CMA Inter - FM MCQ Booklet

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Financial Management
MCQ Booklet
A N
CMA InterL
J A
Group - 2 Paper -10
S H
T I
A
For aSstrong grip over the subject
CA
© SJC Institute LLP
This book shall not be reproduced or shared by photocopying, recording, or otherwise by

any unauthorised person without prior written permission from the publisher. All disputes
are subject to Kolkata Jurisdiction
Study from CA Satish Jalan

Cost 1 & 2 |FM |OM SM
SCM |SFM |SPM BV |Cost Audit
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Preface
Dear Students,
I am delighted to introduce you this latest compilation of Objective Questions of Financial Management
for CMA Inter. This book covers short questions of Multiple Choice, Fill in the blanks and True/False
Type.
The hardest of efforts have been put forth to handpick all the possible varieties of theory as well as
practical questions of a chapter, which would be building up your concepts of theory and check your
practical sum solving skills.
What is now required from your side is that once you are prepared with your course, you should try
to solve all the questions, and check with the answers given at the end of the respective topics. One
thing I must mention here that the students who have studied Financial Management Subject with
me, would be able to solve almost 100 percent of the questions here swiftly.
Have a fun filled learning!
A N
L
JA
Regards,
CA Satish Jalan
S H
T I
S A
CA

Contents as per ICMAI Mat
Sl. Page
Chapter Name
No. No.
1. Introduction to Financial Management 1
2. Tools for Financial Analysis & Planning 11
3. Working Capital Management 24
4. Cost of Capital, Capital Structure Theories, Dividend 33
Decisions and Leverage Analysis
AN
5. Capital Budgeting-Investment Decision 46
A L
J
S H
T I
S A
CA

A N
L
JA
S H
T I
S A
CA

Introduction to Financial Management
Chapter 1
I. Multiple Choice Questions

1. Which of the following is the main objective of financial management?
(a) Revenue Maximisation
(b) Profit Maximisation
(c) Wealth Maximisation
(d) Cost Minimisation
A N
2. L
Which one of the following activities is outside the purview of financing decision in
financial management?
JA
H
(a) Identification of the source of funds
S
T I
(b) Measurement of the cost of funds
(c) Deciding on the time of raising the funds
SA
(d) Deciding on the utilization of the funds
CA
3. Which of the following forms of equity financing is especially designed for funding High
Risk & High Reward projects?
(a) ADR
(b) GDR
(c) FCCB
(d) Venture Capital
4. A process through which loans and other receivables are underwritten and sold in a form
of asset is known as:
(a) Factoring
(b) Forfeiting
(c) Securitisation
(d) Bill Discounting
5. Which of the following is not a characteristic of GDR?
(a) Is a negotiable instrument
(b) Carry voting rights
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FM MCQ Booklet
(c) Freely tradable in International Market

(d) Denominated in US Dollars
6. Which of the following is a feature of Factoring?
(a) Tool of short term borrowing
(b) Purchase of export bill only
(c) Used in Export business only
(d) Done without recourse to the client
7. Which one of the following activities is outside the purview of dividend decision in
financial management?
(a) Identification of the profit after taxes
(b) Measurement of the cost of funds
(c) Deciding on the pay-out ratio
N
(d) Considering issue of bonus shares to equity shareholders
A
8. “Shareholders Wealth” in a firm is reflected by:
L
(a) the number of people employed in the firm
JA
(b) the book value of the firm’s assets less the book value of its liabilities
S H
T I
(c) the amount of salary paid to its employees
(d) the market price per share of the firm
9.
S A
Profit Maximization is the main objective of business because:
CA
(a) Profit acts as a measure of efficiency and
(b) It serves as a protection against risk
(c) Both
(d) none
10. Stock holder’s wealth = ____________
(a) No. of shares owned x Current stock price per share
(b) No. of shares owned x Current stock price per share
(c) No. of shares owned x Current stock price per share
(d) none
11. Working Capital Management refers to a Trade-off between _____________and
Profitability.
(a) Liquidity
(b) Risk
(c) Both of the above
(d) None of the above
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12. Which one of the following is a medium term source?

(a) Public Deposits
(b) Lease Financing
(c) Euro Debt Issue
(d) All of the above
13. The lease period in such a contract is less than the useful life of asset. Here we are talking
about _______.
(a) Operating or Service Lease
(b) Service Lease
(c) Financial Lease
14. Which one is the Benefit(s) of Factoring?
(a) Better Cash Flows
A N
(b) Better Assets Management
L
(c) Better Working Capital Management
JA
S H
percent.
T I
15. Find the present value of ` 1,000 receivable 6 years hence if the rate of discount is 10
(a) 564.5
S A
(b) 554.5
(c) 574.5
(d) 600
CA
16. The term _______means manipulation of accounts in a way so as to conceal vital facts
and present the financial statements in a way to show a better position than what it
actually is.
(a) window dressing
(b) creative accounting
(c) window accounting
(d) modified accounting
17. Collateralized borrowing and lending obligation (CBLO) is a discounted instrument
available in electronic book entry for the maturity period ranging from __________.
(a) 1 day to 19 days
(b) 1 day to 15 days
(c) 1 day to 30 days
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18. IPO refers to ____________; the first time a company comes to public to raise money.
(a) Immediate Public Offer
(b) Immediate Public Offering
(c) Initial Public Offer
(d) Initial Public Offering
19. SPO refers to ________, the second and subsequent time a company raises money from
the public directly.
(a) Second Public Offering
(b) Subsequent Public Offering
(c) Subsequent Public Offer
(d) Seasonal Public Offering
20. Liquid Liability = Current Liability – Bank Overdraft – ___________
(a) Cash Credit
A N
(b) Trade Credit L
JA
S H
I
21. A firm determines the shareholders’ wealth by taking
T
S A
(a) the number of people employed in the firm
(b) the book value of the firm’s assets less the book value of its liabilities
CA
(c) the amount of salary paid to its employees
(d) the market price per share of the firm
22. Debt Financing is a cheaper source of finance because of
(a) Time Value of Money
(b) Rate of Interest
(c) Tax-deductibility of Interest
(d) Dividends not Payable to lenders
23. Management of all matters related to an organisation’s finances is called:
(a) Cash inflows and outflows
(b) Allocation of resources
(c) Financial management
(d) Finance
24. The most important goal of financial management is:
(a) Profit maximisation
4 |CMA Inter
(b) Matching income and expenditure

(c) Using business assets effectively
(d) Wealth maximisation.
25. To achieve wealth maximization, the finance manager is supposed to take careful decision
in respect of:
(a) Investment
(b) Financing
(c) Dividend
26. Which of the following are microeconomic variables that help define and explain the
discipline of finance?
(a) Risk and return
(b) Capital structure
A N
(c) Inflation
L
JA
27. Equity shares :
S H
T I
(a) Have an unlimited life, and voting rights and receive dividends
(b) Have a limited life, with no voting rights but receive dividends
S A
(c) Have a limited life, and voting rights and receive dividends
CA
(d) Have an unlimited life, and voting rights but receive no dividends
28. Preference shares:
(a) Do not get dividends
(b) Have no voting rights
(c) Are not part of a company’s share capital
(d) Receive dividends
29. A debenture:
(a) Is a long-term loan
(b) Does not require security
(c) Is a short-term loan
(d) Receives dividend payments
30. Debt capital refers to:
(a) Money raised through the sale of shares.
(b) Funds raised by borrowing that must be repaid.

