[Solved] Capital budgeting decisions MCQ [Free PDF] - Objective Question Answer for Capital budgeting decisions Quiz - Download Now! (2024)

1. Cash
2. Stock
3. Property
4. Scrip

The correct answer is Scrip.

Key PointsFrom the provided options, a scrip dividend promises to pay shareholders at a future date.

Scrip Dividend:

A scrip dividend is a form of dividend payment where shareholders receive promissory notes or certificates (scrip) representing the value of the declared dividend. Instead of receiving cash, stock, or other assets immediately, shareholders receive a promise to be paid at a later date. Scrip dividends are essentially a form of deferred payment.

Additional InformationCash:

Explanation: Cash dividends are paid in the form of cash to shareholders at the time of distribution. There is no deferral or promise for future payment in the case of a regular cash dividend. Shareholders receive their cash dividend as of the dividend payment date.
Stock:

Explanation: Stock dividends involve the distribution of additional shares of the company's stock to existing shareholders. Like cash dividends, stock dividends are typically distributed on the dividend payment date without a promise for future payment. Shareholders receive additional shares based on their existing ownership.
Property:

Explanation: Property dividends involve distributing assets or property other than cash or stock. Like cash and stock dividends, property dividends are typically distributed as of the dividend payment date, and there is no promise for future payment. Shareholders receive the specified property or assets at the time of distribution.
In summary, while cash, stock, and property dividends involve the immediate distribution of value to shareholders, a scrip dividend involves providing a promissory note or certificate representing the value of the dividend, with the actual payment deferred to a future date.

Get Started for Free

Trusted by 5.2 Crore+ Students

1. Dividend yield
2. Maturity
3. Face value
4. Coupon payment frequency

The correct answer is Dividend yield.

Key PointsDividend yield is not a defining quality of a bond. Dividend yield is associated with stocks, not bonds. Let's briefly explain each of the options:

Dividend Yield:

Dividend yield is a measure used for stocks, representing the annual dividend income as a percentage of the current market price per share. Bonds, on the other hand, pay periodic interest (coupon payments) rather than dividends.
Maturity:

Maturity is a defining quality of a bond. It refers to the date when the principal amount of the bond is due to be repaid to the bondholder. Bonds can be short-term (with a maturity of a few years) or long-term (with a maturity of several decades).
Face Value:

Face value, also known as par value, is a defining quality of a bond. It represents the principal amount that will be repaid to the bondholder at maturity. The face value is typically the amount the bond was originally issued for.
Coupon Payment Frequency:

Coupon payment frequency is a defining quality of a bond. It refers to how often the bond pays interest to the bondholder. Common frequencies include annual, semi-annual, or quarterly coupon payments.
So, the correct answer is "dividend yield." Dividend yield is a concept more relevant to stocks, where investors receive a share of the company's profits in the form of dividends. In contrast, bonds provide periodic interest payments and return the principal amount at maturity.

Get Started for Free

Trusted by 5.2 Crore+ Students

1. Investment decision
2. Financial decision
3. Dividend decision
4. More than one of the above
5. None of the above

The correct answer is Financial Decision.

Key PointsFinancial Decision:

• Financial decisions refer to the decisions made by a company or individual regarding the management of financial resources. This includes decisions related to investments, financing, and capital budgeting.
• In the given scenario, Rajat is making a financial decision by planning the breakup of his finances to determine how much capital he will allocate to fixed assets and current assets. This decision will have an impact on his overall financial position and the financial resources available for other investments or expenditures.
• Overall, financial decisions are critical for individuals and companies to manage their financial resources effectively and achieve their financial goals and objectives. By making informed financial decisions, individuals and companies can allocate their resources in a way that maximizes their ROI and supports their long-term financial success.

Additional InformationInvestment decision refers to the process of identifying and evaluating potential investment opportunities, and determining which investments to pursue based on their expected return on investment and risk. Investment decisions can involve investments in tangible assets such as property, plant, and equipment, or intangible assets such as research and development.

Dividend decision refers to the decision made by a company regarding the payment of dividends to shareholders. Dividend decisions involve determining the amount of profits to be distributed to shareholders, the timing of the distribution, and the method of distribution.

