Financial Management Questions and Answers





Financial Management solved MCQ Questions :

Financial management describes how an organization or institution's finances are strategically planned, organized, directed, and controlled. This section focus on all topics of the Financial Management subject. Here you can get important mcq questions on Financial Management with answers. These questions will help you to prepare for interviews, entrance exams, online tests, and semester exams. These Financial Management multiple choice questions are for both freshers and experienced candidates.

Financial Management MCQ Chapter Wise :

Here you will find a list of important questions and answers with detailed solution on financial management in MCQ quiz style for competitive exams and interviews. Here, You can practice these MCQs chapter-wise for FREE.

Below section consists of important multiple choice questions on financial management with answers -:

1. The field of finance is closely related to the fields of:
a) statistics and economics
b) statistics and risk analysis
c) economics and accounting
d) accounting and comparative return analysis

Answer: c

2. Which of the following properly lists balance sheet items in order of liquidity, from most liquid to least liquid?
a) Accounts receivable, inventory, marketable securities, cash.
b) Cash, marketable securities, accounts receivable, inventory.
c) Inventory, marketable securities, cash, accounts receivable.
d) Cash, inventory, accounts receivable, marketable securities.

Answer: b

3. Amortization is considered a source of funds to the firm because
a) it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
b) it represents a reduction in asset holdings
c) it represents an increase in an asset account
d) amortization is not a source of funds

Answer: a

4. Receivables turnover is:
a) a profitability ratio
b) a debt utilization ratio
c) an asset utilization ratio
d) a liquidity ratio

Answer: c

5. Financial ratios are used to:
a) weigh and evaluate the operating performance of the firm
b) provide an absolute benchmark of industry performance
c) determine which firm will provide the highest return to investors
d) None of the above are correct

Answer: a

6. Profitability ratios measure
a) the speed at which the firm is turning over its assets
b) the ability of the firm to earn an adequate return on sales, total assets, and invested capital
c) the firm's ability to pay off short term obligations as they are due
d) the debt position of the firm in light of its assets and earning power

Answer: b

7. The construction of the pro forma income statement is based on:
a) the prior year's income statement
b) sales projections and the production plan
c) the cash budget
d) the cash budget and prior year's income statement

Answer: b

8. The primary purpose of the cash budget is:
a) to break the income statement down into monthly periods
b) to determine monthly cash receipts
c) to determine the collection pattern
d) to allow the firm to anticipate the need for outside funding

Answer: d

9. Operating leverage may be defined as:
a) the degree to which debt is used in financing the firm
b) the difference between price and variable costs
c) the extent to which capital assets and fixed costs are utilized
d) the difference between fixed costs and the contribution margin

Answer: c

10. Financial leverage:
a) reflects the firm's commitment to fixed, financial assets
b) has no impact on the earning of the firm
c) reflects the amount of debt used in the capital structure of the firm
d) primarily affects the left side of the balance sheet

Answer: c

11. Most retail stores are mainly concerned with:
a) their buyers' forecasts for the coming season
b) matching sales and inventory levels
c) decreasing inventory turnover
d) their investment in capital assets

Answer: b

12. The liquidity premium theory suggests that long-term interest rates are higher than short-term interest rates because:
a) investors generally prefer to invest short periods of time.
b) government policy maintains this relationship.
c) there is greater risk in long-term bonds.
d) exchange rate fluctuations establish this relationship.

Answer: c

13. Using a lockbox system to improve collections:
a) is more expensive than the use of collection centers
b) utilizes local banks to clear local payments made to the collection center
c) provides more float than collection centers
d) results in checks being forward to a P.O. box and clearing through local banks

Answer: d

14. All of the following are factors influencing the choice of marketable securities except:
a) yield
b) maturity
c) marketability
d) maximum investment allowed

Answer: d

15. In establishing credit standards, the firm must consider the nature of the credit risk based on all of the following, except:
a) prior record of payment
b) terms of credit
c) financial stability
d) current net worth

Answer: b

16. A cash discount may best be defined as:
a) a reduction in price if payment is made within the specified time period
b) a discount offered to critical suppliers
c) a discount applied to volume sales
d) a discount or the repayment of the firm's debt

Answer: a

17. The extent to which inventory financing may be employed is based on all of the following, except:
a) the marketability of the pledged goods
b) their associated price stability of the goods
c) the perishability of the goods
d) the control of the goods by the manufacturer

