Important MCQs of Financial Management chapter of Business Studies Class 12

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Looking for important MCQs of Financial Management chapter of Business studies of class 12 with answers of CBSE, ISC, and other State Boards.

We have compiled a comprehensive list of very important multiple choice questions with answers of the Financial Management chapter of BST class 12

Multiple Choice Questions of Financial Management gchapter of Business Studies Class 12

Let’s Practice.

A decision to acquire a new and modern plant to upgrade an old one is a:

a) Financing decision
b) Working capital decision
c) Investment decision
d) Dividend decision

Ans – c)

The financial management is concerned with

a) Efficient acquisition of finance
b) Efficient utilisation of finance
c) Efficient disposal of surplus
d) All of the above

Ans – d)

Higher working capital usually results in:

a) Higher current ratio, higher risk, and higher profits
b) Lower current ratio, higher risk, and profits
c) Higher equitably, lower risk, and lower profits
d) Lower equitably, lower risk and higher profits

Ans – a)

The decision in financial management which determines the proportion between debt and equity is called

a) Financing decision
b) Investment decision
c) Capital structure
d) Dividend decision

Ans – a)

Which decisions are taken by the Financial Manager?

a) Investment Decisions
b) Purchase Decisions
c) Dividend Decisions
d) All the above

Ans – a), c)

A decision to acquire a new and modern plant to upgrade an old one is a

a) Financing decision
b) Investment decision
c) Working capital decision
d) Dividend decision

Ans – b)

Financial planning arrives at:

a) Minimising the external borrowing by resorting to equity issues
b) Entering that the firm always have significantly more funds than required so that there is no paucity of funds
c) Ensuring that the firm paces neither a shortage nor a glut of unusable funds
d) Doing only what is possible with the funds that the firm has at its disposal

Ans – c)

Higher dividend per share is associated with

a) Higher earnings high-cost flows, unstable earnings, and higher growth opportunities
b) High earning high cash flow, stable earnings, and high growth opportunity
c) High earning low cash flow, stable earnings, higher growth opportunities
d) High earnings, high cash flow, stable earnings, lower growth opportunities

Ans – d)

PNG Ltd earned a high profit in the current year. However, Rohit, Finance Manager of the company thinks that it is better to declare a smaller dividend as he is unsure about the earning potential of the company in the coming years. Rohit’s choice of dividend decision is based on which of the factor affects it?

a) Growth Opportunities
b) Stability of Dividend
c) Stability of Earnings
d) Amount of Earnings

Ans – b)

The size of assets, profitability and competitiveness are affected by one of the financial decisions state that decision

a) Investment decision
b) Financing decision
c) Dividend decision
d) All of the above

Ans – a)

Higher dividends per share is associated with:

a) High earnings, high cash flows, unusual earnings, and higher growth opportunities
b) High earnings, high cash flows, stable earnings, and high growth opportunities
c) High earnings, high cash flows, stable earnings, and lower growth opportunities
d) High earnings, low cash flows, stable earnings, and lower growth opportunities

Ans – c)

One of the concepts of financial management takes into consideration the growth, performance, investment, and requirement of funds for a given period. Identify the concept.

a) Financial Management
b) Investment decision
c) Capital structure
d) Financial Planning

Ans – d)

Financial Management aims at:

a) Ensuring availability of enough funds
b) Reducing the cost of funds procured
c) Effective deployment of funds
d) All of the above

Ans – d)

Financial planning is

a) Same as Financial Management
b) Part of Financial Management
c) Same as Financing decision
d) None of the above

Ans – b)

In which type of business, more investment in fixed assets is required?

a) Manufacturing
b) Trading
c) Both a) and b)
d) None of these

Ans – a)

Name the concept which increases the return of equity shares with the change in the capital structure of the company.

a) Financial Planning
b) Capital Structure
c) Trading on equity
d) Investment decision

Ans – c)

The investment decision is also termed as:

a) Dividend Decision
b) Working Capital Decision
c) Capital Budgeting Decision
d) Financial Decision

Ans – c)

Higher debt/equity ratio result is

a) Lower financial risk
b) a Higher degree of operating risk
c) a Higher degree of financial risk
d) Higher EPS

Ans – c)

Financial leverage is called favourable if:

a) Return on Investment is lower than the cost of debt
b) ROI is higher than the cost of debt
c) Debt is nearly available
d) If the degree of existing financial leverage is low

Ans – b)

