Financial Management

1. Maximization of Shareholders Wealth is the main goal of financial

management.
2. The proportion of profit distributed as dividend is called the Dividend
Payout Ratio.
3. Traditional phase was only outsiders looking approach, due to its over
emphasis on episodic events and lack of importance to day-to-day problems.
4. The relationship between finance and economics can be studied under
Micro Economics and Macro Economics areas of economics.
5. The transition phase is almost similar to that traditional phase but more
emphasis was given to the day-to-day (Working Capital) problem faced
by the finance manager.
6. Financial Managers and accountants perform the same functions in a firm.
False
7. The decision function of financial management can be broken down into
the investment, financing, and asset management decisions.
8. "Shareholder wealth" in a firm is represented by: The market price per
share of the firm's common stock.
9. The focal point of financial management in a firm is the creation of
value for shareholders.
10. Profit and
management.

Wealth

maximizations

are

the

goals

of

financial

11. The financial decisions are not Independent, but they are Inter related
to each other.
12. Financial management is that managerial activity, which is concerned
with the Planning and Controlling of the firms financial resources.
13. Modern financial management is concerned with proper anticipating,
Acquisition and allocation of fund effectively.

Financial Management

14. Financial Managers and accountants perform the same functions in a

firm. False
1. Sale of shares and bonds are not the daily activities of financial
management?
B.V. Patel Institute of Business Management, Computer &
Information Technology, Uka Tarsadia University Question Bank
030030304: Fundamentals of Financial Management

Financial Management

15. The controller's responsibilities are primarily accounting in nature, while

the treasurer's responsibilities are primarily related to financial
management.
16. Preparation of the firm's accounting statements is not the
responsibility of financial management.
17. Modern Approach for financial management is superior to the traditional
approach of financial management. TRUE
18. Financial planning seeks to quantify various financial resources
available and plan the size and timing of expenditures.
19. A financial manager is a person who is responsible, in a significant
way, to carry out the finance functions.
20. Agency problem suggest that managers may try to maximize their
personal gains rather than maximizing the wealth of the
shareholders
21. The type of stock that gets its dividend before the common stock gets its
dividend is called Preference Share stock.
22. The holders of Equity Share stock elect the corporation's board of
directors.
23. How many days available for exercise right by the investors? 30 days
24. Dividends in arrears occur only on Cumulative preference stock.
25. In case of debenture issued by the company the Trustee is responsible
to ensure that company fulfills its contractual obligation.
26. Retained earnings are Free source of finance.
27. A rights issue is offered to all Existing Shareholders individually on the
basis of pre-emptive rights.
28. GDR is issued by international bank, which can be subject of Worldwide
circulation on capital markets.

Financial Management

29. GDR stand for Global Depository Receipt.

30. Preference share also called Hybrid security.
31. Retained earnings can enhance and maintain the Operating efficiency.
32. Equity share also known as Variable income security.
33. A Term Loan has a specific amount that has a specified repayment
schedule.
34. Venture capital is usually in the form of equity Participation.
35. A venture capitalist invests financial capital in the enterprises as ThirdParty investors.
36. A company may opt to issue a GDR to obtain greater exposure and raise
capital in the world market.
37. Investment is usually made in small and medium scale enterprises as
well as in high risk but high growth potential projects by Venture Capitalist.
38. GDR to obtain greater exposure and raise capital in the world market.
True
a. True b. False
39. Term loan provided by commercial, corporate and co-operative banks.
True

Financial Management

Unit I Foundations in Finance

1.Which are the two major area of financial management?
Profit Maximization and Wealth Maximization
2.Which objective of financial management is superior?
Wealth maximization is superior
3. What is wealth maximization?
Wealth maximization simply means maximization of shareholders wealth.
4. State the key difference between finance and accounting.
Accounting is the practice of preparing accounting records, including
measuring, preparation, analyzing, and the interpretation of financial
statements. Finance, on the other hand, is the efficient and productive
management of assets and liabilities based on existing information.
5. Define Financial Management.
Planning is an inextricable dimension of financial management. The term
financial management connotes that funds flows are directed according to
some plan. Financial managements can be said a good guide for allotment
of future resources of an organisation.
6. What is Agency Problem?
the agency problem usually refers to a conflict of interest between a
company's management and the company's stockholders. The manager,
acting as the agent for the shareholders, or principals, is supposed to make
decisions that will maximize shareholder wealth. However, it is in the
manager's own best interest to maximize his own wealth.
7. Enlist the shortcoming of the profit maximization objective of a firm.
Pursuing a profit maximization strategy comes with the obvious risk that the
company may be so entrenched in the singular strategy meant to maximize
its profits that it loses everything if the market takes a sudden turn.
8. State the advantages of wealth maximization objective.
The most overt advantage of a wealth maximization goal is that you make
money for all owners of the business. Naturally, if you start a business on
your own or with other investors, you'd like to make as much money as you
can. If all of your business decisions connect with this end in mind, you could

