-
web.groovymark@gmail.com
- December 25, 2024
Question 21
What does the quick ratio exclude that the current ratio includes?
a) Cash
b) Inventory
c) Accounts receivable
d) Marketable securities
Answer: b) Inventory
Explanation: The quick ratio excludes inventory, providing a more stringent test of a company’s liquidity compared to the current ratio.
Question 22
What is the key difference between common stock and preferred stock?
a) Common stockholders have voting rights, while preferred stockholders do not
b) Preferred stockholders receive dividends, while common stockholders do not
c) Common stockholders are paid before preferred stockholders in case of liquidation
d) Preferred stockholders cannot sell their shares
Answer: a) Common stockholders have voting rights, while preferred stockholders do not
Explanation: Common stockholders typically have voting rights, whereas preferred stockholders generally do not, but they have a higher claim on assets in case of liquidation.
Question 23
What is the formula to calculate the times interest earned (TIE) ratio?
a) EBIT / Interest expense
b) Net Income / Interest expense
c) Sales / Interest expense
d) Total Assets / Interest expense
Answer: a) EBIT / Interest expense
Explanation: The TIE ratio measures a company’s ability to meet its interest obligations, calculated by dividing earnings before interest and taxes (EBIT) by interest expense.
Question 24
A company has total liabilities of $200,000 and total equity of $300,000. What is the debt-to-equity ratio?
a) 0.5
b) 0.67
c) 1.5
d) 2.0
Answer: b) 0.67
Explanation: Debt-to-equity ratio = Total Liabilities / Total Equity. In this case: $200,000 / $300,000 = 0.67.
Question 25
What does the term “leverage” refer to in finance?
a) Using borrowed capital to increase potential returns
b) Using equity to pay off debt
c) Avoiding risk by investing in bonds
d) Liquidating assets for cash
Answer: a) Using borrowed capital to increase potential returns
Explanation: Leverage refers to using borrowed funds to finance investments, with the goal of increasing returns on equity.
Question 26
What is the primary risk faced by bondholders?
a) Inflation risk
b) Default risk
c) Liquidity risk
d) Currency risk
Answer: b) Default risk
Explanation: Bondholders face the risk that the issuer may default on payments, meaning they may not receive the full interest and principal owed.
Question 27
Which of the following is a capital budgeting technique?
a) Current ratio
b) Net present value (NPV)
c) Earnings per share (EPS)
d) Price-to-earnings (P/E) ratio
Answer: b) Net present value (NPV)
Explanation: NPV is a capital budgeting method used to assess the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.
Question 28
A company’s stock price increases from $30 to $45 in one year. What is the percentage increase in stock price?
a) 33%
b) 40%
c) 50%
d) 67%
Answer: c) 50%
Explanation: Percentage increase = [(New Price - Old Price) / Old Price] × 100. In this case: [(45 - 30) / 30] × 100 = 50%.
Question 29
What does a price-to-book (P/B) ratio greater than 1 indicate?
a) The stock is undervalued
b) The stock is overvalued
c) The stock price is equal to the book value
d) The stock price is greater than the book value
Answer: d) The stock price is greater than the book value
Explanation: A P/B ratio greater than 1 indicates that the stock’s market value exceeds its book value.
Question 30
What is the formula for calculating operating profit margin?
a) Net Income / Sales
b) Gross Profit / Sales
c) Operating Income / Sales
d) EBIT / Total Assets
Answer: c) Operating Income / Sales
Explanation: Operating profit margin is calculated by dividing operating income (EBIT) by sales, showing how much profit a company makes on each dollar of revenue before interest and taxes.
Question 31
A bond has a coupon rate of 4%, and the market interest rate is 5%. What will happen to the bond price?
a) The bond price will rise
b) The bond price will fall
c) The bond price will stay the same
d) The bond will be called
Answer: b) The bond price will fall
Explanation: When the market interest rate is higher than the coupon rate, the bond price typically falls to provide a yield that matches the market rate.
Question 32
A company’s retained earnings at the beginning of the year were $500,000, and its net income for the year was $200,000. If it paid $50,000 in dividends, what are its retained earnings at the end of the year?
a) $550,000
b) $600,000
c) $650,000
d) $700,000
Answer: c) $650,000
Explanation: Ending retained earnings = Beginning retained earnings + Net Income - Dividends. In this case: $500,000 + $200,000 - $50,000 = $650,000.
Question 33
What is the key purpose of a stock split?
a) To reduce the company’s debt
b) To increase the company’s market capitalization
c) To make shares more affordable to investors
d) To increase dividend payments
Answer: c) To make shares more affordable to investors
Explanation: A stock split increases the number of shares outstanding while reducing the price per share, making the stock more accessible to smaller investors.
Question 34
Which of the following is an example of a fixed cost for a company?
a) Direct labor costs
b) Raw materials
c) Rent
d) Sales commissions
Answer: c) Rent
Explanation: Fixed costs remain constant regardless of production levels, such as rent, insurance, or salaries.
Question 35
A company issues bonds with a face value of $10,000 at 105. What does this mean?
a) The bonds were sold at a discount
b) The bonds were sold at face value
c) The bonds were sold at a premium
d) The bonds were called
Answer: c) The bonds were sold at a premium
Explanation: Bonds sold at 105 means they were sold at 105% of the face value, which represents a premium.
Question 36
What does the dividend payout ratio measure?
a) The percentage of earnings paid to shareholders as dividends
b) The percentage of sales paid as dividends
c) The ratio of dividends to market value
d) The ratio of dividends to total debt
Answer: a) The percentage of earnings paid to shareholders as dividends
Explanation: The dividend payout ratio is the portion of net income that a company distributes to its shareholders in the form of dividends.
Question 37
What is meant by the term “free cash flow”?
a) Cash flow from operating activities
b) Cash available to be reinvested in the business
c) Cash available after all obligations are paid
d) Cash used for financing activities
Answer: c) Cash available after all obligations are paid
Explanation: Free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Question 38
A company’s earnings per share (EPS) increases from $2.00 to $3.00, while the stock price increases from $40 to $45. What happens to the P/E ratio?
a) It increases
b) It decreases
c) It stays the same
d) It becomes negative
Answer: b) It decreases
Explanation: P/E ratio = Stock Price / EPS. Since the EPS increased by a larger percentage than the stock price, the P/E ratio decreases.
Question 39
A company’s total sales are $1,000,000, and its cost of goods sold (COGS) is $700,000. What is its gross profit?
a) $200,000
b) $300,000
c) $400,000
d) $500,000
Answer: b) $300,000
Explanation: Gross profit = Total Sales - COGS. In this case: $1,000,000 - $700,000 = $300,000.
Question 40
What does a low price-to-earnings (P/E) ratio suggest about a company?
a) The company is undervalued
b) The company is overvalued
c) The company has a high growth rate
d) The company has high earnings volatility
Answer: a) The company is undervalued
Explanation: A low P/E ratio suggests that the stock is trading at a lower price relative to its earnings, possibly indicating undervaluation.