Customers of different banks can use the same ATM machine for the withdrawal of money. This is related to which factor of fixed capital
requirement

a) Diversification
b) Growth Prospects
c) Availability of finance
d) Level of collaboration/Joint Venture and Leasing

Ans – d)

Borrowing @ 10% and the tax rate @ 30% means the after tax cost of debt is:

a) 20%
b) 7%
c) 3%
d) 10%

Ans – b)

A plan to open more branches and diversify the product mix will lead to requiring how much fixed capital

a) More
b) Less
c) No effect
d) Both a) and b)

Ans – a)

If the return on investment is more than the cost of debt, then earnings per share will with _____ in debt:

a) Rise, Decrease
b) Fall, Increase
c) Rise, Increase
d) Fall, Decrease

Ans – c)

Longer the operating and production cycle __ is the requirement of working capital.

a) More
b) Less
c) No effect of operating cycle on working capital
d) None of the above

Ans – a)

Companies with higher growth potential are likely to:

a) Pay lower dividends
b) Pay higher dividends
c) Dividends are not affected by growth considerations
d) None of the above

Ans – a)

Megha is planning to enter the business of Herbal Shampoo, in the beginning, she was thinking there are very few companies making herbal shampoo, but when she started selling her product she realised that many companies are already in the business of selling herbal shampoo. Identify the factor affecting working capital in the above para.

a) Growth prospects
b) Nature of business
c) Level of Competition
d) Business cycle fluctuation

Ans – c)

Which of the following statement is not correct?

a) Financial leverage is the proportion of debt in the overall capital
b) Debt is more risky as compared to Equity
c) EPS will rise with the increase in debt only when ROI < Cost of Debt
d) Purchase of Machinery is linked to the working capital decision

Ans – c), d)

The main objective of financial management is

a) Profit Maximisation
b) Wealth Maximisation
c) Ensuring availability of finance
d) None of the above

Ans – b)

A company that uses labour intensive technique needs fixed capital, while a company using capital intensive technique requires ______ fixed capital.

a) No, Less
b) Less, More
c) More, Less
d) No, More

Ans – b)

The investment decision is also called

a) Capital Budgeting decision
b) Working capital decision
c) Current Assets decision
d) None of the above

Ans – a)

Return on Investment is computed as:

a) Total Investment/EBIT * 100
b) EBIT/EBT * 100
c) EBIT/Total Investment * 100
d) EBT/Total Investment * 100

Ans – c)

Capital Structure indicates the ratio between

a) Assets and liabilities of the firm
b) Current assets and fixed assets
c) Debt and equity in the total capital
d) Profit and Revenue of the firm

Ans – c)

Financial Planning provides a link between _ and decisions.

a) Investment, Dividend
b) Financial Dividend
c) Investment, Financing
d) Investment, Working Capital

Ans – c)

If fixed operating cost is high, a firm should prefer

a) Debt
b) Equity
c) Both a) and b)
d) None of the above

Ans – b)

Which decision is concerned about the quantum of finance to be raised from various long-term sources?

a) Investment Decision
b) Financial Decision
c) Dividend Decision
d) Capital Budgeting Decision

Ans – b)

The decision related to acquiring funds from debt or equity is called

a) Investment decision
b) Financing decision
c) Dividend decision
d) All of the above

Ans – b)

If a company acquires assets on the lease, then it requires:

a) Less fixed capital
b) More fixed capital
c) No fixed capital
d) No working capital

Ans – a)

The decision related to the distribution of residual profit is called

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

Ans – c)

Harsh is engaged in Transport Business and transports fruits and vegetables to different states. His business requires:

a) More Working Capital
b) Less Working Capital
c) No Working Capital
d) More Fixed Capital

Ans – b)

If a firm has growth opportunities, it should prefer giving

a) Low dividend
b) High dividend
c) Does not affect dividend decision
d) None of the above

Ans – a)

Capital Structure refers to the proportion of and ______ used for financial business operations.

a) Assets, Liabilities
b) Current Assets, Current Liabilities
c) Fixed Capital, Working Capital
d) Debt, Equity

Ans – d)

If a large number of shareholders of the firm are from middle-income groups and old age groups who prefer regular income, then the firm should prefer giving

a) Low dividend
b) High dividend
c) No dividend
d) None of the above

Ans – b)

Financial decision making is concerned with making the following decisions:

a) Financing Decision
b) Investment Decision
c) Dividend Decision
d) All of these

Ans – d)

The concept which makes sure the availability of the right amount of finance at the right time is called

a) Financial Planning
b) Capital Structure
c) Working Capital
d) Fixed Capital

Ans – a)

