MCQs

FINANCIAL MANAGEMENT

1. A firm's overall cost of capital:

a) varies inversely with its cost of debt.
b) is unaffected by changes in the tax rate.
c) is the same as the firm s return on equity.
d) is the required return on the total assets of a firm.

Ans. d
2. Which one of the following represents the best estimate for a firm's pre-tax cost of debt?
a) the current yield-to-maturity on the firm's existing debt
b) the firm's historical cost of capital
c) twice the rate of return currently offered on risk-free securities
d) the current coupon on the firm's existing debt

Ans. a
3. An increase in the market value of a preferred stock will _____ the cost of preferred stock.
a) increase
b) either increase or decrease
c) either not affect or increase
d) decrease

Ans. e
4. Capital structure weights are based on the:

a) market values of a firm's debt and equity.

b) market value of a firm's equity and the face value of its debt.
c) initial issue values of a firm's debt and equity.
d) book value of a firm's debt and equity.

Ans. a
5. Which one of the following is a correct statement regarding a firm's weighted average cost
of capital (WACC)?
a) An increase in the market risk premium will tend to decrease a firm's WACC.
b) A reduction in the risk level of a firm will tend to increase the firm's WACC.
c) A 5 percent increase in a firm's debt-equity ratio will tend to increase the firm's WACC.
d) The WACC can be used as the required return for all new projects with similar risk to
that of the existing firm.

Ans. d
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6. The rate of return on its existing assets that a firm must earn to maintain the current value
of the firm's stock is called the:
a) return on equity.
b) internal rate of return.
c) weighted average cost of capital.
d) weighted average cost of equity.
Ans.c
7. During planning period, a marginal cost for raising a new debt is classified as
a) debt cost
b) relevant cost
c) borrowing cost
d) embedded cost

Ans. b
8. In weighted average cost of capital, a company can affect its capital cost through
a) policy of capital structure
b) policy of dividends
c) policy of investment
d) all of above

Ans. d
9. A risk associated with project and way considered by well diversified stockholder is
classified as
a) expected risk
b) beta risk
c) industry risk
d) returning risk

Ans. b
10. Variability for expected returns for projects is classified as
a) expected risk
b) stand-alone risk
c) variable risk
d) returning risk

Ans. b
11. Cost of common stock is 16% and bond yield is 9% then bond risk premium would be
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a) 7%
b) $7
c) 1.78%
d) 25%

Ans. a
12. Cost of capital is equal to required return rate on equity in case if investors are only
a) valuation manager
b) common stockholders
c) asset seller
d) equity dealer

Ans. b
13. Retention ratio is 0.60 and return on equity is 15.5% then growth retention model would be
a) 14.90%
b) 25.84%
c) 16.10%
d) 9.30%

Ans. d
14. Method uses for an estimation of cost of equity is classified as
a) market cash flow
b) future cash flow method
c) discounted cash flow method
d) present cash flow method

Ans. c

15. Method in which company finds other companies considered in same line of business to
evaluate divisions is classified as
a) pure play method
b) same play method
c) division line method
d) single product method

Ans. a
16. Stock selling price is $45, an expected dividend is $10 and an expected growth rate is 8%
then cost of common stock would be
a) $55
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b) $58
c) $53
d) 30.22%

Ans. d
17. A type of beta which incorporates about company such as changes in capital structure is
classified as
a) industry beta
b) market beta
c) subtracted beta
d) fundamental beta

Ans. d
18. Dividend per share is $18 and sell it for $122 and floatation cost is $4 then component cost
of preferred stock will be
a) 15.25%
b) 0.1525 times
c) $15.25
d) 0.15%

Ans. a
19. In weighted average capital, capital structure weights estimation does not rely on value of
a) investor's equity
b) market value of equity
c) book value of equity
d) stock equity

Ans. c

20. In retention growth model, percent of net income firms usually pay out as shareholders
dividends is classified as
a) payout ratio
b) payback ratio
c) growth retention ratio
d) present value of ratio

Ans. a

21. In weighted average cost of capital, rising in interest rate leads to

a) increase in cost of debt
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b) increase capital structure

c) decrease in cost of debt
d) decrease capital structure

Ans. a
22. Forecast by analysts, retention growth model and historical growth rates are methods used
for an
a) estimate future growth
b) estimate option future value
c) estimate option present value
d) estimate growth ratio

Ans. a
23. Premium which is considered as difference of expected return on common stock and
current yield on Treasury bonds is called
a) current risk premium
b) past risk premium
c) beta premium
d) expected premium

Ans. a
24. An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax
a) term structure
b) market premium
c) risk premium

d) cost of debt

Ans. d
25. Special situation in which large projects are financed by with and securities claims on
project's cash flow is classified as
a) claimed securities
b) project financing
c) stock financing
d) interest cost

