Business Finance MCQ Questions and Answers

1. Which of the following statement is false?

1. The opportunity cost of an input is considered in capital budgeting

2. Cash flows and accounting profits are different
3. Capital budgeting decisions are reversible in nature
4. An expansion decision is a capital budgeting decision

Answer: Capital budgeting decisions are reversible in nature

2.Which of the following statement(s) is/are false?

1. Capital profits can never be distributed as dividends to the shareholders.
2. Dividends are paid out of profits and, therefore, do not affect the liquidity position of
the firm.
3. Every company should follow the policy of low dividend payment.
4. Walter's model suggests that dividend payment dose not affect the market price of
the share.
Choose the correct answer

1. 1, 2 and 3
2. 2, 3 and 4
3. Both 3 and 4
4. All of the above

Answer: All of the above

3. Which of the following is an assumption of the APT?

1. Investors are risk-averse

2. Short sales are not allowed
3. All investors hold the market portfolio
4. Investors follow the mean-variance rule

Answer: All investors hold the market portfolio

4. Operational techniques include___________

1. Purchasing of currency options

2. Exposure netting
3. Diversification of a company's operation
4. Both 2 & 3

Answer: Both 2 & 3

5. Positive NPV in project appraised by a firm may not occur an account of___________

1. Economics of scale
2. Product differentiation
3. Intangible benefits
 4. Market research

Answer: Intangible benefits

6.Which of the following are the examples of systematical risk.

1. Elimination of Government Subsidy
2. Increase in bank rate
3. Labour problem
4. High levered fund
Select the correct answer:

1. 1, 2 and 4
2. Both 1 and 4
3. 1, 2 and 3
4. Both 1 and 2

Answer: Both 1 and 2

7. The issues in international capital budgeting include

1. Exchange rate risk
2. Political risk
3. Geographical risk
4. Parent vs project cash flow

1. Both 1 and 2
2. 1, 2 and 4
3. 1, 2 and 3
4. Both 2 and 4

Answer: 1, 2 and 4

8. The appropriate ratio for indicating liquidity crisis is__________

1. Current ratio
2. Sales turnover ratio
3. Operating ratio
4. Acid test ratio

Answer: Acid test ratio

9.Assertion (A): A furores contract specifies in advance the exchange rate to be used,
but it is not as flexible as a forward contract.
Reason (R): A futures contract is for a specific currency amount and a specific marurity
date.

1. (R) is not a correct explanation of (A)

2. (R) is a correct explanation of (A)
3. (A) and (R) are not related to each other
4. (R) is irrelevant for (A)
Answer: (R) is a correct explanation of (A)

10. If we move from present value to calculate the future value, we can use the concept
of compounding rate. If we were to move from future value towards the calculation of
present value, the concept used will be_____________

1. Simple rate of interest

2. Compounding rate of interest
3. Anyrate can be used
4. Discount rate

Answer: Discount rate

11. A company has issued 10% perpetual debt of Rs. 1,00,000 at 5% premium. If tax
rate is 30%, then the cost of debt will be___________

1. 15%
2. 10%
3. 8.21%
4. 6.66%

Answer: 6.66%

12. Which of the following sources of finance has an implicit cost ofcapital?

1. Preference share capital

2. Retained earnings
3. Equity share capital
4. Debentures

Answer: Retained earnings

13. Assertion (A): The important aspect of dividend policy is to determine the amount of
earnings to be distributed to shareholders and the amount to be retained in the firm.
Reason (R): Dividend policy of the firm has its effect on both the long term financing
and the wealth of shareholders.

1. Both (A) and (R) are correct, but (R) is not the correct explanation of (A)
2. (A) is correct, but (R) is incorrect
3. Both (A) and (R) are correct and (R) is the correct explanation of (A)
4. (R) is correct, but (A) is incorrect

Answer: Both (A) and (R) are correct and (R) is the correct explanation of (A)

14. Interim cash inflows are reinvested at a rate of return equal to the internal rate of
return is the built-in mechanism for________

