SRI VIDYA MANDIR ARTS & SCIENCE COLLEGE

(AUTONOMOUS)
Katteri – 636 902, Uthangarai, Krishnagiri District, Tamil Nadu
(An Autonomous College Affiliated to Periyar University, Salem)
(Recognized under Status 2(f) & 12(B) of the UGC Act 1956)
Accredited by NAAC with ‘A’ Grade [3.27/4.00]

FINANCIAL MANAGEMENT

CLASS : III BBA & III BBA (CA)

Course code : 20UBA5C12/20UBX5C14

UNIT- I

1. Funds are financial resources in the form of:

(a) Corporate capital(b) Business funds(c) Cash Equivalents(d) All of these

2. An asset that derives value from a contractual Claim is called as

(a) Fictitious asset (b) Financial asset (c)Tangible asset (d) Real asset

3. The government finance which rganiza the principles and practices relating to the Procurement
and management of funds for Central Government, and Local bodies is known as:

(a) Public finance (b) Business Finance (c)Private Finance (d)All of these

4. Business finance deals with which of the following?

(a) Utilize funds efficiently (b) Procuring funds from different sources on fair terms

(c) Both of these (d) None of these

5. The financial activities which are performed regularly are known as:

(a) Non-recurring finance functions (b) Both of these

(c) Recurring finance functions (d) None of these

6. Financial management came into existence as a separate field of study from…?

(a) 19th century (b) 21st century (c) 20th century (d) None of these

7. The financial activities which are performed regularly are known as:

(a) Non-recurring finance functions (b) Both of these

(c) Recurring finance functions (d) None of these

8. The financial activities which are performed only on special events like promotion.
Amalgamation and solvency crisis are called as:

(a) Non-recurring finance functions (b) Recurring finance functions

(c) Both of these (d)None of these

9. The sum of short term and long-term sources of finance is known as:

(a) Capital structure (b) Both of these (c) Financial structure (d) None of these

10.The sources of finance from which the quantum of required funds can be raised is/are:

(a) Share capital (b) Trade credit (c) Debt capital (d) All of these

11. The profits or income of an entity or rganization can be used:

(a) To distribute it as dividend to the shareholders

(b) To retain it in business in the form of accumulated profits

(c) Either a or b (d) None of these

12. The financial manager selects one or more sources of finance after proper taking into

Consideration of:

(a) Cost of capital (b) Control (c) Risk (d) All of these

13. The financial objectives in terms of decision criteria may be:

(a) Welfare maximization (b) Wealth maximization

(c)Profit maximization (d) Any of these

14. The profit maximization objective has been criticized on the basis of:

(a) Ignore risk factor (b) Ignore time value of money (c) Ambiguity (d) All of these

15. Which is the main motive is to select activities having positive impact on society in:

(a) Profit maximization objective (b) Welfare maximization objective

(c)Wealth maximization objective (d) None of these

16. The social cost benefits analysis is primarily used to determine the economic benefits of the
activities in forms of which of the following:

(a) Market prices (b) Discounted prices(c) Shadow prices(d) Augmented prices

17. Treasurer performs the functions of which of the following functions:

(a) Credit management (b) Cash management

(c) Procurement of essential funds (d) All of these

18. Financial controller is responsible

(a) Cash management (b) Credit management

(c) Securities management (d) None of these

19. Financial Management is mainly concerned with ________.

A. acquiring financial resources for firms’ activities

B. utilizing financial resources for firms’ activities

C. procurement of funds of the enterprise

D. All of the above

20. Select the correct option.

A. Profits maximization can be part of a Wealth maximization strategy

B. Wealth maximization can be part of a Profits maximization strategy

C. Profits maximization and Wealth maximization strategy are the same

D. Wealth maximization is completely different from Profits maximization strategy

21. According to Massie, Financial management is the __________activity of a business.

A. operational B. marketing C. human resource management D. sales

22. Financial management process deals with _______

A. investments B. financing decisions C. profit maximization D.

more assets

23. Financial management mainly focuses on _______.

A. Arrangement of funds

B. Efficient management of every business

C. Brand dimension

D. All elements of acquiring and using means of financial resources for financial activities

24. Financial management is an _______ function of any business.

A. organic B. inorganic C. conventional D. least important

25. ______ is concerned with the duties of the financial managers in the business firm.

A. Financial Management B. Accounting Management

C. Personnel Management D. Merger

26. The financial management function has become _____ and complex.

A. Less demanding B. More demanding C. Less important D. Outdated

27. The ______ approach of financial management provides an analytical framework for
financial problems.

A. Classical B. Traditional C. Modern D. Empirical

28. The ______approach of financial management fully ignores the internal decision-making.

A. Business finance B. Traditional C. Modern D. two sided

29. _______ is the main goal of financial management.

A. profit maximization B. fund transfer

C. maximum returns D. wealth maximization

30. The main objective of financial management of an enterprise is to _________.

A. maximize the business expenses B. maximize the profit

C. maintain bill and payments D. maximize the production costs

31. The concept of financial management is mainly related to ______

A. arrangement of funds for the company

B. procurement & utilization of funds for company operations

C. profit maximization for the organization

D. accounting of profit and loss on yearly basis

32. The managerial process which is concerned with the planning and control of financial
resources is called as:

(a) Control function (b) Finance function (c) Management function

(d) None of these

5 MARKS
1. What id financial management? Explain it scope.
2. Explain functions of treasurer.
3. Explain functions of controller.
4. What are the roles of financial manager?
5. Write the functions of finance manager
9 MARKS
1. Explain organization structure of financial management.
2. Explain objectives of financial management.
3. Explain functions of financial management.
4. Explain scope and importance of financial management.
5. What are the factors affecting financial planning.
6. Describe the wealth maximization and its merits and demerits.

