FINMA1-prelims-softcopy

FINMA1 - PRELIMS
1. What is the primary objective of financial management in a business?

a) To maximize sales revenue
b) To ensure profitability in the short term
c) To maximize the wealth of shareholders
d) To minimize operational costs
2. Which of the following best explains the role of financial management in capital
budgeting decisions?
a) Selecting projects that generate immediate profits
b) Evaluating the potential return on long-term investments
c) Managing daily cash flow needs
d) Determining employee salaries and benefits
3. How does financial management contribute to effective risk management in a business?

a) By eliminating all financial risks
b) By identifying, analyzing, and mitigating potential financial risks
c) By avoiding all high-risk investments
d) By focusing solely on short-term financial gains
4. Which of the following is a key aspect of working capital management under financial
management?
a) Deciding on long-term investment opportunities
b) Managing the balance between current assets and liabilities
c) Setting the company's strategic direction
d) Evaluating the company’s overall financial performance
5. Why is the cost of capital important in financial management decisions?

a) It determines the maximum amount the company can borrow
b) It helps in assessing the profitability of investment opportunities
c) It is only relevant for short-term financing
d) It has no impact on dividend decisions
6. What role does financial management play in dividend policy decisions?

a) It ensures that dividends are paid out regardless of profitability
b) It balances the need to retain earnings with the desire to return profits to
shareholders
c) It mandates that dividends are always reinvested in the company
d) It focuses only on maximizing dividend payments
7. How does financial management influence the capital structure of a company?

a) By determining the ratio of debt to equity financing
b) By deciding which projects to fund in the short term
c) By managing day-to-day cash flows
d) By setting the prices for the company’s products
8. In the context of financial management, what is the significance of liquidity

management?
a) It focuses on long-term investments only
b) It ensures that the company can meet its short-term obligations as they arise
c) It is concerned solely with profit maximization
d) It has no direct impact on the company's financial health
9. Which statement best describes the scope of financial management?

a) It is limited to budgeting and forecasting
b) It includes decisions related to investment, financing, and dividend policy
c) It is only concerned with cost-cutting measures
d) It focuses exclusively on financial reporting
10. Why is the objective of profit maximization considered less comprehensive than wealth
maximization in financial management?
a) Profit maximization ignores the time value of money and risk factors
b) Profit maximization focuses too much on cash flow
c) Wealth maximization leads to more short-term gains
d) Wealth maximization ignores the needs of shareholders
11. A company's management is considering two projects: Project A offers a higher potential
return but with greater risk, while Project B offers a lower return but with less risk.
According to the primary goal of financial management, which project should the
company choose?
a) Project A, because higher returns should always be prioritized
b) Project B, because minimizing risk is the most important factor
c) The project that maximizes shareholder wealth considering the risk-return
tradeoff
d) Neither, as both options have drawbacks
12. You have the option to receive P1,000 today or P1,100 one year from now. Assuming an
annual discount rate of 8%, which option should you choose based on the time value of
money?
a) P1,000 today because money now is worth more
b) P1,100 one year from now because the amount is higher
c) P1,100 one year from now because it exceeds the present value of P1,000
d) It doesn’t matter; both options are essentially the same
13. A company’s financial statements show a steady increase in revenues but a significant
decline in cash flow. What could this indicate about the company's financial health?
a) The company is likely overvalued
b) The company may be facing liquidity issues despite higher revenues
c) The company’s profitability is increasing
d) The company is effectively managing its cash and investments
14. If a firm decides to take on a high level of debt to finance its operations, what impact
might this have on the firm’s short-term financial decisions?
a) It would have no impact on short-term decisions
b) It may require more careful management of working capital to ensure liquidity
c) It will automatically lead to higher profits
d) It will reduce the need for short-term borrowing
15. An investor has a portfolio heavily concentrated in technology stocks. What could be a
potential risk of this investment strategy, and how could diversification mitigate it?
a) The risk of market volatility; diversification can reduce exposure to a single
industry
b) The risk of low returns; diversification can increase returns in a specific industry
c) The risk of losing dividends; diversification can provide more consistent dividend
income
d) The risk of inflation; diversification can entirely eliminate inflation risk
16. Horizontal analysis is a technique for evaluating a series of financial statement data over
a period of time
a) To determine which items are in error
b) That has been arranged from lowest amount to the highest amount
c) That has been arranged from the highest amount to the lowest amount
d) To determine the amount and/or percentage increase or decrease that has taken
place
17. In horizontal analysis, each item is expressed as a percentage of the
a) Base year figure
b) Total asset figure
c) Net income figure
d) Retained earnings figure
18. The type of analysis that is concerned with the relationships among the components of
the financial statements is to prepare a
a) Ratio analysis
b) Trend analysis
c) Vertical analysis
d) Profitability analysis
19. In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is the better company?
a) The current ratio includes assets other than cash
b) A higher current ratio may indicate inadequate inventory on hand
c) The two companies may define working capital in different terms
d) A high current ratio may indicate inefficient use of various assets and liabilities
20. When a balance sheet amount is related to an income statement amount in computing a
ratio
a) Comparisons with industry ratios are not meaningful
b) The balance sheet amount should be converted to an average for the year
c) The income statement amount should be converted to an average for the year
d) The ratio loses its historical perspective because of the beginning-of-the-year
amount is combined with an end-of-the-year amount.

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FINMA1 - PRELIMS

1. What is the primary objective of financial management in a business?

3. How does financial management contribute to effective risk management in a business?

5. Why is the cost of capital important in financial management decisions?

6. What role does financial management play in dividend policy decisions?

7. How does financial management influence the capital structure of a company?

8. In the context of financial management, what is the significance of liquidity

9. Which statement best describes the scope of financial management?

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