190 Solved Mcqs of Mgt201 by

190 Solved MCQs of MGT201
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1. If coefficient of Correlation, Ro = 0 then :

Investments are perfectly positively correlated
Investments are uncorrelated
Investments are perfectly negatively correlated
None of the above
2. This is the measure that how closely the investments move.
Standard Deviation
Mean Deviation
Correlation Coefficient
None of the above
3. The objective for using the concept of Diversification is to :
Minimize the Risk
Maximize the return
A&B
None of the Above
4. The following risk is entirely wiped out by Diversification.

Market Risk
Companys unique Risk
Capital Risk
None of the above
5. Total Risk for Investment consists of Diversifiable Risk and :

Market Risk
Capital Risk
Dividend Yield
Capital Gain Yield
6. If a share As Beta = + 1.0 then :

That share is twice as risky as the Market
That share is exactly as risky as the Market
That share is half as risky as the Market
None of the above
7. The Beta for the most Stocks ranges between :

-2.5 and -1.5
-1.5 and -0.5
-0.5 and +0.5
+0.5 and +1.5
8. According to the capital-asset pricing model (CAPM), a security's expected

(required) return is equal to the risk-free rate plus a premium
Equal to the security's beta.
Based on the unsystematic risk of the security.
Based on the total risk of the security.
Based on the systematic risk of the security.
9. The risk-free security has a beta equal to ------------, while the market
portfolio's beta is equal to ------------.
one; more than one.
one; less than one.
zero; one
less than zero; more than zero.
10. An "aggressive" common stock would have a "beta"

Equal to zero
Greater than one

Equal to one.
Less than one.
11. In calculating the costs of the individual components of a firm's financing, the
corporate tax rate is important to which of the following component cost formulas?
Common stock.
Debt.
Preferred stock
None of the given options
12. Optimal capital structure refers to the particular combination that minimizes
the------------while maximizing the------------.
Operating cost, sales
Taxes, Interest expense
Cost of capital, Stock price
13. The dividend-payout ratio is equal to:
The dividend yield plus the capital gains yield.
Dividends per share divided by earnings per share.
Dividends per share divided by par value per share.
Dividends per share divided by current price per share.
14. Which of the following would be consistent with a more aggressive approach to
financing working capital?
Financing short-term needs with short-term funds.
Financing permanent inventory buildup with long-term debt.
Financing seasonal needs with short-term funds.
Financing some long-term needs with short-term funds.
15. The opportunity cost of holding cash rises when:
Interest rates are high
Interest rates are low
Central bank issue more bank notes
16. Which of the following source of financing involve no transactions costs?

Common shares
Preferred shares
Retained earnings
All of the given options
17. Texas Products Inc. has a division that makes plastic composite bags for the
space industry. The division has fixed costs of $45,000 per month, and it expects to
sell 45,000 bags per month. If the variable cost per bag is $6.00, what price must the
division charge in order to break even?
$6.00
$7.00
$8.00
$9.00
18.The Free Indeed Company manufactures ladies shoes that are sold through
discount houses. The shoes are sold for $20 each pair; the fixed costs are $110,000
for up to 30,000 pairs of shoes; variable costs are $13 per pair of shoes. What is the
firms breakeven point in units sold?
30,000 pairs of shoes
19. Suppose you know that your firm is facing relatively poor prospects but needs
new capital. If you also know that investors do not have this information, signaling
theory would predict that you would:
Issue debt to maintain the returns of equity holders.
Issue equity to share the burden of decreased equity returns between old and
new shareholders.
Both a and b are correct
None of the given option is correct
20. The extent to which fixed costs are used in a firms operations is called its:
Financial leverage.
Operating leverage.
Financial leverage.
Foreign risk exposure.
21. Which of the following statement refers to the concept of Hedging and Risk
Management?
Dont compare apples to oranges
Get insurance because you will break some eggs
A safe rupee is worth more than a risky rupee
Dont put all your eggs in one basket
22. A group of assets such as stocks and bonds held by an investor.
Portfolio
Capital Structure
Budget
None of the above
23. _______________ refers to the risk that the company might go bankrupt or close
down & bonds, or shares issued by the company may collapse
Inflation Risk
Default Risk
Sovereign Risk
Maturity Risk
24. The following risk is entirely wiped out by Diversification.
Systematic Risk
Unsystematic Risk
Portfolio Risk
Total Risk
25. The objective for using the concept of Diversification is to :
Minimize the Risk
Maximize the return
A&B
None of the Above
26. While studying the relationship in risk and return, It is commonly known that:
Higher the risk, lower the return
Lower the risk, higher the return
Higher the risk, higher the return
None of the above
27. This type of risk affects almost all types of assets.
Systematic Risk
Unsystematic Risk
Total Risk
Portfolio Risk
MCQ # 28, 29, 30 are based on the following data:
SNT Corporation has a bond issue outstanding with an annual coupon rate of 7
percent and 4 years remaining until maturity. The par value of the bond is Rs.
1,000. The bond pays interest annually.
28. What will be the current value of bond if present market conditions justify a 14
percent required rate of return?
Rs. 975.25
Rs. 795.77
Rs. 840.30
Rs. 610.56
29. What would be the current value on the same rate if there are 20 years
remaining to maturity?
Rs. 795.77
Rs. 840.30
Rs. 536.16
Rs. 672.25
30. According to the data of Question # 8, the bond is selling on _______________
and according to the data of Question # 9, the bond is selling on _______________.
Premium; Premium
Discount; Discount
Premium; Discount
Discount; Premium
31. _____________ is a statistical spread of possible returns for a Stock and
____________ is a statistical spread of possible returns for that Stock relative to the
market spread.
Market Risk; Market Beta
Market Risk; Market Return
Market Beta; Market Risk
Market Return; Market Risk
32. Capital structure decisions refer to the:
Dividend yield of the firms stock
Blend of equity and debt used by firm

Capital gains available on the firms stock
Maturity date for the firms securities
33. The company cost of capital for a firm with a 60/40 debt/equity split, 8% cost of
debt, 15% cost of equity, and a 35% tax rate would be:
7.02 %
9.12 %
11.08 %
13.80 %
34. A project with an initial investment of Rs. 1,000 generates a cash flow of Rs. 200
in year 1, Rs. 300 in year 2, and Rs. 350 in next three years. The Payback for the
project will have NPV of __________ at a 12% required rate of return and payback
period of ______ years.
Rs. 10.87; 3.60
Rs. 15.19; 3.43
Rs. 87.88; 3.60
Rs. 87.88; 3.43
35. According to CAPM estimates, what is the cost of equity for a firm with beta of
1.5 when the risk-free interest rate is 6% and the expected return on the market
portfolio is 15%?
19.5 %
21.0 %
22.5 %
24.0 %
36. Higher operating leverage is related to the use of additional _____________.

Fixed Costs
Variable Costs
Debt Financing
Common Equity Financing
37. Lower financial leverage is related to the use of additional ______________.

Fixed Costs
Variable Costs
Debt Financing
Common Equity Financing
38. Gordon and Lintner Theory is also known as ________________________.

MM Irrelevance Theory
Tax Preference Theory
MM Capital Structure Theory
Bird in the Hand Theory
39.
Relaxed Policy requires ____________ amount of Current Assets whereas
Restricted Policy requires _____________ amount of Current Assets.

Small; Small
Large; Large
Small; Large
Large; Small
40. Which of the following Cash Management Policy minimize cash holdings when
interest rates are high?
Interest-based Policy
Cash Flow Synchronization Policy
Speed up Cash Collection Policy
Float Policy
41. What approximate annual interest rate would you have to earn in order to double
your money in six years?
16 percent
7 percent
10 percent
12 percent
42. National Automobile Parts had sales of $2 million this year. The marketing
manager expects sales to grow at a 10 percent compound annual rate over the next 10
years. On this basis, sales in 10 years should be closest to
$5,187,485.
$2,593,722.
$4,622,885.
$5,081,309.
43.The present value of an annuity due exceeds the value of a comparable ordinary
annuity because ------------.
Each cash flow occurs at the beginning of the period for an ordinary annuity
Each cash flow of the annuity due is compounded one additional period
Each cash flow of the annuity due is discontinued one less period
Each cash flow of the ordinary annuity is discounted one less period
44.The buyer of a zero-coupon bond expects to receive
Price appreciation.
A rate of return equal to zero over the life of the bond.
Variable dividends instead of a fixed interest payment annually.
All interest payments in one lump sum at maturity
45.If interest rates rise, which of the following bonds will suffer the greatest decline
in price?
An 8 percent bond maturing in 2008
A 6 percent bond maturing in 2008
An 8 percent bond maturing in 2018
A 6 percent bond maturing in 2018
46. The return to an investor on a share of common stock
Cannot be related to earnings or earnings payout.
Includes both a dividend yield and a capital gains yield.
Cannot be calculated if dividend growth rate is not constant.
Is zero if dividends are not expected to grow.
47.How much should you pay for a bond with a $700 face value, a 5 percent coupon
rate, and five years to maturity if your appropriate discount rate is 7 percent and
interest is paid annually? Answers are rounded to the nearest dollar.
$1,000
$761
$643
$918
48.If the general level of interest rates rise, the prices of already issued bonds will
Remain unchanged.
Rise.
Fluctuate violently.
Fall.
49.The present value of $100 per year received for 10 years discounted at 8 percent is
closest to
$177.
$362.
$425.
$671.
50.An investor holding a well-diversified portfolio will not be exposed to

Unsystematic risk.
Default risk.
Systematic risk.
Inflation risk.
51. An investor holding a well-diversified portfolio will not be exposed to

Unsystematic risk.
Default risk.
Systematic risk.
Inflation risk
52. An investor is considering investing in only one of the following securities:
A
B
C
Expected Return
0.10 0.10 0.15
Standard Deviation 0.05 0.06 0.09
Which of the following statements is true?
Securities B and C are of equal relative risk.
Securities A and B are equally desirable if the investor is risk-averse.
Security C is more desirable than Security A if the investor is very risk-averse.
Security B is relatively less risky than Security C.
53. If the expected return on Treasury securities is 7 percent, the expected
return on the market portfolio is 10 percent, and the beta of the Tolliman
Lighting Corp. is 1.25, then the required return on TLC stock is
7 percent.
10.75 percent.
3 percent.
3.75 percent.
54. In the Capital Asset Pricing Model, the term (Rm - Rf) represents
The unsystematic risk premium for a security.
The security market line.
The market risk premium.
The expected return of a security.
55. The risk-free security has a beta equal to , while the market
portfolio's beta is equal to ....
One; more than one.
One; less than one.
10
Zero; One.
Less than zero; more than zero.
Equal to zero.
Greater than one.
Equal to one.
Less than one.
57. The SML (security market line) equation shows the relationship between a
securitys market risk and its ...
Intrinsic value
Required rate of return
Face Value
Book Value
58. A line that describes the relationship between an individual security's
returns and returns on the market portfolio.
Characteristic line
Security market line
Capital market line
Beta
59. The CAPM can be used to estimate
Dividends.
The required rate of return on a security.
The actual price of a security when the market opens tomorrow morning.
Betas.
60.Holding everything else constant, increasing fixed costs . the firm's
break-even point.
Decreases
Increases the covariance of
Increases
Does not affect
61. ----------------- reflects the operating efficiency of a company during an accounting

period.
Balance Sheet
Income Statement
Cash Flow statement
Cost of Goods Sold
11
62. In finance we refer to the market for short-term government and

corporate debt
securities as the __________
market.
Money
Capital
Primary
Secondary
63. A company reported a net income of Rs 120,000 during 2004-2005 .During that
period the company reported total assets of Rs1, 000,000. What would be the Return on
Assets (ROA) of the company?
12%
0.12%
120%
120
64. The future value of a bank deposit of Rs 100,000 after 5 years, if the interest rate is
12% and is compounded semiannually would be --------------.
more than Rs 100,000
Less than Rs 100,000
Equal to Rs 100,000
Impossible to calculate future value of the deposit.
65. -------------- represents ownership of the holder in a company.
Common Stocks
Debentures
Mortgage bonds
Accounts payable
66. If the number of outstanding common shares of a company decreases then its EPS -----------------.
Falls
Rises
Remains unchanged
Non of the above.
67. Financial Accounting deals with Book Value (historical cost minus accumulated
depreciation) whereas Financial Management focuses on _______________.
Market Value
Fixed cost
Historic cost
Accumulated depreciation
68. Economic Value Added for a firm is obtained by subtracting cost of capital from ---------------------------.
12
Operating Cost
Operating profit
Net income
Revenue
69. Which group of ratios measures a firm's ability to meet its shortterm obligations?
Debt ratios
Liquidity ratios
Coverage ratios
Profitability
70. Which of the following is not a cash outflow for a firm?
Depreciation
Dividends
Interest payments
Taxes
71.
Money paid (earned) for the use of money is called ____________.

Inflation
Interest
Earnest money
Non of the above
72.A person deposited Rs.50,000 in a bank. What would be the worth of this
amount after 5 years, if the bank pays 12% p.a, and is compounded quarterly?
86,400
87,400
100,000
84,500
73.At 15% discount rate a project has NPV equal to zero, what would be the IRR
of this project.
10%
15%
12%
14%
74.A public limited company sold bonds to a firm for Rs.150,000. The company
would retire these bonds for Rs.200,000 at maturity, and would pay no interest to
the holder during this period. Which type of bonds the company issued?
Zero coupon bonds
Debentures
Mortgage Bond
Non of the above
13
75.Which of the following capital budgeting technique ignores time value of

money?
IRR method
NPV method
Payback period method
Non of the given options
76.Which of the following have variable future dividends?
Preferred Stock
Common stock
Bonds
Non of the above
77.When market interest rate increases, the market price of bonds usually
___________.
Increases
Decreases
Remains unchanged
Non of the above
78.Which of the following is not included in the cash flows of a project?
Opportunity cost
Depreciation
Tax savings
Sunk costs
79.Which of the following is not the objective of capital budgeting techniques?
Financial viability of the project
To assess working capital requirement
To evaluate the value of investment
To measure durability of the project
80.An ordinary annuity whose payments or receipts continue forever is
called___________.
Annuity due
Deferred annuity
Perpetuity
Non of the above
81. The greater the beta, the_________of the security involved.
Greater the unavoidable risk