CAPITAL BUDGETING

UNIT - II

1. Which of the following is not true about Capital Budgeting?

a. Capital Budgeting decisions have an influence on the future stability of an
organisation
b. Capital Budgeting decisions include investments to expand the business
c. Capital Budgeting decisions are of an irreversible nature
d. Sunk cost is a part of Capital Budgeting

Answer: d

2. Why is evaluating Capital Budgeting decisions based on cash flows?

 a. Cash is more important for an organisation than profits
b. Cash flows are much easier to calculate compared to profits
c. Both a and b are incorrect
d. Both a and b are correct

Answer: c

3. _______ is a project whose cash flows are not affected by the acceptance or rejection of other
projects.
a. Risk-free project
b. Low-cost project
c. Independent project
d. None of the above

Answer: c

4. Which of the following would be the result of including flotation costs in the analysis of a
project?
a. It will increase the initial outflow of cash for the project
b. It will increase the rate of return for the project
c. It will increase the Net Present Value (NPV) of the project
d. It will have zero effect on the current value of the project

Answer: a

5. What should be the criteria of selection when choosing among mutually exclusive projects?
a. Selecting a project with a lower cost of capital
b. Selecting a project with the quickest payback
c. Selecting a project with the longest payback
d. Selecting a project with the highest net present value

Answer: b

6. Which of the following is true for a project with a shorter payback period?
a. The project will have more Net Present Value
b. The project will have less Net Present Value
c. The project carries a greater amount of risk
d. The project carries a lesser amount of risk

Answer: d

7. Which of the following is the term that describes the amount of time taken for a capital
budgeting project to recover its initial investment?
a. Investment period
b. Redemption period
c. Payback period
d. Maturity period

Answer: c

8. Which of the following can be a criterion for the acceptance of a project?

a. The Profitability Index should be greater than unity
b. The Internal Rate of Return should be greater than the cost of capital
c. The Net Present Value should be greater than zero
d. All of the above

Answer: d

9. Which of the following is true for a project with a shorter payback period?
a. The project will have a lesser risk
b. The project will have less Net Present Value
c. The project will have more Net Present Value
 d. The project will have a greater risk

Answer: a

10. Capital Budgeting decisions are evaluated using the _________ and _______ is used for this
purpose.
a. Weighted average, cost of capital
b. Weighted average, component cost
c. Unweighted average, cost of capital
d. None of the above

Answer: a

11. What is the main difference between accounting profit and economic profit?
a. Economic profit is based on cash flows, while accounting profit is based on specific
rules for accountancy
b. Accounting profit includes the last accounting period, while economic profit includes
the entire life of a firm’s existence
c. Accounting profit has a small charge for debt, but economic profit has a small charge
for the providers of capital
d. All of the above

Answer: d

12. Which of the following is a disadvantage of using the payback period?

a. It does not take into account the cost of capital and timing of return
b. When compared to the accounting rate of return method, it is more difficult to
calculate and understand
c. It does not take the initial investment into account
d. All of the above

Answer: a

13. What is the main reason behind the specific required rates of return for different projects?
a. It does not take into account the cost of capital and timing of return
b. If a firm is divided then the units will also have a separate rate of return
c. Both a and b are correct
d. None of the above

Answer: a

14. Which of the following decisions require the use of a decision-tree approach?
a. It is used for projects with independent cash flows
b. It is used for making a decision to either accept or reject a proposal
c. It is used for sequential decisions
d. None of the above

Answer: a

15. Which of the following is true for an investment proposal with the most significant relative
risk?
a. It will have the lowest opportunity loss
b. It will have the highest expected net present value
c. It will have the highest standard deviation of the net present value
d. It will have the highest coefficient of variation of the net present value

Answer: d

16. Which of the following would be the best example of a capital budgeting decision?
a. Purchasing new machinery to replace an existing one
b. Transferring money to your creditor’s account
c. Payment of electricity bill for your factory
 d. None of the above

Answer: a

17. Which of the following decisions affects the size of assets, the profitability and
competitiveness of a firm?
a. Dividend decision
b. Working capital decision
c. Capital Budgeting decision
d. None of the above

Answer: c

18. Which of the following is not incorporated within the capital budgeting decision for a
company?
a. The rate of cash discount
b. Time value of money
c. The required rate of return
d. None of the above

Answer: a

19. Which of the following principles is not considered within capital budgeting for a company?
a. Post-tax principle
b. Accrual principle
c. Cash flows principle
d. None of the above

Answer: b

20. Which of the following is not true for Capital Budgeting for a business?
a. The timing of cash flows is relevant
b. The existing investment within a project is not considered as the sunk cost
c. The cost of capital is equal to the minimum required rate of return
d. The capital budgeting is only related to the asset replacement decisions

Answer: b
21. A proposal is not a capital budgeting proposal if it:

a) is related to Fixed Assets

b) brings long-term benefits
c) brings short-term benefits only
d) has very large investment
Answer:
(C) brings short-term benefits only

22. Risk of a capital budgeting can be incorporated:

a) Adjusting the Cash flows

b) Adjusting the Discount Rate
c) Adjusting the life
d) All of the above

Answer:
(D) All of the above

23. In Certainty Equivalent Approach, the CE Factors for different years are:

a) Generally increasing
b) Generally decreasing
 c) Generally same
d) None of the above

Answer:
(B) Generally decreasing

24. Situation in which company replaces existing assets with new assets is classified as

a) Replacement projects
b) New projects
c) Existing projects
d) Internal projects

