All Free Management Sciences MCQs with Answers

• A. Expansion
• B. Salvages
• C. Taxation
• D. Discounts

Explanation: Depreciation is a non-cash expense, but it reduces taxable income and therefore lowers the tax payment.

• A. Inflation effects
• B. Opportunity effects
• C. Equity effects
• D. Debt effects

Explanation: Nominal interest rates and nominal cash flows include the effect of inflation, so they must be used consistently in project evaluation.

• A. Irrelevant cash flow
• B. Relevant cash flow
• C. Incremental cash flow
• D. Decrease cash flow

Explanation: The cash-flow change caused specifically by accepting and implementing a project is its incremental cash flow.

• A. Occurred cost
• B. Mean cost
• C. Opportunity costs
• D. Weighted cost

Explanation: The benefit sacrificed by using an owned asset in a project instead of its next-best alternative use is an opportunity cost.

• A. Mature expected return rate
• B. Lower than expected return rate
• C. Higher than expected return rate
• D. Equal to expected return rate

Explanation: With zero default probability and no call, the bond's promised cash flows will be received as scheduled, so its yield to maturity equals…

• A. Going rate of return
• B. Yield
• C. Earning rate
• D. Both A and B

Explanation: The required rate used to discount a bond's future cash flows is its yield, commonly called the going or market rate of return.

• A. Artificial provision
• B. Call provision
• C. Redeem provision
• D. Original provision

Explanation: A call provision gives the issuing corporation the right to redeem a bond before its maturity date.

• A. Increased
• B. Decreased
• C. Earned
• D. Never changed

Explanation: Bond prices and market interest rates move inversely: when the market rate rises, the bond's fixed coupon payments become less attractive…

• A. Borrowed bond
• B. Purchasing power bond
• C. Surplus bond
• D. Deficit bond

Explanation: A purchasing-power bond adjusts its payments or principal according to an inflation index, helping preserve the investor's real purchasing…

• A. Debt cost
• B. Relevant cost
• C. Borrowing cost
• D. Embedded cost

Explanation: The marginal cost of new debt is an incremental financing cost, so it is relevant to the planning decision.

• A. Expected risk
• B. Beta risk
• C. Industry risk
• D. Returning risk

Explanation: A well-diversified stockholder is concerned mainly with systematic risk, which reflects a project's sensitivity to market movements and is…

• A. Expected risk
• B. Stand-alone risk
• C. Variable risk
• D. Returning risk

Explanation: Stand-alone risk is the variability of a project's expected returns when the project is considered by itself.

• A. Market cash flow
• B. Future cash flow method
• C. Discounted cash flow method
• D. Present cash flow method

Explanation: The discounted cash flow method estimates the cost of equity by equating the present value of expected future shareholder cash flows with…

• A. Investors equity
• B. Market value of equity
• C. Book value of equity
• D. Stock equity

Explanation: WACC normally uses market-value weights because they reflect the current economic value of each financing source.

• A. Historical beta
• B. Market beta
• C. Coefficient beta
• D. Riskier beta

Explanation: A beta estimated by regressing a security's historical returns against market returns is called historical beta.

• A. Component cost is used
• B. Common stock value is used
• C. Cost of capital is used
• D. Asset valuation is used

Explanation: Capital budgeting decisions are often evaluated using the weighted average cost of capital as the required return or discount rate.

• A. Stock market
• B. Investors
• C. Capitalist
• D. Exchange index

Explanation: The components of WACC represent funds supplied by investors and lenders, such as debt holders and equity shareholders.

• A. Term structure
• B. Market premium
• C. Risk premium
• D. Cost of debt

Explanation: The interest rate a firm must pay on newly issued debt represents its pre-tax cost of debt.

• A. Estimate future growth
• B. Estimate option future value
• C. Estimate option present value
• D. Estimate growth ratio

Explanation: Analyst forecasts, retention-growth models and historical growth rates are techniques for estimating a company’s future growth.

• A. Debt rate
• B. Investment return
• C. Interest rate
• D. Cost of equity

Explanation: Cost of equity is the return shareholders require, combining expected dividends with expected capital appreciation.