Ans. b
26. Historical growth rates, analysis forecasts and retention growth model are approaches to
estimate
a) present value of gain
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b) growth rate
c) growth gain

d) discounted gain

Ans. b
27. In weighted average cost of capital, cost of capital which is risk adjusted and developed for
each category of
a) long-term projects
b) industry [industrial] projects
c) divisional projects

d) short-term projects

Ans. b
28. Cost of equity which is raised by reinvesting earnings internally must be higher than the
a) cost of initial offering
b) cost of new common equity
c) cost of preferred equity

d) cost of floatation

Ans. b
29. Capital budgeting decisions are analysed with help of weighted average and for this
purpose
a) component cost is used
b) common stock value is used
c) cost of capital is used
d) asset valuation is used

Ans. c
30. Risk free rate is subtracted from expected market return is considered as
a) country risk
b) diversifiable risk
c) equity risk premium
d) market risk premium

Ans. c
31. A firm's optimal capital structure:

a) is the debt-equity ratio that results in the lowest possible weighted average cost of
capital.
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b) is generally a mix of 40 percent debt and 60 percent equity.

c) exists when the debt-equity ratio is .50.
d) is the debt-equity ratio that exists at the point where the firm's weighted after tax cost of
debt is minimized.

Ans. a
32. The term "capital structure" refers to:

a) long-term debt, preferred stock, and common stock equity.

b) current assets and current liabilities.
c) total assets minus liabilities.
d) shareholders' equity.

Ans. a
33. A critical assumption of the net operating income (NOI) approach to valuation is:

a) that debt and equity levels remain unchanged.

b) that dividends increase at a constant rate.
c) that ko remains constant regardless of changes in leverage.
d) that interest expense and taxes are included in the calculation.

Ans. c
34. The traditional approach towards the valuation of a company assumes:

a) that the overall capitalization rate holds constant with changes in financial leverage.
b) that there is an optimum capital structure.
c) that total risk is not altered by changes in the capital structure.
d) that markets are perfect.

Ans. b
35. Two firms that are virtually identical except for their capital structure are selling in the market
at different values. According to M&M

a) one will be at greater risk of bankruptcy.

b) the firm with greater financial leverage will have the higher value.
c) this proves that markets cannot be efficient.
d) this will not continue because arbitrage will eventually cause the firms to sell at the
same value.

Ans. d

36. The cost of monitoring management is considered to be a (an):

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e) bankruptcy cost.
f) transaction cost.
g) agency cost.
h) institutional cost.

Ans. g
37. The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency costs –

a) remains constant with increasing levels of financial leverage.

b) first declines and then ultimately rises with increasing levels of financial leverage.
c) increases with increasing levels of financial leverage.
d) decreases with increasing levels of financial leverage.

Ans. b
38. Which one of the following statements concerning financial leverage is correct?

a) If a firm employs financial leverage, the shareholders will be exposed to greater risk.
b) A firm employing leverage will always have a higher earnings per share than a firm
which does not employ leverage.
c) Financial leverage is always beneficial to a firm when the interest rate on the debt is
less than 10 percent.
d) The benefits of leverage are unaffected by changes in a firm's earnings before interest
and taxes.

Ans. a
39. Less Debt, Inc., just revised its capital structure such that the firm's debt-equity ratio
decreased from .80 to .40. Those individual investors who prefer the old capital structure:

a) can replicate that structure by reducing their debt and doubling their investment in the
firm.
b) should sell half of their equity holdings and invest in cash.
c) should loan out funds equivalent to the amount invested in Less Debt.
d) can replicate that structure by increasing their use of homemade leverage.

Ans. d
40. M&M Proposition I, without taxes, states that:

a) firms should borrow to the point where the tax benefit from debt is equal to the cost of
the increased probability of financial distress.
b) financial risk is determined by the debt-equity ratio.
c) it is completely irrelevant how a firm arranges its finances.
d) the weighted average cost of capital is constant.
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Ans. c
41. Which of the following statements regarding the net operating income approach is incorrect?

a) The overall capitalization rate, ko, is constant.

b) The cost of debt funds, kd, is constant.
c) The required return on equity, ke, is constant.
d) The total value of the firm is unaffected by changes in financial leverage.

Ans. c
42. The use of personal borrowing to change the overall amount of financial leverage to which
an individual is exposed is called:

a) homemade leverage.
b) restructured leverage.
c) the weighted average cost of capital.
d) personal offset.

Ans. a
43. The proposition that the value of a firm is independent of the firm's capital structure is called:

a) the capital asset pricing model.

b) M&M Proposition I.
c) M&M Proposition II.
d) the efficient markets hypothesis.

Ans. b
44. The proposition that a firm's cost of equity capital is a positive linear function of the firm's
capital structure is called:

a) the capital asset pricing model.

b) M&M Proposition I.
c) M&M Proposition II.
d) the efficient markets hypothesis.

Ans. c
45. The equity risk derived from the nature of a firm's operating activities is called _____ risk.

a) Systematic
b) Market
c) Business
d) Financial
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Ans. c
46. The unlevered cost of capital is:

a) the cost of capital for a firm with no equity in its capital structure.
b) the cost of capital for a firm that has no debt obligations.
c) equal to the interest tax shield multiplied by the pre-tax net income.
d) equal to the cost of preferred stock for a firm with no debt.