Answer: d

18. If interest or compounding is done on other than an annual basis, adjust by
a) dividing the number of years by the number of compounding periods
b) multiplying the number of years by the number of compounding periods
c) dividing the interest rate by the number of compounding period
d) multiplying the years and dividing the interest rate by the number of compounding periods

Answer: d

19. Commercial paper may best be defined as:
a) a short term obligation of the government issued to commercial investors
b) short term unsecured promissory notes issued by corporations
c) an insignificant source of funds to large corporations
d) the debt obligations of chartered banks

Answer: b

20. Annuity payments are generally assumed to occur:
a) during the period
b) at the beginning of the period
c) at the end of the period
d) it doesn't matter when they occur

Answer: c

21. The valuation of a financial asset is based on determining:
a) the present value of future cash flows
b) the current yield to maturity on long term corporate bonds
c) the capital budgeting process
d) what the corporation is paying to attract preferred shareholders

Answer: a

22. When the coupon rate on a bond is equal to the yield to maturity, the price of the bond will be:
a) par
b) above par
c) below par
d) more information is required

Answer: a

23. To determine the price of preferred stock:
a) divide the rate of return by the dividend amount
b) divide the dividend amount by the rate of return
c) divide the dividend amount by the rate of return minus the growth rate
d) divide the dividend amount by the growth rate

Answer: b

24. One assumption underlying the use of the cost of capital to analyze capital projects is that:
a) current costs will remain the same
b) capital structure will vary with the type of financing
c) different risk projects are required to diversify the firm
d) the analyzed projects are of comparable risk to existing projects

Answer: d

25. The cost of retained earnings is equal to:
a) the return on new common stock
b) the return on preferred stock
c) the return on existing common stock
d) It does not have a cost.

Answer: c

26. The capital budgeting decision involves the planning of expenditures for projects with a life of at least:
a) one year
b) five years
c) ten years
d) fifteen years

Answer: a

27. Under the payback period:
a) we compute the time required to recoup the original investment
b) there is no consideration of inflows after the cutoff period
c) the time value of money is ignored
d) all of the above are correct

Answer: d

28. All of the following are true of capital cost allowance except:
a) it is a non-cash expense
b) it is not tax-deductible
c) it provides tax shield benefits
d) it should not be disregarded in capital budgeting decisions

Answer: b

29.The standard deviation:
a) is the square root of the variance
b) measures dispersion or variability around the expected value
c) may be used to compare investments with the same expected return
d) all of the above are correct

Answer: d

30. The efficient frontier represents:
a) the difference between investment returns
b) optimal risk-return tradeoffs
c) the correct investment for all firms to make
d) the correlation between profits and the portfolio effect

Answer: b

31. Which of the following constitutes an internal source of funds:
a) corporate bonds
b) common stock
c) commercial paper
d) retained earnings and amortization cash flow

Answer: d

32. It would be fair to say that securities markets in the future:
a) will become more competitive as an international market system develops
b) will be less efficient
c) will be more highly segregated than they are today
d) will be less automated than today's markets

Answer: a

33. The spread may best be defined as:
a) the compensation due the lead underwriter
b) the total compensation for those participating in the distribution process
c) the price finally paid by the public for the shares
d) the proceeds from the distribution received by the firm

Answer: b

34. Private placement involves selling securities directly to:
a) insurance companies
b) pension funds
c) wealthy individuals
d) all of the above are correct

Answer: d

35. In a lease versus borrow to purchase decision the appropriate discount rate, except for the salvage value, is:
a) the cost of capital
b) the aftertax cost of debt
c) the cost of equity capital
d) the cost of the debt

Answer: b

36. Preferred equity has all of the following characteristics except:
a) fixed dividends
b) the cumulative right to annual dividends
c) precedence over common stock dividends
d) residual claim to income

Answer: d

37. Under the marginal principle of retained earnings:
a) the firm must compare what it can earn with what shareholders could earn on funds if they were distributed
b) all funds above and beyond retained earnings are paid to shareholders
c) funds not paid to creditors and preferred shareholders belong to common shareholders
d) all projects are financed internally

Answer: a

38. A stock dividend:
a) represents a distribution of additional shares to common shareholders
b) differs from a stock split largely in size
c) normally has no real value to the investor
d) all of the above are correct

Answer: d

39. Debt that is not secured by specific assets is called:
a) an indenture
b) a debenture
c) a mortgage agreement
d) common stock

