MCQ’s of Corporate Finance

Module -1

1. Which of the following is not one of the three fundamental methods of firm
valuation?
a) Discounted Cash flow
b) Income or earnings - where the firm is valued on some multiple of accounting
income or earnings.
c) Balance sheet - where the firm is valued in terms of its assets.
d) Market Share

2. Which of the following has Net profit as basis for calculation?

a) Net present value
b) Average rate of return
c) Internal rate of return
d) Payback period

3.Corporate wealth maximization is the value maximization for_____?

a) Equity shareholders
b) Stakeholders
c) Employees
d) Debt capital owners

4.Which of the following valuation methods is based on “Going concern concept”?

a) Market value method
b) Book value method
c) Liquidation method
d) Salvage value method
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5. Heterogeneous cash flows can be made comparable by?

a) Discounting technique

b) Compounding technique

c) Either a or b

d) None of the above

6. What is the primary goal of financial management?

a) To minimize the risk
b) To maximize the return
c) To maximize the owner’s wealth
d) To raise profit

7. The capital budget is associated with?

a) Long terms and short terms assets
b) Fixed assets
c) Long terms assets
d) Short term assets

8. The concept of Financial management is?

a) Profit maximization
b) All features of obtaining and using financial resources for company operations
c) Organization of funds
d) Effective Management of every company
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9.The only feasible purpose of financial management is

a) Wealth Maximization

b) Sales Maximization

c) Profit Maximization

d) Assets maximization

10. An uncovered cost at start of year is divided by full cash flow during recovery year
then added in prior years to full recovery for calculating ?

a)Original period

b) Investment period

c) Payback period

d) Forecasted period

11. What is the value of the firm usually based on?

a) The value of debt and equity.
b) The value of equity.
c) The value of debt.
d) The value of assets plus liabilities.

12. Internal rate of return is …

a) Rate at which discounted cash inflow is more than discounted cash outflow
b) Rate at which discounted cash inflow is less than discounted cash outflow
c) Rate at which discounted cash inflow is equal to the discounted cash outflow
d) Either a or b
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13. When operating under a single-period capital-rationing constraint, you may first
want to try selecting projects by descending order of their __________ in order to give
yourself the best chance to select the mix of projects that adds most to firm value.
a) profitability index (PI)
b) net present value (NPV)
c) internal rate of return (IRR)
d) payback period (PBP)

14. 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

15. Payment if it is divided with interest rate will be the formula of

A. future value of perpetuity

B. present value of perpetuity
C. due perpetuity
D. deferred perpetuity

16. ___________________ of a firm refers to the composition of its long-term funds and
its capital structure.

a) Capitalisation

b) Over-capitalisation

c) Under-capitalisation

d) Market capitalization

17. In the _______________, the future value of all cash inflow at the end of time horizon
at a particular rate of interest is calculated.
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a) Risk-free rate

b) Compounding technique

c) Discounting technique

d) Risk Premium

18. When __________ is greater than zero the project should be accepted.

a) Internal rate of return

b) Profitability index

c) Net present value

d) Modified internal rate of return

19. Which of the following is NOT a cash outflow for the firm?
a) depreciation.
b) dividends.
c) interest payments.
d) taxes

20. Reserves & Surplus are which form of financing?

a) Security Financing
b) Internal Financing
c) Loans Financing
d) International Financing

21. ______________ is the price at which the bond is traded in the stock exchange.
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a) Redemption value
b) Face value
c) Market value
d) Maturity value

22. ____________ and____________ carry a fixed rate of interest and are to be paid off
irrespective of the firm’s revenues.
a) Debentures, Dividends
b) Debentures, Bonds
c) Dividends, Bonds
d) Dividends, Treasury notes

23. Investment is the _______________.

A. Net additions made to the nation’s capital stocks
B. commitment to buy a flat or house
C. Employment of funds on assets to earn returns
D. Employment of funds on goods and services that are used in production process

24.Financial Management is mainly concerned with ______________.

