Fundamentals of Business Finance Practice Exam

Fundamentals of Business Finance Practice Exam

 

What is the primary purpose of managerial finance?

A) To maximize short-term profits
B) To ensure legal compliance
C) To make financial decisions that increase shareholder wealth
D) To minimize costs

Which of the following is NOT a key area of study in business finance?

A) Financial statement analysis
B) Corporate governance
C) Time value of money
D) Employee motivation

Which of the following is considered a capital budgeting decision?

A) Deciding how much cash to hold
B) Deciding which new product lines to introduce
C) Determining how to raise new funds for operations
D) Deciding the best time to pay dividends

In financial markets, what is the primary function of the capital markets?

A) To raise funds for companies through stock and bond issuance
B) To facilitate currency exchange
C) To provide banking services to consumers
D) To regulate tax policies

Which of the following best defines the “time value of money”?

A) Money received today is worth more than the same amount in the future
B) Money earned through interest is the same as principal
C) Interest rates are fixed over time
D) The value of money decreases over time

If an investor invests in a stock with a high risk, what return should they expect?

A) A low return
B) A zero return
C) A high return
D) A guaranteed return

What does the risk-free rate represent in financial analysis?

A) The rate of return on investments with no risk
B) The average return on all financial assets
C) The rate at which the Federal Reserve lends money to banks
D) The return from investments with the highest risk

What is the cost of capital?

A) The price a company must pay to borrow money
B) The return on investment required by an investor
C) The tax rate paid by the company
D) The total value of a company’s assets

Which of the following is a characteristic of a risk-averse investor?

A) Willing to take high risks for potential high returns
B) Prefers low-risk, stable investments
C) Invests only in bonds
D) Avoids all investment in stocks

Which of the following financial statements provides a snapshot of a company’s financial position at a specific point in time?

A) Income statement
B) Cash flow statement
C) Balance sheet
D) Statement of retained earnings

What does the term “asset valuation” refer to in finance?

A) Determining the true market value of an asset
B) Estimating the profit potential of a business
C) Calculating the risk of an asset
D) Estimating the cost of capital

Which of the following is considered an example of a short-term financial decision?

A) Determining a company’s capital structure
B) Issuing long-term bonds
C) Deciding how much cash to hold in reserve
D) Making decisions regarding mergers and acquisitions

What does the capital asset pricing model (CAPM) help determine?

A) The cost of equity
B) The cost of debt
C) The appropriate level of working capital
D) The financial leverage ratio

What is the primary benefit of diversification in an investment portfolio?

A) Increased risk
B) Reduced risk
C) Maximized profit potential
D) Guaranteed return

Which financial concept calculates the present value of a series of future cash flows?

A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index

In the context of time value of money, what does the term “discounting” refer to?

A) Calculating future cash flows
B) Estimating the cost of capital
C) Converting future cash flows into their present value
D) Increasing the value of future cash flows

What is the role of a financial manager in relation to risk management?

A) To eliminate all risk from the company’s operations
B) To identify, assess, and manage risks to minimize financial impact
C) To focus solely on maximizing profits
D) To manage only operational risks

How does an increase in interest rates typically affect the value of a bond?

A) Increases bond value
B) Decreases bond value
C) Has no effect on bond value
D) Doubles the bond value

Which of the following is an example of an equity financing method?

A) Issuing bonds
B) Taking out a bank loan
C) Issuing stock
D) Borrowing from family and friends

The net present value (NPV) method is most useful for evaluating:

A) Short-term financing decisions
B) Dividend policy decisions
C) Long-term investment projects
D) Stock price movements

The internal rate of return (IRR) represents the:

A) Discount rate that makes the NPV of a project equal to zero
B) Maximum rate of return an investor can achieve
C) Average rate of return expected from the project
D) Rate of inflation

Which of the following best describes the concept of liquidity in finance?

A) The ease with which an asset can be converted into cash without losing value
B) The ability of a company to earn a profit
C) The ratio of liabilities to assets
D) The long-term profitability of a company

Which of the following is NOT typically a part of financial statement analysis?

