Financial Management MCQ Questions and Solutions with Explanations | Commerce

If market interest rates are expected to rise, you would expect bond prices to fall more than stock prices. The prevailing rate of interest offered on cash deposits, determined by demand and supply of deposits and based on the duration (the longer the duration, the higher the rate) and amount (the higher the amount, the higher the rate) of deposits.

Informational content, Reduction of uncertainty and Some investors' preference for current income is an argument for the relevance of dividends.

The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.

Financial risk is most associated with the use of debt financing by corporations. Financial risk is the risk that a company won't be able to meet its obligations to pay back its debts. Which in turn could mean that potential investors will lose the money invested in the company. The more debt a company has, the higher the potential financial risk.

Retained earnings are the cumulative earnings of the company after dividends. Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account.

Composition of the current assets does not affect the capital structure of a company. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

Political stability is the major factor concerning country risk. Political stability in this case refers to the lack of real competition for the governing elite. The 'politically stable' system enforces stringent barriers to personal freedoms.

Arbitrage is the level processing technique introduced in MM approach. Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price.

The rational expectations model of dividend policy says that If the declared dividend is in accordance with the expectations, the change in the firms value will be minimal.

Liquidity risk increases whenever interest rates increase. Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands.