Finance & Financial Management

Finance: Decisions Under Scarcity of Capital

Finance MCQs in this bank come in three families: valuation arithmetic, capital-budgeting and structure decisions, and market mechanics. The first two reward practice; the third rewards exact recall.

What These 407 Questions Cover

• Bonds and valuation — the largest single group: yield to maturity, coupon and zero-coupon pricing, the inverse price–yield relationship, and bond ratings.
• Time value of money — present and future value, annuities and perpetuities, and the effect of compounding frequency.
• Capital budgeting — NPV and its acceptance rule, IRR, payback and discounted payback, profitability index, and mutually exclusive projects.
• Cost of capital — after-tax cost of debt, cost of equity, weighted average cost of capital, and the choice between book and market weights.
• Risk and CAPM — systematic versus unsystematic risk, beta, and the security market line.
• Dividend policy — retained earnings, forms of dividend, and the arguments for and against distribution.
• Leverage and capital structure — operating, financial and combined leverage, and the classic structure theories.
• Markets — money-market and capital-market instruments, primary versus secondary trading, and share-market mechanics.

Still Missing From This Page

Working-capital numericals (EOQ and the cash-conversion cycle) are represented only lightly. More importantly, this bank holds no Pakistan-specific institutional content yet — nothing on the State Bank’s monetary policy instruments, SECP regulation, the PSX, or T-bills and PIBs. SBP and banking-consortium tests do examine those, so cover them from your own notes until those sets are built.

How to Use These Sets

Work every numerical with the formula written out first. The explanations show the substitution step, which is where candidates lose marks even when they know the method.

Rules Worth Memorising

• Accept a project when NPV is positive; NPV and IRR agree for independent projects with conventional cash flows.
• Higher fixed operating costs raise DOL; higher fixed financing costs raise DFL.
• After-tax cost of debt equals pre-tax cost multiplied by (1 − tax rate) — interest is tax-deductible, dividends are not.
• Bond prices move inversely to yields, and for a discount bond the yield to maturity exceeds the coupon rate.
• Diversification removes unsystematic risk only; systematic risk is what gets priced.