A) Ratio analysis
B) Trend analysis
C) Stock price analysis
D) Profit maximization strategies

In the context of capital budgeting, the payback period refers to:

A) The time it takes for an investment to pay back its initial cost
B) The expected return rate on an investment
C) The time it takes for the project to break even
D) The total amount of interest paid on the project

What does a high current ratio indicate about a company’s financial position?

A) The company is highly leveraged
B) The company has a strong ability to pay short-term liabilities
C) The company is not generating enough profit
D) The company has low liquidity

What is a common method for evaluating the financial risk of a company?

A) SWOT analysis
B) Discounted cash flow analysis
C) Risk-adjusted return measures
D) Market share analysis

Which of the following would be considered a financing decision for a company?

A) Deciding whether to launch a new product
B) Choosing between debt or equity to raise funds
C) Estimating future sales growth
D) Determining the most efficient operational workflow

Which term describes the cost of a company’s total capital, including both debt and equity?

A) WACC (Weighted Average Cost of Capital)
B) EBIT (Earnings Before Interest and Taxes)
C) ROE (Return on Equity)
D) EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

What is the primary risk faced by a business when it takes on too much debt?

A) Lower cost of capital
B) Reduced market share
C) Increased bankruptcy risk
D) Higher tax rates

The decision to reinvest profits into the company or pay them as dividends is an example of a:

A) Capital budgeting decision
B) Dividend policy decision
C) Working capital management decision
D) Financing decision

 

31. What is the primary advantage of using debt financing over equity financing?

A) The ability to share ownership with investors
B) The flexibility in managing financial decisions
C) The tax deductibility of interest payments
D) The ability to raise unlimited capital

32. Which of the following represents an example of systematic risk?

A) A factory fire
B) A rise in interest rates
C) A company’s management change
D) A new product launch

33. Which of the following financial statements shows a company’s revenues and expenses over a specific period?

A) Balance sheet
B) Cash flow statement
C) Income statement
D) Statement of stockholders’ equity

34. The formula for calculating the future value of a single sum is based on:

A) Compound interest
B) Simple interest
C) Discounting
D) Dividends

35. A company wants to evaluate the profitability of a new investment. Which financial metric should they primarily use?

A) Debt-to-equity ratio
B) Return on investment (ROI)
C) Current ratio
D) Quick ratio

36. The risk that an investment’s value will fluctuate due to changes in the market as a whole is known as:

A) Unsystematic risk
B) Market risk
C) Credit risk
D) Interest rate risk

37. A firm’s dividend policy determines:

A) How much debt the company will use
B) How frequently dividends are paid to shareholders
C) How much of its profits will be paid out as dividends
D) The salary of top management

38. A company’s weighted average cost of capital (WACC) is used to determine:

A) The overall cost of debt for the company
B) The rate of return the company must earn on its investments to satisfy investors
C) The company’s net income
D) The company’s profit margin

39. The process of adjusting a future cash flow to its present value is known as:

A) Depreciation
B) Discounting
C) Amortization
D) Capital budgeting

40. What is the primary function of the financial markets?

A) To provide funds for businesses through stocks and bonds
B) To regulate corporate taxes
C) To set interest rates for loans
D) To manage corporate governance

41. What is meant by the term “capital structure” in business finance?

A) The mix of debt and equity used by a company to finance its operations
B) The amount of capital held by a company in cash
C) The organization of a company’s management team
D) The way in which a company’s capital is distributed among assets

42. What is the role of the board of directors in financial management?

A) To manage day-to-day operations of the company
B) To make decisions on capital budgeting projects
C) To oversee the financial decisions made by management
D) To directly manage cash flow

43. Which of the following statements is true about preferred stock?

A) Preferred stockholders have voting rights in the company
B) Preferred stockholders are paid dividends before common stockholders
C) Preferred stock is a debt instrument
D) Preferred stock has a lower claim on assets than common stock

44. Which of the following is true about the relationship between risk and return?

A) Higher risk is always associated with lower returns
B) There is no relationship between risk and return
C) Higher risk is typically associated with higher potential returns
D) Higher risk guarantees higher returns

