Financial Management MCQ - 13

1. Mr. Naresh deposited Rs.2,000 at the beginning of every month in a bank for five years, if the interest rate is 12% p.a. compounded monthly, then the accumulated amount he will get after 5 years is
[A]Rs.89,910
[B]Rs.1,34,400
[C]Rs.1,63,340
[D]Rs.1,64,973


2. Following is the probability distribution of rates of return of a stock:
Return (%) 10 12 15 20
Probability 0.30 0.10 0.40 0.20
The expected rate of return from the stock is
[A]12.0%
[B]14.2%
[C]15.0%
[D]16.8%


3. Net working capital is equal to
[A]Current assets – Current liabilities.
[B]Fixed assets – current assets
[C]Current Assets – Cash
[D]Long term loans – short term loans


4. The objective of financial management is to
[A]Maximize the revenues
[B]Minimize the expenses
[C]Maximize the return on investment
[D]Maximize the wealth of the owners by increasing the value of the firm


5. Mr. Sharma wishes to purchase a 91 day T-bill of face value Rs.100, maturing after 60 days. If, on maturity, he wishes to earn a yield of 11.5%, the purchase price of T-bill for Mr. Sharma should be
[A]Rs.88.50
[B]Rs.92.21
[C]Rs.97.22
[D]Rs.98.14


6. If the return on a security lies below the security market line,
[A]The security is conservative security
[B]The security is aggressive security
[C]The ris k free rate of return is more than the expected return from that security
[D]The security is over priced


7. A stock has an expected return of 12.25 percent. The beta of the stock is 1.15 and the risk-free rate is 5 percent. What is the market risk premium?
[A]1.30%
[B]6.30%
[C]6.50%
[D]7.25%


8. Which of following statements is/are true with respect to rights issue?
I. It involves the issue of securities to the existing shareholders and to the public simultaneously.
II. It involves the issue of securities to the existing shareholders at a price, which is generally lower than the current market price.
III. It generally entails lower cost of issue.
IV. It is generally made to high networth individuals.
[A]Only (I) above
[B]Only (III) above
[C]Both (II) and (III) above
[D]Both (II) and (IV) above


9. The cost of debt remains more or less constant up to a certain degree of leverage but rises there after at an increasing rate. This proposition is based on
[A]Net income approach on capital structure
[B]Net operating income approach on capital structure
[C]Traditional approach on capital structure
[D]Modigliani and Miller approach


10. Which of the following statements is/are true regarding the capital recovery factor?
I. It is the inverse of the PVIF factor.
II. It represents the amount that has to be invested at the end of every year for a period of ‘n’ years at the rate of interest ‘k’ in order to accumulate Re.1 at the end of the period.
III. It can be applied to find out the amount to be invested periodically to liquidate a loan over a specified period at a given rate of interest.
[A]Only (II) above
[B]Only (III) above
[C]Both (II) and (III) above
[D]Both (I) and (III) above


11. As the number of securities in a portfolio increases,
[A]The portfolio variance increases
[B]The portfolio variance depends more on average covariance
[C]The portfolio variance depends more on average expected value
[D]The portfolio variance depends more on average variance


12. Which of the following can be inferred from the Miller and Modigliani model on dividend policy?
[A]As the dividend payout ratio increases, the share price decreases, if the rate of return is greater than the cost of capital
[B]As the dividend payout ratio decreases, the share price decreases, if the rate of return is less than the cost of capital
[C]The dividend policy of the firm does not influence its value
[D]Irrespective of the rate of return and cost of capital the share price increases, as the amount of dividend payout ratio increases


13. Which of the following statements is/are true?
I. Current yield is equal to the coupon rate, if the market price is equal to the face value of the bond.
II. When the required rate of return (kd) is greater than the coupon rate, the value of the bond is less than its par value.
III. Current yield is equal to the interest paid divided by the face value of the bond.
[A]Only (I) above
[B]Both (I) and (II) above
[C]Both (I) and (III) above
[D]Both (II) and (III) above


14. In a world with corporate taxes but no possibility of firm’s financial distress, the value of the firm will be maximized, when
[A]Pure debt is used
[B]Pure equity is used
[C]Debt and equity are used in equal proportion
[D]Debt-equity ratio is 2:1


15. Consider the following data regarding a product:
Total cost of ordering and carrying inventory Rs.870
Quantity per order 1,000 units
Carrying cost as a percentage of the purchase price 3%
Fixed cost per order Rs.100
Purchase price Rs.10
The annual usage of the material is
[A]3,000 units
[B]7,200 units
[C]8,900 units
[D]9,000 units