Corporate Finance MCQ Questions and Answers Part – 3

Corporate Finance MCQ Questions and Answers Part – 1

Corporate Finance MCQ Questions and Answers Part – 2

Corporate Finance MCQ Questions and Answers Part – 3

101. Which of the following statements represents the financing decision of a company?
A. Procuring new machineries for the R&D activities.
B. Spending heavily for the advertisement of the product of the company
C. Adopting state of the art technology to reduce the cost of production.
D. Purchasing a new building at Delhi to open a regional office.
ANSWER: D
102. . Financial risk arises due to the ____________.
A. variability of returns due to fluctuations in the securities market.
B. changes in prevailing interest rates in the market.
C. leverage used by the company
D. . liquidity of the assets of the company.
ANSWER: D
103. The factor(s) which affect(s) P/E ratio is/are _____________.
A. Growth rate
B. Debt proportion
C. Retention ratio
D. All of the above.
ANSWER: D
104. . Long -term solvency is indicated by _____________.
A. Liquidity ratio
B. Debt-equity ratio
C. Return coverage ratio
D. Both a and b
ANSWER: B
105. Which of the following is/are the problem(s) encountered in financial statement analysis?
A. Development of benchmarks
B. Window dressing.
C. Interpretation of results
D. All of the above.
ANSWER: D
106. Earnings Per Share (EPS) is equal to ____________
A. Profit before tax/No. of outstanding shares.
B. Profit after tax/No. of outstanding shares
C. Profit after tax/Amount of equity share capital.
D. Profit after tax less equity dividends/No. of outstanding shares.
ANSWER: B
107. Degree of total leverage can be applied in measuring change in _____________
A. EBIT to a percentage change in quantity.
B. EPS to a percentage change in EBIT.
C. EPS to a percentage change in quantity.
D. Quantity to a percentage change in EBIT.
ANSWER: C
108. The measure of business risk is_____________.
A. operating leverage.
B. financial leverage.
C. total leverage.
D. working capital leverage.
ANSWER: A
109. The value of EBIT at which EPS is equal to zero is known as ___________
A. Break even point.
B. Financial break even point.
C. Operating break even point
D. Overall break even point.
ANSWER: B
110. operating Leverage is the response of changes in _____________.
A. EBIT to the changes in sales..
B. EPS to the changes in EBIT
C. Production to the changes in sales.
D. None of the above.
ANSWER: A
111. Operating Leverage Measures the responsiveness of earnings per share to variability in _______
A. earnings before interest
B. taxesIs undefined at the operating break even point
C. All of the above.
D. None of the above.
ANSWER: C
112. The use of preference share capital as against debt finance _____________.
A. Reduces DFL.
B. Increases DFL.
C. Increases financial risk.
D. Both a and b.
ANSWER: B
113. The Degree of Financial Leverage (DFL) ______________.
A. Measures financial risk of the firm.
B. Is zero at financial break even point.
C. Increases as EBIT increases.
D. Both a and b.
ANSWER: A
114. The objective of financial management is to ______________.
A. Maximize the return on investment.
B. Minimize the risk.
C. Maximize the wealth of the owners by increasing the value of the firm.
D. All the above.
ANSWER: D
115. Which of the following characteristics are true, with reference to preference capital?
A. Preference dividend is tax deductible.
B. The claim of preference shareholders is prior to the claim of equity shareholders.
C. Preference share holders are not the owners of the concern.
D. All of the above
ANSWER: D
116. What are the factors which make debentures attractive to investors?
A. They enjoy a high order of priority in the event of liquidation.
B. Stable rate of return.
C. No risk.
D. All of the above.
ANSWER: D
117. The method of raising equity capital from existing members by offering securities on pro rata basis is
referred to as ______________.
A. Public issue.
B. Bonus issue.
C. Private placement.
D. Bought-Out-Deal.
ANSWER: B
118. Which of the following is not a source of long-term finance?
A. Equity shares.
B. Preference shares.
C. Commercial papers
D. . Reserves and surplus.
ANSWER: D
119. For which of the following factors are the debentures more attractive to the investors?
A. The principal is redeemable at maturity.
B. A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event of
liquidation
C. trustee is appointed to preserve the interest of the debenture holders.
D. All the above.
ANSWER: D
120. If debentures are issued by a company, ____________.
A. The interest of the debentures holders is assured by SEBI.
B. Debenture redemption reserve should be at least 75 percent of the issue amount prior to the
commencement of the redemption process
C. Call option on debentures allows the issuer to redeem the debentures at a certain price before maturity
D. Put option on debentures allows the issuer to redeem the debentures at a certain price before maturity.
ANSWER: D
121. A company may rise capital from the primary market through _____________.
A. Public issue
B. . Rights issue
C. Bought out deals.
D. All of the above.
ANSWER: D
122. According to traditional approach, the average cost of capital _______________.
A. Remains constant up to a degree of leverage and rises sharply thereafter with every increase in leverage
B. Rises constantly with increase in leverage
C. . Decrease up to certain point, remains unchanged for moderate increase in leverage and rises beyond a
certain point
D. Decrease at an increasing rate with increase in leverage
ANSWER: C
123. The cost of capital of a firm is ______________.
A. The dividend paid on the equity capital.
B. The weighted average of the cost of various long-term and short-term sources of finance.
