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web.groovymark@gmail.com
- December 25, 2024
Question 21
Which of the following is an example of a firm-specific risk?
a) Changes in interest rates
b) A company losing market share due to poor management decisions
c) An economic recession
d) Currency fluctuations
Answer: b) A company losing market share due to poor management decisions
Explanation: Firm-specific risks are risks that affect an individual company, such as management decisions, as opposed to market-wide risks.
Question 22
Which of the following is an example of systematic risk?
a) A company’s CEO resigns
b) A company recalls a product
c) A natural disaster affecting all businesses in a region
d) A competitor releasing a superior product
Answer: c) A natural disaster affecting all businesses in a region
Explanation: Systematic risk affects the entire market or economy, unlike firm-specific risk, which affects only a single company.
Question 23
What does the term “liquidity” refer to in finance?
a) The ability of an asset to generate returns
b) The ease with which an asset can be converted into cash
c) The amount of debt a company has
d) The percentage of assets financed by equity
Answer: b) The ease with which an asset can be converted into cash
Explanation: Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price.
Question 24
A company has a debt-to-equity ratio of 1.5. What does this indicate?
a) The company has 1.5 times more debt than equity
b) The company has 1.5 times more equity than debt
c) The company’s assets are highly liquid
d) The company’s operating expenses exceed its revenue
Answer: a) The company has 1.5 times more debt than equity
Explanation: A debt-to-equity ratio of 1.5 means the company uses $1.50 of debt for every $1 of equity to finance its operations.
Question 25
What is the main purpose of the capital asset pricing model (CAPM)?
a) To calculate the value of a bond
b) To determine the cost of equity
c) To forecast future sales
d) To measure a company’s liquidity
Answer: b) To determine the cost of equity
Explanation: CAPM is used to calculate the required return on equity, factoring in the risk-free rate, the market risk premium, and the stock's beta.
Question 26
What is the formula for calculating a company’s enterprise value (EV)?
a) Market capitalization + debt – cash
b) Market capitalization × net income
c) Total assets – total liabilities
d) Revenue + operating expenses
Answer: a) Market capitalization + debt – cash
Explanation: Enterprise value represents the total value of a company, including debt, equity, and cash.
Question 27
What is the purpose of a company’s dividend reinvestment plan (DRIP)?
a) To allow shareholders to automatically reinvest dividends into additional shares of stock
b) To increase a company’s market share
c) To provide liquidity for company executives
d) To reduce the company’s dividend payout ratio
Answer: a) To allow shareholders to automatically reinvest dividends into additional shares of stock
Explanation: A DRIP allows shareholders to reinvest dividends into more shares, often at a discount.
Question 28
Which of the following best describes a bond’s “coupon rate”?
a) The rate at which the bond’s price fluctuates
b) The interest rate the bond issuer pays to bondholders
c) The rate at which the bondholder’s investment grows
d) The bond’s maturity date
Answer: b) The interest rate the bond issuer pays to bondholders
Explanation: The coupon rate is the interest rate paid by the bond issuer to bondholders, typically expressed as a percentage of the bond's face value.
Question 29
What is a company’s free cash flow (FCF)?
a) Net income minus taxes
b) Operating cash flow minus capital expenditures
c) Total revenue minus operating expenses
d) The amount of cash held in reserves
Answer: b) Operating cash flow minus capital expenditures
Explanation: Free cash flow represents the cash a company generates after accounting for capital expenditures needed to maintain or expand assets.
Question 30
Which of the following is a lagging economic indicator?
a) Unemployment rate
b) Stock market returns
c) Consumer confidence index
d) Yield curve
Answer: a) Unemployment rate
Explanation: Lagging indicators, like the unemployment rate, change after the economy as a whole changes.
Question 31
A company’s inventory turnover ratio is 8. What does this mean?
a) The company replenishes its inventory every 8 months
b) The company sells and replaces its entire inventory 8 times per year
c) The company’s inventory costs are 8% of total sales
d) The company keeps 8 months’ worth of inventory on hand
Answer: b) The company sells and replaces its entire inventory 8 times per year
Explanation: The inventory turnover ratio measures how many times a company sells and replaces its inventory over a specific period, usually a year.
