# Finance Basic Multiple Choice Question MCQ

Categories: Finance

Ques 1.If a company has a share price of $100 and its earnings per share averaged $2, what is its P/E ratio?

a) 20

b) 50

c) 80

d) 70

Ans. a

Ques 2.If a company's earnings per share is $20 and it has a share price of $600, what is the P/E ratio?

a) 30

b) 40

c) 50

d) 20

Ans. b

Ques 3.Making gifts of money, goods, or time to help non-profit organizations, groups or individuals is:

a) Corporate social marketing

b) Cause marketing

c) Cause-related marketing

d) Corporate philanthropy

Ans. d

Ques 4.The term _____ can be used in a broad sense to describe all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the

enterprise.

a) corporate governance

b) corporate policy

c) corporate oversight

d) corporate strategy

Ans. a

Ques 5. A profitability index (PI) of .92 for a project means that __________.

a) the project's costs (cash outlay) are (is) less than the present value of the project's benefits

b) the project's NPV is greater than zero

c) the project's NPV is greater than 1

d) the project returns 92 cents in present value for each current dollar invested (cost)

Ans. d

Ques 6.The LMN Corporation is considering an investment that will cost $80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are $25,000 per year and for the last two years they are $20,000 per year. What is the payback period for this investment?

a) 3.2 years.

b) 3.5 years.

c) 4.0 years.

d) Cannot be determined from this information.

Ans. b

Ques 7.Bulging Stomach Restaurants, Inc., has estimated that a proposed project's 8-year net cash benefit will be $4,000 per year for years 1 through 8, with an additional terminal benefit of $8,000 at the end of the eighth year. Assuming that these cash inflows satisfy exactly Bulging's required rate of return of 8 percent, the project's initial cash outflow is closest to which of the following four possible answers?

a) $27,309

b) $25,149

c) $14,851

d) $40,000

Ans. a

Ques 8.Which of the following statements is incorrect regarding a normal project?

a) If the NPV of a project is greater than 0, then its PI will exceed 1.

b) If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0.

c) If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash flows.

d) If the IRR of a project is greater than the discount rate, k, then its PI will be greater than 1.

Ans. c

Ques 9. Assume that a firm has accurately calculated the net cash flows relating to two mutually exclusive investment proposals. If the net present value of both proposals exceed zero and the firm is not under the constraint of capital rationing, then the firm should __________.

a) calculate the IRRs of these investments to be certain that the IRRs are greater than the cost of capital

b) compare the profitability index of these investments to those of other possible investments

c) calculate the payback periods to make certain that the initial cash outlays can be recovered within a appropriate period of time

d) accept the proposal that has the largest NPV since the goal of the firm is to maximize shareholder wealth and, since the projects are mutually exclusive, we can only take one

Ans. d

Ques 10. A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as __________

a) a mutually exclusive project

b) an independent project

c) a dependent project

d) a contingent project

Ans. b

Ques 11.When operating under a single-period capital-rationing constraint, you may first want to try selecting projects by descending order of their __________ in order to give yourself the best chance to select the mix of projects that adds most to firm value.

a) profitability index (PI)

b) net present value (NPV)

c) internal rate of return (IRR)

d) payback period (PBP)

Ans. a

Ques 12.Which of the following statements is correct regarding the internal rate of return (IRR) method?

a) Each project has a unique internal rate of return.

b) As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be used with reasonable confidence.

c) The internal rate of return does not consider the time value of money.

d) The internal rate of return is rarely used by firms today because of the ease at which net present value is calculated.

Ans. b

Ques 13.Which of the following is not a potential for a ranking problem between two mutually exclusive projects?

a) The projects have unequal lives that differ by several years.

b) The costs of the two projects differ by nearly 30%.

c) The two projects have cash flow patterns that differ dramatically.

d) One of the mutually exclusive projects involves replacement while the other involves expansion.

Ans. d

Ques 14. A project whose acceptance precludes the acceptance of one or more alternative projects is referred to as __________.

a) a mutually exclusive project.

b) an independent project.

c) a dependent project.

d) a contingent project.

Ans. a

Ques 15.Two mutually exclusive projects are being considered. Neither project will be repeated again in the future after their current lives are complete. There exists a potential problem though -- the expected life of the first project is one year and the expected life of the second project is three years. This has caused the NPV and IRR methods to suggest different project preferences. What technique can be used to help make a better decision in this scenario?

a) Rely on the NPV method and make your choice as it will tell you which one is best.

b) Use the common-life technique to replicate the one-year project three times and recalculate the NPV and IRR for the one-year project.

c) Ignore the NPV technique and simply choose the highest IRR since managers are concerned about maximizing returns.

d) In this situation, we need to rely on the profitability index (PI) method and choose the one with the highest PI.

Ans. a

Ques 16. High P/E ratios tend to indicate that a company will _______

a) grow quickly

b) grow at the same speed as the average company

c) grow slowly

d) not grow

Ans. a

Ques 17. _________ is equal to (common shareholders' equity/common shares outstanding).

a) Book value per share

b) Liquidation value per share

c) Market value per share

d) Tobin's Q

Ans. a

Ques 18.The _______ is defined as the present value of all cash proceeds to the investor in the stock.

a) dividend payout ratio

b) intrinsic value

c) market capitalization rate

d) plowback ratio

Ans. b

Ques 19. Historically, P/E ratios have tended to be _________.

a) higher when inflation has been high

b) lower when inflation has been high

c) uncorrelated with inflation rates but correlated with other macroeconomic variables

d) uncorrelated with any macroeconomic variables including inflation rates

Ans. b

Ques 20. All of the following influence capital budgeting cash flows EXCEPT:

a) Accelerated depreciation

b) Salvage value

c) Tax rate changes

d) Method of project financing used

Ans. d