Indicate whether the following statements are ‘True’ or ‘False’. Support your answer with reason
Chapter -1 Page no:-27
1.The primary goal of financial management decisions is to maximize the price of the firm’s stock.
- True. The primary goal of the financial management is to maximize the stock price because this objective considers all stakeholders. If the price of stock is maximized, all parties related with companies will be benefited.
- Finance is related with the acquisition, allocation, management and efficient utilization of firm’s financial resources.
- True. Financial management is related with acquisition and utilization of money by the firm which includes allocation and management of money.
- The primary emphasis of the financial manager is on profit maximization.
- False. Primary emphasis of financial manager is to maximize stock price because this goal considers all parties related with the firm
5.Risk management in the most crucial responsibility of financial manager.
- True. Financial manager should manage risk for his/her firm by purchasing insurance policy and by hedging tools.
- The objective of profit maximization considers the time value of money.
- False. Profit maximization does not consider the time value of money and two equal profit projects provides the equal weight.
- A high earnings per share represents the higher stock price of the corporation.
- True. Stock price is the product of price earnings ratio and earnings per share. Stock price depends on the earning per share, thus higher the earnings per share higher will be the stock price and vice versa
- Investment decision is also known as capital structure decision.
- False. Investment decision is the decision related with the purchase of fixed asset. On the other hand, capital structure decision is the selection of optimal mix of long term sources of financing.
- The treasurer oversees the accounting activities of the firm.
- False. Treasurer oversees the financing activities and controller oversees the accounting activities.
10.For a firm wealth maximization goal is preferable to profit maximization goal.
- True. Wealth maximization goal is preferable than profit maximization because wealth maximization goal is clear, consider risk element and time value of money.
- Financial manager places primary emphasis on cash flows.
- True. Value of the firm is derived from the cash flows so financial manager must emphasis on cash flows. Bigger the cash flows bigger the value of the firm and vice versa.
- Financial management is concerned with the maintenance and creation of wealth.
True. Goal of the financial management or financial manager is to maximize the wealth of the firm and maintain in consistent level.
- Shareholder wealth is measured by the market value of the firm’s common stock.
- True. Shareholder wealth is measured by the market value of the firm’s common stock. If the market value of the firm’s share is increased, then the value of the firm is increased.
- Financial manager has close relation with financial market.
- True. Performance of the financial manager shown in the market by increasing in the stock price. So, there is close relationship with financial market.
- Day to day functions of the finance department are carried out by financial manager.
False. Financial manager (chief financial officer, treasurer, controller, and respective department heads) are responsible for the policy making functions or managerial functions or executive functions. On the other hand, day to day functions are carried out by lower level staff of respective departments.
- Public finance is the study of money management of individual.
- False. Public finance is the study of management of money by government. On the other hand, money management by individual is called personal finance.
- Business finance is the study of money management of all forms of business organizations.
- True. Money management by all forms of business organization (sole, partnership and corporation) is called business finance.
chapter-7 page no:-574
1.The net present value profile is a graph showing how a project’s NPV changes as the IRR changes.
- False. NPV profile is a graph which shows the how a project’s NPV changes with change in cost of capital.
- Both the IRR rule and the accounting rate of return rule take into consideration the time value of money.
- False. IRR rule consider the time value of money and accounting rate of return does not consider the time value of money.
- The NPV of a project will equal zero whenever the payback period of a project equals the required rate of return.
- False. NPV of a project will equal zero if the required rate of return of the project must be equal with its internal rate of return.
- NPV is a better capital-budgeting technique than IRR.
- True. NPV is a better capital budgeting technique because it measures the firm’s value in rupees and there will be only one decision. But in case of IRR, there may be multiple IRR.
- The NPV assumes cash flows are reinvested at the firm’s cost of capital.
- True. NPV method assumes cash flows from the project are reinvested at firm’s cost of capital.
- Projects with nonnormal cash flows sometimes have multiple MIRRs.
- False. If there is nononrmal cash flows there will be multiples IRR but in case of MIRR there is no multiple MIRR there is only MIRR in case of nonnormal cash flows.
- The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.
- False. Because the IRR is independent of the discount rate.
- There are many conditions under which a project can have more than one IRR. One such condition is where an otherwise normal project has a negative cash flow at the end of the life.
True. The situation identified is that of a project with nonnormal cash flows, which has multiple IRRs.
- The phenomenon called multiple internal rates of return arises when two or more mutually exclusive projects that have different lives are being compared.
- False. Multiple IRRs occur with projects with nonnormal cash flows, not with mutually exclusive projects with different lives.
- The modified IRR method has wide appeal to professors, but most business executives prefer the NPV method to either the regular or modified IRR.
- Fasle. Business executives tend to prefer the IRR because it gives a measure of the project’s safety margin.
- If a project has an NPV greater than zero, then taking on the project will increase the value of the firm’s stock.
- True. If the NPV is greater than zero, the value of firm will increase by NPV amount.
- Underlying the IRR is the assumption that cash flows can be reinvested at the firm’s cost of capital.
- Fasle. The IRR assumes reinvestment at the IRR.
- The discounted payback period always leads to the same accept /reject decisions as the NPV method.
- False. Since the discounted payback ignores cash flows beyond the payback period, it could lead to rejections of projects with high late cash flows and hence NPV >0.
- Under mutually exclusive projects we can choose both projects.
- False. If two projects are mutually exclusive (that is, only one can be accepted), the one with the higher NPV should be chosen, assuming that the NPV is positive. If both projects have negative NPVs, neither should be chosen.
- Under independent projects can be accepted or rejected individually.
- True. Independent projects can be selected independently because there is no effect by selecting one project to others. All projects having positive NPV are accepted assuming unlimited budget.
- You are thinking of buying a motorbike. You are considering (i) Hero Honda (ii) CBZ (iii) Yamaha and (iv) Pulsar. This is an independent case.
- False. We are choosing one out of three so this is mutually exclusive case.
- While calculating relevant cash flows for capital budgeting decision, additional working capital represents cash inflow at the end of project period.
True. If working capital is additional in zero year than it will be release at the end of project period and it will be cash inflow at the end of the project.
- Project that adds the capacity to the existing one to increase the output or increase the distribution channel is termed as replacement project.
- False. It is expansion project. In expansion project, a company may add capacity to its existing product lines to expand existing operations. For example, a fertilizer company may increase its plant capacity to manufacture more urea.
- As an expansion project, a company is considering selling a truck used for delivery of its products and purchasing two new vans for same delivery purpose.
- False. This is replacement project. Companies invest in two new vans by replacing truck, so this replacement project.
- If cost of capital is more than the crossover rate, there is no conflict in decisions given by net present value and internal rate of return techniques.
- True. If the cost of capital is more than the crossover rate there will be no conflict because decision will be same accept or reject. Below crossover rate there will be conflict.