FIN3702 complete Exam Pack 2025- Accurate Question
and Well Explained Answers
1.What is the primary objective of financial management in a corporation?
A. Maximizing employee salaries
B. Maximizing shareholder wealth
C. Minimizing production costs
D. Increasing market share only
Answer: B. Maximizing shareholder wealth
Rationale: Financial management focuses on increasing the value of the firm for shareholders
through effective investment, financing, and dividend decisions.
2. Which financial statement reports a company’s assets, liabilities, and equity at a specific
date?
A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Statement of Retained Earnings
Answer: C. Balance Sheet
Rationale: The balance sheet provides a snapshot of a company’s financial position by showing
what it owns and owes at a particular point in time.
3. What does liquidity refer to in finance?
A. Ability to generate profits
B. Ability to meet short-term obligations
C. Amount of dividends paid
D. Level of long-term debt
Answer: B. Ability to meet short-term obligations
Rationale: Liquidity measures how easily a business can pay its current liabilities using current
assets.
, 4. Which ratio is calculated as Current Assets divided by Current Liabilities?
A. Debt Ratio
B. Gross Profit Margin
C. Current Ratio
D. Return on Equity
Answer: C. Current Ratio
Rationale: The current ratio evaluates a company’s short-term financial strength and ability to
cover current obligations.
5. What is the formula for Net Profit Margin?
A. Net Income ÷ Sales
B. Sales ÷ Total Assets
C. Total Assets ÷ Equity
D. Gross Profit ÷ Inventory
Answer: A. Net Income ÷ Sales
Rationale: Net profit margin indicates the percentage of sales revenue remaining after all
expenses have been deducted.
6. Which concept states that money available today is worth more than the same amount in
the future?
A. Accounting Principle
B. Matching Concept
C. Time Value of Money
D. Conservatism Principle
Answer: C. Time Value of Money
Rationale: Due to earning potential, inflation, and investment opportunities, money today has
greater value than money received later.
7. What is compound interest?
A. Interest calculated only on principal
B. Interest paid annually only
, C. Interest earned on principal and accumulated interest
D. Interest charged by banks only
Answer: C. Interest earned on principal and accumulated interest
Rationale: Compound interest allows investments to grow faster because interest is earned on
previously accumulated interest.
8. Which investment appraisal technique considers the time value of money?
A. Payback Period
B. Net Present Value
C. Accounting Rate of Return
D. Break-even Analysis
Answer: B. Net Present Value
Rationale: NPV discounts future cash flows to present value, making it a discounted cash flow
technique.
9. A positive Net Present Value indicates that:
A. The project should be rejected
B. The project earns less than required return
C. The project adds value to the firm
D. The project has no risk
Answer: C. The project adds value to the firm
Rationale: A positive NPV means expected returns exceed the required rate of return, increasing
shareholder wealth.
10. What is the Internal Rate of Return (IRR)?
A. Rate at which NPV equals zero
B. Average accounting profit
C. Interest rate charged by banks
D. Dividend growth rate
Answer: A. Rate at which NPV equals zero
Rationale: IRR represents the discount rate where the present value of inflows equals outflows.
, 11. Which type of risk affects all firms in the market?
A. Business Risk
B. Financial Risk
C. Systematic Risk
D. Unsystematic Risk
Answer: C. Systematic Risk
Rationale: Systematic risk arises from market-wide factors such as inflation, interest rates, and
economic conditions.
12. Diversification mainly reduces:
A. Market Risk
B. Systematic Risk
C. Unsystematic Risk
D. Interest Rate Risk
Answer: C. Unsystematic Risk
Rationale: Diversification spreads investments across assets, reducing firm-specific risks.
13. What is the cost of capital?
A. Historical cost of assets
B. Required return necessary to make a capital budgeting project worthwhile
C. Market value of liabilities
D. Cost of employee salaries
Answer: B. Required return necessary to make a capital budgeting project worthwhile
Rationale: Cost of capital represents the minimum return investors expect from financing the
business.
