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web.groovymark@gmail.com
- December 25, 2024
Question 21
What is the formula to calculate a company’s net profit margin?
a) Net Income / Total Sales
b) Operating Income / Total Sales
c) Gross Profit / Total Sales
d) EBIT / Total Sales
Answer: a) Net Income / Total Sales
Explanation: Net profit margin is calculated by dividing net income by total sales, showing the percentage of revenue that becomes profit.
Question 22
What does “diversification” in a portfolio mean?
a) Investing in the same asset class
b) Investing in a wide variety of assets to reduce risk
c) Investing all funds in one stock
d) Avoiding high-risk investments
Answer: b) Investing in a wide variety of assets to reduce risk
Explanation: Diversification involves spreading investments across different asset classes to reduce exposure to any single risk.
Question 23
Which of the following is a source of long-term financing for a corporation?
a) Accounts payable
b) Commercial paper
c) Bank loans
d) Corporate bonds
Answer: d) Corporate bonds
Explanation: Corporate bonds are a long-term financing method used by companies to raise capital.
Question 24
What is meant by “capital structure”?
a) The composition of a company’s total liabilities
b) The mix of a company’s debt and equity financing
c) The allocation of capital within a company
d) The amount of cash available for short-term expenses
Answer: b) The mix of a company’s debt and equity financing
Explanation: Capital structure refers to the proportion of debt and equity that a company uses to finance its operations.
Question 25
A company’s debt-to-equity ratio is 2:1. What does this indicate?
a) The company has twice as much equity as debt
b) The company has twice as much debt as equity
c) The company has equal amounts of debt and equity
d) The company is not using any debt financing
Answer: b) The company has twice as much debt as equity
Explanation: A debt-to-equity ratio of 2:1 means the company is financing twice as much with debt compared to equity.
Question 26
What is the purpose of an income statement?
a) To report a company’s financial position at a specific point in time
b) To show how much revenue a company earned over a period of time
c) To provide information on cash flows
d) To calculate a company’s retained earnings
Answer: b) To show how much revenue a company earned over a period of time
Explanation: The income statement reports a company’s financial performance by showing its revenues, expenses, and profits over a specific period.
Question 27
What does the term “fixed costs” refer to?
a) Costs that increase with production
b) Costs that decrease with production
c) Costs that remain constant regardless of production levels
d) Costs that fluctuate based on sales
Answer: c) Costs that remain constant regardless of production levels
Explanation: Fixed costs do not change with the level of production or sales, such as rent or salaries.
Question 28
What is the effect of depreciation on net income?
a) It increases net income
b) It decreases net income
c) It has no effect on net income
d) It increases total liabilities
Answer: b) It decreases net income
Explanation: Depreciation is a non-cash expense that reduces net income by allocating the cost of a tangible asset over its useful life.
Question 29
A bond’s coupon rate is 6%, and its face value is $1,000. What is its annual interest payment?
a) $30
b) $60
c) $90
d) $100
Answer: b) $60
Explanation: Annual interest payment = Coupon rate × Face value. In this case: 6% × $1,000 = $60.
Question 30
What is the purpose of financial forecasting?
a) To estimate future financial needs and performance
b) To calculate historical profit margins
c) To determine a company’s current stock price
d) To assess the value of existing assets
Answer: a) To estimate future financial needs and performance
Explanation: Financial forecasting is used to predict a company’s future revenue, expenses, and capital needs based on historical data and assumptions.
Question 31
Which of the following ratios measures a company’s efficiency in using its assets?
a) Current ratio
b) Quick ratio
c) Asset turnover ratio
d) Debt-to-equity ratio
Answer: c) Asset turnover ratio
Explanation: The asset turnover ratio measures how efficiently a company uses its assets to generate sales.
Question 32
A company issues 1,000 shares of stock at $50 per share. How much capital does it raise?
a) $5,000
b) $25,000
c) $50,000
d) $100,000
Answer: c) $50,000
Explanation: The company raises $50,000 by issuing 1,000 shares at $50 each (1,000 × $50 = $50,000).
Question 33
What does a company’s quick ratio measure?
a) A company’s ability to meet long-term obligations
b) A company’s ability to meet short-term obligations without relying on inventory
c) A company’s total debt as a percentage of equity
d) A company’s revenue growth
Answer: b) A company’s ability to meet short-term obligations without relying on inventory
Explanation: The quick ratio is a measure of liquidity, excluding inventory, to assess a company’s ability to cover its short-term liabilities.
Question 34
What is the primary goal of a company’s capital budgeting process?
a) To manage cash flows
b) To decide which long-term projects to invest in
c) To allocate capital to daily operations
d) To raise capital from investors
Answer: b) To decide which long-term projects to invest in
Explanation: Capital budgeting involves evaluating and selecting long-term projects that are expected to generate future benefits.
Question 35
What does “compounding” refer to in finance?
a) The process of borrowing more money to pay off debts
b) The process of earning interest on both the initial investment and previously earned interest
c) The process of calculating depreciation
d) The process of reducing risk through diversification
Answer: b) The process of earning interest on both the initial investment and previously earned interest
Explanation: Compounding occurs when interest is earned on both the original principal and the accumulated interest from previous periods.
Question 36
What is a company’s “operating margin”?
a) Operating income divided by total assets
b) Operating income divided by total liabilities
c) Operating income divided by total revenue
d) Operating income divided by net income
Answer: c) Operating income divided by total revenue
Explanation: Operating margin measures the percentage of revenue that remains after paying for operating expenses.
Question 37
A company’s stock price increases from $25 to $30 in one year. What is the percentage increase?
a) 10%
b) 15%
c) 20%
d) 25%
Answer: d) 25%
Explanation: Percentage increase = (New price - Old price) / Old price × 100. In this case: ($30 - $25) / $25 × 100 = 25%.
Question 38
What is the effect of issuing new shares of stock on a company’s earnings per share (EPS)?
a) It increases EPS
b) It decreases EPS
c) It has no effect on EPS
d) It eliminates EPS
Answer: b) It decreases EPS
Explanation: Issuing new shares increases the number of shares outstanding, which reduces the company’s earnings per share (EPS).
Question 39
A company has cash and cash equivalents of $100,000 and total current liabilities of $400,000. What is its cash ratio?
a) 0.10
b) 0.25
c) 0.50
d) 0.75
Answer: b) 0.25
Explanation: Cash ratio = Cash and cash equivalents / Total current liabilities. In this case: $100,000 / $400,000 = 0.25.
Question 40
What does a company’s price-to-book (P/B) ratio measure?
a) The market value of the company’s assets
b) The company’s book value divided by its market capitalization
c) The company’s market price per share divided by its book value per share
d) The company’s earnings divided by its total assets
Answer: c) The company’s market price per share divided by its book value per share
Explanation: The P/B ratio compares a company’s market value to its book value, indicating whether the stock is overvalued or undervalued.
