Financial Management in Business Finance : Practice MCQ Questions & Answers with Explanations

2 practice sets · Page 1 of 1

Business FinanceEasyFinancial ManagementObjectives

The primary objective of financial management is:

Profit maximisation

Sales maximisation

Wealth maximisation of shareholders

Cost minimisation

View Answer

Correct Answer: C — Wealth maximisation of shareholders

Explanation:

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.

Business FinanceMediumDividend DecisionFinancial Management

According to the Modigliani-Miller (MM) hypothesis, the value of a firm is:

Dependent on its dividend policy

Independent of its dividend policy

Maximised when dividend payout is 100%

Determined solely by retained earnings

View Answer

Correct Answer: B — Independent of its dividend policy

Explanation:

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.