MULTIPLE CHOICE QUESTIONS FROM ICAI SITE

1. Increase in which of the following would not increase cost of equity calculated on the basis of
capital asset pricing model?
Answer 1: Market Risk premium
Answer 2: Expected market rate of interest
Answer 3: Beta
Answer 4: Effective tax rate
Right Answer: 4

2. A company has average accounts receivable of' 10,00,000and annual credit sales of' 60,00,000. Its
average collection period would be
Answer 1: 60.83 days
Answer 2:6.00 days
Answer 3:1.67 days
Answer 4: 0.67 days
Right Answer: 1

3. Observing changes in the financial variables across the years is

Answer 1: Vertical analysis
Answer 2 : Horizontal Analysis
Answer 3: Peer-firm Analysis
Answer 4: Industry Analysis
Right Answer: 2

4. Cost of capital is that minimum_________,which a firm must and is expected toearn on

its_______ so as to maintain themarket value of its shares
Answer 1: investments, rate of return
Answer 2: rate of return, investments
Answer 3: expenditure, rate of return
Answer 4: rate of return, expenditure
Right Answer: 2

5. If Working capital of company is a 1,35,000, Current ratio=2.5, Liquid ratio=1.5, reserve &
surplus is = 90,000 then what are the Quick assets of the company?
Answer 1:90,000
Answer 2:1,35,000
Answer 3:1,45,000
Answer 4:60,000
Right Answer: 2

6. Determine the market price of share of XYZ ltd as per gordon's model, given equity capitalisation
rate =11% expected earning =Rs. 20 rate of return on investment =10% & retention ratio =30%
Answer 1:165
Answer 2:175
Answer 3:185
Answer 4:195
Right Answer: 2

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7. Which of the following is the limitation of Linter’s model
Answer 1: This model does not offer a market price for the shares
Answer 2: The adjustment factor is an arbitrary number and not based on any scientific criterion
or methods
Answer 3 : Both (a) & (b)
Answer 4: None of the above
Right Answer: 3

8. If the debt component in the capital structure is predominant

Answer 1: The fixed interest cost of the firm will be minimum thereby decreasing its risk.
Answer 2: Earning per share (EPS)will be very low.
Answer 3: Dividend expectation of the equity shareholders are Low & PE ratio may decrease.
Answer 4: The fixed interest cost of the firm increases thereby increasing its risk.
Right Answer: 4

9. A company’s debt equity ratio is 3:5. Pretax cost of debt and equity are 7% and 10% respectively.
What is the weighted average cost of capital if the tax rate is 30%?
Answer 1:12.21%
Answer 2:17%
Answer 3:14.9%
Answer 4:8.09%
Right Answer: 4

10. The cost of monitoring management is considered to be a (an)

Answer 1: Bankruptcy cost
Answer 2: Transaction cost
Answer 3 : Agency cost
Answer 4: Institutional cost
Right Answer: 3

11. Gross Working Capital refers to

Answer 1: Current Assets - Current Liabilities
Answer 2: Current Liabilities - Current Assets
Answer 3 : Current Assets
Answer 4: Current Liabilities
Right Answer: 3

12. Strict credit policy with customers may not result in

Answer 1: Faster Collections
Answer 2: Decline in Sales
Answer 3 : Increase in Sales
Answer 4: Lower Collection Period
Right Answer: 3

13. Which of the following statements regarding Modigliani and Miller’s propositions (assuming
perfect capital markets and homogenous expectations) is most accurate?
Answer 1: Firm value is maximized with a capital structure consisting of 100% equity.
Answer 2: The cost of equity increases as the firm increases its financial leverage
Answer 3: The use of debt financing increases the firm as weighted average cost of capital
Answer 4: None of the above
Right Answer: 2

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14. Which one of the following approaches of the capital structure pleads that debt financing initially
increases the value of the firm;however excess debt financing beyond a particular point reduces
the value of the firm?
Answer 1: Net income approach
Answer 2: Net operating income approach
Answer 3 : Traditional approach
Answer 4: M&M Approach
Right Answer: 3

15. Discounted payback period for aproject shall be_____________ the paybackperiod of the same
project.
Answer 1: Equal to
Answer 2: More Than
Answer 3: Less Than
Answer 4: Half
Right Answer: 2

16. Which one of the following is the assumption of Gordon’s Model

Answer 1: Ke> g
Answer 2: Retention ratio, (b), once decide upon, is constant
Answer 3: Firm is an all equity firm
Answer 4: All of the above
Right Answer: 4

17. What are the different options other than cash used for distributing profits to shareholders
Answer 1: Bonus shares
Answer 2: Stock split
Answer 3: Both (a) and (b)
Answer 4: None of the above
Right Answer: 1

18. From the following information, calculate combined leverage:

Sales 20,00,000
Variable Cost 40%
Fixed Cost 10,00,000
Borrowings 10,00,000 @8% p.a.
Answer 1:10 times
Answer 2:6 times
Answer 3:1.667 times
Answer 4: 0.10 times
Right Answer: 1

19. The number of indifference points possible between 5 financial plans are
Answer 1:5
Answer 2:8
Answer 3:3
Answer 4:10
Right Answer: 4

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20. Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be
required to bring 70% change in EBIT?
Answer 1:10%
Answer 2:70%
Answer 3:11.429%
Answer 4:30%
Right Answer: 1
21. A firm has sales of a 75,00,000, variable cost of a42,00,000 and fixed cost of a6,00,000. It has a
debt of a 45,00,000at 9% and equity of a 55,00,000.Does it have favourable financial leverage?
Answer 1: ROI is less than interest on loan funds and hence it has no favourable financial
leverage."
Answer 2: ROI is equal to interest cn loan funds and hence it has favourable financial leverage.
Answer 3 : ROI is greater than interest on loan funds and hence it has favourable financial
leverage.
Answer 4: ROI is greater than interest on loan funds and hence it has unfavourable financial
leverage.
Right Answer: 3

22. Which of the following steps may be adopted to avoid the negative consequences of over-
capitalisation
Answer 1: The shares of the company should be split up. This will reduce dividend per share,
though EPS shall remain unchanged
Answer 2: Issue of Bonus Shares
Answer 3: Revising upward the par value of shares in exchange of the existing shares held by
them
Answer 4: Reduction in claims of debenture- holders and creditors
Right Answer: 4
23. Decision about mergers, takeovers, expansion, liquidiation were covered in financial management
Under______ phase of Financial Management
Answer 1: Traditional
Answer 2: Transitional
Answer 3: Modern Answer 4: None
Right Answer: 1
24. There is no operating leverage if there is no ……………
Answer 1: Profit
Answer 2: Sales
Answer 3 : Fixed cost
Answer 4: EPS
Right Answer: 3
25. Equity financing may be considered better than debt financing because of the fact that
Answer 1: Issuance cost of equity is lesser than that of debt
Answer 2 : It is more attractive for investors because of potential for higher returns
Answer 3: Dividend is tax deductible
Answer 4: It is less expensive than debt
Right Answer: 2
26. With limited capital & number of available projects, one should select the project with
Answer 1: IRR less than Cost of Capital
Answer 2: Profitability Index less than 1
Answer 3: Lowest Internal Rate of Return
Answer 4: Highest Net Present Value
Right Answer: 4
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 27. The venture capital financing is a ________________ financing of new high risky venture
promoted by skilled entrepreneurs who lack ____________ and funds but have ___________.
Answer 1: Debt, Experience, Skill
Answer 2: Equity, Experience, Idea
Answer 3: Debt, Experience, Idea
Answer 4; Equity, Skill, Idea
Right Answer: 2

28. Equity shares

Answer 1: Have an unlimited life, and voting rights and receive dividends
Answer 2: Have a limited life, with no voting rights but receive dividends
Answer 3: Have a limited life, and voting rights and receive dividends
Answer 4: Have an unlimited life, and voting rights but receive no dividends
Right Answer: 1

29. In order to find cost of equity under CAPM, which of these is not required
Answer 1: Risk free rate
Answer 2: Beta
Answer 3 : Market Price of the Security
Answer 4: Market Rate of Return
Right Answer: 3

30. Increase in which of the following shall reduce the net operating cycle
Answer 1: Work in Process holding period
Answer 2: Raw Material Storage period
Answer 3: Receivables collection period
Answer 4: Credit period allowed by Suppliers
Right Answer: 4

31. Which of these methods of capital budgeting are based on cash flows
Answer 1: Payback Method
Answer 2: NPV
Answer 3: Profitability Index
Answer 4: All of the above
Right Answer: 4

32. A company’s equity share is currently selling for 50 per share. Current year’s dividend was Rs. 2
per share and the earnings of the company is expected to increase by 5%. What is the firm’s cost
of existing equity
Answer 1:9.2%
Answer 2:4.2%
Answer 3:14%
Answer 4:9%
Right Answer: 1

33. With initial investment of a 1,00,000and yearly cash inflows of 27,000 for 5 years, the NPV of
the project with cost of capital of 10% shall be approximately
Answer 1:35,000
Answer 2: 2,357
Answer 3:2,357
Answer 4: -35,000
Right Answer: 3

