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web.groovymark@gmail.com
- December 23, 2024
Question 01
A company’s net income is $250,000, and it has a total asset base of $1,000,000. What is its Return on Assets (ROA)?
- a) 15%
- b) 20%
- c) 25%
- d) 30%
Answer: b) 25%
Explanation: ROA is calculated by dividing net income by total assets. In this case: $250,000 / $1,000,000 = 0.25 or 25%.
Question 02
What is the effect of depreciation on a company’s cash flow?
- a) It reduces cash flow
- b) It increases cash flow
- c) It has no impact on cash flow
- d) It increases net income
Answer: b) It increases cash flow
Explanation: Depreciation is a non-cash expense, meaning it reduces taxable income and tax liability, but it does not directly reduce cash flow. Thus, cash flow increases.
Question 03
Which financial statement shows the changes in a company’s retained earnings over a period of time?
- a) Balance Sheet
- b) Income Statement
- c) Statement of Retained Earnings
- d) Statement of Cash Flows
Answer: c) Statement of Retained Earnings
Explanation: The statement of retained earnings shows how net income and dividends affect retained earnings over a specific period.
Question 04
A company’s year-end balance sheet shows the following: Accounts Receivable = $5,000, Inventory = $7,000, and Sales = $50,000. What is the company’s Days Sales Outstanding (DSO) if the firm operates 365 days per year?
- a) 36.5 days
- b) 42.0 days
- c) 45.5 days
- d) 50.5 days
Answer: b) 36.5 days
Explanation: DSO is calculated as (Accounts Receivable / Sales) × 365. In this case: ($5,000 / $50,000) × 365 = 36.5 days.
Question 05
Which of the following best describes the term “capital budgeting”?
- a) The allocation of a company’s operating expenses
- b) The process of deciding how to allocate resources for long-term investments
- c) The method used to manage a company’s short-term assets
- d) The decision on how to finance current liabilities
Answer: b) The process of deciding how to allocate resources for long-term investments
Explanation: Capital budgeting refers to the process of planning and managing a company’s long-term investments in assets like property, machinery, and new projects.
Question 06
If a company’s return on equity (ROE) is higher than the industry average, what does this indicate?
- a) The company has a higher liquidity than the industry
- b) The company is generating more profits from its equity than the industry average
- c) The company has more debt than its competitors
- d) The company’s stock is undervalued
Answer: b) The company is generating more profits from its equity than the industry average
Explanation: A higher ROE indicates that the company is more efficient at generating profits from shareholders' equity compared to other companies in the industry.
Question 07
What happens to a bond’s price when interest rates fall below the bond’s coupon rate?
- a) The bond’s price falls below par
- b) The bond’s price rises above par
- c) The bond’s price remains unchanged
- d) The bond’s yield increases
Answer: b) The bond’s price rises above par
Explanation: When interest rates fall below a bond’s coupon rate, the bond becomes more attractive to investors, which drives up its price above par value.
Question 08
What is the effect of using more debt in a company’s capital structure?
- a) It increases financial leverage
- b) It decreases financial risk
- c) It reduces the company’s cost of equity
- d) It increases operational efficiency
Answer: a) It increases financial leverage
Explanation: Using more debt increases financial leverage, which can amplify returns but also increases the financial risk due to the obligation to make interest payments.
Question 09
If a company pays $1,000 in interest on its debt and has an EBIT of $5,000, what is its Times Interest Earned (TIE) ratio?
- a) 2.0
- b) 3.0
- c) 4.0
- d) 5.0
Answer: c) 5.0
Explanation: The TIE ratio is calculated as EBIT / Interest Expense. In this case: $5,000 / $1,000 = 5.0.
Question 10
Which of the following transactions would be classified under financing activities on the statement of cash flows?
- a) Cash received from sales
- b) Cash paid for inventory purchases
- c) Cash dividends paid to shareholders
- d) Cash used to purchase new equipment
Answer: c) Cash dividends paid to shareholders
Explanation: Financing activities include transactions involving debt, equity, and dividends. Paying dividends is a financing activity, while sales, inventory purchases, and equipment purchases are operating or investing activities.
Question 11
What is the significance of the Weighted Average Cost of Capital (WACC) for a company?