Greater the avoidable risk
Less the unavoidable risk
Less the avoidable risk
14
82. According to the capital-asset pricing model (CAPM), a security's

expected (required) return is equal to the risk-free rate plus a premium
Equal to the security's beta.

Based on the unsystematic risk of the security.
Based on the total risk of the security.
Based on the systematic risk of the security.
83.In Efficient Markets, Price of Stocks is based on ____________.
Market Risk
Liquidation Value
Diversifiable Risk
Book Value
84.The SML (security market line) equation shows the relationship between
a securitys market risk and its ____________.
Intrinsic value
Required rate of return
Face Value
Book Value
85.The risk-free security has a beta equal to____________, while the market
portfolio's beta is equal to ____________.
One; more than one.

One; less than one.
Zero; One.
Less than zero; more than zero.
86. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite
Company common stock has a beta of 1.80. The expected return on the
market is 10 percent, and the risk-free rate is 6 percent. According to the
capital-asset pricing model (CAPM) and making use of the information
above, the required return on Plaid Pants' common stock should be
____________, and the required return on Acme's common stock should be
____________ .
3.6 percent; 7.2 percent

87. Following are the possible one year returns estimates for common stocks
of a corporation.
15
Possibility of occurrence
Possible returns
0.1
-10%
0.2
5%
0.4
20%
0.2
35%
0.1
50%
The expected return on this common stock would be
10.45%s
16.43%
20.75%
25%
Equal to zero.
Greater than one.
Equal to one.
Less than one.
89. A line that describes the relationship between an individual security's

returns and returns on the market portfolio.
Characteristic line
Security market line
Capital market line
Beta
90. Because investors dislike uncertainty, they will require _________ rates of
return from risky investments.
Higher
Lower
The same
None of the above
91. Preferred shareholders' claims on assets and income of a firm come

_______ those of creditors __________those of common shareholders.
Before; and also before

After; but before
After; and also after
Equal to; and equal to
92. Which of the following would appear as liability in the balance sheet of a
company?
16
The value of Bonds purchased for investment purposes

The value of Bonds issued for raising capital
The value of Stocks purchased for investment purposes
93. Operating leverage may be defined as:
The degree to which debt is used in financing the firm

The difference between price and variable costs
The extent to which capital assets and fixed costs are utilized
The difference between fixed costs and the contribution margin
94. The ultimate ownership of the firm resides:
With management
With common shareholders
With preferred shareholders
With bondholders
95. Preferred shareholders:
Play a primary role in the financing of the firm

Have a subordinated claim to dividends
Possess an ownership interest in the firm
Normally have no vote on corporate issues
96. The cost of each component of a firm's capital structure multiplied by its
weight in the capital structure is called the:
Marginal cost of capital
Cost of debt
Weighted average cost of capital
None of the above
97. The cost of new common stock (external equity) is generally higher than
the cost of retained earnings (internal equity) because of:
Tax effects.
Investors required returns.
Flotation costs.
Coupon payments
98. The mix of debt, preferred stock, and common equity with which the firm
plans to raise capital is called the:
17
Financial risk.
Operating leverage.
Business risk.
Target capital structure.
99. Which of the following can be a cause of a high basic business risk?
High operating leverage
Large changes in customers demand
Uncertainty in input costs
All of the above
100. Which of the following causes an increase in a company diversifiable

risk?
Issuance of bonds
Issuance of common stocks
Investing in short term money market securities
Non of the given option
101. ---------------- refers to the overall cost to an organization of obtaining

investment funds, including the cost of both debt sources and equity sources.
Operating cost
Cost of outsourcing
Cost of capital
Cost of Debt
102. -------------- represents the risk borne by common stockholders as a result of the
introduction of fixed obligations such as debt and preferred stock in the capital
structure.
Financial risk
Market risk
Operating risk
None of the given options.
103. ---------------increases financial risk and bankruptcy risk of a firm.

Debt financing
Equity financing
Spontaneous financing
All of the above options
104. In calculating the costs of the individual components of a firm's financing, the
corporate tax rate is important to which of the following component cost formulas?
18
Common stock.
Debt.
Preferred stock
105. Which of the following sources of financing involve no transactions costs?

