-
web.groovymark@gmail.com
- December 25, 2024
Question 41
What is the definition of “capital structure”?
a) The mix of assets and liabilities in a company
b) The mix of debt and equity used to finance a company
c) The proportion of long-term and short-term debt
d) The distribution of dividends and retained earnings
Answer: b) The mix of debt and equity used to finance a company
Explanation: Capital structure refers to how a company finances its overall operations and growth by using different sources of funds, such as debt and equity.
Question 42
A bond has a face value of $1,000 and pays interest annually at a coupon rate of 6%. If the bondholder sells the bond for $900, what is the yield to maturity (YTM) compared to the coupon rate?
a) YTM is higher than the coupon rate
b) YTM is lower than the coupon rate
c) YTM is equal to the coupon rate
d) YTM is negative
Answer: a) YTM is higher than the coupon rate
Explanation: Since the bond is sold at a discount, the yield to maturity (YTM) will be higher than the coupon rate because the bondholder receives interest payments plus the difference between the purchase price and the face value at maturity.
Question 43
What does the term “liquidity” refer to?
a) The ability of a company to meet long-term obligations
b) The ability of a company to raise equity capital
c) The ability of a company to pay short-term obligations
d) The ability of a company to invest in long-term projects
Answer: c) The ability of a company to pay short-term obligations
Explanation: Liquidity refers to how easily a company can convert its assets to cash in order to pay off its short-term liabilities.
Question 44
What is the effect of depreciation on cash flow?
a) It decreases cash flow
b) It increases cash flow
c) It has no effect on cash flow
d) It decreases net income but increases cash flow
Answer: d) It decreases net income but increases cash flow
Explanation: Depreciation is a non-cash expense that reduces net income but does not affect cash flow directly, as it is added back in the cash flow statement.
Question 45
What is the formula for calculating return on assets (ROA)?
a) Net Income / Total Assets
b) Net Income / Total Equity
c) EBIT / Total Assets
d) EBIT / Total Equity
Answer: a) Net Income / Total Assets
Explanation: Return on assets (ROA) measures how efficiently a company is using its assets to generate profit.
Question 46
A company’s dividend yield is 4%, and its stock price is $50. What is its annual dividend per share?
a) $1.00
b) $2.00
c) $3.00
d) $4.00
Answer: b) $2.00
Explanation: Dividend yield = Annual Dividend / Stock Price. Rearranging the formula: Annual Dividend = Dividend Yield × Stock Price. In this case: 0.04 × $50 = $2.00.
Question 47
Which of the following is a measure of a company’s solvency?
a) Current ratio
b) Quick ratio
c) Debt-to-equity ratio
d) Inventory turnover ratio
Answer: c) Debt-to-equity ratio
Explanation: The debt-to-equity ratio is a measure of solvency, which indicates how much of the company is financed by debt compared to equity.
Question 48
What is the difference between a stock dividend and a cash dividend?
a) Stock dividends increase the number of shares outstanding, while cash dividends reduce retained earnings
b) Cash dividends increase the number of shares outstanding, while stock dividends reduce retained earnings
c) Stock dividends are paid in cash, while cash dividends are paid in stock
d) Cash dividends are reinvested in the company, while stock dividends are not
Answer: a) Stock dividends increase the number of shares outstanding, while cash dividends reduce retained earnings
Explanation: Stock dividends increase the number of shares a shareholder owns, while cash dividends are a payout from retained earnings.
Question 49
What is meant by “diversification” in investing?
a) Investing in a single asset class
b) Spreading investments across different assets to reduce risk
c) Buying only high-risk assets
d) Investing all assets in foreign markets
Answer: b) Spreading investments across different assets to reduce risk
Explanation: Diversification involves holding a variety of assets to reduce exposure to any single asset or risk.
Question 50
A company’s operating expenses are $300,000, and its sales are $1,200,000. What is its operating expense ratio?
a) 20%
b) 25%
c) 30%
d) 35%
Answer: b) 25%
Explanation: Operating expense ratio = Operating Expenses / Sales. In this case: $300,000 / $1,200,000 = 25%.
