Financial Management — Part 1 MCQs with Explanations

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.

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.

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.

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.

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

National savings certificate is not a money market securities. The National Savings Certificate is a fixed income investment scheme that you can open with any post office.

Capital budgeting is related to long terms assets. Capital budgeting is the process a business undertakes to evaluate potential major projects or investments.

The expansion of CAPM is Capital asset pricing model. The capital asset pricing model (CAPM) is used to calculate the required rate of return for any risky asset.

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.

The company’s average cost of capital is the average cost of shares and all sources of long-term funds. A long-term investment is an account on the asset side of a company's balance sheet that represents the company's investments, including stocks, bonds, real estate and cash. Long-term investments are assets that a company intends to hold for more than a year.

The underwriter has to take up the unsubscribed part of the agreed portion. The underwriter undertakes the guarantee for only part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him.

Future value interest factor takes Compounding rate. Future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth.

The Financial Leverage (FL) measures the relationship between the EBIT and the EPS and it reflects the effect of change in EBIT on the level of EPS. The FL measures the responsiveness of the EPS to a change in EBIT and is defined as the % change in EPS divided by the % change in EBIT. Symbolically, = Increase in EPS ¸EPS/Increase in EBIT¸EBIT

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.

Present value takes Discounting rate. Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.

Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate the break-even point of a business, as well as the likely profit levels on individual sales.

An example of a derivative security is a call option on Mobil stock and a commodity futures contract. A derivative security is a financial instrument whose value depends upon the value of another asset.

Financial leverage helps one to estimate financial risk. Financial leverage which is also known as leverage or trading on equity, refers to the use of debt to acquire additional assets.

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.

The Combined Leverage (CL) is not a distinct type of leverage analysis, rather it is a product of the Operating Leverage and the Financial Leverage. The CL may be defined as the % change in EPS for a given % change in the sales level and may be calculated as follows: Combined Leverage = Operating Leverage x Financial Leverage = % Change in EPS / % Change in sales

Most investors are risk averse which means they avoid the stock market due to the high degree of risk. A risk-averse investor, on the other hand, dislikes risk and, thus, stays away from high-risk stocks or investments and is prepared to forego higher rates of return.

A company's cost of capital is simply the cost of money the company uses for financing. If a company only uses current liabilities and long-term debt to finance its operations, then it uses debt and the cost of capital is usually the interest rate on that debt.The cost of capital is also called the hurdle rate.

Treasury bills would be considered a risk-free investment. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less.

Cost of retained earnings is equal to Cost of equity. The cost of retained earnings is the earnings foregone by the shareholders. In other words, the opportunity cost of retained earnings may be taken as the cost of retained earnings.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns.

Operating incomes and the discount rate of a particular risk class are the 2 factors determining Independence hypothesis. The Independence hypothesis is a proposed solution to the synoptic problem. It holds that Matthew, Mark, and Luke are each original compositions formed independently of each other, with no documentary relationship.

The largest single institutional owner of common stocks is mutual funds. Mutual fund is an entity that pools money of large number of investors to invest in different securities.

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.

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.

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.

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.

Treasury bills are traded in the money market. The money market is the trade in short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders.

The cost of capital of a long term debt is generally Higher than that of owned funds. Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.

A 6-month Treasury bill would not be considered as capital market security. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less.

Net working capital is a liquidity calculation that measures a company’s ability to pay off its current liabilities with current assets.

Coupon rate is the rate of interest paid by bond issuers on the bond's face value. It is the periodic rate of interest paid by bond issuers to its purchasers.

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

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.

If an investor states that Intel is overvalued at 65 times, he is referring to P/E ratio. The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

When a company uses increased fixed cost for production, this is an example of operating leverage. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.