Here are 50 MCQs – Corporate Finance (US CMA Part 2) Please solve
Topics include: Risk & Return, CAPM, Cost of Capital, Capital Budgeting, Working Capital, Leverage, Dividend Policy, Valuation, etc.
Risk & Return
1. Holding Period Return (HPR) equals:
A. (Ending price – Beginning price) / Ending price
B. (Income + Price change) / Beginning price
C. Dividend / Market price
D. Net income / Investment
Answer:
2. Expected return of a portfolio is:
A. Weighted average of returns
B. Simple average
C. Highest return
D. Risk-free rate
Answer:
3. Standard deviation measures:
A. Systematic risk
B. Total risk
C. Beta
D. Market risk only
Answer:
4. Beta measures:
A. Firm-specific risk
B. Market risk sensitivity
C. Liquidity
D. Profitability
Answer:
5. A beta greater than 1 implies:
A. Less volatile than market
B. More volatile than market
C. No risk
D. Risk-free
Answer:
6. CAPM formula is:
A. Rf + β (Rm – Rf)
B. Rm + β
C. Rf – β
D. β / Rm
Answer:
7. Market risk premium equals:
A. Rm
B. Rf
C. Rm – Rf
D. β – Rf
Answer:
8. Diversification reduces:
A. Market risk
B. Systematic risk
C. Unsystematic risk
D. Beta
Answer:
9. Coefficient of variation equals:
A. Return / Risk
B. Risk / Return
C. Beta × Return
D. SD × Return
Answer:
10. Higher CV indicates:
A. Less risk
B. Better investment
C. Higher risk per unit of return
D. Lower volatility
Answer:
Cost of Capital
11. WACC weights are based on:
A. Book values only
B. Market values
C. Par value
D. Historical cost
Answer:
12. After-tax cost of debt equals:
A. Kd
B. Kd (1 – t)
C. Kd + t
D. Kd / (1 – t)
Answer:
13. Cost of preferred stock equals:
A. D / P
B. D / P (1 – t)
C. P / D
D. Rf + β
Answer:
14. Retained earnings cost is estimated using:
A. CAPM or DDM
B. Book value
C. Tax rate
D. EPS
Answer:
15. Flotation costs increase:
A. Cost of retained earnings
B. Cost of new equity
C. Cost of debt
D. WACC always decreases
Answer:
Capital Budgeting
16. NPV method assumes reinvestment at:
A. IRR
B. Cost of capital
C. Risk-free rate
D. Zero rate
Answer:
17. IRR is the rate that makes:
A. PI zero
B. NPV zero
C. Cash flow zero
D. Revenue zero
Answer:
18. Accept project if NPV is:
A. Negative
B. Zero
C. Positive
D. Less than IRR
Answer:
19. Payback period ignores:
A. Cash flows
B. Time value of money
C. Initial investment
D. Risk
Answer:
20. Discounted payback considers:
A. Inflation only
B. Time value of money
C. Accounting profit
D. Dividends
Answer:
21. Profitability Index equals:
A. PV inflows / PV outflows
B. Inflows – Outflows
C. IRR / Cost
D. Net income / Investment
Answer:
22. Mutually exclusive projects require selection of:
A. All projects
B. One best project
C. None
D. Average return
Answer:
23. Sunk costs are:
A. Relevant
B. Incremental
C. Irrelevant
D. Opportunity cost
Answer:
24. Opportunity cost is:
A. Historical cost
B. Forgone benefit
C. Fixed cost
D. Tax expense
Answer:
25. Depreciation tax shield equals:
A. Depreciation × Tax rate
B. Depreciation / Tax
C. Tax × Revenue
D. Revenue × Depreciation
Answer:
Working Capital Management
26. Operating cycle equals:
A. Inventory + Payables
B. Inventory + Receivables
C. Receivables – Payables
D. Cash + Receivables
Answer:
27. Cash conversion cycle equals:
A. OC + Payables
B. OC – Payables period
C. Receivables period only
D. Inventory – Receivables
Answer:
28. Conservative policy means:
A. High short-term debt
B. High current assets
C. Low liquidity
D. High risk
Answer:
29. Factoring improves:
A. Profit margin
B. Liquidity
C. Leverage
D. Fixed assets
Answer:
30. EOQ minimizes:
A. Ordering + Carrying costs
B. Revenue
C. Profit
D. Taxes
Answer:
Leverage
31. Operating leverage relates to:
A. Fixed operating costs
B. Debt
C. Equity
D. Dividends
Answer:
32. Financial leverage relates to:
A. Fixed operating cost
B. Fixed financing cost
C. Variable cost
D. Inventory
Answer:
33. Degree of operating leverage (DOL) measures:
A. EBIT sensitivity to sales
B. EPS sensitivity
C. Debt level
D. Market risk
Answer:
34. Combined leverage measures sensitivity of:
A. EBIT to sales
B. EPS to sales
C. Sales to cost
D. Cash to debt
Answer:
Dividend Policy
35. Residual dividend theory suggests dividends are paid from:
A. Debt
B. Residual earnings after investment
C. Revenue
D. Cash only
Answer:
36. Modigliani-Miller dividend theory assumes:
A. Perfect capital market
B. High taxes
C. Bankruptcy cost
D. Information asymmetry
Answer:
37. Dividend payout ratio equals:
A. Dividend / Net income
B. Net income / Dividend
C. Dividend / Revenue
D. Dividend / Assets
Answer:
Valuation
38. Gordon Growth Model value equals:
A. D1 / (r – g)
B. D0 / r
C. EPS / r
D. D1 × r
Answer:
39. If growth rate exceeds required return:
A. Value negative
B. Model invalid
C. Value zero
D. Accept project
Answer:
40. Bond value equals:
A. PV of coupons only
B. PV of principal only
C. PV of coupons + PV of principal
D. Face value
Answer:
41. Bond sells at premium when:
A. Coupon < Market rate
B. Coupon > Market rate
C. Coupon = Market rate
D. Zero coupon
Answer:
42. Yield to maturity is:
A. Coupon rate
B. Market rate
C. IRR of bond cash flows
D. Dividend yield
Answer:
Risk Analysis in Capital Budgeting
43. Sensitivity analysis changes:
A. All variables together
B. One variable at a time
C. Tax rate only
D. Interest only
Answer:
44. Scenario analysis evaluates:
A. Single outcome
B. Multiple combined changes
C. No change
D. Historical cost
Answer:
45. Certainty equivalent approach adjusts:
A. Discount rate
B. Cash flows for risk
C. Taxes
D. Depreciation
Answer:
46. Risk-adjusted discount rate approach adjusts:
A. Cash flows
B. Discount rate
C. Investment cost
D. Revenue
Answer:
Mergers & Capital Structure
47. Optimal capital structure minimizes:
A. EPS
B. WACC
C. Revenue
D. Debt
Answer:
48. Trade-off theory balances:
A. Risk & Return
B. Tax shield & Bankruptcy cost
C. Sales & Profit
D. Equity & Revenue
Answer:
49. Pecking order theory prefers financing in order of:
A. Equity → Debt → Internal
B. Internal → Debt → Equity
C. Debt → Equity → Internal
D. Equity only
Answer:
50. Financial distress cost increases when:
A. Debt increases significantly
B. Equity increases
C. Profit increases
D. WACC decreases
Answer:
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