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web.groovymark@gmail.com
- December 23, 2024
Question 01
What is the primary benefit of a callable bond for the issuer?
- a) It allows the issuer to pay lower interest
- b) It allows the issuer to redeem the bond before maturity
- c) It guarantees a fixed income for the bondholder
- d) It converts debt into equity
Answer: b) It allows the issuer to redeem the bond before maturity
Explanation: Callable bonds give issuers the right to redeem the bond early, typically to refinance at lower interest rates when market rates decrease.
Question 02
A company has $2,500,000 in total equity and 250,000 shares outstanding. What is its book value per share?
- a) $5
- b) $7
- c) $8
- d) $10
Answer: d) $10
Explanation: Book value per share is calculated as Total Equity / Shares Outstanding. In this case: $2,500,000 / 250,000 = $10.
Question 03
Which financial ratio is most useful for assessing a company’s ability to meet its short-term obligations?
- a) Debt-to-equity ratio
- b) Price-to-earnings ratio
- c) Current ratio
- d) Return on equity
Answer: c) Current ratio
Explanation: The current ratio measures a company's ability to meet its short-term liabilities with its short-term assets, making it a key liquidity ratio.
Question 04
What is the impact of high financial leverage on a company’s return on equity (ROE)?
- a) It reduces ROE
- b) It increases ROE but with higher risk
- c) It has no impact on ROE
- d) It guarantees higher returns
Answer: b) It increases ROE but with higher risk
Explanation: High financial leverage amplifies ROE when returns are positive but increases the risk of large losses when returns are negative.
Question 05
What does a beta of 1.5 indicate about a stock?
- a) The stock is less volatile than the market
- b) The stock is equally volatile as the market
- c) The stock is 50% more volatile than the market
- d) The stock is 50% less volatile than the market
Answer: c) The stock is 50% more volatile than the market
Explanation: A beta of 1.5 indicates that the stock is 50% more volatile than the market, meaning it tends to increase or decrease by 1.5 times the market’s movements.
Question 06
A company has a net income of $500,000 and dividends of $100,000. What is the company’s retention ratio?
- a) 10%
- b) 20%
- c) 60%
- d) 80%
Answer: d) 80%
Explanation: The retention ratio is calculated as (Net Income - Dividends) / Net Income. In this case: ($500,000 - $100,000) / $500,000 = 80%.
Question 07
Which of the following securities is likely to offer the highest return?
- a) Treasury Bonds
- b) Corporate Bonds
- c) High-Yield Bonds
- d) Municipal Bonds
Answer: c) High-Yield Bonds
Explanation: High-yield bonds, also known as junk bonds, offer higher returns than other bonds due to the greater risk of default.
Question 08
What does a company’s quick ratio exclude that the current ratio includes?
- a) Cash
- b) Marketable securities
- c) Inventory
- d) Accounts receivable
Answer: c) Inventory
Explanation: The quick ratio excludes inventory from current assets to provide a more conservative measure of liquidity, whereas the current ratio includes inventory.
Question 09
A company has sales of $2,000,000, net income of $200,000, and total assets of $1,000,000. What is its return on assets (ROA)?
- a) 10%
- b) 15%
- c) 20%
- d) 25%
Answer: c) 20%
Explanation: ROA is calculated as Net Income / Total Assets. In this case: $200,000 / $1,000,000 = 20%.
Question 10
What is the primary advantage of preferred stock over common stock for investors?
- a) Voting rights
- b) Fixed dividends
- c) Higher capital appreciation
- d) Increased liquidity
Answer: b) Fixed dividends
Explanation: Preferred stock typically pays fixed dividends and has priority over common stockholders in receiving dividends and assets in the event of liquidation.
Question 11
A company’s price-to-earnings (P/E) ratio is 15, and its earnings per share (EPS) is $4. What is the stock price?
- a) $40
- b) $50
- c) $55
- d) $60
Answer: b) $60
Explanation: The stock price is calculated as P/E ratio × EPS. In this case: 15 × $4 = $60.
Question 12
A bond with a face value of $1,000 is currently selling for $950 and has an annual coupon rate of 5%. What is its current yield?
- a) 4.75%
- b) 5.00%
- c) 5.26%
- d) 5.50%
Answer: c) 5.26%
Explanation: The current yield is calculated as Annual Coupon Payment / Current Price. In this case: ($1,000 × 5%) / $950 = 5.26%.
Question 13
If the internal rate of return (IRR) of a project is lower than the company’s required rate of return, what should the company do?
- a) Accept the project
- b) Reject the project
- c) Adjust the project’s cost
- d) Increase the project’s risk
Answer: b) Reject the project
Explanation: If the IRR is lower than the required rate of return, the project does not meet the company’s return expectations and should be rejected.
Question 14
A company has a cost of debt of 6% and a tax rate of 30%. What is the after-tax cost of debt?
- a) 4.2%
- b) 5.0%
- c) 5.6%
- d) 6.0%
Answer: a) 4.2%
Explanation: The after-tax cost of debt is calculated as Cost of Debt × (1 - Tax Rate). In this case: 6% × (1 - 0.30) = 4.2%.
Question 15
What is the primary purpose of the Sarbanes-Oxley Act (SOX)?
- a) To protect investors from fraudulent financial reporting
- b) To reduce corporate tax rates
- c) To increase shareholder voting rights
- d) To regulate international trade
Answer: a) To protect investors from fraudulent financial reporting
Explanation: The Sarbanes-Oxley Act (SOX) was enacted to enhance transparency and accountability in corporate financial reporting, primarily to prevent fraud.
Question 16
A bond with a face value of $1,000 has a coupon rate of 6%, paid semiannually. How much will the bondholder receive in interest each year?
- a) $30
- b) $60
- c) $120
- d) $600
Answer: b) $60
Explanation: The annual interest payment is calculated as Face Value × Coupon Rate. In this case: $1,000 × 6% = $60 per year.
Question 17
What does a company’s accounts receivable turnover ratio measure?
- a) The company’s efficiency in collecting receivables
- b) The company’s ability to pay off its debts
- c) The company’s liquidity position
- d) The company’s profitability
Answer: a) The company’s efficiency in collecting receivables
Explanation: The accounts receivable turnover ratio measures how efficiently a company collects payments from its customers, indicating how quickly receivables are converted into cash.
Question 18
A company’s inventory turnover ratio is 8, and its average inventory is $150,000. What is the company’s cost of goods sold (COGS)?
- a) $900,000
- b) $1,000,000
- c) $1,200,000
- d) $1,500,000
Answer: b) $1,200,000
Explanation: COGS is calculated as Inventory Turnover × Average Inventory. In this case: 8 × $150,000 = $1,200,000.
Question 19
What does the time value of money concept imply?
- a) Money today is worth more than money in the future
- b) Money today is worth less than money in the future
- c) Money in the future has the same value as money today
- d) Money has no value until it is invested
Answer: a) Money today is worth more than money in the future
Explanation: The time value of money states that a dollar today is worth more than a dollar in the future because of its earning potential over time.
Question 20
A company has a cost of equity of 10%, a cost of debt of 5%, and a debt-to-equity ratio of 1:1. If the tax rate is 30%, what is the company’s WACC?
- a) 6.5%
- b) 7.0%
- c) 7.5%
- d) 8.0%
Answer: c) 7.5%
Explanation: WACC is calculated as (Weight of Debt × After-tax Cost of Debt) + (Weight of Equity × Cost of Equity). In this case, WACC = (0.5 × 5% × (1 - 0.30)) + (0.5 × 10%) = 7.5%.
