quantity and operating capacity on EBIT.
• It is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.
• A company that generates sales with a high gross margin and low variable costs has high operating leverage.
• It is useful in ascertaining the effect of a change in sales quantity on operating profit.

Combined leverage

• ​It refers to high profits due to fixed costs.
• A degree of combined leverage (DCL) is a leverage ratio that summarizes the combined effect that the degree of operating leverage (DOL) and the degree of financial leverage has on earnings per share (EPS), given a particular change in sales.

Get Started for Free

Trusted by 5.9 Crore+ Students

Financial Management Question 15

1. A, B only
2. D, E only
3. B, C only
4. A, D only

Financial Management Question 15 Detailed Solution

The correct answer isB, C only.

Key PointsLet's analyze each statement:

• Discount Rate
  • This option is incorrect because:
  • The internal rate of return (IRR) method itself doesn't directly focus on the discount rate; it determines the discount rate that makes the net present value (NPV) zero.
  • When comparing mutually exclusive projects, IRR doesn't directly address differences caused by varying discount rates.
• Timing
  • This option is correct because:
  • IRR may not accurately handle projects with different cash flow timings.
  • Projects with early returns versus those with later returns can yield misleading IRR results, leading to potentially poor decision-making.
• Scale
  • This option is correct because:
  • The IRR method doesn't consider the scale or size of projects.
  • Comparing projects of different scales using IRR can be misleading, as a higher IRR on a small project might be less desirable than a lower IRR on a larger project.
• Reversing Flow
  • This option is incorrect because:
  • Reversing flow (changes in the direction of cash flows) can complicate IRR calculations but isn't a fundamental problem in comparing mutually exclusive projects.
  • Multiple IRRs can exist if cash flows change direction, but this issue isn't specific to project scale or timing differences.
• Leverage
  • This option is incorrect because:
  • Leverage refers to the use of borrowed capital to finance a project, which isn't a direct concern when comparing the IRR of mutually exclusive projects.
  • IRR analysis typically assumes project financing is separate from evaluation.

Based on the evaluation above, the correct answer is option 3: B and C, as these statements correctly describe aspects of the limitations of the IRR method when evaluating mutually exclusive projects.

Get Started for Free

Trusted by 5.9 Crore+ Students