Answer: b

40. A convertible security is
a) convertible into cash at the option of the holder
b) a bond or share of preferred, convertible into common at the firm's option
c) a bond or share of preferred, convertible into common at the holders' option
d) a security convertible into a debenture at the holder's option

Answer: c

41. The first area of study to benefit from the focus in the 1950's to a more analytical, decision oriented approach was:
a) cash and inventory management
b) capital budgeting (allocating financial capital to the purchase of plant and equipment)
c) capital structure formulation (the balance between liabilities and equity)
d) dividend policy (the relationship between dividends and earnings)

Answer: b

42. Agency theory examines the
a) relationship between the owners and managers of the firm
b) insurability of the firm's assets
c) relationship between dividend policy and firm value
d) value of the firm relative to other firms in the industry

Answer: a

43. A corporation will typically pay moderate dividends in:
a) Development-Stage I
b) Growth-Stage II
c) Expansion-Stage III
d) Maturity-Stage IV

Answer: c

44. The balance sheet of the firm shows:
a) the profitability of the firm over time
b) the holdings and obligations of the firm
c) the assets of the firm on a current cost basis
d) the receipt and disbursement of corporate funds

Answer: b

45. The statement of cash flows:
a) measures changes in net income over time
b) the receipt and disbursement of funds of the firm
c) the assets of the firm and the means by which they are financed
d) emphasizes the critical nature of the firm's cash flows

Answer: d

46. To an economist, the term income means:
a) sales-cost of goods sold
b) change in real worth taking place between the beginning and each of a period
c) operating profit-interest expense
d) earnings aftertaxes

Answer: b

47. Under the Du Pont method of analysis, return on total assets is:
a) profit margin times assets turnover
b) net income/total assets
c) income before interest and taxes (EBIT)/total assets
d) net income/sales

Answer: b

48. To the securities analyst, the most important ratio group is:
a) asset utilization
b) profitability
c) liquidity
d) debt utilization

Answer: b

49. Which of the following is not a step in the development of the pro forma income statement?
a) Establish a sales projection.
b) Determine a production schedule and associated expenses to determine gross profit.
c) Determine the cash receipts.
d) Determine profit by completing the actual pro forma statement

Answer: c

50. The first step in preparing the pro forma balance sheet is to:
a) prepare the pro forma income statement
b) prepare the cash budget
c) prepare the statement of cash flows
d) examine the prior period's balance sheet and translate the items through time

Answer: d

51. On the pro forma income statement, the increase in retained earnings is derived:
a) earnings before taxes - taxes
b) earnings aftertaxes - dividends
c) operating profit - taxes
d) operating profit - dividends

Answer: b

52. Most break-even analysis:
a) is conducted on the basis of cash flows
b) is theoretical only and has little impact on the firm
c) excludes fixed costs
d) is done on the basis of accounting flows

Answer: d

53. The indifference point identifies:
a) equality of impact on eps between two financing plans
b) equality of impact on EBIT between two financing plans
c) equality of impact on revenue between two financing plans
d) equality of impact on number of shares between two financing plans

Answer: a

54. The key to current asset planning is:
a) ensuring that the firm remains current on its obligation
b) maintaining an inventory surplus to ensure liquidity
c) forecasting sales accurately and matching production with the forecast
d) maintaining the proper rate of asset growth

Answer: c

55. Which of the following would not be important in examining the firm's build-up of accounts receivable/cash/current assets:
a) sales forecast
b) cash receipts and cash payments schedules
c) income statement
d) a brief cash budget

Answer: c

56. An inverted yield curve often foreshadows:
a) an inflationary period
b) a recessionary period
c) a large government bond issue
d) nothing at all

Answer: b

57. If a firm has an average daily, remittance of $4,000,000 and 1.5 days in the collection process may be saved through a lockbox system, has the firm freed up any real funds for other investment?
a) No, these funds are theoretical in nature only
b) Yes, approximately $2,666,667 has been freed up
c) Yes, approximately $6,000,000 has been freed up
d) Cannot be determined from information provided

Answer: c

58. The level of accounts receivable for the firm:
a) should be judged based on historical standards of industry norms
b) should be judged as to whether the return earned on A/R equals or exceeds the potential gain from other investments
c) is irrelevant as long as sales are increasing
d) is not the concern of the financial manager