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FM MCQ Booklet
(c) Factoring accounts receivable

(d) Inventory loans
31. The most popular source of short-term funding is:
(a) Factoring
(b) Trade credit
(c) Family and friends
(d) Commercial banks
32. Financial Management is mainly concerned with __________________
(a) arrangement of funds.
(b) all aspects of acquiring and utilizing financial resources for firms activities.
(c) efficient Management of every business.
(d) profit maximization
33. __________ varies inversely with profitability. A N
L
JA
(a) Liquidity
(b) Risk
(c) Both A and B
S H
(d) None of the above.
T I
(a) debt cost S A
34. During planning period, a marginal cost for raising a new debt is classified as
CA
(b) relevant cost
(c) borrowing cost
(d) embedded cost
35. From the enumerated list please select instrument which is not dealt in capital market.
(a) Commercial Paper
(b) Debenture
(c) Sweat Equity
36. From the enumerated list please select instrument which is not dealt in money market.
(a) Equity shares
(b) Treasury Bill
(c) Certificate of Deposit

6 |CMA Inter
37. If the RBI intends to reduce the supply of money as part of an anti-inflation policy, it
might
(a) Lower Bank rate
(b) Increase Cash Reserve Ratio
(c) Buy Govt. securities in open market
(d) Decrease Statutory Liquidy Ratio
38. ________ _________ are book costs relating to the past
(a) Historical Costs
(b) Future Costs
(c) Composite Cost
(d) Average Cost
39. The maturity period of commercial paper usually ranges from :
(a) 90 days to 360 days
A N
(b) 6 months L
(c) 91 days to 360 days
JA
(d) 90 days
S H
I
40. Which of the following is not a source of short term finance -
T
(a) Commercial paper
S
(b) Certificate of deposit
A
(c) Factoring
CA
(d) Euro Debt Issue
41. Which of the following is not a characteristics of GDR :
(a) Freely traded in the international market
(b) Investors earn fixed income by way of dividend
(c) Shares underlying the GDR carry voting rights
(d) GDR is a negotiable instrument.
42. Time value of money explains that:
(a) a unit of money received today is worth less than a unit received in future
(b) a unit of money received today and at some other time in future is equal
(c) a unit of money received today and at some other time in future is independent
(d) a unit of money received today is worth more than a unit received in future

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Answer
1. (c) Wealth Maximisation
2. (d) Deciding on the utilization of the funds
3. (d) Venture Capital
4. (c) Securitisation
5. (b) Carry voting rights
6. (a) Tool of short term borrowing
7. (b) Measurement of the cost of funds
8. (d) the market price per share of the firm
9. (c) Both
10. (a) No. of shares owned x Current stock price per share
11. (c) Both of the above
12. (d) All of the above A N
L
JA
13. (a) Operating or Service Lease
14. (d) All of the above
15. (a) 564.5
S H
16. (a) window dressing
T I
17. (a) 1 day to 19 days
S A
18. (d) Initial Public Offering
20. (a)
CA
19. (b) Subsequent Public Offering
Cash Credit
21. (b) the book value of the firm’s assets less the book value of its liabilities
22. (c) Tax-deductibility of Interest
23. (c) Financial management
24. (a) Profit maximisation
27. (c) Have a limited life, and voting rights and receive dividends
28. (d) Receive dividends
29. (a) Is a long-term loan
30. (b) Funds raised by borrowing that must be repaid
31. (d) Commercial banks

8 |CMA Inter
32. (b) all aspects of acquiring and utilizing financial resources for firms activities.
33. (a) Liquidity
34. (b) relevant cost
35. (a) Commercial Paper
36. (a) Equity shares
37. (b) Increase Cash Reserve Ratio
38. (a) Historical Costs
39. (a) 90 days to 360 days
40. (d) Euro Debt Issue
41. (c) Shares underlying the GDR carry voting rights
42. (d) a unit of money received today is worth more than a unit received in future
II. True or False

A N
L
JA
1. Commercial Paper (CP) is a secured promissory note.
2. Bill Financing is least liquid from Banker’s point of view.
3. H
Treasury Bills are short term instruments issued by the Reserve Bank of India to address
S
short term liquidity shortfalls.
T I
4.
5. S A
A Depository Receipt in the US market is called American Depository Receipt (ADR).
Commercial Paper is a long term source of Finance.
6.
7. CA
There is a conflict between profitability and liquidity of a firm.
The Finance Manager has to bring a trade-off between risk and return by maintaining a
proper balance between debt capital and equity share capital.
8. The earlier objective of profit maximization is now replaced by wealth maximization.
9. The modern approach to the Financial Management is concerned with only the solution
of a problem - financing of a business enterprise.
10. The investment decision is concerned with the selection of assets.
11. One of the most important functions of the Finance Manager is to ensure availability of
adequate financing.
12. Bill Discounting is defined as the relationship between the seller of goods and a financial
firm, called the Factor.
13. Finance is called the "Chemistry of money".
14. Capital Rationing as a situation when the Government has imposed a ceiling on
investment by a firm.
15. In Financial Management, the objective of Financial Manager is profit maximization.

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16. Wealth maximization goal is only an extension of profit maximization goal of the
organization.
17. Management Accountancy makes corporate planning and strategy effective.
18. A goal or objective is a necessary first step for effective financial management.
19. Maximizing the price of a share of the firm's common stock is the equivalent of maximizing
the wealth of the firm's present owners.
20. Depreciation is a use of funds.
21. The hedging approach to financing involves matching maturities of debt with specific
financing needs.
22. A deposit made by one company to another company normally for a period upto 4
months is referred to as inter corporate deposit.
23. Global Depository Receipt (GDR) are freely traded in the international market and do
carry voting rights.
N
24. Deciding on the total amount of assets needed by the firm is a key step in the investment
A
decision.
L
JA
25. The price of a share of common stock acts as a barometer indicating how well management
is doing on behalf of shareholders.
H
26. The goal of the firm should be to maximize earnings per share.
S
T I
27. Letter of Credit represents short-term unsecured promissory notes issued by firms which
S A
enjoy a fairly high credit rating.
28. Financial management deals with planning and mobilization of funds required by firm.
Answer
CA
True - 3, 4, 6, 7, 8, 10, 11, 16, 17, 18, 19, 21, 24, 25, 28
False - 1, 2, 5, 9, 12, 13, 14, 15, 20, 22, 23, 26, 27
III. Fill in the blanks

1. A process through which loans and other receivables are underwritten and sold in a form
of asset is known as _______.
2. The term _______means manipulation of accounts in a way so as to conceal vital facts
and present the financial statements in a way to show a better position than what it
actually is.
3. Concept of maximum permissible bank finance was introduced by _______ Committee.
Answer
1. Securitisation
2. Window dressing
3. Tandon
10 |CMA Inter
Tools for Financial Analysis & Planning
Chapter 2

1. A firm has a capital of ` 10 lakhs, sales of ` 5 lakhs, gross profit of ` 2 lakhs and expenses
of ` 1 lakh. The Net Profit Ratio is:
(a) 50%
(b) 40%
(c) 20%
A N
(d) 10% L
2. In Net Profit Ratio, the denominator is:
JA
(a) Credit Sales
S H
(b) Net Sales
(c) Cost of Sales T I
(d) Cost of Goods Sold
S A
CA
3. Current Assets ` 20,00,000; Current Liabilities ` 10,00,000 and Stock ` 2,00,000, then what
is liquid ratio?
(a) 2 times
(b) 1.8 times
(c) 1.4 times
(d) None of these
4. Cash Flow Statement is also known as
(a) Statement of Changes in Financial Position on Cash basis
(b) Statement accounting for variation in cash
(c) Both a and b
5. Which of the following is a Profitability Ratio?
(a) Proprietary Ratio
(b) Debt –equity Ratio

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(c) Price Earnings Ratio

(d) Fixed Asset Ratio
6. GP Margin=20%, GP= ` 54000, Sales=
(a) ` 300000
(b) ` 270000
(c) ` 280000
(d) ` 290000
7. Which of the following is not a Source of Fund?
(a) Issue of Capital
(b) Issue of Debenture
(c) Decrease in working capital
8.
(d) Increase in working capital
Determinants of credit policy relates to: A N
L
JA
(a) Credit standards
(b) Credit terms
(c) Collection Procedures
S H
T I
9. A
ROI (Return on Investment) can be decomposed into the following ratios:
S
(a) Overall Turnover Ratio and Current Ratio
CA
(b) Net Profit Ratio and Fixed Assets Turnover
(c) Working Capital Turnover Ratio and Net Profit Ratio
(d) Net Profit Ratio and Overall Turnover Ratio
10. Which of the following does not help to increase Current Ratio?
(a) Issue of Debentures to buy Stock
(b) Issue of Debentures to pay Creditors
(c) Sale of Investment to pay Creditors
(d) Avail Bank Overdraft to buy Machine
11. Which of the following statements is correct?
(a) A higher Receivable Turnover is not desirable.
(b) Interest Coverage Ratio depends upon Tax Rate.
(c) Increase in Net Profit Ratio means increase in Sales
(d) Lower Debt Equity Ratio means lower Financial Risk

12 |CMA Inter
12. Liquid Liability = Current Liability – Bank Overdraft – ___________

(a) Cash Credit
(b) Trade Credit
13. Ratio analysis is the process of determining and interpreting numerical relationships
based on _______.
(a) Financial values
(b) Financial statements
(c) Financial numerical information
14. Ratio analysis is based on __________ measure.
(a) relative
A N
(b) absolute L
JA
S H
_________. T I
15. The persons interested in the analysis of financial statements can be grouped as
(a) Owners or investors

SA
CA
(b) Creditors
(c) Financial executives
16. The term “Operating Profit” means profit before __________________.
(a) interest
(b) tax
(c) interest and tax
(d) interest or tax
17. Debt- equity Ratio is an example of ________________.
(a) Short term solvency Ratio
(b) Long term solvency Ratio
(c) Profitability Ratio

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18. In Cash Flow Statement, Cash includes________________.

