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MGT201 Solved MCQs - MGT201 Solved Online Quizzes - MGT201 Solved MCQs Bank - MGT201 MCQs Collection from Online Quizzes – MGT201 Mega Solved MCQs – MGT201 Mid Term Final Term Papers Solved MCQs

MGT201 Solved MCQs - MGT201 Solved Online Quizzes - MGT201 Solved MCQs Bank - MGT201 MCQs Collection from Online Quizzes – MGT201 Mega Solved MCQs – MGT201 Mid Term Final Term Papers Solved MCQs

MGT201 Virtual University MCQs BANK - MCQs Collection from Online Quizzes

Which of the following is likely to be correct for a company which invests in projects with Positive NPV? 
Select correct option: 

Company’s EVA (Economic Value Added) rises by the same value 
Company’s MVA (Market Value Added) or market value rises 
Company Shareholders’ Wealth rises 
All of the given options

Market Value Added (MVA), Net Present Value (NPV), and Economic Value Added (EVA) 
We use a measure called MVA in our assessment of a company’s net present value (NPV). In turn, we use a metric called EVA in our assessment of prospective  economic earnings. We begin with EVA, as it naturally leads to MVA, the market’s  efficient market assessment of NPV.
From a finance perspective, EVA is defined in terms of how it relates to the firm’s “market value added.” 
In theory (market efficiency), MVA is equal to the net present value (NPV) of the firm’s expected future EVA.
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm?
Select correct Option:
The firm has minimized its total carrying costs
The firm should increase its order size
The firm should decrease its order size
The firm has maximized its order costs

When marginal benefit (e.g., marginal reduction in order costs) exceeds marginal cost (e.g., marginal carrying cost of inventory) of increasing the order size, it worth doing it.

Which of the following is as EBIT?  
Select correct option:   
 Funds provided by operations 
 Earnings before taxes 
 Net income  
 Operating profit 

EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: 


EBIT =  Revenue - Operating  Expenses


Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and taxes added back to it


Security market line gives the relationship between _______ and _________.  

Select correct option:   
 Market risk and the required return 
 Systematic risk and the required return  
 Non-diversified risk and the required return  
 All of the given options
security market line   A straight line that shows the equilibrium relationship between systematic risk and expected rates of return for individual securities. According to the SML, the excess return on a risky asset is equal to the excess return on the market portfolio multiplied by the beta coefficient. 
In finance, systematic risk, sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with aggregate market returns

All of the following are the reasons for Uncertain NPV calculations EXCEPT:

Select correct option:
Estimated discount rate does not change with the markets
Estimated Life of project is doubtful
Annual after-tax cash flows are difficult to estimate
Timing of cash flows is not exactly predictable
Limitation of NPV analysis in Uncertain settings
 
1. Requires information about cash flow that may often not be known Characterizing the level of risk and uncertainty associated with a new and innovative strategy is itself an uncertain and risky undertaking
2. Assumes uncertainty and risk associated with a strategy remain constant over the life of that strategy Risk level differs over different periods, and is itself affected by strategic actions 
3.Fails to incorporate value of future strategies that are enabled by current strategy Path dependent nature of capability acquisition 

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Cost of Capital Solved MCQs

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1                     

A firm's cost of capital is the:

 

            A)        cost of borrowing money

            B)        cost of issuing stock

            C)        cost of bonds

            D)        overall cost of financing to the firm

 

Explanation: This is also called the weighted average cost of capital (WACC).

 

2         

The cost of debt financing is generally __________ the cost of preferred or common equity financing.

 

            A)        less than

            B)        more than

            C)        equal to

            D)        not enough information to tell

 

Explanation: This is because there is less risk to the lender than if he/she were to buy stock and because interest payments on debt are tax deductible to a firm.

 

3                     

The cost of preferred stock is usually more than the cost of debt because of:

 

            A)        low dividends

            B)        tax deductibility of interest payments on debt

            C)        high stock price

            D)        none of the above

 

Explanation: Preferred stock is not tax deductible and there is slightly more risk associated with preferred stock than with bonds.

