Financial Management MCQ Questions and Solutions with Explanations | Commerce

The underwriter has to take up the unsubscribed part of the agreed portion. The underwriter undertakes the guarantee for only part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him.

Future value interest factor takes Compounding rate. Future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth.

The Financial Leverage (FL) measures the relationship between the EBIT and the EPS and it reflects the effect of change in EBIT on the level of EPS. The FL measures the responsiveness of the EPS to a change in EBIT and is defined as the % change in EPS divided by the % change in EBIT. Symbolically, = Increase in EPS ¸EPS/Increase in EBIT¸EBIT

A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.

Present value takes Discounting rate. Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.

Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate the break-even point of a business, as well as the likely profit levels on individual sales.

An example of a derivative security is a call option on Mobil stock and a commodity futures contract. A derivative security is a financial instrument whose value depends upon the value of another asset.

Financial leverage helps one to estimate financial risk. Financial leverage which is also known as leverage or trading on equity, refers to the use of debt to acquire additional assets.

The traditional approach to the finance function relates to the initial stages of its evolution during 1920s and 1930s. According to this approach, the scope, of finance function was confined to only procurement of funds needed by a business on most suitable terms.
The utilisation of funds was considered beyond the purview of finance function. It was felt that decisions regarding the application of funds are taken somewhere else in the organisation. However, institutions and instruments for raising funds were considered to be a part of finance function.

The Combined Leverage (CL) is not a distinct type of leverage analysis, rather it is a product of the Operating Leverage and the Financial Leverage. The CL may be defined as the % change in EPS for a given % change in the sales level and may be calculated as follows:

Combined Leverage = Operating Leverage x Financial Leverage = % Change in EPS / % Change in sales