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34. Which of the following is irrelevant for optimal capital structure
Answer 1: Flexibility
Answer 2: Solvency
Answer 3: Liquidity
Answer 4: Control
Right Answer: 2
35. The average collection period is used as an accounting measure to symbolize the avg.No. of days
among a credit score sale date and the date whilst the customer remitspayment. An entity’s
average collectionperiod indicates the effectiveness of its Accounts Receivable (or Trade
Receivables) Management.
Answer 1: EPS
Answer 2: DPS
Answer 3: PE Ratio
Answer 4: Credit Rating
Right Answer: 4
36. Cost of capital is highest in case of
Answer 1: Debt
Answer 2: Equity
Answer 3: Loans
Answer 4: Bonds
Right Answer: 2
37. Capital Structure weights can be based on
Answer 1: Market Values of Debt & Equity
Answer 2: Market Value of Equity & Face value of Debt
Answer 3: Initial Issue Price of Debt & Equity
Answer 4: Book Value of Assets
Right Answer: 1
38. External Commercial Borrowings can be accessed through ____________
Answer 1: only automatic route
Answer 2: only approval route
Answer 3 : both automatic and approval route
Answer 4: neither automatic nor approval route
Right Answer: 3
39. With IRR criteria and no limitation on funds, one can accept projects which have
Answer 1: IRR more than cost of capital
Answer 2: IRR less than cost of capital
Answer 3: IRR being equal to borrowing rate
Answer 4: All of the above
Right Answer: 1

40. Management of all matters related to an organisation’s finances is called

Answer 1: Cash inflows and outflows
Answer 2: Allocator of resources
Answer 3: Financial management
Answer 4: Finance
Right Answer: 3

41. Focus of financial management is mainly concerned with the decision related to
Answer 1: Financing
Answer 2: Investing
Answer 3: Dividend
Answer 4: All of above
Right Answer: 4
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42. Statement 1: If our corporate tax rate increases from 25% to 30%, our weighted average cost of
capital is likely to decline. Statement 2: What is happening in the stock or bond markets is
irrelevant to our decisions for how to raise capital. We should always seek to raise capital in the
exact proportions called for by our optimal capital structure
Which of the Statements 1 and 2, correct or incorrect?
Answer 1: Correct, Correct
Answer 2: Incorrect, correct
Answer 3: Incorrect, Incorrect
Answer 4: Correct, Incorrect
Right Answer: 4

43. Financial Structure refers to

Answer 1: All financial resources
Answer 2 : Short-term funds
Answer 3: Long-term funds
Answer 4: None of these
Right Answer: 1

44. The term "capital structure" means

Answer 1: Long-term debt, preferred stock, and equity shares
Answer 2: Current assets and current liabilities
Answer 3: Net working capital
Answer 4: Shareholders equity
Right Answer: 1

45. Which of the following are microeconomic variables that help define and explain the discipline of
finance
Answer 1: Risk and return
Answer 2: Capital structure
Answer 3: Inflation
Answer 4: All of the above
Right Answer: 4

46. Current Ratio is 2.5:1 and Liquid Ratio is 1.5:1. If inventory is a 9,60,000, then the amount of
current assets will be:
Answer': 9.6 Lakh
Answer 2: 14.40 Lakh
Answer 3 : 24 Lakh
Answer 4: 38.40 Lakh
Right Answer: 3

47. Which of the following indicates business risk

Answer 1: Operating leverage
Answer 2: Financial leverage
Answer 3: Combined leverage
Answer 4: Total leverage
Right Answer: 1

48. Which of the following is not an example of current assets

Answer 1: Accrued Income
Answer 2: Cash & Bank
Answer 3: Short term advances to creditors
Answer 4: Bank Overdraft
Right Answer: 4
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49. Assertion(A)Risk principle of capital structure is one that minimize cost of capital structure.
Reason (R)According to this principle, reliance is placed more on equity for financial purpose.
Answer 1: Both A & R are true, and R is correct explanation of A
Answer 2: Both A & R are true, but R is not correct explanation of A
Answer 3: A is true, but R is false
Answer 4 : A is false, But R is true.
Right Answer :4

51. which of the following is the common connection in financing, investing decisions
Answer 1: Investment instruments type should be same as financing instrument type
Answer 2: Investments will definitely grow in line with financing
Answer 3: Debt Equity ratio should be same for investments and financing actions
Answer 4: Risk Return Trade off
Right Answer: 4

52. Consider the below mentioned statements

1. A company is considered to beover - 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:
Answer 1:1-True, 2-True
Answer 2:1-False, 2-True
Answer 3:1-False, 2-False
Answer 4:1-True, 2-False
Right Answer: 2

53. Which of the following is not a determinant of working capital

Answer 1: Nature of Business
Answer 2: Target Profit
Answer 3: Type of Product
Answer 4: Credit Policy
Right Answer: 2

54. From the following information, calculateP/E ratio:

Equity share capital of 10 each 8,00,000
9% Preference share capital of' 10 each 3,00,000
Profit (after 35% tax) 2,67,000
Depreciation 67,000
Market price of equity share 48
Answer 1:15 times
Answer 2:16 times
Answer 3:17 times
Answer 4:18 times
Right Answer: 2

55. Electronic funds transfer may eliminate most types of floats except
Answer 1: Billing Float
Answer 2: Mail Float
Answer 3: Cheque Processing Float
Answer 4: Bank Processing Float
Right Answer: 1

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56. Which of the following is one of the steps in capital budgeting process
Answer 1: Controlling Selling Expenses
Answer 2: Determination of Price
Answer 3: Deciding the capital structure
Answer 4 : Estimation of Project cash flows
Right Answer: 4

57. Which of the following is not a capital budgeting decision

Answer 1: Inventory Control
Answer 2: Business Expansion
Answer 3: Acquisition of Long Term Asset
Answer 4: Replacement of Existing Asset
Right Answer: 1

58.. Which of the following is the irrelevance theory?

Answer 1: Walter model
Answer 2: Gordon model
Answer 3 : M.M. hypothesis
Answer 4: Lintera’s model
Right Answer: 3

60. The 'Dividend-Payout Ratio' is equal to

Answer 1: The Dividend yield plus the capital gains yield
Answer 2: Dividends per share divided by Earning per Equity Share
Answer 3: Dividends per share divided by par value per share
Answer 4: Dividends per share divided by current price per share
Right Answer: 2
61. Which of the following is not true about ratio analysis
Answer 1: It is affected by price level changes
Answer 2: It is difficult to evolve a standard ratio
Answer 3: It can give false and misleading results
Answer 4: It is not useful in inter-firm and intra firm comparison
Right Answer: 4
62. As per Miller-Orr cash management model, when cash balance reaches lower limit then
Answer 1: It may be invested in securities
Answer 2: Loan may be taken
Answer 3 : Some marketable securities may be liquidated
Answer 4: Creditor payments should be put on hold
Right Answer: 3
63. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growth rate
Answer 1:5%
Answer 2:7%
Answer 3:6.4%
Answer 4:9.6%
Right Answer: 3

64. Which of the following is not followed in discounting techniques of capital budgeting
Answer 1: Cash Flow Principal
Answer 2 : Accrual Principal
Answer 3: Interest Exclusion
Answer 4: Post Tax Principal
Right Answer: 2
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65. Electronic funds transfer may eliminate most types of floats except
Answer 1: Billing Float
Answer 2: Mail Float
Answer 3: Cheque Processing Float
Answer 4: Bank Processing Float
Right Answer: 1

66. Which of the following is one of the steps in capital budgeting process
Answer 1: Controlling Selling Expenses
Answer 2: Determination of Price
Answer 3: Deciding the capital structure
Answer 4: Estimation of Project cash flows
Right Answer: 4

67. Which of the following is not a capital budgeting decision

Answer 1: Inventory Control
Answer 2: Business Expansion
Answer 3: Acquisition of Long Term Asset
Answer 4: Replacement of Existing Asset
Right Answer: 1

68. The Reinvestment assumption under NPV method assumes that the cash flows are reinvested at
the
Answer 1: Marginal Cost of Capital
Answer 2: Internal Rate of Return
Answer 3 : Discount rate used to calculate NPV
Answer 4: Bank Borrowing rate
Right Answer: 3

69. Which of the following activities are performed by CFOs now in addition to those performed by
past CFOs
Answer 1: Budgeting
Answer 2: Forecasting
Answer 3 : Risk Management
Answer 4: Treasury management
Right Answer: 3

70. Which of the following is the limitation of Linter’s model?

Answer 1: Market price per share is reduced after the split.
Answer 2: the number of outstanding shares is increased.
Answer 3 : Retained earnings are changed.
Answer 4: Proportional ownership is unchanged.
Right Answer: 3

71. If degree of financial leverage is 3 and there is 15% increase in Earning per share (EPS), then
EBIT will be
Answer 1: Decrease by 15%
Answer 2: Increase by 45%
Answer 3: Decrease by 45%
Answer 4: Increase by 5%
Right Answer: 4

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72. A principal agent relationship between_____________ and ___________ which is known
asAgency Problem
Answer 1: Managers & Owner
Answer 2: Executive & Proprietor
Answer 3 : both (a) & (b)
Answer 4: Managers & secretary
Right Answer: 3

73. What should be the optimum Dividend pay-out ratio, when r = 15% &Ke = 12%:
Answer 1:100%
Answer 2:50%
Answer 3: Zero
Answer 4: None of the above
Right Answer: 3

74. A project whose useful life is 4 years has IRR of 15% and will save cost of 1,60,000annually.
What is the project cost i.e. initial investment?
Answer 1: 10,66,667
Answer 2: 4,60,000
Answer 3: 5,32,800
Answer 4: 4,56,800
Right Answer: 4

75. Degree of combined leverage is the fraction of

Answer 1: Degree of combined leverage is the fraction of
Answer 2 : Percentage change in EPS on Percentage change in Sales
Answer 3: Percentage change in Sales on Percentage change in EPS
Answer 4: Percentage change in EPS on Percentage change in EBIT
Right Answer: 2

76. Financial Management is mainly concerned with the

Answer 1: Acquiring and developing assets to forfeit its overall benefit
Answer 2: Acquiring, financing and managing assets to accomplish the overall goal of a business
enterprise
Answer 3: Efficient management of the business
Answer 4: Sole objective of profit maximisation
Right Answer: 2

77. The assumptions of MM hypothesis of capital structure do not include the following
Answer 1: Capital markets are imperfect
Answer 2: Investors have homogeneous expectations
Answer 3: All firms can be classified into homogeneous risk classes
Answer 4: The dividend-payout ratio is cent percent, and there is no corporate tax
Right Answer: 1

78. A firm's optimal capital structure

Answer 1: Is the debt-equity ratio that results in the minimum possible weighted average cost of
capital
Answer 2:40 percent debt and 60 percent equity
Answer 3: When the debt-equity ratio is 0.50
Answer 4: When Cost of equity is minimum
Right Answer: 1

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79. Which of the following statement is false
Answer 1: Retained earnings do not involve any cost
Answer 2: Weightage average cost of capital is sum total of cost of debt and equity
Answer 3: Cost of equity is impacted by tax effects
Answer 4: All of the above
Right Answer: 4

80. The most popular source of short-term funding is

Answer 1: Factoring
Answer 2 : Trade credit
Answer 3: Family and friends
Answer 4: Commercial banks
Right Answer: 2

81. External sources of finance do not include

Answer 1: Debentures
Answer 2: Retained earnings
Answer 3: Overdrafts
Answer 4: Leasing
Right Answer: 2

82. Which of the following need not be followed by the finance manager for measuring and
maximising shareholders' wealth
Answer 1; Accounting profit analysis
Answer 2: Cash Flow approach
Answer 3: Cost benefit analysis
Answer 4: Application of time value of money
Right Answer: 1
83. Current Liabilities can be settled by
Answer 1: Creation of a new current liability
Answer 2: Use of Non-current assets
Answer 3: Creation of Non-Current Liability
Answer 4: Proceeds of Long-Term Investments
Right Answer: 1
84. Ram Verse Ltd is an all equity financed company. It is considering replacing Rs. 275 lakhs equity
shares with 15% debentures of the same amount. Current Market value of the company is 1750
lakhs with cost of capital at 20%. Future EBITs are going to be constant and entire earnings are
going to be distributed. Corporate Tax Rate can be assumed to be 30%. What will be the new
market value of the firm?
Answer 1: Rs.1832.5 lakhs
Answer 2: Rs.82.50 lakhs
Answer 3: Rs.1750 lakhs
Answer 4: Rs.1732.50 lakhs
Right Answer: 1
85. Total assets of Alpha Company are a 3,00,000. The company’s total assets turnover ratio is 3, its
fixed operating cost is a 1,50,000 and its variable operating cost ratio is 50%.The income-tax rate
is 50%. It also has long term debts of a 1,20,000 on which interest @ 10% is payable.
Operating, Financial & Combined Leverages of the company are -
Answer 1:1.5; 1.042; 1.563 respectively
Answer 2:1.05; 1.42; 1.05625 respectively
Answer 3: 1.50; 1.42; 2.13 respectively
Answer 4:1.55; 1.042; 1.6151 respectively
Right Answer: 1
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86. If the shareholders prefer regular income, how does this affect the dividend decision
Answer 1: It will lead to payment of dividend
Answer 2: It is the indicator to retain more earnings
Answer 3: It has no impact on dividend decision
Answer 4: Cana’t say
Right Answer: 1

87. To have optimal capital structure the firm must have fulfill the following condition -
Answer 1: Return on investment should be greater than cost of investment.
Answer 2: There should be minimum financial risk.
Answer 3: Cost of investment should be greater than return of investment.
Answer 4: All the above.
Right Answer: 4

88. Which ratio not include fictitious assets and losses

Answer 1: Cost of goods purchased and cost of average inventory
Answer 2: Cost of goods sold and cost of average inventory, and cost of goods purchased and
cost of average inventor
Answer 3: Cost of goods sold and cost of average inventory
Answer 4: None of the options is correct
Right Answer: 1

89. If Margin of Safety is 0.25 and there is 8% increase in output, then EBIT will be:
Answer 1: Decrease by 2%
Answer 2 : Increase by 32%
Answer 3: Increase by 2%
Answer 4: Decrease by 32%
Right Answer: 2

90. A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
Answer 1: If sales rise by 4.5%, then EBIT will rise by 1%
Answer 2: If EBIT rises by 4.5%, then EPS will rise by 1%.
Answer 3: If EBIT rises by 1 %, then EPS will rise by 4.5%.
Answer 4: If sales rise by 1 %, then EBIT will rise by 4.5%
Right Answer: 4

91. With reference to ' IFC Masala Bonds’, which of the statements given below is/are correct
1. The International Finance Corporation, which offered these bonds, is an arm of the World
Bank.
2. They are rupee-denominated bonds and are a source of debt financing for the public and private
sector.
Answer 1:1 only
Answer 2:2 only
Answer 3: Both 1 and 2
Answer 4: Neither 1 nor 2
Right Answer: 3

92. Internal sources of finance do not include

Answer 1: Better management of working capital
Answer 2: Ordinary shares
Answer 3: Retained earnings Answer 4: Reserve and Surplus
Right Answer: 2
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93. Marketable securities are primarily
Answer 1: short-term debt instruments
Answer 2: short-term equity securities
Answer 3: long-term debt instruments
Answer 4: long-term equity securities
Right Answer: 1
94. How can a company improve its accounts receivable turnover?
Answer 1: Extend payment terms for customers
Answer 2: Increase credit limits for customers
Answer 3 : Offer discounts for early payment
Answer 4: All of the above
Right Answer: 3
95. Total sales=3000000, Cash sales 25% of credit sales, Debtors Turnover is 8times then what are
the average debtors?
Answer 1:2400000
Answer 2:300000
Answer 3:600000
Answer 4:900000
Right Answer: 2
96. Cost of Capital refers to
Answer 1: Floatation Costs
Answer 2: Dividend
Answer 3 : Minimum Required Rate of Return
Answer 4: Opportunity cost
Right Answer: 3
97. If EBIT is ' 15,00,000, interest is ' 2,50,000 Corporate tax is 40%, degree of financial leverage is;
Answer 1:1.11
Answer 2:1.20
Answer 3:1.31
Answer 4:1.41
Right Answer: 2
98. Which of these ratios could be a better indicator of Working Capital
Answer 1: Current Assets to Fixed Assets
Answer 2: Interest Coverage Ratio
Answer 3: Debt Equity Ratio
Answer 4: Financial Leverage
Right Answer: 1
99. Ratio of net profit before interest and tax to sales is
Answer 1: Gross profit ratio
Answer 2: Net profit ratio
Answer 3 : Operating profit ratio
Answer 4: Interest coverage ratio
Right Answer: 3
100. Given data:- Gross Profit= a 60,000, GP Ratio=20%, Stock Velocity=6 times then find out what
is average stock ?
Answer 1:40,000
Answer 2:300,000
Answer 3:240,000
Answer 4:37,500
Right Answer: 1
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102. Commercial paper is a__________ issued by ___________ interest rate of which is linked
to__________
Answer 1: Debenture, Corporates, 1 Yr Gov Securities Yield
Answer 2: Promissory Note, Corporates, 1 Yr Gov Securities Yield
Answer 3: Promissory Note, Banks, 1 Yr Gov Securities Yield
Answer 4: Promissory Note, Banks, RBI Repo rate
Right Answer: 2

103. The shareholder value maximisation model holds that the primary goal of the firm is to maximise
its
Answer 1: Accounting profit
Answer 2: Liquidity
Answer 3 : Market value
Answer 4: Working capital
Right Answer: 3

104. Wealth maximisation approach is based on the concept of

Answer 1: Cost benefit analysis
Answer 2: Cash flow approach
Answer 3: Time value of money
Answer 4: All of the above
Right Answer: 4

105. Need for cash can be categorized as any of these except

Answer 1: Transaction
Answer 2: Entertainment
Answer 3: Speculative
Answer 4: Precautionary
Right Answer: 2

106. An organization carrying higher levels of inventory is most probably following which policy of
working capital management
Answer 1: Conservative
Answer 2: Aggressive
Answer 3: Moderate
Answer 4: Opportunistic
Right Answer: 1

107. The cost of equity capital is all of the following except

Answer 1: The minimum rate that a firm should earn on the equity-financed part of an investment
Answer 2: A return on the equity-financed portion of an investment that, at worst, leaves the
market price of the stock unchanged
Answer 3: By far, the most difficult component cost to estimate
Answer 4: Generally, lower than the beforetax cost of debt
Right Answer: 4
108. Which of the following is not a part of Quick Assets
Answer 1: Disposable investments
Answer 2: Receivables
Answer 3: Cash and Cash equivalents
Answer 4: Prepaid expenses
Right Answer: 4

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109. Mature companies having few investment opportunities will show high payout ratios, this
statement is
Answer 1: False
Answer 2: True
Answer 3: Partial true
Answer 4: None of these
Right Answer: 2
110. Which of the following is the limitation of Linter’s model
Answer 1: This model does not offer a market price for the shares
Answer 2: The adjustment factor is an arbitrary number and not based on any scientific criterion
or methods
Answer 3 : Both (a) & (b)
Right Answer : 3
111. Strict credit policy with customers may not result in
Answer 1: Faster Collections
Answer 2: Decline in Sales
Answer 3 : Increase in Sales
Answer 4: Lower Collection Period
Right Answer: 3
112. Operating in double shifts may not impact which of the below (in terms of units at least)
Answer 1: Work in Process Inventory
Answer 2: Raw Material Inventory
Answer 3: Finished Goods Inventory
Answer 4: Receivables
Right Answer: 1

113. Which of the following has an implicit cost of capital

Answer 1: Equity Shares
Answer 2: Preference Shares
Answer 3 : Retained Earnings
Answer 4: Debentures
Right Answer: 3

114. A debenture
Answer 1: Is a long-term loan
Answer 2: Does not require security
Answer 3: Is a short-term loan
Answer 4: Receives dividend payments
Right Answer: 1
115. Debt capital refers to:
Answer 1: Money raised through the sale of shares.
Answer 2 : Funds raised by borrowing that must be repaid
Answer 3: Factoring accounts receivable
Answer 4: Inventory loans
Right Answer: 2
116. Depreciation is taken into consideration in capital budgeting because
Answer 1: It reduces Tax liability
Answer 2: It is unavoidable
Answer 3: It is a cash outflow
Answer 4: t is a cash inflow
Right Answer: 1
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117. A firm with high operating leverage ischaracterized by………………. while one with
highfinancial leverage is characterized by………………….
Answer 1: Low fixed cost of production; low fixed financial costs
Answer 2: High variable cost of production; high variable financial costs
Answer 3 : High fixed costs of production; high fixed financial costs
Answer 4: Low costs of production; high fixed financial costs
Right Answer: 3

118. Which of the following is not a determinant of working capital

Answer 1: Nature of Business
Answer 2: Target Profit
Answer 3: Type of Product
Answer 4: Credit Policy
Right Answer: 2

119. The______________ is useful in evaluating creditand collection policies.

Answer 1: Average payment period
Answer 2: Current ratio
Answer 3 : Average collection period
Answer 4: Inventory turnover ratio
Right Answer: 3

120. Which of the following is not true about ratio analysis?

Answer 1: It is affected by price level changes.
Answer 2: It is difficult to evolve a standard ratio.
Answer 3: It can give false and misleading results.
Answer 4: It is not useful in inter-firm and intra firm comparison.
Right Answer: 4

121. What is the relationship between the allowance for doubtful accounts and working capital
Answer 1: When bad debts expense is recorded for the period, working capital decreases.
Answer 2: When bad debts expense is recorded for the period, cash increases
Answer 3: When an account is written off against the allowance, working capital decreases
Answer 4: When an account is written off against the allowance, cash decreases
Right Answer: 1

122. A company’s equity share is currently selling for Rs. 50 per share. Current year’s dividend was
Rs. 2 per share and the earnings of the company is expected to increase by 5%. What is the firm’s
cost of existing equity
Answer 1:9.2%
Answer 2:4.2%
Answer 3:14%
Answer 4:9%
Right Answer: 1

123. While issuing new equity shares, the cost of issue is known as
Answer 1: WACC
Answer 2 : Cost of Equity
Answer 3 : Cost of Debt
Answer 4: Floatation Cost
Right Answer: 4

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124. Output (units) = 3,00,000 Fixed cost = 3,00,000 Unit variable cost = 1.00 Interest expenses = a
25,000 Unit selling price = 3.00 Applicable tax rate is 35% Calculate Financial Leverage.
Answer 1:1.11
Answer 2:2.40
Answer 3:2.67
Answer 4:1.07
Right Answer: 1

125. Using capital budgeting techniques, A project is accepted when

Answer 1: Net Present Value is positive
Answer 2: Profitability Index is more than 1
Answer 3: Its IRR is greater than Cost of Capital
Answer 4: Any of the above
Right Answer: 4

126. An organization can affect its WACC through changing

Answer 1: Capital Structure
Answer 2: Dividend Policy
Answer 3: Investment Policy
Answer 4: All of these
Right Answer: 4

127. Interest on government bonds is also known as

Answer 1: Beta of the security
Answer 2 : Market Rate of Return
Answer 3 : Market Price of the Security
Answer 4: Risk Free Rate of Return
Right Answer: 4
128. Which of these components of Working Capital require consideration of Cash Cost
Answer 1: Raw Material Inventory
Answer 2: Receivables
Answer 3: Work in Progress Inventory
Answer 4: Trade Payables
Right Answer: 2
129. The best methods to evaluate the projects with unequal lives can be
Answer 1: ARR or Payback Period
Answer 2: Replacement Chain or Equivalent Annualized Criteria
Answer 3: NPV or Discounted Payback
Answer 4: None of these
Right Answer: 2
120. The main objective of financial management is to
Answer 1: Secure profitability
Answer 2 :Maximise shareholder wealth
Answer 3: Enhancing the cost of debt
Answer 4: None of above
Right Answer: 2

121. Long-term solvency is indicated by

Answer 1: Debt/equity ratio
Answer 2: Current Ratio
Answer 3: Operating ratio
Answer 4: Net profit ratio
Right Answer: 1
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122. The Receivable-Turnover ratio helps management to
Answer 1: Managing resources
Answer 2: Managing inventory
Answer 3: Managing customer relationship
Answer 4: Managing working capital
Right Answer: 4
123. An EBIT-EPS indifference analysis chart is used for
Answer 1: Evaluating the effects of business risk on EPS
Answer 2 : Examining EPS results for alternative financial plans at varying EBIT levels
Answer 3: Determining the impact of a change in sales on EBIT
Answer 4: Showing the changes in EPS quality over time
Right Answer: 2
124. Cost of capital is lowest in case of debt because of
Answer 1: Tax Deductibility
Answer 2: Lower Stated rate
Answer 3: Time Value of Money
Answer 4: All of the above
Right Answer: 1
125. Marketable securities are primarily
Answer 1: short-term debt instruments
Answer 2: short-term equity securities
Answer 3: long-term debt instruments
Answer 4: long-term equity securities
Right Answer: 1
126. In preference shares
Answer 1: Dividends are not available
Answer 2: Limited voting rights are available
Answer 3: Are not part of a companya’s share capital
Answer 4: Interest can be received
Right Answer: 2
127. If a company has profits with a certain cash conversion or net operating cycle, considering
reducing cash conversion cycle further, with other things remaining the same, would
Answer 1: Increase the profits which might not be in the same proportion as the number of days
reduced in cash conversion cycle.
Answer 2: Reduce the profits in the same proportion as the number of days reduced in cash
conversion cycle.
Answer 3: Convert profits to losses which might not be in the same proportion as the number of
days reduced in cash conversion cycle
Answer 4: Increase profits in the same proportion as the number of days reduced in cash
conversion cycle
Right Answer: 1
128. Compute EPS according to Graham & Dodd approach from the given information:
Market price Rs.56
Dividend pay-out ratio 60%
Multiplier 2
Answer 1: Rs 30
Answer 2: Rs 56
Answer 3: Rs 28
Answer 4: Rs 84
Right Answer: 1

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129. Which of the following is a correct type of Debentures
Answer 1: Bearer
Answer 2: Mortgage
Answer 3: Fully convertible
Answer 4: All of the above
Right Answer: 4

130. ………………is the ratio of net operating incomebefore fixed charges to net operating income
after fixed charges.
Answer 1: Financial Leverage
Answer 2: Operating Leverage
Answer 3: Operation Leverage
Answer 4: Combined Leverage
Right Answer: 2

131. Mr. Dashan recently came back from a conference titled Capital Structure Theory and was
extremely excited about what he learned concerning Modigliani and Miller’s capital structure
propositions. He has been trying to choose between three potential capital structures for his firm,
Dashmart Corporation, and believes that Modigliani and Miller’s work may guide him in the right
direction. The capital structures Munn is considering are:
CSI: 100% equity.
CS II: 50% equity and 50% debt.
CS III: 100% debt.
If he uses Modigliani and Miller’s propositions and includes all of their assumptionsincluding the
assumption of no taxes, which capital structure is he most likely to choose? Which capital struture
would be choosen in case of tax regime?
Answer 1: CS I and CS II
Answer 2: CS I and CS III
Answer 3: CS II and CS III
Answer 4: Any CS
Right Answer: 4

132. How is the quick ratio different from the current ratio?
Answer 1: The quick ratio includes inventory in its calculation, while the current
ratio does not.
Answer 2: The quick ratio excludes inventory from its calculation, while the current ratio includes
it.
Answer 3: The quick ratio measures a companys ability to pay long-term debts, while the current
ratio measures its ability to pay short-term debts.
Answer 4: The quick ratio measures a companys profitability, while the current ratio measures its
liquidity.
Right Answer: 2

133. If a firm declared 25% dividend on share of face value of Rs 10 its growth rate is 5%& its rate of
capitaliation is 12% its expected price would be Rs...
Answer 1:31.2
Answer 2:33.50
Answer 3 : 3 6
Answer 4:37.50
Right Answer: 4

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134. Marketable securities are primarily
Answer 1: short-term debt instruments
Answer 2: short-term equity securities
Answer 3: long-term debt instruments
Answer 4: long-term equity securities
Right Answer: 1

135. Reserves & Surplus are which form of financing

Answer 1: Security Financing
Answer 2 : Internal Financing
Answer 3: Loans Financing
Answer 4: International Financing
Right Answer: 2
136. Which of the following events would decrease the internal rate of return of a proposed asset
purchase?
Answer 1: Decrease related working capital requirements
Answer 2: Shorten the payback period
Answer 3 : Decrease tax credits on the asset
Answer 4: Use accelerated, instead of straight- line depreciation
Right Answer: 3

137. If Gross Profit=54000, GP Ratio=20%, Average collection period is 18 days (360 Days year),
then find out Average Debtors considering that credit sales are 80% of total sales?
Answer 1:13500
Answer 2:10800
Answer 3:12000
Answer 4:14000
Right Answer: 2
138. Capital Budgeting is important for the below reasons except
Answer 1: They are irreversible
Answer 2: They involve substantial investment
Answer 3 : They are for short period of time
Answer 4: They are complex & futuristic
Right Answer: 3

