Free Business Finance MCQs with Answers

• A. Sunk cost
• B. Opportunity cost
• C. Financing cost
• D. All of the given options

Explanation: Opportunity cost is the value of the best alternative sacrificed when a particular investment is chosen.

• A. Homemade leverage
• B. Financial leverage
• C. Operating leverage
• D. None of the given optionHire An Accountant

Explanation: Homemade leverage occurs when an individual borrows personally to change the effective leverage of an investment.

• A. Bank loan
• B. Commercial papers
• C. Trade credit
• D. None of the given options.Try Prep Courses

Explanation: Trade credit is commonly regarded as the cheapest financing source because it is often obtained without explicit interest and arises…

• A. -1
• B. 0
• C. 1
• D. 2Compare Credit Cards

Explanation: An investment is acceptable under the profitability index rule when PI exceeds 1, meaning the present value of future cash inflows is…

• A. Higher
• B. Lower
• C. Constant
• D. None of These

Explanation: The real interest rate is a major base component of nominal interest rates, so a higher real rate generally pushes other interest rates…

• A. It is the most basic form of calculating interest.
• B. It earns profit not only on principal but also on interest.
• C. It is calculated by multiplying principal by rate multiplied by time.
• D. It does not take into account the accumulated interest for calculation.Compare Personal Loans

Explanation: Compound interest earns returns on both the original principal and interest accumulated from earlier periods.

• A. To maintain a high ratio of current assets to sales
• B. To maintain a low ratio of current assets to sales
• C. To less short-term debt and more long-term debt
• D. To more short-term debt and less long-term debt

Explanation: A restrictive current-asset policy keeps relatively few current assets, producing a low current-assets-to-sales ratio.

• A. Bond Price < Par Value and YTM > coupon rate
• B. Bond Price > Par Value and YTM > coupon rate
• C. Bond Price > Par Value and YTM < coupon rate
• D. Bond Price < Par Value and YTM < coupon rate

Explanation: A bond sells at a discount when its price is below par value, usually because its coupon rate is below the market-required return.

• A. Stock Bundle
• B. Portfolio
• C. Capital Structure
• D. None of These

Explanation: A portfolio is a collection of investments held by an investor, such as stocks, bonds, and other securities.

• A. IRR (Internal Rate of Return)
• B. MIRR (Modified Internal Rate of Return)
• C. WACC (Weighted Average Cost of Capital)
• D. AAR (Average Accounting Return)

Explanation: WACC is the blended required return demanded by all providers of capital, so the firm must earn at least this return on its existing…

• A. an ordinary annuity
• B. annuity due
• C. multiple cash flows
• D. perpetuity

Explanation: An ordinary annuity consists of equal cash flows received at the end of each period for a stated number of periods.

• A. a common-size statement
• B. an income statemen
• C. a cash flow statement
• D. a balance sheet

Explanation: A common-size statement converts each item into a percentage of a common base, such as sales for an income statement or total assets for a…

• A. Capital Structuring
• B. Capital Rationing
• C. Capital Budgeting
• D. Working Capital Management

Explanation: Capital budgeting is the planning and evaluation of long-term investments such as machinery, expansion, and replacement projects.

• A. Par value
• B. Coupon value
• C. Present value of an annuity
• D. Present value of a lump sum

Explanation: Par value is the face or principal amount stated on a bond and is generally the amount repaid at maturity.

• A. Surplus Asset
• B. Short-term Ratio
• C. Working Capital
• D. Current Ratio

Explanation: Working capital equals current assets minus current liabilities, showing the short-term funds available for day-to-day operations.

• A. CF from Assets = CF to Creditors - CF to Stockholder
• B. CF from Assets = CF to Stockholders - CF to Creditors
• C. CF to Stockholders = CF to Creditors + CF from Assets
• D. CF from Assets = CF to Creditors + CF to Stockholder

Explanation: Cash flow from assets must equal the cash distributed to creditors plus the cash distributed to stockholders.

• A. Liquidity Ratios
• B. Leverage Ratios
• C. Profitability Ratios
• D. Market Value Ratios

Explanation: Profitability ratios assess how effectively a business generates earnings from its sales, assets, or equity after considering its costs.

• A. Operating efficiency
• B. Asset use efficiency
• C. Financial policy
• D. Dividend policyAccounting & Auditing

Explanation: Profit margin measures the profit earned from each unit of sales, so it primarily indicates operating efficiency and cost control.

• A. Dividends
• B. Retained Earnings
• C. Capital Gain
• D. None of the given options

Explanation: Retained earnings are the portion of after-tax profit kept in the business instead of being distributed as dividends.

• A. Primary market
• B. Secondary market
• C. Tertiary market
• D. None of the given options

Explanation: Newly issued securities are sold in the primary market, where the issuing company or government receives the funds.