12 BSt - Financial Management Test 1

12 BSt – Financial Management Test 1

The number of attempts remaining is 3

Compare RoI with cost of debt.

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1. If a company’s Return on Investment (RoI) is 6.67% and the interest rate on debt is 10%, what situation regarding financial leverage results?

1. Neutral financial structure

2. Favourable financial leverage

3. Optimal capital structure

4. Unfavourable financial leverage

Focus on how funds are procured.

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2. Which major financial decision determines the overall cost of capital and the financial risk of the enterprise?

1. Working Capital Decision

2. Dividend Decision

3. Financing Decision

4. Investment Decision

Look for the related market concept.

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3. The primary aim of financial management is to maximize shareholders’ wealth, which means maximizing:

1. Current ratio

2. Current price of equity shares

3. Net profit ratio

4. Total assets

Consider the long-term impact on profitability.

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4. Which major financial decision impacts virtually all items in the profit and loss account, such as interest expense and depreciation?

1. Financing Decision

2. Working Capital Decision

3. Investment Decision

4. Liquidity Decision

Relates to operating expenses.

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5. Which type of cost, if high (e.g., building rent, salaries), suggests that a company should prefer lower debt financing to reduce fixed financing costs?

1. Interest Expenses

2. Fixed Operating Costs

3. Variable Operating Costs

4. Floatation Costs

Relates to preparation of a blueprint.

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6. The process of estimating the fund requirement of a business and specifying the sources of funds is called:

1. Capital Budgeting

2. Financial Planning

3. Capital Structure

4. Working Capital Management

Focus on resource allocation in assets.

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7. Which decision relates to how the firm’s funds are invested in different assets, aiming to earn the highest possible return?

1. Retained Earnings Decision

2. Financing Decision

3. Working Capital Decision

4. Investment Decision

Recall the twin objectives.

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8. Which of the following is NOT an objective of financial planning?

1. See that the firm does not raise resources unnecessarily

2. Forecast likely shortages and surpluses

3. Maximise shareholders' wealth

4. Ensure availability of funds when required

Focus on the ratio addressing cash flow deficiencies of ICR.

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9. What financial tool, used in capital structure planning, compares cash profits generated by operations with the total cash required for the service of debt and preference share capital?

1. Debt Service Coverage Ratio (DSCR)

2. Return on Investment (RoI)

3. Interest Coverage Ratio (ICR)

4. Debt-Equity Ratio

Relates to using fixed charge funds advantageously.

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10. The concept where the cost of debt is lower than the return the company is earning on funds employed, leading to an increase in Earnings Per Share (EPS), is known as:

1. Financial Risk Management

2. Wealth Maximisation

3. Financial Planning

4. Trading on Equity

Relates to tackling uncertainty.

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11. Which concept helps a firm to face eventual situations better by preparing alternative financial plans to meet different situations (e.g., varying growth rates)?

1. Capital Structure Analysis

2. Capital Budgeting Decision

3. Trading on Equity

4. Financial Planning

Consider the obligatory nature of payment.

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12. Which source of finance is considered riskless for the business because there is no compulsion regarding payment of returns or repayment of capital?

1. Debt

2. Equity

3. Preference Share Capital

4. Retained Earnings

Consider management of current components.

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13. What is the composition of current assets often influenced by, besides fixed asset investment?

1. Growth Prospects

2. Capital Budgeting

3. Credit and Inventory Management

4. Financing Decision

Defines a core operational cycle.

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14. What is the time span between the receipt of raw material and their conversion into finished goods known as?

1. Production Cycle

2. Business Cycle

3. Lead Time

4. Inventory Conversion Period

Focus on the difficulty of reversal.

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15. Why is it stated that Investment (Capital Budgeting) decisions are irreversible?

1. They involve small amounts of funds

2. They only affect short-term profits

3. They cannot be reversed without incurring heavy losses

4. They involve only current assets

Look for the ratio measuring interest servicing capability.

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16. Which ratio refers to the number of times earnings before interest and taxes (EBIT) of a company covers the interest obligation?

1. Debt-Equity Ratio

2. Debt Service Coverage Ratio

3. Interest Coverage Ratio

4. Current Ratio

Focus on actual cash available.

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17. In the context of dividend decisions, what financial statements factor provides the necessary resources, as dividend payment involves an outflow of cash?

1. Growth Opportunities

2. Stability of Earnings

3. Amount of Earnings

4. Cash Flow Position

Connects debt usage to shareholder expectation.

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18. If a company increases its debt, the financial risk faced by the equity holders increases. Consequently, their desired rate of return may also increase. This factor relates to:

1. Regulatory Framework

2. Tax Rate

3. Floatation Costs

4. Cost of Equity

Focus on the time frame of conversion.

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19. What type of assets are expected to get converted into cash or cash equivalents within a period of one year?

1. Intangible Assets

2. Current Assets

3. Long-Term Investments

4. Fixed Assets

Focus on the key comparisons for procurement.

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20. For optimal procurement of finance, available sources are identified and compared primarily in terms of their:

1. Market performance and stability

2. Profitability and liquidity

3. Costs and associated risks

4. Control and flexibility

This relates to long-term asset allocation.

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21. A long-term investment decision involving commitment of finance on a long-term basis, such as acquiring a new fixed asset, is also called a:

1. Working Capital Management

2. Capital Budgeting decision

3. Financing decision

4. Dividend decision

Focus on tax implications.

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22. According to financial management principles, debt is cheaper than equity because:

1. Lenders charge a higher rate of return

2. Debt capital never requires repayment

3. Interest on debt is a tax-deductible expense

4. Interest payment is not obligatory

Relates market condition to financing choice.

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23. In a scenario where financial markets are depressed (bearish phase), a company may find raising equity capital difficult. In such a situation, the company may opt for:

1. Higher Equity

2. Debt

3. Internal Accruals

4. Preference Shares

Relates to choice of technique.

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24. If a business requires lower investment in fixed assets because it relies less on plant and machinery and more on manual labour, it is described as:

1. Capital-intensive

2. Labour-intensive

3. Technology-intensive

4. Diversified