Capital structure refers to the mix of debt and equity financing used by a company to fund its operations and investments. Capital structure decisions involve determining the appropriate level of debt and equity financing to use, and the optimal balance between the two to achieve the company's financial goals and objectives.

Hence, the correct answer is Financial decision.

Get Started for Free

Trusted by 5.2 Crore+ Students

1. r > k
2. r = k
3. r < k
4. None of the above

The correct answer isr > k.

Key Points

• Walter's Dividend Model
  • Walter's Dividend Model is a theoretical model for dividend policy, proposed by Professor James E. Walter.
  • It suggests a relationship between the internal rate of return (r), the cost of capital or required rate of return (k), and the dividend payout ratio.
• Assumptions:
  • The firm finances all investments with retained earnings; there's no external financing (debt or new equity).
  • The firm's internal rate of return (r), and cost of capital (k) are constant.
  • There is a 100% dividend payout or retention.
  • The firm has an infinite life.
• Interpretation of the Model:
  • If the internal rate of return (r) is greater than the cost of capital (k), a firm should retain earnings because it can earn more by investing internally than what investors could earn on their own (r > k).
  • If the internal rate of return (r) is equal to the cost of capital (k), it doesn’t matter whether earnings are distributed or retained. The value of the firm will remain the same regardless of the dividend policy (r = k).
  • If the internal rate of return (r) is less than the cost of capital (k), a firm should distribute all earnings as dividends because investors could earn more investing the money themselves than what the firm could earn on its internal investments (r < k).
• Criticism:
  • The model has been criticized for its unrealistic assumptions, such as no external financing and a constant rate of return.
  • In the real world, firms usually have a mix of retained earnings, debt (loans), and new equity to finance their operations and growth.
  • Rates of return may fluctuate based on the changes in operating conditions, market variations, and other influencing factors.

Get Started for Free

Trusted by 5.2 Crore+ Students

1. Accounted rate of return
2. Payback period
3. Internal rate of return
4. External rate of return
5. None of the above

The correct answer isInternal rate of return.

Key Points

The internal rate of returnmethodfalls under Discounted Cash Flow Criteria.

Discounted Cash Flow

• ​Itrefers to a valuation method that estimates the value of an investment using its expected future cash flows.
• The present value of expected future cash flows is arrived at by using a projected discount rate.
• Companies typically use the weighted average cost of capital (WACC) for the discount rate because it accounts for the rate of return expected by shareholders.
• A DCF analysis can be applied to value a stock, company, project, and many other assets or activities.

Important Points

Internal Rate of Return (IRR)

• It is a metric used in financial analysis to estimate the profitability of potential investments.
• IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
• It is also known as the discount rate.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 6

1. 100,000 crore
2. 20,000 crore
3. 50,000 crore
4. 60,000 crore

Capital budgeting decisions Question 6 Detailed Solution

The correct answer is60,000 crore.

Key Points

• An allocation of Rs 60,000 crore has been made to cover 3.8 crore households in 2022-23 under Har Ghar, Nal Se Jal Scheme.
• Finance Minister said that the current coverage of Har Ghar, Nal Se Jal is 8.7 crores.
  • Out of which 5.5 crore households were provided tap water in the last 2 years itself.
• Nirmala Sitharaman also announced an allocation of Rs 48,000 crore for the completion of 80 lakh houses.
  • ​For the identified eligible beneficiaries of PM Awas Yojana, both Rural and Urban, in 2022-23.
• The Central Government will work with the state governments to reduce of time required for all land and construction-related approvals.
• It will also work for promoting affordable housing for the middle class and Economically Weaker Sections(EWS) in urban areas.

Additional Information

• Jal Jeevan Mission (Har Ghar Nal se Jal)
  • Launched in2019.
  • Aim: To provide every single rural household with functional household tap connections (FHTC)‘Har Ghar Nal Se Jal’ by 2024.
  • A decentralized approachis implemented at national, state, district levels for specific needs and purposes (Targeted Area approach).
  • The major role played byPaani Samitis and womenin mobilizing the population.
  • The Jal Jeevan Mission will bebased on a community approachto water and will include extensive Information, Education and communication as a key component of the mission
• Objectives:
  1. Piped water supply
  2. Augmenting existing drinking water resources.
  3. Using technology to treat water and make them portable and safe for drinking.
  4. Greywater treatment and management.
  5. Integration with other water resource management programs like Atal Bhujal Yojana, Swajal Scheme, Swachh Bharat Mission, for better and overall management and conservation of water.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 7

1. financing and investment only
2. investment, financing, and asset management
3. financing and dividend only
4. capital budgeting, cash management, and credit management only

Capital budgeting decisions Question 7 Detailed Solution

The correct answer isinvestment, financing, and asset management.