Financial Management

make enough money on the company's income or upon sale of the business
to become wealthy.

9. How the finance and economics related each other?

Economics is a social science that analyses the distribution and consumption
of goods and services. Finance is the study of how to optimally allocate
assets and how individuals and organizations should invest assets in order to
get the highest possible return given changing conditions over time. Finance
is fundamentally a forward looking field, concerned with what an asset will
be
worth
in
the
future
10. Explain the functions of finance manager.
Raising of funds allocation of funds, Profit planning, Understanding capital
markets.
Unit II Capital investment and sourcing decisions
11.What do you mean y the term Security
A financial instrument that represents: an ownership position in a publiclytraded corporation (stock), a creditor relationship with governmental body or
a corporation (bond), or rights to ownership as represented by an option. A
security is a fungible, negotiable financial instrument that represents some
type
of
financial
value.
12. What is convertible preference share?
These shares are corporate fixed-income securities that the investor can
choose to turn into a certain number of shares of the company's common
stock after a predetermined time span or on a specific date.

13. Which are the two rights to preference share holders?

Claim to dividends, Participating Preference shares, Voting right, Preemptive
right
14. What is debenture?
A type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation
of the issuer. Both corporations and governments frequently issue this type
of bond in order to secure capital. Like other types of bonds, debentures are

Financial Management

documented

in

an

indenture

15.State the features of equity share.

Equity share capital remains permanently with the company. It is returned
only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the
company.
(iii) The rate of dividend on equity capital depends upon the availability of
surplus funds. There is no fixed rate of dividend on equity capital.
Advantages of Equity Shares:
1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of
the company.
3. It is a permanent source of capital and the company has to repay it except
under liquidation.
4. Equity shareholders are the real owners of the company who have the
voting rights.
5. In case of profits, equity shareholders are the real gainers by way of
increased dividends and appreciation in the value of shares.
Disadvantages of Equity Shares:
1. If only equity shares are issued, the company cannot take the advantage
of trading on equity.
2. As equity capital cannot be redeemed, there is a danger of over
capitalisation.
3. Equity shareholders can put obstacles for management by manipulation
and organising themselves.
4. During prosperous periods higher dividends have to be paid leading to
increase in the value of shares in the market and it leads to speculation.

Financial Management

5. Investors who desire to invest in safe securities with a fixed income have
no attraction for such shares.

16. What is pre-emptive right?

A privilege extended to select shareholders of a corporation that will give
them the right to purchase additional shares in the company before the
general public has the opportunity in the event there is a seasoned offering.
A preemptive right is written in the contract between the purchaser and the
company,
but
does
not
function
like
a
put
option.

17. Retained earnings are a free source of Finance for company-Explain.

The portion of net profit distributed to shareholders is called dividend and
the remaining portion of the profit is called retained earning. In other word,
the amount of undistributed profit which is available for investment is called
retained earning. Retained earning is considered as internal source of longterm
financing
and
it
is
a
part
of
shareholders
equity.
Generally, retained earning is considered as cost free source of financing. It
is because neither dividend nor interest is payable on retained profit.
However, this statement is not true. Shareholders of the company that
retains more profit expect more income in future than the shareholders of
the company that pay more dividend and retains less profit. Therefore, there
is an opportunity cost of retained earning. In other words, retained earning is
not a cost free source of financing. The cost of retained earning must be at
least equal to shareholders rate of return on re-investment of dividend paid
by
the
company.

18. Briefly explain the concept of capital rationing.

Capital rationing is a strategy used by organizations attempting to limit
the costs of their own investments. Typically, a company engaging in capital
rationing has made unsuccessful investments of capital in the recent past
and would like to raise the return on those investments prior to engaging in
new business.
19. Define Capital Budgeting.

