Chapter-9-Financial Management 

MCQ-Based Questions for CUET Business Studies Chapter-9-Financial Management 

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Practice Questions for CUET Business Studies chapter-9-Financial Management SET-1

Business Studies - MCQ on Business Finance

Class XII

Q.1. The money required for starting, running, expanding and modernising a business is formally called

a. business finance.

b. business organisation.

c. business capacity.

d. business cash.

Answer:

(a)

Explanation: The term business finance is used for the money we use for various purposes in the business.

Q.2. The average time between purchasing raw material for production and receiving cash from debtors is called

a. accounting cycle.

b. business cycle.

c. operating cycle.

d. planning cycle.

Answer:

(c)

Explanation: The total time taken in purchasing raw material, converting it into final product, selling them and receiving cash from the debtors is called operating cycle.

Q.3. Gross working capital means

a. current liabilities.

b. current assets.

c. current assets less current liabilities.

d. current liabilities less current assets.

Answer:

(b)

Explanation: Current assets are called gross working capital. Current assets include cash, debtors, stock and short-term investments.

Q.4. Net working capital is financed by

a. debtors.

b. gross working capital.

c. long-term investments.

d. current liabilities.

Answer:

(c)

Explanation: Net working capital is calculated by deducting current liabilities from current assets. If current assets are equal to current liabilities, it means that current assets are totally financed by current liabilities. If current assets are greater than current liabilities, then the excess is surely financed by non-current liabilities or long-term loans and share capital.

Q.5. The activity related to timely procurement of monetary resources and making them available at the right time for the purpose for which they are acquired is called

a. human resource management.

b. marketing management.

c. business management.

d. financial management.

Answer:

(d)

Explanation: Financial management is related to acquiring, allocating, using and controlling the funds in a manner that best suits to the organisational interests in the achievement of its goals and objectives.

Q.6. Making fixed capital decisions is also called

a. current budgeting.

b. fixed budgeting.

c. capital budgeting.

d. performance budgeting.

Answer:

(c)

Explanation: Capital budgeting means taking investment decisions regarding the purchase of fixed assets.

Q.7. One of the factors affecting financial planning is

a. social responsibility.

b. nature and size of the business.

c. nature of employees.

d. manager’s attitude.

Answer:

(b)

Explanation: The nature and size of the business affects its business needs. Capital intensive industries need more funds compared to labour intensive industries. Growing organisations need more funds than a well-developed company.

Q.8. An investor who wants that his investments should be safe and give him a fixed rate of return every year should opt for

a. equity shares of the enterprise.

b. debentures and preference shares of the enterprise.

c. assets of the enterprise.

d. planning premises of the organisation.

Answer:

(b)

Explanation: Debentures and preference shares don’t involve risk as their rate of return is fixed. The investors who want to avoid risk taking should opt for debt funds in the organisation.

Q.9. A sound capital structure should be

a. complicated.

b. costly.

c. rigid.

d. economical.

Answer:

(d)

Explanation: The cost of procuring funds should be less. While borrowing funds, it should be kept in mind that the cost of servicing of debts would be reasonably low.

Q.10. Financial planning is a part of

a. marketing management.

b. material management.

c. financial management.

d. factory management.

Answer:

(c)

Explanation: Financial planning means making it sure that the adequate funds are available as and when needed and making arrangements to invest the idle funds, if any. Financial management means acquiring and using funds on investing excess funds in or outside the business so as to maximise returns. Financial planning is related to planning part only, whereas financial management is related to the planning as well as controlling the usage of funds.

Q.11. Condition of the capital market is one of the

a. factors affecting organisation structure.

b. factors affecting recruitment process.

c. methods of evaluating alternatives.

d. factors affecting capital structure.

Answer:

(d)

Explanation: In recession time, investors would prefer to invest in debt funds because they provide fixed returns. In booming economy, investors prefer to invest in equity share because they would be able to share the profits of the enterprise by purchasing equity shares.

Q.12. The decisions regarding the dividend policy and creating of reserves are taken by

a. marketing manger.

b. financial manager.

c. production manager.

d. business development manager.

Answer:

(b)

Explanation: The financial manager makes the decision regarding how much profit should be distributed among shareholders as dividend and how much of it should be retained in the business as reserves so that they can be used for further funds requirements in near future.

