Important questions about Corporate Finance - Corporate Finance Section 2. Corporate Finance - Corporate Finance Section 2 MCQ questions with answers. Corporate Finance - Corporate Finance Section 2 exam questions and answers for students and interviews.
1. Two mutually exclusive projects have conventional cash flows, but one
project has a larger NPV while the other has a higher IRR. Which of the
following most likely explains this conflict?
A : The size of the two projects is the same.
B : Risk of the projects as reflected in the required rate of return.
C : Differing cash flow patterns.
2. Claude Browning is reviewing a profitable investment project that has a
conventional cash flow pattern. If the cash flows of the project, initial
outlay, and future after-tax cash flows all reduce by half, Browning would
predict that the IRR would:
A : stay the same and the NPV would decrease.
B : stay the same and the NPV would stay the same.
C : decrease and the NPV would decrease.
3. Erika Schneider has evaluated an investment proposal and found that its
payback period is two years, it has a negative NPV, and a positive IRR. Is
this combination of results possible?
A : No, because a project with a positive IRR has a positive NPV.
B : No, because a project with such a rapid payback period has a positive
C : Yes.
4. Capital budgeting projects A and B have similar outlays, but different patterns of future cash flows. The required rate of return for both projects is 12 percent, at which the NPV and IRR turn out to be as follows:
A : a rate between 21.79 percent and 27.18 percent.
B : a rate between 0.00 percent and 12.00 percent.
C : a rate between 12.00 percent and 21.79 percent
5. Katrina Lowry is facing multiple IRRs problem regarding an upcoming project.
A : 25 percent only.
B : 25 percent and 600 percent.
C : 25 percent and 400 percent.
46. Which of the following is not affected by changes in tax rate?
A : Net Profit Margin.
B : WACC.
C : DFL.
47. Which of the following is the most appropriate reason for analysts to
understand a company’s use of operating and financial leverage?
A : To analyze the past performance of the company.
B : To evaluate the operating margin of the company.
C : To forecast future cash flows and select an appropriate discount rate.
48. Using the firm’s income statement presented below, its degree of financial leverage is closest to:
A : 1.6.
B : 2.1.
C : 2.7.
49. Using the company’s income statement presented, its degree of operating
A : 3.1.
B : 3.4.
C : 6.2.
50. A manufacturing company has the following income statement.
A : 1.20.
B : 1.53.
C : 1.83
51. Fred has the following information available.
A : 1.30.
B : 1.81.
C : 2.00.
52. Alpha and Beta both operate in the automobile sector with the same
degree of operating leverage. Alpha has a capital structure of 40% debt
and 60% equity, while Beta is financed completely by equity. Which of the
following statements is most accurate? Compared to Beta, Alpha has:
A : the same sensitivity of operating income to changes in unit sales.
B : the same sensitivity of net income to changes in operating income.
C : a lower sensitivity of net income to changes in unit sales.
53. All else equal, company A has greater financial leverage compared to its
counterpart company B. Which of the following statements is
A : Company A has a greater risk of default.
B : Company A has higher net income.
C : Company A has higher return on equity.
54. A company manufactures items with a selling price of $125 at a variable
cost of $62.5 per unit. The operating fixed costs incurred by the company
are $250,000, while the fixed interest charges incurred are $65,000. The
company is liable to pay taxes at a rate of 35%. The quantity of items that
the company should manufacture and sell to break-even is closest to:
A : 5,040.
B : 4,676.
C : 4,000.
55. Soomros now sells 1 million units at Rs.3,972 per unit. Fixed operating
costs are Rs.1,960 million and variable operating costs are Rs.1,250 per
unit. If the company pays Rs.376 million in interest, the levels of sales at
the operating breakeven and the level of sales at the breakeven points are,
A : Rs.2,860,073,475 and Rs.3,408,740,632.
B : Rs.2,875,073,470 and Rs.3,428,740,630.
C : Rs.3,560,073,475 and Rs.4,105,740,632.
56. In order to assess the riskiness of two companies in the same industry, Mr. Habitt collected the following information from the latest financial statements and management discussions for Habitt and Machinesque respectively: Number of units produced and sold: 2.7 million and 3.5 million
A : 0.0875 million and 0.105 million respectively.
B : 0.536 million and 1.1 million respectively.
C : 1.1 million and 0.075 million respectively.
57. The owner of a TV store is forecasting for the year 2014 and wants to find out the breakeven point of 2013 with the following data to ensure accuracy:
A : 2.0 million TV sets.
B : 2.5 million TV sets.
C : 3.0 million TV sets.
58. The unit contribution margin for a product is $15. Assuming fixed costs of
$15,000, interest costs of $4,000, and a tax rate of 40%, the operating
breakeven point (in units) is closest to:
A : 870.
B : 1,000.
C : 1,200.
59. The per unit contribution margin for a product is $24. Assuming fixed
costs of $48,000, interest costs of $5,000, and taxes of $3,000, the
operating breakeven point (in units) is closest to:
A : 1,667.
B : 2,000.
C : 2,333.
60. The unit contribution margin for a product is $20. Assuming fixed costs of
$200,000, interest costs of $25,000, and a tax rate of 35%, the operating
breakeven point (in units) is closest to:
A : 11,250.
B : 10,813.
C : 10,000.
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