MORE 100 MCQS Chapter 9: Financial Management
CBSE BOARD 2024
1. Financial Management is mainly concerned with:
A) Managing the human resources of the firm
B) Optimal procurement and usage of finance
C) Maximizing the sales of the company
D) Arranging temporary workers
Correct Answer: B) Optimal procurement and usage of finance.
Board Tip: The core of financial management is getting money at the lowest cost and using it where it earns the highest return.
Board Tip: The core of financial management is getting money at the lowest cost and using it where it earns the highest return.
2. The primary objective of Financial Management is:
A) Profit Maximization
B) Sales Maximization
C) Wealth Maximization of Shareholders
D) Minimizing Taxes
Correct Answer: C) Wealth Maximization of Shareholders.
Logic: Profit maximization is a narrow, short-term goal. Wealth maximization is the ultimate, long-term objective.
Logic: Profit maximization is a narrow, short-term goal. Wealth maximization is the ultimate, long-term objective.
COMPETENCY BASED
3. How is the "Wealth of Shareholders" actually measured in the real business world?
A) By the total cash available in the company's bank account
B) By the market price of the company's equity shares
C) By the number of employees in the firm
D) By the amount of debt the company has paid off
Correct Answer: B) By the market price of the company's equity shares.
Analysis: If a financial decision increases the market price of the shares, the shareholders' wealth increases.
Analysis: If a financial decision increases the market price of the shares, the shareholders' wealth increases.
CBSE BOARD 2023
4. Which of the following is NOT one of the three broad financial decisions?
A) Investment Decision
B) Financing Decision
C) Dividend Decision
D) Marketing Decision
Correct Answer: D) Marketing Decision.
ASSERTION-REASON
5. Assertion (A): Profit maximization should not be the sole objective of financial management.
Reason (R): Profit maximization ignores the risk involved and the time value of money, whereas wealth maximization considers both.
Reason (R): Profit maximization ignores the risk involved and the time value of money, whereas wealth maximization considers both.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
CBSE SAMPLE PAPER 2025
6. The decision that relates to how the firm's funds are invested in different assets so that they earn the highest possible return is called:
A) Financing Decision
B) Dividend Decision
C) Investment Decision
D) Capital Structure Decision
Correct Answer: C) Investment Decision.
TRICKY QUESTION
7. A long-term investment decision is also known as a:
A) Working Capital Decision
B) Capital Budgeting Decision
C) Dividend Decision
D) Liquidity Decision
Correct Answer: B) Capital Budgeting Decision.
Board Tip: Committing finance on a long-term basis (e.g., buying a new factory) is Capital Budgeting. Short-term investment is Working Capital management.
Board Tip: Committing finance on a long-term basis (e.g., buying a new factory) is Capital Budgeting. Short-term investment is Working Capital management.
CASE SCENARIO
8. 'Alpha Tech' is planning to replace its old machinery with a new, advanced robotic assembly line costing ₹50 Crores. This decision is irreversible without huge losses. Which financial decision is the company making?
A) Short-term Investment Decision
B) Capital Budgeting Decision
C) Financing Decision
D) Dividend Decision
Correct Answer: B) Capital Budgeting Decision.
Analysis: Massive funds, long-term impact, and irreversibility are the hallmark traits of a Capital Budgeting decision.
Analysis: Massive funds, long-term impact, and irreversibility are the hallmark traits of a Capital Budgeting decision.
CBSE BOARD 2022
9. Which of the following is NOT a factor affecting the Investment Decision (Capital Budgeting)?
A) Cash flows of the project
B) The rate of return
C) Investment criteria involved
D) Control considerations
Correct Answer: D) Control considerations.
Note: Control considerations affect the *Financing* decision (whether to issue equity and lose control, or issue debt and keep control).
Note: Control considerations affect the *Financing* decision (whether to issue equity and lose control, or issue debt and keep control).
ASSERTION-REASON
10. Assertion (A): Capital budgeting decisions are very crucial for any business.
Reason (R): They affect the earning capacity, long-term growth, and risk of the business, and involve huge amounts of funds.
Reason (R): They affect the earning capacity, long-term growth, and risk of the business, and involve huge amounts of funds.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
11. The decision regarding the quantum of finance to be raised from various long-term sources (like equity vs. debt) is called:
A) Investment Decision
B) Financing Decision
C) Dividend Decision
D) Working Capital Decision
Correct Answer: B) Financing Decision.
CBSE BOARD 2021
12. From the perspective of the company, which is generally considered the cheapest source of finance?
A) Equity Share Capital
B) Preference Share Capital
C) Debt (Debentures/Loans)
D) Retained Earnings
Correct Answer: C) Debt (Debentures/Loans).
Logic: Debt is cheapest because lenders take less risk (they get fixed interest regardless of profit), and the interest paid is a tax-deductible expense for the company.
Logic: Debt is cheapest because lenders take less risk (they get fixed interest regardless of profit), and the interest paid is a tax-deductible expense for the company.
COMPETENCY BASED
13. While debt is the *cheapest* source of finance, it is also the most ________ source for a business.
A) Profitable
B) Flexible
C) Risky
D) Stable
Correct Answer: C) Risky.
Analysis: It increases Financial Risk because the company is legally obligated to pay interest and repay the principal, even if it suffers massive losses.
Analysis: It increases Financial Risk because the company is legally obligated to pay interest and repay the principal, even if it suffers massive losses.
TRICKY QUESTION
14. The cost of raising funds (like brokerage, underwriting commission, and prospectus printing costs) is known as:
A) Fixed Operating Cost
B) Financial Risk
C) Flotation Cost
D) Cost of Debt
Correct Answer: C) Flotation Cost.
Board Tip: Higher flotation costs make a source of finance less attractive.
Board Tip: Higher flotation costs make a source of finance less attractive.
CBSE BOARD 2024
15. If a company is experiencing a very strong and stable cash flow position, which source of finance should it prefer?
A) Equity
B) Debt
C) Trade Credit
D) Short-term bank overdraft
Correct Answer: B) Debt.
Note: Strong cash flows mean the company can easily handle the fixed burden of paying interest and returning the principal, making debt the best choice to maximize shareholder returns.
Note: Strong cash flows mean the company can easily handle the fixed burden of paying interest and returning the principal, making debt the best choice to maximize shareholder returns.