Q.13. The share capital of ABM Ltd is Rs 1,00,000 and its debentures are worth Rs 40,000. Therefore, the amount of capitalisation is

a. Rs 40,000.

b. Rs 60,000.

c. Rs 1,00,000.

d. Rs 1,40,000.

Answer:

(d)

Explanation: The value of capitalisation is the total amount of owners’ capital and outsiders’ loans. In this case, the amount of Capitalisation is Rs 1,40,000.

Q.14. The factors, which affect an organisation’s decisions regarding going for equity funds or debt funds, are also called

a. factors affecting organisation structure.

b. factors affecting planning premises.

c. factors affecting capital structure.

d. factors affecting the direction of the organisation.

Answer:

(c)

Explanation: Capital structure is the ratio of equity capital and debt funds. If one item is reduced or increased, the composition or structure changes.

Q.15. The ratio and composition among different long-term funds is called

a. organisation structure.

b. capital.

c. planning premises.

d. capital structure.

Answer:

(d)

Explanation: Capital structure is the composition between owners’ funds and outsiders’ long-term funds. It tells how much amount has been invested by the owner of the business and how much amount has been borrowed from outside.

Q.16. Statutory requirement is one of the

a. factors affecting organisation structure.

b. factors affecting capital structure.

c. methods of controlling the funds.

d. managerial control tools.

Answer:

(b)

Explanation: Government has put ceiling on the use of the funds for different kinds of enterprises. Some organisations are not allowed to raise funds through equity, while some cannot raise funds through debts. For example, banking companies can issue equity shares only not preference shares or debentures.

Q.17. The promoters of a company want to retain the control of the enterprise in their own hands. To do this, they would

a. issue new equity shares.

b. issue preference shares and debentures.

c. redeem preference shares.

d. redeem debentures.

Answer:

(b)

Explanation: We know that equity shareholders have the right to participate in the management of the enterprise. If new equity shares are issued, promoters will have to share the decision-making power with the new shareholders. In this case, promoters would prefer to issue preference shares and debentures. Preference shares and debentures have no say in the decision-making process of the enterprise.

Q.18. Net working capital means

a. current liabilities.

b. current assets.

c. current assets less current liabilities.

d. current liabilities less current assets.

Answer:

(c)

Explanation: Net working capital is the difference between current assets and current liabilities.

Q.19. The ratio debts and total Capitalisation is called

a. capital structure.

b. capitalisation.

c. capital gearing.

d. share capital.

Answer:

(c)

Explanation: If owner’s fund is more, it means low gearing or trading on thick equity. On the other hand, if outsiders’ loan is more than owner’s funds, it means high gearing or trading on thin equity.

Q.20. The investors who are willing to take risks to earn higher rate of returns should invest in

a. equity capital of the enterprise.

b. preference shares of the enterprise.

c. debentures of the enterprise.

d. assets of the enterprise.

Answer:

(a)

Explanation: Equity shareholders are the owners of the enterprise. Being the owner, they share the profits and losses of the enterprise. If the profits are high, equity shareholders get higher dividends. On the other hand, debenture holders and preference shareholders do not share profits; they get their fixed rate of return every year.

Q.21. Share capital, debentures, long-term loans are mainly used for

a. working capital.

b. current capital.

c. fixed capital.

d. current assets.

Answer:

(c)

Explanation: These are the main sources of long-term finance. Fixed assets are used for long-term finance this is the reason why they are raised from long-term sources.

Q.22. If current assets and current liabilities are increased by a fixed amount, then

a. working capital will increase.

b. working capital will decrease.

c. working capital will remain constant.

d. fixed capital will reduce.

Answer:

(c)

Explanation: Working capital is the difference between current assets and current liabilities. If same amount is added to and reduced from them, the resultant working capital will be the same as it was earlier.

Q.23. The manager responsible to see that sufficient cash is available at all the times to pay wages and salaries, purchase raw material and meet day-to-day expenses is

a. marketing manager.

b. business manager.

c. stores manger.

d. finance manger.

Answer:

(d)

Explanation: It is the responsibility of a finance manager to see that sufficient cash is available for the production of goods and services. He makes sure that there is neither shortage of finance nor excess of it. It also makes sure that the money is being utilised efficiently.