1. Internal rate of return method

2. Net present value method
3. Profitability index method
 4. None of the above

Answer: Internal rate of return method

15. Which one of the following is the most popular method for estimating the cost of
equity?

1. Dividend yield method

2. Capital asset pricing model
3. Earnings yield method
4. Gordon's dividend discount model

Answer: Capital asset pricing model

16. The international monetary system went through several distinct stages of evolution.
These stages are summarised, in alphabetic order, as follows
1. Bimetallism
2. Brettonwoods system
3. Classical gold standard
4. Flexible exchange rate regime
5. Interwar period
The chronological order that they actually occurred is

1. 1, 3, 5, 2, 4
2. 4, 1, 3, 2, 5
3. 3, 1, 4, 2, 5
4. 5, 2, 1, 3, 4

Answer: 1, 3, 5, 2, 4

17. What are the main objectives of financing decision?

1. To get optimal working capital figure.
2. To get optimal capital structure.
3. To make the company exposed to high risk.
4. To keep the cost of capital lowest.
5. To make the value of share highest.

1. 2, 3, 4 and 5
2. 1, 2, 4 and 5
3. 1, 2, 3, 4 and 5
4. 2, 4 and 5

Answer: 1, 2, 4 and 5

18. Which one of the following assumptions is not included in the James E. Walter
Valuation model?

1. No change in the key variables such as EPS and DPS

2. The firm has finite life
3. All earnings are either distributed as dividends or invested internally immediately
 4. All financing by retained earnings only

Answer: The firm has finite life

19. Negative net working capital means assets are not being used effectively, and a
company may face a liquidity crisis. This implies

1. Short-term funds have been used for fixed assets

2. Long-term funds have been used for fixed assets
3. Short-term funds have been used for current assets
4. Long-term funds have been used for current assets

Answer: Short-term funds have been used for fixed assets

20. Who proposed a model to apply economic order quantity concept of inventory
mangement to determine the optimum cash holding in a firm?

1. Miller and Off

2. Keith V. Smith
3. J. M. keynea
4. William J. Baumol

Answer: William J. Baumol

21. The conflicts in project ranking in capital budgeting as per NPV and IRR may arise
because of___________

1. Time disparity
2. Life disparity
3. Size disparity
4. All of these

Answer: All of these

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

1. Cost of capital is equal to minimum required rate of return

2. Existing investment in a project is not treated as sunk cost
3. Timing of cash flows is relevant
4. Capital budgeting is related to asset replacement decisions

Answer: Existing investment in a project is not treated as sunk cost

23. Which of the following is an implicit cost of increasing proportion of debt of a

company?

1. Rate of return of the company would decrease

2. Tax shield would not be available on new debts
3. PE ratio of the company would increase
4. Equity shareholders would demand higher return
Answer: Equity shareholders would demand higher return

24. When assessing economic exposure, financial managers should consider how
variations in exchange rates influence _____________

1. The product market, the factor market and the capital market
2. The costs of labor and other inputs to be used in overseas production
3. A company's sales prospects in foreign markets
4. The home-currency value of financial assets and liabilities denominated in foreign

Answer: A company's sales prospects in foreign markets

25. Dividend irrelevance hypothesis implied in the__________

1. Walter model
2. Gordon model
3. Traditional model
4. M. M. model

Answer: M. M. model

26. Negative net working capital implies that_________

1. Short-term funds have been used for fixed assets

2. Short-term funds have been used for current assets
3. Long-term funds have been used for fixed assets
4. Long-term funds have been used for current assets

Answer: Short-term funds have been used for fixed assets

27. Indicate the cost of equity capital based on capital asset pricing model with the
following information. Beta coefficient 1.40 Risk free rate of interset 9% Expected rate
of return on equity in the market 16%_________

1. 18%
2. 98%
3. 16%
4. 18.8%

Answer: 18.8%

28. Dividend irrelevance argument of MM model is based on___________

1. Arbitrage
2. Issue of debentures
3. Hedging
4. Liquidity

Answer: Arbitrage
29. The cost of capital from all the sources of funds is called__________

1. Implicit cost
2. Composite cost
3. Simple Average cost
4. Specific cost

Answer: Composite cost

30. Profitability index of a project is the ratio of present value of cash inflows
to__________

1. Total cash outflow

2. Present value of cash outflows
3. Total cash inflow
4. Initial cost minus depreciation

Answer: Present value of cash outflows