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web.groovymark@gmail.com
- November 28, 2024
Question 01
What type of interest rate is used to describe the rate at which invested money grows for a specific period?
a) Nominal interest rate
b) Real interest rate
c) Risk-free rate
d) Compound interest rate
Correct Answer: a) Nominal interest rate
Explanation: The nominal interest rate is the rate at which money grows over a period of time without accounting for inflation or other external factors
Question 02
What is the risk premium in finance?
a) The compensation investors receive for taking on higher risk
b) The interest rate set by the central bank
c) The return expected on a government bond
d) The cost of borrowing funds
Correct Answer: a) The compensation investors recive for taking on higher risk
Explanation: The risk premium is the additional return investors expect to receive for taking on greater risk compared to risk-free investments
Question 03
What is a callable bond?
a) A bond that can be converted into equity
b) A bond that pays no interest until maturity
c) A bond that the issuer can redeem before maturity
d) A bond issued at a discount
Correct Answer: c) A bond that the issuer can redeem before maturity
Explanation: A callable bond allows the issuer to repay the bond before its maturity date, often to refinance at a lower interest rate
Question 04
Which of the following is an example of a leading economic indicator?
a) Unemployment rate
b) Yield curve
c) Gross domestic product (GDP)
d) Consumer spending
Correct Answer: b) Yield curve
Explanation: The yield curve is considered a leading indicator as it can signal future economic activity, especially when it inverts, signaling a potential downturn
Question 05
What is the role of the Federal Reserve in the U.S. economy?
a) To set prices for goods and services
b) To regulate inflation and unemployment through monetary policy
c) To manage the federal budget
d) To establish fiscal policy for the government
Correct Answer: b) To regulate inflation and unemployment through monetary policy
Explanation: The Federal Reserve manages monetary policy to regulate inflation and unemployment by adjusting interest rates and controlling money supply
Question 06
Which financial market deals with short-term borrowing and lending of liquid assets?
a) Money market
b) Capital market
c) Derivatives market
d) Equity market
Correct Answer: a) Money market
Explanation: The money market deals with short-term financial instruments that are typically highly liquid, such as Treasury bills and commercial paper
Question 07
What is the term for a series of equal payments made at the end of consecutive periods over a fixed length of time?
a) Perpetuity
b) Annuity
c) Balloon payment
d) Amortization
Correct Answer: b) Annuity
Explanation: An annuity is a series of equal payments made at regular intervals, typically at the end of each period
Question 08
Which of the following describes a perpetuity?
a) A bond that pays interest only at maturity
b) A series of equal payments that continue indefinitely
c) A loan with variable interest payments
d) A financial asset with a fixed term
Correct Answer: b) A series of equal payments that continue indefinitely
Explanation: A perpetuity is a type of financial asset that pays equal amounts at regular intervals indefinitely, with no set end date
Question 09
What does the quick ratio measure?
a) A company’s ability to pay off long-term debt
b) A company’s liquidity without considering inventory
c) The ratio of total assets to total liabilities
d) The efficiency of a company in using its assets to generate revenue
Correct Answer: b) A company’s liquidity without considering inventory
Explanation: The quick ratio, also known as the acid-test ratio, measures a company's ability to meet short-term obligations without relying on the sale of inventory
Question 10
What does the DuPont framework break down?
a) Profit margin, return on equity, and earnings per share
b) Return on assets, return on equity, and profit margin
c) Profit margin, asset turnover, and financial leverage
d) Dividend payout, profit margin, and cost of capital
Correct Answer: c) Profit margin, asset turnover, and financial leverage
Explanation: The DuPont framework breaks down return on equity (ROE) into three components: profit margin, asset turnover, and financial leverage
Question 11
Which account is considered a spontaneous account that varies with sales growth?
a) Long-term debt
b) Accounts payable
c) Retained earnings
d) Fixed assets
Correct Answer: b) Accounts payable
Explanation: Accounts payable is a spontaneous account that naturally fluctuates with sales because it involves short-term liabilities incurred as a result of sales activities.
Question 12
What is the primary goal of capital budgeting?
a) To increase shareholder value by selecting the most profitable projects
b) To minimize tax liabilities
c) To ensure compliance with regulations
d) To maximize a company’s market share
Correct Answer: a) To increase shareholder value by selecting the most profitable projects
Explanation: Capital budgeting aims to select the projects that will increase shareholder value by evaluating potential investments based on their profitability and return on investment.
Question 13
What is the profitability index (PI) used for in capital budgeting?
a) To compare the size of different projects
b) To evaluate the relative profitability of a project
c) To determine the internal rate of return of a project
d) To calculate the payback period of a project
Correct Answer: b) To evaluate the relative profitability of a project
Explanation: The profitability index (PI) is used to compare the profitability of projects by dividing the present value of cash inflows by the initial investment.
Question 14
What is the internal rate of return (IRR) in project valuation?
a) The rate at which the NPV of a project is zero
b) The return on equity generated by a project
c) The interest rate paid on a loan
d) The expected return from investing in government bonds
Correct Answer: a) The rate at which the NPV of a project is zero
Explanation: The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero, indicating the project's expected rate of return
Question 15
A firm is considering a project with a PI of 0.85. What does this indicate about the project?
a) The project is highly profitable
b) The project should be accepted
c) The project will generate cash flows 15% short of the initial investment
d) The project will return more than its initial investment
Correct Answer: c) The project will generate cash flows 15% short of the initial investment
Explanation: A PI of less than 1 means the project will generate cash flows that are less than the initial investment, suggesting it may not be profitable.
Question 16
What is a sustainable growth rate (SGR)?
a) The rate of return required by investors
b) The growth rate that allows a firm to maintain its current financial ratios
c) The maximum rate a company can grow without external financing
d) The rate of inflation adjusted for economic conditions
Correct Answer: b) The growth rate that allows a firm to maintain its current financial ratios
Explanation: The sustainable growth rate (SGR) is the maximum growth rate a company can achieve without having to issue new equity or change its financial structure.
Question 17
How can a firm reduce its discretionary financing needed (DFN)?
a) By increasing dividend payouts
b) By decreasing the profit margin
c) By increasing net margin
d) By issuing new equity
Correct Answer: c) By increasing net margin
Explanation: Increasing the net margin allows a company to generate more internal funds, reducing the need for external financing, such as debt or equity
Question 18
What is the formula for return on assets (ROA)?
a) Net income / Total equity
b) Net income / Total assets
c) Operating income / Sales
d) Operating income / Total liabilities
Correct Answer: b) Net income / Total assets
Explanation: Return on assets (ROA) is a financial metric that shows how efficiently a company uses its assets to generate profits.
Question 19
What is the purpose of financial forecasting?
a) To manage day-to-day operations
b) To predict future cash flows and financing needs
c) To create budgets for marketing expenses
d) To measure past financial performance
Correct Answer: b) To predict future cash flows and financing needs
Explanation: Financial forecasting helps a company plan for future financial needs by estimating future cash inflows and outflows based on current decisions and trends
Question 20
What is the purpose of budgeting in financial management?
a) To forecast future earnings
b) To allocate resources efficiently
c) To determine how a firm will repay its loans
d) To compare past and present financial performance
Correct Answer: b) To allocate resources efficiently
Explanation: Budgeting in financial management helps firms allocate resources efficiently by planning for future expenses, revenue, and cash flows.
