Tag: nature and significance of management

Questions Related to nature and significance of management

A firm can only issue debt or equity as a source of finance. It cannot issue both at the same time.

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. True

  2. False

Show answer
Correct Option: B
Explanation:

False.

Firm can issue equity and debt at the same time.
Debt financing is capital acquired through the borrowing of funds to be repaid at a later date. Common types of debt are loans. The benefit of debt financing is that it allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible.
Equity financing refers to funds generated by the sale of stock.

Who formulated the following model for estimating the market price of equity share?
$P = \dfrac {D + \dfrac {R _{a}}{R _{c}}(E - D)}{R _{c}}$
Where, $P =$ Market price of equity share
$D = DPS$
$E = EPS$
$E - D =$ Retained earning per share
$R _{a} =$ Internal rate of return on investment
$R _{c} =$ Cost of capital.

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. Modigliani-Miller

  2. Myron-Gordon

  3. James E. Walter

  4. Clarkson and Elliot

Show answer
Correct Option: C
Explanation:
Professor James E. Walter that the choice of dividend policies almost always affects the value of the enterprise. His model shows clearly the importance of the relationship between the firm’s internal rate of return (r) and its cost of capital $(k)$ in determining the dividend policy that will maximize the wealth of shareholders.

Walter’s formula to calculate the market price per share (P) is:

$P=\cfrac {\cfrac {D}{k}+\cfrac {E-D}{k} \times r} {k}$

P = market price per share
D = dividend per share
E = earnings per share

Which one of the following is not among the assumptions of the Modigliani-Miller model?

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. Perfect capital market

  2. Equivalent risk classes

  3. Unity for dividend payout ratio

  4. Absence of taxes

Show answer
Correct Option: C
Explanation:

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it does not affect the wealth of the shareholders. They argue that the value of the firm depends on the firm’s earnings which result from its investment policy. 
Modigliani and Miller model is based on the following assumptions : 
1. The firm operates in perfect capital market.

2.The firm has a fixed investment policy.
3. Absence of taxes.
4. Risk of uncertainty does not exist. That is, investors are able to forecast future prices and dividends with certainty and one discount rate is appropriate for all securities and all time periods.

Dividend warrants must be posted within ______ days from the date of declaration of dividend.

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. 24

  2. 34

  3. 30

  4. 45

Show answer
Correct Option: C