Lakshya Education MCQs

Question: Other things remaining the same, an increase in the tax rate on corporate profits will:
Options:
A.None of these
B.make the debt relatively the dearer
C.have no impact on the cost of debt
D.make the debt relatively cheaper
Answer: Option D
: D

Cost of Debt is affected by tax rate because Interest on Debt is a deductible expense. A higher tax rate, thus, makes debt relatively cheaper as compared to equity. For Example: If the firm borrows @10% and tax rate is @30%, then the after cost of debt will be @7%.

Submit Answer & Explaination

Earn Reward Points by submitting Detailed Explaination for this Question

More Questions on This Topic :

Question 1. A decision to acquire a new and modern plant to upgrade an old one is a:
  1.    Financing Decision
  2.    Investment decision
  3.    Working capital decision
  4.    None of the above
Answer: Option B
: B

The Investment decision refers to the decision of investing funds in different assets. It can be long term or short term. A Long term Investment decision is also called 'Capital Budgeting Decision' . It involves investing the finance in capital assets like making investment in a new machine to replace an existing one, etc.
Question 2. A company's earning before interest amd tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is Rs. 50 lac. Advise company whenever it should included debt or equity to raise its capital.
  1.    Debt
  2.    Equity
  3.    None of the above 
  4.    All of the above
Answer: Option A
: A

Company should prefer debt to raise fund as debt is gainful for equity shareholders till ROI > Rate of Intrest

In the above case ROI = racEBITTotalIncome×100=750×100=14%

14> 10, so debt is more suitable.
Question 3. Current assets of a business firm should be financed through:
  1.    long-term liability only
  2.    None of these
  3.    both types (i.e. long and short term liabilities)
  4.    current liability only
Answer: Option C
: C

Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year e.g. inventories, debtors etc. Hence these should be financed by both long term and short term libility.
Question 4. ___ is an important determinant of a company's ability to trading on equity.
  1.    ICR
  2.    ROI
  3.    DSCR
  4.    All of the above
Answer: Option B
: B

ROI is an important determinant of a company's ability to trading on equity.
Question 5. Financial leverage is a proportion of debt in an overall capital. State whether true or false. 
  1.    True 
  2.    False
  3.    DSCR
  4.    All of the above
Answer: Option A
: A

True.Financial leverage is a proportion of debt in an overall capital.
Question 6. Which of the following is not concerned with the long term investment decision
  1.    Research and Development Programme
  2.    Opening a new branch
  3.    Inventory management
  4.    Management of fixed capital
Answer: Option C
: C

Long term investment decisions are also called capital budgeting decisions which include purchase of land and building, plant and machinery,change of technology, research and development and expenditure of advertising campaign etc. Inventory management comes under working capital management decisions.

Check all Questions in this Topic : Click HERE