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web.groovymark@gmail.com
- December 23, 2024
Question 41
A company has $600,000 in total assets and $300,000 in total liabilities. What is its equity multiplier?
- a) 1.5
- b) 2.0
- c) 2.5
- d) 3.0
Answer: b) 2.0
Explanation: The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $600,000 - $300,000 = $300,000. Therefore, Equity Multiplier = $600,000 / $300,000 = 2.0.
Question 42
A company’s current assets are $500,000, and its current liabilities are $400,000. What is its current ratio?
- a) 0.75
- b) 1.0
- c) 1.25
- d) 1.5
Answer: c) 1.25
Explanation: The current ratio is calculated as Current Assets / Current Liabilities. In this case: $500,000 / $400,000 = 1.25.
Question 43
Which of the following represents a firm’s market capitalization?
- a) Total debt
- b) Total equity
- c) Share price multiplied by the number of outstanding shares
- d) Earnings per share multiplied by net income
Answer: c) Share price multiplied by the number of outstanding shares
Explanation: Market capitalization is calculated as the current share price multiplied by the number of outstanding shares, representing the total market value of the firm’s equity.
Question 44
A company has a debt ratio of 0.4 and total assets of $1,000,000. What is its total debt?
- a) $200,000
- b) $300,000
- c) $400,000
- d) $500,000
Answer: c) $400,000
Explanation: The debt ratio is calculated as Total Debt / Total Assets. Rearranging the formula: Total Debt = Debt Ratio × Total Assets. In this case: 0.4 × $1,000,000 = $400,000.
Question 45
What is the purpose of a company’s cash budget?
- a) To determine future sales growth
- b) To estimate the company’s long-term liabilities
- c) To forecast cash inflows and outflows over a period of time
- d) To calculate the company’s stock price
Answer: c) To forecast cash inflows and outflows over a period of time
Explanation: A cash budget forecasts a company’s cash inflows and outflows over a specific period to ensure sufficient liquidity to meet its obligations.
Question 46
Which of the following describes the weighted average cost of capital (WACC)?
- a) The interest rate charged on a company’s loans
- b) The average rate a company must pay to finance its assets
- c) The average market return expected by shareholders
- d) The company’s dividend yield
Answer: b) The average rate a company must pay to finance its assets
Explanation: WACC represents the average cost of financing a company’s assets, taking into account both debt and equity financing.
Question 47
A company has a price-to-earnings (P/E) ratio of 20 and earnings per share (EPS) of $5. What is its stock price?
- a) $50
- b) $75
- c) $100
- d) $125
Answer: c) $100
Explanation: The stock price is calculated as P/E ratio × EPS. In this case: 20 × $5 = $100.
Question 48
What is the impact of an increase in a company’s financial leverage on its risk?
- a) Financial risk decreases
- b) Financial risk remains the same
- c) Financial risk increases
- d) Financial risk is eliminated
Answer: c) Financial risk increases
Explanation: Increased financial leverage, which refers to the use of debt, increases the company’s financial risk because it must meet debt obligations regardless of profitability.
Question 49
A company has $400,000 in total liabilities and $600,000 in total assets. What is its equity multiplier?
- a) 1.25
- b) 1.5
- c) 1.67
- d) 2.0
Answer: d) 2.0
Explanation: The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $600,000 - $400,000 = $200,000. Therefore, Equity Multiplier = $600,000 / $200,000 = 3.0.
Question 50
What is the primary benefit of using the internal rate of return (IRR) method in capital budgeting?
- a) It provides an easy comparison of multiple projects’ profitability
- b) It ignores the time value of money
- c) It does not require future cash flow estimates
- d) It is less complicated than other methods
Answer: a) It provides an easy comparison of multiple projects’ profitability
Explanation: The IRR method allows comparison of different projects by calculating the return rate that makes the NPV of a project zero, offering a simple way to assess profitability.
