Corporate Finance MCQ With Answers

The correct answer is shareholders because they are the owners of the company and their primary concern is maximizing the value of their investment. Shareholders provide the necessary capital for the company's operations and expect a return on their investment in the form of dividends or capital appreciation. Therefore, the company should prioritize their interests and make decisions that enhance shareholder value. While employees, board of directors, and the governing body are also important stakeholders, their interests may align with or be subordinate to those of the shareholders.

The combined present value of cash flows will be Rs. 350 because it is the sum of the present values of cash flow X (Rs. 200) and cash flow Y (Rs. 150). By adding these two values together, we get a total of Rs. 350.

Short Term Period in business refers to a relatively brief duration within which business activities are conducted. It typically encompasses a time frame of less than a year. This shorter time period allows businesses to focus on immediate goals, such as meeting quarterly targets or addressing short-term market fluctuations. By defining short term as less than a year, it provides a clear and concise understanding of the timeframe under consideration.

Annuity is a financial concept that refers to a series of equal cash flows occurring at regular intervals over a specific period of time. This means that the amount of money received or paid out remains the same for each interval, and the intervals between the cash flows are also consistent. Annuities can be used for various purposes, such as retirement savings or loan repayments, and the equal cash flows make it easier to plan and budget for future financial needs.

The firm's investment decision refers to the process of allocating capital to various investment opportunities. This decision involves analyzing and evaluating potential projects or investments to determine their profitability and feasibility. It is commonly known as the capital budgeting decision because it involves budgeting and allocating funds for long-term investments that will generate future cash flows. The capital budgeting decision plays a crucial role in determining the firm's growth and profitability by ensuring that the investments made are aligned with the company's strategic objectives and generate a positive return on investment.

Patents are not considered as financial assets because they do not have an inherent monetary value or provide a direct claim to future cash flows. While patents can be valuable intellectual property assets, they are not classified as financial assets because their value is subjective and dependent on factors such as market demand and legal protection. Financial assets, on the other hand, are instruments or contracts that represent a legal claim to receive cash or other financial assets. Common stock, preferred stock, and bonds are all examples of financial assets as they represent ownership or debt claims with a quantifiable value.

The correct answer is 0.7561 because the discounting factor is calculated by dividing 1 by (1 + interest rate)^number of years. In this case, the interest rate is 15% and the number of years is 2. Therefore, the discounting factor is 1 / (1 + 0.15)^2 = 0.7561.

Over or Under Subscription is a term used in the context of a public issue. When a company offers its shares to the public for the first time, it may receive more or less demand than the number of shares available. If the demand for shares exceeds the number of shares offered, it is called oversubscription. Conversely, if the demand is less than the number of shares offered, it is called undersubscription. This term is commonly used in the stock market when determining the allotment of shares to investors.

The Quick Ratio is a financial metric that measures a company's ability to meet its short-term obligations with its most liquid assets. It excludes inventory from the calculation as it is not easily convertible to cash. Therefore, the Quick Ratio primarily reflects the cash position of the company, indicating how well it can cover its immediate liabilities using cash and cash equivalents. It provides insight into the company's liquidity and ability to handle unexpected expenses or financial difficulties.

The cost of capital should be less than the internal rate of return (IRR) because the cost of capital represents the rate of return required by investors to fund a project or investment, while the IRR represents the rate of return generated by the project itself. If the cost of capital is higher than the IRR, it means that the project is not generating enough return to cover the cost of funding, making it an unattractive investment. Therefore, the cost of capital should be lower than the IRR to ensure profitability and attractiveness for investors.

Corporations have the main feature of limited liability, which means that the shareholders' personal assets are protected and they are only liable for the amount they have invested in the company. This feature provides a legal separation between the shareholders and the corporation, allowing the company to take risks without putting the shareholders' personal assets at stake. In contrast, sole proprietorships and partnerships do not have limited liability, which means that the owners' personal assets can be used to satisfy business debts. NGOs, on the other hand, are not typically organized as corporations and may not have the same legal protections.

Rating agencies are not direct middlemen in the capital market. While brokers, bankers, and trustees all play intermediary roles in the capital market, rating agencies provide credit ratings and assessments of the creditworthiness of issuers and their securities. They do not directly facilitate the buying and selling of securities or provide financial services like brokers, bankers, and trustees do.

The correct answer is Disinvestment. Disinvestment refers to the sale of government or public sector assets to private players or investors. In this case, the Steel Authority of India sold 5% of their stake to private players, which resulted in raising $275 million. This strategy is often employed by governments to reduce their stake in public sector enterprises and raise funds for various purposes.

The Finance Controller is responsible for various financial tasks such as preparation and interpretation of financial statements, internal auditing, and tax management. However, raising funds for the business is not typically a responsibility of the Finance Controller. This task is usually handled by the finance department or the CFO, who works closely with banks, investors, and other financial institutions to secure funding for the company's operations and growth.

The correct answer is Long Term Solvency Ratio. This ratio is used to assess the long-term financial stability and solvency of a company by analyzing its ability to meet its long-term obligations. It focuses on the company's long-term debt and its ability to generate enough income to cover these obligations. By calculating this ratio, investors and creditors can determine the level of risk associated with investing or lending to the company.

The Modigliani Miller Approach suggests that the market prices of shares have no impact on dividend decisions. This means that the decision to pay dividends or retain earnings should not be influenced by the current market price of the company's shares. Instead, dividend decisions should be based on factors such as the rate of dividend, the company's tendency to retain earnings, and shareholders' expectations. The Modigliani Miller Approach emphasizes that the market prices of shares should not be a determining factor in dividend policy.

Creditors of a company are typically concerned with the liquidity ratio. This ratio measures a company's ability to meet its short-term financial obligations. Creditors want to ensure that the company has enough liquid assets to repay its debts as they become due. By analyzing the liquidity ratio, creditors can assess the company's ability to generate cash quickly and determine the level of risk involved in lending to the company. Therefore, creditors closely monitor the liquidity ratio to make informed decisions regarding extending credit to the company.

The correct answer is "Earnings after Tax excluding Interest." In calculating Economic Value Added (EVA), it is important to consider the earnings after tax but excluding interest. This is because interest is a financing cost that is not directly related to the company's operational performance. By excluding interest, the EVA calculation focuses on the company's ability to generate profits from its core operations, providing a more accurate measure of value creation.

The formula of X-Y/Z is used for calculating the Liquidation Value of Business Assets. This formula suggests that the difference between X and Y is divided by Z to determine the liquidation value.

This question is asking for the description that best fits a speculative stock that has a high probability in the future. The correct answer is "Low, Negative & Overpriced." This means that the stock is currently priced higher than its actual value, indicating that it may be overvalued. Additionally, the negative aspect suggests that the stock may have a negative outlook or be associated with some risks. The low probability indicates that despite these factors, there is still a chance for the stock to perform well in the future.