Ans. b
47. The equity risk derived from a firm's capital structure policy is called _____ risk.

a) Market
b) Extrinsic
c) Business
d) Financial

Ans. d
48. A firm should select the capital structure that:

a) produces the highest cost of capital.

b) maximizes the value of the firm.
c) is fully unlevered.
d) equates the value of debt with the value of equity.

Ans. b
49. The optimal capital structure has been achieved when the:

a) debt-equity ratio is equal to 1.

b) weight of equity is equal to the weight of debt.
c) cost of equity is maximized given a pre-tax cost of debt.
d) debt-equity ratio results in the lowest possible weighted average cost of capital.

Ans. d
50. Which one of the following statements is correct concerning the relationship between a
levered and an unlevered capital structure? Assume there are no taxes.

a) When a firm is operating at a point where the actual earnings before interest and taxes
(EBIT) exceed the break-even level, then adding debt to the capital structure will
increase the earnings per share (EPS).
b) The earnings per share will equal zero when EBIT is zero for a levered firm.
c) The advantages of leverage are inversely related to the level of EBIT.
d) The use of leverage at any level of EBIT increases the EPS.
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Ans. a
51. The capital structure that maximizes the value of a firm also:

a) minimizes financial distress costs.

b) minimizes the cost of capital.
c) maximizes the value of the debt.
d) maximizes the value of the unlevered firm.

Ans. b
52. The optimal capital structure:

a) will be the same for all firms in the same industry.

b) will remain constant over time unless the firm does an acquisition.
c) will vary over time as taxes and market conditions change.
d) is unaffected by changes in the financial markets.

Ans. c
53. Based on M&M Proposition II with taxes, the weighted average cost of capital:

a) is equal to the after-tax cost of debt.

b) has a linear relationship with the cost of equity capital.
c) is unaffected by the tax rate.
d) decreases as the debt-equity ratio increases.

Ans. d
54. M&M Proposition II is the proposition that:

a) supports the argument that the capital structure of a firm is irrelevant to the value of the
firm.
b) the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate.
c) a firm's cost of equity capital is a positive linear function of the firm's capital structure.
d) the cost of equity is equivalent to the required return on the total assets of a firm.

Ans. c
55. The proposition that the value of a levered firm is equal to the value of an unlevered firm is
known as:

a) M&M Proposition I with no tax.

b) M&M Proposition II with no tax.
c) M&M Proposition I with tax.
d) M&M Proposition II with tax.
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Ans. a
56. Financial leverage impacts the performance of the firm by:

a) increasing the volatility of the firm's EBIT.

b) decreasing the volatility of the firm's EBIT.
c) decreasing the volatility of the firm's net income.
d) increasing the volatility of the firm's net income.

Ans. d
57. The increase in risk to equity holders when financial leverage is introduced is evidenced by:

a) higher EPS as EBIT increases.

b) a higher variability of EPS with debt than all equity.
c) increased use of homemade leverage.
d) equivalence value between levered and unlevered firms in the presence of taxes.

Ans. b
58. A payment made out of a firm's earnings to its owners in the form of either cash or stock is
called a:

a) dividend.
b) distribution.
c) repurchase.
d) payment-in-kind.

Ans. a
59. A payment made by a firm to its owners from sources other than current or accumulated
retained earnings is called a:

a) dividend.
b) distribution.
c) repurchase.
d) stock split.

Ans. b
60. The declaration date is the date on which the:

a) holders of record are determined for a dividend payment.

b) stock begins selling without entitlement to an upcoming dividend payment.
c) board of directors passes a resolution to pay a dividend.
d) bank trustee approves a dividend payment.
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Ans. c
61. A cash payment generally paid quarterly by a firm to its owners in the normal course of
business is called a:

a) repurchase.
b) liquidating dividend.
c) regular cash dividend.
d) special dividend.
Ans. c
62. The ex-dividend date is defined as _____ business days before the date of record.

a) 1
b) 2
c) 3
d) 5
Ans. b
63. The date by which a shareholder must be recorded as the share owner in order to receive a
declared dividend is called the:

a) ex-rights date.
b) ex-dividend date.
c) date of record.
d) date of payment.
Ans. c
64. The date the dividend payments are mailed is called the:

a) ex-rights date.
b) date of record.
c) date of payment.
d) declaration date.
Ans. c
65. The ability of shareholders to undo a firm's dividend policy and create an alternative dividend
policy by reinvesting dividends or selling shares of stock is called (a):

a) personalization.
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b) capital structure irrelevancy.

c) homemade leverage.
d) homemade dividend policy.
Ans. d
66. A policy under which a firm pays dividends only after its capital investment needs are met while
maintaining a constant debt/equity ratio is called a:

a) homemade dividend policy.

b) constant distribution approach.
c) residual dividend approach.
d) constant dividend growth model.
Ans. c
67. The target payout ratio is:

a) a firm's preferred rate of dividend growth.

b) the amount of dividend required to maintain a constant debt-equity ratio
c) the preferred number of dividend payments per year divided by 12.
d) a firm's long-term desired dividend-to-earnings ratio.
Ans. d
68. A method used to distribute earnings to shareholders that offers preferential treatment over
dividends is a:

a) merger.
b) liquidation.
c) rights offer.
d) Repurchase
Ans. d
69. A payment made by a firm to its owners in the form of new shares is called a _____ dividend.

a) stock
b) normal
c) special
d) Extra
Ans. a
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70. Which one of the following is an argument in favor of a low dividend policy?

a) the tax on capital gains is deferred until the gain is realized

b) a preponderance of stockholders have minimal taxable income
c) a majority of stockholders have other investment opportunities that offer higher
rewards with similar risk characteristics
d) corporate tax rates exceed personal tax rates
Ans. a
71. An investor is more likely to prefer a high dividend payout if a firm:

a) has high flotation costs.

b) has few, if any, positive net present value projects.
c) has lower tax rates than the investor.
d) has a stock price that is increasing rapidly.
Ans. a
72. The __________ is the proportion of earnings that are paid to common shareholders in the form
of a cash dividend.

a) retention rate
b) 1 plus the retention rate
c) growth rate
d) dividend payout ratio
Ans. d
73. "Large-percentage stock dividends" are typically __________ percent or higher of previously
outstanding common stock.

a) 25
b) 35
c) 51
d) 70
Ans. a
74. A dividend reinvestment plan (DRIP) is __________.

a) an optional plan, provided by brokerage firms, allowing shareholders to

automatically reinvest dividend payments in additional shares of the firm's stock.
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b) an optional plan, provided by large corporate firms, allowing shareholders to

automatically reinvest dividend payments in additional shares of the firm's stock.
c) a mandatory plan, provided by brokerage firms, where shareholders are
automatically reinvesting dividend payments in additional shares of the firm's stock
at a reduced price.
d) a mandatory plan, provided by large corporate firms, where shareholders are
automatically reinvesting dividend payments in additional shares of the firm's stock
at a reduced price.
Ans. b
75. Modigliani and Miller argue that the dividend decision __________.

a) is irrelevant as the value of the firm is based on the earning power of its assets
b) is relevant as the value of the firm is not based just on the earning power of its assets
c) is irrelevant as dividends represent cash leaving the firm to shareholders, who own
the firm anyway
d) is relevant as cash outflow always influences other firm decisions
Ans. a
76. Which of the following examples best represents a passive dividend policy?

a) The firm sets a policy such that the proportion of dividends paid from net income
remains constant.
b) The firm pays dividends with what remains of net income after taking acceptable
investment projects.
c) The firm sets a policy such that the quantity (dollar amount per share) of dividends
paid from net income remains constant.
d) All of the above are examples of various types of passive dividend policies.
Ans. b
77. A firm which adopts a residual dividend policy:

a) prefers to offer new securities for sale on a routine basis.

b) prefers constant dividends to a constant debt-equity ratio.
c) places a higher priority on funding its investment needs than on paying dividends.
d) will pay regular cash dividends that are constant in amount.
Ans. c
78. A strict residual dividend policy:
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a) tends to produce higher dividend payout ratios for high-growth firms versus low-
growth firms.
b) tends to produce steady, predictable dividend payments.
c) adds great uncertainty to the payment of future dividends.
d) guarantees that a minimal amount will be paid as a dividend on a quarterly basis.
Ans. c
79. The span of time within which the investment made for the project will be recovered by the net
returns of the project is known as

a) Period of return
b) Payback period
c) Span of return
d) None of the above
Ans. b
80. ___________ on capital is called ‘Cost of capital’.

a) Lower expected return

b) Normally expected return
c) Higher expected return
d) None of the above
Ans. b
81. Projects with __________ are preferred

a) Lower payback period

b) Normal payback period
c) Higher payback period
d) Any of the above
Ans. a
82. The values of the future net incomes discounted by the cost of capital are called

a) Average capital cost

b) Discounted capital cost
c) Net capital cost
d) Net present values
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Ans. d
83. Under Net present value criterion, a project is approved if

a) Its net present value is positive

b) The funds are unlimited
c) Both (A) and (B)
d) None of the above
Ans. c
84. The internal Rate of Return (IRR) criterion for project acceptance, under theoretically infinite
funds is: accept all projects which have

a) IRR equal to the cost of capital

b) IRR greater than the cost of capital
c) IRR less than the cost of capital
d) None of the above
Ans. b
85. Which of the following criterion is often preferred

a) Net present value

b) Profitability index
c) Internal Rate of Return
d) All of the above
Ans. c
86. The project is accepted of

a) if the profitability index is equal to one

b) The funds are unlimited
c) If the profitability index is greater than one
d) Both (B) and (C)
Ans. d
87. Where capital availability is unlimited and the projects are not mutually exclusive, for the same
cost of capital, following criterion is used

a) Net present value

b) Internal Rate of Return
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c) Profitability Index
d) Any of the above
Ans. d
88. A project is accepted when

a) Net present value is greater than zero

b) Internal Rate of Return will be greater than cost of capital
c) Profitability index will be greater than unity
d) Any of the above
Ans. d
89. With limited finance and a number of project proposals at hand, select that package of projects
which has

