# Finance multiple choice questions

1.The value of resources used in an investment project should be measured in terms of their:A) acquisition costB) historical costC) opportunity costD) depreciated cost2.Which of the following is not a major step in the capital budgeting process?A) generating investment project proposalsB) estimating cash flowsC) analyzing the effect of a project on the firm’s financial ratiosD) performing a project post-audit and review3.Which of the following items is not considered as a part of the net investment calculation?A) the first year’s net cash flowB) increase in net working capitalC) salvage of an old piece of equipment that is being replacedD) installation and shipping charges4.Depreciation:A) does not affect cash flows.B) does not affect profits.C) is not a cash outflow.D) is a cash inflow.5.Capital expenditure projects may be classified in all the following types except:A) growth opportunitiesB) required to meet legal requirementsC) cost reduction opportunitiesD) capital rationing8.One weakness of the internal rate of return approach is that:A) it does not directly consider the timing of the cash flows from a projectB) it fails to provide a straightforward decision-making criterionC) it implicitly assumes that the firm is able to reinvest the interim cash flows from a project atthe firm’s cost of capital.D) none of the above9.The relationship between NPV and IRR is such that:A) both approaches always provide the same ranking of alternative investment projects.B) the IRR of a project is equal to the firm’s cost of capital if the NPV of a project is $0.C) if the NPV of a project is negative, the IRR must be greater than the cost of capital.D) none of the above10.The internal rate of return does not take into account the:A) explicit risk of the net cash flowsB) magnitude of cash flows over the project’s lifeC) net investmentD) timing of cash flows over the entire life of a project11.Real options in capital budgeting can be classified in all of the following ways except:A) abandonment optionB) investment optionC) purchasing power optionD) shutdown options14.The basic capital budgeting decision models, that is, NPV and IRR, handle risk by:A) ignoring itB) assuming all cash flows are known with certaintyC) assuming all projects are of average risk and evaluating them based on expected valuesD) using risk-adjusted discount rates to evaluate projects15.The use of sensitivity analysis requires that:A) a model of a project’s cash flows be developedB) probability distributions of the determinants of a project’s cash flows be estimatedC) the firms have access to a very large computerD) the firm is greatly interested in the portfolio risk reduction characteristics of a project16.A firm’s leveraged beta will always be ____ its unleveraged beta.A) less thanB) greater thanC) the same asD) could be all of the above17.The cost of capital is:A) the rate of return required by investors in the firm’s securitiesB) the minimum rate of return required on new investments of high risk undertaken by the firmC) approximately 10% for most firmsD) concerned with plant and equipment only18.The CAPM assumes that the only risk of concern to the investor is ____, which is measured by____.A) unsystematic risk, betaB) systematic risk, the return to the market portfolioC) systematic risk, betaD) unsystematic risk, the return to the market portfolio21.With an optimal capital structure:A) overall capital costs are minimizedB) the net present value of new projects is minimizedC) financial leverage is minimizedD) the weighted cost of capital is maximized22.The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capitalto the firm is known as the:A) optimal corporate structureB) target financial structureC) optimal capital structureD) optimal degree of combined leverage24.The percentage change in a firm’s EBIT that results in a 1% change in sales or output is knownas theA) degree of combined leverageB) degree of financial leverageC) degree of operating leverageD) degree of business risk25.In the analysis of financial leverage, all of the following are referred to as fixed charges except:A) bond interestB) common stock dividendsC) bank interestD) preferred stock dividends26.The degree of combined leverage is equal to the ____ multiplied by the ____.A) degree of operating leverage, variable cost ratioB) degree of financial leverage, variable cost ratioC) degree of operating leverage, degree of financial leverageD) degree of operating leverage, fixed cost ratio27.An analytical technique called ____ can be used to help determine when debt financing isadvantageous and when equity financing is advantageous.A) DFL-EPS analysisB) EBIT-EPS analysisC) DCL-EPS analysisD) DOL-EBIT analysis28.In EBIT-EPS analysis, the indifference point is found at the point where ____ for the twoalternative financing plans are equal.A) EBITB) EPSC) stock pricesD) DOL