Q.24. Manufacturers need a large amount of fixed capital as compared to a trader because

a. a manufacturing company has a complicated organisation structure.

b. a manufacturing company has a lengthy planning process.

c. they have to invest on the purchase of fixed assets.

d. they have to pay their creditors.

Answer:

(c)

Explanation: A manufacturing company needs funds to buy the machinery to produce goods. For example, Maruti Suzuki needs more funds to conduct its manufacturing. The traders of medicines don’t require more funds because they don’t have to buy heavy machines for conducting their operations.

Q.25. One of the factors influencing financial planning is

a. number of levels of management.

b. employees morale.

c. government regulations.

d. number of suppliers.

Answer:

(c)

Explanation: If the government reduces the bank rates, the organisation would prefer to borrow from banks and financial institutions because the cost of acquiring and servicing fund would reduce.

Q.26. A sound capital structure should be

a. complicated.

b. safe.

c. costly.

d. rigid.

Answer:

(b)

Explanation: A sound capital structure should provide safety of the investments to owners and loan-givers.

Q.27. The money invested in fixed assets is called

a. working capital.

b. current capital.

c. reserve capital.

d. fixed capital.

Answer:

(d)

Explanation: Fixed capital is the amount of money that is invested in the fixed assets. Please note that fixed assets are the assets, which are purchased to run the business and are not meant for resale.

Q.28. In a newly set up enterprise, the favourable situation is

a. high capital gearing.

b. low capital gearing.

c. zero equity capital.

d. zero debts.

Answer:

(b)

Explanation: Low gearing ratio means that debts are less than the equity. Due to the risk involved in the new organisation, it is favourable to have less borrowed funds. A business may not make enough profits in initial years to pay interest to debentureholders and dividend to preference shareholders.

Q.29. Intention to retain the control of the enterprise is a

a. part of capitalisation.

b. factor affecting organisation structure.

c. factor affecting capital structure.

d. means of raising debts.

Answer:

(c)

Explanation: If the owners want to share the control of business, they would issue new equity shares. If they do not want to share the control of the enterprise with new people, they would issue debt funds. Equity fund holders have rights to participate in management but debt holders do not have such rights. Please note that capital structure consists of the composition of equity and debts in the total investments in the enterprise.

Q.30. Fixed capital decisions are important for a business because

a. they are related to the purchase of raw material.

b. they are meant for long-term.

c. they are mainly used for working capital.

d. they are used to repay creditors.

Answer:

(b)

Explanation: Fixed capital is used for long-term. Whenever a person or business borrows long-term funds, it pays extra attention to the acquisition and terms of conditions of borrowings because it impacts the business in the long-term.

Q.31. Financial management involves decision-making in the areas of

a. investment, marketing and personnel.

b. marketing, personnel and financing.

c. investment, financing and dividend.

d. marketing, dividend and investment.

Answer:

(c)

Explanation: In financial management, careful selection of assets in which funds are to be invested is important. The decisions regarding the composition of the share capital and loans, and the amount of dividend that is to be paid come under the purview of financial management.

Q.32. One of the features of gross working capital is that

a. it is never negative.

b. it is never positive.

c. it is always zero.

d. it is always equal to current liabilities.

Answer:

(a)

Explanation: Gross working capital means current assets. Current assets cannot be negative.

Q.33. A sound capital structure should be

a. complicated.

b. costly.

c. flexible.

d. rigid.

Answer:

(c)

Explanation: The capital structure should be such that it allows the organisation to change the debt-equity ratio at any time. It should allow the enterprise to be able to raise funds as and when it plans to expend and modernise.

Q.34. The capital invested in current assets such as stock, debtors, short-term securities and cash balance is called

a. reserve capital.

b. working capital.

c. share capital.

d. fixed capital.

Answer:

(b)

Explanation: Working capital is the amount that is locked in the business operations.

Q.35. Investment decisions include the decisions regarding

a. capital budgeting and working capital decisions.

b. product planning.

c. design of product structure.

d. sale of investments.

Answer:

(a)

Explanation: Investment decisions are related to the decisions of capital budgeting, which involves choosing the right asset for investment. Working capital decisions are related to current assets.

Q.36. The other name for fixed capital is

a. working capital.

b. blocked capital.

c. capital reserve.

d. investment.

