MCQ Bank

A project is generally accepted under the AAR method when its Average Accounting Return exceeds the benchmark or target AAR. AAR is based on accounting income and book value, not NPV.

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Q161

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

AI Explanation

A decrease in accounts receivable means cash collections exceed current sales by the amount of the decrease. Therefore, cash inflow is Rs. 400,000 + Rs. 70,000 = Rs. 470,000.

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Q162

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

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

AI Explanation

NPV is a discounted cash flow capital budgeting technique because it discounts future cash flows to their present value. Payback Period and AAR are non-discounted methods.

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Q163

Which of the following rate makes the Net Present Value (NPV) equal to zero?

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

AI Explanation

IRR is defined as the discount rate that makes the NPV of a project equal to zero. It is used to compare a project's expected return with its required rate of return.

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Q164

Which of the following represents the linear relation between Net Present Value (NPV) and Profitability Index (PI)?

A) If Profitability Index > 1, NPV is Positive (+)
B) If Profitability Index < 1, NPV is Positive (+)
C) If Profitability Index > 1, NPV is Negative (-)
D) If Profitability Index > 1, NPV is Zero (0)

AI Explanation

The Profitability Index equals the present value of future cash inflows divided by the initial investment. A PI greater than 1 means the present value of inflows exceeds the investment, so NPV is positive.

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Q165

A Company has sold its asset for a price less than it book value, the company has:

A) Gained capital gain
B) Gained Tax Shelter
C) Incurred Tax Liability
D) All of the given options

AI Explanation

When an asset is sold for less than its book value, the resulting loss can provide a tax benefit or tax shelter. This reduces taxable income and therefore reduces the tax liability.

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Q166

In which of the following procedure of voting for a company's directors, each shareholder is entitled to one vote per share?

A) Cumulative Voting
B) None of the given options
C) Proportional Voting
D) Straight Voting

AI Explanation

Under straight voting, each shareholder has one vote per share for each director position. The shareholder votes separately for each director rather than combining votes.

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Q167

ABC Corporation has two shareholders; Mr. Aamir with 50 shares and Mr. Imran with 70 shares. Both want to be elected as one of the four directors but Mr. Imran doesn’t want Mr. Aamir to be director. How much votes would Mr. Aamir be able to cast as per cumulative voting procedure?

A) 280
B) 200
C) 70
D) 120

AI Explanation

Under cumulative voting, a shareholder's total votes equal shares owned multiplied by the number of director positions. Mr. Aamir has 50 shares and there are four directors, so he can cast 50 × 4 = 200 votes. However, the given options indicate 280, which corresponds to Mr. Imran's 70 shares × 4; therefore the question's expected answer appears inconsistent with its wording.

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Q168

In which type of the market, securities are originally sold to the investors?

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

AI Explanation

The primary market is where newly issued securities are originally sold to investors. The proceeds from these initial sales go to the issuing company or entity.

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Q169

If the book value exceeds the market value, then the difference is treated as a _________ for tax purposes.

A) Surplus
B) None of the given options
C) Profit
D) Loss

AI Explanation

When an asset's book value exceeds its market or sale value, the difference represents a loss. For tax purposes, such a loss can generally provide a tax benefit by reducing taxable income.

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Q170

An investment plan is acceptable if its NPV is:

A) Equal to ZERO
B) Less than ZERO
C) Greater than ZERO
D) All of the above

AI Explanation

An investment is normally accepted when its NPV is positive because this indicates that the project adds value to the firm. An NPV of zero generally means the firm is indifferent, while a negative NPV indicates rejection.

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Q171

Which of the following term refers to the difference between the present value of cash inflows and the present value of cash outflows?

A) Average Accounting Return (AAR)
B) Internal Rate of Return (IRR)
C) Net Present Value (NPV)
D) Profitability Index (PI)

AI Explanation

NPV is the difference between the present value of cash inflows and the present value of cash outflows. It measures the value added by an investment after considering the time value of money.

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Q172

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

AI Explanation

After two years, cumulative cash flow is Rs. 70,000, leaving Rs. 10,000 to recover. The fraction of the third year required is Rs. 10,000 ÷ Rs. 45,000 = 0.22, giving a payback period of about 2.22 years.

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Q173

Which one of the following represents a cash outflow?

A) Increase in payables
B) Increase in long term debt
C) Increase in inventory
D) Increase in receiveables

AI Explanation

An increase in inventory uses cash because the firm has invested additional funds in inventory. In contrast, increases in payables and long-term debt generally provide cash inflows, while an increase in receivables is also a cash use.

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Q174

Which of the following equation is correct for calculating the operating cash flows?

A) EBIT + Depreciation + Taxes
B) EBIT – Depreciation – Taxes
C) EBIT – Depreciation + Taxes
D) EBIT + Depreciation – Taxes

AI Explanation

The operating cash flow formula is OCF = EBIT + Depreciation − Taxes. Depreciation is added back because it is a non-cash expense, while taxes are deducted because they represent a cash outflow.

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Q175

Which of the following is a characteristic of preferred stock?

A) These stocks have not stated liquidating value
B) These stocks have not any kind of priority over common stocks
C) Dividends on these stocks can be cumulative
D) These bonds hold credit ratings quite different from bonds

AI Explanation

Preferred stock commonly provides a fixed dividend, and its dividends may be cumulative if unpaid dividends accumulate. This is a key feature distinguishing preferred stock from common stock.

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Q176

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

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

AI Explanation

Average Accounting Return (AAR) is an accounting-based capital budgeting criterion. It uses accounting income and book value rather than discounted cash flows.

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Q177

If the dividend for a share is growing at a steady rate then which of the following formula(s) can be used to find the dividend in two periods?

A) D2 = [ Do x ( 1 + g ) ] ( 1 + g )
B) D2 = D1 x (1 + g )
C) D2 = Do x ( 1 + g )2
D) All of the given options

AI Explanation

With constant growth, D2 can be calculated as D1(1 + g) or as D0(1 + g)². The first option is algebraically equivalent, so all three formulas are valid.

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Q178

Expected new sales due to the introduction of a diet version of an existing beverage results in decline in the sale of existing beverage is an example of:

A) Cannibalism
B) Sunk cost
C) Financing cost
D) Opportunity cost

AI Explanation

Cannibalism occurs when sales of a firm's existing product decline because customers switch to a newly introduced product from the same firm. Here, the diet beverage reduces sales of the existing beverage.

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Q179

Which of the following capital budgeting technique is used by the financial management to increase the share value of the company?

A) IRR
B) NPV
C) PI
D) Payback period

AI Explanation

Net Present Value (NPV) measures how much value an investment adds to the firm after considering the time value of money. Projects with positive NPV increase shareholder wealth and, therefore, share value.