740+ Financial Management Solved MCQs

101.

Profitability Index, when applied to Divisible Projects, impliedly assumes that:

A. Project cannot be taken in parts
B. NPV is linearly proportionate to part of the project taken up
C. NPV is additive in nature
D. Both (b) and (c)
Answer» D. Both (b) and (c)
102.

If there is no inflation during a period, then the Money Cashflow would be equal to:

A. Present Value
B. Real Cash flow
C. Real Cash flow + Present Value
D. Real Cash flow - Present Value
Answer» B. Real Cash flow
103.

The Real Cashflows must be discounted to get the present value at a rate equal to:

A. Money Discount Rate
B. Inflation Rate
C. Real Discount Rate
D. Risk free rate of interest
Answer» C. Real Discount Rate
104.

Real rate of return is equal to:

A. Nominal Rate × Inflation Rate
B. Nominal Rate ÷ Inflation Rate
C. Nominal Rate - Inflation Rate
D. Nominal Rate + Inflation Rate
Answer» B. Nominal Rate ÷ Inflation Rate
105.

If the Real rate of return is 10% and Inflation s Money Discount Rate is:

A. 14.4%
B. 2.5%
C. 25%
D. 14%
Answer» A. 14.4%
106.

If the Money Discount Rate is 19% and Inflation Rate is 12%, then the Real Discount Rate is:

A. 7%
B. 5%
C. 5.70%
D. 6.25%
Answer» D. 6.25%
107.

Money Discount Rate if equal to:

A. (1 + Inflation Rate) (1 + Real Rate)-1
B. (1 + Inflation Rate) 4- (1 + Real Rate)-1
C. (1 + Real Rate) 4- (1 + Inflation Rate)-1
D. (1 + Real Rate) + (1 + Inflation Rate)-1
Answer» A. (1 + Inflation Rate) (1 + Real Rate)-1
108.

Real Discount Rate is equal to:

A. (1 + Inf. Rate) (1 + Money D Rate)-1
B. (1 + Money D Rate) + (1 + Inf. Rate)-1
C. (1 + Money D Rate) 4- (1 + Inf. Rate)-1
D. (1 + Money D Rate) - (1 + Inf. Rate)-1
Answer» C. (1 + Money D Rate) 4- (1 + Inf. Rate)-1
109.

Two mutually exclusive projects with different economic lives can be compared on the basis of

A. Internal Rate of Return
B. Profitability Index
C. Net Present Value
D. Equivalent Annuity Value
Answer» D. Equivalent Annuity Value
110.

Risk in Capital budgeting implies that the decision-maker knows___________of the cash flows.

A. Variability
B. Probability
C. Certainty
D. None of the above
Answer» B. Probability
111.

In Certainty-equivalent approach, adjusted cash flows are discounted at:

A. Accounting Rate of Return
B. Internal Rate of Return
C. Hurdle Rate
D. Risk-free Rate
Answer» D. Risk-free Rate
112.

Risk in Capital budgeting is same as:

A. Uncertainty of Cash flows
B. Probability of Cash flows
C. Certainty of Cash flows
D. Variability of Cash flows
Answer» D. Variability of Cash flows
113.

Which of the following is a risk factor in capital budgeting?

A. Industry specific risk factors
B. Competition risk factors
C. Project specific risk factors
D. All of the above
Answer» D. All of the above
114.

In Risk-Adjusted Discount Rate method, the normal rate of discount is:

A. Increased
B. Decreased
C. Unchanged
D. None of the above
Answer» A. Increased
115.

In Risk-Adjusted Discount Rate method, which one is adjusted?

A. Cash flows
B. Life of the proposal
C. Rate of discount
D. Salvage value
Answer» C. Rate of discount
116.

NPV of a proposal, as calculated by RADR real CE Approach will be:

A. Same
B. Unequal
C. Both (a) and (b)
D. None of (a) and (b)
Answer» B. Unequal
117.

Risk of a Capital budgeting can be incorporated

A. Adjusting the Cash flows
B. Adjusting the Discount Rate
C. Adjusting the life
D. All of the above
Answer» D. All of the above
118.

Which element of the basic NPV equation is adjusted by the RADR?

