MCQ Bank

The primary market is where securities are originally issued and sold to investors. The issuing company receives the funds raised from these initial sales.

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Q81

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

AI Explanation

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

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Q82

Which one of the following formulas can be used to calculate Operating Cash Flow (OCF) under tax shield approach?

A) OCF = (sales – cost) x (1 + tax rate) + (depreciation x tax rate)
B) OCF = (sales + cost) x (1 – tax rate) + (depreciation x tax rate)
C) OCF = (sales – cost) x (1 – tax rate) – (depreciation x tax rate)
D) OCF = (sales – cost) x (1 – tax rate) + (depreciation x tax rate)

AI Explanation

Under the tax shield approach, operating cash flow equals the after-tax operating profit plus the depreciation tax shield. The formula is OCF = (Sales − Cost)(1 − Tax Rate) + Depreciation × Tax Rate.

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Q83

Which of the following is affected by financial leverage?

A) Sales
B) None of the given options
C) Production
D) Shareholders' profit

AI Explanation

Financial leverage affects shareholders' profit because debt financing introduces fixed interest obligations. Changes in operating performance can therefore have a magnified effect on the profit available to shareholders.

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Q84

Standard deviations for Investment A and Investment B are 25% and 12% respectively. This indicates that :

A) Investment A is less volatile than Investment B
B) Investment A is more volatile than Investment B
C) Investment B is more volatile than Investment A
D) Investment B is equally volatile to Investment A

AI Explanation

Standard deviation measures the volatility or variability of an investment's returns. Since Investment A has a standard deviation of 25% compared with 12% for Investment B, A is more volatile.

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Q85

The total market value of a company’s stocks is calculated as Rs. 250 million and the total market value of the company’s debt are calculated as Rs. 150 million. What percent of the firm’s financing is equity ?

A) 62.50%
B) 33.33%
C) 50.00%
D) 85.00%

AI Explanation

Total market value of financing is Rs. 250 million + Rs. 150 million = Rs. 400 million. Equity percentage = Rs. 250 million ÷ Rs. 400 million × 100 = 62.50%.

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Q86

What will be the weighted average cost of capital if a firm's capital structure has 55% debt and 45% common equity; while, after-tax cost for debt is 8% and the cost of common equity is 15%?

A) 11.15 %
B) 9.91 %
C) 10.40 %
D) 10.54 %

AI Explanation

WACC = (55% × 8%) + (45% × 15%). This equals 4.40% + 6.75% = 11.15%.

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Q87

Which of the following best describes dividend yield?

A) It tells that how much interest is earned on each unit deposited in a broker account
B) It tells that how much tax is paid for each unit invested in a company’s shares
C) It tells that how much income is earned for each unit invested in a company’s shares
D) It tells that how much tax is paid on each unit deposited in a broker account

AI Explanation

Dividend yield measures the dividend income earned relative to the market price of a share. It indicates the income return received for each unit invested in the company's shares.

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Q88

A firm’s equity is worth 4 million and its debt is worth 2 million. What is the percentage of firm’s financing that is equity ?

A) 67%
B) 40%
C) 20%
D) 33%

AI Explanation

Total financing is 4 million + 2 million = 6 million. Equity percentage = 4 ÷ 6 × 100 = 66.67%, which rounds to 67%.

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Q89

Which of the following is the return that firm’s creditors demand on new borrowings ?

A) Cost of debt
B) Cost of preferred stock
C) Cost of common equity
D) Cost of retained earnings

AI Explanation

The cost of debt is the return that a firm's creditors require on new borrowing. It represents the firm's financing cost associated with debt.

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Q90

Variability of return means to which extent returns change around a/an ---------------:

A) Average Return
B) Maximum Return
C) Minimum Return
D) Expected Return

AI Explanation

Variability of return describes the extent to which actual returns fluctuate around the average return. A greater variation around the average indicates greater investment risk.

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Q91

Dividend received on stocks held by an investor is called:

A) Total Return
B) Income yield
C) Capital yield
D) Total profit

AI Explanation

Dividend received from stocks represents income earned by the investor from holding the shares. This return is commonly referred to as income yield or dividend yield.

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Q92

Which of the following refers to the use of borrowed money to increase the return on equity of an investment purchase ?

A) Financial Leverage
B) None of the given options
C) Operating Leverage
D) Structural Leverage

AI Explanation

Financial leverage is the use of borrowed funds to finance an investment or business activity. It can increase the return on equity when the investment earns more than the cost of borrowing.

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Q93

Total portfolio risk is equal to :

A) systematic risk plus market risk
B) unsystematic risk plus diversifiable risk
C) systematic risk plus non-diversifiable risk
D) systematic risk plus diversifiable risk

AI Explanation

Total portfolio risk consists of systematic risk and unsystematic (diversifiable) risk. Systematic risk cannot be eliminated through diversification, while diversifiable risk can be reduced by holding a broad portfolio.

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Q94

Which of the following term refers to the situation when investors loan out the money ?

A) Leverage
B) Loaning
C) Levering
D) Un-levering

AI Explanation

Leverage refers to the use of borrowed money or debt to finance an investment or activity. Borrowing can amplify both potential returns and potential losses.

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Q95

Preferred stock is a hybrid security because it possesses the features of both _________ and _________.

A) Preferred stock; Debt
B) Common stock; Debt
C) Treasury bills; Bonds
D) Common stock; Treasury bills

AI Explanation

Preferred stock has characteristics of both common equity and debt. It resembles common stock because it represents ownership, while its fixed dividend feature makes it similar to debt.

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Q96

The total market value of a company’s stocks is calculated as Rs. 250 million and the total market value of the company’s debt are calculated as Rs. 100 million. What percent of the firm’s financing is debt ?

A) 28.57%
B) 50.00%
C) 70.00%
D) 62.50%

AI Explanation

Total market value of financing is Rs. 250 million + Rs. 100 million = Rs. 350 million. Debt percentage = Rs. 100 million ÷ Rs. 350 million × 100 = 28.57%.

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Q97

Which of the following is known as the group of assets such as stocks and bonds held by an investor ?

A) Stock Bundle
B) Capital Structure
C) None of the given options
D) Portfolio

AI Explanation

A portfolio is a collection of investments such as stocks, bonds, and other securities held by an investor. It allows investors to manage and diversify their investments.

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Q98

Which one of the following is "NOT" a component of Cost of Capital?

A) Cost of underwriting
B) Cost of preferred stock
C) Cost of debt
D) Cost of equity

AI Explanation

The main components of the cost of capital include the cost of debt, preferred stock, and equity. Cost of underwriting is a flotation or issuance cost rather than a component of the firm's cost of capital.

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Q99

Suppose currently risk-free investments are offering 12% whereas the particular investment is offering 18%. What is the risk premium?

A) 8%
B) 6%
C) 30%
D) 12%

AI Explanation

Risk premium is calculated as the return on the risky investment minus the risk-free rate. Therefore, 18% − 12% = 6%.