Common shares
Preferred shares
Retained earnings
106. Optimal capital structure refers to the particular combination that minimizes
the ---------------while maximizing the------------.
Operating cost, sales
Taxes, Interest expense
Cost of capital, Stock price
107. The -------------- is the interest rate that it is assumed can be obtained by
investing in financial instruments with no risk.
Risk-free interest rate
Effective interest rate
Nominal interest rate
108.According to signaling theory of capital structure, if future prospects of a firm

genuinely looks good then financial managers of the firm would prefer to raise
financing through --------------.
Equity capital
Borrowed capital
Issuance of preferred stock
None of the given options.
109. The extent to which fixed-income securities (debt and preferred stock) are used
in a firm's capital structure is called ------------.
Financial risk
Financial leverage
Cost of capital
19
110. ---------------- refers to the net income expressed as a percentage of average

equity.
Capital gain
Return on equity
EBIT
Tax shield
111. A debenture
is an agreement between the trustee and the firm which guarantees the
marketability
Of the bond issue.
Is an unsecured bond.
May be changed by the firm if it gives the trustee 90 days written notice.
112.A $1,000 face value convertible bond can be converted into 20 shares of
common stock. If the market price of the common stock is $40, the
conversion price per share is
75
50
35
20
113.Interest rate risk on ling term bonds is ___________ than the interest rate
risk for short term risk.
Less
More
None of the above
114. Bonds which are backed by real assets are called ________________
Debentures
Junk Bonds
Convertible bonds
Mortgage Bonds
115. When required rate of return is equal to coupon rate then market value is
___________ par value.
Greater than
Less than
20
Equal to
None of the given option
116. If market price of bond is less than its par value then this bond is selling
at a __________
Premium
Discount
Face value
Market price
117._________ receives a fixed regular dividend.
Common shareholder
Preferred shareholder
Bondholder
118. __________ is issued from foreign country.
Eurobond
Junk bond
Zero bond
119. Which of the following is not considered as bond?
Term Finance Certificate

T-Bill
Defense Saving Certificate
120. Which of the following is the fair price of a preferred stock (perpetual
investment)?
If Dividend of the preferred stock = Rs. 2 / share
Par Value = Rs. 10/ share
Expected price after 2 years =Rs. 13
Required rate of Return = 15%
Rs. 12.99
Rs. 13.33
Rs. 13.08
21
121. You are considering buying common stocks in GTC Corporation. The firm
yesterday paid a dividend of Rs.5.5. you have projected that dividends will grow at a rate
of 10% per year indefinitely. If you want an annual return of 20%, what is the most you
should pay per share of these common stocks?
Rs.60.50
Rs.80.00
Rs.70.50
Rs.55.43
122. You are considering buying common stocks in ZTC Corporation. You have
projected that the next dividend the company will pay will equal Rs.6.00 and that
dividends will grow at a rate of 8% per year thereafter. If you want an annual return of
16%, what is the most you should pay per share of these common stocks?
Rs.80.00
Rs.75.00
Rs.85.00
Rs.81.00
123. How much should you pay for the preferred stock of the ETC Corporation, if it has
Rs.100 par value, pays Rs.10 a share in annual dividends, and your required rate of return
is 10%.
Rs.85.00
Rs.75.00
Rs.100.00
Rs.60.00
124. If the intrinsic value of a stock is greater than its market value, which of the
following is a reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio.
The market is overvaluing the stock.
The market is undervaluing the stock.
125. Just today ABC Corporation paid an annual dividend of Rs.1.00 per share on its
common stocks. The stock market analysts have estimated a fair price of Rs.20.00 per
share for these stocks. Assume that the market expects this companys annual dividend to
grow at a constant rate of 6% indefinitely. The expected Dividend Yield for these
common stocks would be:
5.3%
6.5%
7.5%
126. A measure of risk per unit of expected return.
Standard deviation
Coefficient of variation
22
Correlation Coefficient
Beta
127. An investor places 40% of his funds in security A and the balance in security B. The
expected returns on A and B are 12% and 18% respectively. The standard deviations of
returns on A and B are 20% and 15% respectively. The expected return on this 2-stock
portfolio would be:
20%
17%
15.6%
It can not be determined
128. This type of risk is avoidable through proper diversification.
Portfolio risk
Systematic risk
Total risk
Unsystematic risk
129. XYZ Airlines will pay a Rs.4.00 dividend next year on its common stock, which is
currently selling at Rs.100 per share. What is the markets required return on this
investment if the dividend is expected to grow at 5% forever?
9%
4%
5%
7%
130. In the formula rCE = (D1V1/Po) + g, what does g represent?

