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Corporate Finance Quiz Questions and Answers

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Corporate finance selection of MCQ and their answers
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  Corporate Finance II  –  Quiz 1 Name   No.   1.   A software company is considering a decision to buy a large tract of land in a small town to build a software development centre, though the state of the town’s infrastructure does not  justify building the same over the next 10 years. This decision is associated with: a.   A sunk cost b.   An option to expand c.   Incremental cash flow d.   a & b e.   b & c f.   a & c 2.   The discount rate used for comparing investment projects should consider a.   Opportunity cost of funds b.   Project risk c.   Bank fixed deposit rate d.   a & b e.   All of the above 3.   A company decides to take office space on a constant annual lease instead of buying office space, such that the lease costs are at equivalent annual terms compared to purchase costs. Other things being same, this decision is likely to result in a.   A lower cash break-even point b.   A higher cash break-even point c.   No change in cash break-even point d.   No change in accounting break-even point 4.   An analysis of what happens to the estimate of net present value when only one forecasting variable is changed in called ___________analysis. a.   Forecasting b.   Scenario c.   Sensitivity d.   Simulation e.   Break-even 5.   Machine A costs Rs 5,000 & can be operated for 4 years for a running cost of Rs 1,000 per year. Machine B costs Rs 3,000 & can be operated for 3 years for a running cost of Rs 700 per year. The machines have to be scrapped after the operating lives for nil salvage value. Compare the machines on Equivalent Annual Costs assuming a discount rate of 10%. a.   A has lower EAC than B by Rs 3117 b.   B has lower EAC than A by Rs 3117 c.   A has lower EAC than B by Rs 140 d.   B has lower EAC than A by Rs 140 e.   A has lower EAC than B by Rs 280 Question Not Considered: Correct Answer: A has lower EAC than B by Rs 671 6.   Alpha Shipping is considering buying a ship for Rs 20 crore in order to start an ocean freight service at a capital cost of 15%. The owner believes he has an 80% chance to receive a  licence to operate within a year, in which case he expects to have a payoff (present value of subsequent cash flows of Rs 30 crore at the end of 1 year if business grows (50% chance) & Rs 10 crore if the business is bad (50% chance). He also has an option to sell the ship at the end of one year for Rs 15 crore if licence to operate is not received. Should he buy the ship & what is the value of the option to sell the ship after one year? a.   No, nil b.   Yes, Rs 13 crore c.   Yes, Rs 6.5 crore d.   No, Rs 2.6 crore
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