Free Business Finance MCQs with Answers

• A. Rs. 80,000
• B. Rs. 125,000
• C. Rs. 135,000
• D. Rs. 180,000

Explanation: The value of a perpetuity is calculated as annual cash flow divided by the required return. Thus, Rs. 10,000 divided by 0.08 equals Rs.

• A. Purchase of inventory for cash
• B. Payment of wages to employees
• C. Issue of ordinary shares for cash
• D. Receipt of cash from customers

Explanation: Issuing ordinary shares brings finance into the business from its owners, so it is a financing cash flow.

• A. Fixed operating costs
• B. Fixed financing charges
• C. Variable production costs
• D. Short-term trade receivables

Explanation: Financial leverage arises when a firm uses financing that creates fixed payments, such as interest on debt or preference dividends.

• A. 2 times
• B. 3 times
• C. 4 times
• D. 5 times

Explanation: Inventory turnover is calculated by dividing cost of goods sold by average inventory. Rs. 1,200,000 divided by Rs.

• A. 8%
• B. 10%
• C. 12%
• D. 15%

Explanation: Return on assets equals profit after tax divided by average total assets, multiplied by 100. The calculation is Rs. 240,000 divided by Rs.

• A. It will rise proportionately
• B. It will remain unchanged
• C. It will generally fall
• D. It will become equal to face value

Explanation: Existing fixed-rate bonds become less attractive when new bonds offer higher interest rates.

• A. Tax benefit of debt equals its expected financial distress cost
• B. Book value of equity equals the market value of debt
• C. Dividend payment equals the annual interest payment
• D. Current assets equal current liabilities

Explanation: Debt can provide a tax advantage because interest is generally deductible, but excessive debt increases financial distress risk.

• A. Excludes the initial investment
• B. Uses accounting profit instead of cash flow
• C. Accounts for the time value of money
• D. Includes only cash flows after payback

Explanation: Discounted payback converts future cash inflows into present values before determining when the investment is recovered.

• A. Long-term secured debt issued by governments
• B. Unsecured short-term debt issued by creditworthy companies
• C. Preference shares issued to existing shareholders
• D. A bank deposit held for a fixed period

Explanation: Commercial paper consists of unsecured short-term promissory notes issued mainly by financially strong companies.

• A. It occurs during the first year
• B. It occurs during the second year
• C. It occurs during the third year
• D. It is not reached within three years

Explanation: The present values of the inflows are approximately Rs. 363,636, Rs. 330,579, and Rs. 300,526. Their cumulative value exceeds Rs.

• A. Market values of the financing sources
• B. Historical values of the financing sources
• C. Nominal values of the financing sources
• D. Replacement values of the assets

Explanation: Market values reflect the current economic value of debt and equity, so they better represent the opportunity cost of finance.

• A. Rs. 22,539
• B. Rs. 24,869
• C. Rs. 27,100
• D. Rs. 30,000

Explanation: The present value is Rs. 10,000 multiplied by the three-year annuity factor at 10%, which is approximately 2.4869.

• A. 4 times
• B. 5 times
• C. 6 times
• D. 8 times

Explanation: Receivables turnover equals credit sales divided by average trade receivables. The calculation is Rs. 1,500,000 divided by Rs.

• A. 30%
• B. 40%
• C. 60%
• D. 160%

Explanation: Contribution is sales minus variable costs, so it equals Rs. 400,000. Dividing this by sales of Rs.

• A. Finance is raised by issuing ordinary shares
• B. Funds can be withdrawn up to an agreed limit
• C. A fixed payment is made to suppliers
• D. Finance is generated by selling old equipment

Explanation: A bank overdraft allows a business to withdraw more money than its current bank balance, up to an agreed limit.

• A. Systematic market risk
• B. Unsystematic business risk
• C. Inflation risk
• D. Interest rate risk

Explanation: Diversification spreads exposure across different firms and industries, reducing company-specific or unsystematic risk.

• A. The EBIT level at which two financing plans produce equal EPS
• B. The sales level at which total costs equal total revenue
• C. The asset level at which debt equals equity
• D. The interest rate at which a project has zero NPV

Explanation: The EBIT-EPS indifference point is the level of earnings before interest and tax at which alternative financing plans result in the same…

• A. Accounting rate of return
• B. Equivalent annual cost method
• C. Simple payback method
• D. Current ratio method

Explanation: The equivalent annual cost method converts the costs of projects with different lives into comparable annual amounts.

• A. It increases by the market value of shares
• B. It decreases by the nominal value of shares
• C. It remains unchanged, although equity accounts may be rearranged
• D. It becomes equal to total liabilities

Explanation: A stock dividend transfers amounts within shareholders' equity, such as from retained earnings to share capital, but does not bring in new…

• A. General reserve
• B. Share premium account
• C. Retained earnings account
• D. Revaluation surplus account

Explanation: The amount received above the nominal value of issued shares is called share premium or securities premium.