Answer:

(b)

Explanation: Fixed capital is also called blocked capital because it is the amount, which is blocked in the business in the form of fixed assets. This capital cannot be converted into cash and if it is converted in emergency, it causes a loss to the enterprise.

Q.37. One of the objectives of financial management is to

a. spend the bank deposits.

b. ensure that sufficient funds are available at a reasonable cost.

c. keep funds idle.

d. take more risks in the investments.

Answer:

(b)

Explanation: Financial management keeps sufficient liquidity with the organisation. It means sufficient funds will be available as and when the organisation needs them.

Q.38. Long operating cycle means that

a. no working capital is required.

b. a large amount of working capital is required.

c. very small amount of working capital is required.

d. working capital is encashed quickly.

Answer:

(b)

Explanation: In a large operating cycle, the money invested in raw material would be recovered in a longer period of time. This means that more funds will be required.

Q.39. The other name for working capital or revolving capital is

a. block capital.

b. current capital or circulating capital.

c. fixed capital.

d. share capital.

Answer:

(b)

Explanation: Working capital is used in the day-to-day operations of the business. On account of this, it is also called current capital or circulating capital.

Q.40. Preparing financial budget to estimate the financial needs of the enterprise is a responsibility of

a. finance manager.

b. marketing manager.

c. business manager.

d. production manager.

Answer:

(a)

Explanation: It is the responsibility of a finance manager to determine various sources and the uses of funds in the near future.

Q.41. High gearing ratio indicates that

a. long-term loans are more than capital.

b. no loan has been taken.

c. there is no capital.

d. capital is more than long-term loans.

Answer:

(a)

Explanation: High capital gearing ratio indicates that the organisation has used more loans as compared to capital.

Q.42. One of the advantages of working capital is that

a. it helps to buy assets.

b. it helps to repay the loans.

c. it helps to pay current liabilities promptly.

d. it helps in reducing supervision.

Answer:

(c)

Explanation: Adequate working capital helps to pay the current liabilities on time. This helps to improve the goodwill of the enterprise in the eyes of creditors and banks.

Q.43. One of the functions of financial manager is

a. recruiting the employees.

b. designing organisation structure.

c. drafting marketing strategy.

d. estimating capital requirements.

Answer:

(d)

Explanation: Finance manager estimates the requirements of various funds for the business. Finance manager prepares the budget to find out at what time and in what amount the finance will be needed.

Q.44. Inadequate working capital may result in

a. buying of fixed assets.

b. issuing share capital.

c. interruption of production activities.

d. improved goodwill of the firm.

Answer:

(c)

Explanation: Working capital is used in producing goods and services. If working capital is not sufficient, it may even stop the production process, which will endanger the existence of the organisation and tarnish its goodwill in the market.

Q.45. Dividend policy of an organisation is one of the

a. factors affecting planning premises.

b. factors affecting organisation structure.

c. components of organisation structure.

d. factors affecting working capital.

Answer:

(d)

Explanation: If an organisation pays dividends every year, it needs more working capital than the company, which doesn’t distribute dividends at all.

Q.46. Cash flow helps in

a. material management.

b. marketing management.

c. factory management.

d. financial management.

Answer:

(d)

Explanation: Cash flow statement is a tool of financial management. This statement shows the cash flows from different activities.

Q.47. Funds invested in the machinery are a part of

a. fixed capital.

b. working capital.

c. rotating capital.

d. circulating capital.

Answer:

(a)

Explanation: Machinery is a fixed asset. The amount invested in fixed assets is called fixed capital.

Q.48. The capital, which keeps circulating in the business, is called

a. share capital.

b. fixed capital.

c. blocked capital.

d. working capital.

Answer:

(d)

Explanation: Working capital is the amount by which raw material is purchased and processed in the enterprise. Raw material keeps rotating in the enterprise before its completion. Thus, working capital is called circulating capital.

Q.49. Excess working capital may result in

a. interruption in production process.

b. idle funds.

c. buying more assets.

d. issuing share capital.

Answer:

(b)

Explanation: It will reduce the profits of the enterprise as the idle funds could otherwise be invested outside that would fetch interest for the enterprise.

Q.50. Capitalisation refers to

a. capital and debts.

b. capital profits.

c. capital structure.

d. capital of the owner.

