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Wednesday, August 1, 2012

Objective Questions and Answers of Financial Management - 14

1. Which of the following statements is/are true regarding aggressive financing policy for current assets?
I. The financing mix will be tilted towards equity.
II. Risk of technical insolvency will be high.
III. The cost of financing will be high.
[A]Only (I) above
[B]Only (II) above
[C]Only (III) above
[D]Both (I) and (III) above

2. Which of the following statements is/are not true?
I. If the spread between credit period and cash discount period is greater, the cost of trade credit will be higher.
II. If the spread between credit period and cash discount period is lower, the cost of trade credit will be higher.
III. If the discount rate increases, the cost of trade credit decreases.
[A]Only (I) above
[B]Only (II) above
[C]Only (III) above
[D]Both (I) and (III) above

3. If the material is priced at the value that is realizable at the time of issue, such pricing method is referred to as
[A]Standard price method
[B]Replacement method
[C]LIFO method
[D]Weighted average cost method

4. Which of the following is not a relevant factor in cash management?
[A]Prompt billing and mailing the same to the customers
[B]Branch wise collection of receivables
[C]Centralized purchases and payments to the suppliers
[D]Availing of term loans to the maximum possible limit

5. The weakness/es of the internal rate of return approach is/are that
I. It does not directly consider the timing of the cash flows from a project.
II. It fails to provide a straightforward decision-making criterion.
III. It cannot be a meaningful criterion for the projects with multiple internal rates of return, whose cash inflows and outflows are interspersed.
[A]Only (I) above
[B]Only (III) above
[C]Only (II) above
[D]Both (II) and (III) above

6. An investment project is expected to generate earnings before taxes (EBT) of Rs.60,000 per year. Annual depreciation from the project is Rs.30,000 and the firms’ tax rate is 40 percent. The project’s annual net cash flows are

7. In the presence of floatation costs, the cost of external equity is
[A]More than the cost of existing equity capital
[B]Less than the cost of existing equity capital
[C]Equal to the cost of existing equity capital
[D]Equal to the cost of long-term debt

8. Which of the following is/are the limitation(s) of Walter model on dividend policy?
I. Exclusive financing by retained earnings makes the model suitable only for all equity firms.
II. In case of high investments the return on investment will not be constant.
III. The business risk of the firm has a direct impact on the value of the firm, thus cost of equity capital cannot be constant.
[A]Only (I) above
[B]Only (II) above
[C]Both (I) and (II) above
[D]All (I), (II) and (III) above

9. Overtrading means
[A]The firm has disproportionately high amount of working capital with respect to the level of sales
[B]The firm has disproportionately low amount of working capital with respect to the level of sales
[C]The firm has disproportionately high level of receivables with respect to total assets
[D]The firm has disproportionately high level of cash with respect to total assets

10. Which of the following foreign exchange exposures refers to the impact on the value of firms operations due to unanticipated changes in the exchange rates?
[A]Transformation exposure
[B]Transaction exposure
[C]Translation exposure
[D]Economic exposure

11. The rates available in the market are:
Rs./$ Spot 43.78 / 79
£/$ 0.5285 /86
If an Indian importer requires pounds, the rate quoted to him is

12. If interest rate parity holds and the transaction costs are zero, covered foreign financing will result in an effective borrowing rate that is
[A]Less than domestic interest rate
[B]Greater than domestic interest rate
[C]Equal to domestic interest rate
[D]Less than domestic interest rate if forward rate is in discount

13. In a swap-out deal, the foreign currency is
[A]Bought both spot and forward
[B]Sold both spot and forward
[C]Sold spot and bought forward
[D]Sold forward with different maturities

14. The system under which the exchange rates are determined by the demand and supply position for the currencies in the foreign exchange market is known as
[A]Target zone arrangement system
[B]Crawling peg system
[C]Fixed exchange rate system
[D]Floating exchange rate system

15. The following are the exchange rates quoted in Singapore market:
S$/Euro : 2.0118/21
S$/US$ : 1.7384/86
The synthetic rates of US $/Euro are


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