Practicing Success

Register
Start Free Mocks
CUETMOCK

Ace Your

CUET Preparation Today

Start Free Mocks
Home Questions ZEAVZ5D96U
Target Exam

CUET

Subject

Business Studies

Chapter

Financial Management

Question:

Match List – I with List – II.

List – I

List – II

 A. Fixed capital

 I. EBIT/ interest

 B. Working capital

 II. Investment in non-current Assets

 C. Interest coverage Ratio 

 III. Investment in current Assets

 D. Financial leverage

 IV. Proportion of debt in the capital structure 

Choose the correct answer from the options given below : 

Options:

A-I, B-IV, C-III, D-II

A-II, B-III, C-I, D-IV

A-III, B-II, C-IV, D-I

A-IV, B-II, C-III, D-I

Correct Answer:

A-II, B-III, C-I, D-IV

Explanation:

The correct answer is Option (2) - A-II, B-III, C-I, D-IV

* Fixed capital- Investment in non-current assets. Fixed capital refers to investment in long-term assets. Management of fixed capital involves allocation of firm’s capital to different projects or assets with long-term implications for the business. These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability and risk of the business in the long run. These long-term assets last for more than one year.

* Working capital- Investment in current assets. Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day-to-day working of a business. Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets.

* Interest coverage Ratio- EBIT/interest. The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. This may be calculated as follows-
EBIT / Interest.
The higher the ratio, lower shall be the risk of company failing to meet its interest payment obligations. However, this ratio is not an adequate measure. A firm may have a high EBIT but low cash balance. Apart from interest, repayment obligations are also relevant.

* Financial leverage- Proportion of debt in the capital structure. The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as Debt/Equity or Debt / (D + E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.

CUET Questions