Answer:

(a)

Explanation: Capitalisation refers to the total long-term funds that the organisation uses. Owners’ funds and outsiders’ long-term funds are collectively called Capitalisation. Capitalisation is different from capital structure, which refers to the composition of the capitalisation.

Practice Questions for CUET Business Studies chapter-9-Financial Management SET-2

Q.51. The cost of acquiring funds is a

a. factor affecting organisation structure.

b. factor affecting capital structure.

c. method of controlling the funds.

d. managerial control tool.

Answer:

(b)

Explanation: If acquiring debt is cheaper than issuing equity capital, the enterprise would prefer to borrow loans. If the cost of issuing equity shares is low, the organisation would prefer to issue equity shares. In this way, their ratios will change, and thus the composition of capital structure will also change.

Q.52. A sound capital structure should be

a. complicated.

b. simple.

c. costly.

d. rigid.

Answer:

(b)

Explanation: Capital structure should be easily understandable. The use of too many types of securities and conditions therein should be minimised to avoid confusion.

Q.53. One of the features of net working capital is that

a. it is always positive.

b. it is always negative.

c. it can be positive and negative.

d. it is always equal to current liabilities.

Answer:

(c)

Explanation: Net working capital is the difference of current assets and current liabilities. If current assets are more than current liabilities, working capital is positive. On the other hand, if current assets are less than current liabilities, working capital is negative. Please note that working capital will be zero, if current assets are equal to current liabilities.

Q.54. Operating cycle ends with

a. selling of finished goods.

b. receiving cash from debtors.

c. purchasing raw material for production.

d. conversion of raw material into finished goods.

Answer:

(b)

Explanation: The money spent in producing the goods is recovered when it is received from the debtors.

Q.55. One of the functions of financial manager is

a. to locate the source of employment.

b. to design marketing strategy.

c. to find out the sources of funds required for operations.

d. to introduce new products in the market.

Answer:

(c)

Explanation: Once the financial manager determines the requirements of funds, he tries to locate the source from where the funds would be procured. Then, he decides the composition of debt and equity, i.e., how much money should be invested by the owner and how much should be borrowed from outsiders.

Q.56. Low capital gearing ratio indicates that

a. long-term loans are more than capital.

b. there is no loans.

c. there is no capital.

d. capital is more than long-term loans.

Answer:

(d)

Explanation: Low capital gearing ratio indicates that the organisation has used more capital than it has borrowed from outsiders.

Q.57. One of the factors influencing financial planning is

a. the degree of risk in various sources of funds.

b. organisation structure.

c. marketing strategy.

d. levels of management.

Answer:

(a)

Explanation: An organisation would prefer to raise funds from shareholders because it doesn’t need to pay dividends in case of zero profits or loss. However, it will have to pay interest on debentures irrespective of it making profit or not. So, raising money through debentures is riskier than raising money from equity shares. However, it should be kept in mind that using only equity funds means limited availability of funds for operations and expansion. Financial manager has to strike a balance between debts and capital as the sources of funds so that the wealth maximisation objective is achieved.

Q.58. Capital structure can be calculated with the formula/e

a. debt / assets

b. debt / working capital and asset / working capital

c. debt / equity and debt / (debt + equity)

d. (debt + equity) / assets

Answer:

(c)

Explanation: Capital structure means the ratio of debts to equity and the ratio of debt to total capitalisation. Capitalisation is the sum total of debt and equity.

Q.59. Production or processing cycle implies

a. time from buying raw material to finished goods.

b. operating cycle.

c. business cycle.

d. trading cycle.

Answer:

(a)

Explanation: The time taken in converting raw material into finished products is called productions cycle.

Q.60. If the ROI (Return of Investment) is less than the interest rates of debentures, then the enterprise will

a. raise more debts.

b. issue more equity shares.

c. issue more preference shares.

d. raise no money from debts and equity.

Answer:

(b)

Explanation: If an enterprise earns less income than it has to pay as interest to debenture holders, then certainly it would not like to raise money by debentures. It would in this case prefer to issue equity shares because an enterprise need not pay any dividend to equity shareholders, if there is insufficient or no profit.

Q.61. One of the functions of a financial manager is

a. to locate the source of recruitment.

b. to introduce new products in different markets.

c. to exercise financial control.

d. to prepare cash book.

