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BCS Written Finance study materials
BCS Written Finance study resources

BCS Written Finance practice questions

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Question 1Financial Management and Corporate Finance

A firm has current assets of $480,000 and current liabilities of $300,000. What is its current ratio?

  1. 2.40
  2. 1.60 Correct answer.
  3. 1.80
  4. 0.63

Explanation

The current ratio divides current assets by current liabilities, so $480,000 divided by $300,000 equals 1.60. It measures short-term liquidity, showing how many dollars of near-term resources cover each dollar of obligations due within a year.

Question 2Financial Management and Corporate Finance

Which measure best captures a company's ability to meet interest obligations from operating profit?

  1. Debt-to-equity ratio
  2. Inventory turnover
  3. Interest cover ratio Correct answer.
  4. Dividend payout ratio

Explanation

Interest cover divides operating profit (earnings before interest and tax) by the interest charge, so it directly shows how many times profit covers interest. A higher multiple signals a wider cushion before interest payments are at risk.

Question 3Financial Management and Corporate Finance

A company sells goods on credit with terms of 30 days. Which ratio most directly reveals whether customers are paying on time?

  1. Quick ratio
  2. Receivables collection period Correct answer.
  3. Asset turnover
  4. Gross profit margin

Explanation

The receivables collection period converts the receivables balance into the average number of days credit customers take to pay. Comparing it with the 30-day terms shows whether collection is slipping.

Question 4Financial Management and Corporate Finance

Under the net present value rule, a project should be accepted when its NPV is:

  1. Equal to the discount rate
  2. Negative
  3. Positive Correct answer.
  4. Equal to zero

Explanation

NPV discounts all project cash flows at the required rate of return, so a positive result means the project adds value beyond that required return. A zero NPV merely earns the required return, while a negative one destroys value.

Question 5Financial Management and Corporate Finance

A firm's dividend per share is $2.40 and its share price is $32.00. What is the dividend yield?

  1. 13.33%
  2. 8.00%
  3. 7.50% Correct answer.
  4. 2.40%

Explanation

Dividend yield equals dividend per share divided by share price, so $2.40 divided by $32.00 gives 7.50%. It expresses the cash return from dividends relative to the capital invested at the current market price.

Question 6Financial Management and Corporate Finance

Which source of finance is generally classified as equity rather than debt?

  1. Bank term loan
  2. Redeemable preference shares
  3. Corporate bonds
  4. Ordinary shares Correct answer.

Explanation

Ordinary shares represent ownership claims with no contractual obligation to repay principal or pay a fixed return, so they are equity. Lenders and bondholders instead hold contractual rights to interest and repayment.

Question 7Financial Management and Corporate Finance

Which cost is treated as a relevant cash flow when appraising an investment project?

  1. Sunk research spending already incurred
  2. Allocated head-office overhead with no cash change
  3. Interest charges on existing group debt
  4. Incremental working capital required Correct answer.

Explanation

Appraisal uses incremental after-tax cash flows, and additional working capital tied up by a project is such a flow because it is invested and later released. Costs that are past or unaffected by the decision are excluded.

Question 8Financial Management and Corporate Finance

A company's gearing ratio rises sharply after a large bond issue. What is the most likely consequence for its cost of equity?

  1. It rises because financial risk borne by shareholders increases Correct answer.
  2. It falls because interest is tax deductible
  3. It becomes equal to the coupon rate
  4. It stays unchanged because equity is unaffected by borrowing

Explanation

Higher gearing increases the volatility of returns to shareholders and their exposure to fixed interest commitments, so they demand a higher return. The tax shield on interest benefits the cost of debt, not the equity holders' required return.

Question 9Financial Management and Corporate Finance

A firm has sales of $900,000, cost of sales of $540,000 and operating expenses of $180,000. What is its operating profit margin?

  1. 18%
  2. 20% Correct answer.
  3. 60%
  4. 40%

Explanation

Operating profit is $900,000 less $540,000 less $180,000, which equals $180,000. Dividing this by sales of $900,000 gives a margin of 20%, showing profit generated before interest and tax per dollar of revenue.

Question 10Financial Management and Corporate Finance

A project requires $200,000 of initial investment and generates $60,000 per year for five years. What is its payback period?

