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web.groovymark@gmail.com
- December 23, 2024
Question 01
Which financial statement reports a firm’s assets, liabilities, and equity at a specific point in time?
- a) Income Statement
- b) Statement of Cash Flows
- c) Balance Sheet
- d) Statement of Retained Earnings
Answer: c) Balance Sheet
Explanation: The balance sheet reports a company’s assets, liabilities, and equity at a specific point in time. The income statement reports revenues and expenses over a period, the statement of cash flows reports cash movement, and the statement of retained earnings shows changes in equity from net income and dividends.
Question 02
What is the formula for Return on Equity (ROE) using the DuPont method?
- a) Profit Margin × Total Asset Turnover
- b) Profit Margin × Equity Multiplier
- c) Profit Margin × Asset Turnover × Equity Multiplier
- d) Profit Margin × Debt-to-Equity Ratio
Answer: c) Profit Margin × Asset Turnover × Equity Multiplier
Explanation: The DuPont method breaks down ROE into Profit Margin × Asset Turnover × Equity Multiplier, which reflects how effectively a company is using its resources to generate profit for equity holders.
Question 03
A bond is issued at $1,000 face value with a coupon rate of 6%, and the current market price is $950. What is the bond’s yield to maturity?
- a) Less than 6%
- b) Exactly 6%
- c) Greater than 6%
- d) Cannot be determined
Answer: c) Greater than 6%
Explanation: When a bond is sold below face value, its yield to maturity is greater than the coupon rate because investors are earning more in terms of interest relative to their investment.
Question 04
Which of the following is a liquidity ratio?
- a) Debt-to-Equity Ratio
- b) Return on Assets
- c) Quick Ratio
- d) Gross Profit Margin
Answer: c) Quick Ratio
Explanation: The quick ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations using its most liquid assets. Debt-to-Equity is a leverage ratio, Return on Assets is a profitability ratio, and Gross Profit Margin is an efficiency ratio.
Question 05
Which capital budgeting technique uses the discount rate that makes the net present value of all cash flows equal to zero?
- a) Net Present Value (NPV)
- b) Internal Rate of Return (IRR)
- c) Payback Period
- d) Profitability Index (PI)
Answer: b) Internal Rate of Return (IRR)
Explanation: The IRR is the discount rate that forces the net present value (NPV) of a project’s cash flows to equal zero, representing the project’s expected rate of return.
Question 06
What does an increase in a company’s inventory represent on the statement of cash flows?
- a) An inflow of cash
- b) An outflow of cash
- c) A non-cash transaction
- d) No impact on cash flow
Answer: b) An outflow of cash
Explanation: An increase in inventory means the company has spent cash to purchase inventory, representing an outflow in the operating activities section of the cash flow statement.
Question 07
What is the face value of a bond?
- a) The amount paid annually as interest
- b) The amount paid by the issuer at maturity
- c) The price at which the bond is currently trading
- d) The coupon rate of the bond
Answer: b) The amount paid by the issuer at maturity
Explanation: The face value (also called par value) is the amount the bond issuer promises to pay at the bond's maturity. It is different from the bond's trading price and coupon rate.
Question 08
Which financial ratio measures a company’s ability to pay its short-term liabilities with its most liquid assets?
- a) Current Ratio
- b) Debt Ratio
- c) Quick Ratio
- d) Interest Coverage Ratio
Answer: c) Quick Ratio
Explanation: The quick ratio excludes inventory from current assets to measure a company’s ability to cover short-term liabilities with its most liquid assets like cash and receivables.
Question 09
When using the Capital Asset Pricing Model (CAPM), what is the measure of a stock’s risk relative to the market?
- a) Alpha
- b) Standard Deviation
- c) Beta
- d) Sharpe Ratio
Answer: c) Beta
Explanation: Beta measures a stock’s sensitivity to market movements. A beta of 1 means the stock moves with the market, while a beta higher than 1 means greater volatility relative to the market.
Question 10
A company has the following data: Sales = $100,000, Net Income = $20,000, Assets = $200,000, and Equity = $100,000. What is the company’s Return on Assets (ROA)?
