MCQ's of Basics of Finance MBA 831

Multiple Choice
Questions
On
Basics of Finance
(mba-831)
Submitted To: Jai Kishan Chandel
Associate Prof.
Institute of Mgt. Studies, K.U.K
Institute of Management Studies,

Kurukshetra University, Kurukshetra
Dated: 05/Sept./2011
Multiple Choice Questions
Subject: Basics of Finance (mba-831)

UNIT-I:
Definition and importance of finance function, functions of finance, distinction between
accounting function and finance function, definition and functions of financial management,
objectives of financial management organization of the finance function.
1. The balance sheet is alternately known as :
(a) Assets statement
(b) Statement of financial position
(c) Statement of profit and loss
(d) None of the given options
2. Trading & Profit & loss account and balance sheet is prepared from:
(a) Ledger balance
(b) Ledger balances, cash and bank balances
(c) Cash book and bank book
(d) Trial balance
3. Interest on drawing is an:
(a) Expenditure for the business
(b) Expense for the business
(c) Gain for the business
(d) Loss for the business
4. The distinction between revenue account and capital account is necessary for the
preparation of:
(a) Final accounts
(b) Receipt and payment account
(c) Cash flow statements
(d) Funds flow statements
5. Capital expenditure is that expenditure which is:
(a) Paid in lump-sum
(b) Large in amount
(c) Intended to benefit the future period
(d) Intended to benefit the current period
6. Calculate the gross profit /loss if:

Sales Rs. 60,000; Cost of sales Rs. 50,000; Opening stock Rs. 10,000; Purchases Rs. 40,000;
Wages Rs. 20,000 and Office rent Rs. 10,000.
(a) Loss Rs. 10,000
(b) Loss Rs. 20, 000

(c) Profit Rs. 10,000
7. Balance Sheet shows the:
(a) Profit earned by the business
(b) Total capital employed
(c) Financial position of the business
(d) Trading results of the business
8. Net profit is equal to:
(a) Sales less cost of sales and operating expenses
(b) Gross profit less operating expenses
(c) Sales less operating expenses
(d) Both (a) & (b)
9. Selling expenses are shown in:
(a) Trading account
(b) Profit and loss account
(c) Profit and loss appropriation account
(d) Manufacturing account
10. Current liabilities are such obligations which are to be satisfied within:
(a) One year
(b) Two years
(c) Three years
(d) All of the given options
11. Depreciation is charged on land in case of:
(a) Leased hold land
(b) Land purchased by the owner himself
(c) Depreciation is never being charged on land
12. Which of the following does not affect the cash balance of a business?
(a) Increases in inventory
(b) Changes in accounts receivables
(c) Depreciation
(d) Seasonality
13. Ongoing expenditures, such as general and administrative expenses, which occur in the
process of selling and managing a company are known as:
(a)
(b)
(c)
(d)
Cost of goods sold

Selling expenses
Gross margin
Operating expenses
14. Which of the following is not the same as the others?

(a) Gain
(b) Gross margin
(c) Income
(d) Revenue
15. The income statement records:
(a) Sales
(b) Cost of goods sold
(c) Expenses
(d) All of the above
16. The difference between assets and liabilities is called:
(a) Balance sheet
(b) Profit
(c) Gross margin
(d) Equity
17. Long-term liabilities are:
(a) Debts or portions of debt due more than 12 months from the date of the balance sheet
(b) Bills for inventory
(c) Amounts due for renovations
(d) Amounts due for supplies
18. Which of the following is not a category used for assets on the balance sheet?
(a) Current
(b) Fixed
(c) Other
(d) Accrued
19. The _____________ compares the possessions of a company and the debts that it owes
on a specific day.
(a) Income statement
(b) Balance sheet
(c) Cash flow projection
(d) Completed-contract method
20. Which of the following accounting methods is the simplest and easiest to use?
(a) Completed-contract method
(b) Cash basis
(c) Accrual basis
21. If business purchases goods for resale purposes, such purchases are charged to
_____________
(a) Expenses account
(b) Purchases account
(c) Sales account
22. The amount of resources supplied by the owner in business is called:
(a) Investments
(b) Assets
(c) Capital
(d) Reserves
23. Excess of sales over cost of goods sold in an accounting period is termed as:
(a) Net Profit
(b) Gross Profit
(c) Retained earnings
24. At the end of the year, goods that are unsold are deducted from:
(a) Finished goods
(b) Closing stock
(c) Cost of goods sold
(d) Opening stock
25. Conversion cost is:
(a) Total factory cost
(b) The cost incurred in converting raw material into finished goods
(c) The cost incurred in converting raw material into work in process
26. The cost of the asset after the expiry of its useful life is called___________
(a) Written down value
(b) Residual value
(c) Expired value

27. When bank statement shows a debit balance, it means:
(a) Overdraft balance as per cash book
(b) Favorable balance as per cash book
(c) Un Favorable balance as per bank book
(d) None of the above
28. Closing stock is credited in the:
(a) Balance sheet
(b) Profit & Loss account
(c) Cost of good sold statement
(d) None of the given option
29. Depreciation of machinery will be shown in the profit & loss account under the head of:
(a) Selling expense
(b) Administrative Expenses
(c) Marketing expense
(d) Financial expense
30. Assets and liabilities are presented in the balance sheet in the order of their:
(a) Life
(b) Classification
(c) Maturity
31. A Transaction caused a decrease of Rs. 10,000 in both total Assets and total Liabilities.
This Transaction could be:
(a) Purchase of delivery Truck for Rs. 10,000 Cash
(b) An asset worth Rs. 10,000 was destroyed by fire
(c) Repayment of Rs. 10,000 bank loan
(d) Collection of Rs. 10,000 from Debtors
32. The following Journal entry was recorded in Dixy stores accounting records:
Cash -------------------------------------------------------- 12,000
Notes Receivables ---------------------------------------- 48,000
Land -------------------------------------------------------- 60,000
This transaction:
(a) Involves the purchase of land for Rs. 60,000
(b) Involves a Rs. 12,000 Cash payment

(c) Involves the sales of Land for Rs. 60,000
(d) Causes an increase in total assets for Rs. 12,000
33. Identify which of the following statements does not correctly describe the Net Income.
(a) Net Income is computed in Income statement, appears in the statement of Owners
equity and increases Owners equity in the balance sheet.
(b) Net income is equal to Revenue minus expenses.
(c) Net Income is computed in Income statement, appears in the statement of Owners
equity and increases the amount of cash shown in the balance sheet.
(d) Net Income can be determined using the account balances appearing in the adjusted
Trial balance.
34. Which of the following cannot be classified as Account?
(a) Assets.
(b) Liabilities.
(c) Income.
(d) Proprietor
35. Given the following, what is the amount of Capital?