139. All of these are methods of cash budgeting except

Answer 1: Adjusted Balance Sheet Method
Answer 2: Adjusted Income Method
Answer 3: Receipts & Payment Method
Answer 4: Taxable Income Method
Right Answer: 4

140. With retention ratio of 60% and return on equity of 15.5%, the growth rate shall be
Answer 1:14.90%
Answer 2:9.30%
Answer 3:25.84%
Answer 4:16.10%
Right Answer: 2

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141. In considering the payback period for three projects, Sun Corp. gathered the following data about
cash flows:
Year 1 Year 2 Year 3 Year 4

ProjectX (20,000) 6,000 6,000 6,000

ProjectY (50,000) 30,000 30,000 10,000
ProjectZ (20,000) 10,000 10,000 5,000
Answer 1: Projects X, Y and Z.
Answer 2 : Projects Y and Z.
Answer 3: Project Y only.
Answer 4: Projects X and Z
Right Answer: 2

142. Bhaskar Ltd. estimated that a proposed project 8-year net cash benefit will be 4,000 per year for
years 1 to 8, with an additional terminal benefit of 8,000 at the end of the eighth year. Assuming
that these cash inflows satisfy exactly the required rate of return of 8 percent, the projected initial
cash outflow is closest to which of the following four possible answers?
Answer 1: a 27,308
Answer 2: 25,149
Answer 3: 14,851
Answer 4: 40,000
Right Answer: 1

143. If the financing requirements are to be executed through debt (relatively cheaper source of
finance), then it would be preferable to distribute....,,,,,,
Answer 1: More Dividend
Answer 2: Less dividend
Answer 3: No Dividend
Answer 4: None of the above
Right Answer: 1

144. A company has an existing EPS of Rs. 7.5; it makes an FPO of 15000 shares issued at a price of
Rs. 25 per share. The funds thus raised are expected to earn a post-tax return of 28%. What will
be the expected impact on EPS?
Answer 1: EPS will remain 7.5
Answer 2: EPS will be greater than 7.5
Answer 3 : EPS will be below 7.5
Answer 4: Information not sufficient for calculation
Right Answer: 3

145. Financial leverage may be defined as

Answer 1: Use of funds with a product cost in order to increase earnings per share
Answer 2: Use of funds with a contribution cost in order to increase earnings before interest and
taxes
Answer 3 : Use of funds with a fixed cost in order to increase earnings per share
Answer 4: Use of funds with a fixed cost in order to increase earnings before interest and taxes
Right Answer: 3

146. If DOL is 1.24 and DFL is 1.99, DCL would be

Answer 1:2.14
Answer 2:2.18
Answer 3:2.31
Answer 4:2.47
Right Answer: 4
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147. The cash required during a specific period to meet interest expenses and principal payments is
referred to as the:
Answer 1: Debt capacity
Answer 2 : Debt-service burden
Answer 3: Adequacy capacity
Answer 4: Fixed-charge burden
Right Answer: 2

148. A critical assumption of the Net Operating Income (NOI) approach to valuation is
Answer 1: That debt and equity levels remain unchanged
Answer 2: That dividends increase at a constant rate
Answer 3 : That ko remains constant regardless of changes in leverage
Answer 4: That interest expense and taxes are included in the calculation
Right Answer: 3

149. Which of following activities will not lead to increase in shareholders wealth?
Answer 1: Investing in projects with high cash flows
Answer 2: Raising funds through sources which have low cost
Answer 3: Regular growth in dividends
Answer 4: Maintaining high levels of cash at bank
Right Answer: 4

150. “Shareholders Wealth” in a firm is reflected by

Answer 1: the number of people employed in the firm
Answer 2: the book value of the firma’s assets less the book value of its liabilities
Answer 3: the amount of salary paid to its employees
Answer 4: the market price per share of the firm
Right Answer: 4

151. Which of the following statement is not true for capital budgeting
Answer 1: Irreversible decisions
Answer 2 : Sunk Cost is Relevant cost
Answer 3: Affect future stability of firm
Answer 4: Can relate to Business Expansion
Right Answer: 2

152. Operating Leverage is calculated as

Answer 1: Contribution / EBIT
Answer 2: EBIT / PBT
Answer 3: EBIT / Interest
Answer 4: EBIT / Tax
Right Answer: 1

153. A project’s net present value, ignoring income tax considerations, is normally affected by the
Answer 1: Proceeds from the sale of the asset to be replaced
Answer 2: Carrying amount of the asset to be replaced by the project
Answer 3 : Amount of annual depreciation on the asset to be replaced
Answer 4: Amount of annual depreciation on fixed assets used directly on the project
Right Answer: 1

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154. Which of the following is a liquidity ratio
Answer 1: Equity ratio
Answer 2: Proprietary ratio
Answer 3 : Net Working Capital
Answer 4: Capital Gearing ratio
Right Answer: 3

155. Capital Gearing ratio is the fraction of

Answer 1: Preference Share Capital and Debentures to Equity Share Capital and Reserve &
Surplus.
Answer 2: Equity Share Capital and Reserve & Surplus to Preference Share Capital and
Debentures.
Answer 3: Equity Share Capital to Total Assets.
Answer 4: Total Assets to Equity Share Capital
Right Answer:1
156. An organization carrying higher levels of inventory is most probably following which policy of
working capital management
Answer 1: Conservative
Answer 2: Aggressive
Answer 3: Moderate
Answer 4: Opportunistic
Right Answer: 1

157. All of the following are true of stock splits except:

Answer 1: More Dividend
Answer 2: Less dividend
Answer 3: No Dividend
Answer 4: None of the above
Right Answer: 1

158. Which of the following statement is correct with respect to Gordon’s model
Answer 1: When IRR is greater than cost of capital, the price per share increases and dividend
pay-out decreases.
Answer 2: When IRR is greater than cost of capital, the price per share decreases and dividend
pay-out increase
Answer 3: When IRR is equal to cost of capital, the price per share increases and dividend pay-
out decreases
Answer 4: When IRR is lower than cost of capital, the price per share increases and dividend pay-
out decreases
Right Answer: 1

159. According to the residual dividend theory ,dividend payment is determined based on
Answer 1: The availability of excess fund after all investment opportunities with positive net
present value are undertaken
Answer 2: The preference of shareholder for a consistent dividend payout ratio
Answer 3: The desire to maintain a stable dividend payout ratio regardless of investment
opportunity.
Answer 4: The goal of maximizing shareholder wealth by paying out all available earning as
dividend
Right Answer: 1

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160. A company recently issued 9% preferred shares. The preferred shares sold for Rs. 40 a share with
a par of Rs. 20. The cost of issuing the stock was Rs. 5 a share. What is the company's cost of
preferred share
Answer 1 : 9 %
Answer 2 : 4 . 5 %
Answer 3:5.1%
Answer 4:10.3%
Right Answer: 3

161. Inventory ratio is a relationship between ___________.

Answer 1: Cost of goods purchased and cost of average inventory
Answer 2: Cost of goods sold and cost of average inventory, and cost of goods purchased and
cost of average inventory
Answer 3 : Cost of goods sold and cost of average inventory
Answer 4: None of the options is correct
Right Answer: 3

162. Which of the following marketable securities is the obligation of a commercial bank
Answer 1: Commercial paper
Answer 2 : Negotiable certificate of deposit
Answer 3: Repurchase agreement
Answer 4: T-bills
Right Answer: 2

163. _______________bonds give the investor an option back to the company before maturity.
Answer 1: Callable
Answer 2: Puttable
Answer 3: Both
Answer 4: Foreign
Right Answer: 2

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 MCQs OF STUDY MATERIAL

SCOPE AND OBJECTIVE OF FINANCIAL MANAGEMENT

1. Focus of financial management is mainly concerned with the decision relatedto:
(a) Financing
(b) Investing
(c) Dividend
(d) All of above.
2. The main objective of financial management is to:
(a) Secure profitability
(b) Maximise shareholder wealth
(c) Enhancing the cost of debt
(d) None of above.
3. The shareholder value maximisation model holds that the primary goal of thefirm is to maximise its:
(a) Accounting profit
(b) Liquidity
(c) Market value
(d) Working capital.
4. Wealth maximisation approach is based on the concept of:
(a) Cost benefit analysis
(b) Cash flow approach
(c) Time value of money
(d) All of the above.
5. Management of all matters related to an organisation’s finances is called:
(a) Cash inflows and outflows
(b) Allocation of resources
(c) Financial management
(d) Finance.
6. Which of the following is the disadvantage of having shareholders wealthmaximisation goals?
(a) Emphasizes the short-term gains.
(b) Ignores the timing of returns.
(c) Requires immediate resources.
(d) Offers no clear relationship between financial decisions and share price.
7. The most important goal of financial management is:
(a) Profit maximisation
(b) Matching income and expenditure
(c) Using business assets effectively

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(d) Wealth maximisation.
8. To achieve wealth maximization, the finance manager has to take carefuldecision in respect of:
(a) Investment
(b) Financing
(c) Dividend
(d) All the above.
9. Early in the history of finance, an important issue was:
(a) Liquidity
(b) Technology
(c) Capital structure
(d) Financing options.
10. Which of the following are microeconomic variables that help define andexplain the discipline of
finance?
(a) Risk and return
(b) Capital structure
(c) Inflation
(d) All of the above.
11. Financial Management is mainly concerned with the-
(a) Acquiring and developing assets to forfeit its overall benefit.
(b) Acquiring, financing and managing assets to accomplish the overallgoal of a business enterprise.
(c) Efficient management of the business.
(d) Sole objective of profit maximisation.
12. Which of the following need not be followed by the finance manager formeasuring and maximising
shareholders' wealth?
(a) Accounting profit analysis.
(b) Cash Flow approach.
(c) Cost benefit analysis.
(d) Application of time value of money.

