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web.groovymark@gmail.com
- December 25, 2024
Question 01
What is the primary function of financial markets?
a) To facilitate the exchange of goods and services
b) To provide a platform for borrowing and lending
c) To promote international trade
d) To regulate monetary policy
Answer: b) To provide a platform for borrowing and lending
Explanation: Financial markets serve as platforms for the exchange of capital between lenders and borrowers, enabling the efficient allocation of resources.
Question 02
Which financial statement reports 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 its assets, liabilities, and equity at a specific date.
Question 03
What is the definition of “working capital”?
a) Long-term investments minus short-term liabilities
b) Current assets minus current liabilities
c) Total liabilities minus total equity
d) Net income minus dividends paid
Answer: b) Current assets minus current liabilities
Explanation: Working capital is the difference between a company’s current assets and current liabilities, representing the liquidity available for daily operations.
Question 04
What does a current ratio of less than 1 indicate?
a) The company has more current assets than current liabilities
b) The company has more current liabilities than current assets
c) The company is highly profitable
d) The company has low liquidity risk
Answer: b) The company has more current liabilities than current assets
Explanation: A current ratio of less than 1 means the company may struggle to cover its short-term obligations with its current assets.
Question 05
What is the formula for calculating earnings per share (EPS)?
a) Net income / Total sales
b) Net income / Average total assets
c) Net income / Average outstanding shares
d) Net income / Total equity
Answer: c) Net income / Average outstanding shares
Explanation: EPS is calculated by dividing net income by the average number of outstanding shares, indicating how much profit is allocated to each share.
Question 06
What does a beta of more than 1 indicate about a stock?
a) The stock is less volatile than the market
b) The stock is more volatile than the market
c) The stock has no volatility
d) The stock is negatively correlated with the market
Answer: b) The stock is more volatile than the market
Explanation: A beta greater than 1 indicates that the stock’s price moves more than the market, meaning it is more volatile.
Question 07
Which of the following is a measure of profitability?
a) Current ratio
b) Return on equity (ROE)
c) Debt-to-equity ratio
d) Inventory turnover
Answer: b) Return on equity (ROE)
Explanation: ROE measures how effectively a company generates profit from its shareholders' equity.
Question 08
What does the term “liquidity” refer to in finance?
a) The ease with which a company can pay off its long-term debt
b) The ability to convert assets into cash quickly
c) The amount of cash a company holds
d) The amount of credit available to a company
Answer: b) The ability to convert assets into cash quickly
Explanation: Liquidity refers to the ability to convert assets into cash without significant loss of value.
Question 09
A company has a net income of $150,000 and average equity of $500,000. What is its return on equity (ROE)?
a) 20%
b) 25%
c) 30%
d) 35%
Answer: b) 30%
Explanation: ROE = Net Income / Average Equity. In this case: $150,000 / $500,000 = 30%.
Question 10
What is the primary goal of financial management in a corporation?
a) Maximizing revenue
b) Minimizing costs
c) Maximizing shareholder wealth
d) Reducing taxes
Answer: c) Maximizing shareholder wealth
Explanation: The main objective of financial management is to maximize shareholder wealth by increasing the value of the company’s stock.
Question 11
A company’s sales are $500,000, and its cost of goods sold (COGS) is $300,000. What is its gross profit?
a) $100,000
b) $150,000
c) $200,000
d) $250,000
Answer: c) $200,000
Explanation: Gross profit = Sales - COGS. In this case: $500,000 - $300,000 = $200,000.
Question 12
What is meant by “capital budgeting”?
a) The process of allocating funds for day-to-day operations
b) The process of making investment decisions in long-term assets
c) The process of determining a company’s capital structure
d) The process of raising capital through equity
Answer: b) The process of making investment decisions in long-term assets
Explanation: Capital budgeting involves evaluating and selecting investments in long-term projects or assets that are expected to generate future cash flows.
Question 13
What does a negative net working capital indicate?
a) The company has more current liabilities than current assets
b) The company is highly profitable
c) The company has more long-term liabilities than long-term assets
d) The company is solvent
Answer: a) The company has more current liabilities than current assets
Explanation: Negative net working capital means the company’s current liabilities exceed its current assets, potentially indicating liquidity issues.
Question 14
What is the impact of leverage on a company’s return on equity (ROE)?
a) Leverage decreases ROE
b) Leverage has no impact on ROE
c) Leverage increases ROE
d) Leverage eliminates ROE
Answer: c) Leverage increases ROE
Explanation: Leverage, or using debt to finance assets, can increase ROE by amplifying the returns on shareholders’ equity, but it also increases risk.
Question 15
A bond with a face value of $1,000 pays a 5% annual coupon. What is the annual coupon payment?
a) $25
b) $50
c) $100
d) $200
Answer: b) $50
Explanation: Annual coupon payment = Coupon rate × Face value. In this case: 5% × $1,000 = $50.
Question 16
What is the purpose of a company’s cash flow statement?
a) To report the company’s profit
b) To show the company’s financial position
c) To provide information on cash inflows and outflows
d) To measure the company’s liquidity
Answer: c) To provide information on cash inflows and outflows
Explanation: The cash flow statement shows how cash moves into and out of a company over a period of time.
Question 17
Which of the following is an example of a long-term liability?
a) Accounts payable
b) Short-term debt
c) Bonds payable
d) Accrued expenses
Answer: c) Bonds payable
Explanation: Bonds payable are considered long-term liabilities as they are obligations due after one year.
Question 18
What is the definition of “market capitalization”?
a) The total amount of a company’s liabilities
b) The total number of outstanding shares
c) The total value of a company’s outstanding shares of stock
d) The company’s net income divided by outstanding shares
Answer: c) The total value of a company’s outstanding shares of stock
Explanation: Market capitalization is calculated by multiplying a company’s current stock price by its outstanding shares.
Question 19
What does a price-to-earnings (P/E) ratio measure?
a) The value of a company’s dividends
b) A company’s earnings per share
c) How much investors are willing to pay for each dollar of earnings
d) A company’s growth potential
Answer: c) How much investors are willing to pay for each dollar of earnings
Explanation: The P/E ratio indicates how much investors are willing to pay for each dollar of a company’s earnings.
Question 20
A company has total assets of $800,000 and total liabilities of $500,000. What is its equity?
a) $100,000
b) $200,000
c) $300,000
d) $400,000
Answer: c) $300,000
Explanation: Equity = Total Assets - Total Liabilities. In this case: $800,000 - $500,000 = $300,000.