CASE SCENARIO
16. The existing promoters of 'Zenith Corp.' hold 51% of the shares. They need ₹100 Crores for expansion but are terrified of losing their majority control over the company. Which source of finance should they choose?
A) Issue of new Equity Shares
B) Issue of Debentures (Debt)
C) Sell a part of their own shares
D) None of the above
Correct Answer: B) Issue of Debentures (Debt).
Analysis: Issuing new equity brings in new owners, diluting control. Debt holders (debentures) do not get voting rights, so control remains with the original promoters.
Analysis: Issuing new equity brings in new owners, diluting control. Debt holders (debentures) do not get voting rights, so control remains with the original promoters.
CBSE SAMPLE PAPER 2025
17. The decision regarding how much of the profit earned by the company (after paying tax) should be distributed to shareholders and how much should be retained in the business is called:
A) Financing Decision
B) Investment Decision
C) Dividend Decision
D) Capital Structure Decision
Correct Answer: C) Dividend Decision.
ASSERTION-REASON
18. Assertion (A): A company with excellent future growth opportunities will likely declare a lower dividend.
Reason (R): The company will need to retain a larger portion of its earnings to finance the upcoming expansion projects.
Reason (R): The company will need to retain a larger portion of its earnings to finance the upcoming expansion projects.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
19. If the stock market is undergoing a 'Bullish' phase (rising prices), companies will find it easier to raise funds through:
A) Equity
B) Debt
C) Bank Loans
D) Retained Earnings
Correct Answer: A) Equity.
Logic: During a boom (bull phase), investors are confident and willing to take risks by investing in the stock market (equity).
Logic: During a boom (bull phase), investors are confident and willing to take risks by investing in the stock market (equity).
CBSE BOARD 2023
20. Which factor affecting the dividend decision relates to the legal restrictions placed by the Companies Act on declaring dividends out of past profits?
A) Contractual constraints
B) Legal constraints
C) Stability of dividends
D) Shareholder preference
Correct Answer: B) Legal constraints.
COMPETENCY BASED
21. A mature company operating in a stable industry with consistent earnings and no major upcoming projects is most likely to have:
A) A high dividend payout ratio
B) A zero dividend payout ratio
C) 100% retained earnings
D) High reliance on new equity issues
Correct Answer: A) A high dividend payout ratio.
Analysis: Stable earnings + No need for reinvestment (no projects) = Distribute maximum cash to shareholders.
Analysis: Stable earnings + No need for reinvestment (no projects) = Distribute maximum cash to shareholders.
TRICKY QUESTION
22. If the Corporate Tax Rate is very high, debt becomes:
A) More expensive
B) Cheaper and more attractive
C) Riskier than equity
D) Unaffected
Correct Answer: B) Cheaper and more attractive.
Board Tip: Interest paid on debt is deducted *before* calculating tax. A higher tax rate means the company saves more money on taxes by using debt!
Board Tip: Interest paid on debt is deducted *before* calculating tax. A higher tax rate means the company saves more money on taxes by using debt!
CASE SCENARIO
23. When a company takes a massive loan from a bank, the bank includes a clause stating that the company cannot declare dividends exceeding 10% until the loan is fully repaid. This factor affecting the dividend decision is known as:
A) Legal Constraints
B) Shareholder Preference
C) Contractual Constraints
D) Access to capital market
Correct Answer: C) Contractual Constraints.
Analysis: The company is bound by the specific contract signed with the lender (bank).
Analysis: The company is bound by the specific contract signed with the lender (bank).
CBSE BOARD 2021
24. What impact does 'Tax on Dividends' have on the dividend decision? (Assume dividends are taxable in the hands of the shareholders).
A) If tax is high, shareholders prefer higher dividends.
B) If tax is high, shareholders prefer the company to retain the earnings (lower dividends).
C) Tax on dividends does not affect shareholder preference.
D) High tax forces companies to issue debt.
Correct Answer: B) If tax is high, shareholders prefer the company to retain the earnings (lower dividends).
Logic: Shareholders don't want to lose their income to heavy taxes, so they prefer the money to stay inside the company, which increases the share price instead (capital gains).
Logic: Shareholders don't want to lose their income to heavy taxes, so they prefer the money to stay inside the company, which increases the share price instead (capital gains).
FINAL MASTER QUESTION
25. Match the Financial Decision with its core concern:
(i) Investment Decision
(ii) Financing Decision
(iii) Dividend Decision
With:
(a) Deciding the proportion of debt and equity
(b) Deciding how much profit to distribute or retain
(c) Deciding which fixed assets to buy
(i) Investment Decision
(ii) Financing Decision
(iii) Dividend Decision
With:
(a) Deciding the proportion of debt and equity
(b) Deciding how much profit to distribute or retain
(c) Deciding which fixed assets to buy
A) (i)-(c), (ii)-(a), (iii)-(b)
B) (i)-(a), (ii)-(b), (iii)-(c)
C) (i)-(b), (ii)-(c), (iii)-(a)
D) (i)-(c), (ii)-(b), (iii)-(a)
Correct Answer: A) (i)-(c), (ii)-(a), (iii)-(b).
Final Analysis: Memorize these three pillars! Investment = Where to spend. Financing = Where to get the money. Dividend = What to do with the profit.
Final Analysis: Memorize these three pillars! Investment = Where to spend. Financing = Where to get the money. Dividend = What to do with the profit.
CBSE BOARD 2024
26. The process of estimating the fund requirements of a business and specifying the sources of funds is called:
A) Financial Management
B) Financial Planning
C) Capital Structure
D) Dividend Decision
Correct Answer: B) Financial Planning.
Board Tip: While Financial Management is the overall management of money, Financial Planning is the specific act of preparing the blueprint for future financial needs.
Board Tip: While Financial Management is the overall management of money, Financial Planning is the specific act of preparing the blueprint for future financial needs.
27. Which of the following is the twin objective of Financial Planning?
A) Profit maximization and wealth maximization
B) Ensuring availability of funds whenever required and seeing that the firm does not raise resources unnecessarily
C) Minimizing taxes and maximizing sales
D) Arranging short-term and long-term loans
Correct Answer: B) Ensuring availability of funds whenever required and seeing that the firm does not raise resources unnecessarily.
Logic: Shortage of funds harms the business, but surplus (idle) funds add to the cost of interest without earning any return.
Logic: Shortage of funds harms the business, but surplus (idle) funds add to the cost of interest without earning any return.
