Free Business Finance MCQs with Answers
975 Business Finance MCQs from Management Sciences, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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- A. 0.5:1
- B. 1:1
- C. 2:1
- D. 2.5:1
Explanation: The current ratio is calculated as current assets divided by current liabilities. Thus, Rs. 500,000 divided by Rs.
Correct answer: 2:1- A. Rs. 900
- B. Rs. 1,000
- C. Rs. 1,010
- D. Rs. 1,210
Explanation: Present value equals future value divided by one plus the discount rate. Therefore, Rs. 1,100 divided by 1.10 equals Rs. 1,000. Rs.
Correct answer: Rs. 1,000- A. Negative Rs. 41,000
- B. Zero
- C. Positive Rs. 41,000
- D. Positive Rs. 100,000
Explanation: The present value of the inflows is approximately Rs. 1,041,000, calculated by discounting each Rs. 600,000 receipt at 10%.
Correct answer: Positive Rs. 41,000- A. Fixed assets minus long-term debt
- B. Current assets minus current liabilities
- C. Total assets minus total liabilities
- D. Current liabilities minus current assets
Explanation: Net working capital equals current assets minus current liabilities. It represents the short-term funds available to support routine…
Correct answer: Current assets minus current liabilities- A. Bank overdraft
- B. Issue of ordinary shares
- C. Retained earnings
- D. Trade credit
Explanation: Retained earnings are profits kept in the business rather than distributed to owners, so they are an internal source of finance.
Correct answer: Retained earnings- A. Debt eliminates operating expenses
- B. Interest and principal payments are contractual obligations
- C. Debt always lowers the company’s sales
- D. Interest payments increase ordinary shareholders’ control
Explanation: Debt requires scheduled interest and principal payments even when profits are low.
Correct answer: Interest and principal payments are contractual obligations- A. 7.2%
- B. 8.0%
- C. 9.6%
- D. 12.0%
Explanation: The after-tax cost of debt is 8% multiplied by 75%, or 6%. WACC is (60% × 12%) plus (40% × 6%), which equals 9.6%.
Correct answer: 9.6%- A. Working capital management
- B. Capital budgeting
- C. Dividend administration
- D. Cash collection control
Explanation: Capital budgeting evaluates long-term investments such as factories, machinery and major expansion projects.
Correct answer: Capital budgeting- A. To estimate future cash receipts and payments
- B. To calculate the depreciation of fixed assets
- C. To determine the market value of ordinary shares
- D. To record only completed credit sales
Explanation: A cash budget forecasts expected cash inflows, cash outflows and the resulting cash balance over a future period.
Correct answer: To estimate future cash receipts and payments- A. Increase funds tied up in inventory
- B. Release cash from working capital
- C. Increase the company’s long-term debt automatically
- D. Eliminate the need for trade credit
Explanation: A shorter inventory holding period means goods are converted into sales more quickly, reducing funds tied up in stock.
Correct answer: Release cash from working capital11. Which financial statement reports a company's assets, liabilities and equity at a specific date?
- A. Income statement
- B. Statement of cash flows
- C. Balance sheet
- D. Statement of retained earnings
Explanation: The balance sheet presents the accounting equation, showing assets, liabilities and equity at a particular date.
Correct answer: Balance sheet- A. 1.25:1
- B. 1.38:1
- C. 1.63:1
- D. 2.00:1
Explanation: Quick assets equal Rs. 800,000 minus Rs. 200,000 inventory and Rs. 50,000 prepaid expenses, giving Rs. 550,000.
Correct answer: 1.38:1- A. Rs. 300,000
- B. Rs. 310,000
- C. Rs. 331,000
- D. Rs. 364,000
Explanation: This is the future value of an ordinary annuity. The value is Rs. 100,000 multiplied by the future value annuity factor for three years at…
Correct answer: Rs. 331,000- A. 2.20 years
- B. 2.50 years
- C. 2.60 years
- D. 3.00 years
Explanation: After two years, the project recovers Rs. 350,000, leaving Rs. 150,000 to recover.
Correct answer: 2.60 years- A. Less than zero
- B. Equal to its initial cost
- C. Greater than or equal to zero
- D. Greater than its accounting profit
Explanation: An NPV of zero means the project earns exactly the required return, while a positive NPV adds value to the firm.
Correct answer: Greater than or equal to zero16. Which source of short-term finance allows a business to buy goods now and pay the supplier later?
- A. Trade credit
- B. Preference shares
- C. Debenture finance
- D. Retained earnings
Explanation: Trade credit arises when suppliers allow the buyer a period to pay for purchased goods or services.
Correct answer: Trade credit17. A company with high operating leverage will generally experience which effect when sales change?
- A. A larger percentage change in EBIT
- B. A smaller percentage change in EBIT
- C. No change in fixed operating cost
- D. A direct fall in financial risk
Explanation: Operating leverage results from fixed operating costs such as rent and depreciation.
Correct answer: A larger percentage change in EBIT- A. Financing permanent assets with long-term funds
- B. Financing some permanent current assets with short-term funds
- C. Holding large cash balances throughout the year
- D. Matching every asset with equity finance
Explanation: An aggressive financing policy uses more short-term finance, sometimes funding part of permanent current assets with short-term…
Correct answer: Financing some permanent current assets with short-term funds- A. New shares, debt, retained earnings
- B. Debt, new shares, retained earnings
- C. Retained earnings, debt, new shares
- D. Preference shares, retained earnings, debt
Explanation: The pecking order theory states that firms generally prefer internally generated funds first, followed by debt, and issue new equity as a…
Correct answer: Retained earnings, debt, new shares- A. Creates a tax deduction
- B. Increases the firm's dividend rate
- C. Eliminates repayment obligations
- D. Raises the nominal value of shares
Explanation: Interest is generally deductible for corporate tax purposes, creating a tax shield.
Correct answer: Creates a tax deductionBusiness Finance MCQs: common questions
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