Premises Rs. 20,000
Stock Rs. 8,500
Cash Rs. 100
Creditors Rs. 3,000
Loan from Saqib Rs. 4,000.
(a) Rs. 21,000
(b) Rs. 21,600
(c) Rs. 32,400
36. Which of the following is not an example of a current liability as at Dec. 31, 2005?
(a) Management fees collected in advance in 2005, to be earned during 2006.
(b) The portion of long-term debt due in 2006.
(c) Warranty liability for products carrying two-year warranty and sold during 2005.
(d) The interest due to creditors and bond holders for 2006, to be paid in 2006.
37. "The firm must be treated as separate and distinct, in its financial terms, from its'
owner(s)". This rule is known as:
(a) The accounting equation
(b) The dual aspect concept
(c) The separate entity concept
(d) The balance sheet

38. The system whereby we record dual effect of each transaction is known as:
(a) Balance Sheet accounting
(b) Double-entry book keeping
(c) Dual aspects of transactions
(d) Management accounting
39. Which of the following is an example of revenue expenditures?
(a) Buying of a delivery van
(b) Paying for a five-year lease on shop premises in city centre
(c) Adding fuel to a delivery van
(d) Re-paying a loan which was borrowed three years ago.
40. Which of the following statements is TRUE?

(a) Assets = capital + liabilities
(b) Capital = assets + liabilities
(c) Assets + liabilities = capital
(d) Assets = Liabilities Capital
41. Depreciation of machinery will be shown in the profit & loss account under the heading
of:
(a) Selling expense
(b) Administrative Expenses
(c) Marketing expense
(d) Financial expense
42. Advance insurance will be ___________ from Insurance expense.
(a) Added
(b) Deducted
(c) Double charged
43. Money lying in our bank account is our:
(a) Liability
(b) Assets
(c) Expense
44. Liquidity is:
(a)
(b)
(c)
(d)
The amount of cash to liquidate

The funds available for use
The ability of business to receive its cash
The ability of a business to pay its debts in time
45. Rent receivable is our:

(a) Income
(b) Current Asset
(c) Expense
(d) Both A and B
46. Salaries and wages are:

(a) Direct expenses
(b) Indirect expenses
(c) Both direct and indirect expenses
47. Which of the following is an example of Non commercial organization?
(a) Sole proprietorship
(b) Partnership
(c) Limited Company
(d) Trusts
48. In case where actual increase or decrease in capital such as Drawing and Profit is not
recorded in capital account, such kind of account is called:
(a) Fixed capital account
(b) Fluctuating capital account
(c) Current account
49. There should be a minimum of _________ members to form a public limited company.
(a) Ten
(b) Nine
(c) Seven
(d) Two
50. Which of the following is not a Component of Financial statement?
(a) Balance Sheet
(b) Notes to the Accounts
(c) Comparative figures of Previous Period
UNIT-II:
Meaning, characteristics and need for financial planning in business concerns, factors to be
considered in drafting a financial plan. Meaning of capitalisation and theories of Capitalisation.
Over-capitalisation and Under-capitalisation.
51. According to the accounting profession, which of the following would be considered a
cash-flow item from a "financing" activity?
(a) A cash outflow to the government for taxes.
(b) A cash outflow to repurchase the firm's own common stock.
(c) A cash outflow to lenders as interest.
(d) A cash outflow to purchase bonds issued by another company.
52. Cash budgets are prepared from past:
(a) Balance sheets.
(b) Income statements.
(c) Income tax and depreciation data.
53. An examination of the sources and uses of funds is part of:
(a) A forecasting technique.
(b) A funds flow analysis.
(c) A ratio analysis.
(d) Calculations for preparing the balance sheet.
54. Which of the following is not a cash outflow for the firm?
(a) Depreciation.
(b) Dividends.
(c) Interest payments.
(d) Taxes.
55. If the following are balance sheet changes:
$ 5,005 decrease in accounts receivable
$ 7,000 increase in cash

$12,012 decrease in notes payable
$ 9,850 increase in inventories
a "source" of funds would be:
(a) $9,850 increase in inventories.
(b) $5,005 decrease in accounts receivable.
(c) $7,000 increase in cash.
(d) $12,012 decrease in notes payable.
cash-flow item from an "investing" activity?
(a) Cash outflow to the government for taxes.
(b) Cash outflow to shareholders as dividends.
(c) Cash outflow to lenders as interest.
(d) Cash outflow to purchase bonds issued by another company.
57. If the following are balance sheet changes:
$ 7,000 decrease in cash
$12,012 increase in notes payable
$ 9,850 increase in inventories
$10,001 increase in accounts payable
a "use" of funds would be:
(a)
(b)
(c)
(d)
$9,850 increase in inventories.

$7,000 decrease in cash.
$10,001 increase in accounts payable.
$12,012 increase in notes payable.
cash-flow item from an "operating" activity?
(a) Cash outflow to the government for taxes.
(b) Cash outflow to shareholders as dividends.
(c) Cash inflow to the firm from selling new common equity shares.
(d) Cash outflow to purchase bonds issued by another company.
59. The sustainable growth rate (SGR) can be expressed as:
(a) The percentage change in retained earnings assuming a steady state model where the
retention rate is held constant.
(b) Being positively related to the firm's target return on equity and negatively related to
its target retention rate.
(c) The maximum annual percentage increase in sales that can be achieved based on
target operating, debt, and dividend-payout ratios.
(d) Being negatively related to the firm's target return on equity and positively related to
its retention rate.
60. ________ is equal to the total market value of the firm's common stock divided by (the
replacement cost of the firm's assets less liabilities).
(a) Book value per share
(b) Liquidation value per share
(c) Market value per share
(d) Tobin's Q
(e) None of the above.
Rationale: Book value per share is assets minus liabilities divided by number of shares.
Liquidation value per share is the amount a shareholder would receive in the event of
bankruptcy. Market value per share is the market price of the stock.
61. High P/E ratios tend to indicate that a company will _______, "all other things being
equal or held constant.
(a) Grow quickly
(b) Grow at the same speed as the average company
(c) Grow slowly
(d) Not grow
(e) None of the above
Rationale: Investors pay for growth; hence the high P/E ratio for growth firms; however, the
investor should be sure that he or she is paying for expected, not historic, growth.
62. _________ is equal to (common shareholders' equity/common shares outstanding).
(d) Tobin's Q
(e) none of the above
63. ________ are analysts who use information concerning current and prospective
profitability of a firm to assess the firm's fair market value.
(a) Credit analysts
(b) Fundamental analysts
(c) Systems analysts
(d) Technical analysts
(e) Specialists
64. The _______ is defined as the present value of all cash proceeds to the investor in the
stock.
(a) Dividend payout ratio
(b) Intrinsic value
(c) Market capitalization rate
(d) Plowback ratio
65. _______ is the amount of money per common share that could be realized by breaking
up the firm, selling the assets, repaying the debt, and distributing the remainder to
shareholders.
(d) Tobin's Q
66. Since 1955, Treasury bond yields and earnings yields on stocks were_______.
(a) Identical
(b) Negatively correlated
(c) Positively correlated
(d) Uncorrelated
67. Historically, P/E ratios have tended to be _________.
(a) Higher when inflation has been high
(b) Lower when inflation has been high
(c) Uncorrelated with inflation rates but correlated with other macroeconomic variables
(d) Uncorrelated with any macroeconomic variables including inflation rates
68. The ______ is a common term for the market consensus value of the required return on
a stock.
(b) Intrinsic value
(c) Market capitalization rate
(d) Plowback rate
69. The _________ is the fraction of earnings reinvested in the firm.