COMPETENCY BASED
28. 'Beta Corp' raised ₹50 Crores by issuing debentures because the interest rates were currently low. However, they do not have any new projects to invest in for the next 8 months. This violates which concept?
A) Objective of Financial Planning (avoiding unnecessary funds)
B) Wealth Maximization
C) Dividend Decision
D) Capital Budgeting
Correct Answer: A) Objective of Financial Planning (avoiding unnecessary funds).
Analysis: Raising funds without immediate use means the firm is paying interest on idle cash, hurting profitability.
Analysis: Raising funds without immediate use means the firm is paying interest on idle cash, hurting profitability.
CBSE BOARD 2023
29. The mix between owners' funds (equity) and borrowed funds (debt) in the total capital of a business is known as:
A) Financial Leverage
B) Working Capital
C) Capital Budgeting
D) Capital Structure
Correct Answer: D) Capital Structure.
ASSERTION-REASON
30. Assertion (A): A higher proportion of debt in the capital structure increases the financial risk of a business.
Reason (R): Debt involves a fixed commitment to pay interest and repay the principal, regardless of whether the company makes a profit or a loss.
Reason (R): Debt involves a fixed commitment to pay interest and repay the principal, regardless of whether the company makes a profit or a loss.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
CBSE SAMPLE PAPER 2025
31. The proportion of debt in the overall capital is also known as:
A) Operating Leverage
B) Financial Leverage
C) Return on Investment
D) Floatation Cost
Correct Answer: B) Financial Leverage.
Board Tip: As financial leverage increases (more debt), the cost of funds declines, but the financial risk increases.
Board Tip: As financial leverage increases (more debt), the cost of funds declines, but the financial risk increases.
TRICKY QUESTION
32. Using more debt to increase the Earnings Per Share (EPS) of the equity shareholders is called:
A) Capital Budgeting
B) Over-capitalization
C) Trading on Equity
D) Financial Planning
Correct Answer: C) Trading on Equity.
Logic: The company is "trading" on the strength of its equity base to borrow funds at a fixed rate, hoping to earn more on those funds than the interest paid, leaving a surplus for shareholders.
Logic: The company is "trading" on the strength of its equity base to borrow funds at a fixed rate, hoping to earn more on those funds than the interest paid, leaving a surplus for shareholders.
CASE SCENARIO
33. 'Zeta Ltd.' has a Return on Investment (ROI) of 15%. The rate of interest on its bank loan is 10%. If the company issues more debt to finance a new project, what will happen to the Earnings Per Share (EPS)?
A) EPS will decrease
B) EPS will remain constant
C) EPS will increase
D) It will lead to financial bankruptcy
Correct Answer: C) EPS will increase.
Analysis: This is a favorable financial leverage. Since ROI (15%) is greater than the Cost of Debt (10%), adding more debt will magnify the earnings for equity shareholders.
Analysis: This is a favorable financial leverage. Since ROI (15%) is greater than the Cost of Debt (10%), adding more debt will magnify the earnings for equity shareholders.
CBSE BOARD 2022
34. Under what condition does "Trading on Equity" become unfavorable and dangerous for the equity shareholders?
A) When ROI is greater than the Cost of Debt
B) When ROI is less than the Cost of Debt
C) When the corporate tax rate is high
D) When the company issues only equity shares
Correct Answer: B) When ROI is less than the Cost of Debt.
Note: If you borrow at 10% but only earn 8% on your business investments, the remaining 2% must be paid out of the equity shareholders' pockets, reducing EPS.
Note: If you borrow at 10% but only earn 8% on your business investments, the remaining 2% must be paid out of the equity shareholders' pockets, reducing EPS.
COMPETENCY BASED
35. Which ratio indicates the number of times the Earnings Before Interest and Taxes (EBIT) of a company covers the interest obligation?
A) Debt-Equity Ratio
B) Return on Investment
C) Interest Coverage Ratio (ICR)
D) Current Ratio
Correct Answer: C) Interest Coverage Ratio (ICR).
Analysis: A higher ICR means the company can easily pay its interest out of its profits, allowing it to safely borrow more debt.
Analysis: A higher ICR means the company can easily pay its interest out of its profits, allowing it to safely borrow more debt.
CBSE BOARD 2021
36. While the Interest Coverage Ratio (ICR) only looks at the ability to pay interest, which ratio takes care of the deficiencies of ICR by also including principal repayment obligations and other fixed charges?
A) Return on Investment (ROI)
B) Debt Service Coverage Ratio (DSCR)
C) Capital Gearing Ratio
D) Operating Profit Ratio
Correct Answer: B) Debt Service Coverage Ratio (DSCR).
ASSERTION-REASON
37. Assertion (A): A company with high operating costs (like high rent and fixed salaries) should rely less on debt.
Reason (R): High operating costs already create a high "Business Risk". Adding debt will increase "Financial Risk", making the overall risk profile of the company too dangerous.
Reason (R): High operating costs already create a high "Business Risk". Adding debt will increase "Financial Risk", making the overall risk profile of the company too dangerous.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
Logic: Business Risk + Financial Risk = Total Risk. If Business Risk is already high, keep Financial Risk (debt) low.
Logic: Business Risk + Financial Risk = Total Risk. If Business Risk is already high, keep Financial Risk (debt) low.
38. If the stock market conditions are 'Bearish' (depressed and falling), a company looking to raise capital should ideally issue:
A) Equity Shares
B) Debt / Debentures
C) Preference Shares only
D) Retained Earnings exclusively
Correct Answer: B) Debt / Debentures.
Board Tip: In a bearish market, investors are scared and want safe, guaranteed returns (interest from debt). They will not buy risky equity shares.
Board Tip: In a bearish market, investors are scared and want safe, guaranteed returns (interest from debt). They will not buy risky equity shares.
CBSE BOARD 2024
39. The cost of raising funds is called Flotation Cost. Between debt and equity, which generally has higher flotation costs?
A) Debt (Loans)
B) Equity (Shares)
C) Both have exactly the same cost
D) Retained Earnings
Correct Answer: B) Equity (Shares).
Note: Issuing shares to the public requires printing prospectuses, paying underwriters, advertising, and paying brokers, making it very expensive.
Note: Issuing shares to the public requires printing prospectuses, paying underwriters, advertising, and paying brokers, making it very expensive.