- a) It determines the price of a company’s stock
- b) It represents the company’s cost of equity only
- c) It represents the minimum return a company must earn on its investments
- d) It measures the risk-free rate of return for the company
Answer: c) It represents the minimum return a company must earn on its investments
Explanation: WACC is the average rate a company must pay for both debt and equity capital. It is the minimum return the company needs to generate to satisfy its investors.
Question 12
A company’s fixed costs are $20,000, and its contribution margin is $5 per unit. How many units must the company sell to break even?
- a) 2,000 units
- b) 3,000 units
- c) 4,000 units
- d) 5,000 units
Answer: d) 4,000 units
Explanation: The break-even point is calculated by dividing fixed costs by the contribution margin per unit. In this case: $20,000 / $5 = 4,000 units.
Question 13
Which financial ratio indicates how many times a company’s inventory is sold and replaced over a period?
- a) Current Ratio
- b) Inventory Turnover Ratio
- c) Return on Equity (ROE)
- d) Debt-to-Equity Ratio
Answer: b) Inventory Turnover Ratio
Explanation: The inventory turnover ratio measures how efficiently a company manages its inventory by showing how many times inventory is sold and replaced over a specific period.
Question 14
What is the main difference between operating leverage and financial leverage?
- a) Operating leverage refers to fixed costs, while financial leverage refers to debt
- b) Operating leverage measures liquidity, while financial leverage measures profitability
- c) Operating leverage is controlled by external factors, while financial leverage is internal
- d) Operating leverage reduces risk, while financial leverage increases it
Answer: a) Operating leverage refers to fixed costs, while financial leverage refers to debt
Explanation: Operating leverage measures the impact of fixed costs on a company’s earnings, while financial leverage refers to the use of debt to finance operations.
Question 15
A bond is currently priced at $950, has a face value of $1,000, and pays an annual coupon of 5%. What is the bond’s current yield?
- a) 4.5%
- b) 5.0%
- c) 5.26%
- d) 6.0%
Answer: c) 5.26%
Explanation: Current yield is calculated as the annual coupon payment divided by the bond’s price. In this case: ($1,000 × 5%) / $950 = 5.26%.
Question 16
If a company’s current ratio is 2.0, what does this indicate?
- a) The company has too much debt
- b) The company can cover its short-term liabilities twice over with its current assets
- c) The company is not generating enough revenue
- d) The company’s long-term liabilities exceed its assets
Answer: b) The company can cover its short-term liabilities twice over with its current assets
Explanation: A current ratio of 2.0 means that for every dollar of short-term liabilities, the company has two dollars of current assets, indicating good liquidity.
Question 17
What is the primary purpose of the Statement of Cash Flows?
- a) To report a company’s revenue and expenses over a period of time
- b) To show the financial position of the company at a point in time
- c) To provide a detailed report on a company’s cash inflows and outflows
- d) To calculate a company’s profitability
Answer: c) To provide a detailed report on a company’s cash inflows and outflows
Explanation: The Statement of Cash Flows reports the cash inflows and outflows from operating, investing, and financing activities over a specific period, giving insight into a company’s liquidity.
Question 18
If a bond is callable, what does this mean?
- a) The bond can be converted into stock
- b) The bond issuer can pay off the bond before maturity
- c) The bondholder has the right to sell the bond back to the issuer
- d) The bond must be held until maturity
Answer: b) The bond issuer can pay off the bond before maturity
Explanation: A callable bond allows the issuer to redeem the bond before its maturity date, typically to take advantage of lower interest rates.
Question 19
What does the price-to-sales (P/S) ratio measure?
- a) The relationship between a company’s stock price and its earnings
- b) The value investors place on a company’s revenue
- c) The profitability of a company’s assets
- d) The proportion of sales made on credit
Answer: b) The value investors place on a company’s revenue
Explanation: The price-to-sales ratio measures how much investors are willing to pay for each dollar of a company’s sales or revenue. It is a valuation measure.
Question 20
A company has $2,000,000 in assets and $1,200,000 in liabilities. What is the company’s equity?
- a) $500,000
- b) $600,000
- c) $800,000
- d) $1,200,000
Answer: c) $800,000
Explanation: Equity is calculated as Assets - Liabilities. In this case: $2,000,000 - $1,200,000 = $800,000.