(a) cash on hand
(b) demand deposits with banks
(c) cash on hand and demand deposits with banks
(d) cash on hand or demand deposits with banks
19. The treatment of interest and dividends received and paid depends upon the nature of
the enterprise. For this purpose, the enterprises are classified as ____________.
(a) (i) Financial enterprises, and (ii) Operating enterprises
(b) (i) Financial enterprises, and (ii) Other enterprises
(c) (i) Financial enterprises, and (ii) Non-Financial enterprises
(d) (i) Trading enterprises, and (ii) Non - Trading enterprises
20. Cash Flow Statement is _____________ for Income Statement or Funds Flow Statement.
(a) not a substitute
A N
(b) a substitute L
(c) depends on situation
JA
S H
Sheet dates. T I
21. Funds Flow Statement reveals the change in _______________ between two Balance
(a) Working capital

S A
CA
(b) Internal capital
(c) Share capital
(d) Both (A) & (C)
22. Which of the following is a Profitability Ratio?
(a) Proprietary Ratio
(b) Debt-Equity Ratio
(c) Price-Earning Ratio
23. Which of the following is not a source of fund?
(a) Issue of Capital
(b) Issue of Debenture
(c) Decrease in Working Capital
(d) Increase in Working Capital

14 |CMA Inter
24. All listed companies are required to prepare

(a) Funds Flow statement
(b) Cash Flow Statement
(c) Statement of Affairs
25. Ratio Analysis can be used to study liquidity, turnover, profitability etc., of a firm. What
does Debt-Equity Ratio help to study?
(a) Solvency
(b) Liquidity
(c) Profitability
(d) Turnover
26. Ratio of Net sales to Net working capital is a:
(a) Profitability ratio
A N
(b) Current ratio
L
(c) Liquidity ratio
(d) Working capital turnover ratio
JA
S H
(a) Current ratio T I
27. Long-term solvency is indicated by:
(b) Debt/equity ratio

S A
CA
(c) Operating ratio
(d) Net profit ratio
28. Ratio of net profit before interest and tax to sales is:
(a) Gross profit ratio
(b) Operating profit ratio
(c) Net profit ratio
(d) Interest coverage ratio
29. The Receivable-Turnover ratio helps management to:
(a) Managing inventory
(b) Managing resources
(c) Managing working capital
(d) Managing customer relationship
30. A ratio of ______________ is considered satisfactory by the financial institutions the
greater debt service coverage ratio indicates the better debt servicing capacity of the
organization.
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(a) 1
(b) 2
(c) 3
(d) 4
31. EBIT= `1120000, PBT= ` 320000, Fixed Costs = ` 700000, Operating Leverage=
(a) 1.625
(b) 2.625
(c) 6.625
(d) 3.625
32. The formula used to calculate current ratio is
(a) Current assets/Current liabilities
(b) Current liabilities/Current assets
(c) Inventory/Current liabilities
A N
(d) Current liabilities / Inventory L
JA
33. Which statement is prepared in the process of funds flow analysis?
(a) Schedule of changes in working capital
S H
(b) Funds Flow Statement
T I
(c) Both A and B
(d) None of the above S A
CA
34. If reserve for bad and doubtful debts is mentioned in the question of Funds Flow
Statement Preparation, it can be shown as
(a) In the schedule by deducting from total debtors under current assets
(b) In the schedule separately under the heading of capital liabilities
(c) Both A & B
35. Which of the following are sources of funds?
(a) Issue of bonus shares
(b) Issue of shares against the purchase of fixed assets
(c) Conversion of debentures into shares
36. ______________ ratio is the indicator of the firm’s commitment to meet its short term
liabilities.
(a) Super quick ratio
(b) Current ratio
16 |CMA Inter
(c) Proprietary ratio

(d) Quick ratio
37. _________ statement reveals the causes of changes in cash position of business concern
between two dates of balance sheets.
(a) Fund Flow Statement
(b) Cash Flow Statement
(c) Revenue Statement
(d) Cost Statement
38. ______________ ratio is also termed as Acid test ratio.
(a) Defensive interval ratio
(b) Current ratio
(d) Quick ratio
A N
L
39. From the following select one factor which is sources of fund.
(a) Payment of dividend
JA
(b) Increase in working capital
S H
(c) Non trading Income
T I
S A
40. From the following select one factor which is application of fund.
CA
(a) Issue of share capital
(b) Decrease in working capital
(c) Increase in working capital
41. Purchase of Machinery by issue of shares should be_________ from Cash Flow statement.
(a) included
(b) excluded
(c) included with value 0
42. Liquidity ratios are expressed in
(a) Pure ratio form
(b) Percentage
(c) Rate or time
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43. When the concept of ratio is defined in respected to the items shown in the financial
statements, it is termed as -
(a) Accounting ratio
(b) Financial ratio
(c) Costing ratio
44. Which of the following are treated as long term investments?
(a) Non-current investments
(b) Trade Investments
(c) Sinking fund investments
45. Profit for the objective of calculating a ratio may be taken as
(a) Profit before tax but after interest
A N
(b) Profit before interest and tax L
(c) Profit after interest and tax
JA
S H
T I
46. If a firm has low fixed costs relative to all other firms in the same industry, a large change
in sales volume (either up or down) would have:
S A
(a) a smaller change in EBIT for the firm versus the other firms.
CA
(b) no effect in any way on the firms as volume does not effect fixed costs.
(c) a decreasing effect on the cyclical nature of the business.
(d) a larger change in EBIT for the firm versus the other firms.
47. ___________________ reflects the impact of change in sales on the level of operating
profits of the firm.
(a) Operating Leverage
(b) Financial Leverage
(c) Combined Leverage
48. __________________may be defined as a % increase in EPS associated with a given
percentage increase in the level of EBIT.
(a) Operating Leverage
(b) Financial Leverage
18 |CMA Inter
49. Which of the following are measures of Leverage -

(a) Operating leverage
(b) Financial leverage
50. Investment decision is concerned with :
(a) Selection of asset in which funds will be invested by a firm
(b) Capital- mix or capital structure of a firm
(c) Distribution of profits of a firm to the shareholders
51. A firm has capital of Rs 10 lakhs,sales of Rs 5 lakhs,gross profit of Rs 2 lakhs and expenses
of Rs 1 lakh.The Net Profit Ratio is:
(a) 50%
A N
(b) 40% L
(c) 20%
JA
(d) 10%
S H
T I
52. Interest received on long term investments is shown under _________. Which one of the
choices from below according to you most appropriately completes the above sentence?
(a) Investing activities
S A
CA
(b) Operating activities
(c) Financing activities
53. A company has a Debt Equity ratio of 1.75 as compared to 1.5 Industry average. It means
that the company has _______________.
(a) Higher capital employed
(b) Higher financial risk
(c) Higher capital employed
(d) Higher profitability
54. Which of the following is a capital structure ratio:
(a) Interest Coverage Ratio
(b) Price Earning Ratio
(c) Proprietary Ratio

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55. A company’s Current Ratio is 2.0. If it uses cash to pay creditors , this transaction would
cause:
(a) No change in the liquidity position
(b) No change in current ratio
(c) Decrease in current ratio
(d) Increase in current ratio
56. Which of the following is a measure of Debt service capacity of a firm?
(a) Debt -equity ratio
(b) Net Working Capital
(d) Interest coverage ratio
57. Of the product of which two ratios is the ROI composed?
(a) Overall Turnover Ratio and Current Ratio
A N
(b) Net Profit Ratio and Fixed Assets Turnover L
JA
(c) Working Capital Turnover Ratio and Net Profit Ratio
H
(d) Net Profit Ratio and Overall Turnover Ratio
S
Answer
T I
1.
2.
(c) 20%
(b) Net sales S A
3.
4.
(b) 1.8 times
CA
(c) Both (a) and (b)
5. (c) Price Earnings Ratio
6. (b) ` 270000
7. (d) Increase in working capital
9. (d) Net Profit Ratio and Overall Turnover Ratio
10. (d) Avail Bank Overdraft to buy Machine
11. (d) Lower Debt Equity Ratio means lower Financial Risk
12. (a) Cash Credit
14. (a) relative
16. (c) interest and tax
20 |CMA Inter
17. (b) Long term solvency Ratio

