Tuesday, November 26, 2024

Unit 9 Business studies: Financial Management, HS 2nd year Commerce

  1. What is the primary aim of financial management?
    a) Maximizing the company's revenue
    b) Ensuring liquidity of assets
    c) Maximizing shareholders' wealth
    d) Reducing operational costs
    Answer: c) Maximizing shareholders' wealth

  2. What does the term 'capital structure' refer to?
    a) The total revenue generated by a firm
    b) The mix of owners' funds and borrowed funds
    c) The proportion of assets and liabilities
    d) The dividend paid to shareholders
    Answer: b) The mix of owners' funds and borrowed funds

  3. Which decision involves the allocation of funds to different assets?
    a) Financing decision
    b) Dividend decision
    c) Investment decision
    d) Working capital decision
    Answer: c) Investment decision

  4. What is the meaning of business finance?
    a) Finance needed only for short-term operations
    b) Money required to carry out business activities
    c) Profit retained after dividend distribution
    d) Revenue generated by selling assets
    Answer: b) Money required to carry out business activities

  5. What is the key objective of financial planning?
    a) To minimize taxes
    b) To reduce costs
    c) To ensure availability of funds at the right time
    d) To enhance operational efficiency
    Answer: c) To ensure availability of funds at the right time

  6. Which of the following refers to funds invested in long-term assets?
    a) Working capital
    b) Fixed capital
    c) Current capital
    d) Reserve capital
    Answer: b) Fixed capital

  7. Which financial decision involves the determination of dividend payout?
    a) Investment decision
    b) Financing decision
    c) Dividend decision
    d) Capital budgeting decision
    Answer: c) Dividend decision

  8. What does 'trading on equity' mean?
    a) Increasing earnings by issuing equity
    b) Using debt to increase earnings for equity shareholders
    c) Investing in equity markets
    d) Reducing the financial risk of shareholders
    Answer: b) Using debt to increase earnings for equity shareholders

  9. Which factor affects working capital requirements due to changes in production levels during the year?
    a) Business cycle
    b) Seasonal factors
    c) Inflation
    d) Credit policy
    Answer: b) Seasonal factors

  10. What is the formula for Net Working Capital (NWC)?
    a) NWC = Total Assets - Total Liabilities
    b) NWC = Current Assets - Current Liabilities
    c) NWC = Fixed Assets - Current Liabilities
    d) NWC = Current Liabilities - Current Assets
    Answer: b) NWC = Current Assets - Current Liabilities


  1. Which of the following is NOT a key financial decision area?
    a) Investment decision
    b) Financing decision
    c) Marketing decision
    d) Dividend decision
    Answer: c) Marketing decision

  2. What is 'financial leverage'?
    a) Ratio of current assets to current liabilities
    b) Ratio of debt to equity
    c) Ratio of profits to total sales
    d) Ratio of total assets to total liabilities
    Answer: b) Ratio of debt to equity

  3. Which of the following is a feature of long-term investment decisions?
    a) They involve small amounts of investment
    b) They are easily reversible
    c) They affect the firm’s long-term growth and profitability
    d) They are made without detailed analysis
    Answer: c) They affect the firm’s long-term growth and profitability

  4. What does EBIT stand for?
    a) Earnings Before Interest and Taxes
    b) Earnings Before Investment and Taxes
    c) Equity Before Interest and Taxes
    d) Earnings Before Income Tax
    Answer: a) Earnings Before Interest and Taxes

  5. What is a 'floatation cost'?
    a) Cost incurred during the distribution of dividends
    b) Cost of maintaining liquidity
    c) Cost incurred while raising funds
    d) Cost associated with inventory management
    Answer: c) Cost incurred while raising funds

  6. Which factor does NOT affect dividend decisions?
    a) Stability of earnings
    b) Taxation policy
    c) Market share
    d) Shareholder preference
    Answer: c) Market share

  7. What does DSCR stand for?
    a) Debt Service Coverage Ratio
    b) Dividend and Shareholder Cash Ratio
    c) Debt Stock Capital Ratio
    d) Dividend Stability and Cash Ratio
    Answer: a) Debt Service Coverage Ratio

  8. Which type of capital is needed for day-to-day business operations?
    a) Fixed capital
    b) Current capital
    c) Working capital
    d) Reserve capital
    Answer: c) Working capital

  9. What is 'capital budgeting'?
    a) Preparing a financial blueprint for an organization
    b) Evaluating and selecting long-term investment projects
    c) Estimating working capital requirements
    d) Analyzing the profitability of daily operations
    Answer: b) Evaluating and selecting long-term investment projects