(b)
(c)
(d)
(e)
Retention rate
Plowback ratio
A and c
B and c
70. The Gordon model

(a) Is a generalization of the perpetuity formula to cover the case of a growing perpetuity.
(b) Is valid only when g is less than k.
(c) Is valid only when k is less than g.
(d) A and b.
(e) A and c.
71. Financial markets and institutions
(a) Involve the movement of huge quantities of money.
(b) Affect the profits of businesses.
(c) Affect the types of goods and services produced in an economy.
(d) All of the above.
(e) Only (A) and (B) of the above.
72. Markets in which funds are transferred from those who have excess funds available to
those who have a shortage of available funds are called
(a) Commodity markets.
(b) Fund-available markets.
(c) Derivative exchange markets.
(d) Financial markets.
73. The price paid for the rental of borrowed funds (usually expressed as a percentage of
the rental of $100 per year) is commonly referred to as the
(a) Inflation rate.
(b) Exchange rate.
(c) Interest rate.
(d) Aggregate price level.
74. The bond markets are important because

(a) They are easily the most widely followed financial markets in the United States.
(b) They are the markets where foreign exchange rates are determined.
(c) They are the markets where interest rates are determined.
(e) Only (A) and (B) of the above.
75. Interest rates are important to financial institutions since an interest rate increase
(a) Decreases the cost of acquiring funds.
(b) Increases the cost of acquiring funds.
(c) Raises the income from assets.
(d) (b) and (c) of the above. E) (a) and (c) of the above. Answer: d
76. Typically, increasing interest rates
(a) Discourage corporate investments.
(b) Discourage individuals from saving.
(c) Encourage corporate expansion.
(d) Encourage corporate borrowing. E) none of the above.
77. Compared to interest rates on long-term U.S. government bonds, interest rates on ____
fluctuate more and are lower on average.
(a) Medium-quality corporate bonds
(b) Low-quality corporate bonds
(c) High-quality corporate bonds
(d) Three-month treasury bills
78. Compared to interest rates on long-term U.S. government bonds, interest rates on
three-month Treasury bills fluctuate _____ and are _____ on average.
(a) More; lower
(b) Less; lower
(c) More; higher
(d) Less; higher
79. The stock market is important because
(a) It is where interest rates are determined.
(b) It is the most widely followed financial market in the united states.
(c) It is where foreign exchange rates are determined.
80. Stock prices since the 1950s have been
(a) Relatively stable, trending upward at a steady pace.
(b) Relatively stable, trending downward at a moderate rate.
(c) Extremely volatile.
(d) Unstable, trending downward at a moderate rate
81. A rising stock market index due to higher share prices
(a) Increases peoples wealth and as a result may increase their willingness to spend.
(b) Increases the amount of funds that business firms can raise by selling newly issued
stock.
(c) Decreases the amount of funds that business firms can raise by selling newly issued
stock.
(d) Both (a) and (b) of the above.
82. A declining stock market index due to lower share prices
(a) Reduces peoples wealth and as a result may reduce their willingness to spend.
(b) Increases peoples wealth and as a result may increase their willingness to spend.
(c) Decreases the amount of funds that business firms can raise by selling newly issued
stock.
(d) Both (a) and (c) of the above. E) both (b) and (c) of the above
83. Changes in stock prices
(a) Affect peoples wealth and their willingness to spend.
(b) Affect firms decisions to sell stock to finance investment spending.
(c) Are characterized by considerable fluctuations.
(e) Only (a) and (b) of the above.
84. (I) Debt markets are often referred to generically as the bond market.
(II) A bond is a security that is a claim on the earnings and assets of a corporation.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.
85. (I) A bond is a debt security that promises to make payments periodically for a specified
period of time.
(II) A stock is a security that is a claim on the earnings and assets of a corporation.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.
86. The price of one countrys currency in terms of anothers is called
(a) The exchange rate.
(b) The interest rate.
(c) The dow jones industrial average.
(d) None of the above.
87. A stronger dollar benefits _____ and hurts _____

(a) American businesses; American consumers.
(b) American businesses; foreign businesses.
(c) American consumers; American businesses.
(d) Foreign businesses; American consumers.
88. A weaker dollar benefits _____ and hurts _____
(a) American businesses; American consumers.
(b) American businesses; foreign consumers.
(c) American consumers; American businesses.
(d) Foreign businesses; American consumers.
89. From 1980 to early 1985 the dollar _____ in value, thereby benefiting American
(a) Appreciated; consumers.
(b) Appreciated; businesses.
(c) Depreciated; consumers.
(d) Depreciated; businesses.
90. Money is defined as
(a) Anything that is generally accepted in payment for goods and services or in the
repayment of debt.
(b) Bills of exchange.
(c) A riskless repository of spending power.
(e) Only (a) and (b) of the above.
UNIT-III:
Sources of Long-term, Medium term and Short-term Finance, Capital structure, Objectives of
Capital structure and Characteristics of an Optimal Capital structure.
There are four parts to the Statement of Cash Flows (or Cash Flow Statement):
1. Operating Activities
2. Investing Activities
3. Financing Activities
4. Supplemental
For each of the following items, indicate which part will be affected.
91. Proceeds from the sale of equipment used in the business
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
92. The Loss on the Sale of Equipment in Drill #2.
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
93. Declaration and payment of dividends on company's stock
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
94. Gain on the Sale of Automobile formerly used in the business
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
95. The proceeds from the sale of the automobile in Drill #5.
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
96. An increase in the balance in a retailer's Merchandise Inventory
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
97. An increase in the balance in Accounts Payable
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
98. Retirement of long-term Bonds Payable
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
99. Purchase of Treasury Stock (company's own stock)
(a)
(b)
(c)
(d)
Operating
Investing
Financing
Supplemental
100.
The purchase of a new delivery truck to be used in the business

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
101.
A decrease in the balance of Accounts Receivable