14. Which source of finance represents ownership in a company?
A. Bonds
B. Debentures
C. Equity Shares
D. Bank Loans
and Well Explained Answers
1.What is the primary objective of financial management in a corporation?
A. Maximizing employee salaries
B. Maximizing shareholder wealth
C. Minimizing production costs
D. Increasing market share only
Answer: B. Maximizing shareholder wealth
Rationale: Financial management focuses on increasing the value of the firm for shareholders
through effective investment, financing, and dividend decisions.
2. Which financial statement reports a company’s assets, liabilities, and equity at a specific
date?
A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Statement of Retained Earnings
Answer: C. Balance Sheet
Rationale: The balance sheet provides a snapshot of a company’s financial position by showing
what it owns and owes at a particular point in time.
3. What does liquidity refer to in finance?
A. Ability to generate profits
B. Ability to meet short-term obligations
C. Amount of dividends paid
D. Level of long-term debt
Answer: B. Ability to meet short-term obligations
Rationale: Liquidity measures how easily a business can pay its current liabilities using current
assets.
, 4. Which ratio is calculated as Current Assets divided by Current Liabilities?
A. Debt Ratio
B. Gross Profit Margin
C. Current Ratio
D. Return on Equity
Answer: C. Current Ratio
Rationale: The current ratio evaluates a company’s short-term financial strength and ability to
cover current obligations.
5. What is the formula for Net Profit Margin?
A. Net Income ÷ Sales
B. Sales ÷ Total Assets
C. Total Assets ÷ Equity
D. Gross Profit ÷ Inventory
Answer: A. Net Income ÷ Sales
Rationale: Net profit margin indicates the percentage of sales revenue remaining after all
expenses have been deducted.
6. Which concept states that money available today is worth more than the same amount in
the future?
A. Accounting Principle
B. Matching Concept
C. Time Value of Money
D. Conservatism Principle
Answer: C. Time Value of Money
Rationale: Due to earning potential, inflation, and investment opportunities, money today has
greater value than money received later.
7. What is compound interest?
A. Interest calculated only on principal
B. Interest paid annually only
, C. Interest earned on principal and accumulated interest
D. Interest charged by banks only
Answer: C. Interest earned on principal and accumulated interest
Rationale: Compound interest allows investments to grow faster because interest is earned on
previously accumulated interest.
8. Which investment appraisal technique considers the time value of money?
A. Payback Period
B. Net Present Value
C. Accounting Rate of Return
D. Break-even Analysis
Answer: B. Net Present Value
Rationale: NPV discounts future cash flows to present value, making it a discounted cash flow
technique.
9. A positive Net Present Value indicates that:
A. The project should be rejected
B. The project earns less than required return
C. The project adds value to the firm
D. The project has no risk
Answer: C. The project adds value to the firm
Rationale: A positive NPV means expected returns exceed the required rate of return, increasing
shareholder wealth.
10. What is the Internal Rate of Return (IRR)?
A. Rate at which NPV equals zero
B. Average accounting profit
C. Interest rate charged by banks
D. Dividend growth rate
Answer: A. Rate at which NPV equals zero
Rationale: IRR represents the discount rate where the present value of inflows equals outflows.
, 11. Which type of risk affects all firms in the market?
A. Business Risk
B. Financial Risk
C. Systematic Risk
D. Unsystematic Risk
Answer: C. Systematic Risk
Rationale: Systematic risk arises from market-wide factors such as inflation, interest rates, and
economic conditions.
12. Diversification mainly reduces:
A. Market Risk
B. Systematic Risk
C. Unsystematic Risk
D. Interest Rate Risk
Answer: C. Unsystematic Risk
Rationale: Diversification spreads investments across assets, reducing firm-specific risks.
13. What is the cost of capital?
A. Historical cost of assets
B. Required return necessary to make a capital budgeting project worthwhile
C. Market value of liabilities
D. Cost of employee salaries
Answer: B. Required return necessary to make a capital budgeting project worthwhile
Rationale: Cost of capital represents the minimum return investors expect from financing the
business.
14. Which source of finance represents ownership in a company?
A. Bonds
B. Debentures
C. Equity Shares
D. Bank Loans