45. Which of the following methods is commonly used to evaluate a project’s cash flow over time?

A) Earnings per share
B) Net present value (NPV)
C) Dividend payout ratio
D) Return on equity

46. In a capital budgeting decision, the break-even point is important because:

A) It determines when the investment will start to generate profits
B) It tells when the company will achieve the highest ROI
C) It identifies when a company should issue new bonds
D) It helps to estimate future cash inflows

47. What does a high debt-to-equity ratio indicate about a company?

A) The company is primarily financed through debt
B) The company has a strong equity base
C) The company has low liquidity
D) The company is underperforming

48. Which of the following is an example of an unsystematic risk?

A) Inflation
B) Changes in interest rates
C) A company’s labor strike
D) A market-wide recession

49. A firm’s “cost of equity” refers to:

A) The interest rate it must pay on its debt
B) The rate of return required by its shareholders
C) The rate paid to bondholders
D) The tax rate applicable to corporate earnings

50. In which of the following scenarios would a company likely use the net present value (NPV) method?

A) To assess whether a company should declare dividends
B) To decide whether to accept or reject a long-term investment project
C) To evaluate the financial performance of its current assets
D) To determine the company’s tax liability

51. Which of the following best describes an operating lease?

A) A lease where the lessor retains the risks and rewards of ownership
B) A lease where the lessee gains ownership of the asset at the end of the lease term
C) A long-term lease for acquiring real estate
D) A lease where the lessee can buy the asset at a discounted rate

52. What does the price-to-earnings (P/E) ratio measure?

A) The company’s current stock price relative to its earnings per share
B) The company’s total debt relative to its equity
C) The total market value of the company’s assets
D) The dividend yield on the company’s stock

53. What is a key advantage of using equity financing?

A) The company does not have to repay the capital
B) It involves no risk for the company
C) It always results in a lower cost of capital than debt
D) It provides tax advantages to the company

54. What is the key difference between debt and equity financing?

A) Debt financing requires repayment, while equity financing involves selling ownership
B) Debt financing results in higher tax liabilities, while equity financing does not
C) Debt financing is always more expensive than equity financing
D) Debt financing involves giving up ownership rights in the company

55. The primary goal of a company’s financial management should be to:

A) Maximize profits in the short term
B) Increase the company’s market share
C) Maximize shareholder wealth
D) Minimize operational costs

56. In the context of capital budgeting, which of the following methods is used to determine the profitability of an investment?

A) Payback period
B) Accounting rate of return (ARR)
C) Net present value (NPV)
D) All of the above

57. Which of the following is an example of financial risk?

A) A sudden increase in interest rates
B) A company’s management decision to cut costs
C) A firm’s decision to expand into a new market
D) The decision to increase the workforce

58. What is the relationship between interest rates and bond prices?

A) As interest rates rise, bond prices generally rise
B) As interest rates rise, bond prices generally fall
C) Interest rates and bond prices are not related
D) Bond prices are unaffected by interest rates

59. The term “liquidity” in finance refers to:

A) The ability of a company to generate profits
B) The ability to convert assets into cash quickly without a significant loss of value
C) The company’s long-term solvency
D) The company’s ability to repay its debt

60. Which of the following is true of common stockholders?

A) They are guaranteed dividends
B) They have a claim on the company’s assets in the event of liquidation after bondholders and preferred stockholders
C) They have voting rights, but no claim on the company’s profits
D) They are responsible for the company’s debts

 

61. Which of the following is NOT a characteristic of debt financing?

A) Interest payments are tax-deductible
B) Debt must be repaid at maturity
C) Debt holders have ownership in the company
D) Debt increases financial leverage

62. Which financial statement provides information about the company’s financial position at a specific point in time?

A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of stockholders’ equity

63. The time value of money concept is based on the idea that:

A) Money received in the future is worth more than money received today
B) Money loses value over time due to inflation
C) Money today is worth more than the same amount in the future
D) The present value of money is irrelevant

64. Which of the following is NOT typically considered when calculating the cost of equity?

A) Dividend yield
B) Risk-free rate
C) Debt-to-equity ratio
D) Expected return on the market