 

4         

The cost of issuing new stock is called:

 

            A)        the cost of equity

            B)        flotation costs

            C)        marginal cost of capital

            D)        none of the above

 

Explanation: Flotation costs are the selling or distribution costs associated with a new issue of stock.

 

5         

The cost of retained earnings does not consider _________ in the equation.

 

            A)        flotation costs

            B)        the dividend in the next time period

            C)        the value of the common equity

            D)        the growth rate of dividends

 

Explanation: When a company retains its earnings there are no flotation costs incurred.

 

6

The most expensive source of financing for a firm is:

 

            A)        debt

            B)        preferred stock

            C)        retained earnings

            D)        new common stock

 

Explanation: This is because of flotation costs, as described above.

 

7         

The cost of capital at the retained earnings breakpoint is the:

 

            A)        weighted average cost of capital

            B)        marginal cost of capital

            C)        cost of new stock

            D)        none of the above

 

Explanation: The marginal cost of capital is the cost of the last dollar of funds raised.

 

8         

The cost of each component of a firm's capital structure multiplied by its weight in the capital structure is called the:

 

            A)        marginal cost of capital

            B)        cost of debt

            C)        weighted average cost of capital

            D)        none of the above

 

Explanation: This represents the overall cost of financing to the firm.

 

9         

When establishing their optimal capital structure, firms should strive to:

 

            A)        minimize the weighted average cost of capital

            B)        minimize the amount of debt financing used

            C)        maximize the marginal cost of capital

            D)        none of the above

 

Explanation: This means the least expensive cost to the firm.

 

10       

The overall cost of financing for the firm is called the:

 

            A)        weighted average cost of capital

            B)        cost of preferred stock

            C)        retained earnings breakpoint

            D)        none of the above

 

Explanation: This is the weighted average cost of capital (WACC).

The Capital Budgeting Decision Solved MCQs

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1                     

______________ focuses on long-term decision-making regarding the acquisition of projects.

 

            A)        Working Capital Management

            B)        Capital Budgeting

            C)        Cash Budgeting

            D)        none of the above

 

Explanation: Capital budgeting deals with long-term financial decisions occuring in the future.

 

2                     

Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back _____________ to the analysis.

 

            A)        the cost of fixed assets

            B)        the cost of accounts payable

            C)        investments

            D)        depreciation

 

Explanation: Since depreciation is a non-cash expenditure it must be added back to determine cash flow.

 

3         

Which of the following capital budgeting methods focuses on firm liquidity?

 

            A)        payback method

            B)        net present value

            C)        internal rate of return

            D)        none of the above

 

Explanation: The payback method determines how quickly the cash investment is recouped.

 

4                     

When faced with mutually exclusive option, which project should be accepted under the payback method?

 

            A)        The one with the longest payback period.

            B)        The one with the shortest Payback period.

            C)        It doesn’t matter because the payback method is not theoretically correct.

            D)        None of the above.

 

Explanation: The payback method emphasizes liquidity, so the one with the shortest payback period is preferable.

 

5         

If the Net Present Values of two, mutually exclusive options are both greater than zero, which option should be selected if the firm uses the Net Present Value method?

 

            A)        The one with the largest Net Present Value.

            B)        The one with the smallest Net Present Value.

            C)        Either one. Both are greater than the cost of capital.

            D)        None of the above

 

Explanation: The one with the largest Net Present Value adds the most value to the firm.

 

6                     

If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method?

 

            A)        The one with the largest Internal Rate of Return.

            B)        The one with the smallest Internal Rate of Return.

            C)        The one with the highest Net Present Value at the firm’s cost of capital.

            D)        None of the above

 

Explanation: The Internal Rate of Return is not reliable for decisions involving mutually exclusive options. The Net Present Value method should be used to select between mutually exclusive options.

 

7                     

If two projects are independent, that means that ___________________.

 

            A)        Selection of one precludes selection of the other.

            B)        You should analyze the projects independently.

            C)        Both a and b

            D)        none of the above

 

Explanation: In other words, one or both projects could be selected.

 

8                     

According to the reinvestment rate assumption, which method of capital budgeting assumes cash flows are reinvested at the project's rate of return?