18. (c) cash on hand and demand deposits with banks
19. (b) (i) Financial enterprises, and (ii) Other enterprises
20. (a) not a substitute
21. (a) Working capital
22. (c) Price-Earning Ratio
23. (d) Increase in Working Capital
24. (b) Cash Flow Statement
25. (a) Solvency
26. (d) Working capital turnover ratio
27. (b) Debt/equity ratio
28. (b) Operating profit ratio
29. (c) Managing working capital A N
L
JA
30. (b) 2
31. (a) 1.625
32. (a) Current assets / Current liabilities
S H
T I
33. (a) Schedule of changes in working capital
34. (c) Both A & B
35. (d) None of the above. S A
CA
36. (b) Current ratio
37. (b) Cash Flow Statement
38. (d) Quick ratio
39. (c) Non trading Income
40. (c) Increase in working capital
41. (b) excluded
42. (a) Pure ratio form
43. (a) Accounting ratio
46. (a) a smaller change in EBIT for the firm versus the other firms
47. (a) Operating Leverage
48. (b) Financial Leverage
CMA Inter
FM MCQ Booklet | 21
50. (a) Selection of asset in which funds will be invested by a firm

51. (c) 20%
52. (a) Investing activities
53. (b) Higher financial risk
54. (c) Proprietary Ratio
55. (c) Decrease in current ratio
56. (d) Interest coverage ratio
57. (d) Net Profit Ratio and Overall Turnover Ratio
II. True or False

1. Ratio Analysis is the only technique of analysis of financial statement.
2.
N
The difference between the cash receipts and cash payments is the net cash flow provided
by (or used in) operating activities.
A
3. DPP = Discounted Annual Cash Flow/Investment. L
4. Liquid Assets do not include Inventory.
JA
5. H
Cash collected from Sundry Debtors will be shown under Cash from Investing Activities
S
6.
as per AS – 3.
T I
The permissible bank borrowings are calculated under Method – I = 0.75 (Current Assets)
– Current Liabilities.
S A
7. Unrealised gains and losses arising from changes in foreign exchange rates are not cash
8.
flows.
CA
A high proprietary ratio will indicate a relatively little danger to the creditors or viseversa
in the event of forced reorganization or winding up of the company.
9. Cash equivalents include purely short term and highly liquid investments which are
readily convertible into cash and which are subject to an insignificant risk of changes
in value.
10. An example of cash flows arising from investing activities is Cash proceeds from issuing
shares.
11. Debtors Turnover Ratio or Debt Collection Period Ratio measures the quantity of debtors
since it indicates the speed with which money is collected from the debtor.
12. According to Accounting Standard - 3 (Revised) an enterprise should prepare a Cash Flow
Statement and should present it for each period with financial statements prepared.
13. Debt Service Coverage Ratio indicates the liquidity of a firm in relation to its ability to
meet projected daily expenditure from operations.
14. Debt-Equity Ratio is a measure of long-term solvency of a firm.
15. Funds Flow Statement is a substitute of Income Statement or a Balance Sheet.
22 |CMA Inter
16. "Funds" (as in "flow of funds") always means cash and near-cash equivalents.
17. Current ratios are used for measuring the short term solvency of an entity.
18. Cash flow statement reveals the changes in cash position between two balance sheet
dates.
19. If a company has no fixed costs, its DOL equals 1.
20. An increase in an asset is a source of funds.
21. Ratio analysis helps to measure the liquidity position.
Answer
True - 2, 4, 7, 8, 9, 12, 14, 17, 18, 19, 21
False - 1, 3, 5, 6, 10, 11, 13, 15, 16, 20

1.
A N
A ratio of ______________ is considered satisfactory by the financial institutions the
L
greater debt service coverage ratio indicates the better debt servicing capacity of the
2.
organization.
JA
Gross profit ratio for a firm remains the same but the net profit ratio is decreasing. The
H
reason for such behavior could be due to ____________.
S
3.
T I
Debt Service Coverage Ratio indicates the liquidity of a firm in relation to its ability to
4. S A
meet projected daily expenditure from operations. Is the above statement true or false?
Liquid ratio is the indicator of ______________ solvency of a company.
5.
CA
A firm has a capital of ` 10 lakhs, sales of ` 5 lakhs, gross profit of ` 2 lakhs and expenses
of `1 lakh. What is the Net Profit Ratio __________.
Answer
1. 2
2. Increase in expense
3. False
4. Short term
5. 20%

CMA Inter
FM MCQ Booklet | 23
Working Capital Management
Chapter 3

1. Annual credit sales ` 4,00,000; Average collection period 45 days (assume 360 days in a
year). What is Average debtors?
(a) ` 60,000
(b) ` 74,000
(c) ` 50,000
A N
(d) ` 4,00,000 L
2.
JA
Cost of goods sold is ` 8000 and gross margin is ` 5000 then revenue will be
(a) ` 3,000
S H
(b) ` 5,000
(c) ` 8,000 T I
(d) ` 13,000
S A
CA
3. Cash & Bank ` 20,000; Debtors ` 2,00,000; Stock ` 2,80,000 and Current Liabilities: Creditors
` 1,00,000; Bills Payable ` 50,000. Then the working capital is:
(a) ` 4,00,000
(b) ` 3,80,000
(c) ` 3,50,000
(d) ` 70,000
4. Gross margin is added to cost of sold goods for calculating
(a) revenues
(b) selling price
(c) unit price
(d) bundle price
5. The excess of Current Assets over Current Liabilities is called:
(a) Net Current Assets
(b) Net Working Capital

24 |CMA Inter
(c) Working Capital

6. A firm following an aggressive working capital strategy would:
(a) Hold substantial amount of fixed assets
(b) Minimize the amount of short term borrowing
(c) Finance fluctuating assets with long term financing
(d) Minimize the amount of fund in very liquid assets
7. Which of the following would be consistent with a conservative approach to financing
working capital?
(a) Financing short-term needs with short-term funds
(b) Financing short-term needs with long-term debt
(c) Financing seasonal needs with short-term funds
A
(d) Financing some long-term needs with short-term fundN
8. L
To financial analysts, "net working capital" means the same thing as __________.
(a) total assets
JA
(b) fixed assets
S H
(c) current assets
T I
9. S A
(d) current assets minus current liabilities
Baumol's Model of Cash Management attempts to:
CA
(a) Minimise the holding cost
(b) Minimization of transaction cost
(c) Minimization of total cost
(d) Minimization of cash balance
10. Which of the following is not considered by Miller-Orr Model?
(a) Variability in cash requirement
(b) Cost of transaction
(c) Holding cost
(d) Total annual requirement of cash
11. Which of the following is not considered while preparing cash budget?
(a) Accrual Principal
(b) Difference in Capital and Revenue items
(c) Conservation Principle
CMA Inter
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FM MCQ Booklet
12. ABC Analysis is used in

(a) Inventory Management
(b) Receivables Management
(c) Accounting Policies
(d) Corporate Governance
13. Working Capital Management involves financing and management of
(a) All Assets
(b) All Current Assets
(c) Cash and Bank Balance
(d) Receivables and Payables
14. The term Float is used in
(a) Receivable Management
(b) Cash Management A N
L
JA
(c) Marketable Management
(d) Inventory Management
15. Working Capital is defined as
S H
T I
(a) Excess of Fixed Assets over long-term liabilities
S A
(b) Excess of current assets over current liabilities
(c) Excess of current liabilities over current assets
CA
16. Working Capital is also known as “Circulating Capital, fluctuating capital and revolving
capital”. The aforesaid statement is;
(a) Incorrect
(b) Correct
(c) Cannot say
17. The basic objectives of Working Capital Management are:
(a) Optimum utilization of resources for profitability
(b) Ensuring marginal return on current assets is always more than cost of capital
(c) To meet day-to-day current obligations
(d) Select any one of the above statement
18. The term net working capital refers to the difference between the current assets minus
current liabilities.
(a) The statement is incorrect

26 |CMA Inter
(b) The statement is correct

(c) Cannot say
19. A Conservative Working Capital strategy calls for high levels of current assets in relation
to sales.
(a) Not agreed
(b) Agreed
(c) Cannot say
20. Trade credit is a
(a) Negotiated source of finance
(b) Spontaneous source of finance
(c) Hybrid source of finance
N
21. Factoring is a method of financing whereby a firm sells its trade debts at a discount to a
A
financial institution. The statement is:
L
(a) Incorrect
(b) Correct JA
(c) Partially correct
S H
(d) Cannot say T I
S A
22. A factoring arrangement can be both with recourse as well as without recourse:
CA
(a) False
(b) True
(c) Partially correct
(d) Cannot say
23. The Bank financing of working capital will generally be in the following form; cash credit,
overdraft, bills discounting, bills acceptance, line of credit; letter of credit and bank
guarantee.
(a) Do not agree
(b) Agreed
(c) Cannot say
24. The credit terms may be expressed as “3/15 net 60”. It means that a 3% discount will be
granted if the customer pays within 15 days, if he does not avail the offer he must make
payment within 60 days.
(a) Do not agree with the statement
(b) Agreed with the statement

