Tag: tools for financial analysis

Questions Related to tools for financial analysis

Long-term and short-term solvency of the enterprise can be assessed on the basis of ___________ statement analysis.

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  1. cash flow

  2. income

  3. financial

  4. all of the above

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Correct Option: C

Window dressing is one of the limitation of financial analysis.

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  1. True

  2. False

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Correct Option: A
Explanation:

True. Window dressing a limitation of financial analysis. Window dressing means where the company shows a better financial position of the company than actual. It Is usually done to impress the lenders or to existing investors. 

Which of the following is not incorporated in Capital Budgeting?

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  1. Tax-Effect

  2. Time Value of Money

  3. Required Rate of Return

  4. Rate of Cash Discount

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Correct Option: D
Explanation:

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. The company understands how much tax benefit will the company have after the investment, whether the rate of return is more than the cost of capital and how much is to be paid in terms of present value. All these are taken into account but rate of cash discount is not. 

Which of the following is not followed while taking Capital budgeting decisions?

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  1. Cash flows be calculated on incremental terms

  2. All costs and benefits are measured on cash basis

  3. All accrued costs and revenues be incorporated

  4. All benefits are measured on after-tax basis

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Correct Option: C
Explanation:

Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.

 In capital budgeting cash is more important than profit. All benefits are measured on cash basis, tax is taken into consideration to understand the tax benefit. 

Which of the following is not true with reference to capital budgeting?

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  1. Capital budgeting is related to asset replacement decisions

  2. Cost of capital is equal to minimum required return

  3. Existing investment in a project is not treated as sunk cost

  4. Timing of cash flows is relevant

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Correct Option: C
Explanation:

Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered. 

Which of the following is not true for capital budgeting?

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  1. Sunk costs are ignored

  2. Opportunity costs are excluded

  3. Incremental cash flows are considered

  4. Relevant cash flows are considered

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Correct Option: B
Explanation:

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. They include all the potential expenses/costs. It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

Capital Budgeting Decisions are __________.

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  1. Reversible

  2. Irreversible

  3. Unimportant

  4. All of the above

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Correct Option: B
Explanation:

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. Hence, capital budgeting decisions are irreversible as its difficult to take back the decision. 

Risk in Capital budgeting implies  _____________.

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  1. Uncertainty of Cash flows

  2. Probability of Cash flows

  3. Certainty of Cash flows

  4. Variability of Cash flows

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Correct Option: A
Explanation:

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. Therefore, risk in capital budgeting means uncertainty of cash flows. 

Feasibility Set Approach to Capital Rationing can be applied in ____________.

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  1. Accept-Reject situations

  2. Divisible projects

  3. Mutually Exclusive Projects

  4. None of the Above

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Correct Option: A
Explanation:

Feasibility Set Approach to capital Rationing can be applied in Accept-reject situations.  Accept-Reject situations are the situations which the company is not sure about, so conducting a feasibility test would ensure if the project is suitable or not for the company. 

In case of the indivisible projects, which of the following may not give the optimum result?

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  1. Internal Rate of Return

  2. Profitability Index

  3. Feasibility Set Approach

  4. All of the above

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Correct Option: C
Explanation:

Feasibility Set Approach to capital Rationing can be applied in divisible projects. Indivisible projects are the one which can be accepted or rejected wholly. So conducting a feasibility test would ensure if the project is suitable or not for the company.