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web.groovymark@gmail.com
- December 26, 2024
Question 21
A company’s dividend payout ratio is 30%, and its earnings per share (EPS) is $4. How much is the dividend per share?
a) $0.80
b) $1.00
c) $1.20
d) $1.50
Answer: b) $1.20
Explanation: Dividend per share = Dividend payout ratio × EPS. In this case: 30% × $4 = $1.20.
Question 22
What is meant by the term “risk premium”?
a) The additional return expected for taking on additional risk
b) The cost of insuring against market risk
c) The amount of risk a company is willing to take
d) The return on risk-free investments
Answer: a) The additional return expected for taking on additional risk
Explanation: Risk premium is the extra return investors expect for holding riskier assets compared to risk-free assets.
Question 23
What does a “high” beta in stock market terms indicate about a stock?
a) The stock is less volatile than the market
b) The stock has a high dividend yield
c) The stock is more volatile than the market
d) The stock is negatively correlated with the market
Answer: c) The stock is more volatile than the market
Explanation: A high beta indicates that a stock’s price moves more than the market, suggesting higher volatility.
Question 24
Which of the following best describes a zero-coupon bond?
a) A bond that pays no interest until maturity
b) A bond that pays interest annually
c) A bond that pays interest semi-annually
d) A bond that pays interest monthly
Answer: a) A bond that pays no interest until maturity
Explanation: Zero-coupon bonds are sold at a discount and do not make periodic interest payments, instead paying the face value at maturity.
Question 25
What does an accounts receivable turnover ratio of 10 indicate?
a) The company collects its receivables every 10 days
b) The company takes 10 days to collect its receivables
c) The company collects its receivables 10 times per year
d) The company collects 10% of its receivables
Answer: c) The company collects its receivables 10 times per year
Explanation: Accounts receivable turnover ratio measures how many times a company collects its average receivables during a period.
Question 26
Which financial metric measures a company’s profitability in relation to its revenue?
a) Current ratio
b) Debt-to-equity ratio
c) Gross margin
d) Inventory turnover
Answer: c) Gross margin
Explanation: Gross margin is a profitability metric that shows the percentage of revenue remaining after deducting the cost of goods sold.
Question 27
What is the impact of compounding interest on the future value of an investment?
a) It reduces the future value
b) It increases the future value
c) It has no effect on the future value
d) It lowers the rate of return
Answer: b) It increases the future value
Explanation: Compounding interest leads to exponential growth of an investment by earning interest on both the initial principal and accumulated interest.
Question 28
What is a call option in financial markets?
a) The right to buy an asset at a specific price before a certain date
b) The obligation to sell an asset at a specific price
c) The right to sell an asset at a specific price before a certain date
d) The obligation to buy an asset at a future date
Answer: a) The right to buy an asset at a specific price before a certain date
Explanation: A call option gives the holder the right to purchase an asset at a predetermined price within a certain period.
Question 29
What does a “yield curve” show in finance?
a) The relationship between bond prices and interest rates
b) The difference between stock and bond returns
c) The relationship between bond yields and maturities
d) The expected returns on high-risk investments
Answer: c) The relationship between bond yields and maturities
Explanation: A yield curve plots bond yields against their maturities, often used to predict economic trends and interest rate movements.
Question 30
Which of the following describes a primary market?
a) A market where new securities are issued
b) A market where securities are traded between investors
c) A market where futures contracts are traded
d) A market where options are traded
Answer: a) A market where new securities are issued
Explanation: In the primary market, companies issue new stocks or bonds directly to investors for the first time.
Question 31
What is the effect of inflation on the purchasing power of money?
a) It increases purchasing power
b) It decreases purchasing power
c) It has no effect on purchasing power
d) It stabilizes purchasing power
Answer: b) It decreases purchasing power
Explanation: Inflation causes prices to rise, which reduces the purchasing power of money over time.
Question 32
What is the main purpose of a company’s income statement?
a) To show the company’s financial position at a specific point in time
b) To report the company’s revenues, expenses, and profits over a period
c) To display the company’s cash inflows and outflows
d) To show changes in shareholders’ equity
Answer: b) To report the company’s revenues, expenses, and profits over a period
Explanation: The income statement summarizes a company’s financial performance over a given period, showing revenues, expenses, and net income.
Question 33
A company’s debt ratio is 40%. What does this indicate?
a) 40% of the company’s assets are financed by debt
b) 40% of the company’s revenue comes from debt financing
c) The company is highly leveraged
d) The company’s total debt equals 40% of its equity
Answer: a) 40% of the company’s assets are financed by debt
Explanation: The debt ratio shows the proportion of a company’s assets that are financed through debt.
Question 34
Which of the following best describes the time value of money?
a) The future value of an investment is always higher than the present value
b) A dollar today is worth more than a dollar in the future
c) Money loses value over time due to inflation
d) Interest rates do not affect the value of money
Answer: b) A dollar today is worth more than a dollar in the future
Explanation: The time value of money states that money available now is worth more than the same amount in the future due to its earning potential.
Question 35
What is the primary role of the U.S. Securities and Exchange Commission (SEC)?
a) To protect investors and maintain fair and efficient markets
b) To regulate corporate tax rates
c) To oversee monetary policy
d) To control interest rates
Answer: a) To protect investors and maintain fair and efficient markets
Explanation: The SEC is responsible for regulating financial markets and ensuring transparency and fairness for investors.
Question 36
Which of the following is considered a form of equity financing?
a) Issuing bonds
b) Taking out a loan
c) Selling shares of stock
d) Leasing equipment
Answer: c) Selling shares of stock
Explanation: Equity financing involves raising capital by selling ownership shares in the company.
Question 37
A company’s sales revenue is $500,000, and its cost of goods sold is $300,000. What is its gross profit?
a) $100,000
b) $200,000
c) $300,000
d) $400,000
Answer: b) $200,000
Explanation: Gross profit = Sales revenue - Cost of goods sold. In this case: $500,000 - $300,000 = $200,000.
Question 38
What does the efficient market hypothesis (EMH) suggest about stock prices?
a) Stock prices are always undervalued
b) Stock prices fully reflect all available information
c) Stock prices are unpredictable
d) Stock prices are driven by investor emotions
Answer: b) Stock prices fully reflect all available information
Explanation: EMH suggests that stock prices incorporate and reflect all relevant information, making it difficult to consistently outperform the market.
Question 39
What is a financial covenant in a loan agreement?
a) A clause that allows the borrower to defer payments
b) A provision requiring the borrower to maintain certain financial ratios
c) A provision that reduces the loan interest rate
d) A clause that restricts the use of the loan
Answer: b) A provision requiring the borrower to maintain certain financial ratios
Explanation: Financial covenants are terms in a loan agreement that require the borrower to meet specific financial conditions.
Question 40
Which financial ratio measures a company’s efficiency in using its assets to generate revenue?
a) Asset turnover ratio
b) Debt-to-equity ratio
c) Price-to-earnings ratio
d) Current ratio
Answer: a) Asset turnover ratio
Explanation: The asset turnover ratio measures how efficiently a company uses its assets to generate revenue.