Question 32
What does a negative operating cash flow indicate?
a) The company is highly profitable
b) The company’s cash inflows from operations are less than its cash outflows
c) The company has positive net income
d) The company is increasing its dividend payout
Answer: b) The company’s cash inflows from operations are less than its cash outflows
Explanation: Negative operating cash flow means the company is spending more cash on operations than it is generating.
Question 33
What is the primary function of the board of directors in a corporation?
a) To manage day-to-day operations
b) To represent shareholders and make major decisions for the company
c) To handle the company’s financial statements
d) To approve all hiring decisions
Answer: b) To represent shareholders and make major decisions for the company
Explanation: The board of directors represents shareholders and makes key decisions regarding the company’s overall direction and strategy.
Question 34
What is the main difference between preferred stock and common stock?
a) Preferred stockholders have voting rights, while common stockholders do not
b) Common stockholders receive dividends before preferred stockholders
c) Preferred stockholders have a higher claim on assets in the event of liquidation
d) Common stock is considered less risky than preferred stock
Answer: c) Preferred stockholders have a higher claim on assets in the event of liquidation
Explanation: Preferred stockholders receive dividends before common stockholders and have a higher claim on assets in case of bankruptcy or liquidation.
Question 35
What does the term “capital budgeting” refer to?
a) The process of managing a company’s short-term financing needs
b) The process of allocating funds to long-term projects and investments
c) The act of setting aside funds for dividend payments
d) The act of reducing capital expenditures
Answer: b) The process of allocating funds to long-term projects and investments
Explanation: Capital budgeting involves evaluating and deciding on long-term investments that are worth pursuing for future growth.
Question 36
What is the main objective of the Sarbanes-Oxley Act (SOX)?
a) To regulate insider trading
b) To increase transparency in corporate financial reporting
c) To lower corporate taxes
d) To facilitate mergers and acquisitions
Answer: b) To increase transparency in corporate financial reporting
Explanation: SOX was enacted to improve corporate governance and financial disclosure, making it harder for companies to commit financial fraud.
Question 37
Which of the following best describes “market risk”?
a) The risk associated with individual companies
b) The risk of an asset’s price decreasing due to market-wide factors
c) The risk that a company will default on its loans
d) The risk of a company losing its competitive advantage
Answer: b) The risk of an asset’s price decreasing due to market-wide factors
Explanation: Market risk, also known as systematic risk, affects all investments and is caused by factors like economic downturns or political instability.
Question 38
What is the main difference between a stock split and a stock dividend?
a) A stock split increases the number of shares, while a stock dividend issues new shares instead of cash
b) A stock split increases the company’s net income, while a stock dividend decreases it
c) A stock split reduces the stock’s value, while a stock dividend increases it
d) A stock split is issued to employees, while a stock dividend is issued to shareholders
Answer: a) A stock split increases the number of shares, while a stock dividend issues new shares instead of cash
Explanation: In a stock split, the number of shares increases while the price decreases proportionally, whereas a stock dividend distributes additional shares to shareholders instead of cash.
Question 39
What is a firm’s “break-even point”?
a) The point at which total revenue equals total expenses
b) The point at which a firm generates its first profit
c) The point at which a firm must raise additional capital
d) The point at which the firm’s debt-to-equity ratio reaches 1
Answer: a) The point at which total revenue equals total expenses
Explanation: A company’s break-even point is when its revenue exactly matches its total costs, resulting in neither profit nor loss.
Question 40
What is a “convertible bond”?
a) A bond that can be converted into common stock
b) A bond that is guaranteed by the federal government
c) A bond that pays interest on a variable schedule
d) A bond that can be traded on a stock exchange
Answer: a) A bond that can be converted into common stock
Explanation: Convertible bonds give investors the option to convert the bond into a specified number of shares of the company’s common stock.
