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web.groovymark@gmail.com
- December 23, 2024
Question 01
A company issues new stock in the primary market. What is the primary purpose of this action?
- a) To increase stock liquidity
- b) To raise capital for the company
- c) To repurchase shares from shareholders
- d) To pay off existing debt
Answer: b) To raise capital for the company
Explanation: When a company issues new stock in the primary market, it is raising new capital by selling shares directly to investors.
Question 02
Which of the following best describes the capital asset pricing model (CAPM)?
- a) A method for calculating the future value of an investment
- b) A model that assesses a stock’s expected return based on its beta
- c) A method to calculate a bond’s duration
- d) A tool for analyzing a company’s cash flow
Answer: b) A model that assesses a stock's expected return based on its beta
Explanation: CAPM determines a stock’s expected return by considering the risk-free rate, market return, and the stock’s beta (systematic risk).
Question 03
A company reports a debt-to-equity ratio of 1.2. What does this indicate?
- a) The company has more equity than debt
- b) The company has more debt than equity
- c) The company is highly liquid
- d) The company is at risk of default
Answer: b) The company has more debt than equity
Explanation: A debt-to-equity ratio greater than 1.0 indicates that the company is using more debt than equity to finance its operations.
Question 04
A bond is priced at $1,100, and its face value is $1,000. What does this indicate about the bond?
- a) The bond is selling at a premium
- b) The bond is selling at a discount
- c) The bond is at par value
- d) The bond has defaulted
Answer: a) The bond is selling at a premium
Explanation: When a bond is priced above its face value, it is selling at a premium, typically because its coupon rate is higher than the current market interest rates.
Question 05
A company has earnings per share (EPS) of $5 and a price-to-earnings (P/E) ratio of 12. What is the company’s stock price?
- a) $50
- b) $55
- c) $60
- d) $65
Answer: c) $60
Explanation: Stock price is calculated as EPS × P/E ratio. In this case: $5 × 12 = $60.
Question 06
What is the purpose of a company’s dividend payout ratio?
- a) To measure profitability
- b) To determine the percentage of earnings paid as dividends
- c) To calculate a company’s liquidity
- d) To assess financial leverage
Answer: b) To determine the percentage of earnings paid as dividends
Explanation: The dividend payout ratio shows what percentage of a company’s earnings are distributed to shareholders as dividends.
Question 07
A company has total assets of $1,000,000 and total liabilities of $600,000. What is the company’s equity?
- a) $200,000
- b) $300,000
- c) $400,000
- d) $500,000
Answer: c) $400,000
Explanation: Equity is calculated as Total Assets - Total Liabilities. In this case: $1,000,000 - $600,000 = $400,000.
Question 08
A company’s stock has a beta of 0.8. If the risk-free rate is 2% and the market return is 8%, what is the expected return on the stock using CAPM?
- a) 5.6%
- b) 6.8%
- c) 7.2%
- d) 8.4%
Answer: b) 6.8%
Explanation: Using CAPM, Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). In this case: 2% + 0.8 × (8% - 2%) = 6.8%.
Question 09
A company’s current ratio is 1.5. What does this imply about the company’s liquidity?
- a) The company is highly liquid
- b) The company has sufficient liquidity to cover short-term liabilities
- c) The company has insufficient liquidity
- d) The company is at risk of default
Answer: b) The company has sufficient liquidity to cover short-term liabilities
Explanation: A current ratio above 1.0 indicates that the company has more current assets than current liabilities, suggesting good liquidity.
Question 10
What does the price-to-sales (P/S) ratio measure?
- a) The amount of debt a company holds
- b) The price of a company’s stock relative to its sales
- c) The company’s profitability relative to its equity
- d) The company’s liquidity position
Answer: b) The price of a company’s stock relative to its sales
Explanation: The P/S ratio compares the company’s stock price to its sales revenue, providing insight into how much investors are paying for each dollar of sales.
Question 11
A company has a market value of equity of $5,000,000 and 500,000 shares outstanding. What is the stock price?
- a) $5
- b) $10
- c) $15
- d) $20
Answer: b) $10
Explanation: Stock price is calculated as Market Value of Equity / Shares Outstanding. In this case: $5,000,000 / 500,000 = $10.
Question 12
A company has a return on equity (ROE) of 20% and a payout ratio of 40%. What is its sustainable growth rate (SGR)?
- a) 8.0%
- b) 10.0%
- c) 12.0%
- d) 15.0%
Answer: c) 12.0%
Explanation: The SGR is calculated as ROE × (1 - Payout Ratio). In this case: 20% × (1 - 0.40) = 12.0%.
Question 13
Which of the following is an example of an investing activity on the statement of cash flows?
- a) Paying off a loan
- b) Purchasing equipment
- c) Paying dividends
- d) Collecting cash from customers
Answer: b) Purchasing equipment
Explanation: Investing activities include transactions related to the purchase or sale of long-term assets, such as equipment.
Question 14
A company issues bonds with a face value of $1,000, a coupon rate of 5%, and a maturity of 10 years. What is the total interest payment over the life of the bond?
- a) $500
- b) $1,000
- c) $1,500
- d) $2,000
Answer: b) $1,000
Explanation: The total interest payment is calculated as Face Value × Coupon Rate × Number of Years. In this case: $1,000 × 5% × 10 = $1,000.
Question 15
What does a company’s debt-to-equity ratio measure?
- a) The company’s liquidity position
- b) The proportion of debt to equity used to finance the company
- c) The company’s profitability
- d) The efficiency of the company’s asset use
Answer: b) The proportion of debt to equity used to finance the company
Explanation: The debt-to-equity ratio measures the relative proportion of debt and equity financing used by the company.
Question 16
A company has total assets of $2,000,000 and total liabilities of $1,500,000. What is its equity multiplier?
- a) 1.33
- b) 2.00
- c) 2.67
- d) 3.00
Answer: b) 2.00
Explanation: The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $2,000,000 - $1,500,000 = $500,000. Therefore, Equity Multiplier = $2,000,000 / $500,000 = 2.00.
Question 17
Which of the following is an example of a secondary market transaction?
- a) A company issues new shares in an IPO
- b) A shareholder sells stock to another investor on an exchange
- c) A company repurchases its own shares
- d) A company issues corporate bonds
Answer: b) A shareholder sells stock to another investor on an exchange
Explanation: Secondary market transactions involve the trading of previously issued securities between investors, such as buying or selling stocks on an exchange.
Question 18
What is the primary advantage of using net present value (NPV) in capital budgeting?
- a) It provides a simple comparison of projects’ cash flows
- b) It accounts for the time value of money
- c) It ignores future cash flows
- d) It guarantees a positive return
Answer: b) It accounts for the time value of money
Explanation: NPV considers the time value of money by discounting future cash flows to present value, providing a comprehensive measure of a project’s profitability.
Question 19
A company’s debt ratio is 0.40, and its total assets are $800,000. What is its total debt?
- a) $200,000
- b) $320,000
- c) $400,000
- d) $500,000
Answer: b) $320,000
Explanation: The debt ratio is calculated as Total Debt / Total Assets. Rearranging the formula, Total Debt = Debt Ratio × Total Assets. In this case: 0.40 × $800,000 = $320,000.
Question 20
A company has a current ratio of 2.0. If its current liabilities are $150,000, what are its current assets?
- a) $200,000
- b) $250,000
- c) $300,000
- d) $350,000
Answer: c) $300,000
Explanation: The current ratio is calculated as Current Assets / Current Liabilities. Rearranging the formula, Current Assets = Current Ratio × Current Liabilities. In this case: 2.0 × $150,000 = $300,000.
