Top 550+ Solved Financial Management MCQ Questions Answer
Q. A single, overall cost of capital is often used to evaluate projects because:
a. it avoids the problem of computing the required rate of return for each investment proposal.
b. it is the only way to measure a firm's required return.
c. it acknowledges that most new investment projects have about the same degree of risk.
d. it acknowledges that most new investment projects offer about the same expected return.
Q. The cost of equity capital is all of the following EXCEPT:
a. the minimum rate that a firm should earn on the equity-financed part of an investment.
b. a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
c. by far the most difficult component cost to estimate.
d. generally lower than the before-tax cost of debt.
Q. In calculating the proportional amount of equity financing employed by a firm, we should use:
a. the common stock equity account on the firm's balance sheet.
b. the sum of common stock and preferred stock on the balance sheet.
c. the book value of the firm.
d. the current market price per share of common stock times the number of shares outstanding.
Q. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
a. common stock.
b. debt.
c. preferred stock.
d. none of the above.
Q. The common stock of a company must provide a higher expected return than the debt of the same company because
a. there is less demand for stock than for bonds.
b. there is greater demand for stock than for bonds.
c. there is more systematic risk involved for the common stock.
d. there is a market premium required for bonds.
Q. A quick approximation of the typical firm's cost of equity may be calculated by
a. adding a 5 percent risk premium to the firm's before-tax cost of debt.
b. adding a 5 percent risk premium to the firm's after-tax cost of debt.
c. subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
d. subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
Q. Market values are often used in computing the weighted average cost of capital because
a. this is the simplest way to do the calculation.
b. this is consistent with the goal of maximizing shareholder value.
c. this is required in the U.S. by the Securities and Exchange Commission.
d. this is a very common mistake.
Q. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company's long-term financing.
a. 1 = bonds; 2 = common stock; 3 = preferred stock.
b. 1 = bonds; 2 = preferred stock; 3 = common stock.
c. 1 = common stock; 2 = preferred stock; 3 = bonds.
d. 1 = preferred stock; 2 = common stock; 3 = bonds.
Q. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .
a. 6 percent
b. 6.25 percent
c. 10 percent
d. 10.4 percent
Q. The term "capital structure" refers to:
a. long-term debt, preferred stock, and common stock equity.
b. current assets and current liabilities.
c. total assets minus liabilities.
d. shareholders' equity.
Q. A critical assumption of the net operating income (NOI) approach to valuation is:
a. that debt and equity levels remain unchanged.
b. that dividends increase at a constant rate.
c. that ko remains constant regardless of changes in leverage.
d. that interest expense and taxes are included in the calculation.
Q. The traditional approach towards the valuation of a company assumes:
a. that the overall capitalization rate holds constant with changes in financial leverage.
b. that there is an optimum capital structure.
c. that total risk is not altered by changes in the capital structure.
d. that markets are perfect.
Q. Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M
a. one will be at greater risk of bankruptcy.
b. the firm with greater financial leverage will have the higher value.
c. this proves that markets cannot be efficient.
d. this will not continue because arbitrage will eventually cause the firms to sell at the same value.
Q. What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?
a. $140,000
b. $220,000
c. $360,000
d. $580,000
Q. Reserves & Surplus are which form of financing?
a. Security Financing
b. Internal Financing
c. Loans Financing
d. International Financing