MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

MODULE – 3
FINANCING DECISIONS & VARIOUS SOURCES OF FINANCE

1. Operating leverage helps in analysis of:

(a) Business Risk, (b) Financing Risk,
(c) Production Risk, (d) Credit Risk

2. Which of the following is studied with the help of financial leverage?

(a) Marketing Risk, (b) Interest Rate Risk,
(c) Foreign Exchange Risk, (d) Financing risk

3. Combined Leverage is obtained from OL and FL by their:

(a) Addition, (b) Subtraction,
(c) Multiplication, (d) Any of these

4. High degree of financial leverage means:

(a) High debt proportion, (b) Lower debt proportion,
(c) Equal debt and equity, (d) No debt

5. Operating leverage arises because of:

(a) Fixed Cost of Production, (b) Fixed Interest Cost,
(c) Variable Cost, (d) None of the above

6. Financial Leverage arises because of:

(a) Fixed cost of production, (b) Variable Cost,
(c) Interest Cost, (d) None of the above

7. Operating Leverage is calculated as:

(a) Contribution ÷ EBIT, (b) EBIT÷PBT,
(c) EBIT ÷Interest, (d) EBIT ÷Tax

8. Financial Leverage is calculated as:

(a) EBIT÷ Contribution, (b) EBIT÷ PBT,
(c) EBIT÷ Sales, (d) EBIT ÷ Variable Cost

9. Which combination is generally good for firms

(a) High OL, High FL (b) Low OL, Low FL,
(c) High OL, Low FL, (d) None of these

10. Combined leverage can be used to measure the relationship between:

(a) EBIT and EPS, (b) PAT and EPS,
(c) Sales and EPS, (d) Sales and EBIT

11. FL is zero if:

(a) EBIT = Interest, (b) EBIT = Zero,
(c) EBIT = Fixed Cost, (d) EBIT = Pref. Dividend

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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

12. Business risk can be measured by:

(a) Financial leverage, (b) Operating leverage,
(c) Combined leverage, (d) None of the above

13. Financial Leverage measures relationship between

(a) EBIT and PBT, (b) EBIT and EPS,
(c) Sales and PBT, (d) Sales and EPS

14. Use of Preference Share Capital in Capital structure

(a) Increases OL, (b) Increases FL,
(c) Decreases OL, (d) Decreases FL

15. Relationship between change in sales and change m is measured by:

(a) Financial leverage, (b) Combined leverage
(c) Operating leverage, (d) None of the above

16. Operating leverage works when:

(a) Sales Increases, (b) Sales Decreases,
(c) Both (a) and (b), (d) None of (a) and (b)

17. Which of the following is correct?

(a) CL= OL + FL, (b) CL=OL-FL,
(c) OL= OL × FL, (d) OL=OL÷FL

18. If the fixed cost of production is zero, which one of the following is correct?
(a) OL is zero, (b) FL is zero,
(c) CL is zero, (d) None of the above

19. If a firm has no debt, which one is correct?

(a) OL is one, (b) FL is one,
(c) OL is zero, (d)FL is zero

20. If a company issues new share capital to redeem debentures, then:

(a) OL will increase, (b) FL will increase,
(c) OL will decrease, (d) FL will decrease

21. If a firm has a DOL of 2.8, it means:

(a) If sales increase by 2.8%, the EBIT will increase by 1%,
(b) If EBIT increase by 2.896, the EPS will increase by 1 %,
(c) If sales rise by 1%, EBIT will rise by 2.8%,
(d) None of the above

22. Higher OL is related to the use of higher:

(a) Debt, (b) Equity,
(c) Fixed Cost, (d) Variable Cost

23. Higher FL is related the use of:

(a) Higher Equity, (b) Higher Debt,
(c) Lower Debt, (d) None of the above

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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

24.In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:
(a) MP of Equity Shares, (b) Number of Equity Shares,
(c) Face Value of Equity Shares, (d) None of the above.

25. Trading on Equity is :

(a) Always beneficial, (b) May be beneficial,
(c) Never beneficial, (d) None of the above.

26. Benefit of 'Trading on Equity' is available only if:

(a) Rate of Interest < Rate of Return, (b) Rate of Interest > Rate of Return,
(c) Both (a) and (b), (d) None of (d) and (b).

27. Indifference Level of EBIT is one at which:

(a) EPS is zero, (b) EPS is Minimum,
(c) EPS is highest, (d) None of these.

28. Financial Break-even level of EBIT is one at which:

(a) EPS is one, (b) EPS is zero,
(c) EPS is Infinite, (d) EPS is Negative.

29. Relationship between change in Sales and d Operating Profit is known as:
(a) Financial Leverage, (b) Operating Leverage,
(c) Net Profit Ratio, (d) Gross Profit Ratio.

30. If a firm has no Preference share capital, Financial Break even level is defined as equal to -
(a) EBIT, (b) Interest liability,
(c) Equity Dividend, (d) Tax Liability.