CMA Inter
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FM MCQ Booklet
(c) Do not agree with the statement

(d) Cannot say
25. The term ‘net 50’ implies that the customer will make payment.
(a) Exactly on 50th day
(b) Not later than 50th day
(c) Before 50th day
26. William J Baumol’s model of Cash Management determines optimum cash level where
the carrying cost and transaction cost are:
(a) Maximum
(b) Medium
(c) Minimum
A N
27. In Miller - ORR Model of Cash Management: L
JA
(a) The lower, upper limit, and return point of Cash Balances are set out
H
(b) Only lower limit and return point are decided
S
I
(c) Only upper limit and return point are decided
T
S A
(d) None of the above are decided.
28. The term "Core current assets" was coined by
CA
(a) Chore Committee
(b) Jilani Committee
(c) Tandon Committee
29. The concept of operating cycle refers to the average time which elapses between the
acquisition of raw materials and the final cash realisation. This statement is:
(a) Incorrect
(b) Correct
(c) Partially True
(d) Cannot say
30. When the items of inventory are classified according to value of usage, the technique is
known as:
(a) XYZ Analysis
(b) DEF Analysis

28 |CMA Inter
(c) ABC Analysis

31. Which of the following is the danger of too high amount of working capital?
(a) It results in unnecessary accumulation of inventories and gives chance to inventory
mishandling, wastage, pilferage, theft, etc., and losses increase.
(b) Excess working capital means idle funds which earns no profits for the business.
(c) It results in overall inefficiency.
(d) All of the above.
32. The proprietors fund is ` 45,00,000 and ratio of fixed assets to proprietors fund is 0.75.
What will be the amount of Net Working Capital?
(a) ` 11,25,000
(b) ` 12,00,000
(c) ` 5,25,000
A N
(d) ` 1,25,000
L
JA
33. Average collection period is 2 months. Cash sales and average receivables are ` 5,00,000
and ` 6,50,000 respectively. What will be the amount of total sales?
(a) ` 22,00,000
S H
(b) ` 44,00,000
T I
(c) ` 39,00,000
S A
(d) ` 6,50,000
CA
34. Flexible working capital is also known as __________.
(a) Rigid Working Capital
(b) Regular Working Capital
(c) Permanent Working Capital
(d) Seasonal Working Capital
35. Rigid working capital is also known as __________.
(a) Variable Working Capital
(b) Seasonal Working Capital
(c) Fixed Working Capital
(d) Temporary Working Capital
36. Which of the following statement is true?
(a) Cash is decreased when new debt is issued to purchase holiday merchandise.
(b) Accepting the credit offered by a supplier is a source of cash.

CMA Inter
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FM MCQ Booklet
(c) Increasing the use of trade credit offered by a supplier is a use of cash.
(d) Collecting an accounts receivable is a use of cash
37. Which one of the following will increase the operating cycle?
(a) increasing the accounts payable period
(b) decreasing the accounts payable period
(c) decreasing the cash cycle
(d) increasing the inventory period
38. Relationship between the length of operating cycle and of a firm and its working capital
requirement is:
(a) Inverse
(b) Independent
(c) Linear
A N
L
39. The motive for holding cash /near cash as a cushion to meet unexpected contingencies/
demand for cash:
JA
(a) Transaction motive
S H
(b) Precautionary motive
(c) Speculative motive T I
(d) Compensating motive
S A
CA
Answer
1. (c) ` 50,000
2. (d) ` 13,000
3. (c) ` 3,50,000
4. (a) revenues
6. (d) Minimize the amount of fund in very liquid assets
7. (b) Financing short-term needs with long-term debt
8. (d) current assets minus current liabilities
9. (c) Minimization of total cost
10. (d) Total annual requirement of cash
12. (a) Inventory Management
13. (b) All Current Assets
30 |CMA Inter
14. (b) Cash Management

15. (b) Excess of current assets over current liabilities
16. (b) Correct
17. (c) To meet day-to-day current obligations
18. (b) The statement is correct
19. (b) Agreed
20. (b) Spontaneous source of finance
21. (b) Correct
22. (b) True
23. (b) Agreed
24. (b) Agreed with the statement
25. (b) Not later than 50th day
26. (c) Minimum A N
L
JA
27. (a) The lower, upper limit, and return point of Cash Balances are set out
28. (c) Tandon Committee
29. (b) Correct
S H
30. (c) ABC Analysis
T I
31. (d) All of the above.
32. (a) ` 11,25,000 S A
33. (b) ` 44,00,000
CA
34. (d) Seasonal Working Capital
35. (c) Fixed Working Capital
36. (b) Accepting the credit offered by a supplier is a source of cash
37. (d) increasing the inventory period
38. (c) Linear
39. (b) Precautionary motive

CMA Inter
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FM MCQ Booklet
II. True or False

1. Gross Working Capital is the difference between total current assets and total current
liabilities.
2. Working Capital Turnover Ratio may be classified under Activity Ratio.
3. Liquid Assets=Current Assets – Inventory.
4. Under cash credit / overdraft arrangement, a predetermined limit for borrowing is
specified by the bank.
5. As per TANDON Committee norms under method 1 the proprietor should contribute
75% of Working Capital Gap.
6. Operating Cycle means time required to Produce One Quantity of a Product.
7. Decrease in working capital is a source of fund.
8. According to ABC Analysis ‘A class inventories’ are with low consumption value.
9. Working Capital can never be negative.
A N
L
10. Gross working capital refers to the total of the current assets.
JA
11. The motive behind holding a cash is to meet the business exigencies and to do the
regular business transaction.
S H
12. An aggressive working capital policy would have low liquidity, higher risk, and higher
profitability potential.
T I
SA
13. Permanent working capital includes fixed assets.
14. In working capital management we find that profitability varies inversely with liquidity.
CA
15. The excess of Current Liabilities over Current Assets is known as Net Working Capital.
Answer
True - 2, 3, 4, 7, 10, 11, 12, 14
False - 1, 5, 6, 8, 9, 13, 15

1. Management of working capital implies trade off between liquidity and_____________.
Answer
Profitability

32 |CMA Inter
Cost of Capital, Capital Structure Theories, Dividend Decisions and Leverage Analysis
Chapter 4
Cost of Capital, Capital Structure
Theories, Dividend Decisions and
Leverage Analysis

1. PAT of a company ` 100 lakhs and number of equity shares of ` 10 each with a capital of
` 50 lakhs, then EPS is:
(a) ` 2
A N
(b) ` 1 L
(c) ` 10
JA
(d) None of these
S H
2. Degree of operating leverage is:
(a) EBIT / EBT T I
(b) Contribution / EBT
S A
CA
(c) Contribution / EBIT
(d) None of these
3. 1,00,000; 10% Debentures of ` 100 each of company, the interest payable for quarter is:
(a) ` 10,00,000
(b) ` 2,50,000
(c) ` 5,00,000
(d) None of these
4. Degree of financial leverage of business indicates.
(a) Total risk
(b) Operating risk
(c) Financial risk
(d) None of these
5. EBIT= ` 1120000, PBT= ` 320000, Fixed Costs= ` 700000, Operating Leverage =
(a) 1.625
(b) 2.625
CMA Inter
FM MCQ Booklet | 33
(c) 6.625
(d) 3.625
6. β (Beta) of a security measures its:
(a) Diversifiable risk
(b) Financial risk
(c) Market risk
(d) None of above
7. A firm is said to be financially unlevered firm if the firm has ……….
(a) only external equity in its capital structure
(b) only owner‘s equity in its capital structure
(c) both external equity and owner‘s equity in its capital structure
(d) only equity share capital in its capital structure
8.
A N
The term optimal capital structure‘ implies that combination of external equity and
internal equity at which ………
L
(a) the overall cost of capital is minimised
(b) the overall cost of capital is maximised
JA
S H
T I
(c) the market value of the firm is minimised
(d) the market value of firm is greater than the overall cost of capital
9.
S A
Net Income Approach to capital structure decision was proposed by …….
CA
(a) J. E. Walter
(b) M.H. Miller and D.Orr
(c) E. Solomon
(d) D. Durand
10. There is a reciprocal relationship between ……………….
(a) DOL and DFL
(b) DOL and margin of safety ratio
(c) DFL and margin of safety ratio
(d) DOL and break-even-point
11. The genesis of financial risk lies in …………….
(a) capital budgeting decision
(b) capital structure decision
(c) dividend decision
(d) liquidity decision

34 |CMA Inter
12. Financial break-even point is that level of EBIT at which ………….