  1. 4.00 years
  2. 2.50 years
  3. 3.33 years Correct answer.
  4. 5.00 years

Explanation

Payback divides the initial outlay by the constant annual cash inflow, so $200,000 divided by $60,000 equals 3.33 years. It shows how long the project takes to recover its cost in undiscounted cash terms.

Question 11Financial Management and Corporate Finance

A firm has a beta of 1.4, the risk-free rate is 3% and the market return is 8%. Using the CAPM, what is the cost of equity?

  1. 8.0%
  2. 14.0%
  3. 10.0% Correct answer.
  4. 11.2%

Explanation

CAPM adds the risk-free rate to beta multiplied by the market risk premium, giving 3% plus 1.4 times 5%, which equals 10%. The premium rewards only systematic risk that cannot be diversified away.

Question 12Financial Management and Corporate Finance

Which statement about the weighted average cost of capital is correct?

  1. It is unaffected by the company's tax rate
  2. It uses book values exclusively
  3. It ignores the cost of retained earnings
  4. It uses market values of capital where available Correct answer.

Explanation

WACC weights each source of capital by its share of total capital, and market values are preferred because they reflect current opportunity costs to investors. Book values are historical and may diverge materially from economic value.

Question 13Financial Management and Corporate Finance

A company holds inventory of $150,000, receivables of $90,000, cash of $10,000 and current liabilities of $125,000. What is its quick ratio?

  1. 2.00
  2. 0.72
  3. 0.80 Correct answer.
  4. 1.20

Explanation

The quick ratio excludes inventory, so quick assets are $90,000 plus $10,000, which equals $100,000. Dividing by current liabilities of $125,000 gives 0.80, indicating near-cash assets fall short of short-term obligations.

Question 14Financial Management and Corporate Finance

Which dividend policy describes paying a fixed proportion of each year's earnings as dividends?

  1. Constant payout policy Correct answer.
  2. Zero payout policy
  3. Residual dividend policy
  4. Constant dividend per share policy

Explanation

A constant payout policy sets dividends as a stable percentage of earnings, so the dividend rises and falls with profit. This links shareholder distributions directly to reported performance each year.

Question 15Financial Management and Corporate Finance

A firm issues debt to repurchase shares in a leveraged recapitalisation. According to trade-off theory, the main benefit is:

  1. Lower business risk
  2. Elimination of agency costs
  3. The interest tax shield Correct answer.
  4. Reduced financial distress risk

Explanation

Trade-off theory holds that debt creates value through the tax deductibility of interest, offset by rising expected costs of financial distress. The optimal capital structure balances these opposing effects.

Question 16Financial Management and Corporate Finance

A supplier offers terms of 2/10 net 40. What is the approximate annualised cost of forgoing the discount and paying at day 40?

  1. 18.4%
  2. 2.0%
  3. 24.5% Correct answer.
  4. 36.7%

Explanation

Forgoing the discount costs 2/98 for 30 extra days of credit, which is about 2.04% per period. Annualising over roughly 12.17 periods gives approximately 24.5%, so cheaper finance should normally be preferred.

Question 17Financial Management and Corporate Finance

Which statement best describes the agency problem between shareholders and managers?

  1. Managers may pursue growth or perks that do not maximise shareholder wealth Correct answer.
  2. Shareholders control daily operating decisions
  3. Managers always act to maximise share price
  4. Lenders demand higher interest than shareholders

Explanation

Separation of ownership from control lets managers pursue their own objectives, such as empire building or excessive perks, at the expense of shareholder value. Governance mechanisms such as performance-linked pay and board oversight aim to align these interests.

Question 18Financial Management and Corporate Finance

A company has earnings before interest and tax of $450,000 and interest payable of $150,000. What is its interest cover?

  1. 4.5 times
  2. 0.33 times
  3. 3.0 times Correct answer.
  4. 1.5 times

Explanation

Interest cover divides operating profit by the interest charge, so $450,000 divided by $150,000 equals 3.0 times. This means operating profit could fall by two-thirds before interest payments were no longer covered.

Question 19Financial Management and Corporate Finance

Which capital budgeting method ignores the time value of money?

  1. Discounted payback
  2. Net present value
  3. Accounting rate of return Correct answer.
  4. Internal rate of return

Explanation

The accounting rate of return compares average accounting profit with the investment outlay and applies no discounting. It therefore treats cash received in later years as equal in value to cash received sooner.