a) The maximum net present value

b) Internal rate of return is greater than cost of capital
c) Profitability index is greater than unity
d) Any of the above
Ans. a
90. A project may be regarded as high risk project when

a) It has smaller variance of outcome but a high initial investment

b) It has larger variance of outcome and high initial investment
c) It has smaller variance of outcome and a low initial investment
d) It has larger variance of outcome and low initial investment
Ans. a
91. Following is (are) the method(s) for adjustment of risks

a) Risk-adjusted Discounting Rate

b) Risk Equivalence Coefficient Method
c) Both (A) and (B)
d) None of the above
Ans. c
92. In proper capital budgeting analysis we evaluate incremental

a) accounting income.
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b) cash flow.
c) earnings.
d) operating profit.
Ans. b
93. The estimated benefits from a project are expressed as cash flows instead of income flows
because:

a) it is simpler to calculate cash flows than income flows.

b) it is cash, not accounting income, that is central to the firm's capital budgeting
decision.
c) this is required by the Internal Revenue Service.
d) this is required by the Securities and Exchange Commission.
Ans. b
94. A capital investment is one that

a) has the prospect of long-term benefits

b) has the prospect of short-term benefits.
c) is only undertaken by large corporations.
d) applies only to investment in fixed assets.
Ans. a

95. Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes.
This amount is called the asset's

a) cost of capital.
b) initial cash outlay.
c) depreciable basis.
d) sunk cost.
Ans. c
96. In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book
value, any amount realized in excess of book value but less than the asset's depreciable basis is
considered a

a) "capital gain" and is taxed at the corporate capital gains tax.

b) "recapture of depreciation" and is taxed at the corporate capital gains rate.
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c) "capital gain" and is taxed at a rate equal to the firm's ordinary tax rate, or a
maximum of 35 percent.
d) "recapture of depreciation" and is taxed at the firm's ordinary income tax rate.
Ans. d

97. Capital Budgeting is a part of:

a) Investment Decision
b) Working Capital Management
c) Marketing Management
d) Capital Structure.
Ans. a
98. Capital Budgeting Decisions are:

a) Reversible
b) Irreversible
c) Unimportant
d) All of the above.
Ans. b
99. Depreciation is incorporated in cash flows because it:

a) Is unavoidable cost
b) Is a cash flow
c) Reduces Tax liability
d) Involves an outflow.
Ans. c
100. Savings in respect of a cost is treated in capital budgeting as:

a) An Inflow
b) An Outflow
c) Nil
d) None of the above.
Ans. a
101. Which of the following is not true with reference capital budgeting?
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a) Capital budgeting is related to asset replacement decisions

b) Cost of capital is equal to minimum required return
c) Existing investment in a project is not treated as sunk cost
d) Timing of cash flows is relevant.
Ans. c
102. Net Profit Ratio Signifies:

a) Operational Profitability
b) Liquidity Position
c) Big-term Solvency
d) Profit for Lenders.
Ans. a
103. DU PONT Analysis deals with:

a) Analysis of Current Assets

b) Analysis of Profit
c) Capital Budgeting
d) Analysis of Fixed Assets.
Ans. b
104. Which of the following helps analysing return to equity Shareholders?

a) Return on Assets
b) Earnings Per Share
c) Net Profit Ratio
d) Return on Investment.
Ans. b
105. XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that the
firm has:

a) Higher Liquidity
b) Higher Financial Risk
c) Higher Profitability
d) Higher Capital Employed.
Ans. b
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106. Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does
Debt-Equity Ratio help to study?

a) Solvency
b) Liquidity
c) Profitability
d) Turnover
Ans. a
107. Which of the following statements is correct?

a) A Higher Receivable Turnover is not desirable

b) Interest Coverage Ratio depends upon Tax Rate,
c) Increase in Net Profit Ratio means increase in Sales
d) Lower Debt-Equity Ratio means lower Financial Risk.
Ans. d
108. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason
for such behaviour could be:

a) Increase in Costs of Goods Sold

b) If Increase in Expense
c) Increase in Dividend
d) Decrease in Sales.
Ans. b
109. Suppliers and Creditors of a firm are interested in

a) Profitability Position
b) Liquidity Position
c) Market Share Position
d) Debt Position.
Ans. b
110. Return on Investment may be improved by:

a) Increasing Turnover
b) Reducing Expenses
c) Increasing Capital Utilization
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d) All of the above.

Ans. d
111. Which of the following does not help to increase Current Ratio?

a) Issue of Debentures to buy Stock

b) Issue of Debentures to pay Creditors
c) Sale of Investment to pay Creditors
d) Avail Bank Overdraft to buy Machine.
Ans. d
112. There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?

