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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975 questions · page 29 of 49
- A. maximum capital budget
- B. greater capital budget
- C. optimal capital budget
- D. minimum capital budget
Explanation: When a firm approaches its optimal capital budget, the marginal cost of capital may increase and available funds may become subject to…
Correct answer: optimal capital budget- A. net present value method
- B. net future value method
- C. net capital budgeting method
- D. net equity budgeting method
Explanation: The net present value method is a discounted-cash-flow technique because it discounts expected future cash flows back to their present…
Correct answer: net present value method- A. terminal value
- B. existed value
- C. quit value
- D. relative value
Explanation: The compounded value of a project's cash flows at the end of its life is called its terminal value.
Correct answer: terminal value- A. negative numbers
- B. positive numbers
- C. hurdle number
- D. relative number
Explanation: Project costs are cash outflows and are recorded as negative numbers in capital-budgeting analysis.
Correct answer: negative numbers- A. minimum life
- B. present value life
- C. economic life
- D. transaction life
Explanation: Economic life is the period over which an asset provides the most economically beneficial service, commonly the life that maximizes its…
Correct answer: economic life- A. technical equity
- B. defined future value
- C. project net present value
- D. equity net present value
Explanation: Net present value is obtained by adding the present values of all project cash flows, including the initial investment as a negative…
Correct answer: project net present value- A. present value consent
- B. mutually exclusive
- C. mutual project
- D. mutual consent
Explanation: Mutually exclusive projects cannot both be selected, so accepting one requires rejecting the other.
Correct answer: mutually exclusive- A. present value of equity
- B. future value of equity
- C. present value cash flow
- D. future value of cash flow
Explanation: NPV calculation begins by discounting each future cash flow to its present value, after which the initial investment and discounted…
Correct answer: present value cash flow- A. non-normal cash flow
- B. normal cash flow
- C. normal costs
- D. non-normal costs
Explanation: A non-normal cash flow changes sign more than once, such as moving from negative to positive and later back to negative.
Correct answer: non-normal cash flow- A. greater than two
- B. equal to
- C. less than one
- D. greater than one
Explanation: Profitability index equals the present value of future inflows divided by the initial investment.
Correct answer: greater than one- A. negative index
- B. exchange index
- C. project index
- D. profitability index
Explanation: The ratio of the present value of future cash flows to the project's initial cost is called the profitability index.
Correct answer: profitability index- A. 8200
- B. 16000
- C. 0.0064
- D. 1562.5
Explanation: Profitability index equals the present value of future cash flows divided by the initial investment. Therefore, PV = 3.2 × $5,000 = $16,000.
Correct answer: 16000573. The situation in which the firm limits the expenditures on capital is classified as __________?
- A. optimal rationing
- B. capital rationing
- C. marginal rationing
- D. transaction rationing
Explanation: Capital rationing occurs when a firm places a limit on the funds available for capital investment.
Correct answer: capital rationing- A. one
- B. multiple
- C. accepted
- D. non-accepted
Explanation: Non-normal cash flows involve more than one change between outflows and inflows, so they may produce multiple internal rates of return.
Correct answer: multiple- A. be reinvested
- B. not be reinvested
- C. be earned
- D. not be earned
Explanation: The traditional IRR method assumes that interim cash inflows can be reinvested at the project’s IRR.
Correct answer: be reinvested- A. less project return
- B. greater project return
- C. shorter payback period
- D. greater payback period
Explanation: A shorter payback period means the investment is recovered sooner, increasing project liquidity and reducing the time funds remain tied…
Correct answer: shorter payback period- A. negative projects
- B. relative projects
- C. evaluate projects
- D. earned projects
Explanation: The profitability index evaluates the value created per unit of investment and is particularly useful for comparing or ranking projects…
Correct answer: evaluate projects- A. 0.55
- B. 1.82
- C. 0.55
- D. 0.0182
Explanation: Profitability index = present value of future cash flows ÷ initial cost = $2,000 ÷ $1,100 = 1.82 approximately.
Correct answer: 1.82- A. negative
- B. zero
- C. positive
- D. independent
Explanation: When a project’s discounted cash flows exactly recover the investment at the required rate of return, its net present value is zero.
Correct answer: zero- A. 3.46 years
- B. 2.46 years
- C. 5.46 years
- D. 4.46 years
Explanation: Payback period = completed years + unrecovered cost ÷ recovery-year cash flow = 4 + $300 ÷ $650 = 4.46 years.
Correct answer: 4.46 years