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 3 of 49
- A. Statement of financial position
- B. Income statement
- C. Cash flow statement
- D. Statement of changes in equity
Explanation: The income statement reports revenue, expenses and profit or loss for a specified period.
Correct answer: Income statement- A. 500 units
- B. 600 units
- C. 707 units
- D. 1,000 units
Explanation: EOQ is calculated as the square root of 2DS divided by H. Here, the result is approximately 707 units, which balances ordering and holding…
Correct answer: 707 units- A. 10,000 units
- B. 12,000 units
- C. 15,000 units
- D. 20,000 units
Explanation: Break-even output equals fixed costs divided by contribution per unit. Contribution is Rs. 20, so Rs. 300,000 divided by Rs.
Correct answer: 15,000 units- A. Incremental budgeting
- B. Flexible budgeting
- C. Zero-based budgeting
- D. Rolling budgeting
Explanation: Zero-based budgeting starts with a zero base and requires managers to justify proposed expenditures.
Correct answer: Zero-based budgeting- A. 6%
- B. 8%
- C. 10%
- D. 12%
Explanation: Current yield is calculated as annual interest divided by the bond's current market price. Thus, Rs. 80 divided by Rs.
Correct answer: 10%- A. 2 times
- B. 3 times
- C. 4 times
- D. 5 times
Explanation: Interest coverage equals earnings before interest and tax divided by interest expense. The calculation is Rs. 600,000 divided by Rs.
Correct answer: 4 times- A. 8%
- B. 10%
- C. 12%
- D. 14%
Explanation: The dividend growth model gives the cost of equity as expected dividend divided by current price plus growth.
Correct answer: 12%- A. Has unlimited funds for all projects
- B. Faces a limit on funds for investment projects
- C. Rejects every project with positive cash flow
- D. Uses only equity to finance projects
Explanation: Capital rationing means that available investment funds are limited, so the company cannot accept every financially attractive project.
Correct answer: Faces a limit on funds for investment projects- A. To remove all project risk
- B. To test how results change when assumptions change
- C. To calculate historical accounting profit
- D. To determine the legal ownership of assets
Explanation: Sensitivity analysis examines how changes in assumptions, such as sales volume or discount rate, affect a project's outcome.
Correct answer: To test how results change when assumptions change- A. Borrowed funds raised for expansion
- B. Earnings remaining after financing acceptable investments
- C. The gross revenue earned during the year
- D. The value of its non-current assets
Explanation: A residual dividend policy gives priority to financing all acceptable investment opportunities from available earnings.
Correct answer: Earnings remaining after financing acceptable investments- A. Rs. 700,000
- B. Rs. 900,000
- C. Rs. 1,000,000
- D. Rs. 1,100,000
Explanation: Owners' equity equals total assets minus total liabilities. Thus, Rs. 2,400,000 minus Rs. 1,500,000 gives Rs. 900,000.
Correct answer: Rs. 900,000- A. Rs. 110,000
- B. Rs. 120,000
- C. Rs. 121,000
- D. Rs. 125,000
Explanation: The future value is calculated as Rs. 100,000 multiplied by 1.10 squared. This produces Rs.
Correct answer: Rs. 121,000- A. 15 days
- B. 40 days
- C. 65 days
- D. 75 days
Explanation: The operating cycle is the inventory conversion period plus the receivables collection period.
Correct answer: 65 days- A. A favourable variance of Rs. 40,000
- B. An adverse variance of Rs. 40,000
- C. A favourable variance of Rs. 460,000
- D. An adverse variance of Rs. 460,000
Explanation: Actual expenses are Rs. 40,000 below the budgeted amount, which is favourable for a cost item.
Correct answer: A favourable variance of Rs. 40,000- A. Debenture interest is normally a fixed obligation
- B. Debenture holders normally elect company directors
- C. Debenture holders receive residual profits first
- D. Debenture capital always has no repayment date
Explanation: Debenture holders are lenders and normally receive specified interest, whether or not profits are high.
Correct answer: Debenture interest is normally a fixed obligation- A. The average cost of all existing finance
- B. The cost of the next unit of finance raised
- C. The historical cost of previously issued shares
- D. The accounting cost of retained earnings
Explanation: Marginal cost of capital is the cost of obtaining one additional unit of finance.
Correct answer: The cost of the next unit of finance raised- A. Managers and owners have identical objectives
- B. Creditors and auditors share the same information
- C. Managers pursue personal goals instead of owners' interests
- D. Customers pay suppliers before receiving goods
Explanation: An agency problem results from a conflict between principals, such as shareholders, and agents, such as managers.
Correct answer: Managers pursue personal goals instead of owners' interests- A. Rs. 200,000
- B. Rs. 300,000
- C. Rs. 700,000
- D. Rs. 1,700,000
Explanation: Margin of safety equals actual sales minus break-even sales. Therefore, Rs. 1,000,000 minus Rs. 700,000 gives Rs. 300,000.
Correct answer: Rs. 300,000- A. Only one change from outflow to inflow
- B. More than one change in the signs of cash flows
- C. Equal inflows in every operating year
- D. A positive net present value at every discount rate
Explanation: Multiple IRRs may arise when cash flows change sign more than once, such as outflow, inflow, and later outflow.
Correct answer: More than one change in the signs of cash flows- A. Increasing investment in long-term machinery
- B. Maintaining adequate liquid current assets
- C. Replacing equity with additional fixed debt
- D. Extending the useful life of existing equipment
Explanation: Cash and other liquid current assets can be used to settle short-term liabilities as they fall due.
Correct answer: Maintaining adequate liquid current assets