Corporate Finance MCQs 2026

Other things equal, higher financial leverage increases a firm's

1. Aliquidity✓
2. Btax rate✓
3. Cshare count✓
4. Dfinancial risk and potential return to equity✓

A company's capital budgeting decisions concern

1. Along-term investment in projects and assets✓
2. Bdaily cash handling✓
3. Cdividend cheque printing✓
4. Dpayroll timing✓

The discount rate typically used to evaluate a firm's average-risk project is the

1. Acoupon rate✓
2. Bprime rate✓
3. Cweighted average cost of capital✓
4. Dinflation rate✓

If a project's IRR exceeds the firm's cost of capital, the project should generally be

1. Aaccepted✓
2. Brejected✓
3. Cdelayed forever✓
4. Dsold immediately✓

Financial distress costs increase as a firm takes on

1. Amore equity✓
2. Bmore debt✓
3. Cmore cash✓
4. Dfewer projects✓

Ordinary (common) shareholders are entitled to

1. Afixed interest✓
2. Ba guaranteed dividend✓
3. Crepayment before creditors✓
4. Dresidual profits and voting rights✓

Corporate governance is primarily concerned with

1. Athe system by which companies are directed and controlled✓
2. Bdaily production only✓
3. Cadvertising campaigns✓
4. Dinventory counting✓

The degree of operating leverage is highest for firms with

1. Amostly variable costs✓
2. Bno fixed costs✓
3. Cvery low sales✓
4. Da high proportion of fixed operating costs✓

A convertible bond gives the holder the option to convert it into

1. Acash only✓
2. Ba specified number of the company's shares✓
3. Canother bond✓
4. Dforeign currency✓

The main disadvantage of excessive debt is

1. Atax savings✓
2. Blower interest cost✓
3. Cincreased risk of insolvency✓
4. Dhigher equity✓

Net working capital equals current assets minus

1. Afixed assets✓
2. Bcurrent liabilities✓
3. Ctotal equity✓
4. Dlong-term debt✓

A firm's value can be estimated as the present value of its expected future

1. Adividends only✓
2. Bsales✓
3. Cfree cash flows✓
4. Doperating expenses✓

Underwriting in a securities issue is performed mainly by

1. Ainvestment banks✓
2. Bexternal auditors✓
3. Ctax authorities✓
4. Dthe company's customers✓

The signaling effect of dividends suggests that a dividend increase may signal

1. Aimpending bankruptcy✓
2. Blower future profits✓
3. Caccounting fraud✓
4. Dmanagement's confidence in future earnings✓

Preference (preferred) shareholders generally receive

1. Aa fixed dividend before ordinary shareholders✓
2. Bno dividend at all✓
3. Cfull voting control always✓
4. Dinterest payments✓

A debenture is a type of

1. Aordinary share✓
2. Bpreference share✓
3. Cgovernment subsidy✓
4. Dlong-term debt instrument (bond)✓

A rights issue gives existing shareholders the right to

1. Asell the whole company✓
2. Bbuy new shares, usually at a discount, in proportion to their holdings✓
3. Creceive interest✓
4. Dappoint the auditors✓

An initial public offering (IPO) is when a company

1. Asells its shares to the public for the first time✓
2. Brepays all its debt✓
3. Cmerges with a rival✓
4. Dpays a special dividend✓

A stock (share) split

1. Areduces total equity✓
2. Bincreases the number of shares while reducing the price per share proportionally✓
3. Cpays cash to shareholders✓
4. Draises new capital✓

A share buyback (repurchase) generally

1. Aincreases the number of shares outstanding✓
2. Bis illegal✓
3. Craises new equity capital✓
4. Dreduces the number of shares outstanding✓

Retained earnings are

1. Aborrowed funds✓
2. Bpreference dividends✓
3. Cprofits reinvested in the business rather than paid as dividends✓
4. Dtax refunds✓

Combined (total) leverage is the product of operating leverage and

1. Aliquidity✓
2. Bfinancial leverage✓
3. Cthe dividend yield✓
4. Dthe current ratio✓

The cost of equity using the dividend growth model equals (D1 divided by price) plus the