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
102.
An increase in Bonds Payable (a long-term liability)

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
A decrease in the current asset account Prepaid Insurance
(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
103.
104.
A decrease in the current liability Income Taxes Payable

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
105.
The proceeds from issuing additional Common Stock

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
106.
The amortization of the cost of an intangible asset

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
107.
The exchange/conversion of long-term bonds into common stock

(a) Operating
(b) Investing
(c) Financing
(d) Supplemental
For items 108 119 indicate whether they will have a positive or negative EFFECT ON
CASH.
A positive effect could also be thought of as a source of cash, an increase in cash, or a positive
amount on the cash flow statement.
A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative
amount on the cash flow statement.
Que.
No.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
Statement
An increase in the balance of Prepaid Insurance
A decrease in Supplies on hand
The proceeds from the sale of equipment formerly used in
the business
The Loss on the Sale of Equipment in the previous drill
An increase in the current liability Income Taxes Payable
A decrease in Accounts Payable
An increase in Accounts Receivable
An increase in the current liability Warranty Liability
Dividends declared and paid
Proceeds from the issuance of Preferred Stock
The Gain on the Sale of Equipment formerly used in the
business
An increase in the long-term asset Investment in Another
(a.)Positiv (b.)Negativ
e
e
Company
120.
Another name of financial Leverage

(a) Financial gearing
(b) Trading on Equity
(c) Both
(d) None
121.
Which firm is said to be Levered Firm

(a) Firm; finances assets by both equity & debt
(b) Firm; finances assets by equity alone
(c) Firm; finances asses by debt alone
(d) None of these
122.
Which firm is said to be Unlevered Firm

(a) Firm; finances assets by both equity & debt
(b) Firm; finances assets by equity alone
(c) Firm; finances asses by debt alone
(d) None of these
123. Which theory assumes that managers have more information about their firm than
investors
(a) M & M Theory
(b) Pecking Order Theory
(c) Traditional Theory
(d) Modern Theory
124.
Cost of floating a debt is less than cost of floating an equity issue

(a) True
(b) False
(c) May be
UNIT-IV:
Concept of cost of capital, Importance of Cost of capital in managerial decision making,
Computation of cost of capital, Concept of average cost of capital.
125.
Higher operating leverage is related to the use of additional __________.

(a) Fixed costs
(b) Variable costs
(c) Debt financing
(d) Common equity financing
126.
Lower financial leverage is related to the use of additional __________.

(a) Fixed costs
(b) Variable costs
(c) Debt financing
(d) Common equity financing
127. Which of the following formulas represents a correct calculation of the degree of
operating leverage?
(a) (Q - QBE)/Q
(b) (EBIT) / (EBIT - FC)
(c) [Q(P-V) + FC] / [Q(P-V) ]
(d) [Q(P-V)] / [Q(P-V) - FC]
128. Which of the following formulas represents the correct calculation of the degree of
financial leverage?
(a) [ NI + T + I ] / [ NI - I - PD/(1-T) ]
(b) EBIT / [ EBIT - I - PD/(1-T) ]
(c) EBIT / [ NI - I - PD/(1-T) ]
(d) All of the above are correct methods to calculate the degree of financial leverage
(DFL).
129. A firm is considering three different financing alternatives -- debt, preferred stock,
and common equity. The firm has created an EBIT-EPS chart that shows several
indifference points. What does each indifference point show the firm?
(a) The level of EBIT that generates identical EPS under two alternative financing plans.
(b) The level of sales that generates identical EBIT and EPS figures.
(c) It shows the level of EBIT and EPS at which DFL is identical under two alternative
financing plans.
(d) None of the above.
130.
Which of the following statements is correct?

(a) The coefficient of variation of EBIT, CVEBIT, is a measure of relative financial risk.
(b) The coefficient of variation of EPS, CVEPS, is a measure of relative total firm risk.
(c) Total firm risk equals business risk times financial risk.
(d) A relative measure of relative business risk equals the difference, CVEPS - CVEBIT.
131. The maximum amount of debt (and other fixed-charge financing) that a firm can
adequately service is referred to as the __________.
(a) Debt capacity
(b) Debt-service burden
(c) Adequacy capacity
(d) Fixed-charge burden
132. The cash required during a specific period to meet interest expenses and principal
payments is referred to as the:
(a) Debt capacity.
(b) Debt-service burden.
(c) Adequacy capacity.
(d) Fixed-charge burden.
133.
Which of the following ratings apply to an investment grade quality security?

(a) BBB rating by Standard and Poor's.
(b) Ba rating by Moody's.
(c) B rating by Standard and Poor's.
(d) Both the first and second answers are ratings that are considered investment grade.
134.
Which of the following costs would be considered a fixed cost?
(a)
(b)
(c)
(d)
Raw materials.
Depreciation.
Bad-debt losses.
Production labor.
135. The key sources of value (earning an excess return) for a company can be attributed
primarily to __________.
(a) competitive advantage and access to capital
(b) quality management and industry attractiveness
(c) access to capital and quality management
(d) industry attractiveness and competitive advantage
136. The overall (weighted average) cost of capital is composed of a weighted average of
__________.
(a) The cost of common equity and the cost of debt
(b) The cost of common equity and the cost of preferred stock
(c) The cost of preferred stock and the cost of debt
(d) The cost of common equity, the cost of preferred stock, and the cost of debt
137. For which of the following costs is it generally necessary to apply a tax adjustment
to a yield measure?
(a) Cost of debt.
(b) Cost of preferred stock.
(c) Cost of common equity.
(d) Cost of retained earnings.
138. Which of the following is not a recognized approach for determining the cost of
equity?
(a) Dividend discount model approach.
(b) Before-tax cost of preferred stock plus risk premium approach.
(c) Capital-asset pricing model approach.
(d) Before-tax cost of debt plus risk premium approach.
139.
How is Economic Value Added (EVA) calculated?

(a) It is the difference between the market value of the firm and the book value of equity.
(b) It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital
charge.
(c) It is the net income of the firm less a dollar cost that equals the weighted average cost
of capital multiplied by the book value of liabilities and equities.
(d) None of the above are
140.
What is the difference between economic profit and accounting profit?
(a) Economic profit includes a charge for all providers of capital while accounting profit
includes only a charge for debt.
(b) Economic profit covers the profit over the life of the firm, while accounting profit
only covers the most recent accounting period.
(c) Accounting profit is based on current accepted accounting rules while economic
profit is based on cash flows.
141. What is the idea behind project-specific required rates of return for a firm or
division?
(a) Different projects should have different required rates of return because they are not
alike with respect to risk.
(b) Each firm should have a different required rate of return because firms are not alike
with respect to risk and have been created historically by projects taken that differ
with regards to risk.
(c) A division of the firm will always have a required rate of return different from the
firm's overall weighted average cost of capital because the risk of the division always
differs from that of the firm.
142.
What is meant by using proxy firms with the CAPM model?