 

            A)        payback period

            B)        net present value

            C)        internal rate of return

            D)        none of the above

 

Explanation: The internal rate of return method assumes that the rate of reinvestment will be equal to the actual internal rate of return.

 

9

When a firm places a budgetary constraint on the projects it invests in, this is called:

 

            A)        capital rationing

            B)        working capital management

            C)        cash budgeting

            D)        none of the above

 

Explanation: This means there is a limit to the amount of funds available.

 

10       

Which of the following capital budgeting methods states the return of a project as a percentage?

 

            A)        payback period

            B)        net present value

            C)        internal rate of return

            D)        none of the above

 

Explanation: The internal rate of return is an interest rate.

Risk and Capital Budgeting Solved MCQs

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1         

Because investors dislike uncertainty, they will require _________ rates of return from risky investments.

 

            A)        higher

            B)        lower

            C)        the same

            D)        none of the above

 

Explanation: This is to compensate them for risk.

 

2                     

__________ is the variability of possible outcomes from a given investment.

 

            A)        Beta

            B)        Return

            C)        Risk

            D)        Variance

 

Explanation: Risk is a measure of uncertainty.

 

3                     

Generally, the larger the standard deviation of an investment's expected outcomes, the _________ the risk.

 

            A)        higher

            B)        lower

            C)        less volatile

            D)        none of the above

 

Explanation: A smaller standard deviation implies less risk.

 

4                     

When stocks are held in a portfolio instead of individually, which measure of risk is appropriate?

 

            A)        standard deviation

            B)        beta

            C)        coefficient of variation

            D)        none of the above

 

Explanation: The coefficient of variation is used to measure more than one stock.

 

5                     

If an individual stock's beta is higher than 1.0, that stock is:

 

            A)        exactly as risky as the market.

            B)        riskier than the market.

            C)        less risky than the market

            D)        none of the above

 

Explanation: A beta less than 1.0 means a stock is less risky than the overall market.

 

6                     

The component of the risk-adjusted discount rate that is derived from the risk of Treasury securities is:

 

            A)        risk premium

            B)        cost of capital

            C)        call premium

            D)        risk-free rate

 

Explanation: Treasury securities are safe, risk-free investments.

 

7                     

The component of the risk-adjusted discount rate that compensates the investor for holding risky assets is the:

 

            A)        risk-free rate

            B)        cost of capital

            C)        risk premium

            D)        none of the above

 

Explanation: The risk premium is a compensation for risk.

 

8         

The standard deviation measures:

 

            A)        portfolio risk

            B)        the risk of an individual security

            C)        the risk of two securities, with different expected returns, compared to each other

            D)        none of the above

 

Explanation: Risk is measured by the standard deviation.

 

9                     

Coefficient of variation measures:

 

            A)        portfolio risk

            B)        the risk of an individual security

            C)        the degree of risk per unit of expected return.

            D)        none of the above

 

Explanation: The coefficient of variation is used to compare more than one security, with differing expected returns and levels of risk.

 

10       

The automobile industry and the heavy manufacturing industry probably have expected returns with a ___________ correlation.

 

            A)        positive

            B)        perfect positive

            C)        negative

            D)        slightly negative

 

Explanation: A positive correlation is associated with industries that are related to each other.

Capital Markets Solved MCQs

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1                     

The U.S. capital markets are composed of securities with maturities of _________.

 

            A)        less than one year

            B)        one year

            C)        one year and greater

            D)        none of the above

 

Explanation: The capital markets deal with long-term securities.

 

2                     

The following can be classified as a capital market security:

 

            A)        banker's acceptance

            B)        U.S. Treasury bills

            C)        money market mutual fund

            D)        common stock

 

Explanation: The other three answers represent short-term securities, which are traded in the money market.

 

3                     

The NAFTA agreement involved which two countries besides the U.S.?

 

            A)        Mexico and Canada

            B)        Cuba and Mexico

            C)        Panama and Cuba

            D)        Canada and Cuba

 

Explanation: It is the North American Free Trade Agreement.

 

4                     

Which of the following types of securities are exempt from at least some taxes?

