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web.groovymark@gmail.com
- December 25, 2024
Question 41
What is a company’s “debt capacity”?
a) The total amount of debt a company can raise based on its assets
b) The total amount of short-term debt a company has
c) The company’s ability to raise equity capital
d) The amount of debt a company plans to repay within the year
Answer: a) The total amount of debt a company can raise based on its assets
Explanation: Debt capacity refers to the maximum amount of debt a company can borrow without significantly increasing its risk of default.
Question 42
What does the term “amortization” refer to in finance?
a) The gradual repayment of a loan over time through regular payments
b) The process of estimating future cash flows
c) The act of converting short-term liabilities into long-term debt
d) The practice of offering discounts for early loan repayments
Answer: a) The gradual repayment of a loan over time through regular payments
Explanation: Amortization involves paying off a loan in equal installments over time, with each payment covering both principal and interest.
Question 43
What does the “time value of money” concept state?
a) Money today is worth more than the same amount of money in the future
b) Money in the future is worth more than the same amount of money today
c) Money loses value over time due to inflation
d) Money grows in value if invested
Answer: a) Money today is worth more than the same amount of money in the future
Explanation: The time value of money suggests that money available today is worth more than the same amount in the future due to its earning potential.
Question 44
What is “beta” in the context of finance?
a) A measure of a stock’s price volatility relative to the market
b) A stock’s dividend growth rate
c) The cost of capital for a firm
d) The rate of return on a risk-free investment
Answer: a) A measure of a stock’s price volatility relative to the market
Explanation: Beta is used in the CAPM to assess a stock’s risk compared to the overall market. A beta of 1 indicates that the stock’s price moves with the market.
Question 45
What is the “interest coverage ratio”?
a) The amount of interest a company earns on its investments
b) A measure of how easily a company can pay interest on its outstanding debt
c) The percentage of total debt that consists of interest
d) The difference between a company’s interest income and interest expenses
Answer: b) A measure of how easily a company can pay interest on its outstanding debt
Explanation: The interest coverage ratio is calculated by dividing a company’s EBIT by its interest expenses, indicating how well the company can cover its debt interest payments.
Question 46
What is the primary difference between a short-term and long-term bond?
a) A short-term bond matures in less than 1 year, while a long-term bond matures in more than 10 years
b) A short-term bond has a fixed interest rate, while a long-term bond has a variable interest rate
c) A short-term bond is issued by corporations, while a long-term bond is issued by the government
d) A short-term bond has lower credit risk than a long-term bond
Answer: a) A short-term bond matures in less than 1 year, while a long-term bond matures in more than 10 years
Explanation: Short-term bonds typically mature in less than 1 year, while long-term bonds have maturities of 10 years or more.
Question 47
A company’s operating margin is 25%. What does this mean?
a) The company retains 25% of its revenue as profit after all expenses are paid
b) The company generates $0.25 in profit for every $1 of revenue
c) The company generates $0.25 in operating profit for every $1 of revenue
d) The company generates 25% of its revenue from interest and investments
Answer: c) The company generates $0.25 in operating profit for every $1 of revenue
Explanation: Operating margin represents the percentage of revenue left over after paying for operating expenses. In this case, 25% of revenue is retained as operating profit.
Question 48
What is a firm’s “dividend payout ratio”?
a) The amount of dividends paid per share
b) The percentage of net income paid out as dividends
c) The ratio of dividends paid to the firm’s stock price
d) The amount of retained earnings left after dividends are paid
Answer: b) The percentage of net income paid out as dividends
Explanation: The dividend payout ratio measures the percentage of earnings distributed to shareholders as dividends.
Question 49
What does the term “float” refer to in finance?
a) The number of shares of a stock available to the public
b) The process of issuing new shares of stock
c) The difference between a company’s cash inflows and outflows
d) The percentage of a bond’s coupon payments that are reinvested
Answer: a) The number of shares of a stock available to the public
Explanation: Float refers to the number of a company’s shares that are publicly available for trading.
Question 50
What is a firm’s “quick ratio”?
a) The ratio of cash and cash equivalents to current liabilities
b) The ratio of net income to total assets
c) The ratio of current assets to current liabilities
d) The ratio of inventory to total liabilities
Answer: a) The ratio of cash and cash equivalents to current liabilities
Explanation: The quick ratio, also known as the acid-test ratio, measures a company’s ability to meet short-term obligations with its most liquid assets (cash and equivalents).