CASE SCENARIO
40. Management wants to keep the company's capital structure flexible, meaning they want the ability to easily reduce the capital if they have surplus funds. To maintain this flexibility, they should use:
A) Equity Shares
B) Debt (which can be repaid/redeemed)
C) Retained earnings
D) Non-redeemable preference shares
Correct Answer: B) Debt (which can be repaid/redeemed).
Analysis: Equity cannot be easily refunded to shareholders. Debt can be paid back whenever the company has extra cash, keeping the structure flexible.
Analysis: Equity cannot be easily refunded to shareholders. Debt can be paid back whenever the company has extra cash, keeping the structure flexible.
CBSE SAMPLE PAPER 2025
41. Why do companies with high corporate tax rates prefer issuing debt instead of equity?
A) Because dividends are tax-deductible
B) Because interest payments on debt are a tax-deductible expense
C) Because debt holders pay the taxes for the company
D) Because the government subsidizes debt
Correct Answer: B) Because interest payments on debt are a tax-deductible expense.
TRICKY QUESTION
42. As a company takes on more and more debt, the 'Cost of Equity' for the shareholders:
A) Decreases, because debt is cheap
B) Remains constant
C) Increases, because the financial risk to the equity shareholders increases
D) Turns into zero
Correct Answer: C) Increases, because the financial risk to the equity shareholders increases.
Logic: If a company has a lot of debt, the shareholders get scared of bankruptcy. To compensate for this high risk, they expect a higher rate of return (cost of equity).
Logic: If a company has a lot of debt, the shareholders get scared of bankruptcy. To compensate for this high risk, they expect a higher rate of return (cost of equity).
COMPETENCY BASED
43. Regulatory frameworks dictate that when a company issues shares, it must follow the guidelines of ________, whereas taking a bank loan follows the rules of ________.
A) RBI; SEBI
B) SEBI; RBI
C) Finance Ministry; RBI
D) Supreme Court; SEBI
Correct Answer: B) SEBI; RBI.
Analysis: Securities and Exchange Board of India (SEBI) regulates the stock market (equity). The Reserve Bank of India (RBI) regulates banking loans (debt).
Analysis: Securities and Exchange Board of India (SEBI) regulates the stock market (equity). The Reserve Bank of India (RBI) regulates banking loans (debt).
CBSE BOARD 2023
44. The financial plan of an organization takes into consideration:
A) Only the long-term needs of the business
B) Only the short-term working capital needs
C) Both long-term investment decisions and short-term working capital needs
D) Only the marketing budget
Correct Answer: C) Both long-term investment decisions and short-term working capital needs.
ASSERTION-REASON
45. Assertion (A): A company should not blindly copy the capital structure of another company in the same industry.
Reason (R): Even within the same industry, two companies can have very different cash flow positions, business risks, and management attitudes toward control.
Reason (R): Even within the same industry, two companies can have very different cash flow positions, business risks, and management attitudes toward control.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
46. The risk of inability to meet fixed financial obligations (like interest, preference dividends, and loan repayments) is termed as:
A) Business Risk
B) Operating Risk
C) Financial Risk
D) Market Risk
Correct Answer: C) Financial Risk.
CBSE BOARD 2021
47. A company with a highly volatile, unpredictable sales revenue should ideally choose a capital structure with:
A) High proportion of Debt
B) Low proportion of Debt (High Equity)
C) Only short-term loans
D) Zero equity
Correct Answer: B) Low proportion of Debt (High Equity).
Note: Unpredictable sales mean a high Business Risk. To balance this, the company must keep Financial Risk (debt) low.
Note: Unpredictable sales mean a high Business Risk. To balance this, the company must keep Financial Risk (debt) low.
CASE SCENARIO
48. 'Omega Ltd.' needs funds. The management considers issuing equity but realizes that it involves paying hefty underwriting commissions, brokerage fees, and prospectus printing costs. Which factor is heavily influencing their financing decision right now?
A) Cash Flow Position
B) Control Consideration
C) Flotation Costs
D) Tax Rate
Correct Answer: C) Flotation Costs.
TRICKY QUESTION
49. What is the fundamental difference between Financial Management and Financial Planning?
A) Financial Management aims to maximize wealth; Financial Planning aims to ensure funds are available smoothly.
B) Financial Management is short-term; Financial Planning is long-term.
C) Financial Management is done by the HR department.
D) They are the exact same concept.
Correct Answer: A) Financial Management aims to maximize wealth; Financial Planning aims to ensure funds are available smoothly.
FINAL MASTER QUESTION
50. Match the Capital Structure Factor with its correct explanation:
(i) Control Consideration
(ii) Tax Rate
(iii) Return on Investment (ROI)
With:
(a) Higher rate makes debt cheaper because interest is a deductible expense.
(b) If this is higher than the Cost of Debt, issuing debt increases EPS.
(c) Issuing debt does not dilute the voting power of existing owners.
(i) Control Consideration
(ii) Tax Rate
(iii) Return on Investment (ROI)
With:
(a) Higher rate makes debt cheaper because interest is a deductible expense.
(b) If this is higher than the Cost of Debt, issuing debt increases EPS.
(c) Issuing debt does not dilute the voting power of existing owners.
A) (i)-(b), (ii)-(c), (iii)-(a)
B) (i)-(a), (ii)-(b), (iii)-(c)
C) (i)-(c), (ii)-(a), (iii)-(b)
D) (i)-(b), (ii)-(a), (iii)-(c)
Correct Answer: C) (i)-(c), (ii)-(a), (iii)-(b).
Final Analysis: Memorizing how these specific factors manipulate the Debt vs. Equity choice guarantees you will conquer the Capital Structure case studies.
Final Analysis: Memorizing how these specific factors manipulate the Debt vs. Equity choice guarantees you will conquer the Capital Structure case studies.
CBSE BOARD 2024
51. The decision regarding the allocation of funds into different long-term assets of the business is known as:
A) Working Capital Management
B) Fixed Capital Management (Capital Budgeting)
C) Dividend Decision
D) Financing Decision
Correct Answer: B) Fixed Capital Management (Capital Budgeting).
52. A retail supermarket chain (trading concern) will generally require ________ Fixed Capital compared to an automobile manufacturing plant.
A) More
B) Equal
C) Less
D) Cannot be determined
Correct Answer: C) Less.
Logic: A trading concern only buys and sells goods. A manufacturing firm needs heavy investment in plant, machinery, and factory buildings, requiring more fixed capital.
