Financial and Investment Management
This set covers: Value & Returns, Capital Budgeting, Dividend Policy, Mergers & Acquisitions, Portfolio Management, Derivatives, Working Capital, and International Finance
🔹 Section A – Value & Returns (Time Value of Money, Bonds, Shares, Risk & Return)
1. The concept that “money today is worth more than the same sum tomorrow” is known as:
A. Risk premium
B. Time value of money
C. Inflation
D. Compounding
Answer: B
Explanation: Money has time value due to earning capacity and uncertainty of future.*
2. Future Value (FV) formula is:
A.
B.
C.
D.
Answer: A
3. Present Value (PV) decreases when:
A. Interest rate increases
B. Time period decreases
C. Discount rate decreases
D. Cash flow increases
Answer: A
4. For an ordinary annuity, payments are made:
A. At the beginning of each period
B. At the end of each period
C. Randomly
D. Twice per year
Answer: B
5. If coupon rate is higher than required return, bond sells at:
A. Par
B. Discount
C. Premium
D. Zero value
Answer: C
6. The value of a bond is equal to:
A. Present value of interest + present value of principal
B. Sum of profits
C. Book value
D. Face value only
Answer: A
7. In Gordon’s Model, share value increases if:
A. Growth rate increases
B. Dividend payout decreases
C. Required return increases
D. Retention ratio decreases
Answer: A
8. Risk is measured statistically by:
A. Mean
B. Standard deviation
C. Variance
D. Both B & C
Answer: D
9. Coefficient of variation measures:
A. Absolute risk
B. Relative risk
C. Expected return
D. Portfolio beta
Answer: B
10. If expected return = 10% and risk-free rate = 5%, risk premium = ?
A. 15%
B. 5%
C. 10%
D. 2%
Answer: B
🔹 Section B – Capital Budgeting
11. Capital budgeting is concerned with:
A. Long-term investment decisions
B. Short-term financing
C. Inventory management
D. Dividend policy
Answer: A
12. Payback period measures:
A. Liquidity of investment
B. Profitability
C. NPV
D. IRR
Answer: A
13. NPV method considers:
A. Time value of money
B. Accounting profits only
C. Depreciation
D. Book value
Answer: A
14. A project is acceptable if:
A. NPV > 0
B. NPV = 0
C. NPV < 0
D. None
Answer: A
15. Internal Rate of Return (IRR) is that rate at which:
A. NPV = 0
B. Profit = 0
C. Cost = Benefit
D. Cash inflow = Cash outflow
Answer: A
16. Profitability Index (PI) =
A. PV of inflows / PV of outflows
B. Outflows / Inflows
C. ROI / Investment
D. None
Answer: A
17. ARR stands for:
A. Accounting Rate of Return
B. Actual Rate of Return
C. Average Risk Return
D. Annual Real Return
Answer: A
18. Discounted cash flow methods include:
A. NPV and IRR
B. ARR
C. Payback period
D. None
Answer: A
19. Risk-adjusted discount rate method adjusts:
A. Discount rate for risk
B. Cash flows
C. Profit margin
D. Inflation rate
Answer: A
20. Sensitivity analysis studies:
A. Impact of changes in variables on NPV
B. Market fluctuations
C. Inflation
D. Fixed costs
Answer: A
🔹 Section C – Dividend Theories
21. Walter’s Model assumes:
A. Constant cost of capital
B. Variable cost of equity
C. No retained earnings
D. Market imperfections
Answer: A
22. According to Walter, if r > k, the firm should:
A. Pay no dividend
B. Pay maximum dividend
C. Pay 50% dividend
D. Ignore dividend
Answer: A
Explanation: When return exceeds cost of capital, reinvestment is better.*
23. Gordon’s Model is also called:
A. Bird-in-hand theory
B. Clientele theory
C. Residual theory
D. None
Answer: A
24. M–M Theory assumes:
A. Perfect capital market
B. Taxes exist
C. Transaction cost
D. Inflation
Answer: A
25. Dividend irrelevance theory is given by:
A. Walter
B. Gordon
C. M–M
D. Keynes
Answer: C
26. Retention ratio is denoted by:
A. b
B. r
C. k
D. g
Answer: A
27. Growth rate (g) =
A. Retention ratio × Return on equity
B. Dividend / EPS
C. EPS / Dividend
D. Profit / Sales
Answer: A
28. Walter’s model uses:
A. D, E, r, k
B. PV, FV, r
C. Rf, β
D. ROI, WACC
Answer: A
29. Under M–M, dividend policy affects:
A. Not the firm’s value
B. Firm’s value
C. Stock price positively
