Business Finance : Practice Questions and Answers

The correct answer is B: Net Profit / Shareholders' Equity.

ROE measures how effectively management is using shareholders' equity to generate profit. A higher ROE indicates more efficient use of equity capital. It is one of the most important profitability ratios used by investors to assess a company's financial performance.

The correct answer is C: The average cost of all sources of finance weighted by their proportion in capital structure.

WACC represents the average rate a company is expected to pay to all its security holders to finance its assets. It is calculated by weighting the cost of each component (equity, debt, preference shares) by its proportion in the total capital structure. WACC is used as the discount rate in NPV calculations.

The correct answer is C: Wealth maximisation of shareholders.

The primary objective of financial management is to maximise shareholders' wealth, reflected in the market value of shares. Profit maximisation is a narrower goal that ignores time value of money, risk, and the quality of earnings. Wealth maximisation is a broader, more comprehensive objective that accounts for these factors.

The correct answer is B: Ignores cash flows after the payback period.

The payback period method calculates how long it takes to recover the initial investment from net cash inflows. Its main limitation is that it ignores all cash flows occurring after the payback period and does not consider the time value of money. Discounted payback period is the modified version that accounts for time value.

The correct answer is B: Independent of its dividend policy.

The Modigliani-Miller hypothesis (1961) states that in a perfect capital market (no taxes, no transaction costs, rational investors), a firm's value is determined entirely by its earning power and the risk of its underlying assets, not by how it distributes earnings. Shareholders are indifferent between dividends and capital gains.

The correct answer is C: Debentures.

Debentures are long-term debt instruments issued by companies to raise capital, typically with a fixed interest rate and a maturity period exceeding one year. Commercial paper and cash credit are short-term sources of finance. Trade credit is also a short-term source extended by suppliers.

The correct answer is C: Long-term investments.

Current assets are assets that can be converted to cash within one year or one operating cycle. They include cash and cash equivalents, accounts receivable, inventory, and short-term investments. Long-term investments are non-current assets as they are held for more than one year.

The correct answer is A: Current Assets / Current Liabilities.

The current ratio measures a company's ability to pay off its short-term liabilities using its short-term assets. A ratio above 1 indicates the company has more current assets than current liabilities, suggesting good short-term liquidity. A ratio below 1 may indicate potential liquidity problems.

The correct answer is C: NPV is the difference between the present value of cash inflows and the initial investment.

NPV accounts for the time value of money by discounting future cash flows. A positive NPV indicates the project adds value and should be accepted; a negative NPV means it should be rejected. NPV and IRR may occasionally give conflicting decisions when evaluating mutually exclusive projects.

The correct answer is C: Trading on equity.

Financial leverage, also known as trading on equity, refers to the use of borrowed funds (debt) to increase the potential return on equity. When a company borrows at a fixed interest rate and earns a higher return on the borrowed funds, the surplus accrues to equity shareholders, thereby magnifying their returns.

The correct answer is D: Return on capital employed (ROCE).

ROCE measures how efficiently a company generates profit from its capital. It focuses on overall profitability and operational efficiency rather than revealing the proportion of debt vs equity in the capital structure. Debt-equity ratio, financial leverage, and capital gearing ratio all directly analyse capital structure by comparing debt and equity financing.

The correct answer is C: 30 per cent.

As per Union Budget 2022, income from the transfer of any virtual/digital asset will be taxed at 30%. No deduction except the cost of acquisition will be allowed, and no loss from such a transaction can be carried forward. Additionally, TDS will be imposed on payments for the transfer of crypto assets at a rate of 1% for transactions above a certain threshold. India's first global cryptocurrency index, tracking the 15 most-traded cryptocurrencies, was launched by CryptoWire (a unit of TickerPlant).

The correct answer is C: 14 per cent.

In the Union Budget 2022, the tax deduction limit for both Central and State government employees was increased from 10% to 14%. This helps bring state government employees' social security benefits on par with central government employees. Additionally, a taxpayer can now file an updated return on payment of taxes within two years from the end of the relevant assessment year. Income from transfer of digital assets (cryptocurrency) is charged at 30% tax plus 1% TDS on each transaction.