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web.groovymark@gmail.com
- December 25, 2024
Question 01
Which financial statement shows a company’s financial position at a specific point in time?
a) Income statement
b) Cash flow statement
c) Balance sheet
d) Statement of retained earnings
Answer: c) Balance sheet
Explanation: The balance sheet provides a snapshot of a company’s financial position, showing assets, liabilities, and equity at a specific point in time.
Question 02
What is the formula to calculate the debt-to-equity ratio?
a) Total Assets / Total Equity
b) Total Liabilities / Total Equity
c) Current Liabilities / Total Equity
d) Current Assets / Total Equity
Answer: b) Total Liabilities / Total Equity
Explanation: The debt-to-equity ratio measures a company's financial leverage by comparing its total liabilities to its total equity.
Question 03
A company’s net income is $500,000, and its total sales are $2,000,000. What is the company’s net profit margin?
a) 15%
b) 20%
c) 25%
d) 30%
Answer: b) 25%
Explanation: Net profit margin = (Net Income / Sales) × 100. In this case: ($500,000 / $2,000,000) × 100 = 25%.
Question 04
What is the purpose of a cash flow statement?
a) To calculate the company’s net income
b) To show the company’s revenues and expenses
c) To show the inflows and outflows of cash
d) To provide a list of company assets
Answer: c) To show the inflows and outflows of cash
Explanation: A cash flow statement shows how changes in the balance sheet affect cash and cash equivalents, breaking down operating, investing, and financing activities.
Question 05
If a bond has a coupon rate of 5% and a face value of $1,000, what is the annual interest payment?
a) $50
b) $75
c) $100
d) $500
Answer: a) $50
Explanation: The annual interest payment is calculated as the coupon rate multiplied by the face value. In this case: 5% of $1,000 = $50.
Question 06
What does a high current ratio indicate?
a) The company has low liquidity
b) The company has high liquidity
c) The company has more liabilities than assets
d) The company is over-leveraged
Answer: b) The company has high liquidity
Explanation: The current ratio is a measure of liquidity, with a high ratio indicating that the company can easily cover its short-term liabilities with its short-term assets.
Question 07
A company issues 1,000 shares of common stock at $10 per share. What is the total amount of equity raised?
a) $1,000
b) $10,000
c) $100,000
d) $1,000,000
Answer: b) $10,000
Explanation: The total equity raised is the number of shares issued multiplied by the price per share. In this case: 1,000 shares × $10 = $10,000.
Question 08
What type of risk can be reduced by diversification?
a) Market risk
b) Systematic risk
c) Firm-specific risk
d) Interest rate risk
Answer: c) Firm-specific risk
Explanation: Firm-specific risk, also known as unsystematic risk, can be mitigated through diversification, whereas systematic risk cannot.
Question 09
A company’s gross profit is $300,000, and its sales are $1,000,000. What is its gross profit margin?
a) 20%
b) 25%
c) 30%
d) 40%
Answer: d) 30%
Explanation: Gross profit margin = (Gross Profit / Sales) × 100. In this case: ($300,000 / $1,000,000) × 100 = 30%.
Question 10
What does the price-to-earnings (P/E) ratio measure?
a) The profitability of a company
b) The value of a stock compared to its earnings
c) The liquidity of a company
d) The leverage of a company
Answer: b) The value of a stock compared to its earnings
Explanation: The P/E ratio measures a company’s current share price relative to its per-share earnings.
Question 11
What is the primary objective of a financial manager?
a) Maximizing sales
b) Maximizing shareholder wealth
c) Minimizing expenses
d) Maximizing market share
Answer: b) Maximizing shareholder wealth
Explanation: The main goal of a financial manager is to maximize the value of the company’s stock, which in turn maximizes shareholder wealth.
Question 12
What does a negative cash flow from investing activities indicate?
a) The company is not generating enough revenue
b) The company is spending more on investments
c) The company is taking on too much debt
d) The company is not paying dividends
Answer: b) The company is spending more on investments
Explanation: Negative cash flow from investing activities typically indicates that the company is investing in assets, such as property, equipment, or securities.
Question 13
A company’s inventory turnover ratio is 5. What does this mean?
a) The company sells its inventory five times a year
b) The company buys its inventory five times a year
c) The company has 5 days of inventory on hand
d) The company’s inventory is overvalued
Answer: a) The company sells its inventory five times a year
Explanation: The inventory turnover ratio indicates how many times a company's inventory is sold and replaced over a period.
Question 14
What is the primary function of the capital markets?
a) To regulate the stock market
b) To provide liquidity for investments
c) To facilitate the raising of capital through the sale of stocks and bonds
d) To create new financial products
Answer: c) To facilitate the raising of capital through the sale of stocks and bonds
Explanation: Capital markets are venues where savings and investments are channeled between suppliers who have capital and those who need capital.
Question 15
What is the formula for return on equity (ROE)?
a) Net Income / Total Assets
b) Net Income / Total Liabilities
c) Net Income / Shareholders’ Equity
d) Net Income / Sales
Answer: c) Net Income / Shareholders' Equity
Explanation: Return on equity (ROE) measures the profitability of a company in relation to the equity.
Question 16
A bond with a face value of $1,000 is trading at $1,050. What is this bond trading at?
a) At a discount
b) At par
c) At a premium
d) Below market value
Answer: c) At a premium
Explanation: A bond is trading at a premium when its market price is above its face value.
Question 17
What is the main purpose of financial forecasting?
a) To project future revenues and expenses
b) To assess past financial performance
c) To determine stock prices
d) To calculate dividends
Answer: a) To project future revenues and expenses
Explanation: Financial forecasting helps predict future performance by estimating revenues, expenses, and capital requirements.
Question 18
A stock’s beta is 1.5. What does this mean?
a) The stock is less volatile than the market
b) The stock is equally volatile as the market
c) The stock is more volatile than the market
d) The stock has no risk
Answer: c) The stock is more volatile than the market
Explanation: A beta greater than 1 indicates that the stock is more volatile than the market.
Question 19
What does working capital represent?
a) Total assets minus total liabilities
b) Current assets minus current liabilities
c) Cash reserves minus debt
d) Long-term assets minus short-term liabilities
Answer: b) Current assets minus current liabilities
Explanation: Working capital is a measure of a company’s short-term financial health and its ability to cover short-term obligations.
Question 20
Which of the following is a non-cash expense?
a) Depreciation
b) Interest expense
c) Dividends
d) Income tax
Answer: a) Depreciation
Explanation: Depreciation is a non-cash expense because it represents the allocation of the cost of an asset over its useful life without any actual cash outflow.
