Multiple Choice Questions of Financial Management

1. Investment is the 

A. net additions made to the nation’s capital stocks

B.person’s commitment to buy a flat or house   

C.employment of funds on assets to earn returns

D.employment of funds on goods and services that are used in production process

Answer: Option C

Solution:

Investment is the employment of funds on assets to earn returns. An investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. 

2. Financial management is mainly concerned with.... 

A.All aspects of acquiring and utilizing financial resources for firms activities

B.Arrangement of funds

C.Efficient Management of every business

D.Profit maximization

Answer: Option A

Solution:

Financial Management is mainly concerned with all aspects of acquiring and utilizing financial resources for firms activities. Financial Management is the application of general principles of management to the financial possessions of an enterprise.

3.The primary goal of the financial management is ............... 

A.to maximize the return

B.to minimize the risk

C.to maximize the wealth of owners

D.to maximize profit

Answer: Option C

Solution:

The primary goal of the financial management is to maximize the wealth of owners. All businesses aim to maximize their profits, minimize their expenses and maximize their market share.

4. In his traditional role the finance manager is responsible for ................ 

A.proper utilisation of funds

B.arrangement of financial resources

C.acquiring capital assets of the organization

D.efficient management of capital

Answer: Option B

Solution:

In his traditional role the finance manager is responsible for arrangement of financial resources. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization.

5. Market value of the share are decided by ............... 

A.the respective companies

B.the investment market

C.the government

D.shareholders

Answer: Option B

Solution:

Market value of the shares are decided by the investment market. Market value is the price an asset would fetch in the marketplace.

6.Working capital management is managing.......... 

 A.short term assets and liabilities

B.long term assets

C.long terms liabilities

D.only short term assets

Answer: Option A

Solution:

Working capital management is managing short term assets and liabilities. The goal of working capital management is to ensure that a company can afford its day-to-day operating expenses while, at the same time, investing the company's assets in the most productive way.

7.   .................... are financial assets. 

A. Bonds

B.Machines

C.Stocks

D.A and C

Answer: Option D

Solution:

A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.

8. Traditional approach confines finance function only to ................... funds. 

A.raising

B.mobilizing

C.utilizing

D.financing

Answer: Option A

Solution:

The traditional approach to the finance function relates to the initial stages of its evolution during 1920s and 1930s. According to this approach, the scope, of finance function was confined to only procurement of funds needed by a business on most suitable terms.
The utilisation of funds was considered beyond the purview of finance function. It was felt that decisions regarding the application of funds are taken somewhere else in the organisation. However, institutions and instruments for raising funds were considered to be a part of finance function.

9. EBIT is usually the same things as......... 

 A.funds provided by operations   

B.earnings before taxes

C.net income

D.operating profit

Answer: Option D

Solution:

EBIT is usually the same thing as operating profit. Earnings before interest and taxes (EBIT) is a company's net income before income tax expense and interest expense have been deducted. EBIT is used to analyze the performance of a company's core operations without tax expenses and the costs of the capital structure influencing profit.

10. The decision to invest a substantial sum in any business venture expecting to earn a minimum return is called 

A.working capital decision

B.an investment decision

C.a production decision

D.a sales decision

Answer: Option B

Solution:

The decision to invest a substantial sum in any business venture expecting to earn a minimum return is called an investment decision. The Investment Decision relates to the decision made by the investors or the top level management with respect to the amount of funds to be deployed in the investment opportunities.

11. Savings accounts are .................  but are not ................... 

 A.negotiable; liquid

B.marketable; liquid

C.liquid; personal

D.liquid; marketable

Answer: Option D

Solution:

Savings accounts are liquid but are not marketable. Marketable securities and money market holdings are considered cash equivalents because they are liquid and not subject to material fluctuations in value.

12. The available Capital funds are to be carefully allocated among competing projects By careful prioritization . This is called............ 