A. Denominator
B. Numerator
C. Both
D. None
Answer» A. Denominator
119.

Cost of Capital refers to:

A. Flotation Cost
B. Dividend
C. Required Rate of Return
D. None of the above.
Answer» B. Dividend
120.

Which of the following sources of funds has an Implicit Cost of Capital?

A. Equity Share Capital
B. Preference Share Capital
C. Debentures
D. Retained earnings
Answer» D. Retained earnings
121.

Which of the following has the highest cost of capital?

A. Equity shares
B. Loans
C. Bonds
D. Preference shares
Answer» A. Equity shares
122.

Cost of Capital for Government securities is also known as:

A. Risk-free Rate of Interest
B. Maximum Rate of Return
C. Rate of Interest on Fixed Deposits
D. None of the above
Answer» A. Risk-free Rate of Interest
123.

Cost of Capital for Bonds and Debentures is calculated on:

A. Before Tax basis
B. After Tax basis
C. Risk-free Rate of Interest basis
D. None of the above.
Answer» B. After Tax basis
124.

Weighted Average Cost of Capital is generally denoted by:

A. kA
B. kw
C. k0
D. kc
Answer» C. k0
125.

Which of the following cost of capital require tax adjustment?

A. Cost of Equity Shares
B. Cost of Preference Shares
C. Cost of Debentures
D. Cost of Retained Earnings.
Answer» C. Cost of Debentures
126.

Which is the most expensive source of funds?

A. New Equity Shares
B. New Preference Shares
C. New Debts
D. Retained Earnings
Answer» A. New Equity Shares
127.

Marginal cost of capital is the cost of:

A. Additional Sales
B. Additional Funds
C. Additional Interests
D. None of the above.
Answer» B. Additional Funds
128.

In case the firm is all-equity financed, WACC would be equal to

A. Cost of Debt
B. Cost of Equity
C. Neither (a) nor (b)
D. Both (a) and (b)
Answer» B. Cost of Equity
129.

In case of partially debt-financed firm, k0 is less

A. Kd
B. Ke
C. Both (a) and (b)
D. None of the above
Answer» B. Ke
130.

In order to calculate Weighted Average Cost of weights may be based on:

A. Market Values
B. Target Values
C. Book Values
D. All of the above
Answer» D. All of the above
131.

Firm's Cost of Capital is the average cost of:

A. All sources
B. All borrowings
C. Share capital
D. Share Bonds & Debentures
Answer» A. All sources
132.

An implicit cost of increasing proportion of debt is:

A. Tax should would not be available on new debt
B. P.E. Ratio would increase
C. Equity shareholders would demand higher return
D. Rate of Return of the company would decrease
Answer» C. Equity shareholders would demand higher return
133.

Cost of Redeemable Preference Share Capital is:

A. Rate of Dividend
B. After Tax Rate of Dividend
C. Discount Rate that equates PV of inflows and out-flows relating to capital
D. None of the above
Answer» C. Discount Rate that equates PV of inflows and out-flows relating to capital
134.

Which of the following is true?

A. Retained earnings are cost free
B. External Equity is cheaper than Internal Equity
C. Retained Earnings are cheaper than External Equity
D. Retained Earnings are costlier than External Equity
Answer» C. Retained Earnings are cheaper than External Equity
135.

Cost of capital may be defined as:

A. Weighted Average cost of all debts
B. Rate of Return expected by Equity Shareholders
C. Average IRR of the Projects of the firm
D. Minimum Rate of Return that the firm should earn
Answer» D. Minimum Rate of Return that the firm should earn
136.

Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:

A. Average Return on Investment
B. Weighted Average Cost of Capital
C. Net Profit Ratio
D. Average Cost of borrowing
Answer» B. Weighted Average Cost of Capital
137.

Cost Capital for Equity Share Capital does not imply that:

A. Market Price is equal to Book Value of share,
B. Shareholders are ready to subscribe to right issue,
C. .Market Price is more than Issue Price,
D. AC of the three above.
Answer» D. AC of the three above.
138.

In order to calculate the proportion of equity financing used by the company, the following should be used:

A. Authorised Share Capital,
B. Equity Share Capital plus Reserves and Surplus,
C. Equity Share Capital plus Preference Share Capital,
D. Equity Share Capital plus Long-term Debt.
Answer» B. Equity Share Capital plus Reserves and Surplus,
139.

