Financial Management MCQ Questions and Solutions with Explanations | Commerce

Contribution/EBIT is the expression for operating leverage. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

The material wealth of a society is equal to the sum of all financial and real assets. The material wealth of a society is determined ultimately by the productive capacity of its economy— the goods and services that can be provided to its members.

Operating Leverage is the response of changes in EBIT to the changes in sales. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

Commercial banks, Investment bank and Insurance companies are example of financial intermediaries.

Walter's Model is a dividend relevance theory proposed by Professor James E. Walter.

It emphasizes the relationship between the firm’s internal rate of return (r), cost of capital (k), and dividend policy in determining the market price of shares.

Key Assumptions of Walter’s Model:

1. The firm is financed entirely by equity and does not use debt.

2. The internal rate of return (r) and the cost of capital (k) are constant.

3. All earnings are either distributed as dividends or reinvested immediately.

4. The firm has a very long or potentially infinite life.

5. The firm offers an increasing amount of dividend per share at a given level of price per share, reflecting how dividend policy influences valuation in the model.

Why Other Options Are Incorrect:

Option B: The model assumes the firm has an infinite life, not a finite one.

Option C: Walter’s model is based on the assumption that the cost of capital remains constant.

Option D: This statement is related to balance sheet accounting and is not relevant to dividend policy under Walter's model.

Hence, the correct answer is: the firm offers an increasing amount of dividend per share at a given level of price per share.

Financial intermediaries exist because small investors cannot efficiently diversify their portfolios, gather all relevant information, assess credit risk of borrowers and advertise for needed investments.

The use of preference share capital as against debt finance reduces DFL. A degree of financial leverage (DFL) is a leverage ratio that measures the sensitivity of a company's earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure.

Firms that specialize in helping companies raise capital by selling securities are called investment banks. An investment bank (IB) is a financial intermediary that performs a variety of services.

The Degree of Financial Leverage (DFL) measures financial risk of the firm. The degree of financial leverage (DFL) measures the percentage change in EPS for a unit change in operating income, also known as earnings before interest and taxes (EBIT).

Financial assets directly contribute to the country's productive capacity. A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.