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web.groovymark@gmail.com
- December 23, 2024
Question 21
A stock pays a $3 annual dividend and is currently priced at $60. What is the stock’s dividend yield?
- a) 3%
- b) 5%
- c) 6%
- d) 7%
Answer: b) 5%
Explanation: The dividend yield is calculated by dividing the annual dividend by the stock price. In this case, $3 / $60 = 0.05 or 5%.
Question 22
A company wants to decrease its working capital. Which of the following actions would achieve this?
- a) Increasing cash reserves
- b) Reducing inventory levels
- c) Taking on more short-term debt
- d) Delaying payments to suppliers
Answer: b) Reducing inventory levels
Explanation: Reducing inventory decreases current assets, which lowers working capital. Increasing cash or delaying payments would increase working capital, while taking on more debt impacts liquidity but not directly working capital.
Question 23
Which of the following is an example of systematic risk?
- a) A CEO resignation
- b) A factory fire
- c) An economic recession
- d) A product recall
Answer: c) An economic recession
Explanation: Systematic risk affects the entire market or economy, such as a recession. The other options are examples of unsystematic (company-specific) risks.
Question 24
What is the formula for the price-to-earnings (P/E) ratio?
- a) Price per share / Book value per share
- b) Price per share / Earnings per share
- c) Net income / Revenue
- d) Earnings per share / Price per share
Answer: b) Price per share / Earnings per share
Explanation: The P/E ratio is calculated as the stock price divided by earnings per share, which helps investors assess how much they are paying for each dollar of earnings.
Question 25
Which of the following best describes the concept of opportunity cost?
- a) The cost of a project that has already been incurred
- b) The potential gain lost by choosing one option over another
- c) The expenses directly related to a specific project
- d) The cost of equity financing for a firm
Answer: b) The potential gain lost by choosing one option over another
Explanation: Opportunity cost represents the benefits an individual or company misses out on when choosing one alternative over another. It does not refer to incurred costs or financing expenses.
Question 26
If a bond’s coupon rate is higher than the current market interest rate, the bond will likely sell for:
- a) Par value
- b) A discount
- c) A premium
- d) Face value
Answer: c) A premium
Explanation: When the coupon rate exceeds current market rates, the bond offers more attractive interest payments than newly issued bonds, so investors are willing to pay more than face value (a premium).
Question 27
Which financial ratio measures a company’s efficiency in using its assets to generate sales?
- a) Asset Turnover
- b) Quick Ratio
- c) Debt-to-Equity Ratio
- d) Return on Equity
Answer: a) Asset Turnover
Explanation: The asset turnover ratio measures how efficiently a company uses its assets to generate sales. The other ratios focus on liquidity, leverage, and profitability.
Question 28
A company’s net income is $500,000, and it has 1,000,000 shares outstanding. What is the company’s earnings per share (EPS)?
- a) $0.50
- b) $1.00
- c) $2.00
- d) $5.00
Answer: b) $0.50
Explanation: Earnings per share is calculated as net income divided by the number of shares outstanding. In this case, $500,000 / 1,000,000 = $0.50.
Question 29
What is the main advantage of a revolving credit agreement over a traditional loan?
- a) It has a lower interest rate
- b) It provides flexibility in borrowing amounts
- c) It does not require collateral
- d) It has no repayment schedule
Which of the following ratios measures a firm’s ability to generate earnings from its equity?
Question 30
How does a company reduce its cost of capital?
- a) Return on Assets (ROA)
- b) Current Ratio
- c) Return on Equity (ROE)
- d) Price-to-Earnings Ratio (P/E)
Answer: c) Return on Equity (ROE)
Explanation: ROE measures the company’s ability to generate earnings from equity, while ROA measures profitability from assets. Current Ratio and P/E measure liquidity and valuation, respectively.
Question 31
In which situation would a firm prefer to issue debt over equity?