31. At Indifference level of EBIT, different capital have:

(a) Same EBIT, (b) Same EPS,
(c) Same PAT, (d) Same PBT.

32. Which of the following is not a relevant factor m EPS Analysis of capital structure?
(a) Rate of Interest on Debt, (b) Tax Rate,
(c) Amount of Preference Share Capital, (d) Dividend paid last year.

33. For a constant EBIT, if the debt level is further increased then
(a) EPS will always increase; (b) EPS may increase,
(c)EPS will never increase, (d) None of the above.

34. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then
(a) Both plans be rejected, (b)Both plans are good,
(c) One is better than other, (d) None of the above.

35. Financial break-even level of EBIT is:

(a) Intercept at Y-axis, (b) Intercept at X-axis,
(c) Slope of EBIT-EPS line (d) None of the above.

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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

36. Which of the following is true for Net Income Approach?

(a) Higher Equity is better, (b) Higher Debt is better,
(c) Debt Ratio is irrelevant, (d) None of the above.

37. In case of Net Income Approach, the Cost of equity is:

(a) Constant, (b) Increasing,
(c) Decreasing, (d) None of the above.

38. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:
(a) Increases, (b) Decreases,
(c) Constant, (d) None of the above.

39. Which of the following is true of Net Income Approach?

(a) VF = VE+VD, (b) VE = VF+VD,
(c) VD = VF+VE, (d) VF = VE-VE,

40. Net Operating Income Approach, which one of the lowing is constant?
(a) Cost of Equity, (b) Cost of Debt,
(c) WACC & kd, (d)Ke and Kd

41. NOI Approach advocates that the degree of debt financing is:
(a) Relevant, (b) May be relevant,
(c) Irrelevant, (d) May be irrelevant.

42. 'Judicious use of leverage' is suggested by:

(a) Net Income Approach, (b) Net Operating Income Approach,
(c) Traditional Approach, (d) All of the above.

43. Which one is true for Net Operating Income Approach?

(a) VD = VF - VE, (b) VE = VF + VD,
(c) VE = VF - VD, (d) VD = VF + VE.

44. In the Traditional Approach, which one of the following remains constant?
(a) Cost of Equity, (b) Cost of Debt,
(c) WACC, (d) None of the above.

45. In MM-Model, irrelevance of capital structure is based on:

(a) Cost of Debt and Equity, (b) Arbitrage Process,
(c) Decreasing k0, (d) All of the above.
46.'That there is no corporate tax' is assumed by:
(a) Net Income Approach, (b) Net Operating Income Approach,
(c) Traditional Approach, (d) All of these.

47. 'That personal leverage can replace corporate leverage' is assumed by:
(a) Traditional Approach, (b) MM Model,
(c) Net Income Approach, (d) Net Operating Income Approach.

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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

48. Which of the following argues that the value of levered firm is higher than that of the unlevered firm?
(a) Net Income Approach, (b) Net Operating Income Approach,
(c) MM Model with taxes, (d) Both (a) and (c).

49. In Traditional Approach, which one is correct?

(a) ke rises constantly, (b) kd decreases constantly,
(c) k0 decreases constantly, (d) None of the above.

50. Which of the following assumes constant kd and ke?

(a) Net Income Approach, (b) Net Operating Income Approach,
(c) Traditional Approach, (d) MM Model.

51. Which of the following is true?

(a) Under Traditional Approach, overall cost of capital remains same,
(b) Under NI Approach, overall cost of capital remains same,
(c) Under NOI Approach, overall cost of capital remains same,
(d) None of the above.

52. The Traditional Approach to Value of the firm m that:

(a) There is no optimal capital structure,
(b) Value can be increased by judicious use of leverage
(c) Cost of Capital and Capital structure are m dent,
(d) Risk of the firm is independent of capital structure

53. A firm has EBIT of Rs. 50,000. Market value of debt is Rs. 80,000 and overall capitalization rate is
20%. Market value of firm under NOI Approach is:
(a) Rs. 2,50,000, (b) Rs. 1,70,000,
(c) Rs. 30,000, (d) Rs. 1,30,000.

54. Which of the following is incorrect for NOI?

(a) k0 is constant, (b) kd is constant,
(c) ke is constant, (d) kd & k0 are constant.

55. Which of the following is incorrect for value of the firm?

(a) In the initial preposition, MM Model argues that value is independent of the financing mix.
(b) Total value of levered and unlevered firms is otherwise arbitrage will take place.
(c) Total value incorporates borrowings by firm but excludes personal borrowing.
(d) Total value does not change because underlying does not change with financing mix.

56. Which of the following appearing in the balance! generates tax advantage and hence affects the c,
structure decision ?
(a) Reserves and Surplus, (b) Long-term debt,
(c) Preference Share Capital, (d) Equity Share Capital.