65. The capital asset pricing model (CAPM) is used to determine:

A) The market value of a company’s stock
B) The cost of debt for a company
C) The required rate of return on an investment
D) The company’s dividend policy

66. What is the primary purpose of capital budgeting?

A) To decide how to raise capital
B) To determine how to distribute dividends
C) To assess the profitability of long-term investments
D) To evaluate short-term liquidity

67. A company uses a weighted average cost of capital (WACC) to:

A) Set the price for its products
B) Calculate the return required by investors
C) Estimate the tax rate on its earnings
D) Determine the optimal amount of debt and equity

68. The term “systematic risk” refers to:

A) The risk specific to a particular company
B) The risk associated with market-wide factors
C) The risk related to the company’s operational efficiency
D) The risk that a company may default on its debt

69. The dividend discount model (DDM) is used to:

A) Estimate the value of a company based on its expected dividends
B) Calculate the cost of equity for the company
C) Assess the risk of an investment
D) Estimate the future growth rate of earnings

70. If the risk-free rate is 3%, and the expected return on the market is 10%, what would be the required rate of return on a stock with a beta of 1.5 using the Capital Asset Pricing Model (CAPM)?

A) 10.5%
B) 13.5%
C) 15.5%
D) 18.0%

71. What is the main advantage of using the internal rate of return (IRR) method for capital budgeting decisions?

A) It accounts for the risk of a project
B) It is easier to calculate than the net present value (NPV)
C) It provides a rate of return that can be compared to the company’s cost of capital
D) It does not require estimating cash flows

72. What is the term used to describe the total market value of a company’s equity?

A) Market capitalization
B) Book value
C) Capital expenditures
D) Gross margin

73. The price of a bond is inversely related to:

A) The bond’s face value
B) The bond’s coupon rate
C) The prevailing interest rates in the market
D) The bond’s maturity date

74. Which of the following is a characteristic of preferred stock?

A) Preferred stockholders have voting rights
B) Preferred stockholders receive dividends before common stockholders
C) Preferred stock is treated as debt for tax purposes
D) Preferred stockholders have a claim on the company’s assets after bondholders

75. The current ratio is used to assess a company’s:

A) Profitability
B) Liquidity
C) Solvency
D) Capital structure

76. A project has an initial investment of $50,000 and generates annual cash flows of $10,000 for 8 years. What is the payback period for the project?

A) 5 years
B) 6 years
C) 7 years
D) 8 years

77. Which of the following is a limitation of using the payback period as a capital budgeting method?

A) It ignores the time value of money
B) It provides a precise estimate of profitability
C) It accounts for cash flows after the payback period
D) It can be easily used to compare projects with different lifespans

78. A company’s weighted average cost of capital (WACC) is:

A) Always higher than the cost of equity
B) A weighted average of the cost of debt and the cost of equity
C) The same as the cost of debt
D) The rate at which a company can raise capital in the stock market

79. What does the debt-to-equity ratio measure?

A) The proportion of debt and equity used to finance the company’s operations
B) The cost of debt relative to the cost of equity
C) The ability of the company to repay its debt
D) The company’s profitability

80. A firm’s cost of capital refers to:

A) The return required to keep the firm’s capital structure balanced
B) The cost of issuing new shares of stock
C) The cost of acquiring new assets
D) The minimum return needed to satisfy investors’ expectations

81. In a competitive market, a company’s cost of equity is typically:

A) Equal to its dividend yield
B) Higher than its cost of debt
C) Lower than its cost of debt
D) Equal to its return on assets

82. Which of the following is true about the present value of a lump sum amount?

A) It increases as the discount rate increases
B) It decreases as the discount rate increases
C) It remains constant regardless of the discount rate
D) It increases as time increases

83. Which of the following is a capital budgeting method that discounts future cash flows to their present value?

A) Payback period
B) Net present value (NPV)
C) Accounting rate of return (ARR)
D) Profitability index