Answer:
(A) Replacement projects

25. A project whose cash flows are more than capital invested for rate of return then net present
value will be

a) Positive
b) Independent
c) Negative
d) Zero

Answer:
(A) Positive

26.In mutually exclusive projects, project which is selected for comparison with others must
have –

a) Higher net present value

b) Lower net present value
c) Zero net present value
d) All of the above

Answer:
(A) Higher net present value

27. In capital budgeting, positive net present value results in –

a) Negative economic value added

b) Positive economic value added
c) Zero economic value added
d) Present economic value added

Answer:
(B) Positive economic value added

28. Cash inflows are revenues of project and are represented by –

a) Hurdle number
b) Relative number
c) Negative numbers
d) Positive numbers

(A) Answer:
(D) Positive numbers
29. The beta coefficient is associated with –

a) Capital asset pricing model

b) Dividend valuation model
c) Risk-free rate plus premium model
d) Tax-adjusted cost of debt

(A) Answer:
(A) Capital asset pricing model

30. The method which calculates the time to recoup initial investment of project in form of
expected cash flows is classified as –

a) Net value cash flow method

b) Payback method
c) Single cash flow method
d) Lean cash flows method

(A) Answer:
(B) Payback method

31. The rate of return to cover risk of investment and decrease in purchasing power as a result of
inflation is classified as –

a) Nominal rate of return

b) Accrual accounting rate of return
c) Real rate of return
d) Required rate of return

(A) Answer:
(A) Nominal rate of return

32. The payback period is multiplied to constant increase in yearly future cash flows to calculate
–

a) Cash value of money

b) Net initial investment
c) Net future value
d) Time value of money

(A) Answer:
(B) Net initial investment

UNIT -II ( 5 MARKS )

1. Explain need and importance of capital budgeting.

2. Explain Pay Back Period method.
3. Explain Pay Back Period method and ARR.
4. Write the need and significance of capital budgeting.
5. Explain the factors influencing capital budgeting decisions

6. Project Y has an initial investment of Rs.5,00,000. Its cash flow for 5 years are
Rs.1,50,000, Rs.1,80,000, Rs.1,50,000, 1,32,000, and 1,20,000. Calculate PBP.
7. A project costs Rs. 5,00,000 and yields annually a profit of Rs. 80,000 after
depreciation at 12% p.a., bur before tax at 50%. Calculate PBP.
 8. A project costs Rs. 2,00,000 and has a scrap value of Rs.8,000 after 5 years. It is
expected to yield profits after taxes and depreciation during the five years amounting to
Rs.16,000, Rs.24,000, Rs. 28,000, Rs. 20,000 and Rs. 8,000. Calculate the average rate
of return on investment.
9. A project costs Rs. 2,50,000 and yields an annual cash inflow of Rs. 50,000 for 7 years.
Calculate its payback period.
10. Calculate the Payback Period for a project which requires a cash outlay of Rs.1,00,000
and generates cash inflow of Rs.25,000, Rs.35,000, Rs.30,000, Rs.25,000 in the
first,second,third and fourth years respectively.
11. A project costs Rs. 5,00,000 and yields annually a profit of Rs. 80,000 after
depreciation at 12% per annum, but before tax at 50%. Calculate Payback Period.
UNIT -II ( 9 MARKS )

1. Explain methods of evaluating a project investment proposal.

2. Explain the capital budgeting process.
3. Explain the types of capital budgeting decisions

4. A company is considering to purchase a machine. Two machines are available X and Y,

each costing Rs. 1,50,000. Earnings after taxation are expected to be as follows:
Cash Flow Machine “X”
Year Cash Flow Machine “Y” (RS)
(RS)
1 45,000 15,000
2 60,000 45,000
3 75,000 60,000
4 45,000 90,000
5 30,000 60,000
Evaluate the Two alternatives according to:
a) The pay-back period

5. Aroma industrial Ltd., is considering the purchase of a new machine which will carry out
operations performed by manual labour. The two alternative models under consideration
are “DAMSEL” and “SHYLOCK”.
Machine “Damsel” Machine shylock”.

Cost of machine 3,00,000 5,00,000

Estimated life years (in years) 10 12
Estimated savings in scrap per annum 20,000 30,000
Additional cost of supervision per annum 24,000 32,000
Additional cost of maintenance per annum 14,000 22,000
Cost of indirect material per annum 12,000 16,000
Estimated savings in wages:
Wages per worker per annum 1,200 1,200
Workers not required 150 200
The rate of taxation may be regarded as 50% of profits. Which model can be recommended for
purchase? With help of PBP.

6. Using the information given below, compute

Machine A Machine B
Original cost - Rs.1,00,000 Rs. 1,50,000
Working life 5 years 5 years
Profit before dep. & Tax:
Years Rs Rs
I 30,000 40,000
II 15,000 45,000
III 40,000 50,000
IV 40,000 24,000
V 35,000 71,000
Tax rate: 50%
Calculate average rate of return on average investment.
Calculate average rate of return assuming that machines A and B have scrap values of Rs. 10,000
and Rs. 20,000 respectively at the end of the 5th year. Find out the profitable machine under each
case.

