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web.groovymark@gmail.com
- December 26, 2024
Question 21
A bond with a face value of $1,000 and an annual coupon rate of 6% pays how much in interest per year?
a) $30
b) $60
c) $100
d) $600
Answer: b) $60
Explanation: Interest payment = Face value × Coupon rate. In this case: $1,000 × 6% = $60.
Question 22
What does a high inventory turnover ratio indicate?
a) The company has excess inventory
b) The company sells its inventory quickly
c) The company is experiencing declining sales
d) The company is not meeting demand
Answer: b) The company sells its inventory quickly
Explanation: A high inventory turnover ratio indicates that a company efficiently sells and replaces its inventory.
Question 23
What is the purpose of a capital budget in corporate finance?
a) To manage day-to-day cash flow
b) To estimate long-term investment needs and financing
c) To plan for employee bonuses
d) To allocate funds for marketing campaigns
Answer: b) To estimate long-term investment needs and financing
Explanation: Capital budgeting helps companies plan for large investments, such as new equipment or infrastructure.
Question 24
Which of the following is a liquidity ratio?
a) Debt-to-equity ratio
b) Return on assets
c) Quick ratio
d) Price-to-earnings ratio
Answer: c) Quick ratio
Explanation: The quick ratio is a liquidity ratio that measures a company’s ability to meet short-term obligations with its most liquid assets.
Question 25
What does a company’s working capital measure?
a) The company’s total assets
b) The company’s cash reserves
c) The company’s profitability
d) The company’s short-term financial health
Answer: d) The company’s short-term financial health
Explanation: Working capital is the difference between a company’s current assets and current liabilities, indicating its ability to cover short-term obligations.
Question 26
What is the primary risk of investing in junk bonds?
a) Interest rate fluctuations
b) Inflation
c) Higher default risk
d) Currency risk
Answer: c) Higher default risk
Explanation: Junk bonds are high-yield bonds that carry a higher risk of default compared to investment-grade bonds.
Question 27
What is the significance of a bond’s maturity date?
a) The date when interest payments begin
b) The date when the bond issuer must repay the face value
c) The date when the bond was issued
d) The date when the bond’s interest rate is adjusted
Answer: b) The date when the bond issuer must repay the face value
Explanation: A bond’s maturity date is the date on which the issuer must repay the bondholder the bond’s face value.
Question 28
What is the main advantage of dollar-cost averaging for investors?
a) It guarantees higher returns
b) It reduces the risk of making poor investment decisions due to market timing
c) It maximizes profits in a bull market
d) It ensures that dividends are reinvested automatically
Answer: b) It reduces the risk of making poor investment decisions due to market timing
Explanation: Dollar-cost averaging involves regularly investing a fixed amount, which helps reduce the impact of market volatility.
Question 29
A company’s total revenue is $500,000, and its total expenses are $350,000. What is the company’s net income?
a) $100,000
b) $150,000
c) $350,000
d) $500,000
Answer: b) $150,000
Explanation: Net income is calculated by subtracting total expenses from total revenue. In this case: $500,000 - $350,000 = $150,000.
Question 30
What is the primary purpose of a company issuing bonds?
a) To raise equity capital
b) To raise debt capital for long-term investments
c) To distribute profits to shareholders
d) To improve its stock price
Answer: b) To raise debt capital for long-term investments
Explanation: Companies issue bonds to borrow money from investors for long-term projects or expansions, which they must repay with interest.
Question 31
Which of the following describes a company’s dividend payout ratio?
a) The percentage of profits paid to shareholders as dividends
b) The percentage of total revenue distributed to employees
c) The percentage of operating expenses covered by dividends
d) The percentage of retained earnings reinvested in the company
Answer: a) The percentage of profits paid to shareholders as dividends
Explanation: The dividend payout ratio is the proportion of earnings distributed to shareholders as dividends.
Question 32
A stock’s beta is 1.5. What does this indicate?
a) The stock is less volatile than the market
b) The stock is more volatile than the market
c) The stock’s price will remain constant
d) The stock will outperform the market
Answer: b) The stock is more volatile than the market
Explanation: A beta greater than 1 indicates that the stock is more volatile than the overall market.
Question 33
What does the term “default risk” refer to in bonds?
a) The risk that bond interest rates will increase
b) The risk that the bond issuer will fail to make interest or principal payments
c) The risk that the bond’s market price will fluctuate
d) The risk that inflation will erode the bond’s value
Answer: b) The risk that the bond issuer will fail to make interest or principal payments
Explanation: Default risk is the risk that the bond issuer will not fulfill its payment obligations to bondholders.
Question 34
What is the purpose of a company’s balance sheet?
a) To show the company’s revenues and expenses
b) To provide a snapshot of the company’s financial position at a specific point in time
c) To outline the company’s future financial goals
d) To record daily transactions
Answer: b) To provide a snapshot of the company’s financial position at a specific point in time
Explanation: The balance sheet shows a company’s assets, liabilities, and equity at a specific point in time.
Question 35
How is a company’s price-to-sales (P/S) ratio calculated?
a) Stock price / Earnings per share
b) Stock price / Revenue per share
c) Sales / Net income
d) Market capitalization / Dividend yield
Answer: b) Stock price / Revenue per share
Explanation: The price-to-sales ratio compares a company’s stock price to its revenue per share, helping assess valuation.
Question 36
What does the term “equity” refer to in corporate finance?
a) The company’s total liabilities
b) The company’s total profits
c) The ownership interest in the company
d) The company’s total revenue
Answer: c) The ownership interest in the company
Explanation: Equity represents the ownership interest in a company, including shareholders' stakes and retained earnings.
Question 37
A company’s sales growth is 10%, and its cost of goods sold growth is 15%. What will happen to the company’s gross profit margin?
a) It will increase
b) It will decrease
c) It will stay the same
d) It will fluctuate randomly
Answer: b) It will decrease
Explanation: If the cost of goods sold grows faster than sales, the company’s gross profit margin will shrink.
Question 38
What is the role of a financial analyst?
a) To manage a company’s payroll
b) To evaluate investment opportunities and financial trends
c) To oversee a company’s marketing campaigns
d) To manage day-to-day cash flow
Answer: b) To evaluate investment opportunities and financial trends
Explanation: Financial analysts assess investment opportunities, analyze financial data, and forecast future financial performance.
Question 39
A company’s debt-to-equity ratio is 1.2. What does this indicate?
a) The company is financed equally by debt and equity
b) The company has more equity than debt
c) The company has more debt than equity
d) The company has no liabilities
Answer: c) The company has more debt than equity
Explanation: A debt-to-equity ratio greater than 1 indicates that the company is primarily financed by debt rather than equity.
Question 40
What is the purpose of the internal rate of return (IRR) in capital budgeting?
a) To calculate the total cost of a project
b) To estimate the required rate of return on a project
c) To determine the discount rate at which the net present value of a project is zero
d) To assess the time it takes to recover an investment
Answer: c) To determine the discount rate at which the net present value of a project is zero
Explanation: IRR is the discount rate that makes the net present value (NPV) of a project equal to zero, helping assess investment profitability.