  10. Which of the following is considered a borrowed fund?
    a) Equity shares
    b) Retained earnings
    c) Debentures
    d) Reserves
    Answer: c) Debentures

Factors Affecting Financial Decisions

  1. Which factor influences the choice of debt or equity by affecting its relative cost?
    a) Tax rate
    b) Scale of operations
    c) Market competition
    d) Nature of the business
    Answer: a) Tax rate

  2. Which of the following is true about financial risk?
    a) It arises from variations in operational costs
    b) It increases with higher equity financing
    c) It is the risk of not meeting fixed financial obligations
    d) It is unrelated to the firm’s profitability
    Answer: c) It is the risk of not meeting fixed financial obligations

  3. How does inflation affect working capital requirements?
    a) It reduces working capital requirements
    b) It increases working capital requirements
    c) It has no effect on working capital requirements
    d) It reduces the liquidity of fixed assets
    Answer: b) It increases working capital requirements

  4. What is the main purpose of financial planning?
    a) To minimize taxation
    b) To increase production
    c) To ensure availability of funds when needed
    d) To reduce competition
    Answer: c) To ensure availability of funds when needed

  5. A firm that is more labor-intensive will generally require:
    a) Higher fixed capital
    b) Lower fixed capital
    c) Higher working capital
    d) Lower working capital
    Answer: b) Lower fixed capital

Dividend and Financing Decisions

  1. Which of these is NOT a source of long-term finance?
    a) Equity shares
    b) Public deposits
    c) Trade credit
    d) Debentures
    Answer: c) Trade credit

  2. Which policy may restrict dividend payments by a company?
    a) Shareholder’s preferences
    b) Legal and contractual constraints
    c) Stock market conditions
    d) Inflation rate
    Answer: b) Legal and contractual constraints

  3. What happens when a firm pays high dividends and retains fewer earnings?
    a) Future earning capacity increases
    b) Working capital decreases
    c) It depends less on external financing
    d) Future earning capacity decreases
    Answer: d) Future earning capacity decreases

  4. What is the effect of higher debt financing on EPS, assuming favorable financial leverage?
    a) EPS decreases
    b) EPS increases
    c) EPS remains constant
    d) EPS becomes zero
    Answer: b) EPS increases

  5. Which type of organization typically requires less working capital?
    a) Trading firm
    b) Manufacturing firm
    c) Large-scale industries
    d) Capital-intensive businesses
    Answer: a) Trading firm


  1. Which of these is a short-term source of finance?
    a) Equity shares
    b) Retained earnings
    c) Trade credit
    d) Debentures
    Answer: c) Trade credit

  2. Which decision determines the proportion of long-term and short-term funds?
    a) Dividend decision
    b) Financing decision
    c) Capital budgeting decision
    d) Investment decision
    Answer: b) Financing decision

  3. Which factor affects capital budgeting decisions by impacting future returns?
    a) Cash flows of the project
    b) Stock market conditions
    c) Credit policy
    d) Working capital turnover
    Answer: a) Cash flows of the project

  4. Which of these is NOT considered while calculating working capital?
    a) Inventories
    b) Trade payables
    c) Machinery
    d) Trade receivables
    Answer: c) Machinery

  5. What does the term 'working capital turnover ratio' indicate?
    a) The liquidity of current liabilities
    b) Efficiency of working capital in generating revenue
    c) The profitability of the firm
    d) The ratio of fixed to current assets
    Answer: b) Efficiency of working capital in generating revenue

  6. What is the expected impact of high competition on working capital requirements?
    a) No impact on working capital
    b) Lower working capital requirements
    c) Higher working capital requirements
    d) Complete elimination of working capital
    Answer: c) Higher working capital requirements

  7. What is the primary goal of capital structure decisions?
    a) Maximizing the firm’s revenue
    b) Minimizing the cost of capital and financial risk
    c) Maximizing the firm’s fixed capital
    d) Minimizing taxation
    Answer: b) Minimizing the cost of capital and financial risk

  8. Which type of business generally has a shorter production cycle?
    a) Textile manufacturing
    b) Software services
    c) Steel manufacturing
    d) Pharmaceutical manufacturing
    Answer: b) Software services

  9. Which factor influences both fixed and working capital requirements?
    a) Scale of operations
    b) Legal constraints
    c) Cash flow timing
    d) Creditors' turnover ratio
    Answer: a) Scale of operations