MCQs of Answer
1. (d) 2. (b) 3. (c) 4. (d) 5. (c) 6. (d)
7. (d) 8. (d) 9. (a) 10. (d) 11. (b) 12. (a)

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 TYPES OF FINANCING

MCQs
1. Equity shares:
(a) Have an unlimited life, and voting rights and receive dividends
(b) Have a limited life, with no voting rights but receive dividends
(c) Have a limited life, and voting rights and receive dividends
(d) Have an unlimited life, and voting rights but receive no dividends
2. External sources of finance do not include:
(a) Debentures
(b) Retained earnings
(c) Overdrafts
(d) Leasing
3. Internal sources of finance do not include:
(a) Better management of working capital
(b) Ordinary shares
(c) Retained earnings
(d) Reserve and Surplus
4. In preference shares:
(a) Dividends are not available
(b) Limited voting rights are available
(c) Are not part of a company’s share capital
(d) Interest can be received
5. A debenture:
(a) Is a long-term loan
(b) Does not require security
(c) Is a short-term loan
(d) Receives dividend payments
6. Debt capital refers to:
(a) Money raised through the sale of shares.
(b) Funds raised by borrowing that must be repaid.
(c) Factoring accounts receivable.
(d) Inventory loans.
7. The most popular source of short-term funding is:
(a) Factoring.
(b) Trade credit.
(c) Family and friends.
(d) Commercial banks.

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8. Marketable securities are primarily:
(a) short-term debt instruments.
(b) short-term equity securities.
(c) long-term debt instruments.
(d) long-term equity securities.
9. Which of the following marketable securities is the obligation of a commercialbank?
(a) Commercial paper
(b) Negotiable certificate of deposit
(c) Repurchase agreement
(d) T-bills
10. Reserves & Surplus are which form of financing?
(a) Security Financing
(b) Internal Financing
(c) Loans Financing
(d) International Financing
11. With reference to `IFC Masala Bonds’, which of the statements given below
is/are correct?

1. The International Finance Corporation, which offered these bonds, is anarm of the World
Bank.
2. They are rupee-denominated bonds and are a source of debt financingfor the public and
private sector.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
12. External Commercial Borrowings can be accessed through ..............
(a) only automatic route
(b) only approval route
(c) both automatic and approval route
(d) neither automatic nor approval route

MCQs Answer

1. (a) 2. (b) 3. (b) 4. (b) 5. (a) 6. (b)

7. (b) 8. (a) 9. (b) 10. (b) 11. (c) 12. (c)

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 RATIO ANALYSIS AND PLANNING
MCQs
1. Ratio of Net sales to Net working capital is a:
(a) Profitability ratio
(b) Liquidity ratio
(c) Current ratio
(d) Working capital turnover ratio
2. Long-term solvency is indicated by:
(a) Debt/equity ratio
(b) Current Ratio
(c) Operating ratio
(d) Net profit ratio
3. Ratio of net profit before interest and tax to sales is:
(a) Gross profit ratio
(b) Net profit ratio
(c) Operating profit ratio
(d) Interest coverage ratio.
4. Observing changes in the financial variables across the years is:
(a) Vertical analysis
(b) Horizontal Analysis
(c) Peer-firm Analysis
(d) Industry Analysis.
5. The Receivable-Turnover ratio helps management to:
(a) Managing resources
(b) Managing inventory
(c) Managing customer relationship
(d) Managing working capital
6. Which of the following is a liquidity ratio?
(a) Equity ratio
(b) Proprietary ratio
(c) Net Working Capital
(d) Capital Gearing ratio
7. Which of the following is not a part of Quick Assets?
(a) Disposable investments
(b) Receivables
(c) Cash and Cash equivalents
(d) Prepaid expenses

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 8. Capital Gearing ratio is the fraction of:
(a) Preference Share Capital and Debentures to Equity Share Capital andReserve & Surplus.
(b) Equity Share Capital and Reserve & Surplus to Preference Share Capitaland Debentures.
(c) Equity Share Capital to Total Assets.
(d) Total Assets to Equity Share Capital.
9. From the following information, calculate P/E ratio:
Equity share capital of ` 10 each ` 8,00,0009%

Preference share capital of ` 10 each ` 3,00,000

Profit (after 35% tax) ` 2,67,000

Depreciation ` 67,000
Market price of equity share ` 48
(a) 15 times
(b) 16 times
(c) 17 times
(d) 18 times
10. Equity multiplier allows the investor to see:
(a) What portion of interest on debt can be covered from earnings availableto equity
shareholders?
(b) How many times preference share interest be paid from earningsavailable to equity
shareholders?
(c) What portion of return on equity is the result of debt?
(d) How many times equity is multiplied to get the value of debt?
11. A company has average accounts receivable of ` 10,00,000 and annual creditsales of `
60,00,000. Its average collection period would be:
(a) 60.83 days
(b) 6.00 days
(c) 1.67 days
(d) 0.67 days
12. A company has net profit margin of 5%, total assets of ` 90,00,000 and returnon assets
of 9%. Its total asset turnover ratio would be:
(a) 1.6
(b) 1.7
(c) 1.8
(d) 1.9
13. What does Q ratio measures?
(a) Relationship between market value and book value per equity share.
(b) Proportion of profit available per equity share.
(c) Overall earnings on average total assets.
(d) Market value of equity as well as debt in comparison to all assets attheir replacement
cost.

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14. Calculate operating expenses from the information given below:

Sales `
75,00,000
Rate of income tax 50%
Net profit to sales 5%
Cost of goods sold `
32,90,000
Interest on debentures ` 60,000
(a) ` 41,00,000
(b) ` 8,10,000
(c) ` 34,00,000
(d) ` 33,90,000
15. Which of the following is not a profitability ratio?
(a) P/E ratio
(b) Return on capital employed (ROCE)
(c) Q Ratio
(d) Preference Dividend Coverage Ratio

MCQs Answer
1. (d) 2. (a) 3. (c) 4. (b) 5. (d) 6. (c)
7. (d) 8. (a) 9. (b) 10. (c) 11. (a) 12. (c)
13. (d) 14. (c) 15. (d)

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 LEVERAGE
MCQs
1. Given

Operating fixed costs ` 20,000

Sales ` 1,00,000
P/ V ratio 40%
The operating leverage is:
(a) 2.00
(b) 2.50
(c) 2.67
(d) 2.47
2. If EBIT is ` 15,00,000, interest is ` 2,50,000, corporate tax is 40%, degree of
financial leverage is;
(a) 1:11
(b) 1.20
(c) 1.31
(d) 1.41
3. If DOL is 1.24 and DFL is 1.99, DCL would be:

(a) 2.14
(b) 2.18
(c) 2.31
(d) 2.47
4. Operating Leverage is calculated as:
(a) Contribution ÷ EBIT
(b) EBIT ÷ PBT
(c) EBIT ÷ Interest
(d) EBIT ÷ Tax
5. Financial Leverage is calculated as:
(a) EBIT ÷ Contribution
(b) EBIT ÷ PBT
(c) EBIT ÷ Sales
(d) EBIT ÷ Variables Cost
6. Which of the following is correct?
(a) CL = OL + FL
(b) CL = OL – FL
(c) OL = OL × FL
(d) OL = OL ÷ FL

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7. Which of the following indicates business risk?
(a) Operating leverage
(b) Financial leverage
(c) Combined leverage
(d) Total leverage
8. Degree of combined leverage is the fraction of:
(a) Percentage change in EBIT on Percentage change in Sales.
(b) Percentage change in EPS on Percentage change in Sales.
(c) Percentage change in Sales on Percentage change in EPS.
(d) Percentage change in EPS on Percentage change in EBIT.
9. From the following information, calculate combined leverage:Sales
` 20,00,000
Variable Cost 40%
Fixed Cost ` 10,00,000
Borrowings ` 10,00,000 @ 8% p.a.
(a) 10 times
(b) 6 times
(c) 1.667 times
(d) 0.10 times
10. Operating leverage is a function of which of the following factors?
(a) Amount of variable cost.
(b) Variable contribution margin.
(c) Volume of purchases.
(d) Amount of semi-variable cost.
11. Financial leverage may be defined as:
(a) Use of funds with a product cost in order to increase earnings per share.
(b) Use of funds with a contribution cost in order to increase earningsbefore interest and
taxes.
(c) Use of funds with a fixed cost in order to increase earnings per share.
(d) Use of funds with a fixed cost in order to increase earnings beforeinterest and taxes.
12. If Margin of Safety is 0.25 and there is 8% increase in output, then EBIT willbe:
(a) Decrease by 2%
(b) Increase by 32%
(c) Increase by 2%
(d) Decrease by 32%

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13. If degree of financial leverage is 3 and there is 15% increase in Earning pershare
(EPS), then EBIT will be:
(a) Decrease by 15%
(b) Increase by 45%
(c) Decrease by 45%
(d) Increase by 5%
14. When EBIT is much higher than Financial break-even point, then degree offinancial
leverage will be slightly:
(a) Less than 1
(b) Equals to 1
(c) More than 1
(d) Equals to 0
15. Firm with high operating leverage will have:
(a) Higher breakeven point
(b) Lower business risk
(c) Higher margin of safety
(d) All of above
16. When sales is at breakeven point, the degree of operating leverage will be:
(a) Zero
(b) Infinite
(c) One
(d) None of above
17. If degree of combined leverage is 3 and margin of safety is 0.50, then degreeof financial
leverage is:
(a) 6.00
(b) 3.00
(c) 0.50
(d) 1.50

MCQs Answer

1. (a) 2. (b) 3. (d) 4. (a) 5. (b) 6. (c)

7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (b)
13. (d) 14. (c) 15. (a) 16. (b) 17. (d)

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 COST OF CAPITAL
MCQs
1. Which of the following is not an assumption of the capital asset pricing model (CAPM)?
(a) The capital market is efficient.
(b) Investors lend or borrow at a risk-free rate of return.
(c) Investors do not have the same expectations about the risk and return.
(d) Investor’s decisions are based on a single-time period.

