Financial Management — Part 2 MCQs with Explanations

If a preferred stock issue is cumulative, this means unpaid dividends will be paid in the future.

When a company uses debt fund in its financial structure, it will lead to a change in Financial leverage. Financial leverage is the amount of debt that an entity uses to buy more assets. Leverage is employed to avoid using too much equity to fund operations.

Reduced expenses is not a characteristic of investments companies.

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.

A company having easy access to the capital markets can follow a liberal dividend policy. It is a policy of distributing a major part of its earnings to its shareholders as dividend and retains a minimum amount as retained earnings.

Fixed cost per unit changes according to volume of production. A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold.

Re-order level is higher than safety level. Reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

The most popular type of Investment Company is a mutual fund. A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.

Variable cost in an organization changes with the volume of production. A variable cost is a cost that changes in relation to variations in an activity. In a business, the "activity" is frequently production volume, with sales volume being another likely triggering event.

A unit investment trust (UIT) is a type of investment company that offers a fixed, unmanaged portfolio of securities, typically bonds or other fixed income instruments. Unlike actively managed funds, a UIT is not actively traded or adjusted by a fund manager after its creation; instead, it is held by an independent trustee who maintains the portfolio until maturity. This makes UITs distinct because they follow a buy-and-hold strategy , ensuring that the original composition of the portfolio remains largely unchanged over time. Therefore, an unmanaged fixed income security portfolio handled by an independent trustee is best described as a unit investment trust .

In financial management, variable cost per unit refers to costs that fluctuate in direct proportion to the level of output or production. Therefore, the correct option is A: varies with the level of output . Variable costs typically include expenses such as raw materials, labor, and utilities, which increase or decrease as production levels change. Option B: remains constant irrespective of the level of output This option describes a fixed cost rather than a variable cost. Fixed costs remain constant regardless of the level of output. They do not change with changes in production levels. Option C: changes with the growth of the firm This option doesn't accurately define variable cost per unit. Variable costs are related to production levels, not necessarily the growth of the firm. They increase or decrease with the quantity of output produced, not necessarily with the overall growth of the firm. Option D: does not change with volume of production This option describes a fixed cost rather than a variable cost. Variable costs do change with the volume of production. As more units are produced, variable costs increase, and they decrease when production levels decrease.

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.

The arbitrary process is the behavioral foundation for the MM approach. The MM approach favors the Net operating income approach and agrees with the fact that the cost of capital is independent of the degree of leverage and at any mix of debt-equity proportions.

Unit investment trusts, Closed-end investment companies and Open-end investment companies generally traded on stock exchanges.

A group of mutual funds with a common management are known as fund families. A mutual fund family is a group of mutual funds that share the same mutual fund sponsor.

Financial leverage is also known as Trading on equity. It is the balance between the cost financing operations with equity or debt and the income earned from the operations. In other words, it's a gamble.

Bonus share are not permitted unless the partly paid shares, if any, are made fully-paid. Bonus shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.

Net asset value takes into account both realized and unrealized capital gains. The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities.

A firm will have favourable leverage if its earnings are more than the debt cost. Financial leverage is favorable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt.

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

If the fund is traded at a price lower than the NAV, it is called “discount”. Similarly if the fund is traded at a price higher than the NAV it is called “premium”.

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.

Mutual funds may be affiliated with an underwriter. This means the underwriter has an exclusive right to distribute shares. A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

Operating leverage = contribution / EBIT. A firm's operating leverage is defined as the percentage change in the firm's operating earnings (EBIT less any non-operating income), that accompanies a percentage change in the contribution margin. That is, the operating income elasticity with respect to the contribution margin.

The Prospectus is a window through which the investor can see the company. A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public.

The traditional approach to capital structure advocates that there is a right combination of equity and debt in the capital structure, at which the market value of a firm is maximum. As per this approach, debt should exist in the capital structure only up to a specific point, beyond which, any increase in leverage would result in the reduction in value of the firm.

The principal is redeemable at maturity, A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event of liquidation and trustee is appointed to preserve the interest of the debenture holders are the factors why the debentures more attractive to the investors.

The formula of EBIT = Contribution - Fixed cost.

Investment bankers operate in the primary market. An investment banker is an individual who often works as part of a financial institution and is primarily concerned with raising capital for corporations, governments, or other entities.

No par stock means shares having no face value. this is issued in USA, UK and Canada.

A company may raise capital from the primary market through Public issue, Rights issue and Bought out deals.

Specialist exchange member is assigned to a specific trading post. A specialist is a person who is a member of a stock exchange, such as the New York Stock Exchange, whose role is to facilitate trading in certain stocks.

A fixed rate of Interest is payable on debentures. Debentures are a debt instrument used by companies and government to issue the loan. The loan is issued to corporates based on their reputation at a fixed rate of interest.

According to traditional approach, the average cost of capital decrease up to certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.

A computerized trading network that matches buy and sell orders electronically entered by customers is an electronic communications networks. An electronic communication network (ECN) is a computerized system that automatically matches buy and sell orders for securities in the market.

Ownership securities consist of equity stock and preferred stock. The term 'ownership securities,' also known as 'capital stock' represents shares. Shares are the most universal form of raising long-term funds from the market. Every company, except a company limited by guarantee, has a statutory right to issue shares.

The cost of capital of a firm refers to the expense a company bears to finance its operations. It is calculated as the weighted average of the cost of various long-term and short-term sources of finance. This includes the cost of equity, debt, preference shares, retained earnings, and other sources of funds. By determining the weighted average cost of each source of finance, a firm can evaluate the overall expense incurred in raising capital for its business activities. This metric is essential for making investment decisions and assessing the profitability of projects.

If an investor is attempting to buy a stock that is very volatile, it would be best to use limit order.

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.

The constant growth model of equity valuation assumes that the dividends paid by the company grow at a constant rate of growth.