C. The average rate of return it must earn on its investments to satisfy the various investors
D. The minimum rate of return it must earn on its investments to keep its investors satisfied.
ANSWER: C
124. The constant growth model of equity valuation assumes that _____________.
A. the dividends paid by the company remain constant.
B. the dividends paid by the company grow at a constant rate of growth.
C. the cost of equity may be less than or equal to the growth rate.
D. the growth rate is less than the cost of equity.
ANSWER: D
125. Cost of equity capital is ____________.
A. lesser than the cost of debt capital.
B. equal to the last dividend paid to the equity share holders
C. equal to the dividend expectations of equity share holders for the coming year
D. none of the above
ANSWER: D
126. Which of the following is not a feature of an optimal capital structure?
A. Safety.
B. Flexibility.
C. Control.
D. Solvency.
ANSWER: B
127. The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is
pronounced by ______________.
A. Traditional approach
B. Net operating income approach
C. Net income approach
D. MM approach
ANSWER: C
128. While calculating weighted average cost of capital _________.
A. Retained earnings are excluded.
B. Cost of issues are included.
C. Weights are based on market value or on book value
D. Equity shares are given more weights.
ANSWER: D
129. The formula for cost of debt is
A. kd=(1/2+f-p)/f+p
B. f+p
C. f-P
D. f*p
ANSWER: A
130. Which of the following is/are assumption behind the realized yield approach?
A. The yield earned by investors has been, on average, in conformity with their expectations.
B. The dividends will continue growing at a constant rate forever.
C. The market price will continue growing at a constant rate forever.
D. Both a and b.
ANSWER: D
131. Which of the following is not an assumption in the Miller & Modigliani approach?
A. There are no transaction costs.
B. Securities are infinitely divisible.
C. Investors have homogeneous expectations
D. All the firms pay tax on their income at the same rate.
ANSWER: D
132. Which of the following is/are true regarding the cost of capital?
A. It is a measure of the returns required by all the suppliers of long-term finance.
B. It is equal to the Internal Rate of Return of a project if the projects Net Present Value is Zero.
C. It is the weighted arithmetic average of the cost of the various sources of long-term finance used.
D. Both b and c
ANSWER: D
133. While calculating the weighted average cost of capital, market value weights are preferred because _________________.
A. Book value weights are historical in nature.
B. This is in conformity with the definition of cost of capital as the investors minimum required rate of return.
C. Book value weights fluctuate violently.
D. Market value weights are fairly consistent over a period of time.
ANSWER: C
134. While calculating weighted average cost of capital _____________.
A. Preference shares are given more weightage.
B. Cost of issue is considered
C. Tax factor is ignored.
D. Risk factor is ignored.
ANSWER: B
135. Which of the following ratios is not affected by the financial structure and the tax rate of a company?
A. Net profit margin.
B. Earning power.
C. Earnings per share.
D. Capitalization rate
ANSWER: C
136. Which of the following factors influence(s) the capital structure of a business entity?
A. Bargaining power with the suppliers
B. Demand for the product of the company
C. Technology adopted
D. Adequate of the assets to meet any sudden spurt in demand.
ANSWER: C
137. Which of the following factors does not affect the capital structure of a company?
A. Cost of capital.
B. Composition of the current assets.
C. Size of the company
D. Expected nature of cash flows
ANSWER: B
138. Which of the following methods does a firm resort to avoid dividend payments?
A. Share splitting.
B. Declaring bonus shares.
C. Rights issue.
D. New issue.
ANSWER: B
139. Under trading means_______________.
A. Having low amount of working capital
B. High turnover of working capital
C. Sales are less compared to assets employed.
D. Low turnover of working capital.
ANSWER: D
140. Cost of capital is the ______ rate of return expected by the investor.
A. maximum.
B. average.
C. marginal.
D. minimum.
ANSWER: A
141. Effective cost of debentures is _________________-as compared to shares.
A. higher.
B. lower.
C. equal.
D. medium.
ANSWER: C
142. Corporation is not a part of __________ finance
A. Public.
B. Private.
C. Public & private.
D. Organization.
ANSWER: D
143. Financial analysts,working capital means the same thing as __________.
A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current Liabilities.
ANSWER: D
144. __________ is concerned with the maximization of a firms earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: B
145. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: A
146. The long-run objective of financial management is to _________________.
A. maximize earnings per share.
B. maximize the value of the firms common stock.
C. maximize return on investment
D. maximize market share.
ANSWER: B
147. This type of risk is avoidable through proper diversification_______________.
A. portfolio risk.
B. systematic risk.
C. unsystematic risk.
D. total risk.
ANSWER: A
148. .In proper capital budgeting analysis we evaluate incremental ____________.
A. accounting income.
B. cash flow.
C. earnings.
D. operating profit.
ANSWER: B
149. The term _____________ means mathematical relationship between two figures.
A. Income.
B. Expense.
C. Profit
D. Ratio.
ANSWER: D
150. EBIT is usually the same thing as_____________
A. funds provided by operations
B. earnings before taxes
C. net income
D. operating profit.
ANSWER: D