(a) A proxy firm is one that uses the capital-asset pricing (CAPM) model as its primary
evaluation tool in determining project selection or rejection.
(b) A proxy firm is one that uses the weighted average cost of capital (WACC) as its
primary evaluation tool in determining project selection or rejection.
(c) A proxy firm is a privately held firm in the same industry as the firm.
(d) A proxy firm is a publicly traded firm, which may be entirely engaged in a business
that is nearly identical to the project, used to estimate the beta for a project.
143. A company that has more than half of its voting shares owned by another company
is generally referred to as a __________ of the other firm.
(a) joint-venture partner
(b) proxy
(c) subsidiary
(d) division
144.
Which of the following is correct regarding the capital component costs for a group?
(a) The component cost of common equity is based on the firm's component cost of
common equity.
(b) The component cost of debt is based on the firm's component cost of debt.
(c) Both of the above answers are
(d) All of the above answers are
145.
The adjusted present value (APV) is best described as being __________.

(a) Equal to the discounted value of all cash flows after the discount rate is adjusted
upward for additional risk
(b) Equal to the discounted value of operating cash flows plus the present value of any
tax-shield benefits less any flotation costs
(c) Equal to the discounted value of operating cash flows plus the present value of any
tax-shield benefits
(d) Equal to the discounted value of operating cash flows less any flotation costs
146. Assume management is looking at a set of possible projects with regards to their
expected NPV, standard deviation, and management's risk attitude. The firm should
attempt to take the set of projects __________.
(a) That fall on the lowest indifference curve
(b) That fall on the highest indifference curve
(c) Where the choice is on the indifference curve that is the farthest to the southeast
(d) That has the lowest standard deviation
147. We can use the CAPM and a proxy firm to estimate the required rate of return on a
project. Sometimes, however, it is necessary to adjust the beta of the proxy company for
differences in capital structure between our firm and the proxy firm. Assuming that the
proxy firm has long-term debt in its capital structure, the unlevered beta of the proxy
firm will be __________ its measured (levered) beta.
(a) Lower than
(b) Higher than
(c) Higher or lower than
(d) Identical to
148. Which among the following statements is not correct about costs relevance in
investment decisions;
(a) Historical cost that was incurred in the past in raising capital is relevant.
(b) Marginal cost is relevant cost in investment decision making.
(c) Both are incorrect.
(d) None
149.
What is the other name of marginal cost in concept cost of capital
(a)
(b)
(c)
(d)
Historical Cost
Future cost
Variable cost
B&C
UNIT-V:
Definition and importance of Capital Budgeting, Methods for evaluating the Capital investment
proposals, Time value of money
150. In
flows.
(a)
(b)
(c)
(d)
proper capital budgeting analysis we evaluate incremental __________ cash

Accounting
Operating
Before-tax
Financing
151. The estimated benefits from a capital budgeting project are expected as cash flows
rather than income flows because __________.
(a) It is more difficult to calculate income flows than cash flows
(b) It is cash, not accounting income, that is central to the firm's capital budgeting
decision
(c) This is required by the accounting profession
(d) This is required by the internal revenue service (irs) and enforced through filings with
the securities and exchange commission (sec)
The IRS and the SEC are not involved with the appropriate determination of the flows from a
project for capital budgeting purposes. The IRS is concerned with tax collection and the SEC
with securities laws.
152.
What is the depreciable basis?

(a) It is the cost of capital (both debt and equity) that can be depreciated and the cost
spread over multiple years of the project.
(b) It is the cost of debt (interest) that can be depreciated and the cost spread over
multiple years of the project.
(c) It is the fully installed cost of an asset that taxing authorities allow to be written off
for tax purposes.
(d) It is the cost of all items expended prior to the decision to accept a project and are
added to the cost of the asset and written off for tax purposes.
153. In estimating "after-tax incremental operating cash flows" for a project, you should
include all of the following except __________.
(a) Changes in costs due to a general appreciation in those costs
(b) The amount (net of taxes) that we could realize from selling a currently unused
building of ours that we intend to use for our project
(c) Changes in working capital resulting from the project, net of spontaneous changes in
current liabilities
(d) Costs that have previously been incurred that are unrecoverable
154.
All of the following influence capital budgeting cash flows except __________.
(a) Choice of depreciation method for tax purposes
(b) Economic length of the project
(c) Projected sales (revenues) for the project
(d) Sunk costs of the project
155. The basic capital budgeting principles involved in determining relevant after-tax
incremental operating cash flows require us to __________.
(a) Include sunk costs, but ignore opportunity costs
(b) Include opportunity costs, but ignore sunk costs
(c) Ignore both opportunity costs and sunk costs
(d) Include both opportunity and sunk costs
156. Place the following items in the proper order of completion regarding the capital
budgeting process.
I.
Perform a post-audit for completed projects;
II.
Generate project proposals;
III.
Estimate appropriate cash flows;
IV. Select value-maximizing projects;
V. Evaluate projects.
(a)
(b)
(c)
(d)
II, V, III, IV, & I.

III, II, V, IV, & I.
II, III, V, IV, & I.
II, III, IV, V, & I.
157. The basic capital budgeting principles involved in determining relevant after-tax
incremental operating cash flows require us to __________.
(a) Include effects of inflation, but ignore project-driven changes in working capital net
of spontaneous changes in current liabilities
(b) Include effects of inflation, and include project-driven changes in working capital net
(c) Ignore both the effects of inflation and project-driven changes in working capital net
(d) Ignore the effects of inflation, but include project-driven changes in working capital
net of spontaneous changes in current liabilities
158. Interest payments, principal payments, and cash dividends are __________ the
typical budgeting cash-flow analysis because they are ________ flows.
(a) Included in; financing
(b) Excluded from; financing
(c) Included in; operating
(d) Excluded from; operating
159.
What is an example of a capitalized expenditure?