D. Negatively
Answer: A
30. Which model is most suitable for growth firms?
A. Walter’s
B. Gordon’s
C. M–M
D. None
Answer: A
🔹 Section D – Mergers, Acquisitions & Corporate Restructuring
31. A merger between firms in same industry is:
A. Horizontal merger
B. Vertical merger
C. Conglomerate merger
D. None
Answer: A
32. A merger between supplier and manufacturer is:
A. Vertical merger
B. Horizontal merger
C. Circular merger
D. Conglomerate merger
Answer: A
33. Value creation occurs when:
A. Combined value > Individual values
B. Combined value < Individual values
C. Combined value = Individual values
D. None
Answer: A
34. Synergy means:
A. 2 + 2 > 4
B. 2 + 2 = 4
C. 2 + 2 < 4
D. None
Answer: A
35. Leveraged buyout (LBO) is financed through:
A. Debt
B. Equity
C. Both
D. Retained earnings
Answer: A
36. Hostile takeover means:
A. Without consent of target management
B. Mutual consent
C. Legal merger
D. Reverse merger
Answer: A
37. Reverse merger means:
A. Smaller company takes over a larger one
B. Conglomerate merger
C. Partial acquisition
D. None
Answer: A
38. Spin-off refers to:
A. Creating a new company from parent
B. Selling shares
C. Buying back shares
D. None
Answer: A
39. Mergers achieve:
A. Economies of scale
B. Cost reduction
C. Market expansion
D. All of the above
Answer: D
40. Due diligence in mergers means:
A. Evaluation before merger
B. Legal compliance
C. Accounting audit
D. Investment decision
Answer: A
🔹 Section E – Portfolio Management (CAPM & APT)
41. Portfolio diversification reduces:
A. Unsystematic risk
B. Systematic risk
C. Inflation
D. Market volatility
Answer: A
42. Systematic risk is caused by:
A. Market factors
B. Company factors
C. Management decisions
D. Product defects
Answer: A
43. Beta (β) in CAPM measures:
A. Systematic risk
B. Unsystematic risk
C. Liquidity
D. Credit risk
Answer: A
44. CAPM formula is:
A.
B.
C.
D. None
Answer: A
45. If β = 1.5, Rf = 6%, Rm = 12%, then Expected Return = ?
A. 15%
B. 9%
C. 12%
D. 10%
Answer: A
(6 + 1.5 × (12 − 6) = 15)
46. If β < 1, the security is:
A. Defensive
B. Aggressive
C. Neutral
D. Risk-free
Answer: A
47. Arbitrage Pricing Theory (APT) was given by:
A. Stephen Ross
B. William Sharpe
C. Markowitz
D. Fisher Black
Answer: A
48. According to APT, returns are affected by:
A. Multiple macro factors
B. Single factor only
C. Micro factors
D. None
Answer: A
49. Diversification can:
A. Eliminate unsystematic risk
B. Eliminate systematic risk
C. Eliminate all risk
D. None
Answer: A
50. The efficient frontier is a concept of:
A. Modern Portfolio Theory
B. CAPM
C. Dividend theory
D. Risk-free asset
Answer: A
🔹 Section F – Derivatives
51. Derivatives derive value from:
A. Underlying assets
B. Real assets
C. Shares only
D. Bonds only
Answer: A
52. A forward contract is:
A. Customized OTC contract
B. Standardized exchange-traded
C. Option
D. None
Answer: A
53. Futures are traded:
A. On exchanges
B. Privately
C. Only by banks
D. None
Answer: A
54. A call option gives right to:
A. Buy an asset
B. Sell an asset
C. Hold an asset
D. None
Answer: A
55. A put option gives right to:
A. Sell
B. Buy
C. Exchange
D. Lend
Answer: A
56. Option premium means:
A. Price paid to buy the option
B. Strike price
C. Spot price
D. None
Answer: A
57. Payoff of call option =
A. Max(0, S – K)
B. Max(0, K – S)
C. S – K
D. None
Answer: A
58. Payoff of put option =
A. Max(0, K – S)
B. Max(0, S – K)
C. S × K
D. None
Answer: A
59. Black–Scholes model is used for:
A. Option pricing
B. Bond valuation
C. Cash management
D. Portfolio management
Answer: A
60. Swap is:
A. Exchange of cash flows
B. Exchange of shares
C. Loan contract
D. Equity deal
Answer: A
🔹 Section G – Working Capital Management
61. Working capital =
A. Current Assets − Current Liabilities
B. Fixed Assets − Long-term Liabilities
C. Total Assets − Total Liabilities
D. None
Answer: A
62. Objective of working capital management:
A. Maintain liquidity & profitability balance
B. Increase sales only
C. Minimize debt
D. None
Answer: A
63. EOQ =
A.