Logic: A trading concern only buys and sells goods. A manufacturing firm needs heavy investment in plant, machinery, and factory buildings, requiring more fixed capital.
COMPETENCY BASED
53. 'Delta Garments' employs hundreds of tailors to stitch clothes manually using basic sewing machines. 'Echo Apparel' uses fully automated robotic tailoring machines. Which company requires a higher Fixed Capital?
A) Delta Garments
B) Echo Apparel
C) Both require the same
D) Neither requires fixed capital
Correct Answer: B) Echo Apparel.
Analysis: This highlights the "Choice of Technique". Capital-intensive techniques (automated machines) require more fixed capital than labour-intensive techniques.
Analysis: This highlights the "Choice of Technique". Capital-intensive techniques (automated machines) require more fixed capital than labour-intensive techniques.
CBSE BOARD 2023
54. Which of the following defines 'Net Working Capital'?
A) Total Current Assets
B) Current Assets minus Current Liabilities
C) Fixed Assets plus Current Assets
D) Current Assets divided by Current Liabilities
Correct Answer: B) Current Assets minus Current Liabilities.
ASSERTION-REASON
55. Assertion (A): Companies with high growth prospects require more fixed capital.
Reason (R): To meet higher anticipated demand in the future, the company must invest heavily in expanding its production capacity and acquiring new fixed assets.
Reason (R): To meet higher anticipated demand in the future, the company must invest heavily in expanding its production capacity and acquiring new fixed assets.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
CBSE SAMPLE PAPER 2025
56. 'Gross Working Capital' refers to the total investment in:
A) Current Liabilities
B) Fixed Assets
C) Current Assets
D) Equity Shares
Correct Answer: C) Current Assets.
Board Tip: Gross Working Capital = Total Current Assets. Net Working Capital = Current Assets - Current Liabilities.
Board Tip: Gross Working Capital = Total Current Assets. Net Working Capital = Current Assets - Current Liabilities.
TRICKY QUESTION
57. Which of the following is NOT a component of Current Assets?
A) Cash and Bank Balance
B) Sundry Debtors
C) Outstanding Expenses
D) Inventory (Stock)
Correct Answer: C) Outstanding Expenses.
Logic: Outstanding expenses are liabilities (money you owe and must pay in the short term), not assets.
Logic: Outstanding expenses are liabilities (money you owe and must pay in the short term), not assets.
CASE SCENARIO
58. 'FreshBake Bakers' makes bread and cakes. Their raw materials are converted into finished goods in just 4 hours. 'ShipBuilders Inc.' takes 2 years to build a single cruise ship. Who will require a larger amount of Working Capital?
A) FreshBake Bakers
B) ShipBuilders Inc.
C) Both require the same
D) Working capital is not needed for these businesses
Correct Answer: B) ShipBuilders Inc.
Analysis: The "Production Cycle" for a ship is very long. Funds get tied up in raw materials and work-in-progress for years before the final product is sold and cash is realized, requiring massive working capital.
Analysis: The "Production Cycle" for a ship is very long. Funds get tied up in raw materials and work-in-progress for years before the final product is sold and cash is realized, requiring massive working capital.
CBSE BOARD 2022
59. During a period of economic 'Boom', the demand for products increases significantly. How does this affect the working capital requirements of a firm?
A) Working capital requirement decreases
B) Working capital requirement remains unaffected
C) Working capital requirement increases
D) Working capital becomes zero
Correct Answer: C) Working capital requirement increases.
Note: Higher demand leads to higher production, which requires more raw materials, more inventory, and leads to more debtors, all increasing the need for working capital.
Note: Higher demand leads to higher production, which requires more raw materials, more inventory, and leads to more debtors, all increasing the need for working capital.
COMPETENCY BASED
60. 'Company X' sells its goods strictly on a cash basis. 'Company Y' offers a liberal 90-day credit period to all its customers to boost sales. Which company will require a larger Working Capital?
A) Company X
B) Company Y
C) Both will require the same amount
D) Company Y will require less Fixed Capital
Correct Answer: B) Company Y.
Analysis: A liberal "Credit Allowed" policy traps funds in Debtors/Receivables for 90 days, increasing the amount of working capital needed to run daily operations.
Analysis: A liberal "Credit Allowed" policy traps funds in Debtors/Receivables for 90 days, increasing the amount of working capital needed to run daily operations.
CBSE BOARD 2021
61. In an economy experiencing high Inflation, the working capital requirements of a business will generally:
A) Decrease
B) Increase
C) Remain constant
D) Turn negative
Correct Answer: B) Increase.
Logic: Inflation means prices are rising. Even to maintain the exact same volume of production, the company will have to pay more for raw materials and wages, requiring more working capital.
Logic: Inflation means prices are rising. Even to maintain the exact same volume of production, the company will have to pay more for raw materials and wages, requiring more working capital.
ASSERTION-REASON
62. Assertion (A): A company that enjoys liberal credit terms from its suppliers requires less working capital.
Reason (R): When suppliers allow the company 60 or 90 days to pay for raw materials, the company can use that time to manufacture and sell the goods without needing its own funds to pay upfront.
Reason (R): When suppliers allow the company 60 or 90 days to pay for raw materials, the company can use that time to manufacture and sell the goods without needing its own funds to pay upfront.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
Note: This factor is known as "Credit Availed".
Note: This factor is known as "Credit Availed".
TRICKY QUESTION
63. Maintaining a very high level of current assets (like keeping massive amounts of idle cash and huge stock levels) ensures high _________, but results in lower _________.
A) Profitability; Liquidity
B) Liquidity; Profitability
C) Risk; Return
D) Fixed Capital; Working Capital
Correct Answer: B) Liquidity; Profitability.
Board Tip: Idle cash pays the bills instantly (high liquidity), but sitting in a safe, it earns 0% interest, dragging down the overall profitability of the firm.
Board Tip: Idle cash pays the bills instantly (high liquidity), but sitting in a safe, it earns 0% interest, dragging down the overall profitability of the firm.
CASE SCENARIO
64. 'Global Airlines' needs 10 new airplanes. Instead of buying them outright for billions of rupees, they sign a long-term contract to rent the airplanes and pay a monthly fee. This decision drastically reduces their requirement for:
A) Working Capital
B) Fixed Capital
C) Current Liabilities
D) Retained Earnings
Correct Answer: B) Fixed Capital.
Analysis: Leasing or renting fixed assets (instead of purchasing them) is a major factor that lowers fixed capital requirements.