(a) Funds spent last year to renovate a building that could be used to house a new project
that is currently being evaluated.
(b) Installation costs necessary to use a machine that was just purchased.
(c) The necessary increase in inventories needed to support a project that is currently
being implemented.
(d) All of the above are examples of capitalized expenditures.
160. In regards to the sale or disposal of a depreciable asset, "recapture of depreciation"

is __________.
(a) Any amount realized in excess of its depreciated (tax) book value
(b) Any amount realized in excess of its original depreciable basis
(c) Any amount realized in excess of its depreciated (tax) book value, but less than its
original depreciable basis
(d) Any amount realized from the sale of the asset
161. For a corporation, what is the maximum federal tax that applies to any gains on the
sale of a depreciable asset above its depreciable basis?
(a) The corporation's marginal tax rate.
(b) 39%.
(c) 35%.
162. Under the MACRS system, and employing the half-year convention, a piece of
machinery falling in the 10-year property class would generally be depreciated over
__________.
(a) Fewer than 10 recovery years
(b) 10 recovery years
(c) 10.5 recovery years

(d) 11 recovery years
The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation
system in the United States. Under this system, the capitalized cost (basis) of tangible property
is recovered over a specified life by annual deductions for depreciation.
163. Which of the following is least likely to be part of the calculation of the terminalyear incremental net cash flow for an energy-related expansion project?
(a) An initial working capital investment is now returned as an additional cash inflow.
(b) Disposal/reclamation costs.
(c) Capitalized expenditures.
(d) Salvage value of any sold or disposed assets.
164.
A profitability index (PI) of .92 for a project means that __________.

(a) The project's costs (cash outlay) are (is) less than the present value of the project's
benefits
(b) The project's npv is greater than zero
(c) The project's npv is greater than 1
(d) The project returns 92 cents in present value for each current dollar invested (cost)
165.
Which of the following statements is incorrect regarding a normal project?

(a) If the NPV of a project is greater than 0, then its PI will exceed 1.
(b) If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will
be less than 0.
(c) If the PI of a project equals 0, then the project's initial cash outflow equals the PV of
its cash flows.
(d) If the IRR of a project is greater than the discount rate, k, then its PI will be greater
than 1.
A discount rate that is greater than the IRR implies a negative NPV project if it is a normal
project.
166. Assume that a firm has accurately calculated the net cash flows relating to two
mutually exclusive investment proposals. If the net present value of both proposals
exceed zero and the firm is not under the constraint of capital rationing, then the firm
should __________.
(a) Calculate the IRRs of these investments to be certain that the irrs are greater than the
cost of capital
(b) Compare the profitability index of these investments to those of other possible
investments
(c) Calculate the payback periods to make certain that the initial cash outlays can be
recovered within a appropriate period of time
(d) Accept the proposal that has the largest NPV since the goal of the firm is to maximize
shareholder wealth and, since the projects are mutually exclusive, we can only take
one
The maximizing goal of the firm suggests choosing the proposal with the largest NPV since
the projects are mutually exclusive (i.e., we can only take one).
167. What do we call a formal comparison of the actual costs and benefits of a project
with original estimates?
(a) Post-completion audit.
(b) Feedback audit.
(c) Cost-benefit analysis.
(d) Business scorecard report.
168. A project whose acceptance does not prevent or require the acceptance of one or
more alternative projects is referred to as __________.
(a) A mutually exclusive project
(b) An independent project
(c) A dependent project
(d) A contingent project
169. 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)
170. 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.
171. Which of the following is not a potential for a ranking problem between two
mutually exclusive projects?
(a) The projects have unequal lives that differ by several years.
(b) The costs of the two projects differ by nearly 30%.
(c) The two projects have cash flow patterns that differ dramatically.
(d) One of the mutually exclusive projects involves replacement while the other involves
expansion.
172. The discount rate associated with the single intersection of the NPV profiles of two
mutually exclusive projects represents __________.
(a) Fisher's rate of intersection
(b) The rate at which the projects have identical profitability indexes
(c) Gordon's rate of return
(d) The minimum acceptable rate of return for each project
173.
An NPV profile for a single project __________.

(a) Displays Fisher's rate of intersection
(b) Is generally upward sloping
(c) Displays the expected NPV for a project at a variety of different discount rates
(d) None of the above answers are
174. A project whose acceptance precludes the acceptance of one or more alternative
projects is referred to as __________.
(a) A mutually exclusive project.
(b) An independent project.
(c) A dependent project.
(d) A contingent project.
175. A project whose acceptance requires the acceptance of one or more alternative
projects is referred to as __________.
(a) A mutually exclusive project
(b) An independent project
(c) A dependent project
(d) None of the above are
176. The discount rate used to determine the present value of a stream of expected future
cash flows is referred to as the __________.
(a) Net operating income
(b) Capitalization rate
(c) Capital structure
(d) Yield on the company's market value of common equity
177. The traditional approach towards the valuation of a company assumes that
__________.
(a) The cost of capital is independent of the capital structure of the firm
(b) The firm maintains constant risk regardless of the type of financing employed
(c) There exists no optimal capital structure
(d) That management can increase the total value of the firm through the judicious use of
financial leverage
178. The presence of which one of the following costs is not used as a major argument
against the M&M arbitrage process?
(a) Bankruptcy costs.
(b) Agency costs.
(c) Transactions costs.
(d) Insurance costs.
179. 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, ki, 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.
180.
Which of the following statements regarding the total value principle is incorrect?
(a) The total value principle allows for corporate borrowing and excludes personal
borrowings via arbitrage.
(b) The total value principle must hold or else arbitrage will take place and then its
presence will cause the value to remain constant regardless of the capital structure.
(c) The total value does not change because the underlying profit and risk of the firm are
with its operations, which do not change when the financing changes.
(d) Modigliani and Miller, in their original position, advocate that the total value of the
firm is identical regardless of the financing mix.
181. Allowing for bankruptcy costs and an increasing probability of bankruptcy with
increasing financial leverage, we should expect __________ than would be the case
without bankruptcy costs.
(a) The premium for business risk to be higher
(b) The premium for business risk to be lower
(c) The premium for financial risk should rise by less
(d) The premium for financial risk should rise by more
182. The existence of __________ on the balance sheet generates tax advantages that
directly influence the capital structure of the firm.
(a) A large proportion of fixed assets
(b) Long-term debt
(c) Retained earnings
(d) All of the above answers are
183.
As the amount of __________ increases the present value of __________.