B.
C.
D. None
Answer: A
64. Cash management ensures:
A. Availability of funds when needed
B. Profit maximization
C. Tax payment
D. None
Answer: A
65. Factoring means:
A. Selling receivables to a factor
B. Buying raw materials
C. Paying suppliers
D. Issuing shares
Answer: A
66. Permanent working capital means:
A. Minimum level required continuously
B. Seasonal requirement
C. Temporary loans
D. None
Answer: A
67. Working capital cycle starts from:
A. Purchase of raw materials
B. Sale of finished goods
C. Receipt of cash
D. Payment to creditors
Answer: A
68. Optimum working capital means:
A. No shortage or surplus
B. Maximum liquidity
C. Minimum debt
D. None
Answer: A
69. Inventory cost includes:
A. Ordering & carrying cost
B. Selling cost
C. Depreciation
D. Labour cost
Answer: A
70. Average collection period measures:
A. Receivable efficiency
B. Payables control
C. Cash turnover
D. None
Answer: A
🔹 Section H – International Financial Management
71. International finance deals with:
A. Cross-border financial decisions
B. Domestic accounting
C. Local banking
D. None
Answer: A
72. Foreign exchange market is a:
A. Global decentralized market
B. Local market
C. Regulated monopoly
D. None
Answer: A
73. Spot rate means:
A. Rate for immediate delivery
B. Future delivery rate
C. Average rate
D. None
Answer: A
74. Forward rate means:
A. Agreed rate for future transaction
B. Present rate
C. Exchange margin
D. None
Answer: A
75. Floating exchange rate is determined by:
A. Market forces
B. Central bank
C. IMF
D. Government
Answer: A
76. Fixed exchange rate is maintained by:
A. Government or central bank
B. Market
C. Investors
D. None
Answer: A
77. Transaction exposure arises from:
A. Contractual cash flows in foreign currency
B. Change in asset value
C. Inflation
D. None
Answer: A
78. Translation exposure affects:
A. Accounting statements
B. Real cash flows
C. Inflation
D. Tax
Answer: A
79. Economic exposure affects:
A. Long-term cash flows and competitiveness
B. Tax liability
C. Asset valuation only
D. None
Answer: A
80. Forward contracts are used to:
A. Hedge foreign exchange risk
B. Increase speculation
C. Control inflation
D. None
Answer: A
🔹 Section I – Advanced & Applied Concepts
81. Arbitrage means:
A. Risk-free profit from price difference
B. Long-term investment
C. Portfolio rebalancing
D. None
Answer: A
82. Currency swap involves:
A. Exchange of principal and interest in different currencies
B. Interest rate change
C. Option trading
D. None
Answer: A
83. Hedging aims to:
A. Minimize risk
B. Increase speculation
C. Maximize risk
D. None
Answer: A
84. Diversification is most effective when securities are:
A. Negatively correlated
B. Positively correlated
C. Independent
D. None
Answer: A
85. Beta = 0 means:
A. Risk-free security
B. Market portfolio
C. Aggressive stock
D. None
Answer: A
86. Interest coverage ratio =
A. EBIT / Interest
B. EBIT / Tax
C. EBIT / Sales
D. EBIT / Debt
Answer: A
87. High β (>1) indicates:
A. Greater volatility
B. Lower volatility
C. No risk
D. None
Answer: A
88. Sharpe ratio =
A. (Rp – Rf) / σ
B. (Rf – Rp) / σ
C. Rp × Rf
D. None
Answer: A
89. Portfolio risk is minimized when:
A. Correlation = −1
B. Correlation = +1
C. Correlation = 0
D. None
Answer: A
90. Risk-free asset has β =
A. 0
B. 1
C. >1
D. <0
Answer: A