Question 20Financial Management and Corporate Finance

A firm's operating profit margin is 12%, asset turnover is 1.5 and the equity multiplier is 2.0. Using the DuPont framework, what is the return on equity?

  1. 18%
  2. 9%
  3. 36% Correct answer.
  4. 24%

Explanation

DuPont analysis multiplies margin, asset turnover and the equity multiplier, so 12% times 1.5 times 2.0 equals 36%. This decomposes return on equity into profitability, efficiency and leverage effects.

Question 21Financial Management and Corporate Finance

A project has an initial outlay of $500,000 and expected cash inflows with a present value of $560,000. What is the profitability index, and should the project be accepted?

  1. 1.12; reject
  2. 0.89; reject
  3. 1.12; accept Correct answer.
  4. 0.89; accept

Explanation

The profitability index divides the present value of inflows by the initial outlay, giving $560,000 divided by $500,000, or 1.12. Any index above 1.0 means positive NPV, so the project should be accepted when capital is available.

Question 22Financial Management and Corporate Finance

A company's bonds trade at a yield to maturity of 6% and its tax rate is 25%. What is the after-tax cost of debt?

  1. 6.0%
  2. 8.0%
  3. 4.5% Correct answer.
  4. 1.5%

Explanation

Because interest is tax deductible, the after-tax cost of debt is the pre-tax yield multiplied by one minus the tax rate. Here 6% times 0.75 equals 4.5%, which is the figure used in WACC.

Question 23Financial Management and Corporate Finance

A firm currently has a WACC of 9% and is considering a project in a different industry with substantially higher systematic risk. Which approach is most appropriate?

  1. Discount at the risk-free rate
  2. Add a fixed 2% premium to the WACC
  3. Discount at the firm's existing 9% WACC
  4. Use a project-specific rate reflecting the risk of comparable firms Correct answer.

Explanation

A project's discount rate should reflect its own systematic risk, so an asset beta drawn from comparable firms in that industry is used to derive a suitable rate. Applying the firm's existing WACC would misprice risk and distort the accept or reject decision.

Question 24Financial Management and Corporate Finance

A company has 4 million shares trading at $5.00 and debt with a market value of $8 million. Its cost of equity is 12% and its pre-tax cost of debt is 6%, with a 25% tax rate. What is its WACC?

  1. 8.57%
  2. 10.29%
  3. 7.86% Correct answer.
  4. 9.00%

Explanation

Equity is $20 million and debt is $8 million, giving total capital of $28 million and weights of 71.4% and 28.6%. The after-tax cost of debt is 4.5%, so WACC equals 0.714 times 12% plus 0.286 times 4.5%, which is about 7.86%.

Question 25Financial Management and Corporate Finance

A company generates stable free cash flow of $3 million per year in perpetuity and has a WACC of 10%. It holds debt of $5 million and cash of $1 million. Using the free cash flow model, what is the value of equity?

  1. $26 million Correct answer.
  2. $25 million
  3. $24 million
  4. $30 million

Explanation

The enterprise value is the perpetuity of $3 million divided by 10%, which equals $30 million. Equity value is enterprise value less debt plus cash, giving $30 million less $5 million plus $1 million, or $26 million.

Question 26Financial Management and Corporate Finance

A company has net profit after tax of $240,000, preference dividends of $40,000, and 200,000 ordinary shares outstanding. What is its earnings per share (EPS)?

  1. $1.00 Correct answer.
  2. $0.80
  3. $1.20
  4. $1.40

Explanation

Earnings per share is calculated by deducting preference dividends from net profit after tax and dividing by the weighted average number of ordinary shares. Here, ($240,000 − $40,000) ÷ 200,000 = $1.00. Preference dividends are excluded because they belong to preference shareholders, not ordinary shareholders.

Question 27Financial Management and Corporate Finance

Which financial ratio measures a company's ability to meet its short-term obligations using its most liquid current assets?

  1. Quick ratio Correct answer.
  2. Debt-to-equity ratio
  3. Current ratio
  4. Return on equity

Explanation

The quick ratio (acid-test ratio) excludes inventory from current assets and compares the remainder to current liabilities, providing a stricter test of short-term liquidity. The current ratio includes inventory, which may not be readily convertible to cash. Debt-to-equity and return on equity measure long-term solvency and profitability, respectively.