a) That the Capital Employed has reduced

b) That the Profitability has gone up
c) That debtors collection period has increased
d) That Sales has decreased.
Ans. c
113. Debt to Total Assets Ratio can be improved by:

a) Borrowing More
b) Issue of Debentures
c) Issue of Equity Shares
d) Redemption of Debt.
Ans. d
114. The following is(are) the type(s) of capital budgeting decision(s)

a) Diversification
b) Replacements
c) Expansion
d) All of the above
Ans. d
115. An increase in marginal cost of capital and capital rationing are two arising complications of

a) Maximum capital budget

b) Greater capital budget
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c) Optimal capital budget

d) Minimum capital budget
Ans. c
116. In estimating value of cash flows, compounded future value is classified as its

a) Terminal value
b) Existed value
c) Quit value
d) Relative value
Ans. a
117. In large expansion programs, increased riskiness and floatation cost associated with project
can cause

a) Rise in marginal cost of capital

b) Fall in marginal cost of capital
c) Rise in transaction cost of capital
d) Fall in transaction cost of capital
Ans. a
118. Project whose cash flows are less than capital invested for required rate of return then net
present value will be

a) Negative
b) Zero
c) Positive
d) Independent
Ans. a
119. Net present value, profitability index, payback and discounted payback are methods to

a) Evaluate cashflow
b) Evaluate projects
c) Evaluate budgets
d) Evaluate equity
Ans. b
120. In capital budgeting, cost of capital is used as discount rate and is based on pre-determines
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a) Cost of inflation
b) Cost of debt and equity
c) Cost of opportunity

d) Cost of transaction
Ans. b
121. Rate of return which is required to satisfy stockholders and debt holders is classified as

a) Weighted average cost of interest

b) Weighted average cost of capital
c) Weighted average salvage value
d) Mean cost of capital
Ans. b
122. Project which is started by firm for increasing sales is classified as

a) New expansion project

b) Old expanded project
c) Firm borrowing project
d) Product line selection
Ans. a
123. An analysis and estimation of cash flows include

a) Input data and key output

b) Depreciation schedule
c) Net salvage value
d) All of the above
Ans. d
124. Having defined working capital as current assets, it can be further classified according to
__________.

a) Financing method and time

b) Rate of return and financing method
c) Time and rate of return
d) Components and time
Ans. d
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125. Dividend policy of a firm affects both the long-time financing and __________ wealth.

a) Owners
b) Creditors
c) Debtor
d) Shareholders
Ans. d
126. The amount of current assets that varies with seasonal requirements is referred to as
__________ working capital.

a) Permanent
b) Net
c) Temporary
d) Gross
Ans. c
127. Excess working capital results in ________.

a) Block of cash
b) Loosing of interests
c) Lack of production
d) Lack of smooth flow of production
Ans. a
128. The market value of the firm is the result of __________.

a) Dividend decision
b) Working capital decision
c) Capital budgeting decision
d) Trade-off between cost and risk
Ans. d
129. Cost of capital is the ______ rate of return expected by the investor.

a) Minimum
b) Maximum
c) Expected
d) Marginal
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Ans. c
130. Insufficient working capital results in __________.

a) Block of cash
b) Loosing of interests
c) Lack of production
d) Lack of smooth flow of production
Ans. d
131. ________ decision relates to the determination of total amount of assets to be held in the
firm.

a) Financing
b) Investment
c) Dividend
d) Controlling
Ans. d
132. Which of the following represents the rate at which a company can grow from internal
sources?

a) Return on assets
b) Sustainable growth rate
c) Adjusted EPS
d) Return on equity
Ans. b
133. Which of the following techniques of project appraisal does not consider the time value of
money?

a) Benefit cost ratio

b) Net present value
c) Internal rate of return
d) Accounting rate of return
Ans. d
134. The sustainable growth rate of a firm can be calculated as the product of the_________.

a) Return on assets and return on equity

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b) Dividend payout ratio and leverage

c) Retention ratio and the return on equity
d) Net profit margin and total sales
Ans. c
135. 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
Ans. d
136. Long -term solvency is indicated by

a) Liquidity ratio
b) Debt-equity ratio
c) Return coverage ratio
d) Both a and b
Ans. b
137. _________ are a way U. S. investors can invest in foreign companies.

a) ADRs
b) IRAs
c) SDRs
d) GNMAs
Ans. a
138. Degree of total leverage can be applied in measuring change in _________.

a) EBIT to percentage change in quantity

b) EPS to percentage change in EBIT
c) EPS to percentage change in quantity
d) Quantity to percentage change in EBIT
Ans. c
139. The measure of business risk is __________.
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a) Operating leverage
b) Financial leverage
c) Total leverage
d) Working capital leverage
Ans. a
140. 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
Ans. b
141. A model for optimizing the selection of securities is the ______ model.

a) Miller-Orr
b) Black-Sholes
c) Markowitz
d) Gordon
Ans. c
142. Degree of financial leverage is a measure of relationship between ___________.

a) EPS and EBIT

b) EPS and quantity produced
c) EBIT and quantity produced
d) EPS and sales
Ans. a
143. Operating leverage examines.

a) The effect of change in quantity on EBIT

b) The effect of change in EBIT on the EPSof the Company
c) The effect of change in output to the EPS of the company
d) The effect of change in EPS on the output of the company
Ans. a
144. Walters model on dividend policy assumes that.
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a) The firm offers an increasing amount of dividend per share at a given level of price
per share
b) The firm has a finite life
c) The cost of capital of the firm is variable
d) Equal to current assets plus current liabilities including bank borrowings
Ans. d
145. Firms that specialize in helping companies raise capital by selling securities are called
________.