(a) EPS > 0
(b) EPS < 0
(c) EPS = 0
(d) EPS > 1
13. Payback period in which an expected cash flows are discounted with the help of project
cost of capital is classified as
(a) discounted payback period
(b) discounted rate of return
(c) discounted cash flows
(d) discounted project cost
14. The 'Dividend-Payout Ratio' is equal to
(a) The Dividend yield plus the capital gains yield
A N
L
(b) Dividends per share divided by Earning per Equity Share
JA
(c) Dividends per share divided by par value per share
H
(d) Dividends per share divided by current price per share
S
T I
15. If EBIT = ` 1,00,000, Fixed Assets = ` 2,00,000, Sales = ` 10,00,000 and Variable Cost = `
7,00,000. Then, the Operating Leverage will be
(a) 2
S A
CA
(b) 3
(c) 6
(d) 4
16. Cost of capital may be defined as:
(a) Weighted Average cost of all debts
(b) Rate of Return expected by Equity Shareholders
(c) Average IRR of the Projects of the firm
(d) Minimum Rate of Return that the firm should earn
17. At Indifference level of EBIT, different capitals have:
(a) same EBIT
(b) same EPS
(c) same PAT
(d) same PBT

CMA Inter
FM MCQ Booklet | 35
18. Cost of Capital refers to

(a) Floatation Cost
(b) Dividend
(c) Required Rate of Return
19. What should be the optimum Dividend payout ratio, when r=12% and Ke=10%?
(a) Zero
(b) 50%
(c) 12%
(d) 100%
20. Which of the following is not an assumption of the capital asset pricing model (CAPM)?
(a) The capital Market is efficient
(b) Investor’s decisions are based on a single-time period
A N
L
(c) Investors lend or borrow at a risk-free rate of return
JA
(d) Investors do not have the same expectations about the risk and return
H
21. Given risk-free rate of return = 5 %, market return = 10%, cost of equity = 15% value of
S
beta ((β) is:
(a) 1.9 T I
(b) 2.2
S A
CA
(c) 2.0
(d) 1.8
22. Which of the following cost of capital require to adjust tax?
(a) Cost of Equity Shares
(b) Cost of Retained Earnings
(c) Cost of Preference Shares
(d) Cost of Debentures
23. Marginal Cost of capital is the cost of:
(a) Additional Funds
(b) Additional Revenue
(c) Additional Interests
24. In order to calculate Weighted Average Cost of Capital, weights may be based on:
(a) Market Values
(b) Book Value
36 |CMA Inter
(c) Target Values

(d) Anyone
25. A Company’s cost of capital is the average cost of:
(a) All borrowings
(b) All share capital
(c) All bonds and debentures
(d) All sources of finance
26. Which of the following statements is false in the context of explaining the concept of
capital structure of a firm:
(a) It resembles the arrangements of the various parts of a building
(b) The relation between equity and debt
(c) It represents the relation between fixed assets and current assets
(d) Combinations of various long-terms sources
A N
L
27. The assumptions of M-M hypothesis of capital structure do not include the following;
(a) Capital markets are imperfect
JA
(b) The dividend-payout ratio is cent percent, and there is no corporate tax
S H
T I
(c) Investors have homogeneous expectations
(d) All firms can be classified into homogeneous risk classes
S
28. Financial Structure refer to A
CA
(a) All Financial resources
(b) Long-term funds
(c) Short-term funds
(d) None of these
29. An EBIT-EPS indifference analysis chart is used for
(a) Evaluating the effects of business risk on EPS
(b) Determining the impact of a change in sales on EBIT
(c) Examining EPS results for alternative financial plans at varying EBIT levels
(d) Showing the changes in EPS quality over time
30. Market values are often used in computing the weighted average cost of capital because:
(a) This isimplest way to do the calculation
(b) This is consistent with the goal of maximising shareholder value
(c) This is a very common mistake.
(d) This is required by SEBI.

CMA Inter
FM MCQ Booklet | 37
31. A company’s optimal capital structure:

(a) When Cost of equity is minimum
(b) Is the debt-equity ratio that results in the minimum possible weighted average cost
of capital
(c) 40 percent debt and 60 percent equity
(d) When the debt-equity ratio is 0 .50
32. Which one of the following is the assumption of Gordon Model?
(a) Retention ratio(b),once decide upon, is constant
(b) Ke > g
(c) Firm is an all equity firm
33. Which of the following is the irrelevance theory?
(a) Walter model
A N
(b) M.M. hypothesis L
(c) Gordon model
JA
(d) Linter’s model
S H
I
34. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growth rate?
T
(a) 5%
(b) 7% S A
(c) 9.6%
(d) 6.4% CA
35. If the shareholders prefer regular income, how does this affect the dividend decision?
(a) It is the indicator to retain more earnings
(b) It will lead to payment of dividend
(c) It has no impact on dividend decision
(d) Can’t say
36. Which of the following is the limitation of Linter model?
(a) The adjustment factor is an arbitrary number and not based on any scientific criterion
or methods
(b) This model does not offer a market price for the shares
(c) Both (a) & (b)

38 |CMA Inter
37. Given Operating fixed cost ` 20,000, Sales ` 1,00,000 and P/V ratio 40%, then the operating
leverage is:
(a) 2.50
(b) 2.00
(c) 2.67
(d) 2.47
38. If EBIT is ` 15,00,000, interest ` 2,50,000, corporate tax 40%, then degree of financial
leverage is:
(a) 1.41
(b) 1.31
(c) 1.20
(d) 1.11
39. Operating Leverage is computed as:
(a) EBIT ÷ Tax A N
L
JA
(b) EBIT ÷ PBT
(c) Contribution ÷ EBIT
(d) EBIT ÷ interest
S H
T I
40. Financial Leverage is computed as:
(a) EBIT ÷ Sales
S A
(b) EBIT ÷ EBT
CA
(c) EBIT ÷ Variable Cost
(d) EBIT ÷ Contribution
41. Company X issues 11% bonds of `100 for an amount aggregating `200,000 at 10%
premium, redeemable at par after 5 years. Corporate tax rate is 35%. The cost of bonds
would be:
(a) 4.9%
(b) 5.0%
(c) 5.2%
(d) 6.0%
42. Which of the following is not a generally accepted approach for Calculation of Cost of
Equity?
(a) CAPM
(b) Dividend Discount Model
(c) Rate of Pref. Dividend Plus Risk
(d) Price-Earnings Ratio
CMA Inter
FM MCQ Booklet | 39
43. A firm has EBIT of ` 50,000. Market value of debt is ` 80,000 and overall capitalization rate
is 20%. Market value of firm under NOI Approach is:
(a) ` 2,50,000
(b) ` 1,70,000
(c) ` 3,00,0000
(d) ` 1,30,000
44. From the following select one factor which is not determinants of dividend policy of a
company.
(a) Inflation
(b) Owner consideration
(c) Capital market conditions
N
45. Preference shares must be redeemed within a period of _______ from the date of issue.
A
(a) 10 yrs
L
(b) 20 yrs
JA
(c) 30yrs
S H
(d) 50 yrs
46. The measure of leverage is : T I
(a) PAT/Equity
S A
CA
(b) Equity/Debt
(c) Total Assets/Equity
(d) Total Debt/Equity
47. A risk associated with project and way considered by well diversified stockholder is
classified as -
(a) expected risk
(b) beta risk
(c) industry risk
(d) returning risk
48. The weighted average cost of capital for a firm is the:
(a) Discount rate which the firm should apply to all of the projects it undertakes.
(b) Rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
(c) Coupon rate the firm should expect to pay on its next bond issue.
(d) Maximum rate which the firm should require on any projects it undertakes.
40 |CMA Inter
49. If the CAPM is used to estimate the cost of equity capital, the expected excess market
return is equal to the:
(a) Return on the stock minus the risk-free rate.
(b) Difference between the return on the market and the risk-free rate.
(c) Beta times the market risk premium.
(d) Beta times the risk-free rate
50. The capital of PQR Limited is as follows :
9% preference shares of `10 each ` 3,00,000
Equity shares of `10 each ` 8,00,000
Following further information is available:

Profit after Tax ` 2,70,000
Equity Dividend paid 20%

The market price of equity shares `40 each
A N
Then the EPS is: L
(a) ` 3.04
JA
(b) ` 10.00
S H
(c) ` 2.84
T I
S A
51. Computation of cost capital of a firm involveswhich of the following steps:
CA
(a) Computation of cost of specific sources of a capital, viz., debt, preference capital,
equity and retained earnings;
(b) Computation of weighted average cost of capital
(c) Both (A) and (B)
52. Minimum rate of return that a firm must earn in order to satisfy its investors is known
as___________. Which one of the choices from below according to you most appropriately
completes the above sentence?
(a) Average return on investment
(b) Net profit ratio
(c) Average cost of borrowing
(d) Weighted average cost of capital