Financial Management

The process in which a business determines whether projects such as

building a new plant or investing in a long-term venture are worth pursuing.
Oftentimes, a prospective project's lifetime cash inflows and outflows are
assessed in order to determine whether the returns generated meet a
sufficient target benchmark.Also known as "investment appraisal."

20. How do you calculate the ARR?

Accounting rate of return (also known as simple rate of return) is the ratio of
estimated accounting profit of a project to the average investment made in
the project. ARR is used in investment appraisal.
Accounting Rate of Return is calculated using the following formula:
Average
Accounting
ARR Profit
=
Average Investment
21. What is independent project?
A project whose acceptance or rejection is independent of the acceptanceor r
ejection of other projects.
22. State the steps of capital budgeting process.
Identify potential opportunities, Evaluate Opportunities, Determine cash
flows, Select projects, Implementation.
23. Explain mutually exclusive project.
A project that is mutually exclusive means that its acceptance is dependent
upon another project.
24. Write a note on internal rate of return.
The discount rate often used in capital budgeting that makes the net present
value of all cash flows from a particular project equal to zero. Generally
speaking, the higher a project's internal rate of return, the more desirable it
is
to
undertake
the
project.
25.Compare NPV and IRR.
IRR assumes that the cash flows are reinvested in the projected at the same
discount rate. This is a major limitation for the use of IRR. NPV makes no
such assumption.

Financial Management

NPV is measured in terms of currency whereas IRR is measured in terms of

expected percentage return.
If NPV calculation uses different discount rates, then it produces different
results for the same project. But, IRR always gives the same result. For the
same reason, given a choice between NPV vs IRR, managers generally prefer
IRR because it is easier and less confusing.
From a comparison of NPV and IRR, it can be seen that NPV is actually a
better measure than IRR, especially, in long term projects, not only because
NPV considers different discount rates but also takes into account the cost of
capital.
26. what do you mean by opportunity cost
The cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an
alternative
action
27.Cost of equity and formula
The cost of equity is the return that stockholders require for their investment
in a company. The traditional formula for cost of equity (COE) is the dividend
capitalization model:

A firm's cost of equity represents the compensation that the market

demands in exchange for owning the asset and bearing the risk of
ownership.

28.Cost of preference share capital and formula

Cost of preference share capital is that part of cost of capital in which we
calculate the amount which is payable to preference shareholders in the form
of dividendwith fixed rate.
Cost of Pref. Share capital (Kp) = amount of preference dividend/ Preference
share capital
29.Cost of debt

Financial Management

Because companies benefit from the tax deductions available on interest

paid, the net cost of the debt is actually the interest paid less the tax savings
resulting
from
the
tax-deductible
interest
payment.
30.What do you mean by Weighted Average cost of capital
A calculation of a firm's cost of capital in which each category of capital is
proportionately weighted. All capital sources - common stock, preferred
stock, bonds and any other long-term debt - are included in a WACC
calculation. All else equal, the WACC of a firm increases as the beta and rate
of return on equity increases, as an increase in WACC notes a decrease in
valuation and a higher risk.
Unit III Financing and Dividend Decisions
31.What is leverage?
The ability to influence a system, or an environment, in a way that multiplies
the outcome of one's efforts without a corresponding increase in the
consumption of resources. In other words, leverage is the advantageous
condition of having a relatively small amount of cost yield a relatively high
level of returns. See also financial leverage and operating leverage
32.What is operating leverage?
Operating leverage is concerned with the investment activities of the firm. It
relates to the incurrence of fixed operating costs in the firms income stream.
The operating cost of a firm is classified into three types: Fixed cost, variable
cost and semi-variable or semi-fixed cost. Fixed cost is a contractual cost and
is a function of time. So it does not change with the change in sales and is
paid regardless of the sales volume.
33.What is financial leverage?
Financial leverage is mainly related to the mix of debt and equity in the
capital structure of a firm. It exists due to the existence of fixed financial
charges that do not depend on the operating profits of the firm. Various
sources from which funds are used in financing of a business can be
categorized into funds having fixed financial charges and funds with no fixed
financial charges. Debentures, bonds, long-term loans and preference shares
are included in the first category and equity shares are included in the
second category.
34.Differentiate financial and operating leverage?
Operating leverage refers to the firms ability to use fixed operating costs to
magnify the effects of changes in sales on its EBIT while financial leverage is

Financial Management

concerned with the firms ability to use fixed financial charges to magnify the
effects of changes in EBIT on the firms EPS.
35.What is EPS?
The portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's
profitability.
Calculated as:

36.Implications

of

leverage?