  10. What is the main determinant of dividend payment in a firm?
    a) Shareholders’ voting power
    b) Current and past earnings
    c) Management’s preference
    d) Tax policies of competitors
    Answer: b) Current and past earnings

Investment and Dividend Decisions

  1. A high Debt Service Coverage Ratio (DSCR) indicates:
    a) High financial risk
    b) Good capacity to service debt
    c) Low profitability
    d) High dividend payout
    Answer: b) Good capacity to service debt

  2. Which of these refers to a firm’s ability to cover interest obligations?
    a) Dividend Yield Ratio
    b) Interest Coverage Ratio (ICR)
    c) Debt Equity Ratio
    d) Profitability Ratio
    Answer: b) Interest Coverage Ratio (ICR)

  3. Which technique is used to evaluate investment proposals?
    a) Floatation cost analysis
    b) Capital budgeting
    c) Working capital turnover
    d) Dividend payout ratio
    Answer: b) Capital budgeting

  4. Which factor makes debt cheaper than equity?
    a) Debt does not involve interest payment
    b) Interest on debt is tax deductible
    c) Debt financing reduces operational risk
    d) Debt is considered risk-free
    Answer: b) Interest on debt is tax deductible

  5. Which phase of the business cycle usually reduces working capital requirements?
    a) Boom
    b) Depression
    c) Recovery
    d) Expansion
    Answer: b) Depression

  6. How does a high level of fixed operating costs impact financial decisions?
    a) Encourages equity financing
    b) Encourages higher debt financing
    c) Reduces profitability
    d) Leads to unstable dividend payout
    Answer: a) Encourages equity financing

  7. What does financial planning NOT include?
    a) Estimating fund requirements
    b) Reducing competition in the market
    c) Preparing for cash surpluses and shortages
    d) Specifying sources of finance
    Answer: b) Reducing competition in the market

  8. Which of these is an example of a current liability?
    a) Machinery
    b) Creditors
    c) Debentures
    d) Land and building
    Answer: b) Creditors

  9. Which financial decision ensures sufficient funds are available for long-term investments?
    a) Working capital management
    b) Dividend decision
    c) Capital budgeting decision
    d) Financing decision
    Answer: c) Capital budgeting decision

  10. What happens to a firm’s financial risk as its debt-equity ratio increases?
    a) Financial risk decreases
    b) Financial risk remains unchanged
    c) Financial risk increases
    d) Financial risk is eliminated
    Answer: c) Financial risk increases

General Financial Concepts

  1. Which factor is least likely to influence fixed capital requirements?
    a) Availability of raw materials
    b) Growth prospects
    c) Choice of technology
    d) Shareholders’ preferences
    Answer: d) Shareholders’ preferences

  2. What is meant by ‘trading on equity’?
    a) Earning returns higher than the cost of debt
    b) Trading company shares in the stock market
    c) Using retained earnings for operations
    d) Reducing equity shares to reduce risk
    Answer: a) Earning returns higher than the cost of debt

  3. Why is a higher Interest Coverage Ratio (ICR) preferred?
    a) It reduces the firm's profitability
    b) It indicates better liquidity
    c) It signals a lower risk of default
    d) It reduces operating expenses
    Answer: c) It signals a lower risk of default

  4. Which factor affects a firm’s decision to retain earnings rather than pay dividends?
    a) Level of shareholder control
    b) Stability of earnings
    c) Market capitalization
    d) Current liabilities
    Answer: b) Stability of earnings

  5. What does capital structure planning focus on?
    a) Balancing short-term and long-term liabilities
    b) Selecting the mix of debt and equity
    c) Choosing dividend policies
    d) Managing cash inflows
    Answer: b) Selecting the mix of debt and equity


  1. Which financial statement reflects a firm’s financial position at a specific point in time?
    a) Income Statement
    b) Cash Flow Statement
    c) Balance Sheet
    d) Statement of Shareholders’ Equity
    Answer: c) Balance Sheet

  2. Which factor increases the attractiveness of debt financing?
    a) High interest rates
    b) Tax deductibility of interest
    c) High dividend payouts
    d) Unstable cash flows
    Answer: b) Tax deductibility of interest

  3. Which type of working capital is associated with daily operations?
    a) Permanent working capital
    b) Temporary working capital
    c) Gross working capital
    d) Fixed working capital
    Answer: b) Temporary working capital

  4. Which component is NOT part of working capital?
    a) Cash in hand
    b) Marketable securities
    c) Plant and machinery
    d) Trade receivables
    Answer: c) Plant and machinery

