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web.groovymark@gmail.com
- December 25, 2024
Question 01
What is the purpose of the current ratio?
a) To measure a company’s ability to meet short-term obligations
b) To assess the company’s profitability
c) To evaluate long-term debt
d) To track the company’s cash flow
Answer: a) To measure a company’s ability to meet short-term obligations
Explanation: The current ratio is a liquidity ratio that measures whether a company has enough resources to meet its short-term liabilities.
Question 02
What is considered the main advantage of investing in mutual funds?
a) Guaranteed returns
b) Professional management and diversification
c) Minimal risk
d) Direct ownership of the underlying assets
Answer: b) Professional management and diversification
Explanation: Mutual funds offer investors professional management and diversification by pooling funds to invest in a variety of securities.
Question 03
What does a company’s price-to-earnings (P/E) ratio indicate?
a) The relationship between the company’s earnings and its stock price
b) The company’s debt-to-equity ratio
c) The amount of dividends paid out to shareholders
d) The company’s operating expenses
Answer: a) The relationship between the company’s earnings and its stock price
Explanation: The P/E ratio is used to assess whether a company’s stock is overvalued or undervalued relative to its earnings.
Question 04
Which of the following is a primary market transaction?
a) A company repurchasing its own shares
b) An investor buying stock on a stock exchange
c) A company issuing new shares to raise capital
d) An investor selling shares to another investor
Answer: c) A company issuing new shares to raise capital
Explanation: A primary market transaction occurs when a company issues new securities directly to investors, typically to raise capital.
Question 05
What is a firm’s weighted average cost of capital (WACC)?
a) The average interest rate paid on all debts
b) The overall cost of financing the firm’s assets, including debt and equity
c) The cost of equity alone
d) The firm’s average return on investment
Answer: b) The overall cost of financing the firm’s assets, including debt and equity
Explanation: WACC is the average rate that a company is expected to pay to finance its assets, reflecting both debt and equity costs.
Question 06
What does the term “leverage” refer to in finance?
a) The use of equity to finance a company’s assets
b) The process of selling stock at a profit
c) The use of borrowed funds to increase potential returns
d) The issuance of bonds to raise capital
Answer: c) The use of borrowed funds to increase potential returns
Explanation: Leverage refers to the use of debt to finance investments, potentially amplifying returns but also increasing risk.
Question 07
A company has a net income of $200,000 and total equity of $1,000,000. What is its return on equity (ROE)?
a) 10%
b) 20%
c) 25%
d) 30%
Answer: b) 20%
Explanation: ROE is calculated as net income divided by total equity. In this case: $200,000 ÷ $1,000,000 = 20%.
Question 08
What is the main purpose of diversification in investment?
a) To maximize returns from a single asset class
b) To reduce risk by spreading investments across different asset classes
c) To increase the amount of debt financing
d) To improve the liquidity of assets
Answer: b) To reduce risk by spreading investments across different asset classes
Explanation: Diversification reduces risk by investing in a variety of assets, so that poor performance in one area is offset by better performance in others.
Question 09
What does the term “liabilities” refer to on a company’s balance sheet?
a) The company’s revenues
b) The company’s debts and obligations
c) The company’s equity
d) The company’s assets
Answer: b) The company’s debts and obligations
Explanation: Liabilities are what the company owes to others, including loans, accounts payable, and other financial obligations.
Question 10
Which of the following would likely decrease a company’s working capital?
a) Collecting accounts receivable more quickly
b) Increasing current assets
c) Increasing current liabilities
d) Reducing inventory levels
Answer: c) Increasing current liabilities
Explanation: Working capital is calculated as current assets minus current liabilities. Increasing liabilities without increasing assets reduces working capital.
Question 11
What is a company’s “cost of debt”?
a) The interest rate it pays on its long-term loans
b) The fees it pays to issue bonds
c) The total amount of debt it has
d) The weighted average cost of borrowing
Answer: a) The interest rate it pays on its long-term loans
Explanation: Cost of debt is the effective interest rate a company pays on its borrowed funds, such as loans or bonds.
Question 12
Which financial statement provides information about a company’s cash inflows and outflows?
a) Balance sheet
b) Income statement
c) Cash flow statement
d) Statement of retained earnings
Answer: c) Cash flow statement
Explanation: The cash flow statement provides details about how much cash is entering and leaving the company from operating, investing, and financing activities.
Question 13
What does the term “capital structure” refer to?
a) The mix of a company’s short-term and long-term liabilities
b) The mix of debt and equity used to finance a company’s assets
c) The total amount of capital a company raises during an IPO
d) The percentage of earnings reinvested in the business
Answer: b) The mix of debt and equity used to finance a company’s assets
Explanation: Capital structure refers to how a company finances its overall operations and growth through a combination of debt and equity.
Question 14
Which of the following best describes operating leverage?
a) The use of equity to finance a company’s day-to-day operations
b) The fixed costs a company incurs that magnify the effect of changes in sales on operating income
c) The use of short-term debt to finance inventory
d) The cost of borrowing money for operational purposes
Answer: b) The fixed costs a company incurs that magnify the effect of changes in sales on operating income
Explanation: Operating leverage occurs when a company has fixed costs that must be covered, which can magnify the impact of sales changes on profitability.
Question 15
What is the primary purpose of financial forecasting?
a) To analyze past financial performance
b) To estimate future revenue, expenses, and financial needs
c) To prepare a company’s tax filings
d) To determine the amount of debt a company should issue
Answer: b) To estimate future revenue, expenses, and financial needs
Explanation: Financial forecasting helps businesses plan for the future by estimating revenues, expenses, and capital needs.
Question 16
What does the term “return on assets (ROA)” measure?
a) The amount of profit generated for each dollar of assets
b) The company’s revenue growth
c) The percentage of assets financed by debt
d) The total equity in the company
Answer: a) The amount of profit generated for each dollar of assets
Explanation: ROA measures a company’s efficiency in using its assets to generate profit.
Question 17
What is a company’s earnings before interest and taxes (EBIT)?
a) Net income before dividends are paid
b) Total revenue minus cost of goods sold
c) Operating profit before interest and taxes are deducted
d) Gross profit minus operating expenses
Answer: c) Operating profit before interest and taxes are deducted
Explanation: EBIT represents a company’s operating profit, excluding interest expenses and taxes.
Question 18
What is the primary goal of financial management in a corporation?
a) To maximize profits
b) To increase stock price and maximize shareholder value
c) To minimize taxes
d) To ensure long-term debt is paid off
Answer: b) To increase stock price and maximize shareholder value
Explanation: The primary objective of financial management is to increase the value of the company’s stock and, consequently, the wealth of its shareholders.
Question 19
What does the term “market capitalization” refer to?
a) The total debt a company has
b) The number of shares outstanding
c) The total value of a company’s outstanding shares of stock
d) The price at which a stock is trading
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, representing the total market value of the company’s equity.
Question 20
A bond has a coupon rate of 5% and a face value of $1,000. How much interest does the bondholder receive annually?
a) $50
b) $100
c) $150
d) $200
Answer: a) $50
Explanation: The annual interest payment is calculated by multiplying the coupon rate by the face value. In this case: 0.05 × $1,000 = $50.