7. x Ltd, is considering the purchase of a machine. Two machines are available E and F.
the cost of each machine is RS.60,000. Each machine has an expected life of 5years. Net
profits before tax during the expected life of the machine are given below.
year Machine E Machine F
RS. RS.
1 15,000 5,000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000
85,000 90,000

Following the method of return on investment, ascertain which of the alternatives will be
more profitable. The average rate of tax may be taken as 50%.
8. The management of Joy Ltd., decided to purchase machine X or Machine Y. The
following information is available:
Particulars Machine X Machine Y
Cost of machine(Rs.) 42,000 15,000
Estimated life (Years) 6 7
Sales per year (Rs.) 30,000 30,000
Costs per annum:
Labor (Rs.) 2,000 10,000
Materials (Rs.) 12,000 12,000
Overheads (Rs.) 4,000 3,000

Advise the management regarding selection of the machine on the basis of Payback
Period

9. A company wants to buy a machine. There are two alternative models. A and B are
available. Prepare a statements of profitability and suggest the suitable machine using
Payback Period Method:
Particulars Machine A Machine B
Estimated life (yrs) 4 5
Cost of machine (Rs.) 50,000 60,000
Estimated savings in scrap(Rs.) 18,000 19,000
Estimated savings in labor(Rs.) 8,000 6,000
Additional cost of maintenance (Rs.) 2,000 2,000
Tax 50% 50%
Depreciation: Fixed percentage
 UNIT – III
CAPITAL STRUCTURE
PART - A
UNIT – III

CAPITAL STRUCTURE

1. …………. refers to the mix of a firm’s capitalization and includes long term sources of funds.
(A) Leverage
(B) Capital structure
(C) Debt mix
(D) Owner’s equity
Answer:
(B) Capital structure

2. The term “capital structure” refers to:

(A) Current assets & current liabilities
(B) Long-term debt, preferred stock, and common stock equity
(C) Total assets minus liabilities
(D) Share holders’ equity
Answer:
(B) Long-term debt, preferred stock, and common stock equity

3. The decisions regarding the forms of financing, their requirements and their relative proportions
in total capitalization known as –
(A) Equity decisions
(B) Equilibrium decisions
(C) Outright decisions
(D) Capital structure decisions
Answer:
(D) Capital structure decisions

4. While designing a capital structure a finance manager should choose a pattern of capital which –
(A) Minimizes cost of capital
(B) Maximizes the owners return.
(C) Maximizes cost of capital and minimizes the owners return.
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

5. Which of the following changes in capital structure would you recommend for growth at faster
rate?
(A) Incorporate more retained earnings out of profit and loss account.
 (B) Incorporate debt in its capital structure to a greater extent.
(C) Merge with other companies.
(D) Pay more dividend to equity share-holders.
Answer:
(B) Incorporate debt in its capital structure to a greater extent.

6. The manner in which an organization’s assets are financed is referred to as its –

(A) Capital structure
(B) Financial structure
(C) Asset structure
(D) Owners structure
Answer:
(B) Financial structure

7. Optimal capital structure consists of -…………..

(A) Appropriate mix of fixed assets and current assets.
(B) Appropriate mix of long term debts and fixed assets.
(C) Appropriate mix of sales and profit.
(D) Appropriate mix of debt and equity.
Answer:
(D) Appropriate mix of debt and equity.

8. Which of the following is not included in capital structure?

(A) Long term debt
(B) Preferred stock
(C) Current assets
(D) Retained earnings
Answer:
(C) Current assets

9. Financial structure involves creation of –

(1) Long term assets
(2) Short term assets
Select the correct answer from the options given below:
(A) (2) only
(B) Neither (1) nor (2)
(C) (1) only
(D) Both (1) and (2)
Answer:
(D) Both (1) and (2)
10. Financial structure is ……………. concept while capital structure is concept
(A) inappropriate; appropriate
(B) appropriate; inappropriate
(C) narrow; broader
(D) broader; narrow
Answer:
(D) broader; narrow

11. Which of the following capital structure consist of zero debt components in the structure mix?
(A) Pyramid Shaped Capital Structure
(B) Inverted Pyramid Shaped Capital Structure
(C) Horizontal Capital Structure
(D) Vertical Capital Structure
Answer:
(C) Horizontal Capital Structure

12. One can get a reasonably accurate broad idea about the risk profile of the firm from its –
(A) Dividend policy
(B) Capital structure
(C) Debt service ratio
(D) Earning yield
Answer:
(B) Capital structure

13. Capital structure relates to …………. capital deployment for creation of ……… assets.
(A) long term; long term
(B) long term; short term
(C) short term; long term
(D) short term; short term
Answer:
(A) long term; long term

14. One can design capital structure with proper proportions of equity, preference and debt mix. The
choice of the combination of these sources is called –
(A) Structural mix
(B) Policy mix
(C) Capital structure mix
(D) Finance mix
Answer:
(C) Capital structure mix
15. According to Cost Principle an ideal pattern or capital structure is one that -…………..
(A) Minimizes cost of capital structure
(B) Maximizes earnings per share (EPS).
(C) Both (A) and (B)
(D) None of the above
Answer:
(C) Both (A) and (B)

16. Business Risk is –

(A) Avoidable risk
(B) Unavoidable risk
(C) Not relevant
(D) Less important than financial risk
Answer:
(B) Unavoidable risk

17. The rate of tax affects the –

(A) Cost of retained earnings
(B) Cost of debt
(C) Cost of equity
(D) All of the above
Answer:
(D) All of the above

18. Business risk is influenced by –

(A) Revenue
(B) Variable cost
(C) Fixed assets
(D) All of the above
Answer:
(D) All of the above

19. Capital Structure of a firm –

(A) Is a reflection of the overall investment and financing strategy of the firm.
(B) Shows how much reliance is being placed by the firm on external sources of finance and
how much internal accrual is being used to finance expansions
(C) Means the structure or constitution or break-up of the capital employed by a firm.
(D) All of the above
Answer:
(D) All of the above
20. Which of the following is vulnerable to hostile takeovers?
(A) Horizontal Capital Structure
(B) Vertical Capital Structure
(C) Pyramid Shaped Capital Structure
(D) All of the above
Answer:
(B) Vertical Capital Structure