(a) Debt; net tax-shield benefits of debt increases
(b) Common equity; bankruptcy and agency costs increase
(c) Debt; net tax-shield benefits of debt decrease
(d) Common equity; net tax-shield benefits of debt decrease.
184. When the manager of a firm uses capital structure changes to convey information
about the profitability and risk of the firm, then the manager is engaging in
__________.
(a) Financial signaling
(b) Informational symmetry
(c) The net operating income approach to capital structure
(d) The traditional approach to capital structure
185. In an M&M world -- but, with taxes -- and where r is the interest rate, B is the value
of perpetual debt, and tc is the corporate tax rate, the present value of tax-shield
benefits of debt would be equal to __________.
(a) ( r ) ( B ) ( tc )
(b) ( r ) ( B )
(c) ( B ) ( tc )
(d) ( r ) ( B ) ( tc ) / ( 1 + r )
186. __________ costs are associated with monitoring management to ensure that it
behaves properly.
(a) Agency
(b) Behavioral
(c) Bankruptcy
(d) Managerial
187. __________ costs are those associated with engaging in various business transactions
that may cause the firm to not have the exact optimal capital structure.
(a) Agency
(b) Transaction
(c) Bankruptcy
(d) Managerial
188. Assume that the market imperfection of taxes exists. If the corporate tax rate were
increased under new legislation, the use of debt would __________.
(a) Rise
(b) Fall
(c) Not be impacted
(d) There is not sufficient information provided to determine the impact.
189. Assume that the economy has unexpectedly and immediately gone into a recession.
Which of the following firms that are in the same industry and face the same business
risks would most likely see the largest increase in the present value of bankruptcy
costs?
(a) A firm with the highest proportion of common equity financing.
(b) A firm with the highest proportion of debt financing.
(c) A firm with the lowest proportion of preferred stock financing.
(d) All firms will see an identical rise in the present value of bankruptcy costs since the
business risk is the same.
190. In general, what would happen to the debt ratio of a firm if it always kept an
optimal capital structure and if:
1. The government changed tax laws that allowed the deduction of dividend
financing and
2. Excluded the deduction of interest expense?
(a) The debt ratio would fall.
(b) The debt ratio would rise.
(c) The debt ratio would not change.
191. Which term would most likely be associated with the phrase "actions speak louder
than words?"
(a) Incentive signaling.
(b) Shareholder wealth maximization.
(c) Financial signaling.
(d) Optimal capital structure.
192. Which of the following is not something that you would consider when evaluating
the optimal capital structure?
(a) Agency Costs.
(b) EBIT-EPS Analysis.
(c) Taxes.
(d) Security Rating.
(e) All of the above are considered when determining the optimal capital structure.
(f) Neither the second nor fourth answer is correct.
193.
To increase a given future value, the discount rate should be adjusted __________.
(a)
(b)
(c)
(d)
upward
downward
first upward and then downward
None of the above answers are correct; you should use PVIF.
194. Interest paid (earned) on only the original principal borrowed (lent) is often
referred to as __________.
(a) present value
(b) simple interest
(c) future value
(d) compound interest
195. Interest paid (earned) on both the original principal borrowed (lent) and previous
interest earned is often referred to as __________.
(a) present value
(b) simple interest
(c) future value
(d) compound interest
196.
Which of the following statements is most correct?

(a) The future value of an annuity due is greater than an otherwise identical ordinary
annuity.
(b) A reduction in the discount rate will increase the future value of an otherwise
identical cash flow stream.
(c) Continuous compounding will result in a higher present value relative to an otherwise
identical investment that is compounded monthly at the same nominal rate.
(d) The FVIFA (i%, N periods) equals the sum of the PVIF(i%, n) for n=1 to N periods.
True/false Type Questions.
Que. No
197.
198.
199.
200.
201.
202.
203.
204.
205.
206.
207.
Statement
(a) True
The stream of cash flows produced by the project directly

influences the value of a capital expansion project.
Capital budgeting is the process of identifying,
analyzing, and selecting investment projects whose cash
flows will all be received beyond one year.
In the initial years of a project the use of an accelerated
form of depreciation, like Modified Cost Recovery
System, increases taxable income relative to the use of
the straight-line method.
Cash flow calculations require adding back depreciation
to net income since it is a non-cash expense.
A capital investment involves making a future cash
outlay in the expectation of current benefits.
For a typical project, increasing the discount rate
decreases the project's value.
The net present value of a project generally increases as
the required rate of return decreases.
Capital rationing occurs when the firm limits funds
available for capital budgeting projects.
A mutually exclusive project is one whose acceptance
precludes the acceptance of alternative projects.
Use of the IRR method implicitly assumes that the
project's cash inflows are reinvested at the internal rate of
return.
An analyst is evaluating the impact upon NPV by
changing two variables (-/+10%, -/+5%, base case) at a
time and placing the results in a two dimensional table.
(b)False
208.
209.
210.
211.
212.
213.
214.
215.
216.
217.
218.
219.
220.
221.
222.
This represents one type of sensitivity analysis.

According to the NOI approach; a firm cannot increase
its total valuation using financial leverage.
With corporate taxes, an unfavorable impact on a
company's total firm valuation usually occurs when less
financial leverage is used.
Modigliani and Miller, (M&M) in their original position
advocate that the relationship between financial leverage
and the cost of capital is explained by the traditional
approach to capital structure and valuation.
The higher a firm's cost of capital, ko, the higher the total
valuation of the firm.
Recapitalization occurs when the firm alters its capital
structure.
Increasing the value of the firm through different types of
financing is the basis behind looking at the optimal
capital structure.
According to Modigliani and Miller, the investor is
indifferent between receiving dividends and having
earnings retained by the firm.
Empirical results on financial signaling indicate that an
increase (a decrease) in dividends leads to a positive
(negative) excess common stock return.
Many states prohibit the payment of dividends that
impair capital.
An investor that had 2,000 shares of common stock now

has 1,000 shares. The investor has not sold any shares.
The investor has just been involved with a regular stock
split.
Stock repurchases have a positive signaling effect.
When the dollar falls in value in relation to a foreign
currency, the current assets and current liabilities of a
foreign subsidiary decrease in dollar value.
A letter of credit is an agreement by a bank to honor a
draft drawn on the importer.
Purchasing-power parity (PPP) implies that a
standardized good should sell for the same price
internationally after adjusting for inflation rates.
Forfaiting is a means of financing foreign trade that
resembles export factoring where medium- to long-term
223.
224.
225.
226.
227.
228.
229.
230.
231.
232.
233.
234.
235.
236.
237.
238.
239.
240.
241.
242.
export receivables are sold without recourse to a

