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web.groovymark@gmail.com
- November 28, 2024
Question 21
What is a discretionary financing need (DFN)?
a) The amount of financing required to fund growth beyond internal funds
b) The amount a firm can grow without external financing
c) The total amount of equity a company needs
d) The amount needed to cover a company’s liabilities
Correct Answer: a) The amount of financing required to fund growth beyond internal funds
Explanation: DFN represents the external funds needed by a firm to support its expected growth when internal resources are insufficient
Question 22
What is capital budgeting?
a) The process of allocating resources to long-term investments
b) The process of setting short-term financial goals
c) The method used to determine a company’s tax liability
d) The assessment of a firm’s current liquidity
Correct Answer: a) The process of allocating resources to long-term investments
Explanation: Capital budgeting involves planning and evaluating long-term investment projects to ensure they align with a company's financial goals
Question 23
What is a positive net present value (NPV) indicative of in a project evaluation?
a) The project will generate more value than its cost
b) The project will break even
c) The project will lose money
d) The project will not require any external financing
Correct Answer: a) The project will generate more value than its cost
Explanation: A positive NPV indicates that the present value of cash inflows from the project exceeds its cost, suggesting profitability
Question 24
How does an inverted yield curve typically affect the economy?
a) It signals future economic growth
b) It signals a potential economic downturn
c) It has no effect on the economy
d) It indicates a rise in inflation
Correct Answer: b) It signals a potential economic downturn
Explanation: An inverted yield curve, where short-term interest rates are higher than long-term rates, often signals an impending economic slowdown or recession
Question 25
What is financial leverage?
a) The use of equity to finance operations
b) The use of debt to increase the potential return on equity
c) The amount of retained earnings a company has
d) The total amount of a company’s assets
Correct Answer: b) The use of debt to increase the potential return on equity
Explanation: Financial leverage refers to the use of borrowed funds to increase the return on equity for shareholders, but it also increases the risk
Question 26
What is the role of a chief financial officer (CFO)?
a) To manage human resources and staffing decisions
b) To oversee financial planning, budgeting, and financial analysis
c) To oversee marketing and sales strategies
d) To create corporate tax strategies
Correct Answer: b) To oversee financial planning, budgeting, and financial analysis
Explanation: The CFO is responsible for managing the financial aspects of a company, including planning, analysis, and risk management
Question 27
What is the purpose of the payback period method in capital budgeting?
a) To measure the profitability of a project
b) To determine how long it will take to recoup an investment
c) To estimate the total cost of a project
d) To calculate the rate of return on a project
Correct Answer: b) To determine how long it will take to recoup an investment
Explanation: The payback period measures the time it will take for the initial investment to be recovered from the project’s cash inflows.
Question 28
Which financial statement shows a company’s financial performance over a period of time?
a) Balance sheet
b) Income statement
c) Cash flow statement
d) Statement of retained earnings
Correct Answer: b) Income statement
Explanation: The income statement shows a company's revenues, expenses, and profits over a specific period, such as a quarter or a year
Question 29
What is a liquidity ratio?
a) A ratio that measures a company’s profitability
b) A ratio that measures how quickly a company can convert assets into cash
c) A ratio that determines a company’s debt-to-equity ratio
d) A ratio that assesses long-term financial stability
Correct Answer: b) A ratio that measures how quickly a company can convert assets into cash
Explanation: Liquidity ratios measure a company's ability to pay off its short-term obligations using its liquid assets
Question 30
What is a current ratio?
a) Total liabilities divided by total assets
b) Total current assets divided by total current liabilities
c) Total debt divided by total equity
d) Total cash flow divided by net income
Correct Answer: b) Total current assets divided by total current liabilities
Explanation: The current ratio measures a company’s ability to pay off its short-term liabilities with its current assets
Question 31
What does working capital represent?
a) The total assets of a company
b) The difference between a company’s current assets and current liabilities
c) The equity held by shareholders
d) The profit a company earns after taxes
Correct Answer: b) The difference between a company's current assets and current liabilities
Explanation: Working capital is a financial metric representing the operating liquidity available to a company for day-to-day operations
Question 32
What is the purpose of the debt-to-equity ratio?
a) To measure how much debt a company is using relative to its equity
b) To measure a company’s profitability
c) To determine how efficiently a company is using its assets
d) To evaluate a company’s stock price
Correct Answer: a) To measure how much debt a company is using relative to its equity
Explanation: The debt-to-equity ratio measures the relative proportion of a company’s financing that comes from creditors versus shareholders
Question 33
What does the term “cost of capital” refer to?
a) The cost of producing goods and services
b) The return that lenders and shareholders expect for investing in a company
c) The amount of capital needed to start a new project
d) The total value of a company’s assets
Correct Answer: b) The return that lenders and shareholders expect for investing in a company
Explanation: The cost of capital represents the return that a company must generate to satisfy its creditors and shareholders for their investment
Question 34
What is an ordinary annuity?
a) A series of equal payments made at the beginning of each period
b) A series of equal payments made at the end of consecutive periods
c) A one-time payment received after a specific time
d) A bond that pays interest regularly
Correct Answer: b) A series of equal payments made at the end of consecutive periods
Explanation: An ordinary annuity involves equal payments made at the end of each period over a fixed time frame, such as monthly or yearly payments.
Question 35
What is a callable bond?
a) A bond that can be repaid before its maturity date by the issuer
b) A bond that pays no interest until maturity
c) A bond that is converted into equity
d) A bond that the holder can sell before maturity
Correct Answer: a) A bond that can be repaid before its maturity date by the issuer
Explanation: Callable bonds allow the issuer to redeem the bond before its maturity date, usually to refinance at a lower interest rate.
Question 36
What is a primary financial market?
a) A market where previously issued securities are traded among investors
b) A market where new securities are issued to raise capital
c) A market where bonds are bought and sold by individuals
d) A market that deals with foreign exchange
Correct Answer: b) A market where new securities are issued to raise capital
Explanation: The primary market is where new securities, such as stocks and bonds, are issued by companies to raise capital.
Question 37
What is an initial public offering (IPO)?
a) The process of a company buying back its shares
b) The first sale of stock by a private company to the public
c) The payment of dividends to shareholders
d) The issuance of bonds by a government agency
Correct Answer: b) The first sale of stock by a private company to the public
Explanation: An IPO is when a company first offers its stock to the public as a way of raising capital and transitioning from private to public.
Question 38
What is a secondary financial market?
a) A market where new securities are issued
b) A market where previously issued securities are bought and sold
c) A market for short-term borrowing and lending
d) A market where government bonds are traded
Correct Answer: b) A market where previously issued securities are bought and sold
Explanation: The secondary market is where investors trade securities that were initially issued in the primary market, such as stocks and bonds
Question 39
What is the purpose of the money market?
a) To provide short-term borrowing and lending opportunities
b) To facilitate long-term investments
c) To trade government bonds and notes
d) To issue new corporate stocks
Correct Answer: a) To provide short-term borrowing and lending opportunities
Explanation: The money market is a sector where short-term borrowing and lending, typically for periods of one year or less, take place
Question 40
What is the difference between the primary and secondary markets?
a) The primary market deals with the sale of new securities, while the secondary market deals with trading existing securities
b) The primary market is for short-term securities, and the secondary market is for long-term investments
c) The primary market is for government bonds, and the secondary market is for corporate stocks
d) The primary market is for trading derivatives, and the secondary market is for trading bonds
Correct Answer: a) The primary market deals with the sale of new securities, while the secondary market deals with trading existing securities
Explanation: In the primary market, companies issue new securities to raise capital, whereas in the secondary market, investors buy and sell existing securities among themselves.
