MCQ Bank

Unsystematic risk is specific to a particular company or industry and can be reduced or eliminated through diversification. It is therefore also called diversifiable risk.

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Q121

The next dividend for a company is Rs. 6 per share. The stock current price is Rs. 57 per share. What will be the cost of capital if the dividends are estimated to grow steadily at 5% ?

A) 12.88%
B) 14.22%
C) 13.07%
D) 15.53%

AI Explanation

Using the dividend growth model, cost of capital = D1/P0 + g. Thus, 6/57 + 5% = 10.53% + 5% = 15.53%, so option D is mathematically correct; option A does not match the standard formula.

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Q122

What would be the standard deviation of returns for an investment that has a variance of 0.0075 ?

A) 0.09101
B) 0.08660
C) 0.10521
D) 0.09487

AI Explanation

Standard deviation is the square root of variance. Therefore, √0.0075 ≈ 0.08660, so option B is mathematically correct; option D does not match the calculation.

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Q123

Under what situation, we can safely say that one capital structure is better than the other ?

A) If it results in a lower value of the firm
B) Capital structure has to do nothing with weighted average cost of capital
C) If it results in a lower weighted average cost of capital
D) If it results in a higher weighted average cost of capital

AI Explanation

A capital structure is generally considered better when it lowers the firm's WACC, because a lower WACC increases the present value of future cash flows. This can increase the overall value of the firm.

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Q124

If you have Rs. 30 in asset A and Rs. 120 in another asset B, the weights for assets A and B will be ____ and ____ respectively.

A) 20%; 80%
B) 80%; 20%
C) 63%; 37%
D) 37%; 63%

AI Explanation

Total investment is Rs. 30 + Rs. 120 = Rs. 150. Asset A has a weight of 30/150 = 20%, while asset B has a weight of 120/150 = 80%.

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Q125

Suppose, you have invested Rs.50 in Stock M out of a total investment of Rs.200. The weight of stock M in your portfolio is:

A) 0.100
B) 0.40
C) o.50
D) 0.25

AI Explanation

Portfolio weight is calculated as the investment in the stock divided by the total portfolio investment. Thus, Rs. 50 ÷ Rs. 200 = 0.25, or 25%.

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Q126

___________ paid by corporation is tax deductible but ___________ paid are not tax deductible.

A) None of the given options
B) Interest; dividend
C) Bonus; interest
D) Dividend; interest

AI Explanation

Interest paid by a corporation is generally tax deductible because it is treated as an expense. Dividends paid to shareholders are distributions of earnings and are not tax deductible.

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Q127

Your gain (or loss) on an investment that you buy is called your :

A) Risk on investment
B) Return on investment
C) Loss on investment
D) Gain on investment

AI Explanation

Return on investment refers to the gain or loss earned from an investment over a period. It can include both income received and changes in the investment's value.

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Q128

Prime advantage of investing in different securities is:

A) All of the given options
B) Reduced risk
C) Increased liquidity
D) Easy management of securities

AI Explanation

The primary advantage of investing in different securities is diversification, which reduces unsystematic risk. Losses in one investment may be offset by gains or stability in others.

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Q129

A project has an initial investment of Rs. 600,000. What would be the NPV for the project if it has a profitability index of 1.12?

A) Rs. 40,000
B) Rs. 65,000
C) Rs. 72,000
D) Rs. 55,000

AI Explanation

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

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Q130

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

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

AI Explanation

Preferred stock generally has priority over common stock for dividend payments and usually carries a fixed dividend rate. It typically has limited or no voting rights.

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Q131

A grant of authority which gives one entity or person the authority to vote for another. This refers to which of the following voting procedures?

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

AI Explanation

A proxy is a grant of authority allowing one person or entity to vote on behalf of another shareholder. Proxy voting is commonly used when a shareholder cannot vote personally.

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Q132

Suppose the initial investment for a project is Rs. 16 million and the cash flows are Rs. 4 million in the first year and Rs. 9 million in the second and Rs. 5 million in the third. The project will have a payback period of:

A) 2.6 Years
B) 4.1 Years
C) 3.1 Years
D) 3.7 Years

AI Explanation

After two years, cumulative cash flows are Rs. 13 million, leaving Rs. 3 million to recover. The third-year cash flow is Rs. 5 million, so payback = 2 + 3/5 = 2.6 years.

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Q133

Which one of the following is a non-cash item?

A) Sales
B) Depreciation
C) Purchases
D) Inventory

AI Explanation

Depreciation is a non-cash expense because it reduces accounting profit without requiring a current cash payment. Sales, purchases, and inventory can involve actual cash flows.

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Q134

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

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

AI Explanation

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

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Q135

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

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

AI Explanation

A mutually exclusive project is one whose acceptance prevents the acceptance of one or more alternative projects. The firm must choose among the competing alternatives.

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Q136

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

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 exactly zero.

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Q137

Net Present Value (NPV) technique which is used to discounts the company’s future cash flows is actually a type of:

A) Stock evaluation technique
B) Capital budgeting technique
C) Loan acquiring technique
D) Cash collection technique

AI Explanation

NPV is a capital budgeting technique used to evaluate investment projects by discounting future cash flows to their present value. It helps determine whether a project adds value to the firm.

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Q138

Preemptive right of a shareholder means:

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

AI Explanation

A preemptive right allows existing shareholders to maintain their proportional ownership when new shares are issued. This protects shareholders from dilution of their ownership percentage.

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Q139

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

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

AI Explanation

IRR is also referred to as the Economic Rate of Return. It is the discount rate at which the NPV of an investment equals zero.