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All questions of Investment Decisions for B Com Exam

What is the primary purpose of fixed asset management in organizations?
  • a)
    To maximize profits
  • b)
    To track employee performance
  • c)
    To prevent theft
  • d)
    To track and manage fixed assets for financial accounting and maintenance purposes
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Fixed asset management primarily aims to track and manage fixed assets for financial accounting, preventive maintenance, and theft deterrence. It helps organizations maintain control over their assets, understand their depreciation, and ensure they are in good condition for efficient operations.
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Which technology is commonly used for tracking fixed assets and allows for easy and accurate reading?
  • a)
    RFID tags
  • b)
    GPS tracking units
  • c)
    Bluetooth tracking beacons
  • d)
    Serial numbered asset tags with barcodes
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Serial numbered asset tags with barcodes are commonly used for tracking fixed assets. These tags make it easy to identify and read assets accurately, facilitating efficient asset management and inventory tracking.

In the context of capital rationing, what is the significance of the cost of capital?
  • a)
    It determines the number of projects a company can undertake.
  • b)
    It is the primary criterion for project selection.
  • c)
    It is not considered in capital rationing decisions.
  • d)
    It is only relevant for large-scale investments.
Correct answer is option 'A'. Can you explain this answer?

Dev Patel answered
The cost of capital plays a crucial role in capital rationing decisions as it helps determine the number of projects a company can undertake. By setting a higher cost of capital or budget restrictions, a company limits its investment options to prioritize projects with the potential to generate higher returns relative to the cost of capital. This ensures efficient allocation of limited capital resources.

Why is the timing of cash flows crucial in capital budgeting?
  • a)
    It affects employee salaries.
  • b)
    It depends on the project's profitability.
  • c)
    It is dependent on the time value of money.
  • d)
    It is related to taxation.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
The timing of cash flows is crucial in capital budgeting because it is dependent on the time value of money. Cash received earlier is worth more in the future, so understanding the timing of cash flows is essential for accurate financial analysis.

What is the main risk associated with financial leverage?
  • a)
    Interest Rate Risk
  • b)
    Liquidity Risk
  • c)
    Business Risk
  • d)
    Financial Risk
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Financial leverage is primarily associated with financial risk. Financial risk arises when a company uses debt financing to a significant extent, and it involves the variability in returns associated with the use of debt. This risk can result from changes in interest rates and the company's ability to meet its debt obligations.

What is the primary purpose of capital rationing in companies?
  • a)
    To invest in all available projects
  • b)
    To prevent wastage of resources
  • c)
    To maximize the number of active projects
  • d)
    To ensure stable finances and stock price
Correct answer is option 'B'. Can you explain this answer?

Dev Patel answered
Capital rationing in companies serves the primary purpose of preventing the wastage of resources by carefully selecting and investing in only the most profitable projects. It aims to allocate capital efficiently and ensure that funds are utilized effectively to generate higher returns. This approach helps in avoiding the dispersion of resources across numerous projects and contributes to better financial management.

What is the main purpose of asset tracking software for businesses?
  • a)
    To track employee activities
  • b)
    To monitor customer interactions
  • c)
    To track and manage valuable assets like equipment and supplies
  • d)
    To manage financial transactions
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
Asset tracking software is primarily used by businesses to track and manage valuable assets such as equipment and supplies. It helps in maintaining control over these assets, reducing losses, and ensuring efficient maintenance.

What is the primary assumption underlying capital rationing?
  • a)
    Unlimited availability of funds for all projects.
  • b)
    All projects have the same rate of return.
  • c)
    Restrictions on capital expenditures.
  • d)
    No need for mathematical techniques in decision-making.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
The primary assumption underlying capital rationing is that there are restrictions on capital expenditures, either through internal financing constraints or investment budget restrictions. This assumption acknowledges that companies do not have unlimited funds available to invest in all projects, leading to the need for a selection process.

What is one of the disadvantages of capital rationing according to the text?
  • a)
    It maximizes value creation for companies.
  • b)
    It allows for the selection of large-scale investments.
  • c)
    It may lead to inefficient project selection.
  • d)
    It always considers intermediate cash flows.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
One of the disadvantages of capital rationing mentioned in the text is that it may lead to inefficient project selection. Capital rationing restricts investment in some profitable projects, potentially missing out on opportunities to maximize value creation for the company. This is because not all profitable projects are accepted, which can result in suboptimal allocation of resources.

What is the key reason for measuring cash flows on an after-tax basis in capital budgeting?
  • a)
    To minimize tax liabilities
  • b)
    To simplify financial calculations
  • c)
    To calculate depreciation
  • d)
    To evaluate a project's present value accurately
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Measuring cash flows on an after-tax basis in capital budgeting is essential because it allows for the evaluation of a project's present value accurately. This approach considers the cash flow that the company gets to keep after accounting for taxes, leading to more realistic financial assessments.