21. Floatation costs are those expenses which are incurred while –
(A) Issuing securities
(B) Repayment of debts
(C) Negotiations for business deal
(D) Repayment of equity and debts
Answer:
(A) Issuing securities

22. Which of the following is floatation cost?

(A) Commission of underwriters
(B) Brokerage paid on issue of securities
(C) Stationery expenses on issue of securities
(D) All of the above
Answer:
(D) All of the above

23. ……….. denotes the level of EBIT for which the firm’s EPS equals zero.
(A) Financial break-even point
(B) Margin of safety
(C) Equilibrium point
(D) Min-max point
Answer:
(A) Financial break-even point

24. If the EBIT is less than the financial 5 breakeven point, then the EPS will be –
(A) Positive
(B) Negative
(C) Zero
(D) Maximum
Answer:
(B) Negative

25. According to Net Income Approach, capital structure decision –

(A) Is relevant to the value of the firm.
 (B) Of the firm are irrelevant.
(C) Will not lead to any change in the total value of the firm and the market price of shares.
(D) Division between debt and equity is irrelevant.
Answer:
(A) Is relevant to the value of the firm.

26. According to Net Operating Income Approach –

(A) Capital structure decisions of the firm are irrelevant.
(B) Any change in the leverage will not lead to any change in the total value of the firm and the
market price of shares, as the overall cost of capital is independent of the degree of leverage.
(C) The division between debt and equity is irrelevant.
(D) All of the above
Answer:
(D) All of the above

27. According to ……………, the firm can increase its total value by decreasing its overall cost of
capital through increasing the degree of leverage.
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(B) Net Income Approach

28. As per Net Income Approach the value of the firm will be maximum at a point where –
(A) Average cost of equity is minimum.
(B) Average cost of debt is minimum.
(C) Weighted average cost of equity is maximum.
(D) Weighted average cost of capital is minimum.
Answer:
(D) Weighted average cost of capital is minimum.

29. Any change in the leverage will not lead to any change in the total value of the firm and the
market price of shares, as the overall cost of capital is independent of the degree of leverage.
This is as per
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Net Operating Income Approach
30. Inability to pay fixed financial payments e.g. payment of interest, preference dividend, return of
the debt capital, etc. is called as –
(A) Business risk
(B) Financial risk
(C) Operating risk
(D) (A) and (C)
Answer:
(B) Financial risk

31. If expected level of EBIT is more than the breakeven point, then the EPS will be –
(A) Minimum
(B) Negative
(C) Positive
(D) Infinite
Answer:
(C) Positive

32. According Modigliani & Miller Approach

(A) Individuals (arbitragers) through the use of personal leverage can alter corporate leverage.
(B) Financial risk increases with more debt content in the capital structure.
(C) The total value of a firm is not affected by its capital structure
(D) All of the above
Answer:
(D) All of the above

33. A situation where a firm has more capital than it needs is called as –
(A) Over Finance
(B) Over Capitalization
(C) Over Trading
(D) Over Realization
Answer:
(B) Over Capitalization

34. Which of the following is one of the causes of over capitalization?

(A) Reduction in the market price of shares.
(B) Borrowing huge amount at higher rate than rate at which company can earn.
(C) Reduction in the rate of dividend and interest payments.
(D) Buying of shares in the unleveraged firm.
Answer:
(B) Borrowing huge amount at higher rate than rate at which company can earn.
35. Finance function comprises –
(A) Safe custody of funds only
(B) Expenditure of funds only
(C) Procurement of finance only
(D) Procurement & effective use of funds
Answer:
(D) Procurement & effective use of funds

36. Finance functions includes –

(A) Planning for funds
(B) Raising of funds
(C) Allocation of resources
(D) All of the above
Answer:
(D) All of the above

37. Earning Yield computed by

(A) EPS/Current Market Price Per Share
(B) Paid up value of Share/100
(C) EPS/Profit × 100
(D) EPS/Market Price
Answer:
(A) EPS/Current Market Price Per Share

PART – B

1. Write the MM theory.

2. Explain the Net Income approach theory.
3. Explain the Net Operating Income approach theory.
4. Write about the traditional approach.
5. Describe the Types of forms of dividend
6. Write short on Types of dividend policy
7. Explain the financial structure and capital structure

PART – C

1. What is capital structure? Explain long term sources of capital structure.

2. Briefly explain the Features of capital structure
3. Explain the Factors determining capital structure
4. Explain the Factors affecting dividend policy
5. Explain the MM theory merits and demerits
6. Write short note on :
 a) NI approach
b) NOI approach
7. Explain the capital structure theories
8. Explain the patterns of capital structure

UNIT – IV
COST OF CAPITAL
1. Cost of equity share or debt is called ___
(A) Related cost of capital (B) Easy to calculate the cost of
capital
(C) Specific cost of capital (D) Burden on the shareholder
Answer:
(C) Specific cost of capital
2. In which of the cost of the following method of equity capital is computed by dividing
the dividend by market price per share or net proceeds per share?
(A) Price Earning Method (B) Adjusted Price Method
(C) Adjusted Dividend Method (D) Dividend Yield Method
Answer:
(D) Dividend Yield Method
3. In weighted average cost of capital, a company can affect its capital cost through____
1. Policy of capital structure
2. Policy of dividends
3. Policy of investment,
Select the correct answer from the options given below:
(A) 1 only
(B) 2 & 3
(C) 1 & 3
(D) All 1, 2 & 3
Answer:
(D) All 1, 2 & 3
4. Which of the following is the correct formula to calculate the cost of equity under the
dividend yield method?

