Corporate Finance & Capital Budgeting — Part 1: 40 MCQs with Explanations

A type of beta which incorporates about company such as changes in capital structure is classified as Fundamental Beta .

In capital budgeting, an internal rate of return of project is classified as its Internal rate of return .

In capital budgeting, number of non-normal cash flows have internal rate of returns are Multiple .

Cost of capital is equal to required return rate on equity in case if investors are only Common stockholders .

An attitude of investor towards dealing with risk determines the Rate of return .

Partners who are only liable for their own part of investment are considered as Limited partners .

In a statement of cash flows, a company investing in short-term financial investments and in fixed assets results in Decreased cash .

Rate of return that an investment provides its investor is classified as Internal rate of return .

Mostly in financials, risk of portfolio is smaller than that of assets Weighted average .

Relationship between risk and required return is classified as Security market line .

Risk which is caused by events such as strikes, unsuccessful marketing programs and other lawsuits is classified as Diversifiable risk .

Type of risk in which beta is equal to one is classified as Average risk stock .

In capital asset pricing model, characteristic line is classified as Regression line .

Type of relationship exists between an expected return and risk of portfolio is classified as Linear .

In capital asset pricing model, assumptions must be followed including All of above .

Risk affects any firm with factors such as war, recessions, inflation and high interest rates is classified as Market risk .

According to capital asset pricing model assumptions, quantities of all assets are Given and fixed .

According to capital asset pricing model assumptions, variances, expected returns and co-variance of all assets are Identical .

According to capital asset pricing model assumptions, investors will borrow unlimited amount of capital at any given Risk free rate of interest .

Risk of fall in income due to fall in interest rates in future is classified as Reinvestment risk .

Financial security with low degree risk and investment held by businesses is classified as Money market mutual funds .

In cash flow estimation and risk analysis, real rate will be equal to nominal rate if there is No inflation .

Net investment in operating capital is subtracted from net operating profit after taxes to calculate Free cash flow .

A risk associated with project and way considered by well diversified stockholder is classified as Beta risk .

Capital gain expected by stockholders and dividends are included in Cost of equity .

In weighted average cost of capital, capital components are funds that usually offer by Investors .

Capital budgeting decisions are analyzed with help of weighted average and for this purpose Cost of capital is used .

In weighted average capital, capital structure weights estimation does not rely on value of Book value of equity .

Set of projects or set of investments usually maximize firm value is classified as Optimal capital budget .

Number of years forecasted to recover an original investment is classified as Payback period .

In capital budgeting, a negative net present value result in Negative economic value added .

Modified rate of return and modified internal rate of return with exceed cost of capital if net present value is Positive .

Reinvestment risk of bonds is higher on Short maturity bonds .

Situation in which firm limits expenditures on capital is classified as Capital rationing .

An internal rate of return in capital budgeting can be modified to make it representative of Relative profitability .

Project whose cash flows are sufficient to repay capital invested for rate of return then net present value will be Zero .

Reinvestment risk of bonds is usually higher on Callable bonds .

An effect of interest rate risk and investment risk on a bonds yield is classified as Maturity risk premium .

Bonds issued by local and state governments with default risk are Municipal bonds .

Real risk-free interest rate in addition with an inflation premium is equal to Quoted risk-free interest rate .