Answer: b

59. The net credit position of the firm is defined as:
a) its credit rating
b) the extent to which the firm has utilized its credit line
c) the difference between short and long term debt
d) the difference between accounts receivable and accounts payable

Answer: d

60. The major disadvantage of commercial paper is:
a) the continued availability of funds is less certain than with bank financing
b) that there is no secondary market for commercial paper
c) firms must maintain an account balance equal to the paper outstanding
d) commercial paper is normally issued with a floating interest rate

Answer: a

61. The interest rate used in time value of money calculations is also referred to as:
a) a discount rate, rate of return or yield
b) a discount rate, accounting return or yield
c) a compound rate, rate of return or market return
d) a compound rate, accounting return, or yield

Answer: a

62. The value in five years of a stream of payments received over the five year period is known as:
a) future value-annuity
b) present value-annuity
c) compound sum-single amount
d) present value-single amount

Answer: a

63. The interest rate used to discount the cash flows associated with a bond is:
a) the required rate of return on the firm's equity
b) the yield to maturity
c) the prime rate
d) the government T-bill rate

Answer: b

64. A payoff schedule for a loan is known as:
a) a mortgage
b) an interest schedule
c) a principal
d) an amortization schedule

Answer: d

65. If the yield to maturity changes, the effect will be greatest on:
a) long term bonds
b) short term bonds
c) government bonds
d) the effect will be the same for all bonds

Answer: a

66. The value of a share of common stock may be thought of as:
a) a perpetuity
b) an annuity
c) the present value of a perpetuity
d) the present value of expected future dividends

Answer: d

67. The cost of debt is measured by:
a) the yield to maturity on the firm's bonds
b) the coupon rate on the firm's bonds
c) the weighted average cost of capital
d) the marginal cost of capital

Answer: a

68. The least expensive form of financing for the firm is:
a) existing common stock
b) preferred stock
c) debt
d) new common stock

Answer: c

69. As more and more funds are required by the firm, the cost of each component of the capital structure may increase. These incremental changes are most correctly referred to as:
a) the weighted average cost of capital
b) the marginal cost of capital
c) the cost of capital
d) the incremental cost of capital

Answer: b

70. All of the following are widely used methods for evaluating capital expenditures except;
a) payback period
b) internal rate of return
c) net present value
d) weighted average cost of capital

Answer: d

71. All of the following are true regarding capital rationing except:
a) it places on artificial constraint on funds that many be invested
b) it may result out of a fear of growth
c) it may result out of a hesitation to use external sources of funds
d) it will help the overall profitability of the firms

Answer: d

72. The expected value may be defined as
a) a weighted average of outcomes times their probability
b) the arithmetic average of the outcomes
c) the median value of the possible outcome
d) a measure of dispersion or variability

Answer: a

73. The key to simulation analysis has been:
a) statistical analysis
b) the development of the computer
c) risk adjusted interest rates
d) the ability to classify investments as to their risk class

Answer: b

74. Markets comprised of securities with maturities of one year or less are generally referred to as:
a) money markets
b) capital markets
c) stock markets
d) bond markets

Answer: a

75. A major disadvantage of preferred stock is:
a) common stock dividends have a higher order of precedence
b) dividends are not tax-deductible
c) there is no secondary market for preferred stock
d) the preferred dividend may vary greatly year to year

Answer: b

76. Organized securities markets exhibit all of the following characteristics except:
a) listings on national and regional exchanges are mutually exclusive
b) each exchange has a central location where buying and selling occurs
c) brokers represent the actual buyers and sellers
d) securities are listed and traded with the approval of the board of governors

Answer: a

77. Going public offers the firm many of the advantages listed below with the exception of:
a) security markets may be tapped for a greater amount of funds
b) the prestige of a public security may help in bank negotiations
c) marketable securities may be used for acquisitions
d) there is less pressure for short-term profits

Answer: d

78. All of the following influence the price of a stock for the firm going public by way of an IPO except:
a) the previous share price
b) an in-depth company analysis
c) the P/E ratio for similar firms in the industry
d) anticipated public demand

Answer: a

79. With a secured claim:
a) specific assets are pledged in the event of default
b) a debenture exists
c) the lower the value of the initial security
d) pledged assets are often sold off and the proceeds distributed

Answer: a

80. Which of the following is a benefit of debt to the firm:
a) interest and principal obligations are contractually set
b) interest payments are tax deductible
c) indenture agreements provide the firm with no restrictions
d) used beyond a certain point, debt will decrease the cost of capital