57. In MM Model with taxes, where 'r' is the interest rate, ‘D’ is the total debt and 't' is tax rate, then
present valued shields would be:
(a) r×D×t, (b) r×D,
(c) D×t, (d) (D× r)/(l-t).
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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

58. The type of collateral (security) used for short-term loan is

(a) Real estate, (b)Plant & Machinery,
(c)Stock of good, (d)Equity share capital

59. Which of the following is a liability of a bank?

(a)Treasury Bills, (b)Commercial papers,
(c)Certificate of Deposits, (d)Junk Bonds.

60. Commercial paper is a type of

(a)Fixed coupon Bond, (b)Unsecured short-term debt,
(c)Equity share capital, (d) Government Bond

61. Which of the following is not a spontaneous source of short-term funds ?

(a)Trade credit, (b)Accrued expenses,
(c)Provision for dividend, (d)All of the above.

62. Concept of Maximum Permissible Bank finance was introduced by

(a)Kannan Committee, (b)Chore Committee,
(c)Nayak Committee, (d)Tandon Committee.

63. In India, Commercial Papers are issued as per the lines issued by
(a) Securities and Exchange Board of India, (b)Reserve Bank of India,
(c)Forward Market Commission, (d)None of the above.

64. Commercial paper are generally issued at a pries

(a)Equal to face value, (b)More than face value,
(c)Less than face value, (d)Equal to redemption value

65. Which of the following is not applicable to commercial paper

(a)Face Value, (b)Issue Price,
(c)Coupon Rate, (d)None of the above.

66. The basic objective of Tandon Committee recommendations is that the dependence of industry on
bank should gradually
(a)Increase, (b)Remain Stable,
(c)Decrease, (d)None of the above

67. Cash discount terms offered by trade creditors never be accepted because
(a)Benefit in very small, (b)Cost is very high,
(c)No sense to pay earlier, (d)None of the above.

68. In lease system, interest is calculated on

(a)Cash down payment, (b)Cash price outstanding,
(c)Hire purchase price, (d)None of the above

69. A short-term lease which is often cancellable is known as

(a)Finance Lease, (b)Net Lease,
(c)Operating Lease, (d)Leverage Lease
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MBA Sem – 2 M O D U L E – 3 (MCQ) Financial Management

70. Which of the following is not a usual type of lease arrangement?

(a)Sale & leaseback, (b)Goods on Approval,
(c)Leverage Lease, (d)Direct Lease

71. Under income-tax provisions, depreciation on lease asset is allowed to

(a) Lessor, (b)Lessee
(c) Any of the two, (d)None of the two

72. Under the provisions of AS-19 'Leases', a leased asset is shown is the balance sheet of
(a)Manufacturer, (b)Lessor,
(c)Lessee, (d) Financing bank

73. A lease which is generally not cancellable and covers full economic life of the asset is known as
(a) Sale and leaseback, (b)Operating Lease,
(c)Finance Lease, (d)Economic Lease

74. Lease which includes a third party (a lender) is known as

(a)Sale and leaseback, (b)Direct Lease,
(c)Inverse Lease, (d) Leveraged Lease

75. One difference between Operating and Financial lease is:

(a)There is often an option to buy in operating lease.
(b)There is often a call option in financial lease.
(c)An operating lease is generally cancelable by lease.
(d) A financial lease in generally cancellable by lease.

76. From the point of view of the lessee, a lease is a:

(a)Working capital decision, (b)Financing decision,
(c)Buy or make decision, (d)Investment decision

77. For a lessor, a lease is a

(a)Investment decision, (b)Financing decision,
(c)Dividend decision, (d)None of the above.

78. Which of the following is not true for a "Lease decision for the lessee?
(a) Helps in project selection (b)Helps in project financing
(c)Helps in project location (d)All of the above.

[Answers: 1. (a), 2. (d), 3. (c), 4. (a), 5. (a), 6. (c), 7. (a), 8. (b), 9. (c), 10. (c), 11. (b), 12. (b), 13. (b),
14. (b), 15. (b), 16. (c), 17. (c), 18. (d), 19. (b), 20. (d), 21. (c), 22. (c), 23. (b), 24. (b), 25. (b), 26. (a),
27 (d), 28. (b), 29. (b), 30. (b), 31. (b), 32. (d), 33. (b), 34. (c), 35. (b), 36(b), 37(a), 38(c), 39(a),
40(c), 41(c), 42(c), 43(c), 44(d) 45(b), 46 (d), 47(b), 48(d), 49(d), 50(a), 51(c), 52(b), 53(b)
54(c),55(d),56(b),57(c), 58. (c), 59. (c), 60. (b), 61. (c), 62. (d), 63. (b), 64. (c), 65 (d), 66. (c), 67.
(d), 68. (b), 69. (c), 70. (b), 71. (a), 72. (c), 73. (c), 74.(d),75(c), 76(b), 77. (a), 78. (b)]

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