Financial Management MCQ Quiz - Objective Question with Answer for Financial Management - Download Free PDF
Last updated on May 21, 2025
Latest Financial Management MCQ Objective Questions
Financial Management Question 1:
An investor plans to exchange $1,000 into euros now, invest the resulting euros for 12 months, and then exchange the euros back into dollars at the end of the 12-month period. The spot exchange rate is €1.415 per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1.8% per year.
Compared to making a dollar investment for 12 months, at what 12-month forward exchange rate will the investor make neither a loss nor a gain?
Answer (Detailed Solution Below)
Financial Management Question 1 Detailed Solution
The correct option is option 3
Additional Information:
- The forward exchange rate is set using the published interest rate parity formula:
- 12-month forward rate = 1.415 × (1.02/1.018) = €1.418 per $1
Financial Management Question 2:
What is the effect on a UK-based company when a foreign competitor’s currency becomes weaker compared to sterling?
Answer (Detailed Solution Below)
Financial Management Question 2 Detailed Solution
The correct option is option 1
Additional Information:
- As a foreign competitor’s currency becomes weaker compared to sterling, its products would become cheaper in sterling terms.
Financial Management Question 3:
Erin Exports Co limits its operations to exporting overseas.
Which of the following statements about Erin’s exposures to exchange rate risk is correct?
Answer (Detailed Solution Below)
Financial Management Question 3 Detailed Solution
The correct option is option 2
Additional Information:
- Erin is exposed to transaction risks associated with settlement of export transactions and to economic risks due to revenues being affected by long-term exchange rate trends. There is no exposure to translation risk since there is no foreign subsidiary or foreign-denominated assets or liabilities.
Financial Management Question 4:
Which capital structure theory suggests that the weighted average cost of capital (WACC) will initially decrease, reach a minimum and then increase?
Answer (Detailed Solution Below)
Financial Management Question 4 Detailed Solution
The correct option is option 2
Additional Information:
- According to the traditional view of capital structure the WACC will initially fall as cheaper debt is introduced. However the cost of equity rises at an increasing rate which, at some point, pushes up the WACC. Hence a “U-shaped” WACC emerges
Financial Management Question 5:
Which of the following statements about Modigliani and Miller’s theory without tax is correct?
Answer (Detailed Solution Below)
Financial Management Question 5 Detailed Solution
The correct option is option 3
Additional Information:
- In their model without corporate tax, MM showed that as gearing rises, the increase in the cost of equity (due to financial risk) is perfectly offset by the increased use of relatively cheap debt, leaving the WACC unchanged.
Top Financial Management MCQ Objective Questions
Financial Management Question 6:
An investor plans to exchange $1,000 into euros now, invest the resulting euros for 12 months, and then exchange the euros back into dollars at the end of the 12-month period. The spot exchange rate is €1.415 per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1.8% per year.
Compared to making a dollar investment for 12 months, at what 12-month forward exchange rate will the investor make neither a loss nor a gain?
Answer (Detailed Solution Below)
Financial Management Question 6 Detailed Solution
The correct option is option 3
Additional Information:
- The forward exchange rate is set using the published interest rate parity formula:
- 12-month forward rate = 1.415 × (1.02/1.018) = €1.418 per $1
Financial Management Question 7:
What is the effect on a UK-based company when a foreign competitor’s currency becomes weaker compared to sterling?
Answer (Detailed Solution Below)
Financial Management Question 7 Detailed Solution
The correct option is option 1
Additional Information:
- As a foreign competitor’s currency becomes weaker compared to sterling, its products would become cheaper in sterling terms.
Financial Management Question 8:
Erin Exports Co limits its operations to exporting overseas.
Which of the following statements about Erin’s exposures to exchange rate risk is correct?