A.capital positioning

B.capital structuring

C.capital rationing

D.capital budgeting

Answer: Option D

Solution:

The available capital funds are to be carefully allocated among competing projects by careful prioritization. This is called capital budgeting. Capital budgeting is the process a business undertakes to evaluate potential major projects or investments.

13.  Dividends are paid ........... 

A.monthly

B.quarterly

C.semi-annually

D.yearly

Answer: Option D

Solution:

Dividends are paid yearly. A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.

14. Long term fund sources are......... 

A.Retained earnings   

B.Debentures

C.Share capital

D.All of the above

Answer: Option D

Solution:

Long term fund sources are Retained earnings, Debentures and Share capital. A long/short fund is a type of mutual fund that takes long and short positions in investments typically from a specific market segment.

15. Short term sources are........ 

A.Bank credit

B.Public deposit

C.Commercial papers

D.All of the above

Answer: Option C

Solution:

Short term sources are Commercial papers. Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll) and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note.

16. Marketable securities are primarily............. 

A.short-term debt instruments

B.short-term equity securities

C.long-term debt instruments

D.long-term equity securities

Answer: Option A

Solution:

Marketable securities are primarily short-term debt instruments. Marketable securities are securities or debts that are to be sold or redeemed within a year. These are financial instruments that can be easily converted to cash such as government bonds, common stock or certificates of deposit.

17.  Which of the following is not an objective of financial management? 

A.Maximization of wealth of shareholders

B.Maximization of profits

C.Mobilization of funds at an acceptable cost

D.Ensuring discipline in the organization.

Answer: Option D

Solution:

Ensuring discipline in the organization. is not an objective of financial management.

18. The objective of financial management is.............. 

A.generate the maximum net profit

B.generate the maximum retained earnings

C.generate the maximum wealth for its shareholders

D.generate maximum funds for the firm at the least cost.

Answer: Option C

Solution:

The objective of financial management is to generate the maximum wealth for its shareholders. Financial Management is the application of general principles of management to the financial possessions of an enterprise. Proper management of an organization's finance provides quality fuel and regular service to ensure efficient functioning.

19. Net working Capital refers to....... 

A.total assets minus fixed assets

B.current assets minus current liabilities

C.current assets minus inventories

D.current assets.

Answer: Option B

Solution:

Net working capital refers to current assets minus current liabilities. Working capital, also known as net working capital (NWC), is the difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

20. Traditional theorists believe that . 

A.there exists an optimal capital structure

B.no optimal capital structure

C.equal optimal capital structure

D.100% debt financial organizations

Answer: Option A

Solution:

Traditional theorists believe that there exists an optimal capital structure. An optimal capital structure is the objectively best mix of debt, preferred stock, and common stock that maximizes a company's market value while minimizing its cost of capital.

21. Which of the following is an argument for the relevance of the dividends ? 

A.Informational content

B.Reduction of uncertainty

C.Some investors' preference for current income

D.All of the above.

Answer: Option D

Solution:

Informational content, Reduction of uncertainty and Some investors' preference for current income is an argument for the relevance of dividends.

22. Retained earnings are........ 

A.an indication of a company's liquidity

B.the same as cash in the bank

C.not important when determining dividends

D.the cumulative earnings of the company after dividends.

Answer: Option D

Solution:

Retained earnings are the cumulative earnings of the company after dividends. Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account.

23. Which of the following factor does not affect the Capital structure of the company ? 

A.Cost of capital

B.Composition of the current assets

C.Size of the company

D.Expected nature of cash flows

Answer: Option B

Solution:

Composition of the current assets does not affect the capital structure of a company. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

24. In finance, the working Capital means the same things as 

A.Total assets

B.Fixed assets

C.Current assets

D.Current assets minus current liabilities.

Answer: Option D

Solution:

In finance, "working capital" means the same thing as current assets minus current liabilities. Working capital is the amount of cash a business can safely spend. It's commonly defined as current assets minus current liabilities.

