INVESTMENT DECISIONS MCQ, Financial Management MCQ for CPD-1

 

INVESTMENT DECISIONS

Concepts of capital budgeting, capital budgeting appraisal methods. Tactical versus strategic investment decisions, capital rationing, factors affecting capital investment decisions.

Multiple choice questions:

1.     The capital budget for the year is approved by a company's

a.      board of directors

b.     capital budgeting committee

c.      officers

d.     shareholders

 

2.     Most capital budgeting methods use

a.      accrual accounting numbers

b.     cash flow numbers

c.      net profit

d.     accrual accounting revenues

 

3.     The capital budgeting decision depends in part on the

a.      availability of funds

b.      relationships among proposed projects

c.      risk associated with a particular project

d.     all of these

 

4.     Capital budgeting is the process

        a.   used in sell or process further decisions

        b.  of determining how much capital share to issue

        c.   of making capital expenditure decisions

        d.  of eliminating unprofitable product lines

5.      A capital budgeting method that takes into consideration the time value of money is the

a.     annual rate of return method

            b.     return on shareholders' equity method

            c.     cash payback technique

d.     internal rate of return method

 

6.     Under the net present value method of budgeting, discounted cash inflows are compared with the

a.        capital outlay required for the investment

b.       capital inflows coming from the project

c.        undiscounted net cash flows

d.       sunk costs of the investment

 

7.     The capital budgeting technique that determines the interest yield of a potential investment is the

a.        external rate of return

b.        internal rate of return

c.        differential analysis

d.        cash flow method

 

8.     The objective under the net present value technique is to calculate

a.        the internal rate of return

b.        the undiscounted cash flows

c.        net present value of cash flows

d.        nominal value of money

 

9.     In theory, when making capital budgeting decisions, all projects with positive NPVs should be

a.        rejected

b.        recalculated

c.        avoided

d.        accepted

10.  Cash payback is calculated using the following formula

a.        cost of capital investment less net annual cash inflow

b.        cost of capital investment plus net annual cash inflow

c.        cost of capital investment plus net annual cash outflow

d.        cost of capital investment less net annual cash outflow

 

11.  Expected annual profit divided by average investment, is the formula used to calculate

a.           return on average investment

b.          cash payback

c.           earnings per share

d.          sunk costs

 

12.  A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _________ loan.

a.      amortized

b.     continuous

c.      balloon

d.     pure discount

e.      interest-only

 

13.  Project selection ambiguity can arise if one relies on IRR instead of NPV when:

a.      The first cash flow is negative and the remaining cash flows are positive.

b.     Projects are independent of one another.

c.      A project has more than one NPV.

d.     The profitability index is greater than one.

e.      Project cash flows are not conventional.

 

14.   Systematic risk is

a.      a risk that affects a large number of assets.

b.     the total risk inherent in an individual security.

c.      also called diversifiable risk.

d.     also called asset-specific risk.

e.      unique to an individual firm.

 

15.  A bond sold five weeks ago for $1,200. The bond is worth $1,040 in today's market. Assuming no changes in risk, which of the following is FALSE?

a.      The bond has less time to maturity today than it did five weeks ago.

b.     The bond has a smaller premium today than it did five weeks ago.

c.      Interest rates must be higher now than they were five weeks ago.

d.     The bond's current yield has increased from five weeks ago.

e.      The coupon payment of the bond must have increased.

 

16.  Net present value _____________.

a.      is equal to the initial investment in a project

b.     is equal to the present value of the project benefits

c.      is equal to zero when the discount rate used is equal to the IRR

d.     is simplified by the fact that future cash flows are easy to estimate

e.      requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable

 

17.  The evaluation of a project based solely on its incremental cash flows is the basis of the:

a.      Incremental cash flow method.

b.     Stand-alone principle.

c.      Dividend growth model.

d.     After-tax salvage value analysis.

e.      Discounted payback method.

Key answers:

1.     (a) board of directors

2.     (b) cash flow numbers

3.     (d) all of these

4.     (c) of making capital expenditure decisions

5.     (d) internal rate of return method

6.     (a) capital outlay required for the investment

7.     (b) internal rate of return

8.     (c ) net present value of cash flows

9.     (d) accepted

10.  (b) cost of capital investment plus net annual cash inflow

11.  (a) return on average investment

12.  (a) amortized

13.  (e) Project cash flows are not conventional.

14.  (a) a risk that affects a large number of assets.

15.  (e) The coupon payment of the bond must have increased.

16.  (c ) is equal to zero when the discount rate used is equal to the IRR

17.  (b) Stand-alone principle.

18.