A. All aspects of acquiring and utilizing financial resources for firms activities
B. Arrangement of funds
C. Efficient Management of every business
D. Profit maximization

25. In his traditional role the finance manager is responsible for ___________.
A. Proper utilization of funds
B. Arrangement of financial resources
C. Acquiring capital assets of the organization
D. Efficient management of capital
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26. A company may raise capital from the primary market through _____________.
A. Public issue
B. Rights issue
C. Bought out deals
D. All of the above

27. Time value of money indicates that

A. Unit of money obtained today is worth more than a unit of money obtained in future

B. A unit of money obtained today is worth less than a unit of money obtained in future

C. There is no difference in the value of money obtained today and tomorrow

D. None of the above

28. Time value of money supports the comparison of cash flows recorded at different
time period by

A. Discounting all cash flows to a common point of time

B. Compounding all cash flows to a common point of time

C.Using either a or b

D. None of the above.

29. Present value tables for annuity cannot be straight away applied to varied stream of
cash flows.

A) True

B) False

10. Amount of money today which is equal to series of payments in future

A. nominal value of annuity

B. sinking value of annuity
C. present value of annuity
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D. future value of annuity

30. Formula used for annuity A as R[(1+i)n -1]⁄i(1+i)n used to calculate

A. future value of annuity

B. nominal value of annuity
C. sinking value of annuity
D. present value of annuity

31.An annuity with an extended life is classified as

A. extended life
B. perpetuity
C. deferred perpetuity
D. due perpetuity

32. 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

33. Payment if it is divided with interest rate will be the formula of

A. future value of perpetuity

B. present value of perpetuity
C. due perpetuity
D. deferred perpetuity

34. Internal rate of return is …?

A. Rate at which discounted cash inflow is more than discounted cash outflow
B. Rate at which discounted cash inflow is less than discounted cash outflow
C. Rate at which discounted cash inflow is equal to the discounted cash outflow
D. Either a or b

35. Corporate wealth maximization is the value maximization for_____?

 MCQ’s of Corporate Finance

A. Equity shareholders
B. Stakeholders
C. Employees
D. Debt capital owners

36. Which of the following statements is correct regarding the internal rate of return
(IRR) method?

A. Each project has a unique internal rate of return.

B. As long as you are not dealing with mutually exclusive projects, capital
rationing,or unusual projects having multiple sign changes in the cash-flow
stream, the internal rate of return method can be used with reasonable
confidence.
C. The internal rate of return does not consider the time value of money.
D. The internal rate of return is rarely used by firms today because of the ease at
which net present value is calculated.
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Module – 2
LongtermInvestmentDecisions

1-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

2.___________ on capital is called ‘Cost of capital’?

(A) Lower expected return

(B) Normally expected return
(C) Higher expected return
(D) None of the above

3.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

4.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
(C) Profitability Index
(D) Any of the above

5.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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6. A discount rate which is equal to the present value of TV to the 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

7. In calculation of internal rate of return, an assumption states that received cash flow from the
project must

A. Be reinvested
B. Not be reinvested
C. Be earned
D. Not be earned

8. In capital budgeting, an internal rate of return of the project is classified as its

A. external rate of return

B. internal rate of return
C. positive rate of return
D. negative rate of return

9. In internal rate of returns, the discount rate which forces the net present values to become zero
is classified as

A. positive rate of return

B. negative rate of return
C. external rate of return
D. internal rate of return

10.  A modified internal rate of return is considered as present value of costs and is equal to

A. p.v of hurdle rate

B. fv of hurdle rate
C. p.v of terminal value
D. fv of terminal value
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11.  In calculation of internal rate of return, an assumption states that received cash flow from the
project must