Answer (Detailed Solution Below)
Financial Management Question 8 Detailed Solution
The correct option is option 2
Additional Information:
- Erin is exposed to transaction risks associated with settlement of export transactions and to economic risks due to revenues being affected by long-term exchange rate trends. There is no exposure to translation risk since there is no foreign subsidiary or foreign-denominated assets or liabilities.
Financial Management Question 9:
Which capital structure theory suggests that the weighted average cost of capital (WACC) will initially decrease, reach a minimum and then increase?
Answer (Detailed Solution Below)
Financial Management Question 9 Detailed Solution
The correct option is option 2
Additional Information:
- According to the traditional view of capital structure the WACC will initially fall as cheaper debt is introduced. However the cost of equity rises at an increasing rate which, at some point, pushes up the WACC. Hence a “U-shaped” WACC emerges
Financial Management Question 10:
Which of the following statements about Modigliani and Miller’s theory without tax is correct?
Answer (Detailed Solution Below)
Financial Management Question 10 Detailed Solution
The correct option is option 3
Additional Information:
- In their model without corporate tax, MM showed that as gearing rises, the increase in the cost of equity (due to financial risk) is perfectly offset by the increased use of relatively cheap debt, leaving the WACC unchanged.
Financial Management Question 11:
Which of the following statements about capital structure theory is true?
- In the traditional view, there is a linear relationship between the cost of equity and financial risk
- Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant
- Pecking order theory does not suggest an optimal debt to equity ratio
- Modigliani and Miller said that, in the presence of tax, the weighted average cost of capital would remain constant
Answer (Detailed Solution Below)
Financial Management Question 11 Detailed Solution
The correct option is option 2
Additional Information:
- Pecking order theory states that managers prefer to use internal equity rather than issue external finance, but does not state there is an optimal level of financial gearing.
Financial Management Question 12:
Which of the following usually determines the optimal capital structure for an organisation?
Answer (Detailed Solution Below)
Financial Management Question 12 Detailed Solution
The correct option is option 3
Additional Information:
- If the WACC is minimised, the present value of the company’s future operating cash flows is maximised; thereby maximising the value of the company and with it, shareholder wealth.
Financial Management Question 13:
Geeh Co paid an interim dividend of $0.06 per ordinary share on 31 October 20X6 and declared a final dividend of $0.08 on 31 December 20X6. The ordinary shares in Geeh Co are trading at a cum-div price of $1.83.
What is the dividend yield? (Answer in % in the Answer box)
Answer (Detailed Solution Below)
Financial Management Question 13 Detailed Solution
The correct option is option 3
Additional Information:
- Dividend yield is a measure of the dividend from the last 12 months divided by the current ex-div share price.
- Dividend for the year = $0.08 + 0.06 = $0.14.
- Ex-div share price = $1.83 - 0.08 = $1.75 (i.e. without the forthcoming dividend)
- Therefore, the yield = 0.14/1.75 = 8% .
Financial Management Question 14:
Lewis Co has $2.5 million in 9% preference shares, with par value $1. The current ex-dividend preference share price is 76.2 cents.
What is the market value of the preference shares of Lewis Co? (Answer in $000 in the Answer box)
Answer (Detailed Solution Below)
Financial Management Question 14 Detailed Solution
The correct option is option 2
Addiitonal Information:
- Market value of preference shares = ($2.5m/$1) × $0.762 = $1.905m
Financial Management Question 15:
A listed company is to enter into a sale and repurchase agreement on the money market.
The company has agreed to sell $10m of treasury bills for $9.6m and will buy them back in 50 days' time for $9.65m.
Assume a 365-day year.
What is the implicit annual interest rate in this transaction (to the nearest 0.01%)?(Answer in % in the Answer box)
Answer (Detailed Solution Below)
Financial Management Question 15 Detailed Solution
The correct option is option 1
Additional Information:
- Increase in value = $9.65m – $9.6m = $0.05m
- As a percentage of the original value = $0.05m/$9.6m = 0.52%
- Annualising this value = 0.52% × 365/50 = 3.80%