# Corporate Finance MCQ With Answers

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Hello and welcome to this short and interesting 'corporate finance MCQ quiz with answers' that is given below. We have created this quiz to test your knowledge about corporate finance and its related concepts. So, if you think you have a good understanding of this topic, then you must take this quiz. Let's see how well you can score. So, you are ready to take this test? Wishing you the best of luck!

• 1.

### At the interest rate of 15%, the 2 years discounting factor will be

• A.

0.7561

• B.

0.8697

• C.

0.9651

• D.

1.1225

A. 0.7561
Explanation
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.

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• 2.

### The firm's investment decision is also called as the

• A.

Financing Decision

• B.

Capital Budgeting Decision

• C.

Liquidity Decision

• D.

Dividend Decision

B. Capital Budgeting Decision
Explanation
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.

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• 3.

### As far as their value is concerned, the top priority group in company should be

• A.

Shareholders

• B.

Employees

• C.

Board of Directors

• D.

Governing Body

A. Shareholders
Explanation
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.

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• 4.

### Normally the Cost of Capital should be -----

• A.

Equal to IRR

• B.

Less than IRR

• C.

More than IRR

• D.

Corresponding to IRR

B. Less than IRR
Explanation
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.

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• 5.

### Modigliani Miller Approach highlights the following aspect in dividend decisions

• A.

Rate of Dividend

• B.

Company tendency to retain earnings

• C.

Zero impact of market prices of shares

• D.

Shareholders' expectations

C. Zero impact of market prices of shares
Explanation
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.

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• 6.

### From the following, which is not the direct middleman in the capital market ?

• A.

Rating Agencies

• B.

Broker

• C.

Banker

• D.

Trustee

A. Rating Agencies
Explanation
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.

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• 7.

### The term Over or Under Subscription is used in case of ---

• A.

Bank Financing

• B.

Public Issue

• C.

Non Performing Assets

• D.

Syndicate Financing

B. Public Issue
Explanation
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.

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• 8.

### If the present value of cash flow X is Rs.200 & that of Y is Rs.150, the combined present value of cash flows will be --

• A.

Rs.200

• B.

Rs.150

• C.

Rs.50

• D.

Rs.350

D. Rs.350
Explanation
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.

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• 9.

### Limited Liability is main feature of ---

• A.

Sole Proprietorship

• B.

Partnership

• C.

Corporations

• D.

N G O

C. Corporations
Explanation
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.

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• 10.

### The Steel Authority Of India sold out 5% of their stake to private players & raised \$ 275 Million. This is popularly called as  --

• A.

• B.

• C.

Disinvestment

• D.

Foreign Direct Investment

C. Disinvestment
Explanation
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.

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• 11.

### A formula of X-Y/Z is used for calculating the -- of Business Assets

• A.

Book Value

• B.

Market Value

• C.

Fair Value

• D.

Liquidation Value

D. Liquidation Value
Explanation
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.

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• 12.

### In ascertaining the EVA, the following component is to be considered.

• A.

Earnings Before Tax

• B.

Earnings After Tax & Interest

• C.

Earnings after Tax excluding Interest

• D.

Profits After Taxes

C. Earnings after Tax excluding Interest
Explanation
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.

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• 13.

### Annuity is defined as -

• A.

Equal cash flows at equal intervals of time at a specific period

• B.

Equal cash flows at equal intervals of time forever

• C.

Unequal cash flows at equal intervals of time forever

• D.

Unequal cash flows at equal intervals of time for specific period

A. Equal cash flows at equal intervals of time at a specific period
Explanation
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.

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• 14.

### The creditors of company are usually interested in observing the --

• A.

Liquidity Ratio

• B.

Solvency Ratio

• C.

Profitability Ratio

• D.

Turnover Ration

A. Liquidity Ratio
Explanation
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.

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• 15.

### From the following, which is not considered as the financial asset ?

• A.

Common Stock

• B.

Patents

• C.

Bonds

• D.

Preferred Stock

B. Patents
Explanation
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.

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• 16.

### Short Term Period in business is generally ___________.

• A.

Less than 3 Months

• B.

Less than 6 Months

• C.

Less than a year

• D.

Less than 5 years

C. Less than a year
Explanation
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.

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• 17.

### The Finance Controller is responsible for the following except

• A.

Preparation & interpretation of Financial Statements

• B.

Internal Auditing

• C.

Tax Management

• D.

D. Raising of Funds for business
Explanation
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.

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• 18.

### Financial leverage of the company is ascertaining by using..

• A.

Liquidity Ratio

• B.

Long Term Solvency Ratio

• C.

Turnover Ratio

• D.

Profitability Ratio

B. Long Term Solvency Ratio
Explanation
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.

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• 19.

### Quick Ratio indicates the ..

• A.

Profitability of the company

• B.

Cash position of the company

• C.

Capital Structure of the company

• D.

None of the above

B. Cash position of the company
Explanation
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.

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• 20.

### Any speculative stock having high probability in future is seem to be  ---- today.

• A.

High, Negative & Under-priced

• B.

High, Negative & Overpriced

• C.

High, Positive & Overpriced

• D.

Low, Negative & Overpriced

D. Low, Negative & Overpriced
Explanation
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.

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• Current Version
• Jun 07, 2023
Quiz Edited by
ProProfs Editorial Team
• Mar 05, 2015
Quiz Created by
AniruddhaT

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