Answer:
(A)
5. ____ is the rate of return associated with the best investment opportunity for the firm and
its shareholders that will be forgone if the projects presently under consideration by the
firm were accepted.
(A) Explicit Cost (B) Future Cost (C) Implicit Cost (D) Specific Cost
Answer:
(C) Implicit Cost
6. Cost of capital is equal to the required return rate on equity in case if investors are
only___
(A) Valuation Manager (B) Common Stockholders
(C) Asset Seller (D) Equity Dealer
Answer:
(B) Common Stockholders
7. Which of the following model/ method makes use of Beta (β) in the calculation of the
cost of equity?
 (A) Risk-Adjusted Discount Model (B) Capital Assets Pricing Method
(C) MM Model (D) Price Earning Method
Answer:
(B) Capital Assets Pricing Method
8. Marginal cost____
(A) is the weighted average cost of new finance raised by the company.
(B) is the additional cost of capital when the company goes for further raising of finance.
(C) is the cost of raising an additional rupee of capital.
(D) All of the above
Answer:
(D) All of the above
9. The bond risk premium is added into bond yield to calculate____
(A) Cost of option (B) Cost of common stock
(C) Cost of preferred stock (D) Cost of working capital
Answer:
(B) Cost of common stock
10. The cost of equity share or debt is called the specific cost of capital. When specific costs
are combined, then we arrive at____
(A) Maximum rate of return (B) Internal rate of return
(C) Overall cost of capital (D) Accounting rate of return
Answer:
(C) Overall cost of capital
11. Interest rates, tax rates, and market risk premium Eire factors which –
(A) Industry cannot control (B) Industry can control
(C) Firm must control (D) Firm cannot control
Answer:
(D) Firm cannot control
12. If we deduct ‘risk-free return’ from ‘market return’ and multiply it with ‘beta factor’ and
again add ‘risk-free return’, the resultant figure will be –
(A) Nil (B) Risk premium (C) Cost of equity (D) WACC of
the firm
Answer:
(C) Cost of equity
13. For each component of capital, a required rate of return is considered as:
(A) Component cost (B) Evaluating cost (C) Asset cost (D) Asset
depreciation value
Answer:
(A) Component cost
14. ____ is the rate that the firm pays to procure financing.
(A) Average Cost of Capital
(B) Combine Cost
(C) Economic Cost
(D) Explicit Cost
Answer:
(D) Explicit Cost
15. Which of the following method of cost of equity is similar to the dividend price
approach?
(A) Discounted cash flow (DCF) method
(B) Capital asset pricing model
(C) Price earning method
(D) After-tax equity method
Answer:
(C) Price earning method
16. The preferred dividend is divided by preferred stock price multiply by (1 – floatation
cost) is used to calculate –
(A) Transaction cost of preferred stock
(B) Financing of preferred stock
(C) Weighted cost of capital
(D) The Component cost of preferred stock
Answer:
(D) The Component cost of preferred stock
17. Statement I:
The cost of retained earnings is the opportunity cost of dividends forgone by
shareholders.
Statement II:
The opportunity cost of reserve & surplus may be considered as their cost, which is
equivalent to the income that would otherwise earn by placing these funds in alternative
investment.
Select the correct answer from the options given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(D) Both Statement I and Statement II are true
18. How you will calculate expected dividend Le. dividend at the end of year one?
(A) D1 = [D0(1 + g)]
(B) D1 = [D0(1 – t)]
(C) D1 = [D0 × (1 – g)]
(D) D1 = [D0 + (1 – g)](1 – t)
Answer:
(A) D1 = [D0(1 + g)]
19. In weighted average cost of capital, rising in interest rate leads to –
(A) Increase in cost of debt
(B) Increase the capital structure
(C) Decrease in cost of debt
(D) Decrease the capital structure
Answer:
(A) Increase in cost of debt
20. ____is the cost that has already been incurred for financing a particular project.
(A) Future Cost
(B) Historical Cost
(C) Implicit Cost
(D) Opportunity Cost
Answer:
(B) Historical Cost
21. In weighted average cost of capital, capital components are funds that are usually offered
by:
(A) Stock market
(B) Investors
(C) Capitalist
(D) Exchange index
Answer:
(B) Investors
22. The overall cost of capital is called as –
(A) Composite cost of capital
(B) Combined cost of capital
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)
23. Premium which is considered as the difference of expected return on common stock and
the current yield on Treasury bonds is called –
(A) Past risk premium
(B) Expected premium
(C) Current risk premium
(D) Beta premium
Answer:
(C) Current risk premium
24. Which of the following figure is irrelevant while calculating the cost of redeemable
preference shares?
(A) Flotation cost
(B) Discount
 (C) EPS
(D) Net proceeds
Answer:
(C) EPS
25. An interest rate that is paid by a firm as soon as it issues debt is classified as pre-tax –
(A) Term structure
(B) Market premium
(C) Risk premium
(D) Cost of debt
Answer:
(D) Cost of debt
26. Which of the following is a controllable factor affecting the cost of capital of the firm?
(A) Dividend policy
(B) Level of interest rates
(C) Tax rates
(D) All of the above
Answer:
(A) Dividend policy
27. Which of the following is an uncontrollable factor affecting the cost of capital of the
firm?
(A) Investment Policy
(B) Capital Structure Policy
(C) Debt service charges
(D) None of the above
Answer:
(D) None of the above
28. Type of cost which is used to raise common equity by reinvesting internal earnings is
classified as
(A) Cost of common equity
(B) Cost of mortgage
(C) Cost of stocks
(D) Cost of reserve assets
Answer:
(A) Cost of common equity
29. Which of the following is the correct formula to calculate the cost of irredeemable
preference shares?
(A) Preference dividend ÷ Net proceeds
(B) Preference dividend × (1 – t)
(C) [Preference dividend × (1 -t)] ÷ Net proceeds
(D) [Preference dividend ÷ Net proceeds] × (1 – t)
Answer:
(A) Preference dividend ÷ Net proceeds
30. Which of the following factor affects the determination of the cost of capital of the firm?
(A) General economic conditions
(B) Market conditions
(C) Operating and financing decisions
(D) All of The above
Answer:
(D) All of The above
31. The cost of equity which is raised by reinvesting earnings internally must be higher than
the –
(A) Cost of the initial offering
(B) Cost of new common equity
(C) Cost of preferred equity
(D) Cost of floatation
Answer:
(B) Cost of new common equity
32. During the planning period, marginal cost to raise new debt is classified as___
(A) Debt cost
(B) Borrowing cost
(C) Relevant cost
(D) Embedded cost
 Answer:
(C) Relevant cost
33. The risk-free rate is subtracted from the expected market return is considered as:
(A) Country risk
(B) Diversifiable risk
(C) Equity risk premium
(D) Market risk premium
Answer:
(C) Equity risk premium
34. For which of the following costs is it generally necessary to apply a tax adjustment to a
yield measure?
(A) Cost of debt
(B) Cost of preferred stock
(C) Cost of common equity
(D) Cost of retained earnings
Answer:
(A) Cost of debt

