A pure public good is characterized by:
National defense is a classic example: one person's use does not reduce others' use and nobody can be excluded.
Accounting and Finance MCQs
The free-rider problem arises mainly in the case of:
People can enjoy the benefits without paying, so markets under-provide public goods.
A positive externality is:
Examples include education and immunization.
Sensitivity analysis in capital budgeting examines:
It tests how sensitive the result is to changes in key assumptions.
The strong form of the Efficient Market Hypothesis states that share prices reflect:
Weak form: past prices; semi-strong: public information; strong: all information.
A share buyback (repurchase) generally:
The company uses cash to buy its own shares, so shares outstanding fall.
In vertical analysis, each item in a financial statement is expressed as a percentage of:
Vertical (common-size) analysis shows relative proportions within a single statement.
Horizontal (trend) analysis compares:
It highlights changes and trends over time.
When NPV and IRR give conflicting rankings for mutually exclusive projects, the preferred criterion is generally:
NPV measures the absolute increase in shareholder wealth.
Dividends are Rs. 30,000 and net income is Rs. 100,000. The dividend payout ratio is:
Payout ratio = 30,000 / 100,000 = 30%.
Dividend per share is Rs. 5 and market price per share is Rs. 100. The dividend yield is:
Dividend yield = 5 / 100 = 5%.
Using the Gordon growth model, next year’s dividend is Rs. 6, the required return is 12% and growth is 4%. The share price is:
P0 = D1 / (r - g) = 6 / (0.12 - 0.04) = Rs. 75.
A bond with a 10% coupon will sell at par if the market interest rate is:
When required yield equals the coupon rate, price equals face value.
A bond sells at a discount when:
Investors demand higher returns so they pay less than face value.
The yield to maturity (YTM) of a bond is:
YTM discounts all promised coupons and the principal to the current price.
A stock split:
A split changes the number of shares outstanding but not total market value or equity.
EBIT is Rs. 300,000 and interest expense is Rs. 60,000. The times interest earned ratio is:
TIE = 300,000 / 60,000 = 5.
Net income is Rs. 60,000 and shareholders’ equity is Rs. 400,000. Return on equity (ROE) is:
ROE = 60,000 / 400,000 = 15%.
Net income is Rs. 50,000 and total assets are Rs. 500,000. Return on assets (ROA) is:
ROA = 50,000 / 500,000 = 10%.
The DuPont identity expresses ROE as:
It breaks ROE into profitability, efficiency and leverage.
Net income is Rs. 500,000, preference dividends are Rs. 50,000 and weighted average ordinary shares are 100,000. Earnings per share (EPS) is:
EPS = (500,000 - 50,000) / 100,000 = Rs. 4.50.
Cost of goods sold is Rs. 600,000 and average inventory is Rs. 100,000. Inventory turnover is:
Turnover = 600,000 / 100,000 = 6 times.
Current assets are Rs. 250,000, inventory is Rs. 100,000 and current liabilities are Rs. 100,000. The quick ratio is:
Quick ratio = (250,000 - 100,000) / 100,000 = 1.5.
Total debt is Rs. 400,000 and total equity is Rs. 200,000. The debt-to-equity ratio is:
D/E = 400,000 / 200,000 = 2.