QN1. Which of the following statements regarding IRR are true?
A. A project can have only one IRR
B. If IRR is less than the firms cost of capital, the project should be rejected
C. A project can have multiple IRRs depending on the cash flow streams
D. Both B and C
Answer
C. A project can have multiple IRRs depending on the cash flow streams
QN2. Which of the following is not a drawback of the accounting rate of return criteria?
A. It gives equal weightage to near flows and distant flows
B. It is calculated using the accounting income and net cash flows
C. The cut off ARR is arbitrarily fixed
D. None of the above
Answer
D. None of the above
QN3. Which of the is true about NPV?
A. It considers all the cash flows
B. It gives more weightage to distant flows than to near term flows
C. It considers time value of money
D. Both A and C
Answer
D. Both A and C
QN4. In relation to the financial management of a company, which of the following provides the best definition of a firm’s primary financial objective?
A. To achieve long term growth in earnings
B. To maximize the level of annual dividends
C. To maximize the wealth of its ordinary shareholder
D. To maximize the level of annual profits
Answer
C. To maximize the wealth of its ordinary shareholder
QN5. Which is the following main decision taken by the financial manager in a company?
A. Income decision
B. Financing decision
C. Appraisal decision
D. Budget decision
Answer
B. Financing decision
QN6. Which of the following is an example of a financial objective that a company might choose to pursue?
A. Dealing honestly and fairly with customers on all occasions
B. Provision of good working conditions and industrial relations
C. Producing environmentally friendly products
D. Restricting the level of gearing to below a specified target level
Answer
D. Restricting the level of gearing to below a specified target level
QN7. Which of the following is LEAST likely to fall within financial management?
A. The dividend payment to shareholders is increased
B. Funds are raised to finance an investment project
C. Surplus asset are sold off
D. Non-executive directors are appointed to the remuneration committee
Answer
D. Non-executive directors are appointed to the remuneration committee
QN8. Which of the following tasks would typically be carried out by a member of the financial management team?
A. Evaluating proposed expansion plans
B. Review of overtime spending
C. Depreciation of non-current assets
D. Apportioning overhead to cost units
Answer
D. Apportioning overhead to cost units
QN9. Which of the following is an example of an internal stakeholder in a firm?
A. Company directors
B. Customers
C. Suppliers
D. Finance providers
Answer
A. Company directors
QN10. Which of the following would you expect to be the responsibility of financial management?
A. Producing annual reports
B. Producing monthly management accounts
C. Advising on investment in non-current assets
D. Deciding pay rates for staff
Answer
C. Advising on investment in non-current assets
QN11. A company is considering a project which has an initial outflow followed by several years of cash inflows with a cash outflow in the final year. How many internal rates of return could there be for this project?
A. Either zero or two
B. Either one or two
C. Zero, one or two
D. Only two
Answer
C. Zero, one or two
QN12. The lower risk of a project can be recognized by increasing which of the following?
A. The cost of the initial investment of the project
B. The estimates of future cash inflows from the project
C. The internal rate of return of the project
D. The required rate of return of the project
Answer
B. The estimates of future cash inflows from the project
QN13. Which is the main advantage of IRR?
A. Considers the whole life of the project
B. It is a measure of absolute return
C. It is an accurate calculation
D. It is useful when liquidity is poor
Answer
A. Considers the whole life of the project
QN14. The payback period is the number of years that it takes a business to recover its original investment from net returns. Which of the following statements is true?
A. It is calculated before both depreciation and taxation
B. It is calculated before depreciation but after taxation
C. It is calculated after depreciation but before taxation
D. It is calculated after both depreciation and taxation
Answer
B. It is calculated before depreciation but after taxation
QN15. Which of the following statement about the Accounting Rate of Return (ARR) method and the payback method are true?
A. Both methods are affected by changes in the cost of capital
B. The ARR does not take account of returns over the entire life of the project
C. A requirement for an early payback can increase a company’s liquidity
D. None of the above
Answer
C. A requirement for an early payback can increase a company’s liquidity
QN16. Which of the following is the best statement of the conclusion of Modigliani and Miller on the relevance of dividend policy?
A. All shareholders are indifferent between receiving dividend income and capital gains
B. Increase in retentions results in a higher growth rate
C. Discounting the dividends is not an appropriate way to value the firm’s equity
D. The value of the shareholders equity is determined solely by the firm’s investment selection criteria
Answer
D. The value of the shareholders equity is determined solely by the firm’s investment selection criteria
QN17. Which of the following statements concerning profit are correct?
A. Accounting profit is not the same as economic profit
B. Profit takes account of risk
C. Gross profit margin is calculated as gross profit divided by shareholders funds
D. None of the above
Answer
A. Accounting profit is not the same as economic profit
QN18. If a geared companies asset beta is used in the CAPM formula (rj = rfBj (rm-rf)) what will rj present?
A. The WACC of the company
B. The ungeared cost of equity.
C. The geared cost of equity
D. The market premium
Answer
B. The ungeared cost of equity.
QN19. Which of the following does NOT directly affect a company’s cost of equity?
A. Return of assets
B. Expected market return
C. Risk free rate of return
D. The company’s beta
Answer
A. Return of assets
QN20. Type of bonds that have tangible property as a collateral are classified as
A. Collateral security
B. Collateral security
C. Equipment trust certificates
D. Equipment bonds
Answer
C. Equipment trust certificates
QN21. What is the dividend cover ratio a measure of?