Mercury Ltd. took a loan from Mystique Finance Co. Mystique has imposed certain restrictions on Mercury Ltd. on payment of dividends in the future. Which factor affecting dividend decision is being highlighted in the given case?

a) Growth Opportunities
b) Legal Constraints
c) Contractual Constraints
d) Stock market reaction

Ans – c)

Financial Planning links

a) Investment and dividend decision
b) Investment and financing decision
c) Dividend and financing decision
d) None of the above

Ans – b)

Financial planning aims:

a) To ensure availability of funds whenever required
b) To ensure that unnecessary finance is not raised
c) Both a) and b)
d) None of these

Ans – c)

If ICR is high, the firm prefers

a) Debt
b) Equity
c) Both a) and b)
d) None of the above

Ans – a)

The situation of favourable financial leverage arises when:

a) Return on Investment = Cost of Debt
b) Return on Investment > Cost of Debt
c) Return on Investment < Cost of Debt
d) None of these

Ans – b)

The amount of fixed assets is decided by

a) Working capital concept
b) Fixed Capital
c) Investment decision
d) Financing decision

Ans – b)

Capital budgeting decisions are very crucial because:

a) They affect the earning capacity of the firm over the long run
b) These decisions are irreversible except at a huge cost
c) These decisions normally involve a huge outflow of funds
d) All of these

Ans – d)

The amount of current assets is decided by

a) Working capital concept
b) Fixed capital
c) Investment decision
d) Financing decision

Ans – a)

The time gap between placing an order and actual receipt of material by the firm is termed as:

a) Operating Cycle
b) Lead time
c) Production Cycle
d) None of these

Ans – b)

Positive leverage effect brings

a) Gain for equity shareholders
b) Loss for equity shareholders
c) Both a) and b)
d) None of the above

Ans – a)

Net Working Capital will be _______ if current assets are of ₹ 5,00,000 and current liabilities are of ₹ 1,00,000.

a) ₹ 6,00,000
b) ₹ 5
c) ₹ 4,00,000
d) None of these

Ans – c)

If the return on investment is less than the rate of interest, then the company must prefer

a) Equity
b) Debt
c) Both a) and b)
d) None of the above

Ans – a)

A decision to acquire a new and modern plant to upgrade an old one is known as _____ decisions

a) Financial decision
b) Working Capital Decision
c) Investment Decision
d) Dividend Decision

Ans – c)

What is the cost of raising funds called?

a) Flotation Cost
b) Marginal Cost
c) Fixed Cost
d) Variable Cost

Ans – a)

ABC Ltd has a Debt Equity ratio of 3:1, whereas XYZ Ltd. has a Debt Equity Ratio of 1:1. Name the advantage ABC Ltd will have over XYZ Ltd. when the rate of interest is lower than the rate of return on investment of the company.

a) Trading on Equity
b) Low risk
c) Low cost of Equity
d) Greater Flexibility

Ans – a)

Gross Working capital refers to:

a) Investment in Fixed Assets
b) Investment in Current Assets
c) Investment in Bank
d) All of the above

Ans – b)

Vikrant joins his father’s business of Organic masalas, new Kotgarh in Himachal after completing his MBA. In order to capture a major share of the market, he decided to sell the product in small attractive packages by using the latest packaging technology. His father suggested that they hire financial consultants to estimate the amount of funds that would be required for the purpose and timings when it would be required. The concept discussed by Vikrant’s father, links which financial decision with the investment decision?

a) Dividend Decision
b) Financial Planning
c) Capital Structure Decision
d) Financing Decision

Ans – d)

Stock market condition is a factor related to

a) Financing decision
b) Dividend decision
c) Investment decision
d) Financial planning

Ans – a)

‘Temptations’ is a food joint in Imperial Mall in Bengaluru. It is becoming popular among students and working people due to healthy, on-the-go dishes on its menu like ‘Paneer Wrap’ ‘Chickpeas Salad’, ‘Grilled Sandwiches’, etc. It has now decided to open two new branches in other parts of Bengaluru. Which financial decision has been discussed in the above case?

a) Long term Investment Decision
b) Short term Investment Decision
c) Dividend Decision
d) Financing Decision

Ans – a)

Retained earnings are affected by

a) Financing decision
b) Investment decision
c) Dividend decision
d) Capital Structure

Ans – c)

What is related to debt

a) Higher cost higher risk
b) Lower cost higher risk
c) High cost low risk
d) Low cost low risk

Ans – b)

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Anurag Pathak
Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.
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