Finance MCQ

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A public limited company is usually owned by:
a) employees
b) the managers
c) board of directors
d) shareholders
d) shareholders

The main objective of the financial management of an organisation is to
a) maximises profity
b) provide foods and services
c) maximise growth
d) maximise shareholders wealth
d) maximise shareholders wealth


The IRR is defined as
a) the discount rate that equals the hurdle rate
b) the discount rate that gives an NPV of zero
c) the discount rate that gives a positive NPV
d) the discount rate that equals the cost of capital
b) the discount rate that gives an NPV of zero

Which of the following statements is true?
a) the NPV method can give rise to multiple rates of return
b) the IRR method works out the company's cost of capital
c) the IRR method is best to use when evaluating projects with different project lives
d) the NPV method is best when evaluating projects of different scale
d) the NPV method is the best when evaluating projects of different scale

Which of the following is not a measure of volatility?
a) beta
B) variance
c) standard deviation
d) expected return
d) expected return

Unsystematic risk is the same as
a) diversifiable risk
b) portfolio risk
c) undiversifiable risk
d) market risk
...

The Capital Market Line shows the relationship between
a) beta and expected return
b) standard deviation and return
c) beta and the risk free rate of return
d) standard deviation and expected return
b)standard deviation and return

Risk averse means that
a) rational investors will seek risky investments
b) rational investors will expect a higher return in line with higher risk
c) rational investors will only invest in risk free assets
d) rational investors will avoid any risk and invest only in the risk free asset
b) rational investors will expect a higher return in line with higher risk

Which one of the following statements is correct?
a) the contribution of a share to the risk of a diversified portfolio depends on its divisible risk
b) the addition of a new share to a portfolio will always reduce risk
c) the contribution of a share to the risk of a diversified portfolio will depend on its undiversifiable risk
d) shares will react equally to market wide factors
c) the contribution of a share to the risk of a diversified portfolio will depend on its undiersifiable risk

Which one of the following portfolios has the least risk?
a) portfolio representing the market index
b) portfolio of blue chip companies
c) portfolio consisting of a mix of company bonds
d) a portfolio of treasury bills
d) a portfolio of treasury bills

The capital structure decision refers to
a) a decision about dividend distribution
b) a decision about what form of equity to use
c) a decision as to the mix of debt and equity
d) a decision on the management of working capital
c) a decision as to the mix of debt and equity

A share will be declared EX dividend when?
a) the final dividend is paid
b) the interim dividend is paid
c) the dividend amount is announced
d) the buyer of a share will not receive the dividend
d) the buyer if a share will not receive the dividend


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Which of the following statements is incorrect?
a) when a company is suffering from financial distress it must stop trading
b) the cost of financial stress is one reason WACC will tend to rise once gearing exceeds a certain level
c) financial distress refers to the financial difficulties facing a company which may lead to bankruptcy
d) adding more debt to a company will increase its chances of suffering from financial distress
a) when a company is suffering from financial distress it must stop trading

A project has a conventional pattern of cash flows. What would be the effects of an increase in the company's cost of capital on the internal rate of return of the project and its payback period
a) IRR increase and payback period increase
b) IRR increase and payback period no change
c) IRR no change and payback period increase
d) IRR no change and payback period no change
d) IRR no change and payback period no change

The required yields for bonds has decreased equally for all maturities. Which of the following statements is false?
a) shorter-dated bonds should tend to outperform longer-dated bonds
b) prices of bonds should rise
c) the cost of raising new debt capital should fall for companies
d) cost of equity could be affected based on the CAPm formula
a) shorter dated bonds should tend to outperform longer dated bonds

Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?
a) the NPV method does not assume reinvestment of cash flows, while the IRR method assumes the cash flows will be reinvested at the internal rate of return
b) the NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return
c) the IRR method does not assume reinvestment of the cash flows, while the NPV method assumes the reinvestment rate is equal to the discount rate
d) the NPV method assumes a reinvestment rate equal to the bank loan interest rate, while the IRR method assumes a reinvestment rate equal to the discount rate
b) the NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return

Which of the following statements is correct?
a) WACC always decreases as leverage increases
b) M and M argue that WACC remains constant if there are no taxes
c) M and M argue that the cost of equity remains constant if there are no taxes
d) cost of equity reduced when a company's changes of suffering from financial distress rises
b) M and M argue that WACC remains constant if there are no taxes

Systematic risk is the same as
a) diversifiable risk
b) market risk
c) specific risk
d) credit risk
c) specific risk

Which of the following statements is correct?
a) companies should issue share capital as dividends are tax deductible
b) ordinary shares carry less risk for investors than preference shares
c) issuance cost are higher for equity than debt
d) issing debt reduces cash for a company
c) issuance costs are higher for equity than debt