There are three major decision areas in financial management i.e. investment decision, financing decision, and dividend decision.

Key PointsInvestment decision-

• It's asset creation for revenue. Investment decisions involve asset selection.
• A company's assets can either generate income over a year or be converted into cash quickly.
• Capital budgeting and working capital management are the two investment decisions.

Financingdecision-

• The capital structure, or the right mix of debt and equity, is an element of the financing decision.
• When, where, and how much money should be invested is decidedunder this decision area.

Dividend decision-

• The dividend decision determines what proportion of net earnings will be distributed to shareholders as dividends and what proportion will be maintained for future investment opportunities.

​Asset management decision-

• Asset management decisions involve investing, retaining, and trading money judiciously to optimize an organization's total wealth.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 8

1. 19 per cent
2. 15 per cent
3. 14 per cent
4. 18 per cent

Capital budgeting decisions Question 8 Detailed Solution

The correct answer is14 per cent.

Key Points

• Both Centre and States govt employees’ tax deduction limit to be increased from 10% to 14%
• This will help the social security benefits of state government employees and bring them at par with the Central govt employees.
• A new tax rule for taxpayers was also announcedwhere a taxpayer can file an updated return on payment of taxes within two years from the end of the relevant assessment year.
• Income from transfer of digital assets (Cryptocurrency) to be charged 30% tax, plus 1% tax on the transaction.

Additional Information

• Income taxis the percentage of income paid to the government by the taxpayers for the betterment of the public at large.
  • The limit for deduction under section 80C of the Income Tax Act in India, for the financial year 2021-22isRs. 1.5 lakh.
  • The maximum tax exemption limit under Section 80C has been retained asRs 1.5 Lakh only.
  • Total Deduction under section80C, 80CCC and 80CCD(1)together cannot exceed Rs 1,50,000 for the financial year 2016-17.
  • The additional tax deduction ofRs 50,000is over and above this1.5Lakh limit.
  • Section 80Callows reducingtaxable income by making tax-saving investments or incurring eligible expenses.
  • TheIncome Tax Act 1961is the law that governs the provisions for income tax in India.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 9

1. Buyer
2. Broker
3. Both buyer and broker
4. Seller

Capital budgeting decisions Question 9 Detailed Solution

The correct answer isSeller.

Key PointsWhat is the Ex-dividend date?

• When a company declares a dividend, it sets two important dates- therecord date & ex-dividend date.
• It sets the ex-dividend date one business day before the record date.
• The buyer of stock gets a dividend only when he purchases before the ex-dividend date.
• On and after the ex-dividend date, the seller gets the dividend.​

Additional InformationBroker-

• A broker is a person or firm that acts as a mediator between an investor and a securities exchange.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 10

1. Bird in hand theory
2. Investor rationality theory
3. 100 percent retention theory
4. Residual theory

Capital budgeting decisions Question 10 Detailed Solution

The correct answer is Residual Theory

Key PointsResidual Theory of dividends:

• According to the residual dividend principle, dividends should be distributed when expenditure for capital expenditure and working capital has been done, and even after that profit remains.
• A firm should adopt its investment strategy in such a way that as many positive net present value projects as possible are accepted and the dividend is paid only when funds are available.
• It keeps zero additional cash in the dividend policy business. The excess cash, if any, must be reinvested in the business or redistributed among shareholders.

For example:

The firm generates ₹1,40,000 in earnings for the month and spends ₹1,00,000 on CapEx. The remaining income of ₹40,000 is paid as a residual dividend to shareholders, which is ₹20,000 less than was paid in each of the last three months.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 11

1. 20 per cent
2. 5 per cent
3. 30 per cent
4. 10 per cent

Capital budgeting decisions Question 11 Detailed Solution

The correct answer is30 per cent.

