MCQ Bank

Homemade leverage refers to the use of personal borrowing by an investor to change the effective financial leverage of an investment. It allows an investor to replicate or alter the leverage of a firm personally.

ACC501 Final Term AI Solved

Q101

Tax adjustment is generally required for which of the following costs?

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

AI Explanation

Tax adjustment is generally required for the cost of debt because interest expense is tax-deductible. Therefore, the after-tax cost of debt is calculated by multiplying the pre-tax cost of debt by (1 − tax rate).

ACC501 Final Term AI Solved

Q102

Increase in price of stocks held by an investor is called:

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

AI Explanation

An increase in the market price of a stock represents a capital gain or capital yield to the investor. It is separate from income yield, which comes from dividends.

ACC501 Final Term AI Solved

Q103

A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred as :

A) Probability distribution
B) The expected return
C) The standard deviation
D) Coefficient of variation

AI Explanation

A probability distribution lists the possible values that a random variable can take along with the probability associated with each value. It provides a complete description of the variable's possible outcomes and likelihoods.

ACC501 Final Term AI Solved

Q104

The value of the firm’s cash flows (or the value of the firm) is ____________ when the WACC is ____________.

A) maximized; maximized
B) minimized; minimized
C) maximized; minimized
D) None of the given options

AI Explanation

The value of a firm's cash flows is maximized when the weighted average cost of capital (WACC) is minimized. A lower WACC increases the present value of future cash flows and therefore increases firm value.

ACC501 Final Term AI Solved

Q105

The next dividend (D1) for a company is Rs. 5 per share. The stock current price is Rs. 50 per share. What will be the cost of capital if the dividends are estimated to grow steadily at 5%?

A) 16%
B) 13%
C) 15%
D) 14%

AI Explanation

Using the dividend growth model, cost of capital = D1/P0 + g. Thus, 5/50 + 5% = 10% + 5% = 15%, so option C is mathematically correct; option A is inconsistent with the standard formula.

ACC501 Final Term AI Solved

Q106

Which of the following is NOT an example of systematic risk ?

A) Interest Rate
B) Gross Domestic Product
C) Inflation
D) Strike call in a company

AI Explanation

Systematic risk affects the overall market and includes factors such as interest rates, inflation, and economic conditions like GDP. A strike call in a specific company is an unsystematic, company-specific risk.

ACC501 Final Term AI Solved

Q107

Which of the following is referred as a statistical measure of the variability of a distribution around its mean ?

A) Probability distribution
B) Coefficient of variation
C) The standard deviation
D) The expected return

AI Explanation

Standard deviation is a statistical measure of how widely observations are dispersed around their mean. A higher standard deviation indicates greater variability and risk.

ACC501 Final Term AI Solved

Q108

Which of the following may be included to a firm’s capital structure?

A) Preferred Stocks
B) All of the given options
C) Bonds
D) Common Stocks

AI Explanation

A firm's capital structure can include common stocks, preferred stocks, and bonds. These represent different sources of long-term financing used by a company.

ACC501 Final Term AI Solved

Q109

What will be the risk premium for a stock that has an expected return rate of 14% and a risk-free rate of 5% ?

A) 15 %
B) 24 %
C) 9 %
D) 6 %

AI Explanation

Risk premium is calculated as expected return minus the risk-free rate. Therefore, 14% − 5% = 9%.

ACC501 Final Term AI Solved

Q110

Which of the following is the overall return the firm must earn on its existing assets to maintain the value of the stock?

A) AAR (Average Accounting Return)
B) MIRR (Modified Internal Rate of Return)
C) IRR (Internal Rate of Return)
D) WACC (Weighted Average Cost of Capital)

AI Explanation

WACC represents the overall return a firm must earn on its existing assets to maintain the value of its stock. It reflects the required return demanded by both debt and equity investors.

ACC501 Final Term AI Solved

Q111

Mr. Nadeem has bought 100 shares of a corporation one year ago at Rs. 22 per share. Over the last year, he received a dividend of Rs. 2.50 per share. At the end of the year, the stock sells for Rs. 28. As per given information, what will be the capital gains yield ?

A) 15.85%
B) 25.10%
C) 45.00%
D) 27.27%

AI Explanation

Capital gains yield = (Ending price − Beginning price) ÷ Beginning price. Thus, (Rs. 28 − Rs. 22) ÷ Rs. 22 × 100 = 27.27%, so option D is mathematically correct; option A does not match the standard formula.

ACC501 Final Term AI Solved

Q112

Which of the following is referred as the ratio of the standard deviation of a distribution to the mean of that distribution ?

A) Coefficient of variation
B) The standard deviation
C) The expected return
D) Probability distribution

AI Explanation

The coefficient of variation is the ratio of the standard deviation to the mean of a distribution. It measures relative variability and is useful for comparing risk across investments with different expected returns.

ACC501 Final Term AI Solved

Q113

Standard deviations for Investment A and Investment B are 15% and 32% respectively. This indicates that :

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

AI Explanation

Standard deviation measures the volatility of an investment's returns. Since Investment B has a standard deviation of 32% compared with 15% for Investment A, B is more volatile.

ACC501 Final Term AI Solved

Q114

Mr. Nadeem has bought 100 shares of a corporation one year ago at Rs. 22 per share. Over the last year, he received a dividend of Rs. 2.50 per share. As per given information what will be the dividend yield ?

A) 21.12%
B) 40.00%
C) 9.92%
D) 11.36%

AI Explanation

Dividend yield = Dividend per share ÷ Purchase price per share × 100. Therefore, Rs. 2.50 ÷ Rs. 22 × 100 = 11.36%.

ACC501 Final Term AI Solved

Q115

Systematic Risk is also known as :

A) Market Risk
B) Residual Risk
C) Diversifiable Risk
D) Asset-specific Risk

AI Explanation

Systematic risk is also called market risk because it arises from broad economic and market-wide factors. It cannot be eliminated through diversification.

ACC501 Final Term AI Solved

Q116

The weighted average cost of capital of a firm is the weighted average of the ___________.

A) Cost of preferred stock
B) Cost of debt
C) All of the given options
D) Cost of common equity

AI Explanation

WACC is a weighted average of the costs of the firm's major sources of long-term financing. These include common equity, preferred stock, and debt.

ACC501 Final Term AI Solved

Q117

Which of the following type of risk can be eliminated by diversification ?

A) Unsystematic Risk
B) Systematic Risk
C) None of the given options
D) Market Risk

AI Explanation

Unsystematic risk is specific to a particular company or industry and can be reduced or eliminated through diversification. Systematic or market risk affects the overall market and cannot be diversified away.

ACC501 Final Term AI Solved

Q118

For an investment project, the cost of capital relevant to the project depends on which of the following?

A) Coupon rate on the firm's existing long-term bonds
B) Risk associated with the project
C) Total risk of the firm's equity
D) Type of security to be issued to finance the project

AI Explanation

The appropriate cost of capital for an investment project depends primarily on the project's risk. A riskier project requires a higher required return than a less risky project.

ACC501 Final Term AI Solved

Q119

A firm’s capital structure may include which of the following ?

A) Preferred Stocks
B) Common stocks
C) Bonds
D) All of the given options

AI Explanation

A firm's capital structure can include common stocks, preferred stocks, and bonds. These represent different sources of long-term financing.