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B Com Exam  >  B Com Tests  >  Test: Investment Decisions - 2 - B Com MCQ

Test: Investment Decisions - 2 - B Com MCQ


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10 Questions MCQ Test - Test: Investment Decisions - 2

Test: Investment Decisions - 2 for B Com 2024 is part of B Com preparation. The Test: Investment Decisions - 2 questions and answers have been prepared according to the B Com exam syllabus.The Test: Investment Decisions - 2 MCQs are made for B Com 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Investment Decisions - 2 below.
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Test: Investment Decisions - 2 - Question 1
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What is the primary purpose of capital rationing in companies?

Detailed Solution for Test: Investment Decisions - 2 - Question 1
Capital rationing in companies serves the primary purpose of preventing the wastage of resources by carefully selecting and investing in only the most profitable projects. It aims to allocate capital efficiently and ensure that funds are utilized effectively to generate higher returns. This approach helps in avoiding the dispersion of resources across numerous projects and contributes to better financial management.
Test: Investment Decisions - 2 - Question 2
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What is one of the disadvantages of capital rationing according to the text?

Detailed Solution for Test: Investment Decisions - 2 - Question 2
One of the disadvantages of capital rationing mentioned in the text is that it may lead to inefficient project selection. Capital rationing restricts investment in some profitable projects, potentially missing out on opportunities to maximize value creation for the company. This is because not all profitable projects are accepted, which can result in suboptimal allocation of resources.
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Test: Investment Decisions - 2 - Question 3
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What does systematic risk refer to in investment analysis?

Detailed Solution for Test: Investment Decisions - 2 - Question 3
Systematic risk, also known as market risk, pertains to the variability in investment returns caused by fluctuations in the overall market or economy. It affects all securities to some degree and is not specific to any particular security. Systematic risk includes factors like market downturns, economic recessions, and other macroeconomic influences that impact the entire market.
Test: Investment Decisions - 2 - Question 4
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What is the primary assumption underlying capital rationing?
Detailed Solution for Test: Investment Decisions - 2 - Question 4
The primary assumption underlying capital rationing is that there are restrictions on capital expenditures, either through internal financing constraints or investment budget restrictions. This assumption acknowledges that companies do not have unlimited funds available to invest in all projects, leading to the need for a selection process.
Test: Investment Decisions - 2 - Question 5
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Which type of risk involves variability in returns due to currency fluctuations?
Detailed Solution for Test: Investment Decisions - 2 - Question 5
Exchange Rate Risk, also known as currency risk, involves variability in returns on securities caused by currency fluctuations when converting foreign gains back to the investor's own currency. This risk is associated with international investments and can impact returns due to changes in exchange rates.
Test: Investment Decisions - 2 - Question 6
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What does nonsystematic risk refer to in investment analysis?
Detailed Solution for Test: Investment Decisions - 2 - Question 6
Nonsystematic risk, also known as specific risk, refers to the risk that is unique to a particular security. It is not related to overall market variability but is specific to factors such as business-specific risks, financial risks, or liquidity risks associated with that particular security.
Test: Investment Decisions - 2 - Question 7
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What is the primary purpose of including inflation in capital budgeting analysis?
Detailed Solution for Test: Investment Decisions - 2 - Question 7
The primary purpose of including inflation in capital budgeting analysis is to use a nominal discount rate consistently. This ensures that the analysis accounts for the impact of inflation on both cash flows and the discount rate, leading to more accurate evaluations of project profitability over time.
Test: Investment Decisions - 2 - Question 8
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What type of risk affects all securities and is associated with fluctuations in interest rates?
Detailed Solution for Test: Investment Decisions - 2 - Question 8
Market Risk, also known as systematic risk, affects all securities and is associated with fluctuations in interest rates, overall market movements, and macroeconomic factors. It is a common risk that investors face regardless of the specific securities they hold in their portfolios.
Test: Investment Decisions - 2 - Question 9
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What is the main risk associated with financial leverage?
Detailed Solution for Test: Investment Decisions - 2 - Question 9
Financial leverage is primarily associated with financial risk. Financial risk arises when a company uses debt financing to a significant extent, and it involves the variability in returns associated with the use of debt. This risk can result from changes in interest rates and the company's ability to meet its debt obligations.
Test: Investment Decisions - 2 - Question 10
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In the context of capital rationing, what is the significance of the cost of capital?
Detailed Solution for Test: Investment Decisions - 2 - Question 10
The cost of capital plays a crucial role in capital rationing decisions as it helps determine the number of projects a company can undertake. By setting a higher cost of capital or budget restrictions, a company limits its investment options to prioritize projects with the potential to generate higher returns relative to the cost of capital. This ensures efficient allocation of limited capital resources.
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