The expected dividend yield from a common stock.
The expected price appreciation yield from a common stock
The dividend yield from a preferred stock
The interest payment from a bond
Total marks: 10
131. The benefit we expect from a project is expressed in terms of:
Cash in flows
Cash out flows
Cash flows
Returns
132. A plant space is allocated to a project. If this space can be used for some other
project then, for project evaluation we must consider its:
Opportunity cost
Sunk cost
Recoverable past cost
23
Irrecoverable past costs.
133. In case of project evaluation, when capital investments contain Current asset
component, it is treated as part of:
Working capital
Operating cash inflows
Capital investment
Additional cash inflow
134. If the cash flow stream for a project is NOT a uniform series of inflows. Initial
outflow occur at time 0. 15% discount rate produces a resulting present value of Rs.
104,000 (approximately) that is greater than the initial cash outflow of Rs. 100,000.
Now if we want to calculate the best discount rate:
We need to try a higher discount rate

We need to try a lower discount rate
15% is the best discount rate
Interpolation is not required here
135. Which of the following technique would be used for a project that has non
normal cash flows?
Internal rate of return

Multiple internal rate of return
Modified internal arte of return
Net present value
136. A capital budgeting technique that is NOT considered as a discounted cash flow
method is:
Payback period
Net present value
Profitability index
137. To select the combination of investment proposals that will provide the greatest
increase in the value of the firm within the budget ceiling constraint is:
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
24
138. For issuance of bond, the discount or capitalization rate, applied to the cash flow
stream will differ among bonds depending upon the:
Risk and return

Risk structure
Risk free rate
Premium for risk
139. AT & T and General Electric Company have exceptionally strong credit
positions. They are such strong that they dont have to put up property as security for
debt issue. The debt instrument they would use to borrow money is:
Mortgage bonds
Indentures
Debentures
T-bills
140. If a bonds
Market required rate of return
Stated coupon rate
13%
12%
In case of bond discount, price for this bond:
Will be less then its face value

Will be more than its face value
Depends upon the market conditions
Cannot be determined
141. Which of the followings states that the cost of equity is a positive linear function of
capital structure?
The Capital Asset Pricing Model

M&M Proposition I
M&M Proposition II
The Law of One Price
142. Which of the following is called the tax savings of the firm derived from the
deductibility of interest expense?
Interest tax shield

Depreciable basis
Financing umbrella
Current yield
25
143. Above the breakeven EBIT, increased financial leverage will __________ EPS, all
else the same. Assume there are no taxes.
Increase
Decrease
Either increase or decrease
Increase EBIT but decrease
144. A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
If sales rise by 3.5% at the firm, then EBIT will rise by 1%

If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
If sales rise by 1% at the firm, then EBIT will rise by 3.5%
145. A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
If sales rise by 3.5% at the firm, then EBIT will rise by 1%

If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
If sales rise by 1% at the firm, then EBIT will rise by 3.5%
146. Which of the following is an example of restructuring strategy?
Dividends are increased from Rs.1 to Rs.2 per share

A new investment increases the firm's business risk
New equity is issued and the proceeds repay debt
A new Board of Directors is elected to the firm
147. The stability of a firm's operating income is the focus of:
Financial leverage
Weighted-average cost of capital
Capital structure
Business risk
148. The presence of which one of the following costs is not used as a major argument
against the M&M arbitrage process?
Bankruptcy costs
Agency costs
Transactions costs
Insurance costs
149. When a firm declares a special cash dividend of $1 per share, shareholders realize
that the:
Annual dividend will be $4 per share
26
Dividends are considered regular

Dividend is not likely to be repeated
Stock must be owned prior to the declaration date to receive the dividend
150. What would you expect to happen to the price of a share of stock on the day it goes
ex-dividend?
The price should increase by the amount of the dividend

The price should decrease by the amount of the dividend
The price should decrease by one-half the amount of the dividend
The price should remain constant
151. Who determine the market price of a share of common stock?