25. The debt- equity ratio of a company 

A.Measure its financial leverage

B.Does not affect the Earnings per share

C.Affects the dividend decision of the company

D.None of the above. 

Answer: Option A

Solution:

The Debt-Equity ratio of a Company measure its financial leverage. The debt-to-equity (D/E) ratio is calculated by dividing a company's total liabilities by its shareholder equity.

26.Shareholder Wealth in a firm is represented by 

A.the number of people employed in the firm

B.the book value of the firm's assets less the book value of its liabilities

C.the amount of salary paid to its employees

D.the market price per share of the firms common stock

Answer & Solution

Answer: Option D

Solution:

Shareholder wealth in a firm is represented by the market price per share of the firms common stock. Shareholder wealth is defined as the present value of the expected future returns to the owners (that is, shareholders) of the firm.

27.The long run objective Of financial management is to........... 

A.maximize earnings per share   

B.maximize the value of the firm's common stock

C.maximize return on investment

D.maximize market share

Answer & Solution

Answer: Option B

Solution:

The long-run objective of financial management is to maximize the value of the firm's common stock. Financial Management is the application of general principles of management to the financial possessions of an enterprise.

28.  ............... is concerned with the maximization Of a firm's stock price. 

A.Shareholder wealth maximization

B.Profit maximization

C.Stakeholder welfare maximization

D.EPS maximization

Answer & Solution

Answer: Option A

Solution:

Shareholder wealth maximization is concerned with the maximization of a firm's stock price. The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm.

29.The cash management refers to management of 

A.cash only

B.cash and bank balances

C.cash and near cash assets

D.fixed assets

Answer & Solution

Answer: Option C

Solution:

The cash management refers to management of cash and near cash assets. Cash management is the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. In business, it is a key component of a company's financial stability.

30. Book value is.......... 

A.the same as market value

B.a more accurate valuation technique than the dividend models

C.the accounting value of the firm as reflected in the financial statements

D.the same as liquidation value

Answer & Solution

Answer: Option C

Solution:

Book value is the accounting value of the firm as reflected in the financial statements. Book value is also the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities.

31.What is the most appropriate goal of the Firm? 

A.Shareholder wealth maximization

B.Profit maximization

C.Stakeholder maximization

D.EPS maximization

Answer & Solution

Answer: Option A

Solution:

Shareholder wealth maximization is the most appropriate goal of the firm. Wealth maximization is the concept of increasing the value of a business in order to increase the value of the shares held by stockholders. 

32.  ................ is concermed with the acquisition, financing and management Of assets with some overall goal in mind. 

A.Financial management

B.Profit maximization

C.Agency theory

D.Social responsibility

Answer & Solution

Answer: Option A

Solution:

Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Financial Management is the application of general principles of management to the financial possessions of an enterprise.

33.  ................ is the distribution of the profits Of a company among its shareholders. 

A.Shares

B.Interest

C.Dividend

D.Commission

Answer & Solution

Answer: Option C

Solution:

Dividend is the distribution of the profits of a company among its shareholders. A dividend is the distribution of reward from a portion of the company's earnings and is paid to a class of its shareholders.

34. Excess working capital results in......... 

A.Block of cash

B.Loosing interests

C.Lack of production

D.Lack of smooth flow of production

Answer & Solution

Answer: Option A

Solution:

Excess working capital results in Block of cash. Excess working capital overall, though, is bad because it means that the amount of money available within the company is much more than what it needs for its operations.

35. The market value of the Firm is the results of.............. 

A.dividend decisions

B.working capital decisions

C.capital budgeting decisions

D.trade-off between cost and risk

Answer & Solution

Answer: Option D

Solution:

The market value of the firm is the result of trade-off between cost and risk. Market value is the price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization of a publicly traded company, and is obtained by multiplying the number of its outstanding shares by the current share price.

