CBSE Class 12 Business Studies Financial Management MCQs Set 06

Question: Other things remaining the same, an increase in the tax rate on corporate profits will:
a) Make the debt relatively cheaper
b) Make the debt relatively dearer
c) Have no impact on the cost of debt
d) We can’t say
Answer: a

Question: Current assets are those assets which get converted into cash:
a) Within six months
b) Within one year
c) Between one and three years
d) Between three and five years
Answer: b

Question: The third decision related to financial management is:
a) Dividend Decision
b) Current Decision
c) Fixed Decision
d) Borrowing Decision
Answer: a

Question: Factors affecting financing decisions are:
a) Stability of earning
b) Investment criteria
c) Cash flow of the project
d) Control consideration
Answer: d

Question: Unfavourable financial leverage leads to:
a) Increase in EPS
b) Decrease in EPS
c) EPS is not affected
d) Increase in tax
Answer: b

Question: Floatation cost is high in:
a) Equity shares
b) Retained earnings
c) Debentures
d) Dividend
Answer: a

Question: The concept which provides a link between investment and financing decision:
a) Trading on equity
b) Financial leverage
c) Capital structure
d) Financial planning
Answer: d

Question: What is the cost of raising funds called?
a) Flotation Cost
b) Marginal Cost
c) Fixed Cost
d) Variable Cost
Answer: a

Question: Higher debt-equity ratio results in:
a) Lower financial risk
b) Higher degree of operating risk
c) Higher degree of financial risk
d) Higher earning per share
Answer: c

Question: EBIT refers to:
a) Earning Before Interest and Tax
b) Earning Before Income and Tax
c) Earning Before Investment and Tax
d) Earning Before Installment and Tax
Answer: a

Question: Financial planning arrives at:
a) Minimising the external borrowing by resorting to equity issues
b) Ensuring that the firm always has more funds than required
c) Ensuring that the firm faces neither a shortage nor a glut of unusable funds
d) Doing only what is possible with the funds that the firm has at its disposal
Answer: c

Question: Companies with stable earnings are likely to:
a) Pay higher dividend
b) Not pay any dividend
c) Pay lesser dividend
d) Dividend not affected by stable earning
Answer: a

Question: A decision to acquire a new and modern plant to upgrade an old one is a:
a) Financing decision
b) Working capital decision
c) Investment decision
d) None of the above
Answer: c

Question: Gross working capital refers to:
a) Investment in Fixed Assets
b) Investment in Current Assets
c) Investment in Bank
d) All of the above
Answer: b

Question: Current assets of a business firm should be financed through:
a) Current liability only
b) Long-term liability only
c) Both long and short-term liabilities
d) Shareholders’ funds
Answer: a

Question: Operating cycle starts with:
a) Procurement of raw material
b) Manufacturing of goods
c) Realize cash from debtors
d) Payment to creditors
Answer: a

Question: Factors affecting dividend decisions are:
a) Return on investment
b) Flotation cost
c) Legal constraints
d) Control consideration
Answer: c

Question: Working capital refers to:
a) Excess of current assets over current liabilities
b) Excess of current liabilities over current assets
c) Excess of fixed assets over current liabilities
d) Excess of current assets over fixed assets
Answer: a

Question: Higher working capital usually results in:
a) Higher current ratio, higher risk and higher profits
b) Lower current ratio, higher risk and lower profits
c) Higher equity, lower risk and lower profits
d) Lower equity, lower risk and higher profits
Answer: a

Question: The cheapest source of finance is:
a) Debenture
b) Equity share capital
c) Preference share
d) Retained earnings
Answer: d

Question: Companies with a higher growth pattern are likely to:
a) Pay lower dividends
b) Pay higher dividends
c) Dividends are not affected by growth considerations
d) None of the above
Answer: a

Question: Financial leverage is called favorable if:
a) Return on investment is lower than the cost of debt
b) Return on investment is higher than the cost of debt
c) Debt is easily available
d) If the degree of existing financial leverage is low
Answer: b

Question: The extent of retained earning is influenced by which decision:
a) Investment decision
b) Dividend decision
c) Working capital decision
d) Financing decision
Answer: b

Question: A fixed asset should be financed through:
a) A long-term liability
b) A short-term liability
c) A mix of long and short-term liabilities
d) Current liability
Answer: a

Question: Return on investment is computed as:
a) Total Investment × EBIT
b) EBIT × EBT
c) EBIT ÷ Total Investment
d) EBT ÷ Total Investment
Answer: c

Question: Acquiring a new fixed asset is an example of:
a) Capital budgeting decisions
b) Dividend decision
c) Financing decision
d) Working capital decision
Answer: a

Question: What is the other name of long-term decision?
a) Capital Budgeting
b) Gross Working Capital
c) Financial Management
d) Working Capital
Answer: a