Key Points

• Income from the transfer of any virtual assets will be taxed at 30 per cent.
• No deduction except the cost of acquisition will be allowed and no loss in the transaction will be allowed to be carried forward,announced in Budget 2022.
• TDS will be imposed on payments for the transfer of crypto assets at a rate of 1% for transactions over a certain threshold.

Important Points

• Unocoinis the name of the cryptocurrency exchange company which opened the first virtual Currency ATM in Bangalore.

• India’s first global index of cryptocurrencies is arule-based broad market indexby market capitalisation, that tracks the performance of widely traded liquid cryptocurrencies in the world.
• It has launched byCryptoWire, the global crypto app which is a special business unit ofTickerPlant.
• It will monitor the performance of the15 most-traded cryptocurrenciesthat are listed on crypto exchanges globally.
• It includes Bitcoin, Ethereum, Binance coin, Solana, Cardano, Ripple, Terra, Dogecoin and Shiba Inu, Avalanche, Polkadot, Uniswap, Litecoin, Chainlink, Bitcoin Cash.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 12

1. 14.40%
2. 72%
3. 16%
4. 55.56%

Capital budgeting decisions Question 12 Detailed Solution

The correct answer is 16%

Key PointsAccounting Rate of Return:

The accounting rate of return is the ratio of the average after-tax profit divided by the average investment. The average investment would be equal to half of the original investment if it were depreciated constantly.

\(ARR = \frac {Average Income}{Average Investment}\)x100

Important PointsCalculation of ARR:

Depreciation is calculated on straight line basis

Therefore, Depreciation = 40000/5 = 8000 per year

Book Value of Investment

Average rate of Return =\(\frac {Average Income}{Average investment} \)x 100

Average rate of Return= \(3200 \over 20000\)x100

Average rate of Return= 16%

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 13

1. Accounted rate of return
2. Payback period
3. Internal rate of return
4. External rate of return

Capital budgeting decisions Question 13 Detailed Solution

The correct answer isInternal rate of return.

Key Points

The internal rate of returnmethodfalls under Discounted Cash Flow Criteria.

Discounted Cash Flow

• ​Itrefers to a valuation method that estimates the value of an investment using its expected future cash flows.
• The present value of expected future cash flows is arrived at by using a projected discount rate.
• Companies typically use the weighted average cost of capital (WACC) for the discount rate because it accounts for the rate of return expected by shareholders.
• A DCF analysis can be applied to value a stock, company, project, and many other assets or activities.

Important Points

Internal Rate of Return (IRR)

• It is a metric used in financial analysis to estimate the profitability of potential investments.
• IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
• It is also known as the discount rate.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 14

1. Payback period
2. Discounted cash flow
3. Average rate of return
4. NPV

Capital budgeting decisions Question 14 Detailed Solution

The correct answer isPayback period.

Key Points

Payback period

• It refers to the time period within which investment in fixed assets is recovered.​
• Shorter paybacks mean more attractive investments, while longer payback periods are less desirable.
• Itis calculated by dividing the amount of the investment by the annual cash flow.

Additional Information

Discounted cash flow​

• Itrefers to a valuation method that estimates the value of an investment using its expected future cash flows.
• Itis equal to the sum of the cash flow in each period divided by one plus the discount rate (WACC) raised to the power of the period number.

Average rate of return​

• Itis the average annual return (profit) from an investment.
• It helps determine which investment opportunity may provide higher returns and show greater growth potential.

Net present value (NPV)

• Itis the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
• It is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

Get Started for Free

Trusted by 5.2 Crore+ Students

Capital budgeting decisions Question 15

1. Accounting rate of return
2. Internal rate of return
3. Profitability Index
4. Net present value

Capital budgeting decisions Question 15 Detailed Solution

The correct answer isInternal rate of return

Key PointsInternal Rate of Return

IRR represents a discount rate which leads to a project net present value (NPV) of zero where the present value of the cash inflows equals to the cash outflows.

It also means that IRR is the discount rate that makes NPV equal 0.

Important PointsThe internal rate of return is the rate used in the capital investment appraisals under which the project the cost and its future cash inflows are brought to equity level. It is a technique of capital budgeting.

Where,

NPV = Net Present Value

N = total number of periods

n = non-negative integer

C_n = cash flow

r = internal rate of return

Get Started for Free

Trusted by 5.2 Crore+ Students