Financial Management Question Bank

Financial Management Question Bank

Q. What is financial management?

Q. What is the role of financial management?

Q. What are the main financial decisions taken by the financial manager?

Q. What are the objectives of financial management?

Q. What is financial planning?

Q. Write the main aspects of financial planning.

Q. Write the main objectives of financial planning.

Q. Explain the factors to be considered for financial planning.

Q. Classify types of financial plans on the basis of time period.

Q. What are the steps in the process of financial planning?

Q. What is the importance of financial planning?

Q. Define : capital structure, financial leverage, capital gearing, trading on equity.

Q. Illustrate the working of trading on equity.

Q. What are the main implications of financial leverage?

Q. What are the main conditions of working of capital gearing or trading on equity?

Q. What are the main factors affecting capital structure?

Q. What is fixed capital?

Q. What is capital budgeting decision?

Q. Give the importance of capital budgeting decision.

Q. What is working capital?

Q. What are the concepts of gross working capital and net working capital?

Q. Define the terms: current assets and current liabilities.

Q. What is working capital decision?

Q. Write the importance of working capital decision.

Q. What are the factors affecting the requirement of working capital by a business enterprise?

Q. What is financing decision?

Q. Define the terms; shareholders’ funds, borrowed funds, financial risks.

Q. What precautions must be taken while taking financing decisions?

Q. What is floatation cost?

Q. What are the factors affecting financing decisions?

Q. What is dividend?

Q. What is dividend decision?

Q. What are the factors affecting dividend decision?

Q. What is Debt Equity ratio?

Q. Why is debt considered cheaper but risky?

Q. Define optimal capital structure.

Q. What is the difference between fixed assets and current assets?

Q. What are the sources of fixed capital?

Financial Management Question Bank

Q. What are the factors to be considered to estimate the requirement of fixed capital by a business enterprise?

Q. Under which situation the EPS of a company falls with increased use of debt? Explain with the help of an example.

Q. A company wants to establish a new unit in which a machinery worth Rs.10 lakhs is involved. Identify the type of decision involved in financial management.

Q. A decision is taken to raise money for long term capital needs of the business from certain sources. What is this decision called?

Q. A decision is taken to distribute certain parts of the profit to shareholders after paying tax. What is this decision called?

Q. Name the source of finance carrying two fixed obligations viz., interest and redemption.

Q. In case of inflation, does an enterprise need more or less of the working capital?

Q. Identify the decision taken in financial management which affects the liquidity as well as the profitability of business.

Q. State why the working capital needs for a service industry are different from that of a manufacturing industry.

Q. To avoid the problem of shortage and surplus of funds what is required in financial management? Name the concept and explain its any three points of importance.

Q. How does loan components or debentures in the capital structure act as lever to raise the return on equity share capital?

Q. Explain how the shareholders are likely to gain with the loan component in capital employed with example.

Q. The directors of a manufacturing company are thinking of issuing ₹ 20 lakhs additional debentures for expansion of their production capacity. This will lead to an increase in debt-equity ratio from 2:1 to 3:1. What are the risks involved in it?

Q. A businessman who wants to start a manufacturing concern, approaches you to suggest him whether the following manufacturing concern would require large or small working capital:(a) Bread (b) Coolers (c)Sugar (d) Motorcar (e) Furniture manufactured against specific orders (f) Locomotives.

Q. A manufacturing company raised funds worth ₹ 10,00,000 and they used funds for purchasing fixed assets. Later, it was found that they did not have sufficient money to purchase raw material and to pay creditors and other expenses. Do you think this decision is a wise decision?

Q. Investors generally view increase in dividend declared as a positive note, and stock prices react positively to it but on the other side Companies Act places certain restrictions on payouts as dividend. These restrictions are adhered to while declaring the dividend. Why are such restrictions imposed?

Q. Identify the factor affecting dividend decision under which investor considers the increase in dividend as a good decision.

Financial Management Question Bank

Write the values followed or ignored in the following cases:(Not in CBSE pattern now)

Q. A company having earned heavy profits with less scope of expansion in future has decided to pay a very less dividends.

Q. A company wants to show higher profit and for this: Depreciation was charged at lower rates, whereas Goodwill, Patents, Trademarks and other intangible assets were shown at higher value.

Q. A wholesaler of onion comes to know that due to less production the prices of onion will increase heavily. He stores the onion and during rising prices, earn heavy profits by selling the stored onion. From the earned profits he provides some money to the people of his region willing to send their girls to school who otherwise go to houses for earning by cleaning.

Q. A manufacturing company raised finance worth ₹ 5,00,000 from shareholders' funds and borrowed funds, out of this amount ₹ 1,00,000 is used by the finance manager for his personal use.

Financial Management Question Bank

MCQs from CBSE Sample Papers

Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from those given below:

Assertion(A): Financial Planning aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds.

Reason(R): Capital structure refers to the mix between owners’ and borrowed funds

Alternatives :

Both Assertion (A) is false and Reason (R) are true.
Both Assertion (A) and Reason (R) are false.
*Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion.
Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion

Identify the incorrect statement with respect to ‘Investment decision’:

Net working capital refers to excess of current assets over current liabilities
Current assets are those assets which get converted into cash within one year
Capital budgeting decisions are irreversible.
*Size of the assets, Profitability and competitiveness are not affected by capital budgeting decisions.