PART – B ( 5 MARKS)

1. Janaki Ltd. issued 12.000 10% Debentures of Rs. 100 each at par. The tax rate is 50%. Calculate
before tax and after tax cost of debt.
2. Kalyan Ltd., issired 50.000 12% Debentures of Rs.100 each at par. The tax rate is 40%, Calculate
cost of debt before tax and after tax.
3. Vikram Ltd. issued Rs.3,00,000 8% Debentures of 10%. The flotation costs (issue expenses) are
2%. The tax rate is 50%. You are required to ascertain cost of debt before tax and after tax.
4. Ganesh Ltd. issued 2.000 9% Debentures of Rs.100 each at a premium of 10% The issue
expenses are 3%. The tax rate is 40%. Calculate cost of debt before tax and after tax.
5. Hadley Ltd. issued 6,000 10% Debentures of Rs.100 a discount of 10%. The issue expenses are
Rs.4,000. Assuming a tax rate of 50% calculate the before tax and after tax cost of debt.
6. Mather Ltd. issued Rs 8,00,000 8% Debentures at a discount of 5%. The flotation costs are 4%,
Assuming tax rate of 40%, compute cost of debt before tax and after tax.
7. Sri Ram Industries Ltd. Issued 10,000 10% Debentures of Rs. 100 each. The tax rate is 50%
Calculate the before tax and after tax cost of debt if the debentures are sued (a) at par; (b) at a
premium of 10% and (e) at a discount of 10%
8. KKL Ltd. issued 10% Debentures of Rs.5,00,000 and realized Rs.4,85,000 after allowing 3%
commission to brokers. The debentures are due for maturity at the end of the 10th year. You are
required to calculate the effective cost of debt before tax.
9. A firm issues debentures of Rs.1,00,000 and realizes Rs.98,000 after allowing 2% commission to
brokers. The debentures carry an interest rate of 10%. The debentures are due for maturity at the
end of the 10th year. Calculate the effective cost of debt before tax.
10. X Ltd. issued 20,000 7% Debentures of Rs, 100 each at a premium of 5%. The maturity period is
5 years and the tax rate is 40%. Calculate the cost of debentures before and after tax if the
debentures are redeemable at par.

PART – C ( 9 MARKS)

11. Sarathy Ltd., issued 14% 20,000 Debentures of Rs. 100 each. Marketing costs are Rs.40,000. The
debentures are to be redeemed after 10 years and the company is taxed at the rate of 40%.
Compute the cost of debt if the debentures are issued (a) at par, (b) at a premium of 5%, and (c) at
a discount of 5%.
 12. Dinesh Ltd., has issued 9% 10,000 Preference shares of Rs.100 each. The issue expenses are Rs.3
per share. You are required to ascertain the cost of preference share capital if the shares are issued
(a) at a par; (b) at a premium of 10% and (c) at a discount of 5%.

13. RK Ltd. issued Rs 20,00,000 11% redeemable debentures at a discount of 10%. The issue
expenses are 4% and the debentures are redeemable after 5 years. You are required to ascertain
cost of debt before tax and after tax assuming a tax rate of 40%

14. Sakthi Ltd., issued 5,000 12% redeemable debentures of Rs. 100 each at a discount of 5%. The
floatation costs are 2% and debentures are redeemable after 5 years Compute before tax and after
tax cost of debt assuming a tax rate of 50

15. Adhitya Ltd., issued 10,000, 10% Debentures of Rs. 100 each at par. These debentures are
redeemable after 10 years at a premium of 8% The cost of issue is 2%. Assuming a corporate tax
rate of 50%, calculate the before tax and after tax cost of debt capital.

16. Sadhiya Ltd., has issued 12,00 12% Preference shares of Rs. 100 each. The shares are redeemable
after 10 years a premium of 10%. Floatation costs are 4%. Calculate the effective com
redeemable preference share capital.

17. Samyo Ltd., issued 11,000 11% Preference shares of Rs. 100 each. The shares redeemable after
11 years at a premium of 5% The issue expenses are Rs.3 pe share. You are asked to find out the
cost of redeemable preference share capital

18. JJ Ltd., issued 7,500 8% Preference shares of Rs.100 each at a premium of 10%. The shares are
redeemable at par after 7 years. The floatation costs are 5%. Compute the effective cost of
redeemable preference capital.

19. KKR Ltd., issued 8,800 10% Preference shares of Rs.100 each at a premium of 5%. The shares
are redeemable at par after 8 years. The issue expenses are 4% Calculate the cost of redeemable
preference capital.

