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 42 of 49
- A. Negative
- B. Zero
- C. Positive
- D. Independent
Explanation: When a project's discounted cash inflows exactly recover the invested capital at the required rate of return, its net present value is…
Correct answer: Zero- A. Less project returns
- B. Greater project return
- C. Shorter payback period
- D. Greater payback period
Explanation: A shorter payback period generally indicates greater liquidity because the investment is recovered sooner, holding other factors constant.
Correct answer: Shorter payback period- A. Relative outflow
- B. Relative inflow
- C. Relative cost
- D. Relative profitability
Explanation: Modified internal rate of return improves the conventional IRR by incorporating financing and reinvestment assumptions, making project…
Correct answer: Relative profitability- A. Optimal rationing
- B. Capital rationing
- C. Marginal rationing
- D. Transaction rationing
Explanation: Capital rationing occurs when a firm imposes a limit on the funds available for capital expenditures, forcing it to choose among competing…
Correct answer: Capital rationing- A. Greater than two
- B. Equal to
- C. Less than one
- D. Greater than one
Explanation: The profitability index equals the present value of future cash inflows divided by the initial investment.
Correct answer: Greater than one- A. Technical equity
- B. Defined future value
- C. Project net present value
- D. Equity net present value
Explanation: Net present value is obtained by summing all cash flows after discounting them to present value, including the initial investment outflow.
Correct answer: Project net present value- A. Negative numbers
- B. Positive numbers
- C. Hurdle number
- D. Relative number
Explanation: Cash outflows reduce the project's net cash flow, so they are recorded as negative numbers in capital-budgeting calculations.
Correct answer: Negative numbers- A. Rise in marginal cost of capital
- B. Fall in marginal cost of capital
- C. Rise in transaction cost of capital
- D. Rise in transaction cost of capital
Explanation: A large expansion can increase the project's risk and require flotation expenses such as underwriting and issuance costs.
Correct answer: Rise in marginal cost of capital- A. Short maturity bonds
- B. High maturity bonds
- C. High premium bonds
- D. High inflated bonds
Explanation: Short-maturity bonds return principal sooner, so the investor must reinvest the proceeds sooner and faces greater exposure to falling…
Correct answer: Short maturity bonds- A. Depreciated bond
- B. Interest bond
- C. Zero coupon bond
- D. Appreciation bond
Explanation: A zero-coupon bond makes no periodic coupon payments and is normally issued below face value, with the investor's return coming from its…
Correct answer: Zero coupon bond- A. Nominal rate
- B. Premium rate
- C. Quoted rate
- D. Both a and c
Explanation: The coupon rate is the stated or quoted annual interest rate applied to a bond's par value, so both “nominal rate” and “quoted rate”…
Correct answer: Both a and c- A. Junk bonds
- B. Outstanding bonds
- C. Standing bonds
- D. Premium bonds
Explanation: Bond prices and market interest rates move inversely: when rates rise, existing bonds with lower coupon rates become less attractive and…
Correct answer: Outstanding bonds- A. Issued security
- B. Treasury bonds
- C. U.S bonds
- D. Return security
Explanation: Treasury bonds are government debt securities backed by the issuing government, including Pakistan's government in this context. “U.S.
Correct answer: Treasury bonds- A. Bond value
- B. Per value
- C. State value
- D. Par value
Explanation: Par value is the face value that the issuing firm promises to repay to the bondholder at maturity.
Correct answer: Par value- A. Original maturity
- B. Permanent maturity
- C. Artificial maturity
- D. Valued maturity
Explanation: Original maturity is the period from the bond's issuance until its stated repayment date.
Correct answer: Original maturity- A. Municipal bonds
- B. Corporation bonds
- C. Default bonds
- D. Zero bonds
Explanation: Municipal bonds are issued by local or state governments to finance public projects.
Correct answer: Municipal bonds- A. Mature issue
- B. Earning issue
- C. New issue
- D. Recent issue
Explanation: A bond issued recently is called a new issue. A mature issue has reached or passed its maturity, while “recent issue” is not the standard…
Correct answer: New issue- A. Provision
- B. Guarantee
- C. Warrants
- D. Convertibles
Explanation: Warrants give bondholders the right to purchase the issuer’s stock at a stated exercise price.
Correct answer: Warrants- A. Required rate of redemption
- B. Required rate of earning
- C. Required rate of return
- D. Required option
Explanation: The required rate of return is the discount rate used to calculate the present value of a bond’s future coupon payments and principal.
Correct answer: Required rate of return- A. Equal to return rate
- B. Seasoned price
- C. Below its par value
- D. Above its par value
Explanation: When the market rate exceeds the bond’s coupon rate, the bond’s fixed payments are less attractive, so its price falls below par value.
Correct answer: Below its par value