A. How many times the company’s earnings could pay the dividend
B. The interest or coupon rate expressed as percentage of the market price
C. The returns to the investor by taking about of dividend income and capital growth
D. How much of the overall dividend payout the individual shareholders are entitled to Small and medium sized entities can have difficulty raising finance due to the maturity gap.
Answer
A. How many times the company’s earnings could pay the dividend
QN22. Which of the following is the best explanation of the maturity gap?
A. The lack of available funds from shareholders
B. Venture capitalists need an exit route for their investment within a specific time period
C. The business finds it difficult to obtain short term funding but easier to obtain long term funding secured against its non-current assets
D. The lack of business history makes borrowing more money for lenders
Answer
C. The business finds it difficult to obtain short term funding but easier to obtain long term funding secured against its non-current assets
QN23. An investor believes that they can make abnormal returns by studying past share price movements. In terms of capital market efficiency to which of the following does the investors belief relate?
A. Fundamental analysis
B. Operational efficiency
C. Technical analysis
D. Semi strong form efficiency
Answer
C. Technical analysis
QN24. Asset based business valuations using net realizable values are useful in which of the following situations?
A. When the company is being bought for the earnings / cash flow that all of its assets can produce in the future
B. For asset stripping
C. To identify a maximum price in a takeover
D. When the company has a highly skilled workforce
Answer
B. For asset stripping
QN25. In relations to capital markets, which of the following is true?
A. The return from investing in larger companies has been shown to be greater than the average return from all companies
B. Weak form efficiency arises when investors tend not to make rational investment decisions
C. Allocative efficiency means that transaction costs are kept to a minimum
D. Research has shown that, over time, share prices appear to follow a random walk
Answer
D. Research has shown that, over time, share prices appear to follow a random walk
QN26. What does the term matching refer to?
A. The coupling of two simple financial instruments to create a more complex one
B. The mechanism whereby a company balances its foreign currency inflows and outflows
C. The adjustment of credit terms between companies
D. Contract not yet offset by futures contracts or fulfilled by delivery
Answer
B. The mechanism whereby a company balances its foreign currency inflows and outflows
QN27. The difference between the price of a futures contract and the spot price on a given date is known as
A. The initial margin
B. Basis
C. Hedge efficiency
D. The premium
Answer
B. Basis
QN28. Which of the following statements is correct?
A. Once purchased, currency futures have a range of close out dates
B. Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market
C. Banks will allow forward exchange contracts to lapse if they are not used by a company
D. Currency options are paid for when they are exercised
Answer
B. Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market
QN29. Which of the following statements is true of a put option?
A. It is the right to sell an asset at a fixed price
B. It is an obligation to sell an asset at a fixed price
C. It is the right to buy an asset at a fixed price
D. It is an obligation to buy an asset at a fixed price
Answer
A. It is the right to sell an asset at a fixed price
QN30. Which of the following measures will allow a UK company to enjoy the benefits of a favorable change in exchange rates for their Euro receivables contract while protecting them from unfavorable exchange rate movements?
A. A forward exchange contract
B. A put option for Euros
C. A call option for Euros
D. A money market hedge
Answer
B. A put option for Euros
QN31. Which of the following are descriptions of basis risk?
- It is the difference between the spot exchange rate and currency futures exchange rate
- It is the possibility that the movements in the currency futures price and spot price will be different
- It is the difference between fixed and floating interest rates
- It is one of the reasons for an imperfect currency futures hedge
A. 1 only
B. 1 and 3
C. 2 and 4 only
D. 2,3 and 4
Answer
C. 2 and 4 only
QN32. _ refers to make up of a firm’s capitalization
A. Capital budgeting
B. Capital structure
C. Capital market
D. Capital value
Answer
B. Capital structure
QN33. The arbitrage process is the behavioral foundation for the
A. Net income approach
B. Net operating income approach
C. Modigliani Miller hypothesis
D. Traditional approach
Answer
C. Modigliani Miller hypothesis
QN34. MM approach is similar to _ approach
A. Net operating income
B. Net income
C. Traditional
D. None of the above
Answer
A. Net operating income
QN35. _ refers to that EBIT level at which EPS remains the same irrespective of the debt equity mix
A. Point of difference
B. Point of indifference
C. Point of division
D. Point of index
Answer
B. Point of indifference
QN36. The statement estimating amount of capital and determining its composition is termed as
A. Operational plan
B. Management plan
C. Financial plan
D. Investment plan
Answer
C. Financial plan
QN37. _ are the funds required for acquisition of assets that are to be used over and over again for a long period
A. Fixed Capital
B. Fluctuating capital
C. Operating Capital
D. None of the above
Answer
A. Fixed Capital
QN38. Trading on Equity is situation where the ROI is more than _ rate
A. dividend
B. interest
C. loss
D. profit
Answer
B. interest
QN39. The period of revival of business activity is termed as the period of –
A. Recovery
B. Activity
C. Loss
D. Recession
Answer
A. Recovery
QN40. Cost of capital comprises premium both for business and risks
A. Financial
B. Business
C. Capital
D. Overwriting
Answer
A. Financial