84. What is the term “liquidity risk” associated with?

A) The risk that an investment will lose value due to changes in interest rates
B) The risk that a company will not be able to meet its short-term obligations
C) The risk that a company will default on its debt
D) The risk of a company being unable to refinance its debt

85. The net present value (NPV) of a project is:

A) Always positive
B) The sum of future cash flows minus the initial investment, discounted at the required rate of return
C) The total value of the firm’s equity
D) The rate at which a company can raise capital

86. What is the primary goal of financial management?

A) Maximizing short-term profits
B) Maximizing shareholder wealth
C) Minimizing the cost of debt
D) Maximizing the company’s market share

87. Which of the following financial metrics is most commonly used to assess the financial health of a company?

A) Return on equity (ROE)
B) Earnings per share (EPS)
C) Price-to-earnings (P/E) ratio
D) All of the above

88. The profitability index (PI) is calculated by:

A) Dividing the present value of future cash flows by the initial investment
B) Subtracting the initial investment from the net present value
C) Dividing the net present value by the initial investment
D) Adding the initial investment to the net present value

89. In the capital budgeting process, the discounted payback period is:

A) The time required to recover the initial investment without considering the time value of money
B) The time required to recover the initial investment considering the time value of money
C) The same as the net present value
D) The time period in which the company earns its required rate of return

90. A project with an internal rate of return (IRR) higher than the required rate of return will have a:

A) Positive net present value (NPV)
B) Negative net present value (NPV)
C) Payback period longer than the required period
D) Risk-adjusted return lower than the required return

 

91. What does the term “cost of capital” represent?

A) The cost of raising new capital through equity or debt
B) The cost of operational expenses
C) The rate of return a company earns on its investments
D) The cost of producing goods and services

92. The risk that an investor takes by holding a diversified portfolio is called:

A) Systematic risk
B) Unsystematic risk
C) Market risk
D) Liquidity risk

93. What does the capital structure of a company refer to?

A) The amount of debt and equity used to finance the company’s operations
B) The number of shares of stock outstanding
C) The company’s fixed assets
D) The company’s cost of capital

94. Which of the following is the primary advantage of using the net present value (NPV) method for capital budgeting?

A) It accounts for the time value of money
B) It is easy to compute
C) It does not require estimating future cash flows
D) It gives equal weight to all cash flows

95. A company is considering two mutually exclusive projects. Which of the following methods would best help decide which project to choose?

A) Payback period
B) Net present value (NPV)
C) Accounting rate of return (ARR)
D) Profitability index

96. The relationship between a bond’s price and its interest rate is:

A) Directly proportional
B) Inversely proportional
C) Unaffected by interest rate changes
D) Not related

97. The primary objective of financial management is to:

A) Maximize revenue
B) Minimize expenses
C) Maximize shareholder wealth
D) Minimize the risk of financial loss

98. A company’s debt-to-equity ratio is a measure of:

A) The proportion of debt and equity used to finance the company’s assets
B) The company’s ability to pay dividends
C) The company’s profitability
D) The company’s market share

99. A company’s operating income is calculated by:

A) Subtracting interest expenses from sales revenue
B) Subtracting cost of goods sold and operating expenses from sales revenue
C) Subtracting taxes from net income
D) Adding interest and taxes to net income

100. What is the key characteristic of preferred stock?

A) It is senior to common stock in terms of claims on assets and dividends
B) It has no dividend payments
C) It has voting rights in shareholder meetings
D) It cannot be converted into common stock

101. The internal rate of return (IRR) is the rate at which:

A) The project’s future cash inflows equal the present value of the initial investment
B) The present value of future cash inflows equals the initial investment
C) The project’s net present value (NPV) is maximized
D) The project’s profitability index (PI) is one

102. Which of the following financial ratios measures a company’s ability to pay short-term obligations?

A) Debt-to-equity ratio
B) Current ratio
C) Return on equity (ROE)
D) Gross margin ratio

103. A company’s weighted average cost of capital (WACC) is:

A) The average cost of the company’s debt
B) The cost of equity minus the cost of debt
C) The weighted average of the cost of equity and the cost of debt
D) The return on assets divided by the cost of equity