- a) When the company is highly leveraged
- b) When interest rates are high
- c) When the cost of debt is lower than the cost of equity
- d) When shareholders demand higher dividends
Answer: c) When the cost of debt is lower than the cost of equity
Explanation: Firms prefer issuing debt over equity when the cost of debt is lower, as it reduces financing costs and preserves ownership, unlike equity financing, which dilutes ownership.
Question 32
Which of the following is true about the cost of equity?
- a) It is always higher than the cost of debt
- b) It is the interest rate a company pays on loans
- c) It is the return required by equity investors
- d) It does not change with market conditions
Answer: c) It is the return required by equity investors
Explanation: The cost of equity is the return investors expect for their investment in the company’s equity. It is not a loan interest rate and can vary depending on the market and company risk.
Question 33
Which of the following represents the formula for the sustainable growth rate?
- a) ROE × (1 – Dividend Payout Ratio)
- b) Profit Margin × Dividend Payout Ratio
- c) ROA × Total Assets Turnover
- d) Net Income / Equity
Answer: a) ROE × (1 - Dividend Payout Ratio)
Explanation: The sustainable growth rate represents how fast a company can grow without needing additional financing and is calculated as ROE × (1 - Dividend Payout Ratio).
Question 34
A company’s total assets are $500,000, and its equity is $300,000. What is the company’s equity multiplier?
- a) 0.6
- b) 1.5
- c) 2.0
- d) 2.5
Answer: b) 1.5
Explanation: The equity multiplier is calculated as Total Assets / Equity. In this case, $500,000 / $300,000 = 1.5. The higher the equity multiplier, the more the company is using debt to finance its assets.
Question 35
What does the cost of debt represent for a firm?
- a) The total interest paid on all loans
- b) The effective interest rate on borrowed funds
- c) The amount a company must pay for future growth
- d) The value of equity divided by debt
Answer: b) The effective interest rate on borrowed funds
Explanation: The cost of debt is the effective interest rate a company pays on its borrowed funds, reflecting the cost of financing through debt.
Question 36
What impact does an increase in the debt-to-equity ratio have on a company’s risk profile?
- a) Reduces financial risk
- b) Increases financial risk
- c) Reduces operational risk
- d) Has no effect on risk
Answer: b) Increases financial risk
Explanation: A higher debt-to-equity ratio increases financial risk because the company becomes more reliant on debt, which creates obligations for interest and principal payments.
Question 37
What is the key feature of common stock that differentiates it from preferred stock?
- a) Common stock has no voting rights
- b) Common stockholders receive dividends before preferred stockholders
- c) Common stockholders have a residual claim on assets
- d) Common stock is always worth more than preferred stock
Answer: c) Common stockholders have a residual claim on assets
Explanation: Common stockholders have a residual claim, meaning they receive whatever remains after debt and preferred shareholders are paid in the event of liquidation.
Question 38
Which of the following bonds is issued in a foreign country but denominated in the issuer’s currency?
- a) Yankee bond
- b) Samurai bond
- c) Bulldog bond
- d) Eurobond
Answer: d) Eurobond
Explanation: A Eurobond is issued in a country other than the one in whose currency it is denominated. Yankee, Samurai, and Bulldog bonds are issued in foreign countries but denominated in the local currency.
Question 39
A company’s sales are projected to increase by 10%, and its operating leverage is 3. What is the expected percentage increase in operating income?
- a) 10%
- b) 15%
- c) 20%
- d) 30%
Answer: d) 30%
Explanation: Operating leverage magnifies the impact of changes in sales on operating income. With an operating leverage of 3, a 10% increase in sales would result in a 30% increase in operating income (10% × 3).
Question 40
If a company’s cost of capital is 8% and its project has a net present value (NPV) of $0, what can be said about the project’s internal rate of return (IRR)?
- a) The IRR is less than 8%
- b) The IRR is equal to 8%
- c) The IRR is greater than 8%
- d) The IRR cannot be determined
Answer: b) The IRR is equal to 8%
Explanation: When a project’s NPV is zero, the internal rate of return (IRR) is exactly equal to the company’s cost of capital, meaning the project earns just enough to cover the cost of the investment.
