MCQ Bank

Profitability Index = Present Value of future cash flows ÷ Initial Investment. With a PI of 1.12, the present value is Rs. 672,000, so NPV = Rs. 672,000 − Rs. 600,000 = Rs. 72,000.

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Internal Rate of Return (IRR) is sometimes referred to as:

A) Simple Interest Rate
B) Required Rate of Return
C) Economic Rate of Return
D) Compound Interest Rate

AI Explanation

The Internal Rate of Return (IRR) is also known as the Economic Rate of Return. It is the discount rate at which the net present value of an investment becomes zero.

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Expected new sales due to the introduction of a diet version of an existing beverage results in decline in the sale of existing beverage is an example of:

A) Opportunity cost
B) Sunk cost
C) Cannibalism
D) Financing cost

AI Explanation

Cannibalism occurs when sales of a new product reduce sales of an existing product from the same company. Here, the diet beverage is expected to take sales away from the existing beverage.

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Which one of the following represents a cash outflow?

A) Increase in long term debt
B) Increase in receiveables
C) Increase in inventory
D) Increase in payables

AI Explanation

An increase in inventory represents a cash outflow because the company uses cash to purchase additional inventory. In contrast, increases in debt and payables generally provide cash inflows.

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Autos and Computers falls under which one of the following MACRS property classes?

A) 3-Year
B) 5-Year
C) 7-Year
D) 10-Year

AI Explanation

Under the Modified Accelerated Cost Recovery System (MACRS), automobiles and computers are classified as 5-year property. Their depreciation is therefore recovered over a 5-year MACRS class life.

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Which of the following capital budgeting technique is used by the financial management to increase the share value of the company?

A) IRR
B) Payback period
C) PI
D) NPV

AI Explanation

Net Present Value (NPV) focuses on the increase in firm value generated by an investment. Projects with positive NPV are expected to increase shareholders' wealth.

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Which of the following set of cash flows represent the change in the firm’s total cash flow that occurs as direct result of accepting the project ?

A) Negative Cash Flows
B) Incremental Cash Flows
C) Relevant Cash Flows
D) All of the given options

AI Explanation

Incremental cash flows are the changes in the firm's total cash flows that occur directly because the project is accepted. They are the relevant cash flows used in capital budgeting analysis.

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Preemptive right of a shareholder means:

A) Right to share proportionately in any new stock sold
B) Right to share proportionately in assets remaining after liabilities at liquidation
C) Right to share proportionately in dividend paid
D) Right to vote on matter of great importance

AI Explanation

A preemptive right allows existing shareholders to maintain their proportional ownership when new shares are issued. It gives them the opportunity to purchase a proportionate share of the new stock.

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Which of the following is NOT a shortcoming of Payback Rule?

A) It fails to consider risk differences
B) Simple and easy to calculate
C) Time value of money is ignored
D) None of the given options

AI Explanation

Being simple and easy to calculate is an advantage of the Payback Rule, not a shortcoming. The rule's shortcomings include ignoring the time value of money and failing to adequately account for differences in risk.

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Which of the following is a measure of accounting profit relative to the book value?

A) Profitability Index
B) Average Accounting Return
C) Internal Rate of Return
D) Net Present Value

AI Explanation

Average Accounting Return (AAR) measures accounting profit relative to the average book value of an investment. NPV, IRR, and PI are based on discounted cash flows rather than accounting profit relative to book value.

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Q10

Which of the following term refers to the difference between the present value of cash inflows and the present value of cash outflows?

A) Internal Rate of Return (IRR)
B) Net Present Value (NPV)
C) Average Accounting Return (AAR)
D) Profitability Index (PI)

AI Explanation

Net Present Value is the difference between the present value of cash inflows and the present value of cash outflows. It measures the net value added by an investment after considering the time value of money.

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Q11

In which of the following procedure of voting for a company's directors, each shareholder is entitled to one vote per share?

A) None of the given options
B) Proportional Voting
C) Straight Voting
D) Cumulative Voting

AI Explanation

Under straight voting, each shareholder has one vote per share for each director position. This means shareholders vote separately for each director rather than combining votes.

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Q12

Sumi Inc. has just paid a dividend of Rs. 7 per share. The dividend of this company grows at a steady rate of 5% per year. What will be the dividend in 5 years?

A) Rs. 8.93
B) Rs. 6.12
C) Rs. 4.41
D) Rs. 7.35

AI Explanation

The dividend in five years is calculated as D5 = Rs. 7 × (1.05)^5. This gives approximately Rs. 8.93.

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Q13

ABC Company has following information regarding its proposed investment:
Initial Investment Rs. 250,000
Net Present Value 40,000
Cost of Capital 12%

What will be the Profitability Index (PI) of proposed investment?

A) 4%
B) 16%
C) 1.16 times
D) 0.16 times

AI Explanation

Profitability Index = Present Value of future cash flows ÷ Initial Investment. Since NPV is Rs. 40,000, the present value of inflows is Rs. 290,000, giving PI = Rs. 290,000 ÷ Rs. 250,000 = 1.16 times.

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Q14

While calculating profitability index, present value of the future cash flows is divided with:

A) Future cash flows
B) Initial investment
C) Growth rate
D) Discount rate

AI Explanation

The Profitability Index is calculated by dividing the present value of future cash flows by the initial investment. It indicates the present value generated for each unit of initial investment.

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Q15

Which of the following can be calculated if, average net income is divided by average book value?

A) NPV
B) IRR
C) Payback period
D) AAR

AI Explanation

Average Accounting Return (AAR) is calculated by dividing average net income by average book value. It measures accounting profitability relative to the average accounting value of the investment.

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Q16

If the book value exceeds the market value, then the difference is treated as a _________ for tax purposes.

A) None of the given options
B) Profit
C) Surplus
D) Loss

AI Explanation

If the book value of an asset exceeds its market value, the difference represents a loss for tax purposes. This loss can generally reduce taxable income, subject to applicable tax rules.

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Q17

Which of the following is a characteristic of preferred stock?

A) These stocks have not any kind of priority over common stocks
B) These stocks have not stated liquidating value
C) Dividends on these stocks can be cumulative
D) These bonds hold credit ratings quite different from bonds

AI Explanation

Preferred stock can have cumulative dividends, meaning unpaid dividends accumulate and must generally be paid before common shareholders receive dividends. Preferred shareholders also typically have priority over common shareholders regarding dividends and liquidation proceeds.

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Q18

For preparing pro forma financial statements, we need to estimates all of the following quantities EXCEPT:

A) Administration cost per unit
B) Selling price per unit
C) Variable cost per unit
D) Unit sales

AI Explanation

Pro forma financial statements require estimates such as selling price per unit, variable cost per unit, and unit sales. Administration cost per unit is not typically a required estimate for preparing these statements.

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Q19

A project whose acceptance prevents the acceptance of one or more alternative projects is referred to as a(n):

A) independent project
B) contingent project
C) mutually exclusive project
D) dependent project

AI Explanation

Mutually exclusive projects are alternatives where accepting one project prevents the acceptance of another. Therefore, the firm must select among the competing projects rather than accept all of them.