What does systematic risk refer to in investment analysis?
  • a)
    Risk associated with changes in interest rates
  • b)
    Risk unique to a specific security
  • c)
    Risk caused by fluctuations in the overall market
  • d)
    Risk related to inflation
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
Systematic risk, also known as market risk, pertains to the variability in investment returns caused by fluctuations in the overall market or economy. It affects all securities to some degree and is not specific to any particular security. Systematic risk includes factors like market downturns, economic recessions, and other macroeconomic influences that impact the entire market.

What is the primary purpose of including inflation in capital budgeting analysis?
  • a)
    To estimate cash flows assuming unit costs remain unchanged.
  • b)
    To ignore the impact of inflation on project profitability.
  • c)
    To use a nominal discount rate consistently.
  • d)
    To focus on realized returns rather than expected returns.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
The primary purpose of including inflation in capital budgeting analysis is to use a nominal discount rate consistently. This ensures that the analysis accounts for the impact of inflation on both cash flows and the discount rate, leading to more accurate evaluations of project profitability over time.

What are the variables used in the analysis mentioned in the text?
  • a)
    Capital expenditures, profits, and sales changes
  • b)
    Gross fixed assets, depreciation charges, and utilization of capacity
  • c)
    Expansion and replacement ratios, age of capital stock, and flow of funds
  • d)
    All of the above
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
The analysis mentioned in the text utilizes various variables, including capital expenditures, profits, sales changes, gross fixed assets, depreciation charges, utilization of capacity, expansion and replacement ratios, age of capital stock, and flow of funds. These variables are used to study the relationship between different factors and capital expenditure decisions of firms.

Which principle of capital budgeting emphasizes that decisions should be based on incremental cash flows?
  • a)
    Principle 1
  • b)
    Principle 2
  • c)
    Principle 3
  • d)
    Principle 4
Correct answer is option 'A'. Can you explain this answer?

Dev Patel answered
Principle 1 of capital budgeting emphasizes that decisions should be based on incremental cash flows, which represent the changes in cash flow if the project is undertaken. This principle helps in evaluating the true financial impact of a project.

What type of risk affects all securities and is associated with fluctuations in interest rates?
  • a)
    Inflation Risk
  • b)
    Market Risk
  • c)
    Business Risk
  • d)
    Country Risk
Correct answer is option 'B'. Can you explain this answer?

Dev Patel answered
Market Risk, also known as systematic risk, affects all securities and is associated with fluctuations in interest rates, overall market movements, and macroeconomic factors. It is a common risk that investors face regardless of the specific securities they hold in their portfolios.

What is the primary purpose of using asset location tracking software?
  • a)
    To calculate depreciation
  • b)
    To track employee attendance
  • c)
    To monitor financial transactions
  • d)
    To determine the physical location of assets
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Asset location tracking software is primarily used to determine the physical location of assets. It helps organizations keep tabs on where their assets are located, making it easier to manage and maintain them efficiently.

Which principle of capital budgeting emphasizes that financing costs should be reflected in a project's required rate of return?
  • a)
    Principle 1
  • b)
    Principle 3
  • c)
    Principle 4
  • d)
    Principle 5
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Principle 5 of capital budgeting emphasizes that financing costs should be reflected in a project's required rate of return. This principle recognizes that a project's expected rate of return should account for the cost of capital and potential risks associated with financing.

What does nonsystematic risk refer to in investment analysis?
  • a)
    Risk attributable to broad macro factors affecting all securities.
  • b)
    Risk associated with changes in interest rates.
  • c)
    Risk unique to a specific security.
  • d)
    Risk caused by fluctuations in the overall market.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
Nonsystematic risk, also known as specific risk, refers to the risk that is unique to a particular security. It is not related to overall market variability but is specific to factors such as business-specific risks, financial risks, or liquidity risks associated with that particular security.

Which type of risk involves variability in returns due to currency fluctuations?
  • a)
    Interest Rate Risk
  • b)
    Business Risk
  • c)
    Exchange Rate Risk
  • d)
    Financial Risk
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
Exchange Rate Risk, also known as currency risk, involves variability in returns on securities caused by currency fluctuations when converting foreign gains back to the investor's own currency. This risk is associated with international investments and can impact returns due to changes in exchange rates.

Chapter doubts & questions for Investment Decisions - Business Economics & Finance 2025 is part of B Com exam preparation. The chapters have been prepared according to the B Com exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for B Com 2025 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

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