1. Agrowth rate✓
2. Btax rate✓
3. Cbeta✓
4. Dcoupon rate✓

Economic Value Added (EVA) measures the value created above the

1. Asales revenue✓
2. Bbook value✓
3. Crequired return on invested capital✓
4. Ddividend paid✓

The dividend payout ratio is dividends divided by

1. Asales✓
2. Btotal assets✓
3. Cshare price✓
4. Dnet income (earnings)✓

According to dividend irrelevance theory (MM), in perfect markets dividend policy

1. Aalways raises value✓
2. Balways lowers value✓
3. Cdoes not affect firm value✓
4. Dis the only value driver✓

The main advantage of debt financing to shareholders is that

1. Ait dilutes ownership✓
2. Bit does not dilute ownership and interest is tax-deductible✓
3. Cit carries no risk✓
4. Dit guarantees profit✓

The payback period measures the time required to

1. Arecover the initial investment from cash inflows✓
2. Bdouble the investment✓
3. Cpay all dividends✓
4. Drepay all long-term debt✓

A major drawback of the simple payback method is that it ignores

1. Athe initial cost✓
2. Bthe cash inflows✓
3. Cthe time value of money and cash flows after payback✓
4. Dthe salvage only✓

The primary goal of financial management in a corporation is generally to

1. Amaximize total sales✓
2. Bminimize costs only✓
3. Cmaximize shareholder (owner) wealth✓
4. Dmaximize the number of employees✓

Shareholder wealth is best reflected by

1. Athe market value (price) of the firm's shares✓
2. Btotal sales revenue✓
3. Cthe number of shares issued✓
4. Dthe amount of tax paid✓

The mix of debt and equity a firm uses to finance its operations is its

1. Aworking capital✓
2. Bcapital structure✓
3. Cdividend policy✓
4. Dcash flow✓

The weighted average cost of capital (WACC) is the

1. Acost of debt only✓
2. Bcost of equity only✓
3. Crisk-free rate✓
4. Daverage cost of a firm's financing sources, weighted by their proportions✓

The cost of debt to a firm is usually lower than the cost of equity partly because

1. Ainterest is tax-deductible✓
2. Bdebt never matures✓
3. Cdividends are guaranteed✓
4. Dequity is risk-free✓

The after-tax cost of debt equals the interest rate multiplied by

1. Athe beta✓
2. Bthe dividend growth rate✓
3. Cthe payout ratio✓
4. Done minus the tax rate✓

Financial leverage refers to the use of

1. Aonly equity✓
2. Bonly cash✓
3. Cfixed-cost debt financing to magnify returns to equity✓
4. Dinventory financing✓

Operating leverage arises from a firm's use of

1. Adebt✓
2. Bfixed operating costs✓
3. Cdividends✓
4. Dequity only✓

According to Modigliani and Miller without taxes, a firm's value is

1. Amaximized by all-equity financing✓
2. Bindependent of its capital structure✓
3. Cmaximized by all-debt financing✓
4. Dequal to its dividends✓

With corporate taxes, MM theory suggests firm value rises with debt because of the

1. Adividend effect✓
2. Bagency effect✓
3. Cinterest tax shield✓
4. Dliquidity effect✓

The trade-off theory of capital structure balances the tax benefit of debt against the

1. Acosts of financial distress and bankruptcy✓
2. Bcost of equity only✓
3. Cdividend yield✓
4. Dbeta✓

The pecking order theory suggests firms prefer to finance first with

1. Anew equity✓
2. Bpreference shares✓
3. Clong-term debt✓
4. Dinternal funds (retained earnings)✓

An agency problem in corporate finance arises from a conflict of interest between

1. Acustomers and suppliers✓
2. Btwo competitors✓
3. Cbuyers and sellers✓
4. Dmanagers and shareholders✓

The net present value (NPV) rule accepts a project if its NPV is

1. Anegative✓
2. Bpositive✓
3. Calways zero✓
4. Dequal to the cost✓

The internal rate of return (IRR) is the discount rate at which a project's NPV equals

1. Athe initial cost✓
2. Bthe cash inflow✓
3. Czero✓
4. Dthe salvage value✓

In capital budgeting, the WACC serves as the

1. Asales target✓
2. Btax rate✓
3. Cminimum required rate of return (hurdle rate) for projects✓
4. Ddividend per share✓