Answer: b

81. Under a pre-emptive right provision:
a) holders of common stock must be given the first option to purchase new shares
b) common shareholders have a pre-emptive right to dividends
c) preferred shareholders have the first option on new common share
d) dilution of existing positions is encouraged

Answer: a

82. A preferred issue carrying a call provision will carry:
a) a higher yield than non-callable preferred
b) a lower yield than non-callable preferred
c) the same yield as non-callable preferred
d) the same yield as callable debt

Answer: a

83. Wealthier shareholders tend to prefer:
a) a high dividend payout ratio
b) short term capital gains
c) floating rate dividends
d) capital appreciation

Answer: d

84. In chronological order, which of the following is correct:
a) ex-dividend date, holder of record date, payment date
b) holder of record date, ex-dividend date, holder of record date
c) payment date, ex-dividend date, holder of record date
d) holder of record date, payment date, ex-dividend date

Answer: a

85. The conversion ratio indicates:
a) the number of shares of common to which the security may be converted
b) the conversion price of the security
c) the number of bonds the common share may be converted to
d) the number of bonds the preferred share may be converted to

Answer: a

86. A warrant may best be defined as:
a) an option to sell a specified number of shares at a stated price
b) an option to buy a stated number of shares at a stated price
c) a convertible security
d) a bond derivative

Answer: b

87. Which of the following is not a non-financial motive for merging:
a) the desire to expand management capabilities
b) the need to expand marketing capabilities
c) the desire for easier access to capital markets
d) the acquisition of new products

Answer: c

88. If a firm acquires another firm with a higher P/E ratio:
a) postmerger earnings per share will be diluted
b) a cash acquisition is questionable
c) a stock-for-stock exchange should be pursued
d) none of the above are correct

Answer: c

89. The arrangement preferred by most business firms and foreign government is:
a) the joint venture
b) the export arrangement
c) the licensing agreement
d) the fully owned foreign subsidiary

Answer: a

90. The spot rate is:
a) unrelated to the foreign exchange rate
b) the rate of exchange for future delivery
c) the rate of exchange for immediate delivery
d) the "black market" exchange rate

Answer: c

91. To minimize transaction exposure, firms may pursue which of the following activities:
a) forward exchange market hedging
b) money market hedging
c) currency futures market hedging
d) all of the above are correct.

Answer: d

92. The ultimate measure of performance is:
a) the amount of the firm's earnings
b) how the earnings are valued by the investor
c) the firm's profit margin
d) return on the firm's total assets

Answer: b

93. Financial markets:
a) exist as a vast global network of individuals and financial institutions
b) include a broad group representing lenders, borrowers, owners, institutional investors, corporations, government units and others
c) circulate information quickly that affects prices of securities
d) all of the above

Answer: d

94. The income statement measures:
a) what the firm owns and how those assets are financed
b) the profitability of the firm at a given point in tim
c) the profitability of the firm over a period of time
d) how changes in the balance sheet are financed over time

Answer: c

95. All of the following are examples of tax deductible expenses, except:
a) dividends on common shares
b) interest payments
c) amortization charges
d) sales and administrative expenses

Answer: a

96. Which of the following is not the responsibility of financial management?
a) allocation of funds to current and capital assets
b) obtaining the best mix of financing alternatives
c) preparation of the firm's accounting statements
d) development of an appropriate dividend policy

Answer: c

97. The allocation of capital is determined by:
a) expected rates of return
b) the Bank of Canada
c) the initial sale of securities in the primary market
d) the size of the federal debt

Answer: a

98. All of the following are true of shareholders' equity except:
a) it represents the combined total of the firm's current and long term assets
b) it represents the total contribution and ownership interest of preferred and common shareholders
c) the three basic components are preferred stock, common stock, and retained earnings
d) it represents the difference between the firm's assets and liabilities

Answer: a

99. Asset utilization ratios measure:
a) the speed at which the firm is turning over its assets
b) the ability of the firm to earn on adequate return on sales, total assets, and invested capital
c) the firm's ability to pay off short term obligations as they are due
d) the debt position of the firm in light of its assets and earning power

Answer: a

100. Among the liquidity ratios, one would include:
a) receivables turnover and inventory turnover
b) current ratio and quick ratio
c) capital asset turnover and total asset turnover
d) receivables turnover and total asset turnover

Answer: b