- a) 10%
- b) 15%
- c) 20%
- d) 25%
Answer: c) 10%
Explanation: ROA is calculated as Net Income / Assets. In this case, $20,000 / $200,000 = 0.1 or 10%.
Question 11
Which of the following is an advantage of using the Capital Asset Pricing Model (CAPM)?
- a) It accounts for unsystematic risk
- b) It considers a stock’s dividend yield
- c) It includes market risk in its calculation
- d) It guarantees a higher return for higher risk investments
Answer: c) It includes market risk in its calculation
Explanation: CAPM considers systematic risk (market risk) and relates it to expected returns. It does not account for unsystematic risk or guarantee returns, and dividend yield is not a factor.
Question 12
A project has an internal rate of return (IRR) of 12%, and the company’s required rate of return is 10%. Should the company accept the project?
- a) Yes, because the IRR is less than the required return
- b) No, because the IRR is greater than the required return
- c) Yes, because the IRR is greater than the required return
- d) No, because the IRR is less than zero
Answer: c) Yes, because the IRR is greater than the required return
Explanation: If the IRR is greater than the company’s required rate of return, the project is expected to generate returns above the minimum acceptable threshold, making it a good investment.
Question 13
What does the equity multiplier measure in the DuPont formula?
- a) Profitability
- b) Financial leverage
- c) Operating efficiency
- d) Market performance
Answer: b) Financial leverage
Explanation: The equity multiplier measures how much of a company’s assets are financed by equity versus debt. A higher equity multiplier indicates greater use of debt financing.
Question 14
What happens to the bond price when market interest rates increase?
- a) The bond price decreases
- b) The bond price increases
- c) The bond price remains unchanged
- d) The bond price fluctuates randomly
Answer: a) The bond price decreases
Explanation: There is an inverse relationship between bond prices and interest rates. When interest rates rise, existing bonds with lower coupon rates become less attractive, so their prices drop.
Question 15
What type of financial instrument represents partial ownership in a company?
- a) Bond
- b) Preferred stock
- c) Common stock
- d) Mutual fund
Answer: c) Common stock
Explanation: Common stock represents equity ownership in a company, giving shareholders voting rights and a claim to assets after debt and preferred stockholders in the event of liquidation.
Question 16
A company’s retained earnings at the beginning of the year were $1,000,000. During the year, the company earned $500,000 in net income and paid out $200,000 in dividends. What are the retained earnings at year-end?
- a) $1,300,000
- b) $1,500,000
- c) $1,800,000
- d) $2,000,000
Answer: a) $1,300,000
Explanation: Retained earnings at the end of the year is calculated by adding net income to the beginning retained earnings and subtracting dividends. $1,000,000 + $500,000 - $200,000 = $1,300,000.
Question 17
What is the primary purpose of a company’s cash budget?
- a) To manage the company’s equity
- b) To assess long-term capital investments
- c) To estimate cash inflows and outflows for a specific period
- d) To evaluate the company’s profitability
Answer: c) To estimate cash inflows and outflows for a specific period
Explanation: A cash budget is used to project the company’s future cash inflows and outflows, helping to manage liquidity and ensure the company can meet its financial obligations.
Question 18
Which of the following is a non-cash expense?
- a) Depreciation
- b) Accounts payable
- c) Cost of goods sold
- d) Interest expense
Answer: a) Depreciation
Explanation: Depreciation is a non-cash expense, meaning it reduces taxable income without affecting cash flow. The other options involve cash transactions.
Question 19
Which financial statement shows a company’s performance over a period of time?
- a) Balance Sheet
- b) Statement of Cash Flows
- c) Income Statement
- d) Statement of Retained Earnings
Answer: c) Income Statement
Explanation: The income statement reports a company’s financial performance, including revenues and expenses, over a specific period of time. The balance sheet shows a snapshot of assets, liabilities, and equity at a point in time.
Question 20
Which of the following ratios is used to measure a company’s profitability relative to its equity?
- a) Return on Assets (ROA)
- b) Return on Equity (ROE)
- c) Debt-to-Equity Ratio
- d) Current Ratio
Answer: b) Return on Equity (ROE)
Explanation: ROE measures how effectively a company is using its equity to generate profits. ROA measures profitability relative to assets, while debt-to-equity and current ratio measure leverage and liquidity, respectively.