The board of directors of the firm
The stock exchange on which the stock is listed
The president of the company
Individuals buying and selling the stock
152. What should be the focal point of financial management in a firm?
The number and types of products or services provided by the firm
The minimization of the amount of taxes paid by the firm
The creation of value for shareholders
The dollars profits earned by the firm
153. Which of the following would generally have unlimited liability?
A limited partner in a partnership
A shareholder in a corporation
The owner of a sole proprietorship
A member in a limited liability company (LLC)
154. Which of the following is equal to the average tax rate?
Total tax liability divided by taxable income
Rate that will be paid on the next dollar of taxable income
Median marginal tax rate
Percentage increase in taxable income from the previous period
155. Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and
a net profit margin of 5 percent. What are its sales?
Rs.3, 750,000
Rs.480, 000
Rs.300, 000
Rs.1, 500,000
Since ROI=8% on $300,000 of assets, then net profit is Rs.24,000 (8%
Rs.300,000). Using the net profit and given that the NPM=5%, sales equals
Rs.480,000 (Rs.24,000 / 5%).
27
156. Which of the following would not improve the current ratio?
Borrow short term to finance additional fixed assets
Issue long-term debt to buy inventory
Sell common stock to reduce current liabilities
Sell fixed assets to reduce accounts payable
157. With continuous compounding at 8 percent for 20 years, what is the approximate
future value of a Rs.20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Rs.20,000[ e(.08 20) ] = Rs.20,000(4.9530324) = Rs.99,061.
158. In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly
decrease, the present value of that future amount to you would __________.
Fall
Rise
Remain unchanged
Incomplete information
159. Cash budgets are prepared from past:
Balance sheets
Income statements
Income tax and depreciation data
160. Which of the following is part of an examination of the sources and uses of funds?
A forecasting technique
A funds flow analysis
A ratio analysis
Calculations for preparing the balance sheet
161. An annuity due is always worth _____ a comparable annuity.
Less than
More than
Equal to
Can not be found
162. As interest rates go up, the present value of a stream of fixed cash flows _____.
Goes down
Goes up
Stays the same
Can not be found
163. ABC company is expected to generate Rs.125 million per year over the next three
28
years in free cash flow. Assuming a discount rate of 10%, what is the present value
of that cash flow stream?
Rs.375 million
Rs.338 million
Rs.311 million
Rs. 211 million
$311 million. The The cash flow stream would look like this: 125.00 x 0.9090 = 113.63;
125.00 x 0.8264 = 103.30; 125.00 x 0.7513 = 93.91. The sum of the three is $310.84, or
$311 million.
164. If we were to increase ABC company cost of equity assumption, what would we
expect to happen to the present value of all future cash flows?
An increase
A decrease
No change
Incomplete information
165. In proper capital budgeting analysis we evaluate incremental __________ cash
flows.
Accounting
Operating
Before-tax
Financing
166. A capital budgeting technique through which discount rate equates the present value
of the future net cash flows from an investment project with the projects initial cash
outflow is known as:
Payback period
Net present value
Profitability index
167. Discounted cash flow methods provide a more objective basis for evaluating and
selecting an investment project. These methods take into account:
Magnitude of expected cash flows
Timing of expected cash flows
Both timing and magnitude of cash flows
168. Which of the followings make the calculation of NPV difficult?
Estimated cash flows
Discount rate
Anticipated life of the business
169. From which of the following category would be the cash flow received from sales
revenue and other income during the life of the project?
29
Financing activity
Operating activity
Investing activity
170. Which of the following technique would be used for a project that has non normal
cash flows?
Multiple internal rate of return
Modified internal arte of return
Net present value
171. Why net present value is the most important criteria for selecting the project in
capital budgeting?
Because it has a direct link with the shareholders dividends maximization
Because it helps in quick judgment regarding the investment in real assets
Because we have a simple formula to calculate the cash flows
Because it has direct link with shareholders wealth maximization
172. In which of the following situations you can expect multiple answers of IRR?
More than one sign change taking place in cash flow diagram
There are two adjacent arrows one of them is downward pointing & the
other one is upward pointing
During the life of project if you have any net cash outflow
173. Which one of the following selects the combination of investment proposals that
will provide the greatest increase in the value of the firm within the budget ceiling
constraint?
Cash budgeting
Capital budgeting
Capital expenditure
Capital rationing
174. Who is responsible for the decisions relating capital budgeting and capital rationing?
Chief executive officer
Junior management
Division heads
All of the given option
175. What is a legal agreement, also called the deed of trust, between the corporation
issuing bonds and the bondholders that establish the terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee
30
176. __________ is a high-risk, high-yield bond rated below investment grade; while a/
(an) __________ bond has its interest payment contingent on sufficient earnings of the
firm.
A junk bond; income
A subordinated debenture; mortgage
A debenture; subordinated debenture
An income bond; mortgage
177. __________ is a long-term, unsecured debt instrument with a lower claim on assets
and income than other classes of debt; while a/(an) __________ bond issue is secured by
the issuer's property.
A subordinated debenture; mortgage
A debenture; subordinated debenture
A junk bond; income
An income bond; junk
178. The value of the bond is NOT directly tied to the value of which of the following
assets?
Liquid assets of the business
Fixed assets of the business
Lon term assets of the business
Real assets of the business
179. The value of a bond is directly derived from which of the following?
Cash flows
Coupon receipts
Par recovery at maturity
180. Which of the following is not the present value of the bond?
Intrinsic value
Fair price
Theoretical price
Market price
181. The current yield on a bond is equal to ________.
The yield to maturity
Annual interest divided by the par value
Annual interest divided by the current market price
The internal rate of return
182. A coupon bond pays annual interest, has a par value of Rs.1,000 matures in 4 years,
has a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield
on this bond is?
10.45%
10.95%
31
10.65%
10.52%
183. Which of the following is a characteristic of a coupon bond?
Does not pay interest on a regular basis but pays a lump sum at maturity
Can always be converted into a specific number of shares of common
stock in the issuing company
Pays interest on a regular basis (typically every six months)
Always sells at par
184. Which of the following value of the shares changes with investors perception about
the companys future and supply and demand situation? (Comprehension)
Par value
Intrinsic value
Market value
Face value
185. The value of direct claim security is derived from which of the following?
Fundamental analysis
Underlying real asset
Supply and demand of securities in the market
186. _________ is equal to (common shareholders' equity/common shares outstanding).
Liquidation value per share
Book value per share
Market value per share
None of the above
187. Low Tech Company has an expected ROE of 10%. The dividend growth rate will be
________ if the firm follows a policy of paying 40% of earnings in the form of
dividends.
4.8%
6.0%
7.2%
3.0%
188. High Tech Chip Company is expected to have EPS in the coming year of Rs.
2.50. The expected ROE is 12.5%. An appropriate required return on the stock is
11%. If the firm has a plowback ratio of 70%, what would be the growth rate of
dividends?
6.25%
8.75%
6.60%
7.50%
32
189. In the dividend discount model, _______ which of the following are not
incorporated into the discount rate?
Real risk-free rate
Risk premium for stocks
Return on assets
Expected inflation rate
190. Bond is a type of Direct Claim Security whose value is NOT secured by
__________.
Tangible assets
Fixed assets
Intangible assets
Real assets
33

