Corporate Finance MCQs 2026

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

1. A liquidity ✓
2. B tax rate ✓
3. C share count ✓
4. D financial risk and potential return to equity ✓

A company's capital budgeting decisions concern

1. A long-term investment in projects and assets ✓
2. B daily cash handling ✓
3. C dividend cheque printing ✓
4. D payroll timing ✓

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

1. A coupon rate ✓
2. B prime rate ✓
3. C weighted average cost of capital ✓
4. D inflation rate ✓

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

1. A accepted ✓
2. B rejected ✓
3. C delayed forever ✓
4. D sold immediately ✓

Financial distress costs increase as a firm takes on

1. A more equity ✓
2. B more debt ✓
3. C more cash ✓
4. D fewer projects ✓

Ordinary (common) shareholders are entitled to

1. A fixed interest ✓
2. B a guaranteed dividend ✓
3. C repayment before creditors ✓
4. D residual profits and voting rights ✓

Corporate governance is primarily concerned with

1. A the system by which companies are directed and controlled ✓
2. B daily production only ✓
3. C advertising campaigns ✓
4. D inventory counting ✓

The degree of operating leverage is highest for firms with

1. A mostly variable costs ✓
2. B no fixed costs ✓
3. C very low sales ✓
4. D a high proportion of fixed operating costs ✓

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

1. A cash only ✓
2. B a specified number of the company's shares ✓
3. C another bond ✓
4. D foreign currency ✓

The main disadvantage of excessive debt is

1. A tax savings ✓
2. B lower interest cost ✓
3. C increased risk of insolvency ✓
4. D higher equity ✓

Net working capital equals current assets minus

1. A fixed assets ✓
2. B current liabilities ✓
3. C total equity ✓
4. D long-term debt ✓

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

1. A dividends only ✓
2. B sales ✓
3. C free cash flows ✓
4. D operating expenses ✓

Underwriting in a securities issue is performed mainly by

1. A investment banks ✓
2. B external auditors ✓
3. C tax authorities ✓
4. D the company's customers ✓

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

1. A impending bankruptcy ✓
2. B lower future profits ✓
3. C accounting fraud ✓
4. D management's confidence in future earnings ✓

Preference (preferred) shareholders generally receive

1. A a fixed dividend before ordinary shareholders ✓
2. B no dividend at all ✓
3. C full voting control always ✓
4. D interest payments ✓

A debenture is a type of

1. A ordinary share ✓
2. B preference share ✓
3. C government subsidy ✓
4. D long-term debt instrument (bond) ✓

A rights issue gives existing shareholders the right to

1. A sell the whole company ✓
2. B buy new shares, usually at a discount, in proportion to their holdings ✓
3. C receive interest ✓
4. D appoint the auditors ✓

An initial public offering (IPO) is when a company

1. A sells its shares to the public for the first time ✓
2. B repays all its debt ✓
3. C merges with a rival ✓
4. D pays a special dividend ✓

A stock (share) split

1. A reduces total equity ✓
2. B increases the number of shares while reducing the price per share proportionally ✓
3. C pays cash to shareholders ✓
4. D raises new capital ✓

A share buyback (repurchase) generally

1. A increases the number of shares outstanding ✓
2. B is illegal ✓
3. C raises new equity capital ✓
4. D reduces the number of shares outstanding ✓

Retained earnings are

1. A borrowed funds ✓
2. B preference dividends ✓
3. C profits reinvested in the business rather than paid as dividends ✓
4. D tax refunds ✓

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

1. A liquidity ✓
2. B financial leverage ✓
3. C the dividend yield ✓
4. D the current ratio ✓

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

1. A growth rate ✓
2. B tax rate ✓
3. C beta ✓
4. D coupon rate ✓

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

1. A sales revenue ✓
2. B book value ✓
3. C required return on invested capital ✓
4. D dividend paid ✓

The dividend payout ratio is dividends divided by

1. A sales ✓
2. B total assets ✓
3. C share price ✓
4. D net income (earnings) ✓

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

1. A always raises value ✓
2. B always lowers value ✓
3. C does not affect firm value ✓
4. D is the only value driver ✓

The main advantage of debt financing to shareholders is that

1. A it dilutes ownership ✓
2. B it does not dilute ownership and interest is tax-deductible ✓
3. C it carries no risk ✓
4. D it guarantees profit ✓

The payback period measures the time required to

1. A recover the initial investment from cash inflows ✓
2. B double the investment ✓
3. C pay all dividends ✓
4. D repay all long-term debt ✓

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

1. A the initial cost ✓
2. B the cash inflows ✓
3. C the time value of money and cash flows after payback ✓
4. D the salvage only ✓

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

1. A maximize total sales ✓
2. B minimize costs only ✓
3. C maximize shareholder (owner) wealth ✓
4. D maximize the number of employees ✓

Shareholder wealth is best reflected by

1. A the market value (price) of the firm's shares ✓
2. B total sales revenue ✓
3. C the number of shares issued ✓
4. D the amount of tax paid ✓

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

1. A working capital ✓
2. B capital structure ✓
3. C dividend policy ✓
4. D cash flow ✓

The weighted average cost of capital (WACC) is the

1. A cost of debt only ✓
2. B cost of equity only ✓
3. C risk-free rate ✓
4. D average 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. A interest is tax-deductible ✓
2. B debt never matures ✓
3. C dividends are guaranteed ✓
4. D equity is risk-free ✓

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

1. A the beta ✓
2. B the dividend growth rate ✓
3. C the payout ratio ✓
4. D one minus the tax rate ✓

Financial leverage refers to the use of

1. A only equity ✓
2. B only cash ✓
3. C fixed-cost debt financing to magnify returns to equity ✓
4. D inventory financing ✓

Operating leverage arises from a firm's use of

1. A debt ✓
2. B fixed operating costs ✓
3. C dividends ✓
4. D equity only ✓

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

1. A maximized by all-equity financing ✓
2. B independent of its capital structure ✓
3. C maximized by all-debt financing ✓
4. D equal to its dividends ✓

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

1. A dividend effect ✓
2. B agency effect ✓
3. C interest tax shield ✓
4. D liquidity effect ✓

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

1. A costs of financial distress and bankruptcy ✓
2. B cost of equity only ✓
3. C dividend yield ✓
4. D beta ✓

The pecking order theory suggests firms prefer to finance first with

1. A new equity ✓
2. B preference shares ✓
3. C long-term debt ✓
4. D internal funds (retained earnings) ✓

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

1. A customers and suppliers ✓
2. B two competitors ✓
3. C buyers and sellers ✓
4. D managers and shareholders ✓

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

1. A negative ✓
2. B positive ✓
3. C always zero ✓
4. D equal to the cost ✓

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

1. A the initial cost ✓
2. B the cash inflow ✓
3. C zero ✓
4. D the salvage value ✓

In capital budgeting, the WACC serves as the

1. A sales target ✓
2. B tax rate ✓
3. C minimum required rate of return (hurdle rate) for projects ✓
4. D dividend per share ✓