2. Given: risk-free rate of return = 5 %; market return = 10%; cost of equity =15%; value
of beta (β) is:
(a) 1.9
(b) 1.8
(c) 2.0
(d) 2.2
3. ____________may be defined as the cost of raising an additional rupee ofcapital:
(a) Marginal cost of capital
(b) Weighted Average cost of capital
(c) Simple Average cost of capital
(d) Liquid cost of capital
4. Which of the following cost of capital requires to adjust taxes?
(a) Cost of Equity Share
(b) Cost of Preference Shares,
(c) Cost of Debentures
(d) Cost of Retained Earnings
5. Marginal Cost of capital is the cost of:
(a) Additional Revenue
(b) Additional Funds
(c) Additional Interests
(d) None of the above
6. In order to calculate Weighted Average Cost of Capital, weights may bebased on:
(a) Market Values
(b) Target Values
(c) Book Values
(d) Anyone of the above

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7. Firm’s Cost of Capital is the average cost of:
(a) All sources of finance
(b) All Borrowings
(c) All share capital
(d) All Bonds & Debentures
8. A company has a financial structure where equity is 70% of its total debt plus equity. Its
cost of equity is 10% and gross loan interest is 5%. Corporation tax is paid at 30%. What is
the company’s weighted average cost of capital (WACC)?
(a) 7.55%
(b) 7.80%
(c) 8.70%
(d) 8.05%
9. The cost of equity capital is all of the following except:
(a) The minimum rate that a firm should earn on the equity-financed part ofan investment.
(b) A return on the equity-financed portion of an investment that, at worst,leaves the market
price of the stock unchanged.
(c) By far, the most difficult component cost to estimate.
(d) Generally, lower than the before-tax cost of debt.
10. What is the overall (weighted average) cost of capital when the firm has ` 20 crores in
long-term debt, ` 4 crores in preferred stock, and ` 16 crores in equity shares? The before-
tax cost for debt, preferred stock, and equity capital are 8%, 9%, and 15%, respectively.
Assume a 50% tax rate.
(a) 7.60%
(b) 6.90%
(c) 7.30%
(d) 8.90%

MCQs Answer
1. (c) 2. (c) 3. (a) 4. (c) 5. (b) 6. (d)
7. (a) 8. (d) 9. (d) 10. (d)

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 CAPITAL STRUCTURE
MCQs

1. The assumptions of MM hypothesis of capital structure do not include thefollowing:

(a) Capital markets are imperfect
(b) Investors have homogeneous expectations
(c) All firms can be classified into homogeneous risk classes
(d) The dividend-payout ratio is cent percent, and there is no corporate tax
2. Which of the following is irrelevant for optimal capital structure?
(a) Flexibility
(b) Solvency
(c) Liquidity
(d) Control
3. Financial Structure refers to:
(a) All financial resources
(b) Short-term funds
(c) Long-term funds
(d) None of these
4. An EBIT-EPS indifference analysis chart is used for:

(a) Evaluating the effects of business risk on EPS

(b) Examining EPS results for alternative financial plans at varying EBITlevels
(c) Determining the impact of a change in sales on EBIT
(d) Showing the changes in EPS quality over time
5. The term "capital structure" means:

(a) Long-term debt, preferred stock, and equity shares

(b) Current assets and current liabilities
(c) Net working capital
(d) Shareholder’s equity
6. The cost of monitoring management is considered to be a (an):
(a) Bankruptcy cost
(b) Transaction cost
(c) Agency cost
(d) Institutional cost
7. The traditional approach towards the valuation of a firm assumes:
(a) That the overall capitalization rate changes in financial leverage.
(b) That there is an optimum capital structure.
(c) That the total risk is not changed with the changes in the capitalstructure.
(d) That the markets are perfect.

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8. Market values are often used in computing the weighted average cost ofcapital because:
(a) This is the simplest way to do the calculation.
(b) This is consistent with the goal of maximizing shareholder value.
(c) This is required by SEBI.
(d) This is a very common mistake.
9. A firm's optimal capital structure:
(a) Is the debt-equity ratio that results in the minimum possible weightedaverage cost of
capital
(b) 40 percent debt and 60 percent equity
(c) When the debt-equity ratio is 0.50
(d) When Cost of equity is minimum
10. Capital structure of a firm influences the:
(a) Risk
(b) Return
(c) Both Risk and Return
(d) Return but not Risk
11. 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 bythe 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
12. A critical assumption of the Net Operating Income (NOI) approach tovaluation is:
(a) That debt and equity levels remain unchanged.
(b) That dividends increase at a constant rate.
(c) That ko remains constant regardless of changes in leverage.
(d) That interest expense and taxes are included in the calculation.

13. Which of the following steps may be adopted to avoid the negativeconsequences of
over-capitalisation?
(a) The shares of the company should be split up. This will reduce dividendper share, though EPS shall
remain unchanged.
(b) Issue of Bonus Shares.
(c) Revising upward the par value of shares in exchange of the existingshares held by them.
(d) Reduction in claims of debenture-holders and creditors.

MCQs Answer
1. (a) 2. (b) 3. (a) 4 (b) 5 (a) 6. (c)
7. (b) 8. (b) 9. (a) 10 (c) 11. (b) 12. (c)
13. (d)

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 INVESTMENT DECISION

MCQs

1. A capital budgeting technique which does not require the computation ofcost of
capital for decision making purposes is:
(a) Net Present Value method
(b) Internal Rate of Return method
(c) Modified Internal Rate of Return method
(d) Payback Period method
2. If two alternative proposals are such that the acceptance of one shall exclude the possibility
of the acceptance of another then such decision making willlead to:
(a) Mutually exclusive decisions
(b) Accept reject decisions
(c) Contingent decisions
(d) None of the above
3. In case a company considers a discounting factor higher than the cost of capital for
arriving at present values, the present values of cash inflows willbe:
(a) Less than those computed on the basis of cost of capital
(b) More than those computed on the basis of cost of capital
(c) Equal to those computed on the basis of the cost of capital
(d) None of the above
4. If the cut off rate of a project is greater than IRR, we may:
(a) Accept the proposal
(b) Reject the proposal
(c) Be neutral about it
(d) Wait for the IRR to increase and match the cut off rate
5. While evaluating capital investment proposals, time value of money is usedin which of
the following techniques:
(a) Payback Period method
(b) Accounting rate of return
(c) Net present value
(d) None of the above
6. IRR would favour project proposals which have:
(a) Heavy cash inflows in the early stages of the project.
(b) Evenly distributed cash inflows throughout the project.
(c) Heavy cash inflows at the later stages of the project.
(d) None of the above.

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 7. The re-investment assumption in the case of the IRR technique assumes that:
(a) Cash flows can be re-invested at the projects IRR.
(b) Cash flows can be re-invested at the weighted cost of capital.
(c) Cash flows can be re-invested at the marginal cost of capital.
(d) None of the above
8. Multiple IRRs are obtained when:
(a) Cash flows in the early stages of the project exceed cash flows duringthe later stages.
(b) Cash flows reverse their signs during the project.
(c) Cash flows are uneven.
(d) None of the above.
9. Depreciation is included as a cost in which of the following techniques:
(a) Accounting rate of return
(b) Net present value
(c) Internal rate of return
(d) None of the above
10. Management is considering a ` 1,00,000 investment in a project with a 5 year life and no
residual value. If the total income from the project is expected to be ` 60,000 and
recognition is given to the effect of straight line depreciation on the investment, the average
rate of return is:
(a) 12%
(b) 24%
(c) 60%
(d) 75%
11. Assume cash outflow equals ` 1,20,000 followed by cash inflows of ` 25,000 per year
for 8 years and a cost of capital of 11%. What is the Net presentvalue?
(a) (` 38,214)
(b) ` 9,653
(c) ` 8,653
(d) ` 38,214
12. What is the Internal rate of return for a project having cash flows of ` 40,000per year
for 10 years and a cost of ` 2,26,009?
(a) 8%
(b) 9%
(c) 10%
(d) 12%
13. While evaluating investments, the release of working capital at the end of theproject's life
should be considered as:
(a) Cash inflow
(b) Cash outflow
(c) Having no effect upon the capital budgeting decision
(d) None of the above

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14. Capital rationing refers to a situation where:
(a) Funds are restricted and the management has to choose from amongstavailable alternative
investments.
(b) Funds are unlimited and the management has to decide how to allocatethem to suitable
projects.
(c) Very few feasible investment proposals are available with themanagement.
(d) None of the above.
15. Capital budgeting is done for:
(a) Evaluating short term investment decisions.
(b) Evaluating medium term investment decisions.
(c) Evaluating long term investment decisions.
(d) None of the above.

