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web.groovymark@gmail.com
- December 23, 2024
Question 21
What is the effect of an increase in accounts receivable on a company’s cash flow from operations?
- a) Cash flow increases
- b) Cash flow decreases
- c) Cash flow remains unchanged
- d) Cash flow becomes negative
Answer: b) Cash flow decreases
Explanation: An increase in accounts receivable represents sales that have not yet been collected in cash, which reduces cash flow from operations.
Question 22
A company’s total assets are $800,000, and its total liabilities are $500,000. What is the company’s debt ratio?
- a) 0.50
- b) 0.60
- c) 0.625
- d) 0.75
Answer: c) 0.625
Explanation: The debt ratio is calculated as Total Liabilities / Total Assets. In this case: $500,000 / $800,000 = 0.625.
Question 23
What is the primary difference between common stock and preferred stock?
- a) Common stockholders receive fixed dividends, while preferred stockholders do not
- b) Preferred stockholders have priority over common stockholders in dividend payments
- c) Common stockholders have priority in liquidation over preferred stockholders
- d) Preferred stockholders have voting rights, while common stockholders do not
Answer: b) Preferred stockholders have priority over common stockholders in dividend payments
Explanation: Preferred stockholders are entitled to receive dividends before common stockholders and have a higher claim on assets in the event of liquidation.
Question 24
What is the purpose of a dividend payout ratio?
- a) To measure a company’s profitability
- b) To determine the percentage of earnings paid to shareholders as dividends
- c) To estimate the company’s future stock price
- d) To calculate a company’s cash flow
Answer: b) To determine the percentage of earnings paid to shareholders as dividends
Explanation: The dividend payout ratio measures the proportion of a company’s earnings that are paid out as dividends to shareholders.
Question 25
A company has an ROE of 12% and a retention ratio of 60%. What is its sustainable growth rate (SGR)?
- a) 4.8%
- b) 6.0%
- c) 7.2%
- d) 9.6%
Answer: c) 7.2%
Explanation: The SGR is calculated as ROE × Retention Ratio. In this case: 12% × 60% = 7.2%.
Question 26
Which of the following is a characteristic of common stock?
- a) Fixed dividend payments
- b) Voting rights
- c) Seniority over bonds in bankruptcy
- d) Priority over preferred stock in dividends
Answer: b) Voting rights
Explanation: Common stockholders typically have voting rights, while preferred stockholders usually do not. Common stockholders do not have priority over bonds or preferred stock in the event of bankruptcy or dividend payments.
Question 27
A bond has a face value of $1,000, a coupon rate of 6%, and matures in 5 years. What is the total interest payment the bondholder will receive over the life of the bond?
- a) $120
- b) $300
- c) $600
- d) $1,000
Answer: c) $600
Explanation: The total interest payment is calculated as Annual Coupon Payment × Number of Years. In this case: ($1,000 × 6%) × 5 = $600.
Question 28
What is the impact of an increase in market interest rates on the price of existing bonds?
- a) Bond prices increase
- b) Bond prices decrease
- c) Bond prices remain the same
- d) Bond prices become more volatile
Answer: b) Bond prices decrease
Explanation: When market interest rates increase, the prices of existing bonds decrease because their fixed coupon payments become less attractive compared to new bonds with higher rates.
Question 29
What is the primary purpose of diversification in investing?
- a) To maximize returns
- b) To reduce unsystematic risk
- c) To increase liquidity
- d) To hedge against currency risk
Answer: b) To reduce unsystematic risk
Explanation: Diversification reduces unsystematic (company-specific) risk by spreading investments across different assets, thus reducing the overall risk of the portfolio.
Question 30
A company has $800,000 in total assets and $500,000 in total liabilities. What is its debt-to-equity ratio?
- a) 0.5
- b) 0.75
- c) 1.0
- d) 1.25
Answer: a) 0.5
Explanation: The debt-to-equity ratio is calculated as Total Liabilities / Total Equity. Total Equity = $800,000 - $500,000 = $300,000. Therefore, Debt-to-Equity = $500,000 / $300,000 = 0.5.