Question: Working capital decisions are concerned with the decision of:
a) Control
b) Debt
c) Inventory
d) Equity
Answer: c

Question: Higher dividend per share is associated with:
a) High earnings, high cash flows, unstable earnings and higher growth opportunities
b) High earnings, high cash flows, stable earnings and high growth opportunities
c) High earnings, high cash flows, stable earnings and lower growth opportunities
d) High earnings, low cash flows, stable earnings and lower growth opportunities
Answer: c

Question: Other things remaining the same, if fixed operating cost is high the firm would opt to raise finance from:
a) Debentures
b) Bills receivable
c) Equity shares
d) Commercial paper
Answer: c

Fill In The Blanks:

Question: Another name for long term investment decision is ____________ .
Answer: capital budgeting

Question: High Interest coverage ratio means companies can have more ____________ funds.
Answer: borrowed

Question: Fixed capital is related to____________.
Answer: investment decision

Question: Current assets get converted into____________ cash within an accounting year.
Answer: cash

Question: If earning is higher, then company declares ____________ rate of dividend.
Answer: high

Question: Favourable financial leverage is when____________ is greater than rate of interest on debt.
Answer: Return on Investment

Question: If tax on dividend is higher, Company pay _______by way of dividend.
Answer: less

Question: Capital structure includes proportion of ____________ and equity.
Answer: debt

Question: Selection of asset related to ____________ decision.
Answer: investment

Question: Capital structure is a mix of _____&____.
Answer: debt ,equity

True / False :

Question: Financial planning provides a link between investment and financing decisions .
Answer: True

Question: Capital budgeting decision has a direct impact on liquidity as well as profitability of a business
Answer: False

Question: Gross working capital refers to the investment in all the current liabilities.
Answer: False

Question: Flotation cost is the cost involved in the issue of shares and debentures.
Answer: True

Question: Capital structure means the portion of current assets and current liabilities.
Answer: False

Question: Companies having good growth opportunities usually declare higher dividend.
Answer: False

Question: If a company followsl abour intensive technique in production, they will go for less requirement of fixed capital.
Answer: True

Question: Provisions of Companies Act must be adhered while declaring dividend .
Answer: True

Question: A company employs more of debt securities in its capital structure if company is sure of generating enough cash inflows.
Answer: True

Question: Higher Inventory to be maintained when more working capital is required.
Answer: True

Match the following :

Question: Match the factors affecting following Financial decision
a. Dividend decisions            l Stock market condition
b. Financial decisions           ll Share holder preference
                                             lll cash flow of the project
Answer: a-ll ,b- ll

Question: Match the impact created by taking following decisions
a. Capital budgeting decisions           l Affects liquidity and profitability
b. Working capital decision.              ll Increase the financial risk of company
c. Dividend decisions.                      lll Increase in size of assets
d. Financing decision                      IV affects retained
Answer: a-lll ,b-l ,c-lV ,d-ll

Question: Match the factor affecting following financial decisions
a. Dividend decision.             I lnvestment criteria
b. lnvestment decision           ll Controlconsideration
c. Financing decision             lll Stability of earning
Answer: a-lll ,b-l ,c-ll

Question:
a. External source of finance is            l Debenture
b. Internal source of finance is            ll Retained earnings
                                                            lll Fixed Assets
Answer: a-l ,b- ll

Question: Match the factors which affects decisions
a. Fixed capital           l Technology upgradation
                                  ll amount of working capital
Answer: a-l

Question:Match the concept with related formulas:
a. ICR.                                    l EAT/number of shares
b Return on investment            ll EBIT/interest
c. Capital structure                  lll Debt/ Debt+Equity
d. EPS.                                   IV EBIT/Capital investment*100
Answer: a-ll ,b-IV ,c-lll ,d-l

Question: Match the factors affecting decisions
a. working capital                l availability of raw material
                                           ll Financing alternatives
Answer: a-l

Question: match the impact of leverage
a. Favourable financial lever age               l Decrease in EPS due to debt component
b. Unfavourable financial lever age           ll Affects retained earning
                                                                 lll Increase in EPS due to debt component
Answer: a-lll,b-l

Question: Match the source of finance with risk and cost
a. Debt                       l Higher cost
b. Equity shares        ll Higher cost and higher risk
                                 lll lower cost
Answer: a-lll ,b- l

Question: Match the following on the basis of financial concept
a flotation cost.                    l risk of default on payment
b. Financial planning           ll proportion ofdebt in total capital structure
c. Financial leverage           lll Cost of raising funds
d. Financial risk                  lV Process of estimating the requirement ofunds and specifying the source of funds
Answer: a-lll ,b-lV, c- ll ,d-l