104. What does a company’s price-to-earnings (P/E) ratio indicate?

A) The profitability of the company
B) The growth rate of earnings
C) The market value of the company’s equity relative to its earnings
D) The risk level of the company’s stock

105. The dividend yield is calculated by:

A) Dividing the dividend per share by the stock price per share
B) Dividing the earnings per share by the stock price per share
C) Dividing the total dividends by the net income
D) Dividing the dividends per share by the earnings per share

106. What does the efficient market hypothesis (EMH) state?

A) Investors can consistently outperform the market
B) Stock prices reflect all available information
C) A company’s stock price will always increase over time
D) Market prices are driven solely by company fundamentals

107. The cost of equity is generally higher than the cost of debt because:

A) Debt is riskier than equity
B) Equity investors require higher returns to compensate for risk
C) Equity is more easily accessible than debt
D) Debt is tax-deductible

108. What does the term “diversification” refer to in investing?

A) Reducing the risk of investment by investing in a variety of assets
B) Focusing on a single asset to maximize returns
C) Investing only in stocks
D) Timing the market to maximize gains

109. What is the key difference between the net present value (NPV) and the internal rate of return (IRR) methods of capital budgeting?

A) NPV assumes reinvestment at the project’s discount rate, while IRR assumes reinvestment at the project’s IRR
B) NPV is based on projected cash flows, while IRR focuses on historical cash flows
C) NPV accounts for the time value of money, while IRR does not
D) There is no difference between NPV and IRR

110. The primary purpose of a bond’s coupon rate is to:

A) Determine the market price of the bond
B) Calculate the bond’s yield to maturity
C) Specify the interest payment to bondholders
D) Set the maturity date of the bond

111. The risk-free rate is best represented by:

A) The return on equity for the stock market
B) The return on U.S. Treasury bonds
C) The return on corporate bonds
D) The return on stock dividends

112. The time value of money concept assumes that:

A) Money today is worth more than the same amount in the future due to its potential earning power
B) Money received in the future is worth the same as money today
C) Interest rates are irrelevant to the time value of money
D) Future money is worth more than present money due to inflation

113. What is a key advantage of using the net present value (NPV) method?

A) It does not require any assumptions about the reinvestment of cash flows
B) It accounts for the time value of money and provides a clear decision rule
C) It is the simplest method to apply
D) It does not require estimating the future cash flows

114. Which of the following is NOT considered a financing activity on the statement of cash flows?

A) Issuing bonds
B) Paying dividends
C) Purchasing equipment
D) Borrowing funds

115. The term “liquidity” refers to:

A) The ability of a company to meet its long-term obligations
B) The ability of a company to convert assets into cash quickly without significant loss of value
C) The risk of default on debt obligations
D) The risk of a company’s stock price fluctuating

116. In the context of business finance, the term “leverage” refers to:

A) The use of debt to increase the potential return on investment
B) The ability of a company to pay its debts
C) The use of equity financing for long-term investments
D) The risk of a company’s stock price dropping

117. Which of the following is the most accurate description of a company’s operating cash flow?

A) Cash generated from day-to-day business operations
B) Cash used for financing activities
C) Cash received from issuing stock
D) Cash used to purchase long-term assets

118. A company that increases its debt level to finance new investments is:

A) Reducing its leverage
B) Increasing its risk of financial distress
C) Reducing its cost of equity
D) Increasing its dividends

119. The price of a stock is determined primarily by:

A) The company’s revenue
B) The market’s expectation of future earnings and growth
C) The interest rate set by the central bank
D) The price-to-earnings (P/E) ratio

120. A company is considering two projects, and both have positive net present values (NPVs). The company should choose the project with:

A) The highest internal rate of return (IRR)
B) The shortest payback period
C) The highest NPV
D) The longest project duration

 

121. The term “time value of money” implies that:

A) The value of money decreases over time due to inflation
B) The value of money remains the same regardless of when it is received
C) Money received today is worth more than the same amount received in the future due to its earning potential
D) Money lost in the future is worth more than money lost today

