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web.groovymark@gmail.com
- December 23, 2024
Question 41
A company’s market value is $500 million, and its book value is $200 million. What is the market-to-book ratio?
a) 2.0
b) 1.5
c) 2.5
d) 3.0
Answer: c) 2.5
Explanation: Market-to-book ratio is calculated by dividing market value by book value: $500 million / $200 million = 2.5.
Question 42
How does a high inventory turnover ratio affect a company’s financial performance?
a) It indicates that the company has a high amount of unsold inventory
b) It suggests that the company is efficient at selling inventory
c) It shows that the company is struggling to meet demand
d) It implies that the company is overstocking inventory
Answer: b) It suggests that the company is efficient at selling inventory
Explanation: A high inventory turnover ratio indicates that the company is effectively managing its inventory and selling goods quickly.
Question 43
What does the price-to-earnings (P/E) ratio represent?
a) The profitability of a company relative to its earnings
b) The market value of a company relative to its earnings
c) The value of a company’s stock compared to its book value
d) The rate of return expected by shareholders
Answer: b) The market value of a company relative to its earnings
Explanation: The P/E ratio compares a company’s current stock price to its earnings per share, providing insight into how much investors are willing to pay for each dollar of earnings.
Question 44
Which ratio is best used to assess a company’s liquidity?
a) Debt-to-equity ratio
b) Quick ratio
c) Price-to-earnings ratio
d) Return on equity
Answer: b) Quick ratio
Explanation: The quick ratio measures a company’s ability to meet short-term obligations using its most liquid assets, excluding inventory.
Question 45
What does an increase in a company’s return on equity (ROE) suggest?
a) The company is becoming less efficient in generating profits from equity
b) The company is generating higher returns for its shareholders
c) The company’s financial leverage has decreased
d) The company’s total liabilities have increased
Answer: b) The company is generating higher returns for its shareholders
Explanation: An increase in ROE indicates that the company is generating more profit for each dollar of shareholders' equity, which benefits investors.
Question 46
What is a potential downside of having too much liquidity?
a) It decreases the company’s current ratio
b) It may indicate that the company is not investing excess cash
c) It increases the company’s debt-to-equity ratio
d) It lowers the company’s operating margin
Answer: b) It may indicate that the company is not investing excess cash
Explanation: Having too much liquidity might suggest that the company is holding excess cash rather than investing it to generate higher returns.
Question 47
Which of the following would increase a company’s debt-to-equity ratio?
a) Issuing new shares of stock
b) Paying off long-term debt
c) Taking on more debt
d) Reducing accounts payable
Answer: c) Taking on more debt
Explanation: Increasing debt raises the company’s total liabilities, which in turn increases the debt-to-equity ratio.
Question 48
How does an increase in the cost of goods sold (COGS) affect gross profit?
a) Increases gross profit
b) Decreases gross profit
c) Has no impact on gross profit
d) Reduces operating profit but not gross profit
Answer: b) Decreases gross profit
Explanation: Gross profit is calculated as total revenue minus COGS. An increase in COGS reduces gross profit.
Question 49
A company repurchases shares of its stock. How does this impact earnings per share (EPS)?
a) EPS decreases
b) EPS increases
c) EPS remains unchanged
d) EPS is diluted
Answer: b) EPS increases
Explanation: Repurchasing shares reduces the number of shares outstanding, which increases earnings per share if net income remains constant.
Question 50
What is the primary benefit of using the discounted cash flow (DCF) method to value a company?
a) It focuses on historical earnings
b) It considers a company’s future cash flows
c) It uses market multiples to assess value
d) It accounts for current market prices
Answer: b) It considers a company’s future cash flows
Explanation: The DCF method calculates the present value of expected future cash flows, providing a forward-looking estimate of a company’s intrinsic value.
