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web.groovymark@gmail.com
- December 25, 2024
Question 01
What is the purpose of financial leverage in a company’s capital structure?
a) To increase equity capital
b) To reduce company risk
c) To increase potential returns by using debt
d) To eliminate the need for equity financing
Answer: c) To increase potential returns by using debt
Explanation: Financial leverage allows a company to use borrowed funds to increase its returns on investment, although it also increases financial risk.
Question 02
Which financial ratio is used to assess a company’s liquidity?
a) Price-to-earnings ratio
b) Current ratio
c) Debt-to-equity ratio
d) Gross margin
Answer: b) Current ratio
Explanation: The current ratio measures a company’s ability to pay short-term obligations with its current assets.
Question 03
What does the term “cost of capital” refer to?
a) The cost of producing goods
b) The cost of raising funds through debt and equity
c) The cost of running daily operations
d) The cost of acquiring new technology
Answer: b) The cost of raising funds through debt and equity
Explanation: Cost of capital is the cost a company incurs to raise funds, which can include debt, equity, or both.
Question 04
Which of the following is a type of preferred stock?
a) Convertible
b) Bond
c) Call option
d) Future contract
Answer: a) Convertible
Explanation: Convertible preferred stock gives the holder the option to convert it into a certain number of common shares.
Question 05
What is a bond’s coupon rate?
a) The bond’s yield at maturity
b) The interest rate the bond issuer agrees to pay annually
c) The bond’s current market price
d) The bond’s credit rating
Answer: b) The interest rate the bond issuer agrees to pay annually
Explanation: The coupon rate is the percentage of the bond’s face value that the issuer will pay annually to the bondholder.
Question 06
A stock has a price-to-earnings (P/E) ratio of 20. What does this indicate?
a) The stock is undervalued
b) The stock price is 20 times higher than the company’s earnings per share
c) The company has a dividend yield of 20%
d) The stock price is 20% higher than the average stock price
Answer: b) The stock price is 20 times higher than the company's earnings per share
Explanation: The P/E ratio compares a company's current stock price to its earnings per share (EPS).
Question 07
Which of the following is an example of systematic risk?
a) A company’s CEO resigning
b) A product recall
c) A national recession
d) A lawsuit against a company
Answer: c) A national recession
Explanation: Systematic risk affects the entire market, such as economic downturns, and cannot be mitigated by diversification.
Question 08
What does the term “market capitalization” refer to?
a) The total value of a company’s outstanding bonds
b) The total value of a company’s debt
c) The total value of a company’s outstanding shares of stock
d) The total value of a company’s earnings
Answer: c) The total value of a company’s outstanding shares of stock
Explanation: Market capitalization is calculated by multiplying the stock price by the number of outstanding shares.
Question 09
What does a price-to-book (P/B) ratio of less than 1 indicate about a stock?
a) The stock is undervalued
b) The stock is overvalued
c) The stock has a high dividend yield
d) The stock price is equal to its book value
Answer: a) The stock is undervalued
Explanation: A P/B ratio of less than 1 suggests that the stock is trading for less than its book value, which may indicate an undervaluation.
Question 10
What is the purpose of diversification in a portfolio?
a) To eliminate risk completely
b) To maximize returns in the short term
c) To reduce overall risk by spreading investments across different assets
d) To invest only in high-risk stocks
Answer: c) To reduce overall risk by spreading investments across different assets
Explanation: Diversification spreads risk across various investments, reducing the impact of poor performance in one area.
Question 11
A bond is trading at a premium. What does this mean?
a) The bond is selling for more than its face value
b) The bond is selling for less than its face value
c) The bond’s yield is higher than the market rate
d) The bond’s interest payments have stopped
Answer: a) The bond is selling for more than its face value
Explanation: When a bond trades at a premium, it is selling for more than its face value, often because its coupon rate is higher than current interest rates.
Question 12
What does a company’s net profit margin represent?
a) The percentage of sales that becomes net profit
b) The company’s total profit
c) The company’s total sales
d) The company’s operating expenses
Answer: a) The percentage of sales that becomes net profit
Explanation: Net profit margin is a profitability ratio that shows the percentage of revenue left after all expenses are deducted.
Question 13
What is the main difference between common stock and preferred stock?
a) Preferred stockholders have voting rights
b) Common stockholders are paid dividends before preferred stockholders
c) Preferred stockholders receive fixed dividends
d) Common stockholders have a fixed dividend
Answer: c) Preferred stockholders receive fixed dividends
Explanation: Preferred stockholders receive fixed dividends and are prioritized over common stockholders for dividend payments.
Question 14
What is the role of a stockbroker?
a) To issue stocks and bonds
b) To provide loans to investors
c) To buy and sell stocks and other securities on behalf of investors
d) To manage a company’s payroll
Answer: c) To buy and sell stocks and other securities on behalf of investors
Explanation: Stockbrokers execute buy and sell orders for stocks and other securities for their clients.
Question 15
A company’s sales are $1,000,000, and its accounts receivable turnover ratio is 5. What is the average accounts receivable?
a) $100,000
b) $200,000
c) $500,000
d) $1,000,000
Answer: b) $200,000
Explanation: Accounts receivable turnover = Sales / Average accounts receivable. Rearranging, Average accounts receivable = Sales / Accounts receivable turnover. In this case: $1,000,000 / 5 = $200,000.
Question 16
What does the Sharpe ratio measure in investment analysis?
a) The total returns of an investment
b) The risk-adjusted return of an investment
c) The volatility of a stock
d) The liquidity of an asset
Answer: b) The risk-adjusted return of an investment
Explanation: The Sharpe ratio measures the return of an investment compared to its risk, helping investors understand risk-adjusted performance.
Question 17
Which type of bond is backed by collateral?
a) Callable bond
b) Convertible bond
c) Secured bond
d) Unsecured bond
Answer: c) Secured bond
Explanation: A secured bond is backed by collateral, such as real estate or other assets, which reduces the risk to investors.
Question 18
What is the effect of paying a higher dividend on a company’s retained earnings?
a) Increases retained earnings
b) Decreases retained earnings
c) No effect on retained earnings
d) Increases the company’s liabilities
Answer: b) Decreases retained earnings
Explanation: When a company pays dividends, it reduces its retained earnings because part of the profits is distributed to shareholders.
Question 19
What is an Initial Public Offering (IPO)?
a) The first time a company issues bonds to the public
b) The first time a company sells its stock to the public
c) A method of repurchasing company stock
d) A private sale of stock to institutional investors
Answer: b) The first time a company sells its stock to the public
Explanation: An IPO is the process by which a private company offers its stock to the public for the first time.
Question 20
Which financial metric is used to measure a company’s operational efficiency?
a) Debt-to-equity ratio
b) Operating margin
c) Price-to-earnings ratio
d) Dividend yield
Answer: b) Operating margin
Explanation: Operating margin measures a company’s efficiency by showing the percentage of revenue remaining after covering operating expenses.
