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 40 of 49
- A. Expansion
- B. Salvages
- C. Taxation
- D. Discounts
Explanation: Depreciation is a non-cash expense, but it reduces taxable income and therefore lowers the tax payment.
Correct answer: Taxation- A. Inflation effects
- B. Opportunity effects
- C. Equity effects
- D. Debt effects
Explanation: Nominal interest rates and nominal cash flows include the effect of inflation, so they must be used consistently in project evaluation.
Correct answer: Inflation effects- A. Irrelevant cash flow
- B. Relevant cash flow
- C. Incremental cash flow
- D. Decrease cash flow
Explanation: The cash-flow change caused specifically by accepting and implementing a project is its incremental cash flow.
Correct answer: Incremental cash flow- A. Occurred cost
- B. Mean cost
- C. Opportunity costs
- D. Weighted cost
Explanation: The benefit sacrificed by using an owned asset in a project instead of its next-best alternative use is an opportunity cost.
Correct answer: Opportunity costs- A. Mature expected return rate
- B. Lower than expected return rate
- C. Higher than expected return rate
- D. Equal to expected return rate
Explanation: With zero default probability and no call, the bond's promised cash flows will be received as scheduled, so its yield to maturity equals…
Correct answer: Equal to expected return rate- A. Going rate of return
- B. Yield
- C. Earning rate
- D. Both A and B
Explanation: The required rate used to discount a bond's future cash flows is its yield, commonly called the going or market rate of return.
Correct answer: Both A and B- A. Artificial provision
- B. Call provision
- C. Redeem provision
- D. Original provision
Explanation: A call provision gives the issuing corporation the right to redeem a bond before its maturity date.
Correct answer: Call provision- A. Increased
- B. Decreased
- C. Earned
- D. Never changed
Explanation: Bond prices and market interest rates move inversely: when the market rate rises, the bond's fixed coupon payments become less attractive…
Correct answer: Increased789. Type of bond in which payments are made on basis of inflation index is classified as_____________?
- A. Borrowed bond
- B. Purchasing power bond
- C. Surplus bond
- D. Deficit bond
Explanation: A purchasing-power bond adjusts its payments or principal according to an inflation index, helping preserve the investor's real purchasing…
Correct answer: Purchasing power bond- A. Debt cost
- B. Relevant cost
- C. Borrowing cost
- D. Embedded cost
Explanation: The marginal cost of new debt is an incremental financing cost, so it is relevant to the planning decision.
Correct answer: Relevant cost- A. Expected risk
- B. Beta risk
- C. Industry risk
- D. Returning risk
Explanation: A well-diversified stockholder is concerned mainly with systematic risk, which reflects a project's sensitivity to market movements and is…
Correct answer: Beta risk- A. Expected risk
- B. Stand-alone risk
- C. Variable risk
- D. Returning risk
Explanation: Stand-alone risk is the variability of a project's expected returns when the project is considered by itself.
Correct answer: Stand-alone risk- A. Market cash flow
- B. Future cash flow method
- C. Discounted cash flow method
- D. Present cash flow method
Explanation: The discounted cash flow method estimates the cost of equity by equating the present value of expected future shareholder cash flows with…
Correct answer: Discounted cash flow method- A. Investors equity
- B. Market value of equity
- C. Book value of equity
- D. Stock equity
Explanation: WACC normally uses market-value weights because they reflect the current economic value of each financing source.
Correct answer: Book value of equity- A. Historical beta
- B. Market beta
- C. Coefficient beta
- D. Riskier beta
Explanation: A beta estimated by regressing a security's historical returns against market returns is called historical beta.
Correct answer: Historical beta- A. Component cost is used
- B. Common stock value is used
- C. Cost of capital is used
- D. Asset valuation is used
Explanation: Capital budgeting decisions are often evaluated using the weighted average cost of capital as the required return or discount rate.
Correct answer: Cost of capital is used797. In weighted average cost of capital, capital components are funds that usually offer by____________?
- A. Stock market
- B. Investors
- C. Capitalist
- D. Exchange index
Explanation: The components of WACC represent funds supplied by investors and lenders, such as debt holders and equity shareholders.
Correct answer: Investors798. An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax__________?
- A. Term structure
- B. Market premium
- C. Risk premium
- D. Cost of debt
Explanation: The interest rate a firm must pay on newly issued debt represents its pre-tax cost of debt.
Correct answer: Cost of debt- A. Estimate future growth
- B. Estimate option future value
- C. Estimate option present value
- D. Estimate growth ratio
Explanation: Analyst forecasts, retention-growth models and historical growth rates are techniques for estimating a company’s future growth.
Correct answer: Estimate future growth- A. Debt rate
- B. Investment return
- C. Interest rate
- D. Cost of equity
Explanation: Cost of equity is the return shareholders require, combining expected dividends with expected capital appreciation.
Correct answer: Cost of equity