Question 28Financial Management and Corporate Finance

A company has a dividend payout ratio of 40% and a return on equity of 15%. Using the sustainable growth rate formula, what is its sustainable growth rate?

  1. 15.0%
  2. 6.0%
  3. 9.0% Correct answer.
  4. 10.0%

Explanation

The sustainable growth rate is calculated as retention ratio multiplied by return on equity. The retention ratio is 1 minus the payout ratio, so 1 − 0.40 = 0.60. Therefore, 0.60 × 15% = 9.0%.

Question 29Financial Management and Corporate Finance

Which of the following is a primary responsibility of a company's treasury department?

  1. Preparing financial statements
  2. Conducting internal audits
  3. Managing cash and liquidity Correct answer.
  4. Setting product prices

Explanation

Treasury is responsible for managing the firm's cash, liquidity, and financial risk, including banking relationships and short-term investments. Financial statement preparation is typically an accounting function, internal audit is a separate control function, and product pricing is a marketing or strategic decision.

Question 30Financial Management and Corporate Finance

A firm has a current ratio of 2.0 and a quick ratio of 1.2. If it uses cash to pay off some current liabilities, what will happen to these ratios?

  1. Both ratios will decrease
  2. Current ratio will increase, quick ratio will decrease
  3. Both ratios will increase Correct answer.
  4. Current ratio will decrease, quick ratio will increase

Explanation

When cash is used to reduce current liabilities, both current assets and current liabilities decrease by the same amount. Because the current ratio exceeds 1, the ratio increases; because the quick ratio also exceeds 1, it increases as well. The quick ratio is affected because cash is a quick asset.

Question 31Financial Management and Corporate Finance

A company has annual credit sales of $1,200,000 and an average accounts receivable balance of $200,000. What is its average collection period (days sales outstanding)?

  1. 60 days Correct answer.
  2. 90 days
  3. 120 days
  4. 30 days

Explanation

The average collection period is calculated as (Accounts receivable ÷ Annual credit sales) × 365. Here, ($200,000 ÷ $1,200,000) × 365 = 60.8 days, approximately 60 days. This indicates the average time taken to collect receivables.

Question 32Financial Management and Corporate Finance

Which of the following best describes the concept of financial leverage?

  1. Using fixed-cost debt to magnify returns to shareholders Correct answer.
  2. Using equity to finance assets
  3. Maintaining high liquidity
  4. Investing in long-term projects

Explanation

Financial leverage refers to the use of debt, which carries fixed interest costs, to potentially increase the return on equity. When the return on assets exceeds the after-tax cost of debt, leverage magnifies shareholder returns, but it also increases financial risk. Equity financing does not create financial leverage.

Question 33Financial Management and Corporate Finance

A firm has a debt-to-equity ratio of 0.5. If it issues additional debt and uses the proceeds to repurchase equity, what is the most likely effect on its financial risk?

  1. Financial risk increases Correct answer.
  2. Financial risk decreases
  3. Financial risk is eliminated
  4. Financial risk remains unchanged

Explanation

Increasing debt while reducing equity raises the debt-to-equity ratio, which increases the fixed interest obligations and the variability of earnings available to shareholders. This higher financial leverage leads to greater financial risk. The other options incorrectly suggest no change or a reduction in risk.

Question 34Financial Management and Corporate Finance

Which of the following is considered a cash flow from financing activities in the statement of cash flows?

  1. Purchase of inventory
  2. Proceeds from issuing shares Correct answer.
  3. Payment of income tax
  4. Sale of equipment

Explanation

Financing activities include transactions that affect the firm's capital structure, such as issuing shares, borrowing, and repaying debt. Proceeds from issuing shares are a financing inflow. Purchases of inventory and payment of income tax are operating activities, while sale of equipment is an investing activity.