  5. What is the primary objective of a financing decision?
    a) To reduce operational risk
    b) To minimize the cost of financing
    c) To increase dividend payouts
    d) To expand the firm’s fixed assets
    Answer: b) To minimize the cost of financing

  6. Which ratio measures the efficiency of inventory management?
    a) Inventory Turnover Ratio
    b) Interest Coverage Ratio
    c) Current Ratio
    d) Debt-to-Equity Ratio
    Answer: a) Inventory Turnover Ratio

  7. What does the term 'credit policy' refer to in working capital management?
    a) The firm’s approach to borrowing funds
    b) Terms offered to customers for payment
    c) Conditions for raising equity shares
    d) Strategy for managing fixed assets
    Answer: b) Terms offered to customers for payment

  8. Which factor primarily affects a firm’s fixed capital requirements?
    a) Seasonal variations
    b) Nature of the business
    c) Availability of cash
    d) Dividend policies
    Answer: b) Nature of the business

  9. Which decision determines the amount of profits to distribute to shareholders?
    a) Capital budgeting decision
    b) Dividend decision
    c) Working capital decision
    d) Financing decision
    Answer: b) Dividend decision

  10. What happens to EPS when the ROI exceeds the cost of debt?
    a) EPS decreases
    b) EPS increases
    c) EPS remains constant
    d) EPS becomes zero
    Answer: b) EPS increases

Investment and Financing Decisions

  1. Which of these is NOT a factor affecting financing decisions?
    a) Cost of funds
    b) Flexibility of resources
    c) Shareholder preferences
    d) Debt Service Coverage Ratio (DSCR)
    Answer: c) Shareholder preferences

  2. What is the effect of higher financial leverage?
    a) Increased operational risk
    b) Increased financial risk
    c) Reduced profitability
    d) Lower debt-to-equity ratio
    Answer: b) Increased financial risk

  3. Which component of financial planning helps avoid idle funds?
    a) Dividend decision
    b) Inventory management
    c) Capital budgeting
    d) Estimation of fund requirements
    Answer: d) Estimation of fund requirements

  4. Which of these factors influences dividend policy by determining profitability?
    a) Cash flow position
    b) Growth opportunities
    c) Market conditions
    d) Stability of earnings
    Answer: d) Stability of earnings

  5. Which decision involves the purchase of land, buildings, or machinery?
    a) Financing decision
    b) Dividend decision
    c) Investment decision
    d) Inventory decision
    Answer: c) Investment decision

  6. What does financial risk depend on?
    a) Degree of operating leverage
    b) Total amount of current liabilities
    c) Proportion of debt in the capital structure
    d) Amount of dividends paid to shareholders
    Answer: c) Proportion of debt in the capital structure

  7. What is an important objective of financial planning?
    a) To maximize operational costs
    b) To reduce the company's profitability
    c) To prepare for financial uncertainties
    d) To minimize inventory turnover
    Answer: c) To prepare for financial uncertainties

  8. Which is NOT an example of a current liability?
    a) Bills payable
    b) Creditors
    c) Accrued expenses
    d) Debentures
    Answer: d) Debentures

  9. Why is equity financing more expensive than debt?
    a) Equity is less risky for investors
    b) Equity dividends are tax-deductible
    c) Equity holders bear more risk than debt holders
    d) Equity does not involve repayment
    Answer: c) Equity holders bear more risk than debt holders

  10. What is the impact of a high tax rate on debt financing?
    a) Debt becomes less attractive
    b) Debt becomes more attractive
    c) Tax rate does not affect debt financing
    d) Debt financing becomes risky
    Answer: b) Debt becomes more attractive

Working Capital Management

  1. Which of these factors does NOT influence working capital requirements?
    a) Business cycle
    b) Fixed assets turnover
    c) Credit terms offered to customers
    d) Operating efficiency
    Answer: b) Fixed assets turnover

  2. What does a higher operating cycle indicate?
    a) Less working capital is needed
    b) More working capital is needed
    c) Fixed capital requirements increase
    d) No effect on working capital requirements
    Answer: b) More working capital is needed

  3. What happens to working capital needs during a boom period?
    a) They increase
    b) They decrease
    c) They remain constant
    d) They are eliminated
    Answer: a) They increase

  4. Which factor reduces the requirement for working capital?
    a) Liberal credit terms
    b) Efficient inventory management
    c) Higher operating cycle
    d) Increased business competition
    Answer: b) Efficient inventory management

