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web.groovymark@gmail.com
- December 26, 2024
Question 41
What is the primary purpose of a company’s cash flow statement?
a) To show the company’s profitability over time
b) To display the company’s assets and liabilities
c) To report the cash inflows and outflows from operating, investing, and financing activities
d) To determine the company’s dividend policy
Answer: c) To report the cash inflows and outflows from operating, investing, and financing activities
Explanation: The cash flow statement summarizes the cash generated and used by a company’s operations, investments, and financing activities.
Question 42
What does a company’s beta measure in finance?
a) The company’s dividend growth rate
b) The volatility of the company’s stock relative to the overall market
c) The company’s earnings growth potential
d) The company’s profitability
Answer: b) The volatility of the company’s stock relative to the overall market
Explanation: Beta measures how much a company’s stock price fluctuates in relation to the market as a whole.
Question 43
A company’s net income is $120,000, and its equity is $600,000. What is its return on equity (ROE)?
a) 10%
b) 15%
c) 20%
d) 25%
Answer: b) 20%
Explanation: ROE = Net income / Equity. In this case: $120,000 / $600,000 = 20%.
Question 44
Which of the following is a limitation of the payback period method for evaluating investments?
a) It ignores the time value of money
b) It overestimates the risk of investments
c) It focuses only on long-term projects
d) It requires complex calculations
Answer: a) It ignores the time value of money
Explanation: The payback period method does not take into account the time value of money or cash flows beyond the payback period.
Question 45
What does a company’s gross margin measure?
a) The percentage of revenue that is retained as profit after expenses
b) The percentage of revenue remaining after deducting the cost of goods sold
c) The percentage of revenue allocated to taxes
d) The percentage of revenue generated from debt financing
Answer: b) The percentage of revenue remaining after deducting the cost of goods sold
Explanation: Gross margin shows how much revenue is left after covering the direct costs of producing goods.
Question 46
What is the primary advantage of using a discounted cash flow (DCF) analysis?
a) It provides a quick estimate of project payback
b) It accounts for the time value of money
c) It ignores cash flows after the payback period
d) It is easy to calculate
Answer: b) It accounts for the time value of money
Explanation: DCF analysis takes into account the time value of money, providing a more accurate assessment of an investment’s value.
Question 47
Which of the following describes “capital budgeting”?
a) Deciding how to allocate a company’s short-term cash reserves
b) Evaluating long-term investments and their potential returns
c) Managing day-to-day cash inflows and outflows
d) Determining the optimal debt-to-equity ratio
Answer: b) Evaluating long-term investments and their potential returns
Explanation: Capital budgeting involves analyzing long-term projects to determine their profitability and feasibility.
Question 48
What is a company’s quick ratio designed to measure?
a) The company’s ability to meet short-term obligations with its most liquid assets
b) The company’s long-term solvency
c) The company’s profitability from core operations
d) The company’s asset turnover
Answer: a) The company’s ability to meet short-term obligations with its most liquid assets
Explanation: The quick ratio measures a company’s liquidity by comparing its most liquid assets to its current liabilities.
Question 49
What is meant by the term “free cash flow”?
a) Cash that is available for reinvestment after dividends are paid
b) Cash available to the company after operating expenses, capital expenditures, and dividends
c) Cash that must be reinvested to avoid taxes
d) Cash used to pay off short-term debt
Answer: b) Cash available to the company after operating expenses, capital expenditures, and dividends
Explanation: Free cash flow represents the cash that a company can use to pay dividends, expand the business, or reduce debt.
Question 50
A company issues 5,000 shares of stock at a price of $20 per share. How much equity capital does the company raise?
a) $50,000
b) $100,000
c) $200,000
d) $500,000
Answer: c) $100,000
Explanation: Equity capital raised = Number of shares × Price per share. In this case: 5,000 × $20 = $100,000.