 

            A)        Federally sponsored agency securities

            B)        Municipal bonds

            C)        common stock

            D)        preferred stock

 

Explanation: Municipal bonds are exempt from federal income taxes.

 

5                     

Which of the following financial markets is the largest in terms of dollar value?

 

            A)        derivatives market

            B)        stock market

            C)        bond market

            D)        commercial paper market

 

Explanation: The bond market represents the largest dollar amount.

 

6         

Which of the following is a source of internal capital for the business firm?

 

            A)        retained earnings

            B)        depreciation

            C)        common stock

            D)        a and b above

 

Explanation: Common stock is a source of external capital for a firm.

 

7         

Which of the following is not an organized exchange?

 

            A)        AMEX

            B)        NASDAQ

            C)        NYSE

            D)        none of the above

 

Explanation: All of the above are organized exchanges.

 

8                     

Recently stock exchanges have moved toward share prices stated in _________.

 

            A)        fractions

            B)        whole numbers

            C)        decimals

            D)        none of the above

 

Explanation: Historically they traded in fractions for many years.

 

9                     

The regulatory body for the New York Stock Exchange is ___________.

 

            A)        U.S. Treasury

            B)        Securities and Exchange Commission

            C)        National Association of Securities Dealers

            D)        all of the above

 

Explanation: The Securities and Exchange Commission (SEC) is the "policeman" for the securities markets.

 

10                   

Which piece of legislation was enacted in order to establish a national securities market?

 

            A)        Securities Act of 1933

            B)        Securities Exchange Act of 1934

            C)        Securities Acts Amendments of 1975

            D)        none of the above

 

Explanation: The purpose of this legislation was to direct the SEC to supervise the development of a national securities market.

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1                     

Investment bankers are intermediaries between business firms and ___________.

 

            A)        banks

            B)        securities dealers

            C)        the investing public

            D)        none of the above

 

Explanation: They are the "middlemen" between the two.

 

2         

Leveraged buyouts rely on ________ to purchase a firm.

 

            A)        Debt

            B)        Equity

            C)        Cash

            D)        none of the above

 

Explanation: It involves issuing bonds or debt.

 

3                     

The Gramm-Leach-Bliley Act repealed the _________________.

 

            A)        McFadden Act

            B)        Securities Act of 1933

            C)        The Federal Reserve Act

            D)        The Glass-Stegall Act

 

Explanation: This act broke down barriers between investment banking and commercial banking.

 

4                     

Which of the following pieces of legislation required that banks keep their commercial and investment functions separate?

 

            A)        McFadden Act

            B)        Gramm-Leach-Bliley Act

            C)        Glass-Steagall Act

            D)        none of the above

 

Explanation: This act was repealed by the Gramm-Leach-Bliley Act.

 

5         

An investment banker may engage in buying and selling a new issue of securities in order to ensure a liquid market. This function is called ______________.

 

            A)        market making

            B)        advising

            C)        agency function

            D)        underwriting

 

Explanation: The purpose of this is to make sure there is a liquid market for the security.

 

6                     

_______________ of earnings may occur after a new stock issue is made.

 

            A)        Maximization

            B)        Dilution

            C)        Termination

            D)        Stabilization

 

Explanation: This means that earnings per share (EPS) may go down.

 

7                     

How long does an investment banker usually try to stabilize the market after an initial public offering?

 

            A)        2-3 days

            B)        2-3 months

            C)        1 month

            D)        none of the above

 

Explanation: A couple of days is the norm.

 

8         

A disadvantage of being a public company is:

 

            A)        the ability to have greater access to the capital markets

            B)        having the ability to engage in merger

            C)        disclosure of information to the SEC

            D)        all of the above are advantages

 

Explanation: Public companies open themselves up to public scrutiny.

 

9         

______________ is the most popular way of raising debt capital for most corporations.

 

            A)        Bank loans

            B)        Public debt issues

            C)        Private debt issues

            D)        None of the above

 

Explanation: “…privately placed debt now exceeds 50% of all long term corporate debt outstanding.”

 

10       

Which of the following are functions of an investment banker?