Total risk can be divided into two parts: business risk and financial risk.
Business risk refers to the stability of a company's assets if it uses no debt or
preferred stock financing. Business risk stems from the unpredictable nature
of doing business, i.e., the unpredictability of consumer demand for products
and services. As a result, it also involves the uncertainty of long-term
profitability. When a company uses debt or preferred stock financing,
additional riskfinancial riskis placed on the company's common
shareholders.
37.What is indifference point?
In the operation of a company, the point at which the use of financial
leverage over the use of equity capital produces no clear advantage in their
effect on earnings-per-share creating an indifference on the part of the
decision-makers.
38. Advantages of leverage?
Business that uses financial leverage can produce higher shareholder profits
than businesses that only employ stock sales for financing. In businesses
that only use shareholder equity, increases in business profit correspond
exactly to increases in per-share stock value or dividend payments.
39.Drawbacks of leverage?
Leveraged positions can lead to a total wipe-out of your trading balance, and
many traders over the years have found themselves falling victim to the
negative effects of leverage, leading to significant losses without proper

Financial Management

management of their risk. For this very reason, it's important to make sure
you understand the disadvantages of leverage, and take care to ensure you
don't fall victim to overexposure when the markets inevitably turn sour
40.what is contribution?
Sales variable cost.

40.

What is Working Capital?

the capital of a business which is used in its day-to-day trading

operations, calculated as the current assets minus the current
liabilities. It refers to the net liquidity.

41.

Explain the concepts of working capital.

Gross Working Capital (Total Current Assets) & Net Working Capital
(Current Assets Current Liabilities).

42.

What are the determinants of Working Capital Management needs of

an enterprise?

Nature & Size of the business, operating cycle, business cycle, size
of receivables, production cycle time, etc.

43.

Explain the operating cycle concept of working capital.

The average time intervening between the acquisition of material or

services entering the process and the final cash realization. i.e.,
Cash -> Raw materials -> Semi-finished goods -> Finished goods ->
Receivables -> Cash.

44.

What are the various sources of working capital financing?

Trade Credit, Buyers Credit, Short-term loans, Bank Overdraft, Letter

of Credit, etc.

45.

What is Cash Budget?

Financial Management

An estimation of the cash inflows and outflows for a business or

individual for a specific period of time.

46.

Name a few Inventory Management Techniques.

Economic Order Quantity, ABC Analysis, JIT, Kanban, Material

Requirements Planning, VED Analysis, etc.

47.

What are Credit Policy & Credit Terms?

Credit Policy is the terms and conditions for supplying goods on

credit. Credit terms are the payment requirements stated on an
invoice.

48.

What does 2/10 net 30 means in receivables management?

It means 2% cash discount can be availed if payment is made by

the buyer within the first 10 days of the 30 day credit period.

49.

Tell the techniques of cash management.

50.

Cash Budget, Baumol Model, Miller-Orr model, and Orglers Model.

What do you mean by Term Loan

A loan got from a bank or financial institution with fixed repayment

period and interest rate.

51.

What is venture capital?

Capital invested in a project in which there is a substantial element

of risk, typically a new or expanding business.

52.

What are the stages of Venture Capital financing.

Seed-stage , Early Stage, Start-up, First Stage, Formative Stage,

Later Stage, Third Stage, Expansion Stage, Mezzanine (bridge),
Balanced-stage.

53.

State the sources of long term finance.

Equity share capital, Preference share capital, Debentures, Bank

Loan, Retained Earnings.

54.

What is Lease & explain the types of Lease?

The lease is a contract whereby one party, the lessor, grants the
right to use a particular good for a period of time to the other party,

Financial Management

the lessee (or tenant), which will pay for the transfer of the right to
use a fixed amount regularly .

Types: Operating Lease, Finance Lease, Leveraged Lease, Sale and

Lease Back, etc.

55.

What is Global Depository Receipt?

A Negotiable certificate issued by one country's bank against a

certain number of shares held in its custody but traded on the stock
exchange of another country.

56.What is American Depository Receipt?

An American depositary receipt (ADR, and sometimes spelled

depository) is a negotiable security that represents securities of a
non-U.S. company that trades in the U.S. financial markets.