a) Commercial banks
b) Investment banks
c) Savings banks
d) Credit unions
Ans. b
146. Dividend changes are perceived important than the absolute level of dividends because.

a) Management change dividends to protect their seats

b) Dividend changes are thought to signal future expectations
c) MM states that absolute level of dividends are irrelevant
d) Changes determine the level of borrowing
Ans. b
147. Which of the following is the assumption of the MM model on dividend policy?

a) The firm is an all equity firm

b) The investments of the firm are financed solely by retained earnings
c) The firm has an infinite life
d) None of the above
Ans. c
148. Which of the following characteristics are true, with reference to preference capital?

a) Preference dividend is not tax deductible

b) The claim of preference share holders is prior to the claim of equity share holders
c) Preference shareholders are not the owners of the concern
d) All of the above
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Ans. d
149. 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
Ans. c
150. 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
Ans. c
151. Under which of the following approaches cost of equity capital is assumed to be constant with
the change in leverage?

a) Net Income approach

b) Net operating income approach
c) MM approach
d) Traditional approach
Ans. a
152. Underlying all investments is the trade-off between_________.

a) Expected return and actual return

b) Low risk and high risk
c) Actual return and high risk
d) Expected return and risk
Ans. d
153. While calculating weighted average cost of capital _________.

a) Preference shares are given more weightage

b) Cost of issue is considered
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c) Tax factor is ignored

d) Risk factor is ignored
Ans. b
154. Which, among the following, are common misconceptions about cost of capital?

a) Depriciation-generated funds have no cost

b) Cost of capital is low if a project is heavily debt-financed
c) Cost of equity is equal to dividend rate
d) All of the above
Ans. d
155. The growth in book value per share shows the_____________.

a) Rise in share price

b) Increase in physical asset of the firm
c) Increase in net worth
d) Growth in reserves
Ans. d
156. Which of the following is not an assumption in the Miller & Modigliani approach?

a) There are no transaction costs

b) Securities are indefinitely divisible
c) Investors are homogenous expectations
d) All firms are pay tax on their income at the same rate
Ans. d
157. A growth industry is defined as ____________.

a) An industry with 15% rate of growth per annum

b) An industry where demand for its product is growing
c) An industry with high capital investment
d) An industry with average growth higher than the growth of the economy
Ans. d
158. According to traditional approach, the average cost of capital _______________.

a) Remains constant upto a degree of leverage and rises sharply thereafter with every
increase in leverage
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b) Rise constantly with increase in leverage

c) Decrease upto 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
Ans. c
159. The cost of capital of a firm is ______________.

a) The dividend paid on equity capital

b) The weighted average of 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 various investors
d) The minimum rate of return it must earn on its investments to keep its investors
satisfied
Ans. d
160. 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
Ans. b
161. Ratios which relate firm's stock to its book value per share, cash flow and earnings are
classified as

a) Return ratios
b) Market value ratios
c) Marginal ratios
d) Equity ratios
Ans. b
162. High price to earning ratio shows company's

a) Low dividends paid

b) High risk prospect
c) High growth prospect
d) High marginal rate
Ans. c
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163. An annual estimated costs of assets uses up every year are included

a) Depreciation and amortization

b) Net sales
c) Net profit
d) Net income
Ans. a
164. Process of calculating future value of money from present value is classified as

a) Compounding
b) Discounting
c) Money value
d) Stock value
Ans. a
165. In calculation of net cash flow, deferred tax payments are classified as

a) Non-cash revenues
b) Non-cash charges
c) Current liabilities
d) Income expenses
Ans. b
166. Rate of return that an investment provides its investor is classified as

a) Investment return rate

b) Internal rate of return
c) International rate of return
d) Intrinsic rate of return
Ans. b
167. Financial securities that can be converted into cash at closing to their book value price are
classified as

a) Inventories
b) Short-term investments
c) Cash equivalents
d) Long-term investments
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Ans. c
168. In a statement of cash flows, a company investing in short-term financial investments and in
fixed assets results in

a) Increased cash
b) Decreased cash
c) Increased liabilities
d) Increased equity
Ans. b
169. Price for debt is called

a) Debt rate
b) Investment return
c) Discount rate
d) Interest rate
Ans. d
170. Capital gain expected by stockholders and dividends are included in

a) Debt rate
b) Investment return
c) Interest rate
d) Cost of equity
Ans. d

171. Growth in earnings per share is primarily resultant of growth in

a) dividends
b) asset value
c) fundamental value
d) yearly value
Ans. a
172. Ability to trade at net price very quickly is classified as

a) Original trading
b) Liquidity
c) Offline trading
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d) Fixed price trading

Ans. b
173. The dividend discount model?

a) Ignores capital gains

b) Incorporates the after-tax value of capital gains
c) Includes capital gains implicitly
d) Restricts capital gains to a minimum
Ans. c

174. The dividend growth rate is referred to as the?

a) Dividend yield
b) Discount rate
c) Market rate
d) Capital gains yield
Ans. a
175. The ______ is defined as the present value of all cash proceeds to the investor in the stock?