122. Which of the following is NOT a component of a company’s capital structure?

A) Common equity
B) Retained earnings
C) Short-term debt
D) Depreciation

123. The cost of debt is typically lower than the cost of equity because:

A) Debt holders take on more risk than equity holders
B) Interest on debt is tax-deductible, reducing the overall cost
C) Debt is risk-free for the company
D) Debt investors have ownership in the company

124. The key difference between operating leases and capital leases is:

A) Operating leases are used to finance the purchase of assets, while capital leases are for renting assets
B) Operating leases appear on the balance sheet, while capital leases do not
C) Operating leases are typically short-term, while capital leases are long-term
D) Capital leases are treated as expenses, while operating leases are treated as liabilities

125. A company should choose a project with a higher internal rate of return (IRR) if:

A) The IRR exceeds the cost of capital
B) The payback period is shorter than the company’s target
C) The project’s risk is low
D) The project does not require initial investment

126. The dividend discount model (DDM) assumes that:

A) Dividends will grow at a constant rate forever
B) The company will never pay dividends
C) The dividend rate is determined by market conditions
D) The stock price will equal the dividend payment

127. The risk-free rate is primarily influenced by:

A) The supply and demand for stocks
B) The return on corporate bonds
C) The interest rate set by the central bank on government securities
D) The company’s earnings potential

128. A bond’s yield to maturity (YTM) is best described as:

A) The annual coupon payment divided by the bond’s price
B) The total return an investor can expect to earn if the bond is held until maturity
C) The price an investor is willing to pay for a bond
D) The bond’s coupon rate adjusted for inflation

129. What is the primary purpose of using sensitivity analysis in capital budgeting?

A) To estimate the most likely cash flows
B) To examine how changes in key variables affect the outcome of a project
C) To calculate the payback period
D) To predict the market price of a company’s stock

130. If a firm’s return on equity (ROE) is greater than the return on assets (ROA), it suggests that:

A) The company is over-leveraged
B) The company has a higher cost of equity than debt
C) The company is under-leveraged
D) The company’s asset utilization is poor

131. The debt-to-equity ratio is a measure of a company’s:

A) Ability to generate profit from its assets
B) Financial leverage and capital structure
C) Efficiency in managing operational costs
D) Market value compared to its book value

132. Which of the following is an advantage of using debt financing?

A) It reduces the financial risk for the company
B) It provides tax benefits due to interest deductibility
C) It does not require the company to repay principal
D) It reduces the company’s overall risk

133. Which of the following represents an example of a company’s operating cash flow?

A) Interest paid on bonds
B) Cash received from selling assets
C) Net income plus depreciation
D) Cash proceeds from issuing new equity

134. A company’s weighted average cost of capital (WACC) is used to:

A) Determine the market value of the company’s stock
B) Evaluate potential investment opportunities
C) Calculate the company’s return on equity
D) Set dividend policies for shareholders

135. What is the main advantage of using the payback period method in capital budgeting?

A) It accounts for the time value of money
B) It is a simple and quick method for evaluating projects
C) It considers the risk of the project
D) It incorporates all potential future cash flows

136. Which of the following is an example of systematic risk?

A) A company’s failure due to poor management
B) A change in government monetary policy
C) A competitor introducing a superior product
D) A company defaulting on its debt

137. Which of the following factors would most likely increase the market price of a company’s stock?

A) A decrease in the dividend payout
B) A decrease in interest rates
C) An increase in debt-to-equity ratio
D) A reduction in the company’s market share

138. The primary goal of capital budgeting is to:

A) Maximize dividends to shareholders
B) Minimize the company’s cost of capital
C) Maximize the value of the firm by selecting projects that will increase shareholder wealth
D) Maximize the firm’s short-term profits

139. What is the key disadvantage of using the internal rate of return (IRR) method for capital budgeting?

A) It does not account for the time value of money
B) It may give multiple rates of return for non-conventional cash flows
C) It is too complicated to apply
D) It does not include the cost of capital in its analysis

140. A company’s cost of equity is determined by:

A) The interest rates on corporate bonds
B) The rate of return required by equity investors
C) The company’s tax rate
D) The company’s profitability