 

            A)        underwriter

            B)        market maker

            C)        advisor

            D)        all of the above

 

Explanation: The investment banker provides all of these functions.

Long-Term Debt and Lease Financing Solved MCQs

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1                     

The principal value of a bond is called the:

 

            A)        the coupon rate

            B)        the par value

            C)        the maturity value

            D)        none of the above

 

Explanation: It is also called the stated value or face value.

 

2         

The _________ is the stated interest rate at the time the bond was issued.

 

            A)        coupon rate

            B)        effective rate

            C)        yield to maturity

            D)        internal rate of return

 

Explanation: This is the interest rate stated on the bond.

 

3                     

A ___________ is a long-term senior bond without collateral.

 

            A)        subordinated debenture

            B)        debenture

            C)        junior debenture

            D)        indenture

 

Explanation: In other words, there is nothing to back up or secure the bond.

 

4                     

The method of bond repayment where bonds are paid off in installments over the life of the bond issue is called:

 

            A)        sinking fund provision

            B)        call provision

            C)        serial repayment

            D)        conversion

 

Explanation: A serial repayment means the bond is paid off in installments over its life.

 

5                     

The method of bond repayment where debt is converted to shares of common stock in the company is called:

 

            A)        serial repayment

            B)        conversion

            C)        sinking fund provision

            D)        call feature

 

Explanation: This allows the company to convert bonds into shares of stock.

 

6                     

Firms generally decide to call their bonds when interest rates:

 

            A)        rise

            B)        drop

            C)        remain the same

            D)        there is no relationship between interest rates and the call provision

 

Explanation: This way a firm will save money on interest expense.

 

7                     

The current yield on a bond worth $900 with a par value of $1000 and a coupon rate of 10% is:

 

            A)        10%

            B)        11.11%

            C)        12.05%

            D)        none of the above

 

Explanation: This is calculated by dividing the stated interest payment (10% x 1000) by the current price of the bond.

 

8                     

Zero coupon bonds:

 

            A)        are sold at par.

            B)        pay no interest payment

            C)        are sold at a deep discount.

            D)        b and c above

 

Explanation: Zero coupon bonds have no interest payments and are sold at a discount from their face value.

 

9         

An advantage of debt financing is:

 

            A)        interest payments are tax deductible

            B)        the use of debt, up to a point, lowers the firm's cost of capital

            C)        does not dilute owner's earnings

            D)        all of the above

 

Explanation: All of these are advantages of using debt.

 

10                   

A capital lease:

 

            A)        is generally used by corporations more often than an operating lease.

            B)        is placed on the balance sheet.

            C)        is capitalized.

            D)        all of the above

 

Explanation: All of these are true of a capital lease.

Common and Preferred Stock Financing Solved MCQs

 

 

 

1                     

________________ have a claim to the residual income of the firm.

 

            A)        Bondholders

            B)        Preferred Stockholders

            C)        Common Stockholders

            D)        none of the above

 

Explanation: Common stockholders are the ultimate owners of a firm.

 

2                     

_______________ voting elects a member of the board of directors of a firm with a 51% vote.

 

            A)        Cumulative

            B)        Preferred

            C)        Majority

            D)        none of the above

 

Explanation: Majority voting means over 50%.

 

3         

Which of the following types of voting includes minority shareholders?

 

            A)        Cumulative

            B)        Preferred

            C)        Majority

            D)        none of the above

 

Explanation: Cumulative voting allows those with less than a 50% interest to elect some of the board of directors.

 

4         

If a corporate charter says that current stockholders must be given the first option to purchase new stock, then that is a __________ rights offering.

 

            A)        Pre-emptive

            B)        Rights-on

            C)        Ex-rights

            D)        none of the above

 

Explanation: Pre-emptiverights gives priority to the current stockholders.

 

5                     

When a rights offering is announced, the stock initially trades:

 

            A)        Ex-rights

            B)        Rights-on

            C)        No-rights

            D)        Pre-emptive right

 

Explanation: Rights-on means that someone who purchases the stock will also receive a right toward a future purchase of the stock.