Analysis: Leasing or renting fixed assets (instead of purchasing them) is a major factor that lowers fixed capital requirements.
CBSE BOARD 2024
65. If a company operates in an industry where technology becomes obsolete very rapidly (e.g., computers, mobile phones), its requirement for fixed capital will be:
A) Higher
B) Lower
C) Unaffected
D) Zero
Correct Answer: A) Higher.
Note: Fast "Technology Upgradation" means the company must frequently replace old machinery with newer, expensive technology, increasing fixed capital needs.
Note: Fast "Technology Upgradation" means the company must frequently replace old machinery with newer, expensive technology, increasing fixed capital needs.
CBSE SAMPLE PAPER 2025
66. A company has a very high "Inventory Turnover Ratio", meaning its goods sell very quickly and do not stay in the warehouse for long. This company will require:
A) More Working Capital
B) Less Working Capital
C) More Fixed Capital
D) No Current Assets
Correct Answer: B) Less Working Capital.
Logic: If stock moves quickly, cash is recovered faster from sales, meaning less money remains blocked in inventory.
Logic: If stock moves quickly, cash is recovered faster from sales, meaning less money remains blocked in inventory.
COMPETENCY BASED
67. If there is a high degree of competition in the market, a firm will have to maintain larger stocks of finished goods to meet urgent orders quickly so that customers don't go to competitors. This will lead to:
A) Lower Fixed Capital requirement
B) Higher Fixed Capital requirement
C) Lower Working Capital requirement
D) Higher Working Capital requirement
Correct Answer: D) Higher Working Capital requirement.
CBSE BOARD 2023
68. Which of the following is considered a 'Current Liability'?
A) Machinery
B) 5-year Bank Loan
C) Sundry Creditors
D) Cash in Hand
Correct Answer: C) Sundry Creditors.
Note: Current liabilities are debts that must be paid within one year.
Note: Current liabilities are debts that must be paid within one year.
ASSERTION-REASON
69. Assertion (A): Seasonal industries like woollen garments have fluctuating working capital requirements.
Reason (R): During the peak season, they require more working capital to hold larger inventory and manage higher receivables, whereas during the slack season, the requirement decreases.
Reason (R): During the peak season, they require more working capital to hold larger inventory and manage higher receivables, whereas during the slack season, the requirement decreases.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
TRICKY QUESTION
70. "Lead Time" refers to the time gap between placing an order for raw materials and actually receiving them. If the lead time is very high and supply is uncertain, a company will need:
A) More Working Capital to stockpile raw materials
B) Less Working Capital because they don't have to pay immediately
C) More Fixed Capital to build new factories
D) Less Fixed Capital
Correct Answer: A) More Working Capital to stockpile raw materials.
Logic: If you aren't sure when the next delivery will arrive, you must keep massive buffer stocks to ensure production doesn't stop, tying up your cash.
Logic: If you aren't sure when the next delivery will arrive, you must keep massive buffer stocks to ensure production doesn't stop, tying up your cash.
CASE SCENARIO
71. Two manufacturing companies, A and B, decide to set up a 'Joint Venture' to build a shared waste-treatment plant instead of building two separate plants. This collaboration will affect both companies by:
A) Increasing their Working Capital needs
B) Decreasing their Working Capital needs
C) Increasing their Fixed Capital needs
D) Decreasing their Fixed Capital needs
Correct Answer: D) Decreasing their Fixed Capital needs.
Analysis: Sharing heavy facilities (Financial Alternatives/Collaboration) means each company invests less money in fixed assets.
Analysis: Sharing heavy facilities (Financial Alternatives/Collaboration) means each company invests less money in fixed assets.
CBSE BOARD 2021
72. The term "Operating Cycle" is primarily associated with the management of:
A) Fixed Assets
B) Dividend Distribution
C) Working Capital
D) Long-term Debt
Correct Answer: C) Working Capital.
Note: It is the time taken to convert cash into raw materials, then to finished goods, then to receivables, and finally back into cash.
Note: It is the time taken to convert cash into raw materials, then to finished goods, then to receivables, and finally back into cash.
CBSE BOARD 2022
73. Which of the following sources is NOT used to meet the Working Capital requirements of a business?
A) Short-term bank loans
B) Trade Credit from suppliers
C) Issue of Debentures
D) Bank overdraft
Correct Answer: C) Issue of Debentures.
Logic: Debentures are a long-term source of finance, primarily used for Fixed Capital needs.
Logic: Debentures are a long-term source of finance, primarily used for Fixed Capital needs.
COMPETENCY BASED
74. If the "Scale of Operations" of a business expands drastically from a local level to a national level, what happens to its capital requirements?
A) Only Fixed Capital requirement increases
B) Only Working Capital requirement increases
C) Both Fixed and Working Capital requirements increase
D) Capital requirements decrease due to economies of scale
Correct Answer: C) Both Fixed and Working Capital requirements increase.
Analysis: A larger scale means bigger factories (Fixed) AND more inventory/daily expenses (Working).
Analysis: A larger scale means bigger factories (Fixed) AND more inventory/daily expenses (Working).
FINAL MASTER QUESTION
75. Categorize the following factors affecting capital requirements:
(i) Choice of Technique
(ii) Credit Availed
(iii) Technology Upgradation
(iv) Seasonal Factors
(i) Choice of Technique
(ii) Credit Availed
(iii) Technology Upgradation
(iv) Seasonal Factors
A) All four affect Fixed Capital
B) (i) & (iii) affect Fixed Capital; (ii) & (iv) affect Working Capital
C) (ii) & (iv) affect Fixed Capital; (i) & (iii) affect Working Capital
D) All four affect Working Capital
Correct Answer: B) (i) & (iii) affect Fixed Capital; (ii) & (iv) affect Working Capital.
Final Analysis: Distinguishing which factors affect Fixed vs. Working capital is a guaranteed 1-mark board question format.
Final Analysis: Distinguishing which factors affect Fixed vs. Working capital is a guaranteed 1-mark board question format.
CBSE BOARD 2024
76. Which of the following statements correctly differentiates between 'Credit Allowed' and 'Credit Availed'?
A) Credit allowed increases working capital needs; Credit availed decreases working capital needs.
B) Credit allowed decreases working capital needs; Credit availed increases working capital needs.
C) Both increase working capital needs.
D) Both decrease working capital needs.
Correct Answer: A) Credit allowed increases working capital needs; Credit availed decreases working capital needs.