The term capital structure denotes:

A. Total of Liability side of Balance Sheet,
B. Equity Funds, Preference Capital and Long term Debt
C. Total Shareholders Equity,
D. Types of Capital Issued by a Company.
Answer» B. Equity Funds, Preference Capital and Long term Debt
140.

Debt Financing is a cheaper source of finance because of:

A. Time Value of Money
B. Rate of Interest,
C. Tax-deductibility of Interest
D. Dividends not Payable to lenders.
Answer» C. Tax-deductibility of Interest
141.

In order to find out cost of equity capital under CAPM, which of the following is not required:

A. Beta Factor
B. Market Rate of Return,
C. Market Price of Equity Share
D. Risk-free Rate of Interest.
Answer» C. Market Price of Equity Share
142.

Tax-rate is relevant and important for calculation of specific cost of capital of:

A. Equity Share Capital
B. Preference Share Capital
C. Debentures
D. (a) and (b) above.
Answer» C. Debentures
143.

Advantage of Debt financing is

A. Interest is tax-deductible
B. It reduces WACC
C. Does not dilute owners control
D. All of the above.
Answer» D. All of the above.
144.

Cost of issuing new shares to the public is known as:

A. Cost of Equity
B. Cost of Capital
C. Flotation Cost
D. Marginal Cost of Capital.
Answer» C. Flotation Cost
145.

Cost of Equity Share Capital is more than cost of debt because:

A. Face value of debentures is more than face value of shares,
B. Equity shares have higher risk than debt,
C. Equity shares are easily saleable
D. All of the three above.
Answer» B. Equity shares have higher risk than debt,
146.

Which of the following is not a generally accepted approach for Calculation of Cost of Equity?

A. CAPM
B. Dividend Discount Model
C. Rate of Pref. Dividend Plus Risk
D. Price-Earnings Ratio
Answer» C. Rate of Pref. Dividend Plus Risk
147.

Operating leverage helps in analysis of:

A. Business Risk
B. Financing Risk
C. Production Risk
D. Credit Risk
Answer» A. Business Risk
148.

Which of the following is studied with the help of financial leverage?

A. Marketing Risk
B. Interest Rate Risk
C. Foreign Exchange Risk
D. Financing risk
Answer» D. Financing risk
149.

Combined Leverage is obtained from OL and FL by their:

A. Addition
B. Subtraction
C. Multiplication
D. Any of these
Answer» C. Multiplication
150.

High degree of financial leverage means:

A. High debt proportion
B. Lower debt proportion
C. Equal debt and equity
D. No debt
Answer» A. High debt proportion
151.

Operating leverage arises because of:

A. Fixed Cost of Production
B. Fixed Interest Cost
C. Variable Cost
D. None of the above
Answer» A. Fixed Cost of Production
152.

Financial Leverage arises because of:

A. Fixed cost of production
B. Variable Cost
C. Interest Cost
D. None of the above
Answer» C. Interest Cost
153.

Operating Leverage is calculated as:

A. Contribution ÷ EBIT
B. EBIT÷PBT
C. EBIT ÷Interest
D. EBIT ÷Tax
Answer» A. Contribution ÷ EBIT
154.

Financial Leverage is calculated as:

A. EBIT÷ Contribution
B. EBIT÷ PBT
C. EBIT÷ Sales
D. EBIT ÷ Variable Cost
Answer» B. EBIT÷ PBT
155.

Which combination is generally good for firms

A. High OL, High FL
B. Low OL, Low FL
C. High OL, Low FL
D. None of these
Answer» C. High OL, Low FL
156.

Combined leverage can be used to measure the relationship between:

A. EBIT and EPS
B. PAT and EPS,
C. Sales and EPS,
D. Sales and EBIT
Answer» C. Sales and EPS,
157.

FL is zero if:

A. EBIT = Interest
B. EBIT = Zero,
C. EBIT = Fixed Cost,
D. EBIT = Pref. Dividend
Answer» B. EBIT = Zero,
158.

Business risk can be measured by:

A. Financial leverage
B. Operating leverage
C. Combined leverage
D. None of the above
Answer» B. Operating leverage
159.

Financial Leverage measures relationship between

A. EBIT and PBT
B. EBIT and EPS
C. Sales and PBT
D. Sales and EPS
Answer» B. EBIT and EPS
160.

Use of Preference Share Capital in Capital structure

A. Increases OL
B. Increases FL
C. Decreases OL
D. Decreases FL
Answer» B. Increases FL
161.

Relationship between change in sales and change m is measured by:

A. Financial leverage
B. Combined leverage
C. Operating leverage
D. None of the above
Answer» B. Combined leverage
162.

Operating leverage works when:

A. Sales Increases
B. Sales Decreases
C. Both (a) and (b)
D. None of (a) and (b)
Answer» C. Both (a) and (b)
163.

Which of the following is correct?

A. CL= OL + FL
B. CL=OL-FL
C. OL= OL × FL
D. OL=OL÷FL
Answer» C. OL= OL × FL
164.

If the fixed cost of production is zero, which one of the following is correct?

A. OL is zero
B. FL is zero
C. CL is zero
D. None of the above
Answer» D. None of the above
165.

If a firm has no debt, which one is correct?

A. OL is one
B. FL is one
C. OL is zero
D. FL is zero
Answer» B. FL is one
166.

If a company issues new share capital to redeem debentures, then:

A. OL will increase
B. FL will increase
C. OL will decrease
D. FL will decrease
Answer» D. FL will decrease
167.

If a firm has a DOL of 2.8, it means:

A. If sales increase by 2.8%, the EBIT will increase by 1%,
B. If EBIT increase by 2.896, the EPS will increase by 1 %,
C. If sales rise by 1%, EBIT will rise by 2.8%,
D. None of the above
Answer» C. If sales rise by 1%, EBIT will rise by 2.8%,
168.

Higher OL is related to the use of higher:

A. Debt
B. Equity
C. Fixed Cost
D. Variable Cost
Answer» C. Fixed Cost
169.

Higher FL is related the use of:

A. Higher Equity
B. Higher Debt
C. Lower Debt
D. None of the above
Answer» B. Higher Debt
170.

In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:

A. MP of Equity Shares
B. Number of Equity Shares
C. Face Value of Equity Shares
D. None of the above.
Answer» B. Number of Equity Shares
171.

Trading on Equity is

A. Always beneficial
B. May be beneficial
C. Never beneficial
D. None of the above.
Answer» B. May be beneficial
172.

Benefit of 'Trading on Equity' is available only if:

A. Rate of Interest < Rate of Return
B. Rate of Interest > Rate of Return
C. Both (a) and (b)
D. None of the above
Answer» A. Rate of Interest < Rate of Return
173.

Indifference Level of EBIT is one at which:

A. EPS is zero
B. EPS is Minimum
C. EPS is highest
D. None of these
Answer» D. None of these
174.

Financial Break-even level of EBIT is one at which:

A. EPS is one
B. EPS is zero
C. EPS is Infinite
D. EPS is Negative
Answer» B. EPS is zero
175.

Relationship between change in Sales and d Operating Profit is known as:

A. Financial Leverage
B. Operating Leverage
C. Net Profit Ratio
D. Gross Profit Ratio
Answer» B. Operating Leverage
176.

If a firm has no Preference share capital, Financial Break even level is defined as equal to -

A. EBIT
B. Interest liability
C. Equity Dividend
D. Tax Liability
Answer» B. Interest liability
177.

At Indifference level of EBIT, different capital have

A. Same EBIT
B. Same EPS
C. Same PAT
D. Same PBT
Answer» B. Same EPS
178.

Which of the following is not a relevant factor m EPS Analysis of capital structure?

A. Rate of Interest on Debt
B. Tax Rate
C. Amount of Preference Share Capital
D. Dividend paid last year
Answer» D. Dividend paid last year
179.

For a constant EBIT, if the debt level is further increased then

A. EPS will always increase
B. EPS may increase
C. EPS will never increase
D. None of the above
Answer» B. EPS may increase
180.

Between two capital plans, if expected EBIT is more than indifference level of EBIT, then

A. Both plans be rejected
B. Both plans are good
C. One is better than other
D. None of the above
Answer» C. One is better than other
181.