Question 31
What is the primary purpose of the weighted average cost of capital (WACC)?
- a) To calculate a company’s stock price
- b) To determine the minimum return a company needs to justify an investment
- c) To estimate a company’s net income
- d) To assess a company’s risk-free rate
Answer: b) To determine the minimum return a company needs to justify an investment
Explanation: WACC represents the average rate a company must pay to finance its assets, considering both debt and equity, and serves as a hurdle rate for investment decisions.
Question 32
A company has total liabilities of $300,000 and total equity of $700,000. What is its debt-to-equity ratio?
- a) 0.3
- b) 0.43
- c) 0.50
- d) 0.75
Answer: b) 0.43
Explanation: The debt-to-equity ratio is calculated as Total Liabilities / Total Equity. In this case: $300,000 / $700,000 = 0.43.
Question 33
What does the term “capital structure” refer to in finance?
- a) A company’s allocation of assets and liabilities
- b) The mixture of debt and equity used to finance a company’s operations
- c) A company’s short-term financing options
- d) The total market value of a company’s assets
Answer: b) The mixture of debt and equity used to finance a company’s operations
Explanation: Capital structure refers to the combination of debt and equity that a company uses to finance its operations and growth.
Question 34
What is the primary goal of financial management for a publicly traded company?
- a) Maximizing shareholder wealth
- b) Minimizing taxes
- c) Reducing operating expenses
- d) Increasing employee satisfaction
Answer: a) Maximizing shareholder wealth
Explanation: The primary goal of financial management for a publicly traded company is to maximize shareholder wealth, typically through increasing stock price and dividends.
Question 35
A company has $200,000 in cash, $300,000 in accounts receivable, and $100,000 in inventory. Its current liabilities are $400,000. What is its quick ratio?
- a) 1.0
- b) 1.25
- c) 1.5
- d) 1.75
Answer: b) 1.25
Explanation: The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. In this case: ($200,000 + $300,000 - $100,000) / $400,000 = 1.25.
Question 36
Which of the following is considered a spontaneous source of financing?
- a) Issuing bonds
- b) Issuing common stock
- c) Accounts payable
- d) Retained earnings
Answer: c) Accounts payable
Explanation: Accounts payable is a spontaneous source of financing because it arises naturally from business operations and doesn’t require formal arrangements like issuing bonds or stock.
Question 37
A company has a market value of equity of $1,000,000 and a market value of debt of $400,000. What is its debt-to-equity ratio?
- a) 0.4
- b) 0.5
- c) 0.6
- d) 0.8
Answer: a) 0.4
Explanation: The debt-to-equity ratio is calculated as Market Value of Debt / Market Value of Equity. In this case: $400,000 / $1,000,000 = 0.4.
Question 38
What is the effect of an increase in a company’s debt on its financial leverage?
- a) Financial leverage decreases
- b) Financial leverage remains the same
- c) Financial leverage increases
- d) Financial leverage becomes negative
Answer: c) Financial leverage increases
Explanation: Financial leverage refers to the use of debt to finance a company’s assets. As a company takes on more debt, its financial leverage increases.
Question 39
A company’s stock has a beta of 1.2. If the market return is expected to be 10%, and the risk-free rate is 3%, what is the stock’s expected return according to CAPM?
- a) 9.6%
- b) 10.4%
- c) 11.2%
- d) 12.4%
Answer: d) 12.4%
Explanation: Using CAPM, Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). In this case: 3% + 1.2 × (10% - 3%) = 12.4%.
Question 40
What is the effect of a company repurchasing its own shares on its earnings per share (EPS)?
- a) EPS decreases
- b) EPS increases
- c) EPS remains unchanged
- d) EPS is diluted
Answer: b) EPS increases
Explanation: When a company repurchases shares, the number of shares outstanding decreases, which increases the earnings per share, assuming net income remains constant.