CMA Inter
FM MCQ Booklet | 41
Answer
1. (d) None of these
2. (c) Contribution / EBIT
3. (b) ` 2,50,000
4. (c) Financial risk
5. (a) 1.625
6. (c) Market risk
7. (b) only owner‘s equity in its capital structure
8. (a) the overall cost of capital is minimised
9. (d) D. Durand
10. (b) DOL and margin of safety ratio
11. (b) capital structure decision
12. (c) EPS = 0 A N
L
JA
13. (a) discounted payback period
14. (b) Dividends per share divided by Earning per Equity Share
15. (b) 3
S H
T I
16. (d) Minimum Rate of Return that the firm should earn
17. (b) same EPS
S A
18. (c) Required Rate of Return
19. (a) Zero
CA
20. (d) Investors do not have the same expectations about the risk and return
21. (c) 2.0
22. (d) Cost of Debentures
23. (a) Additional Funds
24. (d) Anyone
25. (d) All sources of finance
26. (c) It represents the relation between fixed assets and current assets
27. (a) Capital markets are imperfect
28. (a) All Financial resources
29. (c) Examining EPS results for alternative financial plans at varying EBIT levels
30. (b) This is consistent with the goal of maximising shareholder value
31. (b) Is the debt-equity ratio that results in the minimum possible weighted average cost
of capital
42 |CMA Inter

33. (b) M.M. hypothesis
34. (d) 6.4%
35. (b) It will lead to payment of dividend
36. (c) This model does not offer a market price for the shares
37. (b) 2.00
38. (c) 1.20
39. (c) Contribution ÷ EBIT
40. (b) EBIT ÷ EBT
41. (a) 4.9%
42. (c) Rate of Pref. Dividend Plus Risk
43. (b) ` 1,70,000
44. (d) None of the above A N
L
JA
45. (b) 20 yrs
46. (c) Total Assets/Equity
47. (b) beta risk
S H
T I
48. (b) Rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
S A
49. (b) Difference between the return on the market and the risk-free rate.
50. (a) ` 3.04
CA
51. (c) Both (a) and (b)
52. (d) Weighted average cost of capital
II. True or False

1. As per the Gordan Model, Ke=D1/P0 + g, where Ke = Cost of Equity, D1 = Dividend, P0 =
Current market price of share and g = growth rate.
2. Risk free interest rate and cost of capital are same things.
3. Financial leverage depends upon the operating leverage.
4. Cost of capital is highest in Equity share Financing.
5. Payout Ratio = Earning per Equity share / Dividend per equity share.
6. Value of right = Cum right share price minus Ex right share price.
7. Combined leverage = Contribution/EBT.
8. While calculating cost of redeemable debt, it is necessary to consider the repayment of
the principal, but the interest can be ignored.
FM MCQ Booklet| 43
CMA Inter
9. For an all equity company Cost of Capital is same as Cost of Equity.

10. If dividends from at ‘g’% p.a. and cost of equity is ke, the current market price of a share is
determined by a geometric progression with common ratio (1 + g) (1 + ke).
11. The MM Hypothesis assumes that the overall cost of capital is independent of the capital
structure.
12. Companies P and Q are competitors for product PQ. P has a higher degree of operating
leverage than Q. if demand for PQ decreases, profits of Q will decrease at a slower rate
than P.
13. As per Walter’s Model of Dividend Policy the firm should retain its earnings if the rate of
internal retention is higher than the capitalization rate.
14. The business risk is independent of capital structure because the operating profitability
is not influenced by the sources from which the funds have been raised.
15. Under CAPM model, it is assumed that unsystematic risk can be avoided by the investors
A N
by considering different kinds of securities in their portfolio.
16. According to Walter‘s model, the optimal dividend payout ratio of a growth firm is 100
per cent. L
JA
17. The investment policy adopted by the company is fixed. This assumption is made in
Gordon‘s Dividend Model.
S H
different sources of funds.
T I
18. Weighted Average Cost of Capital in always calculated with reference to book value of
(EPS). S A
19. Operating Leverage analyses the relationship between Sales Level and Earning Per Share
CA
20. The Cost of Capital is the required rate of return to maintain the value of the firm.
21. Cost of capital is not the minimum required rate of earning or the cut off rate of capital
Expenditure.
22. Low degree of operating leverage and high degree of financial leverage is not an ideal
situation.
23. Book Value & Market Value weights are always different.
24. Indifference level of EBIT is one at which EPS under two or more financial plans would be
same.
25. Debentures don not offer any coupon payments, but are issued at a discount.
26. A firm's overall cost of capital is simply the sum of the firm's cost of equity, cost of debt,
and cost of preferred stock.
27. Operating leverage reflects the impact of change in sales on the level of operating profits
of the firm.
28. Companies with high growth rates tend to have high dividend-payout ratios because
they want to attract more investors.

44 |CMA Inter
29. If EBIT were to remain constant while the firm incurred additional interest expense, the
degree of financial leverage would increase.
30. According to this model founded by Myron Gordon, the dividend policy of the company
has an impact on share valuation.
31. Retained earnings refer to the distributed profits of a firm.
32. MM model asserts that value of the firm is not affected whether the firm pays dividend
or not.
Answer
True - 1, 4, 6, 7, 9, 10, 11, 12, 13, 14, 15, 20, 24, 27, 29, 30, 32
False - 2, 3, 5, 8, 16, 17, 18, 19, 21, 22, 23, 25, 26, 28, 31

1. N
If Sales = ` 50,000, Variable cost = 60% Fixed cost = ` 12,000. The Operating Leverage will
be ______ . A
L
JA
2. If EBIT = ` 1,00,000, Fixed Assets = ` 2,00,000, Sales = ` 10,00,000 and Variable Cost = `
7,00,000. Then, the Operating Leverage will be ______ .
3. H
Modigliani and Miller Hypothesis is a ______________ model.
S
4. I
As per the Graham and Dodd Model, Market Price of share will ______ when company
T
declares dividend rather than when it does not.
5.
S A
_____________ implies buying securities in a market where price is low and selling
where it is high.
6.
CA
Who said “Value of share is worth the present value of its future Dividend rather than its
earnings”? _______________
Answer
1. 2.50
2. 3
3. Dividend
4. increase
5. Arbitrage Process
6. John Burr Williams

CMA Inter
FM MCQ Booklet | 45
Capital Budgeting-Investment Decision
Chapter 5

1. Investment in a project is ` 200 lakhs and Net Present Value is ` 50 lakhs. Then the amount
of inflows is :
(a) ` 150 lakhs
(b) ` 200 lakhs
(c) ` 100 lakhs
A N
(d) ` 250 lakhs L
2.
JA
Present value of inflows ` 10 lakhs from a project and initial investment is ` 7.5 lakhs. The
NPV is:
(a) ` 17.5 lakhs
S H
(b) ` 7.5 lakhs T I
(c) ` 10 Lakhs
S A
CA
(d) ` 2.5 lakhs
3. The following is not a Discounted Cash Flow Technique:
(a) NPV
(b) PI
(c) Accounting of Average rate of return
(d) IRR
4. Following method is also known as ‘Benefit Cost Ratio.’
(a) NPV
(b) IRR
(c) ARR
(d) PI
5. In mutually exclusive projects, projects which are selected for comparison must have
(a) positive net present value
(b) negative net present value

46 |CMA Inter
(c) zero net present value

(d) none of the above
6. In a single projects situation, results of internal rate of return and net present value lead
to
(a) cash flow decision
(b) cost decision
(c) same decisions
(d) different decisions
7. The discount rate which forces net present values to become zero is classified as
(a) positive rate of return
(b) negative rate of return
(c) external rate of return
(d) internal rate of return
A N
8. L
A point where profile of net present value crosses horizontal axis at plotted graph
indicates project
JA
(a) costs
S H
(b) cash flows
(c) internal rate of return T I
S
(d) external rate of return A
CA
9. Payback period in which an expected cash flows are discounted with the help of project
cost of capital is classified as
(a) discounted payback period
(b) discounted rate of return
(c) discounted cash flows
(d) discounted project cost
10. Number of years forecasted to recover an original investment is classified as
(a) payback period
(b) forecasted period
(c) original period
(d) investment period
11. In proper capital budgeting analysis, we evaluate incremental
(a) Accounting income
(b) Cash flow