Question 35Financial Management and Corporate Finance

A project has an initial investment of $100,000 and is expected to generate annual cash inflows of $30,000 for five years. If the required rate of return is 10%, what is the project's net present value (NPV)? (PV annuity factor at 10% for 5 years = 3.7908)

  1. $13,724 Correct answer.
  2. $13,724 negative
  3. $0
  4. $50,000

Explanation

NPV is calculated by discounting the cash inflows at the required rate and subtracting the initial investment. The present value of inflows is $30,000 × 3.7908 = $113,724. Subtracting $100,000 gives an NPV of $13,724, which is positive and indicates the project is acceptable.

Question 36Financial Management and Corporate Finance

Which of the following statements about the internal rate of return (IRR) method is correct?

  1. It always agrees with NPV for mutually exclusive projects
  2. It may give multiple solutions if cash flows change sign more than once Correct answer.
  3. It is not affected by the scale of the investment
  4. It assumes cash flows are reinvested at the cost of capital

Explanation

The IRR is the discount rate that makes NPV zero. When a project's cash flows include more than one sign change, the NPV profile can cross the horizontal axis multiple times, leading to multiple IRRs. The other statements are incorrect: IRR assumes reinvestment at the IRR itself, can conflict with NPV for mutually exclusive projects, and is sensitive to scale.

Question 37Financial Management and Corporate Finance

A company has a capital structure of 60% equity and 40% debt. The cost of equity is 12%, the pre-tax cost of debt is 8%, and the tax rate is 30%. What is the weighted average cost of capital (WACC)?

  1. 8.0%
  2. 9.0%
  3. 10.4%
  4. 9.44% Correct answer.

Explanation

WACC is the weighted average of the after-tax costs of equity and debt. The after-tax cost of debt is 8% × (1 − 0.30) = 5.6%. Therefore, WACC = (0.60 × 12%) + (0.40 × 5.6%) = 7.2% + 2.24% = 9.44%.

Question 38Financial Management and Corporate Finance

Which of the following is an example of a systematic risk that cannot be eliminated through diversification?

  1. A company's factory fire
  2. A strike by a supplier
  3. A product recall by a competitor
  4. A change in the central bank's interest rate policy Correct answer.

Explanation

Systematic risk affects the entire market and cannot be diversified away. Changes in interest rate policy by the central bank are macroeconomic and affect all firms to some degree. The other events are firm-specific or industry-specific and can be largely diversified.

Question 39Financial Management and Corporate Finance

A firm has an inventory turnover ratio of 5 times and an average inventory of $100,000. What is its cost of goods sold?

  1. $5,000,000
  2. $20,000
  3. $100,000
  4. $500,000 Correct answer.

Explanation

Inventory turnover is calculated as cost of goods sold divided by average inventory. Rearranging, cost of goods sold = inventory turnover × average inventory = 5 × $100,000 = $500,000. This represents the cost of inventory sold during the period.

Question 40Financial Management and Corporate Finance

Which of the following best describes the pecking order theory of capital structure?

  1. Firms prefer internal financing, then debt, then equity Correct answer.
  2. Firms are indifferent between debt and equity
  3. Firms target a specific debt ratio
  4. Firms prefer equity, then debt, then internal financing

Explanation

The pecking order theory suggests that due to information asymmetry and issuance costs, firms prefer to use internal funds first, then issue debt, and issue equity only as a last resort. This contrasts with the trade-off theory, which posits a target capital structure. The other options misstate the order or the theory.

Question 41Public Financial Management and Budgeting

Under a medium-term expenditure framework, what does the annual budget primarily represent?

  1. The first year of a rolling multi-year expenditure plan Correct answer.
  2. A standalone one-year allocation with no link to future years
  3. A contingent liability schedule for state-owned enterprises
  4. A statement of actual cash receipts from the previous year

Explanation

A medium-term expenditure framework sets aggregate fiscal targets and sectoral ceilings for several years ahead, and the annual budget is the binding first-year slice of that rolling plan. This design links policy priorities to resources beyond a single fiscal year, improving predictability and discipline.

Question 42Public Financial Management and Budgeting

Which document typically authorizes the executive to spend public money and is the legal basis for appropriations?

  1. The annual appropriations law enacted by the legislature Correct answer.
  2. The national development plan
  3. The central bank's monetary policy statement
  4. The auditor general's annual report

Explanation

Appropriations become legally enforceable when the legislature enacts the annual budget or appropriations law. The executive may then spend only within the amounts and purposes authorized, and any deviation requires separate legal authority.