 

6         

_____________ makes a firm unattractive in case of a takeover bid.

 

            A)        Rights offering

            B)        Greenmail

            C)        Poison Pill

            D)        Black Knight

 

Explanation: This is an attempt to "poison" an attempted takeover.

 

7                     

________________ are certificates that have a legal claim on an ownership interest in a foreign company's stock.

 

            A)        Stock certificates

            B)        Preferred stock

            C)        Bond indentures

            D)        American Depository Receipts

 

Explanation: This is the definition of American Depository Receipts (ADRs).

 

8         

Securities that have a mandatory dividend are:

 

            A)        bonds

            B)        preferred stock

            C)        common stock

            D)        none of the above

 

Explanation: A firm is not obligated to pay a dividend on any security.

 

9                     

One provision of preferred stock is that they can participate in the firm's yield during good years. That provision is ________________.

 

            A)        the call provision

            B)        cumulative dividends

            C)        the participation provision

            D)        the conversion provision

 

Explanation: The participation provision means that the owners may receive more than the quoted yield if the firm is having a very good year.

 

10       

Which of the following have ownership interest in the firm?

 

            A)        Common stockholders

            B)        Preferred stockholders

            C)        Bondholders

            D)        All of the above

 

Explanation: Common stockholders are the ultimate owners of a firm.

 

Dividend Policy and Retained Earnings Solved MCQs

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1                     

The Board of Directors may do which of the following with net income?

 

            A)        put it in the cash account

            B)        retain it

            C)        pay it out as dividends

            D)        B & C above

 

Explanation: Net income may be either retained by the company or paid out as dividends.

 

2                     

One desire of stockholders regarding dividend policy is:

 

            A)        stable dividends

            B)        frequent dividends

            C)        low dividends

            D)        high dividends

 

Explanation: Stability of dividends is important to stockholders.

 

3                     

A stock dividend:

 

            A)        increases the value of stockholder's equity.

            B)        decreases the value of stockholder's equity

            C)        does not change the value of stockholder's equity.

            D)        none of the above

 

Explanation: Owners' equity is not changed by a stock dividend.

 

4                     

The purpose of a stock split is usually to:

 

            A)        increase the investor's wealth

            B)        bring down the stock price into a lower trading range.

            C)        reduce of threat of takeover

            D)        decrease the number of shares outstanding

 

Explanation: Stock splits are used when the price of a stock gets too high.

 

5                     

As a result of the Jobs and Growth Tax Relief Act of 2003, dividends and capital gains are taxed at a maximum rate of:

 

            A)        38.6%

            B)        20%

            C)        15%

            D)        none of the above

 

Explanation: This recent piece of legislation reduced the maximum capital gains tax rate to 15%.

 

6                     

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?

 

            A)        dividends in arrears

            B)        cash

            C)        common stock

            D)        retained earnings

 

Explanation: A stock split will not affect a company's retained earnings account.

 

7                     

A firm may repurchase its own stock because:

 

            A)        it provides positive information about the firm.

            B)        the firm has inadequate capital budgeting alternatives

            C)        it will increase shareholder's wealth

            D)        all of the above

 

Explanation: These are all reasons for a firm to repurchase its stock.

 

8         

A stock split:

 

            A)        does not change the amount in the common stock account

            B)        is treated by accountants just like a stock dividend

            C)        reduces retained earnings

            D)        none of the above

 

Explanation: A stock split doesn't change the total value of common stock, only the number of shares.

 

9                     

The ex-dividend date is the date:

 

            A)        on which recipients of the dividend are determined

            B)        the dividend is declared

            C)        which no longer includes dividend payments for stock bought on that date.

            D)        none of the above

 

Explanation: The ex-dividend date is also two business days before the holder-of-record date.

 

10                   

Individuals in a high tax bracket typically prefer for a firm to:

 

            A)        issue dividends

            B)        retain earnings

            C)        hold cash

            D)        none of the above

 

Explanation: The reason is so they don't have to pay taxes on the dividends

Convertibles, Warrants, and Derivatives Solved MCQs

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1                     

The conversion ratio is the:

 

            A)        ratio of the conversion premium to market value of the convertible security.

