Corporate Finance MCQ Questions and Answers for Practice

1. What does the term 'capital structure' refer to?

1. The mix of equity and debt used by a company
2. The total assets of a company
3. The capital expenditure of a company
4. The working capital of a company

2. What is a stock split?

1. A company reduces the price of its stock to increase market liquidity
2. A company issues more shares to increase the total number of shares outstanding
3. A company buys back its own shares to reduce the number of outstanding shares
4. A company increases the dividend payout

3. Which of the following is true about "cost of equity"?

1. It is typically lower than the cost of debt
2. It represents the return required by equity investors
3. It is the same as the company's net income
4. It is fixed and does not change

4. What is the term for the risk that a company will not be able to meet its debt obligations?

1. Credit risk
2. Market risk
3. Operational risk
4. Liquidity risk

5. In the Capital Asset Pricing Model (CAPM), what does the "market risk premium" represent?

1. The difference between the return on a risk-free asset and the return on the market
2. The return expected on the market portfolio
3. The difference between the return on the stock and the risk-free rate
4. The risk of the market compared to the risk-free asset

6. What is the key assumption behind the Modigliani-Miller theorem regarding capital structure?

1. Markets are imperfect and frictions exist
2. There are no taxes and markets are efficient
3. Firms with higher leverage always have a lower cost of equity
4. Capital structure is irrelevant under all circumstances

7. Which of the following is a characteristic of preferred stock?

1. It has no voting rights
2. It provides higher potential returns than common stock
3. It is more volatile than common stock
4. It is riskier than bonds

8. What does the Price-to-Earnings (P/E) ratio measure?

1. A company's profitability
2. The cost of equity capital
3. A company's market value relative to its earnings
4. A company's dividend yield

9. In financial terms, what does "liquidity" refer to?

1. The ability to generate profits
2. The ability to meet short-term obligations
3. The company's capital structure
4. The company's operational efficiency

10. Which of the following is true about the Dividend Discount Model (DDM)?

1. It is used to value stocks based on future earnings
2. It assumes a constant growth rate of dividends
3. It is applicable to companies that do not pay dividends
4. It can only be used for small companies

11. What is the main purpose of conducting a financial ratio analysis?

1. To evaluate the profitability of a company
2. To assess the financial health and performance of a company
3. To determine the value of a company's stock
4. To estimate the cost of capital

12. What is "free cash flow" in corporate finance?

1. The cash available after all expenses and capital expenditures have been paid
2. The cash generated from borrowing activities
3. The cash flow from financing activities
4. The cash flow from operations before tax

13. What is the primary goal of financial management?

1. To maximize shareholder wealth
2. To maximize sales revenue
3. To minimize debt
4. To reduce operational costs

14. What is an example of a "leveraged buyout" (LBO)?

1. A company acquires another company using a combination of equity and debt
2. A company issues more shares to raise capital
3. A company repurchases its own shares from the market
4. A company sells a part of its assets to raise funds

15. Which of the following best describes "market risk"?

1. The risk associated with a firm's capital structure
2. The risk that affects all companies and cannot be diversified
3. The risk that can be controlled by the company
4. The risk associated with interest rate fluctuations