Question 43Public Financial Management and Budgeting

A government wants to strengthen fiscal discipline by making the finance ministry the sole authority that can approve new spending proposals with multi-year costs. Which public financial management objective does this most directly serve?

  1. Allocative efficiency across sectors
  2. Transparency to citizens
  3. Aggregate fiscal discipline Correct answer.
  4. Operational efficiency in service delivery

Explanation

Aggregate fiscal discipline concerns keeping total spending and the deficit within the government's macroeconomic targets. Centralizing approval of costly proposals in the finance ministry prevents line ministries from collectively breaching the aggregate ceiling.

Question 44Public Financial Management and Budgeting

What is the main purpose of a commitment control system in public expenditure management?

  1. To record payments only after they have been cleared by the central bank
  2. To calculate the depreciation of public assets over their useful lives
  3. To forecast tax revenue for the coming fiscal year
  4. To prevent spending units from entering contracts that exceed available budget authority Correct answer.

Explanation

Commitment control records obligations such as contracts and purchase orders at the point they are incurred, before cash is paid. This prevents units from over-committing the budget and creating arrears that distort later fiscal reports.

Question 45Public Financial Management and Budgeting

In the budget cycle, which stage immediately follows legislative approval of the budget?

  1. External audit
  2. Legislative scrutiny
  3. Budget execution Correct answer.
  4. Budget formulation

Explanation

Once the legislature has approved appropriations, the executive moves into execution, releasing funds and incurring commitments. Formulation and legislative scrutiny precede approval, and external audit comes after execution and reporting.

Question 46Public Financial Management and Budgeting

Which of the following best describes a programme budget?

  1. Resources are classified by the geographic region of the spending unit
  2. Resources are classified solely by the organizational unit that spends them
  3. Resources are classified by the objectives and services they are intended to deliver Correct answer.
  4. Resources are classified by the economic type of input, such as wages and fuel

Explanation

A programme budget groups spending around objectives, activities, and outputs so that legislators can see what results are being purchased. Line-item and organizational classifications remain useful for control but do not show purpose in the same way.

Question 47Public Financial Management and Budgeting

What does fiscal transparency in budgeting primarily require governments to do?

  1. Report only aggregate totals without sectoral detail
  2. Keep draft budget estimates confidential until the fiscal year ends
  3. Restrict budget documents to members of the legislature
  4. Publish comprehensive, timely, and comparable information on budget plans and outcomes Correct answer.

Explanation

Fiscal transparency means the public can access clear information on the government's fiscal position, budget intentions, and actual results. Comprehensiveness, timeliness, and comparability allow citizens and markets to hold the government accountable.

Question 48Public Financial Management and Budgeting

A line ministry receives its quarterly funding release from the finance ministry. Which function does this release primarily perform?

  1. It replaces the need for legislative approval of the budget
  2. It permanently increases the ministry's annual appropriation
  3. It transfers ownership of the ministry's assets to the treasury
  4. It authorizes the ministry to incur expenditures within the approved appropriation for that period Correct answer.

Explanation

Cash or fund releases ration approved appropriations across the year so that spending is consistent with available revenue and macroeconomic targets. The release permits spending within the existing appropriation but does not change its legal size.

Question 49Public Financial Management and Budgeting

A government moves from cash accounting to accrual accounting for its budget reports. What is the most direct consequence for fiscal reporting?

  1. Transactions are recognized when economic events occur rather than only when cash changes hands Correct answer.
  2. The government no longer needs to report its debt stock
  3. Budget appropriations automatically increase to cover depreciation
  4. External audits become unnecessary because accrual data are self-validating

Explanation

Accrual accounting records revenues and expenses when they are earned or incurred, and recognizes assets and liabilities as they arise. This gives a fuller picture of the government's financial position than cash records, which capture only payment flows.

Question 50Public Financial Management and Budgeting

During budget execution a ministry wants to shift funds from its travel vote to its training vote within the same programme. What is the standard term for this reallocation?

  1. Supplementary appropriation
  2. Reappropriation
  3. Contingency reserve
  4. Virement Correct answer.

Explanation

A virement is an authorized transfer of funds between line items or programmes within an approved budget. It allows flexibility during execution but is normally capped and requires finance ministry or legislative approval depending on the rules.