  5. What is the most liquid current asset?
    a) Cash in hand
    b) Finished goods inventory
    c) Trade receivables
    d) Bills receivable
    Answer: a) Cash in hand

  6. Which of these affects both working capital and fixed capital requirements?
    a) Scale of operations
    b) Profit margin
    c) Dividend payout ratio
    d) Depreciation rate
    Answer: a) Scale of operations

  7. What does a higher debt-to-equity ratio indicate?
    a) Greater reliance on owners' funds
    b) Greater reliance on borrowed funds
    c) Lower financial risk
    d) Higher liquidity
    Answer: b) Greater reliance on borrowed funds

  8. Which of the following is a short-term source of finance?
    a) Retained earnings
    b) Public deposits
    c) Trade payables
    d) Equity shares
    Answer: c) Trade payables

  9. What does the term ‘net working capital’ mean?
    a) Total current assets
    b) Total current liabilities
    c) Current assets minus current liabilities
    d) Fixed assets minus current liabilities
    Answer: c) Current assets minus current liabilities

  10. Which decision ensures liquidity while maintaining profitability?
    a) Dividend decision
    b) Capital budgeting decision
    c) Working capital management
    d) Financing decision
    Answer: c) Working capital management

  1. Which type of business typically requires higher fixed capital?
    a) Trading business
    b) Service business
    c) Manufacturing business
    d) Retail business
    Answer: c) Manufacturing business

  2. What is an example of a financing activity?
    a) Purchasing machinery
    b) Issuing debentures
    c) Paying wages to employees
    d) Selling inventory
    Answer: b) Issuing debentures

  3. Which factor influences a firm’s decision to invest in fixed assets?
    a) Nature of business
    b) Seasonal demand
    c) Market liquidity
    d) Tax policies
    Answer: a) Nature of business

  4. What is a primary objective of dividend policy?
    a) Maximizing the firm’s operational efficiency
    b) Maximizing shareholders’ wealth
    c) Reducing tax liability
    d) Minimizing retained earnings
    Answer: b) Maximizing shareholders’ wealth

  5. Which of these is a characteristic of debt financing?
    a) It reduces financial risk
    b) Interest payments are tax-deductible
    c) Dividends must be paid on debt
    d) It involves no repayment obligation
    Answer: b) Interest payments are tax-deductible

  6. What does financial management primarily focus on?
    a) Managing employee performance
    b) Managing a firm’s finances to achieve its objectives
    c) Creating new market opportunities
    d) Reducing competition in the market
    Answer: b) Managing a firm’s finances to achieve its objectives

  7. Which of these is an example of owners' funds?
    a) Public deposits
    b) Debentures
    c) Retained earnings
    d) Trade payables
    Answer: c) Retained earnings

  8. What happens when a firm over-invests in current assets?
    a) It improves liquidity but reduces profitability
    b) It reduces liquidity and profitability
    c) It improves both liquidity and profitability
    d) It has no impact on financial performance
    Answer: a) It improves liquidity but reduces profitability

  9. Which of these would reduce a firm’s working capital requirement?
    a) Increasing credit to customers
    b) Reducing inventory levels
    c) Lengthening the operating cycle
    d) Increasing competition in the market
    Answer: b) Reducing inventory levels

  10. What is an important characteristic of fixed assets?
    a) High liquidity
    b) Short-term utility
    c) Long-term use in operations
    d) Lower cost compared to current assets
    Answer: c) Long-term use in operations

  11. Which ratio is used to measure a firm’s ability to meet short-term obligations?
    a) Current ratio
    b) Debt-to-equity ratio
    c) Interest coverage ratio
    d) Gross margin ratio
    Answer: a) Current ratio

  12. What is the term for the difference between total assets and total liabilities?
    a) Net working capital
    b) Equity
    c) Net worth
    d) Gross profit
    Answer: c) Net worth

  13. Which factor increases the cost of debt for a firm?
    a) High tax rates
    b) Low interest rates
    c) High financial risk
    d) High equity financing
    Answer: c) High financial risk

  14. Which financial decision affects the firm’s growth and risk in the long run?
    a) Dividend decision
    b) Capital budgeting decision
    c) Working capital decision
    d) Financing decision
    Answer: b) Capital budgeting decision

  15. What is the primary purpose of investment decisions?
    a) To increase short-term liquidity
    b) To maximize long-term profitability
    c) To minimize fixed costs
    d) To manage inventory efficiently
    Answer: b) To maximize long-term profitability

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