36. Effective cost of debentures is................ as compared to shares 

A.higher

B.lower

C.equal

D.medium

Answer & Solution

Answer: Option B

Solution:

Effective cost of debentures is lower as compared to shares. Cost of debt refers to the effective rate a company pays on its current debt.

37.  ............ is the example of financial Intermediaries. 

A.Commercial banks

B.Investment bank

C.Insurance companies

D.All of the above

Answer & Solution

Answer: Option D

Solution:

Commercial banks, Investment bank and Insurance companies are example of financial intermediaries.

38. Financial assets.......... 

A.directly contribute to the country's productive capacity

B.indirectly to the country's productive capacity

C.contribute to the country's productive capacity both directly and indirectly

D.do not contribute to the country's productive capacity either directly or indirectly

Answer & Solution

Answer: Option A

Solution:

Financial assets directly contribute to the country's productive capacity. A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.

39. Which of the following is not the source of Long - term finance? 

A.Equity shares

B.Preference shares

C.Commercial papers

D.Reserves and surplus

Answer & Solution

Answer: Option C

Solution:

Commercial papers is not a source of long-term finance. Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts payable and inventories and meeting short-term liabilities.

40. The permanent financing of an entity represented primarily by long-term finance is known as:

(a) Capital structure

(b) Working capital

(c) Financial structure

(d) Watered capital

Ans-(a) Capital structure

41.The process of determining funds that an entity needs to run its business is called

(a) Capitalization

(b) Quantitative analysis

(c) Financing

(d) Utilisation

Ans-(a) Capitalization

42. The wealth in the form of money which is invested in a business to generate income is
known as:
(a) Capital
(b) Insurance
(c) Value
(d) Donation
Ans-(a) Capital
43. The process of buying a security or asset in one market at lower price and selling the
same in another market at a higher price is known as:
(a) Bargaining
(b) Insider trading
(c) Arbitrage
(d) None of these
Ans-(c) Arbitrage
44. The composition of long term sources of finance making the capitalization is known as
(a) Financial structure
(b) Market Structure
(c) Capital structure
(d) None of these
Ans-(c) Capital structure
45. The amount of capital that is not represented by the same value of assets of an entity at the time of its promotion is its:
(a) Promotion capital
(b) Fixed capital
(c) Working capital
(d) Watered capital
Ans-(d) Watered capital
46. The main factors which affect the capital structure decision of an entity are:
(a) Financial Leverage
(b) Cost of Capital
(c) Nature of Assets
(d) All of these
Ans-(d) All of these
47. The total of short term and long term sources of finance of an entity is its:
(a) Capital structure
(b) Financial structure
(c) Money Structure
(d) Short term structure
Ans-(b) Financial structure
48. The money invested in long term economic resources or assets is known
(a) Working capital
(b) Share Capital
(c) Fixed capital
(d) Debenture Capital
Ans-(c) Fixed capital
49.What is the preference of an entity having short period of operation for reduce
its cost of capital?
(a) Derivatives to debt
(b) Equity to debt
(c) Debt to equity
(d) None of these
Ans-(c) Debt to equity
50. Management, which is experienced and 
very enterprising, does not hesitate to use more
(a) Debt
(b) Earnings
(c) Equity
(d) None of these
Ans-(a) Debt
51.Equity shares are known as:
(a) Debt securities
(b) Ownership securities
(c) Both
(d) None of the above
Ans-(b) Ownership securities
52. Which markmarketvide finance for short 
term purpose ?
(a) Money market
(c) Capital market
(b) Both of these
(d) None of these
Ans-(a) Money market
53.The smallest unit of the capital is known as:
(a) Share
(b) Unit
(c) Account
(d) Bond
Ans-(a) Share
54.The permanent financing of an entity represented primarily by long-term finance is known as:
(a) Capital structure
(b) Working capital
(c) Financial structure
(d) Watered capital
Ans-(a) Capital structure
55. Funds are financial resources in the form of:
(a) Corporate capital
(b) Business funds
(c) Cash Equivalents
(d) All of these
Ans- (d) All of these