CMA Inter
| 47
FM MCQ Booklet
(c) Earnings
(d) Operating profit
12. The term mutually exclusive investments mean:
(a) Choose only the best investments
(b) Selection of one investment precludes the selection of an alternative
(c) The elite investment opportunities will get chosen
(d) There are no investment options available
13. Cost of capital may be defined as:
(a) Weighted Average cost of all debts
(b) Rate of Return expected by Equity Shareholders
(c) Average IRR of the Projects of the firm
(d) Minimum Rate of Return that the firm should earn
14. At Indifference level of EBIT, different capitals have: A N
L
JA
(a) same EBIT
(b) same EPS
(c) same PAT
S H
(d) same PBT
T I
(a) Tax-Effect S A
15. Which of the following is not incorporated in Capital Building?
CA
(b) Time Value of Money
(d) Rate of Cash Discount
16. Which of the following variables is not known in Internal Rate of Return?
(a) Initial Cash Flows
(b) Discount Rate
(c) Terminal Inflows
(d) Life of the Project
17. Cost of Capital refers to
(a) Floatation Cost
(b) Dividend

48 |CMA Inter
18. Capital Budgeting techniques which considers the time value of money is based on
(a) Cash Flows of the organization
(b) Accounting Profit of the organization
(c) Interest Rate on Borrowings
(d) Last Dividend Paid
19. While evaluating projects with different initial outlay, which of the following methods is
more appropriate than NPV?
(a) Payback Period
(b) Accounting Rate of Return
(c) Profitability Index
(d) Discounted Payback Period
20. Which of the following features is not associated with capital budgeting decision?
(a) Long term
A N
(b) Large Capital Outlay L
(c) Reversibility
JA
(d) High Risk
S H
I
21. With respect to NPV, which of the following is incorrect?
T
S A
(a) When NPV is zero, PI will be 1
(b) When NPV is zero, IRR = Cost of Capital
CA
(c) When NPV is zero, we get the PBP
(d) When NPV is zero, we get Discounted PBP
22. Investment is the ___________________
(a) net additions made to the nation’s capital stocks
(b) person’s commitment to buy a flat or house
(c) employment of funds on assets to earn returns
(d) employment of funds on goods and services that are used in production process
23. A project whose cash flows are more than capital invested for rate of return then net
present value will be
(a) positive
(b) independent
(c) negative
(d) zero

CMA Inter
FM MCQ Booklet| 49
24. ________ of a company refers to the composition or make up of its capitalization and it
includes long term capital resources.
(a) Capital Budgeting
(b) Capital structure
25. Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is
considered as
(a) valued relationship
(b) economic relationship
(c) direct relationship
(d) inverse relationship
26. Which of the following is/are important theory/theories of capital structure?
(a) Net Income Approach
(b) Net Operating Income Approach
A N
(c) The Traditional view
L
JA
27. NPV is positive indicates :
S H
T I
(a) Cash inflows are generated at a rate higher than the minimum required by the firm.
(b) Cash inflows are generated at a rate equal to the minimum required
S A
(c) Cash inflows are generated at a rate lower than the minimum required by the firm.
CA
28. When cost of capital of a project is equal to its Internal Rate of Return(IRR)
(a) NPV will be zero
(b) NPV will be +ve
(c) NPV will be -ve
(d) Benefit cost ratio will be zero
Answer
1. (d) ` 250 lakhs
2. (d) ` 2.5 lakhs
3. (c) Accounting of Average rate of return
4. (d) PI
5. (a) positive net present value
6. (c) same decisions
7. (d) internal rate of return
50 |CMA Inter
8. (c) internal rate of return

9. (a) discounted payback period
10. (a) payback period
11. (b) Cash flow
12. (b) Selection of one investment precludes the selection of an alternative
13. (d) Minimum Rate of Return that the firm should earn
14. (b) same EPS
15. (d) Rate of Cash Discount
16. (b) Discount Rate
17. (c) Required Rate of Return
18. (a) Cash Flows of the organization
19. (c) Profitability Index
20. (c) Reversibility A N
L
JA
21. (c) When NPV is zero, we get the PBP
22. (c ) employment of funds on assets to earn returns
23. (a) positive
S H
24. (b) Capital structure
T I
25. (c) direct relationship
26. (d) All of the above S A
CA
27. (a) Cash inflows are generated at a rate higher than the minimum required by the firm
28. (a) NPV will be zero.
II. True or False

1. In case of mutually exclusive capital budgeting decision, all the feasible proposals may
be accepted.
2. Investment decisions and capital budgeting are same.
3. ARR is the Accounting Rate of Return or Average Rate of Return.
4. Capital Budgeting is the short term financial planning.
5. Project can be accepted when NPV is positive or at least zero.
6. Net Present Value method cannot serve as the best decision criteria for selection of
projects when they are mutually exclusive.
7. At Internal Rate of Return the Profitability Index will be zero.
8. NPV is Non-Discounted Cash Flow Technique of Capital Budgeting.

CMA Inter
FM MCQ Booklet| 51
9. The internal rate of return (IRR) assumes that cash flows are reinvested at the firm’s cost
of capital.
10. IRR and NPV always give the same profitability ranking.
11. If the Profitability Index is more than one, the project should be accepted otherwise
rejected.
12. Accounting Rate of Return (ARR) method does not consider time value of money.
13. When NPV is zero PI will be one.
14. In case the IRR of a project is higher than the cost of capital, NPV will be positive.
15. In calculating Discounted Payback Period, IRR is used as the discounting rate.
16. IRR is also known as the highest opportunity cost that the project can bear.
17. Capital Budgetary Forecasts Returns on proposed long-term investments and compares
profitability of different Investments and their cost of capital.
proposals.
A N
18. In mutually exclusive capital budgeting decisions, the firm can accept all feasible
L
19. Investment Decisions and Capital Budgeting are one and the same.
JA
20. IRR indicated that the discounting rate at which net present value is Zero.
H
21. Discounted Payback Period method does not consider time value of money.
S
I
22. Project selection based on NPV method helps to maximize shareholders’ wealth.
T
S A
23. NPV method is not suitable for projects with unequal lives.
24. A project is accepted under IRR method when IRR is less than cost of capital.
CA
25. Under MIRR method cash flows are assumed to be reinvested at firm’s rate of return.
26. All investments are speculative by nature.
27. All other things equal, reducing a firm's current assets will decrease profitability as
measured by ROI.
28. A capital investment involves making a current cash outlay in the expectation of future
benefits.
29. According to the NOI approach to valuation, the total value of the firm is affected by
changes in its capital structure.
30. Depreciation increases taxable income.
31. Profitability Index of a project is the ratio of the present value of future net cash inflows
to the present value of cash outflows.
32. Pay-back Period is the number of years to recover the original capital invested in a project.
33. The key issue of the theory of capital structure is to examine whether a business can
change its value and cost of capital by changing its capital structure.

52 |CMA Inter
Answer
True - 3, 5, 11, 12, 13, 14, 16, 17, 20, 22, 23, 25, 28, 31, 32, 33
False - 1, 2, 4, 6, 7, 8, 9, 10, 15, 18, 19, 21, 24, 26, 27, 29, 30

1. In proper capital budgeting analysis we evaluate incremental ________.
2. Net Income Approach to capital structure decision was proposed by _______.
3. A point where profile of net present value crosses horizontal axis at plotted graph
indicates project’s _______.
4. Capital structure ratio is the indicator of ______________ solvency of a company.
5. An optimal capital structure is one when the market price of the equity share is ______.
6. NPV of a proposal indicates ____________.
Answer A N
L
JA
1. Cash flow
2. Durand
3. Internal Rate of Return
S H
4. Long term
T I
5.
6.
maximum
Profitability S A
CA

CMA Inter
FM MCQ Booklet| 53
A N
L
JA
S H
T I
S A
CA


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Study from CA Satish Jalan

Study from CA Satish Jalan

Contents as per ICMAI Mat

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I. Multiple Choice Questions

(c) Freely tradable in International Market

12. Which one of the following is a medium term source?

(b) Matching income and expenditure

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(c) Factoring accounts receivable

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II. True or False

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III. Fill in the blanks

I. Multiple Choice Questions

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(c) Price Earnings Ratio

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12. Liquid Liability = Current Liability – Bank Overdraft – ___________

(a) Owners or investors

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18. In Cash Flow Statement, Cash includes________________.

(a) Working capital

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24. All listed companies are required to prepare

(b) Debt/equity ratio

(c) Proprietary ratio

49. Which of the following are measures of Leverage -

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17. (b) Long term solvency Ratio

50. (a) Selection of asset in which funds will be invested by a firm

II. True or False

III. Fill in the blanks

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I. Multiple Choice Questions

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(c) Working Capital

12. ABC Analysis is used in

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(b) The statement is correct

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(c) Do not agree with the statement

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(c) ABC Analysis

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14. (b) Cash Management

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II. True or False

III. Fill in the blanks

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I. Multiple Choice Questions

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