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web.groovymark@gmail.com
- December 23, 2024
Question 41
A company has a net income of $300,000 and pays out $50,000 in dividends. What is the company’s retention ratio?
- a) 10%
- b) 20%
- c) 66.7%
- d) 83.3%
Answer: d) 83.3%
Explanation: The retention ratio is calculated as (Net Income - Dividends) / Net Income. In this case: ($300,000 - $50,000) / $300,000 = 83.3%.
Question 42
What is the main purpose of issuing preferred stock?
- a) To raise capital without diluting common shareholders’ voting rights
- b) To increase leverage
- c) To reduce operational risk
- d) To hedge against market volatility
Answer: a) To raise capital without diluting common shareholders’ voting rights
Explanation: Preferred stock allows companies to raise capital without giving preferred shareholders voting rights, thereby preserving the voting power of common shareholders.
Question 43
If the internal rate of return (IRR) of a project is equal to the company’s cost of capital, what is the project’s net present value (NPV)?
- a) Positive
- b) Negative
- c) Zero
- d) Cannot be determined
Answer: c) Zero
Explanation: When the IRR equals the company’s cost of capital, the NPV of the project is zero, meaning the project earns just enough to cover its costs but generates no additional value.
Question 44
Which of the following securities is most likely to be used by a risk-averse investor seeking stable returns?
- a) Common Stock
- b) Treasury Bonds
- c) High-Yield Bonds
- d) Foreign Currency
Answer: b) Treasury Bonds
Explanation: Treasury bonds are low-risk, government-backed securities that provide stable returns, making them ideal for risk-averse investors.
Question 45
What is the main advantage of using the Net Present Value (NPV) method in capital budgeting?
- a) It does not require a discount rate
- b) It ignores the time value of money
- c) It accounts for all cash flows and time value of money
- d) It is easier to calculate than other methods
Answer: c) It accounts for all cash flows and time value of money
Explanation: NPV takes into account all future cash flows and discounts them to present value, providing a comprehensive measure of a project’s profitability.
Question 46
A company has $5,000 in current assets, $2,000 in inventory, and $2,000 in current liabilities. What is its quick ratio?
- a) 1.0
- b) 1.5
- c) 2.0
- d) 2.5
Answer: a) 1.0
Explanation: The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. In this case: ($5,000 - $2,000) / $2,000 = 1.0.
Question 47
Which of the following is considered a hybrid security?
- a) Common Stock
- b) Preferred Stock
- c) Treasury Bonds
- d) Convertible Bonds
Answer: b) Preferred Stock
Explanation: Preferred stock is considered a hybrid security because it has characteristics of both equity (ownership) and debt (fixed dividends).
Question 48
What does the degree of financial leverage (DFL) measure?
- a) The impact of fixed costs on operating income
- b) The sensitivity of a company’s pre-tax profits to changes in sales
- c) The proportion of debt in a company’s capital structure
- d) The company’s ability to repay long-term debt
Answer: b) The sensitivity of a company’s pre-tax profits to changes in sales
Explanation: DFL measures the effect of changes in operating income on pre-tax profits, showing how sensitive a company’s profits are to its leverage.
Question 49
A company with high operating leverage is likely to experience:
- a) High profitability in good times and significant losses in bad times
- b) Stable earnings regardless of changes in sales
- c) Low fixed costs
- d) Less financial risk
Answer: a) High profitability in good times and significant losses in bad times
Explanation: High operating leverage means a company has high fixed costs, so its profits are more sensitive to changes in sales. This leads to high profits when sales are good but larger losses when sales decline.
Question 50
What is the purpose of a bond indenture?
- a) To set the bond’s coupon rate
- b) To outline the terms and conditions of a bond issue
- c) To guarantee the bond’s repayment
- d) To determine the bond’s market price
Answer: b) To outline the terms and conditions of a bond issue
Explanation: A bond indenture is a legal document that outlines the specific terms and conditions of a bond issue, including the coupon rate, maturity date, and any covenants.
