MCQ Bank

Average Accounting Return (AAR) measures accounting profit relative to the average book value of an investment. It is an accounting-based capital budgeting measure.

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Q181

Which of the following option shows the two correct components of required rate of return?

A) Dividend yield & stock price (Po)
B) Dividend & stock price (Po)
C) Dividend & growth rate
D) Dividend yield & growth rate

AI Explanation

Under the dividend growth model, the required rate of return equals dividend yield plus the expected dividend growth rate. Thus, dividend yield and growth rate are the two components.

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Q182

An investment will be ___________ if the IRR doesn’t exceeds the required return and ___________ otherwise.

A) Accepted; accepted
B) Accepted; rejected
C) Rejected; accepted
D) Rejected; rejected

AI Explanation

A project is accepted when its IRR exceeds the required rate of return because it offers a return greater than the minimum required return. If IRR does not exceed the required return, the project is rejected.

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Q183

Which of the following is the amount of time required for an investment to generate cash flows sufficient to recover its initial cost?

A) Payback period
B) Accounts Receivable period
C) Yield to maturity
D) Maturity Period

AI Explanation

The payback period is the time required for an investment's cumulative cash inflows to recover its initial cost. It is a commonly used capital budgeting technique.

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Q184

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 after-tax operating income plus the depreciation tax shield. The depreciation term is therefore multiplied by the tax rate and added to after-tax operating earnings.

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Q185

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

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

AI Explanation

The Payback Period is widely used because it is simple to understand and easy to calculate. It determines how long it takes to recover the initial investment from project cash flows.

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Q186

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

AI Explanation

Profitability Index is calculated as present value of future cash flows divided by the initial investment. Since NPV is Rs. 40,000, the present value of inflows is Rs. 290,000, so PI = 290,000 ÷ 250,000 = 1.16 times.

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Q187

Which of the following capital budgeting technique ignores the concept of “Time Value of Money”?

A) PI
B) NPV
C) Pay back period
D) IRR

AI Explanation

The Payback Period evaluates how quickly the initial investment is recovered from cash inflows. Unlike NPV, PI, and IRR, the traditional payback method does not discount future cash flows for the time value of money.

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Q188

Suppose market value exceeds book value by Rs. 250,000. What will be the after-tax proceeds if there is a tax rate of 34 percent ?

A) Rs. 105,600
B) Rs. 225,000
C) Rs. 165,000
D) Rs. 148,500

AI Explanation

The gain on the asset is Rs. 250,000 and the tax is 34%, giving a tax of Rs. 85,000. After-tax proceeds from the gain are therefore Rs. 250,000 × (1 − 0.34) = Rs. 165,000.

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Q189

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

AI Explanation

The vehicle is currently worth 25% of its original purchase price. Therefore, its market value is Rs. 450,000 × 25% = Rs. 112,500.

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Q190

ABC Company has estimated average net income of Rs. 500,000 on the assets having average book value of Rs. 2,500,000 used in its newly planned commercial project. Determine the project’s AAR.

A) 20%
B) 30%
C) 35%
D) 25%

AI Explanation

Average Accounting Return is calculated as average net income divided by average book value. Thus, AAR = Rs. 500,000 ÷ Rs. 2,500,000 = 20%.

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Q191

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. Its shortcomings include ignoring the time value of money and failing to adequately account for differences in risk.

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Q192

An investment should be accepted if the Net Present Value (NPV) is __________ and rejected if it is ________.

A) Negative; negative
B) Negative; positive
C) Positive; positive
D) Positive; negative

AI Explanation

A project is generally accepted when its NPV is positive because it adds value to the firm. A negative NPV indicates that the project destroys value and should be rejected.

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Q193

Which of the following objective(s) may lead a firm towards the usage of payback period technique to evaluate its projects?

A) If the firm wishes to accept projects with high degree of liquidity.
B) All of the given options
C) If the firm wishes to avoid projects that require a large amount of research and development.
D) If the firm wishes to avoid the higher forecasting errors associated with cash flow a long way into the future.

AI Explanation

The payback method can be attractive when a firm values liquidity, wants to limit exposure to distant cash-flow forecasts, or prefers to avoid projects with substantial long-term research and development. Therefore, all listed objectives can motivate its use.

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Q194

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

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

AI Explanation

Depreciation is a non-cash expense because it reduces accounting income without requiring a current cash payment. Revenue and ordinary expenses generally involve cash-flow effects, depending on their timing.

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Q195

Based upon AAR technique, a project is acceptable if:

A) Average accounting return equal to target average accounting return
B) Target average accounting return equal to average accounting return
C) Target average accounting return exceeds to average accounting return
D) Average accounting return exceeds to target average accounting return

AI Explanation

Under the AAR technique, a project is acceptable when its average accounting return exceeds the target or benchmark AAR. A higher AAR indicates that the project provides the required accounting return.

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Q196

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

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

AI Explanation

The Dividend Growth Model is a valuation model that explicitly assumes a future growth rate for dividends. It is commonly used to estimate stock value based on expected dividends and growth.

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Q197

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. 200,000
D) Rs. 455,000

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 provides a Rs. 45,000 cash inflow: Rs. 500,000 + Rs. 45,000 = Rs. 545,000.

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Q198

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

AI Explanation

The dividend after five years is D5 = Rs. 7 × (1.05)^5. This gives approximately Rs. 8.93 per share.

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Q199

In which type of the market, previously issued securities are traded among investors?

A) None of the given options
B) Tertiary Market
C) Secondary Market
D) Primary Market

AI Explanation

The secondary market is where previously issued securities are bought and sold among investors. The issuing company does not receive the proceeds from these subsequent transactions.