Free Business Finance MCQs with Answers

• A. Limited corporate business
• B. Unlimited corporate business
• C. Controlled corporate business
• D. Corporation

Explanation: Hewlett-Packard and Microsoft are legally organised as corporations, separate from their owners and managed through a formal corporate…

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

Explanation: The required return demanded by shareholders for providing equity capital is called the cost of equity.

• A. Liability plan
• B. Stock planning
• C. Corporation paperwork
• D. Charter

Explanation: A corporation’s charter, also called its articles of incorporation, records key formation details such as authorized stock and the names…

• A. Treasury bills
• B. Commercial paper
• C. Negotiable certificate of deposit
• D. Money market mutual funds

Explanation: Money market mutual funds invest in short-term, high-quality instruments and therefore generally carry relatively low risk for business…

• A. Agent bonds
• B. Development bonds
• C. Pollution control bonds
• D. Both B and C

Explanation: Development bonds support industrial or economic development, while pollution control bonds finance pollution-control facilities.

• A. Income risk
• B. Investment risk
• C. Reinvestment risk
• D. Mature risk

Explanation: Reinvestment risk is the risk that future interest or principal receipts must be reinvested at lower interest rates, reducing future…

• A. At par value
• B. Below its par value
• C. More than its par value
• D. Seasoned par value

Explanation: When the coupon rate equals the prevailing market interest rate, the bond offers exactly the return investors require and therefore sells…

• A. More price changes
• B. Stable prices
• C. Standing prices
• D. Mature prices

Explanation: A longer-maturity bond has greater interest-rate sensitivity, so its market price changes more when interest rates change.

• A. External return method
• B. Net present value of method
• C. Net future value method
• D. Internal return method

Explanation: For mutually exclusive projects with different scales or completion times, net present value provides a common present-value basis for…

• A. Price will be lower
• B. Rate will be higher
• C. Price will be higher
• D. Rate will be lower

Explanation: A call option becomes in the money when the stock price rises above the strike price, increasing its intrinsic value and normally its…

• A. Future value of portfolio
• B. Current value of stock
• C. Future value of stock
• D. Present value of portfolio

Explanation: Under the option-pricing relationship used here, adding the current call-option price to the present value of the related portfolio gives…

• A. Cost of debt
• B. Cost of equity
• C. Cost of internal capital
• D. Cost of reserve assets

Explanation: The return required by lenders is the firm’s cost of debt because it represents the market’s required compensation for supplying borrowed…

• A. Present value ratio
• B. Future value ratio
• C. Retention ratio
• D. Growth ratio

Explanation: The retention ratio shows the proportion of earnings kept in the business, so it is calculated as 1 minus the payout ratio.

• A. Yearly method
• B. Single methods
• C. Double methods
• D. Accelerated methods

Explanation: The double-declining-balance and sum-of-years'-digits methods charge greater depreciation in earlier years and lower amounts later.

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

Explanation: Real interest rates and real cash flows are stated after removing the effect of changes in the general price level.

• A. Relevant inflows
• B. Free cash flow
• C. Relevant outflows
• D. Cash outlay

Explanation: Free cash flow is the cash generated by operations after taxes and after the investment needed to maintain or expand operating capital.

• A. Cash charge
• B. Non cash charge
• C. Cash flow discounts
• D. Net salvage discount

Explanation: Depreciation reduces reported accounting profit but does not involve a current cash payment.

• A. Weighted average cost of interest
• B. Weighted average cost of capital
• C. Weighted average salvage value
• D. Mean cost of capital

Explanation: The return required by both lenders and shareholders is combined according to their financing weights.

• A. No inflation
• B. High inflation
• C. No transactions
• D. No acceleration

Explanation: Inflation creates the difference between nominal and real rates. When inflation is zero, the nominal and real rates are equal, assuming…

• A. Cost of salvage
• B. Cost of interest
• C. Cost of taxation
• D. Cost of capital

Explanation: A firm's overall financing cost combines the costs of debt, preferred stock and common equity using their respective weights.