            B)        price at which a convertible security is exchanged for common stock.

            C)        number of shares of common stock in to which the convertible may be converted.

            D)        none of the above

 

Explanation: The conversion ratio tells how many shares of stock will result from the conversion.

 

2                     

The floor value for a convertible bond is:

 

            A)        the conversion value

            B)        the pure bond value

            C)        the conversion price

            D)        none of the above

 

Explanation: If the stock price falls below the conversion price, the conversion option becomes worthless and the value of the bond becomes simply the present value of the future interest and principal payments. This is the value of the bond without the conversion feature.

 

3                     

A convertible security is:

 

            A)        a security that can be converted into debt at the option of the owner.

            B)        a security that can be converted into preferred stock at the option of the owner.

            C)        a security that can be converted into common stock at the option of the owner.

            D)        none of the above

 

Explanation: This allows one to exchange the security for common stock.

 

4         

The conversion price is usually _______ than the market price of the common stock at the time the bond issue is sold.

 

            A)        higher

            B)        lower

            C)        the same as

            D)        none of the above

 

Explanation: The reason for this is to make the convertible security more desirable.

 

5                     

The interest rate on convertibles is generally __________ the interest rate on nonconvertible securities.

 

            A)        greater than

            B)        less than

            C)        the same as

            D)        none of the above

 

Explanation: Convertible securities are more desirable than nonconvertibles; therefore, they don't have to pay as high an interest rate.

 

6         

The conversion premium will be large:

 

            A)        if investors think the price of the stock will rise.

            B)        if interest rates decline

            C)        when the stock price is falling

            D)        none of the above

 

Explanation: If investors are optimistic about the prospects of the common stock, the conversion premium may be large.

 

7         

The price of a convertible bond:

 

            A)        has upside and downside limits

            B)        has only downside limits

            C)        has only upside limits

            D)        none of the above

 

Explanation: A convertible bond has only a floor or lowest value.

 

8         

Warrants are:

 

            A)        investments whose value is directly related to the price of the underlying stock.

            B)        the same as call options

            C)        the same as put options

            D)        none of the above

 

Explanation: A warrant is an option to buy a stated number of shares of a stock at a specified price (the exercise price) over a given time period.

 

9                     

Which of the following is an advantage of a convertible bond?

 

            A)        downside protection is ineffectual if the bond is bought at a large premium over par value

            B)        conversion may be forced on the bondholder by call provisions on the convertible bond

            C)        there is downside risk for the investor

            D)        none of the above

 

Explanation: This means that there is a lowest possible value (called the floor value) for the security.

 

10                   

A step-up in the conversion price refers to:

 

            A)        the ability of the company to step up the maturity of the bond to an earlier date.

            B)        a shorter time to call

            C)        the provision that decreases the conversion ratio the longer the bond is held

            D)        none of the above

 

Explanation: A step-up in the conversion price means that the conversion ratio is decreasing and the conversion price is increasing.

External Growth through Mergers Solved MCQs

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1                     

Which of the following is NOT a potential benefit of merger?

 

            A)        Synergy

            B)        Portfolio Effect

            C)        Dilution of EPS

            D)        tax loss carry forward

 

Explanation: The other three answers are all benefits of a merger.

 

2         

A business combination where the two firms who are merging develop a new firm is called:

 

            A)        a horizontal merger

            B)        a vertical merger

            C)        a business consolidation

            D)        none of the above

 

Explanation: The result of a business consolidation is a new firm.

 

3                     

The price that an acquiring company must pay for the acquired company is:

 

            A)        book value

            B)        market value

            C)        a higher price than market value

            D)        none of the above

 

Explanation: This is known as the merger premium.

 

4                     

The typical merger premium is:

 

            A)        20%

            B)        20-40%

            C)        40-60%

            D)        none of the above

 

Explanation: The premium is generally 40-60%.

 

5         

Merging with an unrelated company is called a ___________ merger.

 

            A)        conglomerate

            B)        horizontal

            C)        vertical

            D)        none of the above

 

Explanation: This is a merger of totally unrelated companies.