20. Bhagat Ltd., has issued 4,400 10% Preference shares of Rs.100 each at a discount of 10%. The
shares we redeemable after 8 years and the issue expenses are 4% Ascertain the effective cost of
preference share capital.

UNIT – V

WORKING CAPITAL

1. Working capital is also known as___

(A) Operation capital
(B) Operating capital
(C) Current assets capital
(D) Capital relating to main projects of the company
Answer:
(B) Operating capital

2.Positive working capital means that __

(A) The company is able to pay off its long-term liabilities.
(B) The company is able to select profitable projects.
(C) The company is unable to meet its short-term liabilities.
(D) The company is able to pay off its short-term liabilities.
Answer:
(D) The company is able to pay off its short-term liabilities.

3.Working capital =
(A) Core current assets less current liabilities
(B) Core current assets less core current liabilities
(C) Liquid assets less current liabilities
(D) Current assets less current liabilities
Answer:
(D) Current assets less current liabilities

4.Other things remaining constant, if the debtors increase as compared to last year it means –
(A) Company has a poor credit policy
(B) Company has a positive working capital
(C) Company has a negative working capital
(D) Company has no working capital
Answer:
(B) Company has a positive working capital

6.Contingencies are –
(A) Added to gross working capital
(B) Deducted from gross working capital
(C) Contingencies are not considered in financial management; it is considered in accounts only
(D) None of the above
Answer:
(A) Added to gross working capital

8.Working capital is a highly effective barometer of a company’s efficiency and effectiveness.

(A) Operational and servicing
(B) Longterm
(C) Operational and financial
(D) Positive and negative
Answer:
(C) Operational and financial

10.While calculating working capital based on cash cost –

(A) Depreciation is ignored
(B) Non-cash items are not considered
(C) Debtors are calculated on the basis of the cost of goods sold and not on sale price
(D) All of the above
Answer:
(D) All of the above

11.Negative working capital means that –

(A) The company has no current assets at all
(B) The company currently is unable to meet its short-term liabilities
(C) The company has negative earnings before interest and tax
(D) The company currently is able to meet its short-term liabilities
Answer:
(B) The company currently is unable to meet its short-term liabilities

12.Which of the following analyzes the accounts receivable, inventory, and accounts payable
cycles in terms of a number of days?
(A) Operation cycle
(B) Current asset cycle
(C) Operating cycle
(D) Business cycle
Answer:
(C) Operating cycle

13.Which of the following method is not used for calculating the working capital cycle?
(A) Percentage of sales method
(B) Regression analysis method
(C) Operating cycle approach
(D) Trial and error method
Answer:
(D) Trial and error method

20.One of the important objective(s) of working capital management is/are –

(A) To maintain the optimum levels of investment in current assets.
(B) To reduce the levels of current liabilities
(C) Improve the return on capital employed
(D) All of the above
Answer:
(D) All of the above

21.Fluctuating Working Capital is also called as –

(A) Reserve Margin Working Capital
(B) Temporary Working Capital
(C) Permanent Working Capital
(D) Variable working capital
Answer:
(D) Variable working capital

22.Operating cycle is also called as –

(A) Working cycle
(B) Business cycle
(C) Current asset cycle
(D) Working capital cycle
Answer:
(D) Working capital cycle

24.The capital which is needed to meet the seasonal requirements of the business –
(A) Gross Working Capital
(B) Reserve Margin Working Capital
(C) Net working capital
(D) Fluctuating Working Capital
Answer:
(D) Fluctuating Working Capital

29.If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch
the financial resources of the business. This is called –
(A) Over rating
(B) Overtrading
(C) Overcoming
(D) Overtone
Answer:
(B) Overtrading

30.Which of the following represents the amount utilized at the time of contingencies?
(A) Reserve Working Capital
(B) Net working capital
(C) Extra working capital
(D) Fixed working capital
Answer:
(A) Reserve Working Capital

33.Any amount over and above the permanent level of working capital is known as working
capital.
(A) Temporary
(B) Fluctuating
(C) Variable
(D) All of the above
 Answer:
(D) All of the above

PART - B
1. Writetheobjectivesofworkingcapital
2. ManagementListthe factorsaffectingworkingcapital
3. Mentiontheneedofworkingcapitalmanagement
4. Drawtheworkingcapitalcycle
5. Write note on motive for holding cash.
6. Explain theimportanceofcashmanagement.

PART – C
1. Explain theimportanceofworkingcapital.
2. Describe theobjectivesofcashmanagement.
3. What is cash management? Explainthemotivesofholdingcash.
4. Explain theimportanceofreceivablesmanagement.
5. Explain the factors affecting working capital management.
6. Explain the techniques of inventory management.

38. …………. refers to the mix of a firm’s capitalization and includes long term sources of funds.
(a) Leverage
(b) Capital structure
(c) Debt mix
(d) Owner’s equity

39. The decisions regarding the forms of financing, their requirements and their relative proportions
in total capitalization known as –
(a) Equity decisions
(b) Equilibrium decisions
(c) Outright decisions
(d) Capital structure decisions

40. One can get a reasonably accurate broad idea about the risk profile of the firm from its –
(a) Dividend policy
(b) Capital structure
(c) Debt service ratio
(d) Earning yield
41. The rate of tax affects the –
(a) Cost of retained earnings
(b) Cost of debt
(c) Cost of equity
(d) All of the above

42. Inability to pay fixed financial payments e.g. payment of interest, preference dividend, return of
the debt capital, etc. is called as –
(a) Business risk
(b) Financial risk
(c) Operating risk
(d) (A) and (C)