financial institution.
Additional diversification benefits do not exist for a firm
attempting to reduce its total risk by investing in more
than one country since foreign projects (products) are
naturally identical to domestic projects (products).
A DOL must be greater than or equal to zero.
The EBIT-EPS break-even analysis does not consider
differences in risk.
The judgments of investment analysts are important for
the firm to consider since they understand and influence
the financial markets.
The debt ratio is a perfect measure to examine financial
risk.
A business that has some fixed operating costs but has no
debt of any type and no preferred stock can be
considered risk-free.
A company can be viewed as a collection of projects.
The firm should use its weighted average cost of capital
(WACC) to discount the cash flows of all projects.
The firm beta is directly influenced by financial leverage.
The WACC is a general case of the APV.
A good proxy for the expected return on the market,
Rmarket, is the U.S. Treasury bill rate.
The firm providing trade credit will always bear its cost.
The most common type of spontaneous financing is trade
credit.
Two different firms get the same size short-term loans,
for identical purposes and with identical length. One loan
is secured and one loan is unsecured. The interest rate on
the secured short-term loan is probably higher than the
interest rate on an unsecured short-term loan.
As sales decrease, labor costs and thus accrued wages
generally decrease almost proportionally.
Money-market credit and short-term bank loans are
forms of spontaneous (or external) short-term financing.
Accounts receivable and inventory are the principal
assets used to secure long-term business loans.
Capital budgeting is a responsibility of the Treasurer.
Cash management is a responsibility of the Controller.
The asset management decision involves determining the
optimal firm size and the assets that should be acquired
243.
244.
245.
246.
247.
248.
249.
250.
or eliminated.
The financing decision involves determining how the
assets will be financed with regards to the type and mix
as well as the best dividend policy.
The greater the ownership percentage of managers, then
the more likely the managers will behave in a
shareholder wealth maximizing behavior.
Corporate governance refers to the system by which the
firm hires and manages employees.
The present value interest factor of an (ordinary) annuity
(PVIFA) is the reciprocal of the future value interest
factor of an (ordinary) annuity (FVIFA).
If you would like to double your money in 6 years, the
approximate annual return you need is 12 percent (Rule
of 72).
A savings account at Bank A pays 6.2 percent interest,
compounded annually. Bank B's savings account pays 6
percent compounded semiannually. Bank B is paying less
total interest each year.
All other things being equal, I'd rather have $10,000 in
10 years than to receive $10,000 today.
The rate of interest is used to express the time value of
money.
ANSWERS SHEET FOR 250 MCQs ON BASICS OF FINANCE

Sr. No.
1.
2.
Answers
B
D
Sr. No.
51.
52.
Answers
B
D
Sr. No.
1.
2.
Answers
A
C
Sr. No.
51.
52.
Answers
B
C
Sr. No.
1.
2.
Answers
B
A
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21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
C
A
C
C
C
D
B
A
A
D
D
B
D
D
A
D
B
B
B
C
B
C
B
B
C
B
B
C
C
C
C
D
B
A
C
B
C
A
B
B
B
D
D
B
D
A
C
D
References
1. Books;
53.
54.
55.
56.
57.
58.
59.
60
61.
62.
63.
64.
65.
66.
67.
68.
69.
70
71.
72.
73.
74.
75.
76.
77.
78.
79.
80
81.
82.
83.
84.
85.
86.
87.
88.
89.
90
91.
92.
93.
94.
95.
96.
97.
98.
99.
100
B
A
B
D
A
A
C
D
A
A
B
B
B
C
B
C
E
D
D
D
C
C
D
A
D
A
B
C
D
D
D
A
C
A
C
A
A
A
B
A
C
A
B
A
A
C
C
B
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
A
A
C
A
D
B
A
A
A
A
B
B
A
B
A
B
B
C
A
B
B
A
A
D
D
B
A
B
A
B
A
B
D
D
A
B
B
A
A
D
C
B
B
B
A
A
B
B
53.
54.
55.
56.
57.
58.
59.
60
61.
62.
63.
64.
65.
66.
67.
68.
69.
70
71.
72.
73.
74.
75.
76.
77.
78.
79.
80
81.
82.
83.
84.
85.
86.
87.
88.
89.
90
91.
92.
93.
94.
95.
96.
97.
98.
99.
100
D
D
B
C
B
B
B
C
C
D
C
D
C
D
A
B
A
B
D
A
C
A
C
B
D
D
C
A
D
B
A
A
C
A
B
A
B
A
C
E
A
B
D
A
A
A
B
A
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
A
A
A
A
A
A
A
B
B
A
A
A
A
A
B
A
B
A
B
A
B
B
A
A
B
B
A
B
A
B
B
B
A
A
A
B
B
A
B
B
A
A
B
B
A
A
B
A
(a) Financial Management, 9th edition, I.M Pandey, Vikas Publishing House
Pvt. Ltd.
(b) Fundamentals of Financial Management, 12th edition, James C. Van
Horne, John M. Wachowicz Jr., Pearson Publication
2. Websites
(a) http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/66
78/1709602.cw/index.html
(b) http://www.scribd.com/doc/28547233/Financial-Management-MCQs

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Multiple Choice

Institute of Management Studies,

Multiple Choice Questions

Subject: Basics of Finance (mba-831)

6. Calculate the gross profit /loss if:

(b) Loss Rs. 20, 000

Cost of goods sold

14. Which of the following is not the same as the others?

(d) None of the given options

(b) Involves a Rs. 12,000 Cash payment

35. Given the following, what is the amount of Capital?

(d) The balance sheet

40. Which of the following statements is TRUE?

The amount of cash to liquidate

45. Rent receivable is our:

46. Salaries and wages are:

$ 7,000 increase in cash

$9,850 increase in inventories.

69. The _________ is the fraction of earnings reinvested in the firm.

70. The Gordon model

74. The bond markets are important because

87. A stronger dollar benefits _____ and hurts _____

The purchase of a new delivery truck to be used in the business

A decrease in the balance of Accounts Receivable

An increase in Bonds Payable (a long-term liability)

A decrease in the current liability Income Taxes Payable

The proceeds from issuing additional Common Stock

The amortization of the cost of an intangible asset

The exchange/conversion of long-term bonds into common stock

Another name of financial Leverage

Which firm is said to be Levered Firm

Which firm is said to be Unlevered Firm

Cost of floating a debt is less than cost of floating an equity issue

Higher operating leverage is related to the use of additional __________.

Lower financial leverage is related to the use of additional __________.

Which of the following statements is correct?

Which of the following ratings apply to an investment grade quality security?

Which of the following costs would be considered a fixed cost?

How is Economic Value Added (EVA) calculated?

What is the difference between economic profit and accounting profit?

What is meant by using proxy firms with the CAPM model?

(d) All of the above answers are

The adjusted present value (APV) is best described as being __________.

What is the other name of marginal cost in concept cost of capital

proper capital budgeting analysis we evaluate incremental __________ cash

What is the depreciable basis?

II, V, III, IV, & I.

What is an example of a capitalized expenditure?

160. In regards to the sale or disposal of a depreciable asset, "recapture of depreciation"

(c) 10.5 recovery years

A profitability index (PI) of .92 for a project means that __________.

Which of the following statements is incorrect regarding a normal project?

An NPV profile for a single project __________.

As the amount of __________ increases the present value of __________.

Which of the following statements is most correct?

True/false Type Questions.

The stream of cash flows produced by the project directly

This represents one type of sensitivity analysis.

An investor that had 2,000 shares of common stock now

export receivables are sold without recourse to a

ANSWERS SHEET FOR 250 MCQs ON BASICS OF FINANCE

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MCQ's of Basics of Finance MBA 831

MCQ's of Basics of Finance MBA 831

87. A stronger dollar benefits _ and hurts _

As the amount of increases the present value of .