 

6                     

A business combination where the resulting firm maintains the identity of the acquiring firm is called a:

 

            A)        conglomerate

            B)        merger

            C)        consolidation

            D)        none of the above

 

Explanation: A merger occurs when the acquiring firm's original identity is kept with the new firm.

 

7                     

Which of the following is a tender offer that uses debt to buy the firm?

 

            A)        hostile takeover

            B)        negotiated merger

            C)        two-step buyout

            D)        leveraged buyout

 

Explanation: A leveraged buyout involves bonds or debt.

 

8                     

The financial motives for merger include all of the following except:

 

            A)        the portfolio effect

            B)        improved access to the capital markets

            C)        tax loss carry forwards

            D)        synergy

 

Explanation: All of these are financial motives for a merger.

 

9                     

The elimination of overlapping functions and the meshing of two firms' strong areas creates the managerial incentive for merger that is called:

 

            A)        pooling of interest

            B)        purchase of assets

            C)        synergy

            D)        None of the above

 

Explanation: Synergy also occurs when the whole is greater than the sum of its parts.

 

10       

Which of the following kinds of mergers lead to diversification benefits?

 

            A)        vertical

            B)        conglomerate

            C)        horizontal

            D)        none of the above

 

Explanation: A conglomerate merger involves unrelated companies.

International Financial Management Solved MCQs

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1                     

What type of MNC produces a product domestically and ships it to a foreign market?

 

            A)        joint venture

            B)        fully owned foreign subsidiary

            C)        exporter

            D)        importer

 

Explanation: An exporter sells a product to a foreign market.

 

2                     

When an MNC cannot produce an actual product in a foreign subsidiary due to political restrictions, it can export technology and knowledge through:

 

            A)        an exporter

            B)        a joint venture

            C)        an importer

            D)        a licensing agreement

 

Explanation: A licensing agreement allows a multinational corporation (MNC) to export technology and knowledge.

 

3                     

Many MNCs prefer ____________ above all other methods of establishing a foreign presence.

 

            A)        exporting

            B)        joint ventures

            C)        fully owned foreign subsidiaries

            D)        none of the above

 

Explanation: A joint venture has many pluses, including exposing the MNC to the least amount of political risk.

 

4                     

What one currency is worth in terms of another currency is called a(n) __________.

 

            A)        euro

            B)        exchange rate

            C)        spot rate

            D)        forward rate

 

Explanation: The exchange rate shows the price or value of one currency as compared to another.

 

5                     

Currency exchange rates tend to vary inversely with their ____________.

 

            A)        interest rates

            B)        cross rate

            C)        purchasing power

            D)        economic power

 

Explanation: This provides a similar purchasing power in each country and is known as purchasing power parity (PPP).

 

6                     

The system of government accounts that catalog the flow of economic transactions between the residents of one country and the residents of other countries is called ________________.

 

            A)        a joint venture

            B)        current account

            C)        balance of payments

            D)        balance of interest rates

 

Explanation: The balance of payments (BOP) shows the economic transactions between two countries.

 

7         

The exchange rate that is paid for a currency for immediate delivery is the:

 

            A)        spot rate

            B)        cross rate

            C)        forward rate

            D)        none of the above

 

Explanation: The spot rate is the price of a currency right now or "on the spot".

 

8                     

The exchange rate between two currencies outside the American dollar is called the:

 

            A)        forward rate

            B)        cross rate

            C)        spot rate

            D)        none of the above

 

Explanation: The cross rate is the exchange rate for two currencies quoted against the U.S. dollar.

 

9                     

A multinational corporation may be defined as:

 

            A)        a company that imports foreign products

            B)        a company that hires foreign labor

            C)        a company which carries on business activity outside the U.S.

            D)        none of the above

 

Explanation: A multinational corporation (MNC) does business in more than one country.

 

10       

A fully owned foreign subsidiary is a form of MNC in which:

 

            A)        the MNC owns and operates the firm by itself.

            B)        the MNC has a partner in the foreign country.

            C)        the foreign government is cooperative.

            D)        none of the above

 

Explanation: A fully owned foreign subsidiary is owned and operated by the multinational corporation (MNC).

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