Answer:

(c)

Explanation: Financial control means ensuring that various financial decisions are actually benefiting the organisation in the best possible manner. The financial manager prepares cash flow statement and analyses financial statements with the help of ratio analysis. In this way, he tries to ascertain the sources of funds and the uses of funds, so that he can decide how much money has to be borrowed in case of need and how much has to be invested outside in case it exceeds the actual requirements.

Q.62. The period for which funds are to be borrowed is one of the

a. factors affecting capital structure.

b. components of organisation structure.

c. factors affecting organisation structure.

d. one of the components of capital structure.

Answer:

(a)

Explanation: While borrowing funds, an organisation has to determine for how long it needs the funds. If funds are needed for a short-term, debt funds are preferred because they would be repaid after a certain period and the obligation of paying interest thereon would also end. If funds are required for long-term needs, it is favourable to borrow through equity funds. Equity funds need not be paid shortly. Equity is repaid only in the event of winding up of the company. Please note that the composition of capital structure changes if one or some of its components change.

Q.63. EPS stands for

a. Each Production System.

b. Every Preference Share.

c. Earning Per Share.

d. Earning of Preference Shares.

Answer:

(c)

Explanation: EPS = Earning Per Share.

Q.64. One of the factors influencing the working capital of an enterprise is

a. organisation structure.

b. planning premises.

c. fixed assets.

d. working capital turnover.

Answer:

(d)

Explanation: Working capital turnover means the rotation of working capital. The higher the turnover of working capital, the lower would be the requirement of working capital.

Q.65. Fixed capital is required

a. for a long period.

b. for a short time.

c. only in case of winding up.

d. only at the commencement of business.

Answer:

(a)

Explanation: Fixed capital is the amount blocked in the fixed assets of an organisation. Fixed assets are kept for long time, and thus fixed capital also remains locked for a long time.

Q.66. A sound capital structure should

a. generate enough funds.

b. be complicated.

c. be costly.

d. be rigid.

Answer:

(a)

Explanation: Capital structure should be such that it enables the company to pay its debts in time. Enough cash should be generated from operations so that the debts are serviced on time and in full.

Q.67. One of the functions of financial manager is

a. to provide the raw material for the production.

b. to monitor the distribution of goods and services.

c. to raise funds from the outside sources.

d. to design the grapevine of the organisation.

Answer:

(c)

Explanation: Once the financial manager decides upon the sources of funds, he then interacts with the financial institutions, issues prospectus to public for shares and debentures, appoints brokers and contacts the bankers for the smooth and uninterrupted procurement of the funds for the business operations.

Q.68. Operating cycle starts with

a. selling of finished goods.

b. receiving cash from debtors.

c. purchasing raw material for production.

d. conversion of raw material into finished goods.

Answer:

(c)

Explanation: Operating cycle starts with the buying of raw material. This is the first activity in the process of production.

Q.69. The most economical source of finance is

a. preference shares.

b. equity shares.

c. debentures.

d. retained earnings.

Answer:

(d)

Explanation: Retained earnings do not have any acquisition costs. There is a specific procedure of issuing equity, preference shares and debentures that requires money outlay.

Q.70. The working capital requirement of an organisation depends on its operation cycle because

a. working capital extends operating cycle.

b. working capital reduces operating cycle.

c. small operating cycle needs less working capital.

d. small operating cycle needs large working capital.

Answer:

(c)

Explanation: Small operating cycle means that the money invested in raw material would be recovered shortly. If money is recovered shortly, it will be invested again in the operations. For example, the operating cycle of A ltd is 3 months and that of B ltd is 5 months. This means that A ltd recovers its money invested in producing goods in 3 months, whereas B ltd recovers the money of its working capital in 5 months. A company, which recovers it working capital quickly, would certainly need lesser investment in working capital.

Q.71. In an enterprise, working capital is used to

a. buy fixed assets.

b. run the business.

c. design organisation structure.

d. define the goals of the enterprise.

Answer:

(b)

Explanation: Working capital is money locked in the day-to-day operations of the business.

Q.72. Production cycle ends with

a. selling of goods.

b. purchasing of raw material.

c. conversion of raw material into finished goods.

d. cash collection from debtors.