Board Tip: When you *allow* credit to customers, your cash is stuck with them (need more WC). When you *avail* credit from suppliers, you are using their money (need less WC).
Board Tip: When you *allow* credit to customers, your cash is stuck with them (need more WC). When you *avail* credit from suppliers, you are using their money (need less WC).
77. A company that has a large amount of retained earnings and steady cash flow is likely to declare:
A) A lower dividend
B) A higher dividend
C) No dividend
D) Dividends strictly in the form of debt
Correct Answer: B) A higher dividend.
Logic: Dividends involve cash outflows. A company with a strong cash flow position is capable of paying higher dividends.
Logic: Dividends involve cash outflows. A company with a strong cash flow position is capable of paying higher dividends.
COMPETENCY BASED
78. The management of 'Pioneer Steel' decides to use Debt to finance a new project instead of Equity, purely because the interest payments will reduce their tax liability. This decision is primarily influenced by:
A) Flotation Costs
B) Control Consideration
C) Tax Rate
D) State of Capital Market
Correct Answer: C) Tax Rate.
Analysis: Interest is a tax-deductible expense, making debt cheaper when corporate tax rates are high.
Analysis: Interest is a tax-deductible expense, making debt cheaper when corporate tax rates are high.
CBSE BOARD 2023
79. Which of the following sources of finance has a 'fixed' financial burden on the company?
A) Equity Shares
B) Retained Earnings
C) Debentures (Debt)
D) Trade Credit
Correct Answer: C) Debentures (Debt).
Note: The company is legally obligated to pay a fixed rate of interest on debentures, regardless of whether it earns a profit or suffers a loss.
Note: The company is legally obligated to pay a fixed rate of interest on debentures, regardless of whether it earns a profit or suffers a loss.
ASSERTION-REASON
80. Assertion (A): Financial planning is essentially the preparation of a financial blueprint of an organization's future operations.
Reason (R): The objective of financial management is to maximize shareholder wealth.
Reason (R): The objective of financial management is to maximize shareholder wealth.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: B) Both (A) and (R) are true but (R) is NOT the explanation.
Logic: Both statements are factually correct, but the objective of financial management (wealth maximization) is not the *explanation* for what financial planning is (blueprint).
Logic: Both statements are factually correct, but the objective of financial management (wealth maximization) is not the *explanation* for what financial planning is (blueprint).
CBSE SAMPLE PAPER 2025
81. Under what situation does 'Unfavorable Financial Leverage' occur?
A) When Cost of Debt is greater than Return on Investment (ROI)
B) When Return on Investment (ROI) is greater than Cost of Debt
C) When the company issues only equity
D) When dividends are not paid
Correct Answer: A) When Cost of Debt is greater than Return on Investment (ROI).
TRICKY QUESTION
82. The term "Trading on Equity" gets its name because:
A) The company trades its equity shares in the stock market.
B) The company uses its equity base to raise borrowed funds, aiming to increase returns for equity shareholders.
C) The company exchanges debt for equity.
D) The shareholders are constantly trading their shares.
Correct Answer: B) The company uses its equity base to raise borrowed funds, aiming to increase returns for equity shareholders.
CASE SCENARIO
83. 'TechSolutions' wants to expand. However, the stock market is going through a massive crash (Bearish phase) and investors are avoiding risk. Which financing option will 'TechSolutions' find most difficult to utilize?
A) Bank Loan
B) Retained Earnings
C) Equity Shares
D) Debentures
Correct Answer: C) Equity Shares.
Analysis: In a bearish market, investors shy away from risky equity investments and prefer safe, fixed-return instruments like debentures or bank deposits.
Analysis: In a bearish market, investors shy away from risky equity investments and prefer safe, fixed-return instruments like debentures or bank deposits.
CBSE BOARD 2022
84. A company has a very high Debt Service Coverage Ratio (DSCR). This indicates that:
A) The company is bankrupt
B) The company has a low capacity to pay its debt obligations
C) The company can easily meet its fixed financial obligations and can safely borrow more
D) The company should issue more equity to survive
Correct Answer: C) The company can easily meet its fixed financial obligations and can safely borrow more.
COMPETENCY BASED
85. If a firm's business risk is lower, its capacity to use debt is ________.
A) Lower
B) Unaffected
C) Higher
D) Zero
Correct Answer: C) Higher.
Analysis: Total Risk = Business Risk (operating costs) + Financial Risk (debt costs). If business risk is low, there is "room" to take on higher financial risk (more debt) safely.
Analysis: Total Risk = Business Risk (operating costs) + Financial Risk (debt costs). If business risk is low, there is "room" to take on higher financial risk (more debt) safely.
CBSE BOARD 2021
86. Decisions related to the size of assets, profitability, and competitiveness of the business are fundamentally affected by:
A) Dividend Decision
B) Financing Decision
C) Capital Budgeting (Investment) Decision
D) Staffing Decision
Correct Answer: C) Capital Budgeting (Investment) Decision.
Note: Long-term investments dictate the size of the company's asset base and its future earning capacity.
Note: Long-term investments dictate the size of the company's asset base and its future earning capacity.
TRICKY QUESTION
87. A company with a highly unpredictable sales cycle and volatile raw material prices will require:
A) Very little working capital
B) A larger amount of working capital to absorb the shocks
C) High fixed capital and zero working capital
D) Maximum debt in its capital structure
Correct Answer: B) A larger amount of working capital to absorb the shocks.
ASSERTION-REASON
88. Assertion (A): Shareholders generally prefer stable and regular dividends.
Reason (R): A stable dividend policy has a positive impact on the market price of the shares, as investors view it as a sign of the company's steady growth.
Reason (R): A stable dividend policy has a positive impact on the market price of the shares, as investors view it as a sign of the company's steady growth.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
CBSE BOARD 2024
89. What is the impact of "Inflation" on Working Capital requirements?
A) It decreases working capital requirements
B) It increases working capital requirements because more funds are needed to maintain the same volume of production
C) It has absolutely no effect on working capital
D) It converts working capital into fixed capital
Correct Answer: B) It increases working capital requirements because more funds are needed to maintain the same volume of production.
CASE SCENARIO
90. 'AutoMakers Ltd.' requires heavy machinery and large land. However, 'AutoMakers' found a financial alternative and took the land and machinery on a 20-year lease instead of buying it. This decision will:
A) Drastically decrease their fixed capital requirement
B) Drastically increase their fixed capital requirement
C) Decrease their working capital requirement
D) Unaffect their financial structure
Correct Answer: A) Drastically decrease their fixed capital requirement.