MCQs Answer
1. (d) 2. (a) 3. (a) 4. (b) 5. (c) 6. (a)
7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (d)
13. (a) 14. (a) 15. (c)

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 FINANCING OF WORKING CAPITAL
MCQs
1. The credit terms may be expressed as “3/15 net 60”. This means that a 3% discount will be granted if
the customer pays within 15 days, if he does not avail the offer, he must make payment within 60
days.
(a) I agree with the statement
(b) I do not agree with the statement
(c) I cannot say.
2. The term ‘net 50’ implies that the customer will make payment:
(a) Exactly on 50th day
(b) Before 50th day
(c) Not later than 50th day
(d) None of the above.
3. Trade credit is a source of :
(a) Long-term finance
(b) Medium term finance
(c) Spontaneous source of finance
(d) None of the above.
4. The term float is used in:
(a) Inventory Management
(b) Receivable Management
(c) Cash Management
(d) Marketable securities.
5. William J Baumol’s model of Cash Management determines optimum cashlevel where the
carrying cost and transaction cost are:
(a) Maximum
(b) Minimum

(c) Medium
(d) None of the above.
6. In Miller – ORR Model of Cash Management:
(a) The lower, upper limit, and return point of Cash Balances are set out
(b) Only upper limit and return point are decided
(c) Only lower limit and return point are decided
(d) None of the above are decided.

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7. Working Capital is defined as:
(a) Excess of current assets over current liabilities
(b) Excess of current liabilities over current assets
(c) Excess of Fixed Assets over long-term liabilities
(d) None of the above.
8. Working Capital is also known as “Circulating Capital, fluctuating Capital andrevolving capital”.
The aforesaid statement is;
(a) Correct
(b) Incorrect
(c) Cannot say.
9. The basic objectives of Working Capital Management are:
(a) Optimum utilization of resources for profitability
(b) To meet day-to-day current obligations
(c) Ensuring marginal return on current assets is always more than cost ofcapital
(d) Select any one of the above statements.
10. The term Gross Working Capital is known as:
(a) The investment in current liabilities
(b) The investment in long-term liability

(c) The investment in current assets

(d) None of the above.
11. The term net working capital refers to the difference between the currentassets minus current
liabilities.
(a) The statement is correct
(b) The statement is incorrect
(c) I cannot say.
12. The term “Core current assets’ was coined by:
(a) Chore Committee
(b) Tandon Committee
(c) Jilani Committee
(d) None of the above.
13. The concept operating cycle refers to the average time which elapses between the acquisition of raw
materials and the final cash realization. This statementis:
(a) Correct
(b) Incorrect
(c) Partially True
(d) I cannot say.

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14. As a matter of self-imposed financial discipline can there be a situation of zero working capital now-
a-days in some of the professionally managed organizations.
(a) Yes
(b) No
(c) Impossible
(d) Cannot say.
15. Over trading arises when a business expands beyond the level of fundsavailable. The statement is:
(a) Incorrect
(b) Correct
(c) Partially correct
(d) I cannot say.
16. A Conservative Working Capital strategy calls for high levels of current assetsin relation to sales.
(a) I agree
(b) Do not agree
(c) I cannot say.
17. The term Working Capital leverage refer to the impact of level of working capital on company’s
profitability. This measures the responsiveness of ROCE for changes in current assets.
(a) I agree
(b) Do not agree
(c) The statement is partially true.
18. The term spontaneous source of finance refers to the finance which naturallyarise in the course of
business operations. The statement is:
(a) Correct
(b) Incorrect
(c) Partially Correct
(d) I cannot say.
19. Under hedging approach to financing of working capital requirements of a firm, each asset in the
balance sheet assets side would be offset with a financing instrument of the same approximate
maturity. This statement is:
(a) Incorrect
(b) Correct
(c) Partially correct
(d) I cannot say.
20. Trade credit is a:
(a) Negotiated source of finance
(b) Hybrid source of finance
(c) Spontaneous source of finance
(d) None of the above.

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21. Factoring is a method of financing whereby a firm sells its trade debts at adiscount to a financial
institution. The statement is:
(a) Correct
(b) Incorrect
(c) Partially correct
(d) I cannot say.
22. A factoring arrangement can be both with recourse as well as withoutrecourse:
(a) True
(b) False
(c) Partially correct
(d) Cannot say.
23. The Bank financing of working capital will generally be in the following form. Cash Credit, Overdraft,
bills discounting, bills acceptance, line of credit; Letterof credit and bank guarantee.
(a) I agree
(b) I do not agree
(c) I cannot say.
24. When the items of inventory are classified according to value of usage, thetechnique is known as:
(a) XYZ Analysis
(b) ABC Analysis
(c) DEF Analysis
(d) None of the above.

25. When a firm advises its customers to mail their payments to special Post Office collection centers, the
system is known as.
(a) Concentration banking
(b) Lock Box system
(c) Playing the float
(d) None of the above.

MCQs Answer

1. (a) 2. (c) 3. (c) 4. (c) 5. (b) 6. (a)

7. (a) 8. (a) 9. (b) 10. (c) 11. (a) 12. (b)
13. (a) 14. (a) 15. (b) 16. (a) 17. (a) 18. (a)
19. (b) 20. (c) 21. (a) 22. (a) 23. (a) 24. (b)
25. (b)

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 RISK ANALYSIS CAPITAL BUDGETING

MCQs
1. Risk arises from various sources such as:
(a) Market Risk
(b) Competition Risk
(c) International Risk
(d) All of the above
2. Expected cash flows are calculated as:
(a) Sum of likely cash flow of the project.
(b) Sum of likely cash flow of project multiplied by probability of cash flow.
(c) Sum of likely cash flow of project divided by probability of cash flow.
(d) None of the above
3. Variance measures:
(a) How far each number in the set is from the mean
(b) The mean of a given data set
(c) Return on Investment
(d) Level of risk borne for every percent of expected return
4. Certainty Equivalent approach is:
(a) Guaranteed return from an investment after adjusting for certaintyequivalent coefficient.
(b) Return that is expected over the lifetime of a project.
(c) Equivalent to Net Present Value.
(d) An important component in Decision Tree Analysis.
5. The firm expects an NPV of ` 10,000 if the economy is exceptionally strong (30%
probability), an NPV of ` 4,000 if the economy is normal (40% probability), and an NPV
of ` 2,000 if the economy is exceptionally weak (30% probability). Expected Net present
value is .
(a) ` 5,200
(b) ` 6,000
(c) ` 5,000
(d) ` 6,200
6. Risk Premium is:
(a) Extra rate of return expected by the Investors as a reward for bearingextra risk.
(b) Equivalent to the rate of Government Securities.
(c) Return provided to equity shareholders.
(d) Risk free rate of return.

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7. Calculation of Coefficient of Variance depends on:
(a) Standard Deviation
(b) Expected Return
(c) Expected cash flow
(d) All of the above

8. Scenario Analysis is considered under scenarios such as:

(a) Worst Case Scenario
(b) Base Case Scenario
(c) Best Case Scenario
(d) All of the above
9. Sensitivity analysis is useful in decision making because:
(a) It shows the probabilities associated with each outcome.
(b) It tells the user how much critical each input is for the Output value.
(c) It allows to calculate the probable results under different scenarios.
(d) The results of Sensitivity Analysis are reliable.
10. When the risk is high, the cash flow under certainty equivalent coefficient is:
(a) Higher
(b) Lower
(c) No impact
(d) None of the above

MCQs Answer
1. (d) 2. (b) 3. (a) 4. (a) 5. (a) 6. (a)
7. (d) 8. (d) 9. (b) 10. (b)

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 DIVIDEND DECISIONS
MCQs
1. Which one of the following is the assumption of Gordon’s Model:
(a) Ke > g
(b) Retention ratio, (b), once decide upon, is constant
(c) Firm is an all equity firm
(d) All of the above
2. What should be the optimum Dividend pay-out ratio, when r = 15% & Ke = 12%:(a)
100%
(b) 50%

(c) Zero
(d) None of the above.
3. Which of the following is the irrelevance theory?
(a) Walter model
(b) Gordon model
(c) M.M. hypothesis
(d) Linter’s model
4. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growthrate?
(a) 5%
(b) 7%
(c) 6.4%

(d) 9.6%

5. If the shareholders prefer regular income, how does this affect the dividenddecision:
(a) It will lead to payment of dividend
(b) It is the indicator to retain more earnings
(c) It has no impact on dividend decision
(d) Can’t say
6. Mature companies having few investment opportunities will show high payoutratios,
this statement is:
(a) False
(b) True
(c) Partial true
(d) None of these

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7. Which of the following is the limitation of Linter’s model?
(a) This model does not offer a market price for the shares.
(b) The adjustment factor is an arbitrary number and not based on anyscientific criterion or
methods.
(c) Both (a) & (b)
(d) None of the above.
8. What are the different options other than cash used for distributing profits to
shareholders?
(a) Bonus shares
(b) Stock split
(c) Both (a) and (b)
(d) None of the above
9. Which of the following statement is correct with respect to Gordon’s model?
(a) When IRR is greater than cost of capital, the price per share increases anddividend pay-
out decreases.
(b) When IRR is greater than cost of capital, the price per share decreases anddividend pay-
out increases.
(c) When IRR is equal to cost of capital, the price per share increases anddividend pay-
out decreases.
(d) When IRR is lower than cost of capital, the price per share increases anddividend pay-
out decreases.
10. Compute EPS according to Graham & Dodd approach from the giveninformation:

Market price ` 56
Dividend pay-out ratio 60%
Multiplier 2
(a) ` 30

(b) ` 56

(c) ` 28

(d) ` 84

11. Which among the following is not an assumption of Walter’s Model?

(a) Rate of return and cost of capital are constant
(b) Information is freely available to all
(c) There is discrimination in taxes
(d) The firm has perpetual life

MCQs Answer
1. (d) 2. (c) 3. (c) 4. (c) 5. (a) 6. (b)
7. (c) 8. (a) 9. (a) 10. (a) 11. (c)

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