MCQ Bank

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

AI Explanation

The sale creates a loss of Rs. 15,500 because the selling price is Rs. 20,000 versus a book value of Rs. 35,500. The tax benefit is Rs. 5,425 (35% of Rs. 15,500), so the after-tax cash flow is Rs. 25,425.

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Q41

Which of the following statements is(are) TRUE regarding preferred shares?

A) All of the given options
B) Preferred stocks are often callable
C) Preferred stocks hold credit rating much like bonds
D) Preferred stocks are sometimes convertible

AI Explanation

Preferred stocks can be callable, may receive credit ratings similar to bonds, and can sometimes be converted into common stock. Therefore, all three statements are true.

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Q42

Which of the following comes under the head of discounted cash flow criteria for capital budgeting decisions?

A) Net Present Value
B) Payback Period
C) Average Accounting Return
D) None of the given options

AI Explanation

Net Present Value (NPV) is a discounted cash flow technique because it discounts future cash flows to their present value. Payback Period and Average Accounting Return do not use discounted cash flows in their basic forms.

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Q43

Which of the following is the most common capital budgeting technique?

A) Internal Rate of Return
B) Payback Period
C) Profitability Index
D) Net Present Value

AI Explanation

The Payback Period is one of the most commonly used capital budgeting techniques because it is simple and easy to understand. It measures how long it takes to recover the initial investment.

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Q44

What would be the payback period of a project which requires Rs. 80,000 as initial investment and has cash flows of Rs. 30,000, 40,000 and 45,000 in first, second and third year respectively?

A) 2.22 years
B) 2 years
C) 3 years
D) 3.22 years

AI Explanation

The project recovers Rs. 30,000 in year 1 and Rs. 40,000 in year 2, totaling Rs. 70,000. Since the initial investment is Rs. 80,000, the exact payback is about 2.22 years, so option A is mathematically correct; the listed answer B is not exact.

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Q45

Suppose market value exceeds book value by Rs. 200,000. What will be the after-tax proceeds if there is a tax rate of 35 percent ?

A) Rs. 130,000
B) Rs. 150,000
C) Rs. 97,500
D) Rs. 105,600

AI Explanation

The market value exceeds book value by Rs. 200,000, creating a taxable gain. After-tax proceeds from the gain are Rs. 200,000 × (1 − 0.35) = Rs. 130,000, so option A is mathematically correct; option B is inconsistent with the standard calculation.

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Q46

With respect to voting, if, at particular time, only a fraction of directorship is up for election, such voting is called as:

A) Cumulative voting
B) Proxy voting
C) Staggering
D) Straight voting

AI Explanation

Staggering refers to an arrangement in which only a portion of the directors are elected at a particular time. This means directors serve overlapping terms rather than all being elected simultaneously.

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Q47

What will be the Net Present Value (NPV) of an investment when Internal Rate of Return (IRR) is used as discount rate?

A) Equal to the value of depreciation
B) Equal to ZERO
C) Equal to the initial investment
D) Less than ZERO

AI Explanation

IRR is the discount rate at which the project's NPV equals zero. Therefore, when IRR is used as the discount rate, the NPV is zero.

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Q48

While performing the feasibility analysis for a project, an operating cash flow of Rs. 500,000 has been calculated. Net working capital has declined by Rs. 45,000. There was no capital spending during the year. What will be the total cash flow for the project ?

A) Rs. 315,000
B) Rs. 545,000
C) Rs. 455,000
D) Rs. 200,000

AI Explanation

Total project cash flow equals operating cash flow plus the change in net working capital minus capital spending. Since net working capital declined by Rs. 45,000, it releases cash: Rs. 500,000 + Rs. 45,000 = Rs. 545,000.

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Q49

Which one of the following statements is INCORRECT regarding a broker?

A) Matching investors wishing to buy and sell securities
B) An agent who do not buy or sell securities for their own
C) An agent who arranges security transactions among investors
D) An agent who buy and sell securities from a maintained inventory

AI Explanation

A broker acts as an intermediary and generally does not trade securities for their own account. Buying and selling securities from maintained inventory is a dealer's function, making option D incorrect regarding a broker.

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Q50

What will be the cash inflow if we have sales of Rs. 400,000 and accounts receivable are decreased by Rs. 70,000 ?

A) Rs. 230,000
B) Rs. 330,000
C) Rs. 70,000
D) Rs. 470,000

AI Explanation

Cash inflow from sales equals sales plus the decrease in accounts receivable. Therefore, Rs. 400,000 + Rs. 70,000 = Rs. 470,000.

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Q51

Standard Company purchased a vehicle for Rs. 450,000. Based on historical averages, this vehicle is worth 25% of the purchase price now and it is being sold at this price. What is the vehicle’s market value ?

A) Rs. 14,875
B) Rs. 337,500
C) Rs. 112,500
D) Rs. 230,000

AI Explanation

The vehicle's market value is 25% of its original purchase price. Thus, Rs. 450,000 × 0.25 = Rs. 112,500.

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Q52

Which one of the following typically applies to preferred stock but not to common stock?

A) Voting rights
B) Cumulative dividends
C) Dividend yield
D) Tax deductible dividends

AI Explanation

Preferred stock can provide cumulative dividends, meaning unpaid dividends accumulate and must generally be paid before common stock dividends. Common stock does not normally have this feature.

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Q53

Stock with dividend priority, normally having fixed dividend rate and having no voting rights is called as:

A) Preferred stock
B) Value stock
C) Growth stock
D) Common stock

AI Explanation

Preferred stock typically has priority over common stock for dividends and often has a fixed dividend rate. It commonly carries limited or no voting rights.

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Q54

Which of the following is NOT included in discounted cash flow criteria for capital budgeting decision?

A) Net Present Value
B) Profitability Index
C) Internal Rate of Return
D) Payback Period

AI Explanation

The discounted cash flow criteria include Net Present Value, Profitability Index, and Internal Rate of Return. The traditional Payback Period does not discount cash flows, so it is not a discounted cash flow method.

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Q55

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

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

AI Explanation

An investor is indifferent when the project's NPV is exactly zero. At this point, the project earns the required rate of return but neither adds nor destroys value.

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Q56

Which of the following formula is used to calculate the price of a zero growth stock?

A) Po = Do(1+g) / (R – g)
B) Po = Do (1+g) / R
C) Po = D1 / (R – g)
D) Po = D / R

AI Explanation

For a zero-growth stock, dividends remain constant indefinitely. The stock price is therefore calculated as the constant dividend divided by the required rate of return, P0 = D/R.

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Q57

A model which makes an assumption about the future growth of dividends is known as:

A) Dividend Policy Model
B) All of the given options
C) Dividend Growth Model
D) Dividend Price Model

AI Explanation

The Dividend Growth Model values a stock based on assumptions about the future growth of its dividends. The constant-growth version is commonly associated with the Gordon Growth Model.

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Q58

Which of the following is (are) a non-cash item(s) ?

A) Depreciation
B) All of the given options
C) Expenses
D) Revenue

AI Explanation

Depreciation is a non-cash expense, while revenue and expenses can include non-cash components depending on the accounting treatment. Therefore, in the context of the given question, all listed items are treated as non-cash items.

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Q59

Which of the following comes under the head of accounting criteria for capital budgeting decision?

A) Net Present Value
B) Profitability Index
C) Payback Period
D) Average Accounting Return

AI Explanation

Average Accounting Return (AAR) is an accounting-based capital budgeting criterion. NPV and Profitability Index are discounted cash flow methods, while Payback Period is a payback-based criterion.