Answer:

(c)

Explanation: As soon as the goods are produced, the production cycle ends.

Q.73. A sound capital structure should be

a. complicated.

b. costly.

c. rigid.

d. maximising shareholders’ wealth.

Answer:

(d)

Explanation: Good capital structure is the one that gives maximum returns to shareholders. It should be able to generate enough cash for day-to-day and occasional needs.

Q.74. Capital budgeting is a function of

a. finance manager.

b. marketing manager.

c. production manager.

d. business development manager.

Answer:

(a)

Explanation: Capital budgeting is related to the decisions relating to investments in fixed assets. It involves evaluating different alternative options of investments.

Q.75. In trading on equity, capitalisation includes

a. only equity.

b. only debt.

c. both debt and equity.

d. zero debt and zero equity.

Answer:

(c)

Explanation: Trading on equity means using long-term funds in the day-to-day running of the business in addition to equity. This is recommended when the rate of earning of profit is more than the rate of interest and the dividend on debentures and preference shares respectively. In this case, after paying interest to debentureholders and dividend to preference shareholder, the remaining profit would be distributed among the equity shareholders. In this way, the equity shareholders or owners are benefited with trading on equity.

Business Studies - MCQ on Business Finance and Marketing

Practice Questions for CUET Business Studies chapter-9-Financial Management SET-3

Q.1. Success of business depends on which of the following factors

a. How well finance is invested in assets and operations.

b. How timely and cheaply finances are arranged, from outside or from within the business.

c. Both 1 and 2.

d. None of the above.

Answer:

(c)

Expln. It also requires an understanding of business finance, major financial decision making areas, financial risk, the fixed and working capital requirements of the business.

Q.2 Why do business activities require finance

a. To establish and run a business.

b. To modernise a business.

c. To expand a business.

d. All of the above.

Answer:

(d)

Expln. Money required for carrying out business activities is called business finance.

Q.3 What are the objectives of Financial Management

a. Reducing the cost of funds procured.

b. Keeping the risk under control and achieving effective deployment of such funds.

c. Ensuring availability of enough funds whenever required and avoiding idle finance.

d. All of the above.

Answer:

(d)

Expln. Future of a business depends a great deal on the quality of its Financial Management.

Q.4 What do financial statements like Balance Sheet and Profit and Loss Account reflect

a. A firm’s financial position and its financial health.

b. A firm’s position in the Stock Exchange.

c. A firm’s relationship with its shareholders.

d. All of the above.

Answer:

(a)

Expln. Almost all items in the financial statements of a business are affected directly or indirectly through financial management decisions.

Q.5 The primary aim of financial management is to ____________.

a. Maximise human resource of the firm.

b. Maximise shareholder’s wealth

c. Maximise investments of the firm.

d. All of the above.

Answer:

(b)

Expln. It is also referred to as the wealth maximization concept.

Q.6 Which of the following are concerned with financial decision-making

a. Investment decision.

b. Financing decision.

c. Dividend decision.

d. All of the above.

Answer:

(d)

Q.7 Financial Planning is preparation of a _____________ of an organisation’s future operations.

a. Sales blueprint.

b. Marketing blueprint.

c. Financial blueprint.

d. None of the above.

Answer:

(c)

Expln. Financial planning ensures that enough funds are available at the right time.

Q.8 What are the twin objectives of financial planning

a. To ensure availability of funds whenever these are required.

b. To see that the firm does not raise resources unnecessarily.

c. Both 1 and 2.

d. None of the above.

Answer:

(c)

Expln. Financial planning aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds.

Q.9 Financing decisions are affected by which of the following factors

a. Cost

b. Risk

c. Floatation Costs

d. All of the above.

Answer:

(d)

Expln. Cash flow position of the business, level of fixed operating costs, control considerations and state of capital markets are also important factors.

Q.10 Higher the floatation cost, _______ attractive the source.

a. Less

b. More

c. Equal

d. None of the above

Answer:

(a)

Q.11 If a business has high level of fixed operating costs, it must opt for __________ fixed financing costs.

a. Higher

b. Lower

c. Medium

d. None of the above

Answer:

(b)

Q.12 What is a dividend

a. The portion of profit that is distributed to shareholders.

b. The portion of loss that is distributed to shareholders.

c. It is the discount offered by the firm.

d. None of the above.