a) Intrinsic value
b) Dividend payout ratio
c) Market capitalization rate
d) Plowback ratio
Ans. a
176. The estimated value of common stock is the:

a) present value of all expected cash flows.

b) present value of all capital gains.
c) future value of all dividend payments.
d) present value of all dividend payments.
Ans. a
177. Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is considered
as

a) valued relationship
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b) economic relationship
c) direct relationship
d) inverse relationship
Ans. c
178. In cash flow analysis, two projects are compared by using common life is classified as

a) transaction approach
b) replacement chain approach
c) common life approach
d) Both B and C
Ans. d
179. Other factors held constant, but lesser project liquidity is because of

a) shorter payback period

b) greater payback period
c) less project return
d) greater project return
Ans. b
180. projects which are mutually exclusive but different on scale of production or time of
completion then the

a) external return method

b) net present value of method
c) net future value method
d) internal return method
Ans. b
181. A modified internal rate of return is considered as present value of costs and is equal to

a) PV of hurdle rate
b) FV of hurdle rate
c) PV of terminal value
d) FV of terminal value
Ans. c

182. set of projects or set of investments usually maximize firm value is classified as
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a) optimal capital budget

b) minimum capital budget
c) maximum capital budget
d) greater capital budget
Ans. a
183. A discount rate which equals to present value of TV to project cost present value is classified
as

a) negative internal rate of return

b) modified internal rate of return
c) existed internal rate of return
d) relative rate of return
Ans. b
184. In balance sheet, sum of retained earnings and common stock are considered as

a) preferred equity
b) due equity
c) common perpetuity
d) common equity
Ans. d

185. Rate of return which considers riskiness and an available returns on investments is classified
as

a) constant dividend
b) constant rate
c) maximum rate of return
d) minimum acceptable rate of return
Ans. d
186. In expected rate of return for constant growth, an expected dividend yield must be

a) functional decreasing
b) constant
c) continuously growing
d) functional increasing
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Ans. b

187. In expected rate of return for constant growth, an expected yield on capital must be

a) equal to zero
b) greater than expected growth rate
c) less than expected growth rate
d) equal to expected growth rate
Ans. d
188. In a world with no transaction costs or taxes, assuming managers make logical investment
decisions, the level of dividend in any one year:

a) should be as high as possible

b) should be decided before making any investment decisions
c) is really irrelevant
d) should be as low as management can get away with
Ans. c
189. The traditional view of the dividend decision was that:

a) Somehow £1 of dividend was worth more to an investor than £1 of value in the

business
b) Dividends should be limited to a fixed proportion of profit
c) Dividends should be as low as possible
d) Dividends should be a residual
Ans. a
190. The arbitrage proof of M&M demonstrated that:

a) It was always better to pay high dividends

b) It was better to pay low dividends
c) Shareholders like dividends
d) The level of dividend had no effect on shareholder wealth

Ans. d
191. The clientele effect suggests that:

a) Companies should constantly monitor their dividend decisions

b) Different shareholders will prefer different levels of dividend
c) Companies need to contact shareholders to ask their views on dividends
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d) Companies should pay the highest dividends they can

Ans. b
192. In practice many companies seem to adopt a strategy of steady dividend growth. This is
because:

a) They believe that this sends a positive message to the stock market
b) Nobody would invest in them otherwise
c) It allows shareholders to budget better
d) It makes their financial planning easier

Ans. a
193. In general it is likely that companies will benefit by:

a) Increasing their dividend payouts

b) Reducing their dividend payouts
c) Adopting a reasonably consistent approach to dividend payouts
d) Asking their investors what they want

Ans. c

194. An internal rate of return in capital budgeting can be modified to make it representative of

a) relative outflow
b) relative inflow
c) relative cost
d) relative profitability

Ans. d

195. Situation in which firm limits expenditures on capital is classified as

a) optimal rationing
b) capital rationing
c) marginal rationing
d) transaction rationing

Ans. b
196. If two independent projects having hurdle rate then both projects should

a) be accepted
b) not be accepted
c) have capital acceptance
d) have return rate acceptance
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Ans. a

197. Life that maximizes net present value of an asset is classified as

a) minimum life
b) present value life
c) economic life
d) transaction life

Ans. c
198. In large expansion programs, increased riskiness and floatation cost associated with
project can cause
a) rise in marginal cost of capital
b) fall in marginal cost of capital
c) rise in transaction cost of capital
d) rise in transaction cost of capital

Ans. a
199. Project whose cash flows are less than capital invested for required rate of return then
net present value will be
a) negative
b) zero
c) positive
d) independent

Ans. a
200. Present value of future cash flows is divided by an initial cost of project to calculate

a) negative index
b) exchange index
c) project index
d) profitability index

Ans. d
201. Cash flows occurring with more than one change in sign of cash flow are classified as

a) non-normal cash flow

b) normal cash flow
c) normal costs
d) non-normal costs
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Ans. a
202. Situation in which one project is accepted while rejecting another project in comparison
is classified as
a) present value consent
b) mutually exclusive
c) mutual project

d) mutual consent

Ans. b