Financial break-even level of EBIT is:

A. Intercept at Y-axis,
B. Intercept at X-axis
C. Slope of EBIT-EPS line
D. None of the above.
Answer» B. Intercept at X-axis
182.

In case of Net Income Approach, the Cost of equity is:

A. Constant
B. Increasing
C. Decreasing
D. None of the above
Answer» A. Constant
183.

In case of Net Income Approach, when the debt proportion is increased, the cost of debt:

A. Increases
B. Decreases
C. Constant
D. None of the above
Answer» C. Constant
184.

Which of the following is true of Net Income Approach?

A. VF = VE+VD
B. VE = VF+VD
C. VD = VF+VE
D. VF = VE-VE
Answer» A. VF = VE+VD
185.

Net Operating Income Approach, which one of the lowing is constant?

A. Cost of Equity
B. Cost of Debt
C. WACC & kd
D. Ke and Kd
Answer» C. WACC & kd
186.

NOI Approach advocates that the degree of debt financing is:

A. Relevant
B. May be relevant
C. Irrelevant
D. May be irrelevant
Answer» C. Irrelevant
187.

'Judicious use of leverage' is suggested by:

A. Net Income Approach
B. Net Operating Income Approach
C. Traditional Approach
D. All of the above
Answer» C. Traditional Approach
188.

Which one is true for Net Operating Income Approach?

A. VD = VF - VE
B. VE = VF + VD
C. VE = VF - VD
D. VD = VF + VE
Answer» C. VE = VF - VD
189.

In the Traditional Approach, which one of the following remains constant?

A. Cost of Equity
B. Cost of Debt
C. WACC
D. None of the above
Answer» D. None of the above
190.

In MM-Model, irrelevance of capital structure is based on:

A. Cost of Debt and Equity
B. Arbitrage Process
C. Decreasing k0
D. All of the above
Answer» B. Arbitrage Process
191.

'That there is no corporate tax' is assumed by:

A. Net Income Approach
B. Net Operating Income Approach,
C. Traditional Approach
D. All of these
Answer» D. All of these
192.

'That personal leverage can replace corporate leverage' is assumed by:

A. Traditional Approach
B. MM Model
C. Net Income Approach
D. Net Operating Income Approach.
Answer» B. MM Model
193.

Which of the following argues that the value of levered firm is higher than that of the unlevered firm?

A. Net Income Approach
B. Net Operating Income Approach
C. MM Model with taxes
D. Both (a) and (c)
Answer» D. Both (a) and (c)
194.

In Traditional Approach, which one is correct?

A. ke rises constantly
B. kd decreases constantly
C. k0 decreases constantly
D. None of the above
Answer» D. None of the above
195.

Which of the following assumes constant kd and ke?

A. Net Income Approach
B. Net Operating Income Approach
C. Traditional Approach
D. MM Model.
Answer» A. Net Income Approach
196.

Which of the following is true?

A. Under Traditional Approach, overall cost of capital remains same,
B. Under NI Approach, overall cost of capital remains same,
C. Under NOI Approach, overall cost of capital remains same,
D. None of the above.
Answer» C. Under NOI Approach, overall cost of capital remains same,
197.

The Traditional Approach to Value of the firm m that:

A. There is no optimal capital structure,
B. Value can be increased by judicious use of leverage
C. Cost of Capital and Capital structure are m dent,
D. Risk of the firm is independent of capital structure
Answer» B. Value can be increased by judicious use of leverage
198.

A firm has EBIT of . 50,000. Market value of debt is . 80,000 and overall capitalization rate is 20%. Market value of firm under NOI Approach is:

A. 2,50,000
B. 1,70,000
C. 30,000
D. 1,30,000.
Answer» B. 1,70,000
199.

Which of the following is incorrect for NOI?

A. k0 is constant
B. kd is constant
C. ke is constant
D. kd & k0 are constant
Answer» C. ke is constant
200.

Which of the following is incorrect for value of the firm?

A. In the initial preposition, MM Model argues that value is independent of the financing mix.
B. Total value of levered and unlevered firms is otherwise arbitrage will take place.
C. Total value incorporates borrowings by firm but excludes personal borrowing.
D. Total value does not change because underlying does not change with financing mix.
Answer» D. Total value does not change because underlying does not change with financing mix.
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