Analysis: Availability of leasing facilities is a major factor that reduces the need to invest massive funds upfront into fixed assets.
Analysis: Availability of leasing facilities is a major factor that reduces the need to invest massive funds upfront into fixed assets.
91. The primary goal of preparing a "Cash Budget" during Financial Planning is to:
A) Declare dividends
B) Estimate expected cash inflows and outflows to anticipate surplus or deficiency of funds
C) Calculate the company's tax liability
D) Maximize the share price immediately
Correct Answer: B) Estimate expected cash inflows and outflows to anticipate surplus or deficiency of funds.
CBSE SAMPLE PAPER 2025
92. Which of the following investors usually prefer regular, stable dividends over capital gains?
A) Young, risk-taking entrepreneurs
B) Wealthy investors looking for tax savings
C) Retired individuals and small investors relying on regular income
D) Institutional foreign investors
Correct Answer: C) Retired individuals and small investors relying on regular income.
Board Tip: This relates to the "Shareholder Preference" factor in the Dividend Decision.
Board Tip: This relates to the "Shareholder Preference" factor in the Dividend Decision.
COMPETENCY BASED
93. If an enterprise has a very high Fixed Operating Cost (rent, insurance, salaries), it should prefer a capital structure with:
A) A high level of debt
B) Only short-term loans
C) A lower level of debt
D) Zero equity
Correct Answer: C) A lower level of debt.
Analysis: High operating costs = High business risk. To balance this, the company must avoid adding high financial risk (debt).
Analysis: High operating costs = High business risk. To balance this, the company must avoid adding high financial risk (debt).
CBSE BOARD 2023
94. Working capital decisions are directly concerned with the management of:
A) Long-term borrowings
B) Fixed assets and depreciation
C) Current assets and current liabilities
D) Retained earnings
Correct Answer: C) Current assets and current liabilities.
ASSERTION-REASON
95. Assertion (A): Companies in a monopolistic position usually declare higher dividends.
Reason (R): They have a steady, predictable cash flow and face little risk of competition, allowing them to confidently distribute earnings.
Reason (R): They have a steady, predictable cash flow and face little risk of competition, allowing them to confidently distribute earnings.
A) Both (A) and (R) are true and (R) is the correct explanation.
B) Both (A) and (R) are true but (R) is NOT the explanation.
C) (A) is true, but (R) is false.
D) (A) is false, but (R) is true.
Correct Answer: A) Both (A) and (R) are true and (R) is the correct explanation.
TRICKY QUESTION
96. Which factor makes Capital Budgeting decisions the most critical for a company's survival?
A) They involve small amounts of funds.
B) They are easily reversible if a mistake is made.
C) They are irreversible without incurring massive financial losses.
D) They only affect short-term liquidity.
Correct Answer: C) They are irreversible without incurring massive financial losses.
Board Tip: Once you buy a ₹50 Crore machine or build a factory, you cannot simply "return" it if the plan fails.
Board Tip: Once you buy a ₹50 Crore machine or build a factory, you cannot simply "return" it if the plan fails.
CASE SCENARIO
97. A young startup company, 'Innovate AI', has huge growth potential but highly unstable earnings. They need capital. They should rely heavily on:
A) High-interest Bank Loans
B) Debentures
C) Equity Share Capital
D) Short-term overdrafts
Correct Answer: C) Equity Share Capital.
Analysis: Unstable earnings mean the company cannot guarantee fixed interest payments. Equity investors take the risk in exchange for potential high growth.
Analysis: Unstable earnings mean the company cannot guarantee fixed interest payments. Equity investors take the risk in exchange for potential high growth.
CBSE BOARD 2021
98. Flotation costs include all of the following EXCEPT:
A) Brokerage commissions
B) Printing of prospectuses
C) Interest paid to debenture holders
D) Underwriting fees
Correct Answer: C) Interest paid to debenture holders.
Logic: Interest is the *Cost of Debt*, whereas Flotation Costs are the expenses incurred strictly *during the process of raising/issuing* the funds.
Logic: Interest is the *Cost of Debt*, whereas Flotation Costs are the expenses incurred strictly *during the process of raising/issuing* the funds.
99. If a company finds it very easy to raise funds from the capital market at any time (high Access to Capital Market), it is more likely to:
A) Retain all its earnings
B) Declare higher dividends
C) Stop paying dividends completely
D) Close down operations
Correct Answer: B) Declare higher dividends.
Note: If they can easily raise money whenever needed, they don't need to hoard their current profits as retained earnings.
Note: If they can easily raise money whenever needed, they don't need to hoard their current profits as retained earnings.
FINAL MASTER QUESTION
100. Match the Business type with its Capital requirement:
(i) Heavy Manufacturing Plant
(ii) Retail Grocery Store
(iii) IT Consulting Firm (Service)
With:
(a) Low Fixed Capital, Low Working Capital
(b) High Fixed Capital, High Working Capital
(c) Low Fixed Capital, High Working Capital
(i) Heavy Manufacturing Plant
(ii) Retail Grocery Store
(iii) IT Consulting Firm (Service)
With:
(a) Low Fixed Capital, Low Working Capital
(b) High Fixed Capital, High Working Capital
(c) Low Fixed Capital, High Working Capital
A) (i)-(b), (ii)-(c), (iii)-(a)
B) (i)-(a), (ii)-(b), (iii)-(c)
C) (i)-(c), (ii)-(a), (iii)-(b)
D) (i)-(b), (ii)-(a), (iii)-(c)
Correct Answer: A) (i)-(b), (ii)-(c), (iii)-(a).
Final Analysis: Manufacturing = High Fixed (machines) & High WC (raw materials). Retail = Low Fixed (just a store) & High WC (inventory). Service/IT = Low Fixed (computers) & Low WC (no raw material inventory).
Final Analysis: Manufacturing = High Fixed (machines) & High WC (raw materials). Retail = Low Fixed (just a store) & High WC (inventory). Service/IT = Low Fixed (computers) & Low WC (no raw material inventory).
📊
Chapter 9 Mastered!
Outstanding! You have successfully completed all 100 MCQs for Financial Management.
You now possess a deep understanding of Capital Structure, Leverage, and the Three Financial Decisions.
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