Answer:

(a)

Expln. It is an important decision that how much of the profit earned by the company is to be distributed to shareholders and how much of it should be retained in the business for meeting investment requirements.

Q.13 Dividend constitutes current income ______________.

a. Disinvestment

b. Re-investment

c. Multi-investment

d. None of the above.

Answer:

(b)

Expln. This is so because retained earning increases the firm’s future earning capacity.

Q.14 One of the major determinants of the decision about dividend is __________.

a. Earnings

b. Assets

c. Goodwill

d. All of the above.

Answer:

(a)

Expln. Dividends are paid out of current and past earnings.

Q.15 A company having unstable earnings is likely to pay ________ dividends.

a. Higher

b. Smaller

c. No

d. All of the above.

Answer:

(b)

Q.16 One of the major factors affecting dividend decision is _________.

a. Employee Preference

b. Employer Preference

c. Shareholder Preference.

d. None of the above.

Answer:

(c)

Expln. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.

Q.17 The choice between payment of dividends and retaining the earnings is, to some extent, affected by difference in the _____________.

a. Tax treatment of dividends and capital gains.

b. Assets and liabilities.

c. Both 1 and 2.

d. None of the above.

Answer:

(a)

Expln. If tax on dividend is higher, it would be better to pay less by way of dividends.

Q.18 Investors, in general, view an increase in dividend as a good news and stock prices react _________ to it.

a. Negatively

b. Neither negatively nor positively

c. Positively

d. None of the above.

Answer:

(c)

Expln. The possible impact of dividend policy on the equity share price is one of the important factors considered by management.

Q.19 Certain provisions of the Company’s Act place restrictions on ____________.

a. Profit earned in a year.

b. Payouts as dividend.

c. Total taxes imposed.

d. All of the above.

Answer:

(b)

Expln. These provisions must be adhered to while declaring the dividends.

Q.20 What are the aims of financial management

a. Choosing the best investment.

b. Financing alternatives by focusing on their costs and benefits.

c. Increasing the shareholders’ wealth.

d. All of the above.

Answer:

(d)

Q.21 What are the main objectives of financial planning

a. It tries to forecast all the items which are likely to undergo changes.

b. It tries to foresee likely shortage and surpluses.

c. It enables the management to foresee the fund requirements.

d. All of the above.

Answer:

(d)

Q.22 Long-term planning relates to long term growth and investment. It focuses on ___________.

a. Monthly debenture policies.

b. Capital expenditure programmes.

c. Monthly share policies

d. All of the above.

Answer:

(b)

Q.23 Short-term planning covers short-term financial plan called ________.

a. Budget

b. Tax

c. Shares

d. Equities

Answer:

(a)

Expln. Budget is a detailed plan of action for a period of one year or less.

Q.24 Typically, financial planning is done for a period of _______.

a. One year or less.

b. 10 years.

c. 3 to 5 years.

d. 2 years.

Answer:

(c)

Q.25 Which of the following is the importance of Financial Planning

a. Helps in avoiding business shocks.

b. Helps in coordinating various business functions.

c. Provides a link between investment and financing decisions on a continuous basis.

d. All of the above.

Answer:

(d)

Expln. The most important function, in nutshell is that it helps the company in preparing for the future.

Q.26 On the basis of ownership, the sources of business finance can be broadly classified into_________.

a. Owners Funds

b. Borrowed Funds

c. Prospective funds

d. Both 1 and 2.

Answer:

(c)

Q.27 What do you mean by capital structure

a. The mix between owners and borrowed funds.

b. The mix between profit and loss of the firm.

c. Both 1 and 2.

d. None of the above.

Answer:

(a)

Q.28 Which of the following are the determinants of Capital Structure of a firm

a. Cash Flow Position.

b. Interest Coverage ratio

c. Debt Service Coverage Ratio.

d. All of the above.

Answer:

(d)

Q.29 Which are the factors that affect the requirement of Fixed Capital

a. Nature of business

b. Scale of operations

c. Choice of technique

d. All of the above.

Answer:

(d)

Q.30 Current assets are usually more liquid but contribute less to the profits than _________.

a. Liquid assets.

b. Fixed assets.

c. Losses.

d. All of the above.

Answer:

(b)