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web.groovymark@gmail.com
- December 23, 2024
Question 21
A company has earnings per share (EPS) of $4 and a price-to-earnings (P/E) ratio of 10. What is the stock price?
- a) $20
- b) $30
- c) $40
- d) $50
Answer: c) $40
Explanation: Stock price is calculated as EPS × P/E ratio. In this case: $4 × 10 = $40.
Question 22
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 risk (company-specific risk) by spreading investments across various assets, reducing overall risk.
Question 23
A company’s debt-to-equity ratio is 0.8, and its total liabilities are $800,000. What is the company’s equity?
- a) $500,000
- b) $625,000
- c) $750,000
- d) $1,000,000
Answer: d) $1,000,000
Explanation: Debt-to-equity ratio is calculated as Total Debt / Total Equity. Rearranging the formula, Total Equity = Total Debt / Debt-to-Equity Ratio. In this case: $800,000 / 0.8 = $1,000,000.
Question 24
A company issues $1,000,000 in bonds at a 5% coupon rate, paid annually. How much will the company pay in interest each year?
- a) $25,000
- b) $50,000
- c) $75,000
- d) $100,000
Answer: b) $50,000
Explanation: The annual interest payment is calculated as Face Value × Coupon Rate. In this case: $1,000,000 × 5% = $50,000.
Question 25
What does a company’s quick ratio measure?
- a) A company’s ability to meet short-term obligations without relying on inventory
- b) A company’s overall liquidity
- c) A company’s profitability relative to sales
- d) A company’s efficiency in managing debt
Answer: a) A company’s ability to meet short-term obligations without relying on inventory
Explanation: The quick ratio measures a company’s liquidity, excluding inventory, by comparing its most liquid assets (cash, receivables) to its current liabilities.
Question 26
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 future growth rate
- d) To calculate a company’s dividend payout ratio
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, taking into account both debt and equity. It serves as a hurdle rate for investments.
Question 27
A bond with a face value of $1,000 has a coupon rate of 4% and matures in 5 years. What is the total interest payment the bondholder will receive over the life of the bond?
- a) $200
- b) $400
- c) $600
- d) $800
Answer: a) $200
Explanation: The total interest payment is calculated as Face Value × Coupon Rate × Number of Years. In this case: $1,000 × 4% × 5 = $200.
Question 28
What is the primary difference between common stock and preferred stock?
- a) Common stockholders have priority over preferred stockholders in dividend payments
- b) Preferred stockholders receive fixed dividends, while common stockholders do not
- c) Common stockholders do not have voting rights
- d) Preferred stockholders have more ownership in the company
Answer: b) Preferred stockholders receive fixed dividends, while common stockholders do not
Explanation: Preferred stockholders receive fixed dividend payments and have priority over common stockholders for dividends, but they typically lack voting rights.
Question 29
A company has a beta of 1.3, a risk-free rate of 3%, and a market return of 8%. What is the expected return of the stock using the capital asset pricing model (CAPM)?
- a) 8.5%
- b) 9.0%
- c) 9.5%
- d) 10.5%
Answer: d) 10.5%
Explanation: Using CAPM, Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). In this case: 3% + 1.3 × (8% - 3%) = 10.5%.
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: 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
A company’s stock has a price-to-earnings (P/E) ratio of 18 and earnings per share (EPS) of $3. What is the company’s stock price?
- a) $45
- b) $50
- c) $54
- d) $60
Answer: c) $54
Explanation: Stock price is calculated as P/E ratio × EPS. In this case: 18 × $3 = $54.
Question 32
What is the role of the Financial Industry Regulatory Authority (FINRA)?
- a) To issue bonds on behalf of corporations
- b) To regulate and oversee securities firms
- c) To set interest rates on corporate debt
- d) To enforce U.S. tax laws
Answer: b) To regulate and oversee securities firms
Explanation: FINRA is a self-regulatory organization that oversees brokerage firms and exchange markets, ensuring compliance with securities laws.
Question 33
A company has $2,000,000 in total equity and 100,000 shares outstanding. What is its book value per share?
- a) $10
- b) $15
- c) $20
- d) $25
nswer: c) $20
Explanation: Book value per share is calculated as Total Equity / Shares Outstanding. In this case: $2,000,000 / 100,000 = $20.
Question 34
What is the primary benefit of using the internal rate of return (IRR) method in capital budgeting?
- a) It provides an easy comparison of multiple projects’ profitability
- b) It ignores the time value of money
- c) It does not require future cash flow estimates
- d) It is less complicated than other methods
Answer: a) It provides an easy comparison of multiple projects’ profitability
Explanation: The IRR method allows comparison of different projects by calculating the return rate that makes the NPV of a project zero, offering a simple way to assess profitability.
Question 35
A company’s stock has a dividend yield of 4%, and the stock price is $50. What is the annual dividend per share?
- a) $1.00
- b) $2.00
- c) $2.50
- d) $3.00
Answer: c) $2.00
Explanation: Dividend yield is calculated as Annual Dividend / Stock Price. Rearranging the formula, Annual Dividend = Dividend Yield × Stock Price. In this case: 0.04 × $50 = $2.00.
Question 36
What does a company’s accounts receivable turnover ratio measure?
- a) The company’s ability to meet long-term obligations
- b) The company’s efficiency in collecting receivables
- c) The company’s liquidity position
- d) The company’s profitability
Answer: b) The company’s efficiency in collecting receivables
Explanation: The accounts receivable turnover ratio measures how efficiently a company collects payments from customers, indicating how quickly receivables are converted into cash.
Question 37
A company has net income of $400,000 and pays dividends of $100,000. What is its retention ratio?
- a) 25%
- b) 50%
- c) 60%
- d) 75%
Answer: d) 75%
Explanation: The retention ratio is calculated as (Net Income - Dividends) / Net Income. In this case: ($400,000 - $100,000) / $400,000 = 75%.
Question 38
A company’s stock is currently priced at $40, and its earnings per share (EPS) is $4. What is its price-to-earnings (P/E) ratio?
- a) 8
- b) 10
- c) 12
- d) 15
Answer: b) 10
Explanation: P/E ratio is calculated as Stock Price / EPS. In this case: $40 / $4 = 10.
Question 39
What is the purpose of a company’s cash flow from operating activities (CFO)?
- a) To calculate the company’s future cash flows
- b) To measure cash generated from normal business operations
- c) To estimate future earnings per share
- d) To assess the company’s liquidity
Answer: b) To measure cash generated from normal business operations
Explanation: CFO measures the cash inflows and outflows related to a company’s core business activities, providing insight into its ability to generate cash from operations.
Question 40
A company’s stock has a beta of 1.5. What does this indicate?
- 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 means the stock is 50% more volatile than the market, indicating that its price is expected to move 1.5 times the market’s movements.