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190 Solved MCQs of MGT201

1. If coefficient of Correlation, Ro = 0 then :

4. The following risk is entirely wiped out by Diversification.

5. Total Risk for Investment consists of Diversifiable Risk and :

6. If a share As Beta = + 1.0 then :

7. The Beta for the most Stocks ranges between :

8. According to the capital-asset pricing model (CAPM), a security's expected

10. An "aggressive" common stock would have a "beta"

Greater than one

16. Which of the following source of financing involve no transactions costs?

Blend of equity and debt used by firm

36. Higher operating leverage is related to the use of additional _____________.

37. Lower financial leverage is related to the use of additional ______________.

38. Gordon and Lintner Theory is also known as ________________________.

Relaxed Policy requires ____________ amount of Current Assets whereas

Restricted Policy requires _____________ amount of Current Assets.

50.An investor holding a well-diversified portfolio will not be exposed to

51. An investor holding a well-diversified portfolio will not be exposed to

61. ----------------- reflects the operating efficiency of a company during an accounting

62. In finance we refer to the market for short-term government and

Money paid (earned) for the use of money is called ____________.

75.Which of the following capital budgeting technique ignores time value of

81. The greater the beta, the_________of the security involved.

Greater the unavoidable risk

82. According to the capital-asset pricing model (CAPM), a security's

Equal to the security's beta.

One; more than one.

3.6 percent; 7.2 percent

The expected return on this common stock would be

89. A line that describes the relationship between an individual security's

91. Preferred shareholders' claims on assets and income of a firm come

Before; and also before

The value of Bonds purchased for investment purposes

The degree to which debt is used in financing the firm

94. The ultimate ownership of the firm resides:

Play a primary role in the financing of the firm

100. Which of the following causes an increase in a company diversifiable

101. ---------------- refers to the overall cost to an organization of obtaining

103. ---------------increases financial risk and bankruptcy risk of a firm.

105. Which of the following sources of financing involve no transactions costs?

108.According to signaling theory of capital structure, if future prospects of a firm

110. ---------------- refers to the net income expressed as a percentage of average

117._________ receives a fixed regular dividend.

118. __________ is issued from foreign country.

119. Which of the following is not considered as bond?

Term Finance Certificate

130. In the formula rCE = (D1V1/Po) + g, what does g represent?

Irrecoverable past costs.

We need to try a higher discount rate

Internal rate of return

Risk and return

In case of bond discount, price for this bond:

Will be less then its face value

The Capital Asset Pricing Model

Interest tax shield

If sales rise by 3.5% at the firm, then EBIT will rise by 1%

If sales rise by 3.5% at the firm, then EBIT will rise by 1%

146. Which of the following is an example of restructuring strategy?

Dividends are increased from Rs.1 to Rs.2 per share

147. The stability of a firm's operating income is the focus of:

Dividends are considered regular

The price should increase by the amount of the dividend