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web.groovymark@gmail.com
- December 26, 2024
Question 01
What is a key benefit of using financial ratios in business analysis?
a) They eliminate all risks in investment
b) They provide a standard method for comparing companies
c) They guarantee higher profits
d) They replace the need for financial statements
Answer: b) They provide a standard method for comparing companies
Explanation: Financial ratios offer a standardized way to compare the performance and financial health of different companies.
Question 02
What does a debt-to-equity ratio of 0.5 indicate?
a) The company has more debt than equity
b) The company has more equity than debt
c) The company has equal amounts of debt and equity
d) The company is using no equity financing
Answer: b) The company has more equity than debt
Explanation: A debt-to-equity ratio of 0.5 means the company is financing with twice as much equity as debt.
Question 03
Which of the following represents a liquidity ratio?
a) Return on assets
b) Price-to-earnings ratio
c) Current ratio
d) Gross margin
Answer: c) Current ratio
Explanation: The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations.
Question 04
What is the main difference between preferred stock and common stock?
a) Preferred stockholders receive voting rights, while common stockholders do not
b) Preferred stockholders have priority over common stockholders in dividend payments
c) Common stockholders are guaranteed dividends, but preferred stockholders are not
d) Common stockholders have priority over preferred stockholders in bankruptcy
Answer: b) Preferred stockholders have priority over common stockholders in dividend payments
Explanation: Preferred stockholders receive dividends before common stockholders and have a higher claim in case of liquidation.
Question 05
Which financial statement reports a company’s assets, liabilities, and equity at a specific point in time?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Statement of retained earnings
Answer: b) Balance sheet
Explanation: The balance sheet provides a snapshot of a company’s financial position, showing assets, liabilities, and equity.
Question 06
A company has current assets of $500,000 and current liabilities of $250,000. What is its current ratio?
a) 0.5
b) 1.0
c) 2.0
d) 3.0
Answer: c) 2.0
Explanation: Current ratio = Current assets / Current liabilities. In this case: $500,000 / $250,000 = 2.0.
Question 07
What is meant by the term “leverage” in finance?
a) The use of retained earnings to finance new projects
b) The use of debt to increase the potential return on equity
c) The use of cash flow to buy back shares
d) The use of equity financing to reduce debt
Answer: b) The use of debt to increase the potential return on equity
Explanation: Leverage involves using borrowed funds to finance investments, increasing the potential return to shareholders.
Question 08
What does a high inventory turnover ratio indicate about a company?
a) The company is struggling to sell its products
b) The company has slow-moving inventory
c) The company is efficiently selling and restocking inventory
d) The company’s sales are declining
Answer: c) The company is efficiently selling and restocking inventory
Explanation: A high inventory turnover ratio indicates that a company is selling and replenishing inventory quickly, suggesting efficiency.
Question 09
What is the primary function of a capital market?
a) To provide short-term loans to companies
b) To facilitate the trading of long-term financial securities
c) To increase government regulation
d) To provide insurance for investors
Answer: b) To facilitate the trading of long-term financial securities
Explanation: Capital markets are where long-term securities, such as stocks and bonds, are bought and sold.
Question 10
A company’s earnings before interest and taxes (EBIT) is $200,000, and its interest expense is $50,000. What is its interest coverage ratio?
a) 2
b) 3
c) 4
d) 5
Answer: c) 4
Explanation: Interest coverage ratio = EBIT / Interest expense. In this case: $200,000 / $50,000 = 4.
Question 11
What is the main purpose of diversification in an investment portfolio?
a) To increase the overall risk of the portfolio
b) To concentrate investments in one industry
c) To reduce risk by investing in different assets
d) To guarantee high returns
Answer: c) To reduce risk by investing in different assets
Explanation: Diversification spreads investments across various assets, reducing the impact of any single asset's poor performance.
Question 12
A company with a return on equity (ROE) of 20% is considered:
a) To have low profitability
b) To be effectively using shareholders’ equity to generate profits
c) To be inefficient at generating returns
d) To have high debt levels
Answer: b) To be effectively using shareholders' equity to generate profits
Explanation: A high ROE indicates that a company is efficiently generating profits relative to shareholders' equity.
Question 13
What is a “bull market”?
a) A market characterized by falling stock prices
b) A market where short-selling is common
c) A market characterized by rising stock prices
d) A market where stocks are undervalued
Answer: c) A market characterized by rising stock prices
Explanation: A bull market is one in which stock prices are generally rising, indicating optimism and investor confidence.
Question 14
Which of the following best describes “working capital”?
a) Total assets minus total liabilities
b) Current assets minus current liabilities
c) Total revenue minus total expenses
d) Long-term assets minus long-term debt
Answer: b) Current assets minus current liabilities
Explanation: Working capital is the difference between a company’s current assets and current liabilities, indicating its short-term financial health.
Question 15
A company issues bonds with a face value of $1,000 each and a coupon rate of 5%. What is the annual interest payment per bond?
a) $5
b) $50
c) $100
d) $500
Answer: b) $50
Explanation: Annual interest payment = Coupon rate × Face value. In this case: 5% × $1,000 = $50.
Question 16
What does a price-to-earnings (P/E) ratio of 25 suggest?
a) Investors are paying $25 for every $1 of earnings
b) The company has high debt
c) The company’s stock is overvalued
d) The company’s stock is undervalued
Answer: a) Investors are paying $25 for every $1 of earnings
Explanation: The P/E ratio indicates how much investors are willing to pay per dollar of earnings.
Question 17
What is the role of a financial intermediary in the economy?
a) To create new currencies
b) To connect borrowers and savers
c) To determine interest rates
d) To enforce financial regulations
Answer: b) To connect borrowers and savers
Explanation: Financial intermediaries, such as banks, facilitate the flow of funds between savers and borrowers.
Question 18
What is the purpose of a company’s retained earnings?
a) To pay dividends to shareholders
b) To reinvest profits back into the business
c) To increase the company’s liabilities
d) To reduce the company’s taxes
Answer: b) To reinvest profits back into the business
Explanation: Retained earnings are the portion of net income that is kept in the company to finance future growth and expansion.
Question 19
A company’s return on assets (ROA) is 8%, and its total assets are $1,000,000. What is its net income?
a) $40,000
b) $80,000
c) $100,000
d) $120,000
Answer: b) $80,000
Explanation: ROA = Net income / Total assets. Rearranged, Net income = ROA × Total assets. In this case: 8% × $1,000,000 = $80,000.
Question 20
Which type of risk can be reduced through diversification?
a) Systematic risk
b) Market risk
c) Unsystematic risk
d) Interest rate risk
Answer: c) Unsystematic risk
Explanation: Unsystematic risk is specific to individual companies or industries and can be reduced by diversifying investments.