A. be reinvested
B. not be reinvested
C. be earned
D. not be earned

12.  Present value of future cash flows is $4150 and an initial cost is $1300 then profitability
index will be

A. 0.0319
B. 3.19
C. 0.31 times
D. 5450

13. Procedure of finding present values in time value of money is classified as

A. compounding
B. discounting
C. money value
D. stock value

14.  A project whose cash flows are more than capital invested for rate of return then net present
value will be

A. positive
B. independent
C. negative
D. zero

15. If an initial investment is $765000, the payback period is 4.5 years, then increase in future
cash flow will be

A. $5,645,000
B. $6,442,500
C. $3,442,500
D. $5,442,500

16.  If the net initial investment is $6850000 and the uniform increases yearly cash flows is
$2050000, then payback period will be
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A. 3.34 years
B. 4.34 years
C. 5.34 years
D. 6.34 years

17. Net initial investment is divided by uniform increasing in future cash flows to calculate

A. discounting period
B. investment period
C. payback period
D. earning period

18.  If the payback period is 4 years and the uniform increases in cash flows per year is
$2750000, then the net initial investment can be

A. $10,511,000
B. $12,105,000
C. $1,100,000
D. $11,000,000

19. Method, which calculates the time to recoup initial investment of project in form of expected
cash flows is known as

A. net value cash flow method

B. payback method
C. single cash flow method
D. lean cash flow method

20. If the net initial investment is $985000, returned working capital is $7500, then an average
investment over five years will be

A. $596,300
B. $485,300
C. $496,250
D. $486,250

21. Categories of cash flows include

A. net initial investment

B. cash flow from operations after paying taxes
C. cash flow from terminal disposal after paying taxes
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D. all of above

22. Annual earned income is divided from a project by capital invested to calculate

A. accrual accounting rate of return

B. returned working capital
C. increase in expected average annual
D. decrease in expected average annual

23. Working capital cash outflow, cash outflow to buy machine and cash inflow from machine
are the examples of

A. cash flow from operations

B. terminal disposal of investment
C. net initial investment
D. average return on investment

24. Statement of cash flows includes

A) Financing Activities
B) Operating Activities
C) Investing Activities
D) All of the Above

25. In cash flows, when a firm invests in fixed assets and short-term financial investments results
in
A) Increased Equity
B) Increased Liabilities
C) Decreased Cash
D) Increased Cash

26.  A firm that issues stocks and bonds to raise funds results in
A) Decreases Cash
B) Increases Cash
C) Increases Equity
D) Increases Liabilities
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27.  The purchase value of assets over its serviceable life is categorised as
A) Appreciated Liabilities
B) Appreciated Assets
C) Depreciation
D) Appreciation

28. The basic financial statements include

A) Statement of Cash Flows
B) Statement of Retained Earnings
C) Balance Sheet and Income Statement
D) All of the Above

29.  The statement of cash flow clarifies cash flows according to

A) Operating and Non-operating Flows
B) Inflow and Outflow
C) Investing and Non-operating Flows
D) Operating, Investing, and Financing Activities

30. Cash flow example from a financial activity is

A) Payment of Dividend
B) Receipt of Dividend on Investment
C) Cash Received from Customers
D) Purchase of Fixed Asset

31. Cash flow example from an investing activity is

A) Issue of Debenture
B) Repayment of Long-term Loan
C) Purchase of Raw Materials for Cash
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D) Sale of Investment by Non-Financial Enterprise

32.  Which item comes under financial activities in cash flow?

A) Redemption of Preference Share
B) Issue of Preference Share
C) Interest Paid
D) All the above

33. Which of the following is NOT a cash outflow for the firm?

A. Depreciation.
B. Dividends.
C. Interest payments.
D. taxes

34. Which of the following statements is correct?

A. If the NPV of a project is greater than 0, its PI will equal 0.

B. If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
C. If the PI of a project is less than 1, its NPV should be less than 0.
D. If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and
its NPV will be greater than 0.

35. When __________ is greater than zero the project should be accepted.

A. Internal rate of return

B. Profitability index
C. Net present value
D. Modified internal rate of return

36. ____________ is defined as the length of time required to recover the initial cash out
lay.
A. Payback-period
B. Inventory conversion period
C. Discounted payback-period
D. Budget period
MCQ’s of Corporate Finance