Identify the decision which is not taken under financial management.

Dividend Decision
Capital Budgeting Decision
*Pricing Decision
Both 2 and 3

What are the factors that affect financing decisions?

(a) Cash flow position of the company

(b) Stability of earnings

(d) Contractual constraints

(e) State of capital market

(f) Level of competition

Choose the correct alternative from the following:

(b), (c) and (f)
(d), (e) and (f)
(a), (c) and (d)
*(a), (c) and (e)

Read the following statements carefully:

Statement I: Cost of debt is lower than cost of equity for a company.

Statement II: The objective of financial management is to increase shareholder’s wealth.

In the light of given statements, choose the correct alternative from the following:

*Both the statements are true.
Both the statements are false.
Statement I is true, Statement II is false.
Statement II is true, Statement I is false.

The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1. However, at the same time it would increase the Earnings per share. The reason that will justify the above situation is:

Unfavourable financial leverage, as the financial risk will be higher.
Unfavourable financial leverage, as return on investment is lower than the cost of debt.
Favourable financial leverage as debt is easily available
*Favourable financial leverage, as return on investment is higher than cost of debt

Financial Management Question Bank

Case Based Questions:

Read the following text and answer the following questions on the basis of the same:

Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of ₹60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.

Q.1 Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.

Capital Budgeting
*Capital Structure
Dividend Decision
Working Capital Decision

Q.2 In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debt-equity ratio results in:

Lower financial risk
Higher degree of operating risk
*Higher degree of financial risk
Higher Earning of profit.

Q.3 “Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)” The proportion of debt in the overall capital is called___________.

Working Capital
*Financial Leverage
Total Assets
None of these

Q.4 Employ more of cheaper debt may enhance the EPS. Such practice is called:

Equity Trading
Financial Leverage
Investment Decision
*Trading on Equity

Financial Management Question Bank

Case based Question

Read the following text and answer the following questions on the basis of the same:

Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹8,00,000 and total capital investment was ₹1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The financial manager of the company would normally opt for a source which is the cheapest.

Q.1 What is the other name of long term decision?

*Capital Budgeting
Gross working capital
Financial management
Working Capital

Q.2 A decision for replacing machines with modern machinery of higher production capacity is a:

Financing decision
Working capital decision
*Investment decision
None of the above

Q.3 A decision for raising fund of ₹80,00,000 either from 10% Debenture or Equity Shares is a:

*Financing decision
Dividend decision
Investment decision
None of the above

Q.4 The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case? Choose the correct option.

Cash Flow Position of the Company
*Cost
Amount of Earnings
Taxation Policy

Financial Management Question Bank

MCQs from CBSE Question Papers

Question:

'Mudro Infratech' got a short-term contract for building two villas within a period of ten months with the expectation to earn a huge amount of profit. The Works Manager accepted this challenge and completed the work within the given time period. The profit of the company went up by 40% due to this temporary order. The Finance Manager was aware that the company would not earn this huge profit in the near future. So, he decided not to increase dividend per share as earnings for the year had gone up, but not the earning potential of the company. He also knew that this increase in earnings was temporary in nature. The factor affecting Dividend Decision being highlighted above is:

Cash flow position
Shareholders' preference
Growth opportunities
*Stability of dividends

Question:

Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from the options given below:

Assertion (A): When the allocative function is performed well, scarce resources are allocated to those firms which have the highest productivity for the economy.

Reason (R): Allocative function allocates or directs funds into their most productive investment opportunity.

*Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
Assertion (A) is true, but Reason (R) is false.
Assertion (A) is false, but Reason (R) is true.

Question:

Statement 1: The objective of financial management is to maximize shareholders' wealth.

Statement II: The shareholders gain if the value of shares in the market increases.

Choose the correct option from the following:

Statement I is true and Statement II is false.
Statement II is true and Statement I is false.
*Both the Statements are true.
Both the Statements are false.

Question: Which of the following statements is correct for ‘short term investment decisions’ ?

They affect the earning capacity of a business in the long run.
These decisions normally involve huge amounts of investment.
*These decisions affect the liquidity as well as profitability of a business.
They are irreversible except at a huge cost.

Question: Statement I: Shareholders' funds involve commitment regarding the payment of returns or the repayment of capital.

Statement II: Debt is considered to be the cheapest of all the sources of funds and tax deductibility of interest makes it still cheaper.

Choose the correct option from the following:

Statement I is true and Statement II is false.
*Statement II is true and Statement I is false.
Both the Statements are true.
Both the Statements are false.

Question: Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from the options given below:

Assertion (A): While taking dividend decision, the extent of retained earnings also influences the financing decision of the firm.

Reason (R): The firm does not require funds to the extent of re-invested retained earnings.

*Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
Assertion (A) is true, but Reason (R) is false.
Assertion (A) is false, but Reason (R) is true.

Question:

Prashant started a grocery retail business. Due to increasing popularity of online shopping, the degree of competition is very high in this business. His requirement of working capital will be high as he would have to hold larger stocks of finished goods to meet urgent orders from customers. The factor affecting the requirement of working capital is: