MCQ Bank

The Payback Period is a non-discounted capital budgeting technique because it does not account for the time value of money. Profitability Index, IRR, and NPV are discounted cash flow methods.

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Q201

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

AI Explanation

Incremental cash flows are the changes in the firm's total cash flows that occur directly as a result of accepting a project. They are central to evaluating the project's financial impact.

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Q202

One would be indifferent between taking and not taking the investment when:

A) NPV is equal to Zero
B) All of the given options
C) NPV is less than Zero
D) NPV is greater than Zero

AI Explanation

An NPV of zero means the project's discounted cash inflows exactly equal its initial investment and other relevant outflows. At this point, the investor is financially indifferent between accepting and rejecting the project.

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Q203

What will be the price per share if there is a current dividend of Rs. 4.75, required rate of return of 12% and growth rate of 5%?

A) Rs. 43.52
B) Rs. 56.53
C) Rs. 30.19
D) Rs. 71.25

AI Explanation

Using the dividend growth model, the value is P0 = D1/(R − g), where D1 = Rs. 4.75 × 1.05 = Rs. 4.9875. Thus P0 = 4.9875/(0.12 − 0.05) ≈ Rs. 71.25, so the mathematically correct option is D, not B.

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Q204

The book value of a system is Rs. 35,500 at the end of year 4 of its life. What will be the total after-tax cash flow from sale if we sell this system for Rs. 20,000 at this time? (Tax rate is 35%)

A) Rs. 20,327
B) Rs. 15,000
C) Rs. 15,220
D) Rs. 25,425

AI Explanation

Selling below book value creates a tax saving because the loss is Rs. 35,500 − Rs. 20,000 = Rs. 15,500. The tax shield is Rs. 15,500 × 35% = Rs. 5,425, giving after-tax proceeds of Rs. 20,000 + Rs. 5,425 = Rs. 25,425, so the mathematically correct option is D, not A.

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Q205

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

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

AI Explanation

Under MACRS, autos and computers are generally classified as 5-year property. The 5-year recovery period is used for many vehicles and computer equipment.

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Q206

Over the past four years, a company has paid dividends of Rs. 1.00, 1.10, 1.20 and 1.30 in Year 1, 2, 3 and 4 respectively. The same pattern is expected to continue in the future as well. This is an example of a company paying dividends that grows by:

A) At a decreasing rate
B) 10 percent each year
C) A decreasing amount
D) At a constant rate

AI Explanation

The dividend increases by Rs. 0.10 each year: from 1.00 to 1.10, then 1.20 and 1.30. Thus, the dividend grows by a constant amount rather than by a constant percentage.

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Q207

In which method of depreciation, we divide the cost of asset with its useful life?

A) Sum of the years digit
B) Declining value
C) Straight line
D) MACRS

AI Explanation

Under the straight-line depreciation method, the depreciable cost is allocated evenly over the asset's useful life. Therefore, cost divided by useful life forms the basis of the annual depreciation calculation.

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Q208

Mr. Aslam owns 100 shares of a company and there are four directors to be elected. How much votes Mr. Aslam would have as per cumulative voting procedure?

A) 100 votes
B) 200 votes
C) 300 votes
D) 400 votes

AI Explanation

With cumulative voting, total votes equal shares owned multiplied by the number of directors being elected. Mr. Aslam has 100 shares and four directors, so he has 100 × 4 = 400 votes.

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Q209

Which one of the following is NOT considered under MACRS of deprecation?

A) Book value
B) Historical cost value
C) Depreciable value
D) Salvage value

AI Explanation

MACRS generally ignores salvage value when calculating depreciation deductions. Instead, the applicable MACRS recovery period and prescribed depreciation rates are used.

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Q210

When corporations borrow, they generally promise to:
I. Make regular scheduled interest payments
II. Give the right of voting to bondholders
III. Repay the original amount borrowed (principal)
IV. Give an ownership interest in the firm

A) II and IV
B) I and III
C) I and II
D) I, III, and IV

AI Explanation

When a corporation borrows, it generally promises to make scheduled interest payments and repay the principal amount. Bondholders do not normally receive voting rights or an ownership interest in the firm.

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Q211

Which of the following allows a company to repurchase part or all of the bond issue at a stated price?

A) Repayment
B) Protective covenants
C) Seniority
D) Call provision

AI Explanation

A call provision gives the issuing company the right to repurchase some or all of a bond issue at a specified price. This allows the company to retire debt before its scheduled maturity.

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Q212

Which one of the following securities is considered as equity security?

A) Shares
B) Notes
C) Debentures
D) Bonds

AI Explanation

Shares represent ownership in a corporation and are therefore classified as equity securities. Notes, debentures, and bonds represent debt claims against the issuer.

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Q213

Treasury notes and bonds are examples of which of the following types of bonds?

A) Zero coupon bonds
B) Euro bonds
C) Floating-rate bonds
D) Government bonds

AI Explanation

Treasury notes and Treasury bonds are debt securities issued by the government. They are generally regarded as very low-risk or default-free investments because they are backed by the government.

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Q214

Which of the following is NOT an important feature of treasury notes and bonds?

A) Highly liquid
B) Taxable
C) Least liquid
D) Default free

AI Explanation

Treasury notes and bonds are highly liquid securities and are generally considered default-free, although their interest income is taxable. Therefore, being least liquid is not an important feature of Treasury notes and bonds.

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Q215

Investors demand a higher yield as compensation to the risk of possible default. This extra premium is called:

A) Interest rate risk premium
B) Default risk premium
C) Inflation risk premium
D) Taxability premium

AI Explanation

The default risk premium compensates investors for the possibility that a borrower may fail to make required interest or principal payments. Higher default risk generally requires a higher premium.

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Q216

Which one of the following statements is CORRECT regarding call provision?

A) Allows holder to return bonds to company more than its par value
B) Refers to the difference between stated price of bond and call price
C) Allows company to sell bonds more than it par value at any time
D) Allows company to repurchase bond at stated price over a specified period

AI Explanation

A call provision gives the issuing company the right to repurchase bonds at a specified call price during a stated period. It allows the issuer to retire debt before maturity under the specified terms.

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Q217

Which one of the following terms refers to a percentage change in the purchasing power of the investor?

A) Real return
B) The inflation rate
C) Un-adjusted inflation return
D) Nominal return

AI Explanation

Real return measures the investor's return after accounting for changes in purchasing power caused by inflation. It therefore reflects the actual increase or decrease in purchasing power.

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Q218

Which of the following has the voting right in the firm?

A) All of the given options
B) Preferred shareholder
C) Shareholder
D) Bondholder

AI Explanation

Common shareholders generally have voting rights in the firm and can vote on important corporate matters. Bondholders are creditors, while preferred shareholders typically have limited or no voting rights.

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Q219

When real rate is _____, all interest rates will tend to be _____.

A) High; lower
B) None of the given options
C) Low; higher
D) High; higher

AI Explanation

A higher real interest rate generally raises the overall level of interest rates, all else equal. The real rate is a key component of nominal interest rates.