Q41: 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
Answer D. Both A and C
Q42: 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
Answer C. To maximize the wealth of its ordinary shareholder
Q43: 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
Answer B. Financing decision
Q44: 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
Answer D. Restricting the level of gearing to below a specified target level
Q45: 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
Answer D. Non-executive directors are appointed to the remuneration committee
Q46: 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
Answer D. Apportioning overhead to cost units
Q47: 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
Answer A. Company directors
Q48: 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
Answer C. Advising on investment in non-current assets
Q49: 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
Answer C. Zero, one or two
Q50: 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
Answer B. The estimates of future cash inflows from the project
Q51: 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
Answer A. Considers the whole life of the project
Q52: 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
Answer B. It is calculated before depreciation but after taxation
Q53: 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
Answer C. A requirement for an early payback can increase a company’s liquidity
Q54: 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
Answer D. The value of the shareholders equity is determined solely by the firm’s investment selection criteria
Q55: 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
Answer A. Accounting profit is not the same as economic profit
Q56: 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
Answer B. The ungeared cost of equity
Q57: 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
Answer A. Return of assets
Q58: 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
Answer C. Equipment trust certificates
Q59: 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
Answer
Answer A. How many times the company’s earnings could pay the dividend
Q60: Small and medium sized entities can have difficulty raising finance due to the maturity gap. 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
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
Q61: 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
Answer C. Technical analysis
Q62: 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
Answer B. For asset stripping
Q63: 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
Answer D. Research has shown that, over time, share prices appear to follow a random walk
Q64: 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
Answer B. The mechanism whereby a company balances its foreign currency inflows and outflows
Q65: 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
Answer B. Basis
Q66: 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
Answer B. Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market
Q67: 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
Answer A. It is the right to sell an asset at a fixed price
Q68: 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
Answer B. A put option for Euros
Q69: Which of the following are descriptions of basis risk? 1. It is the difference between the spot exchange rate and currency futures exchange rate 2. It is the possibility that the movements in the currency futures price and spot price will be different 3. It is the difference between fixed and floating interest rates 4. 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
Answer C. 2 and 4 only
Q70: ___refers to make up of a firm’s capitalization
- A. Capital budgeting
- B. Capital structure
- C. Capital market
- D. Capital value
Answer
Answer B. Capital structure
Q71: 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
Answer C. Modigliani Miller hypothesis
Q72: MM approach is similar to___approach
- A. Net operating income
- B. Net income
- C. Traditional
- D. None of the above
Answer
Answer A. Net operating income
Q73: ___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
Answer B. Point of indifference
Q74: 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
Answer C. Financial plan
Q75: ___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
Answer A. Fixed Capital
Q76: Trading on Equity is situation where the ROI is more than___rate
- A. dividend
- B. interest
- C. loss
- D. profit
Answer
Answer B. interest
Q77: The period of revival of business activity is termed as the period of –
- A. Recovery
- B. Activity
- C. Loss
- D. Recession
Answer
Answer A. Recovery
Q78: Cost of capital comprises premium both for business and___risks
- A. Financial
- B. Business
- C. Capital
- D. Overwriting
Answer
Answer A. Financial
Q79: Cost of each component of capital is termed as___cost
- A. Opportunity
- B. Fixed
- C. Specific
- D. Explicit
Answer
Answer C. Specific
Q80: According to traditional approach, cost of capital is affected by
- A. Debt equity mix
- B. Liquidity solvency mix
- C. Capital gearing mix
- D. None of the above
Answer
Answer A. Debt equity mix
