Corporate Finance Multiple Choice Questions and Answers for Practice

16. What does "debt-to-equity ratio" measure?

1. The level of profitability of a company
2. The proportion of debt and equity used to finance a company
3. The cost of debt capital
4. The liquidity of a company

17. In which of the following cases would a firm most likely use "convertible bonds"?

1. When they want to issue debt with a lower interest rate
2. When they want to raise equity capital without diluting shareholders
3. When they want to avoid taxes
4. When they are facing liquidity problems

18. What is "beta" in the context of the Capital Asset Pricing Model (CAPM)?

1. The expected return on a stock
2. The risk-free rate of return
3. The measure of a stock's volatility relative to the market
4. The expected dividend growth rate

19. What is the "time value of money" concept based on?

1. The idea that money today is worth more than the same amount in the future
2. The idea that inflation reduces the value of money over time
3. The concept that debt should be repaid before equity is paid
4. The notion that future profits are uncertain

20. Which of the following best describes "working capital"?

1. The total value of assets owned by a company
2. The difference between a company’s current assets and current liabilities
3. The value of a company's non-current assets
4. The total debt used to finance a company

21. Which of the following is an example of a "real option" in finance?

1. The right to buy additional shares at a specific price
2. The right to abandon a project and recover some investment
3. The right to receive a fixed dividend
4. The right to issue new bonds at a discounted rate

22. What is the key feature of a "payback period" method of investment appraisal?

1. It measures how long it takes to recover the initial investment
2. It calculates the net present value of an investment
3. It takes into account the time value of money
4. It measures the profitability of an investment

23. What is "diversification" in the context of investment?

1. Investing in a single asset class
2. Spreading investments across different assets to reduce risk
3. Focusing on high-risk investments for higher returns
4. Investing in low-cost assets to maximize profits

24. The cost of equity is typically estimated using which method?

1. Discounted Cash Flow (DCF)
2. Capital Asset Pricing Model (CAPM)
3. Earnings Per Share (EPS) method
4. Net Present Value (NPV) method

25. What is "economic value added" (EVA)?

1. A measure of a company’s profitability after taxes
2. A measure of a company’s return on equity
3. The residual income after subtracting the cost of capital from operating profit
4. The total market value of a company

26. Which of the following is a characteristic of "preferred stock"?

1. It offers voting rights to shareholders
2. It has a fixed dividend payout
3. It is riskier than common stock
4. It is always convertible into common stock

27. What is the "modigliani-miller" theorem primarily concerned with?

1. The relationship between risk and return
2. The irrelevance of capital structure in perfect markets
3. The effect of taxes on a company's financial decisions
4. The optimal dividend payout ratio

28. Which of the following financial ratios is most useful in measuring a company's liquidity?

1. Debt-to-equity ratio
2. Return on assets
3. Current ratio
4. Price-to-earnings ratio

29. The concept of "risk-return tradeoff" means that:

1. Higher returns are guaranteed with higher risk
2. Lower risk leads to higher returns
3. Investors seek to minimize risk without considering returns
4. Higher risk is typically associated with higher potential returns

30. The "net present value" (NPV) method of investment appraisal assumes that:

1. Future cash flows are more important than current cash flows
2. Cash inflows are more risky than cash outflows
3. Cash flows are discounted to reflect their present value
4. The time value of money is irrelevant