141. Which of the following is an example of a non-operating activity on the statement of cash flows?

A) Depreciation expense
B) Interest paid on debt
C) Cash from sales revenue
D) Proceeds from the sale of equipment

142. What is the primary difference between common stock and preferred stock?

A) Preferred stockholders have voting rights, while common stockholders do not
B) Preferred stockholders receive dividends before common stockholders
C) Common stock is more expensive than preferred stock
D) Preferred stock is riskier than common stock

143. A company’s net present value (NPV) is calculated by:

A) Subtracting initial investment from the sum of discounted future cash flows
B) Adding all future cash flows together
C) Dividing future cash flows by the cost of capital
D) Multiplying future cash flows by the interest rate

144. What is the primary objective of financial management?

A) To maximize the firm’s revenue
B) To minimize expenses
C) To maximize shareholder wealth
D) To increase employee salaries

145. The price of a stock is typically determined by:

A) The company’s net income
B) The company’s cash flow
C) The market’s expectations of future earnings and growth
D) The company’s assets

146. What is the purpose of diversification in investment portfolios?

A) To reduce risk by investing in a variety of assets
B) To focus on maximizing returns from a single asset
C) To track the market index
D) To limit the portfolio’s exposure to debt

147. The capital asset pricing model (CAPM) helps investors determine:

A) The expected return of an asset based on its risk
B) The intrinsic value of a stock
C) The optimal capital structure for a company
D) The tax implications of an investment

148. Which of the following is a disadvantage of debt financing?

A) Debt financing increases financial risk and potential default
B) Debt is not tax-deductible
C) Debt does not need to be repaid
D) Debt financing reduces a company’s leverage

149. What is the main goal of cost of capital analysis in corporate finance?

A) To determine the minimum required return on new investments
B) To maximize the firm’s dividend payout
C) To minimize the company’s debt load
D) To reduce the company’s interest expense

150. The “current ratio” is used to evaluate:

A) A company’s long-term solvency
B) A company’s liquidity position
C) A company’s ability to generate profits
D) A company’s market value

 

151. The profitability index is used to:

A) Determine the total cost of capital
B) Rank investment projects based on their relative profitability
C) Measure the risk of an investment
D) Calculate the payback period

152. In which situation would a company likely issue preferred stock?

A) To raise funds without diluting common stock ownership
B) To reduce the total amount of debt
C) To increase the control of existing shareholders
D) To issue equity that will be repaid within a short time frame

153. What is the effect of increasing a company’s leverage (debt ratio)?

A) It generally decreases the financial risk
B) It increases the company’s exposure to business risk
C) It decreases the potential return on equity
D) It decreases the cost of equity

154. In the dividend discount model (DDM), what happens if the dividend growth rate exceeds the required rate of return?

A) The stock price becomes negative
B) The model will not produce a valid result
C) The stock price increases indefinitely
D) The stock price decreases

155. What does the term “beta” represent in the context of the capital asset pricing model (CAPM)?

A) The market risk premium
B) The total risk of the portfolio
C) The sensitivity of an asset’s returns to market movements
D) The expected return of the market

156. What does the weighted average cost of capital (WACC) help a firm decide?

A) The best stock to invest in
B) The optimal financing mix between debt and equity
C) The correct dividend payout
D) The amount of capital to raise

157. The primary purpose of a financial statement analysis is to:

A) Determine a company’s future market value
B) Evaluate the company’s financial performance and position
C) Measure the company’s stock price volatility
D) Assess the company’s compliance with tax regulations

158. If a company’s debt-to-equity ratio increases, it implies:

A) The company is taking on more debt relative to its equity base
B) The company is increasing its dividends
C) The company is becoming less leveraged
D) The company has improved its financial stability

159. The time value of money is based on the concept that:

A) Money has a fixed value over time
B) Money today is worth more than the same amount of money in the future
C) Money in the future is always worth more due to inflation
D) The value of money decreases only when there is an economic crisis

160. Which of the following is a characteristic of common stock?

A) It pays a fixed dividend
B) It represents ownership in a company
C) It has a higher claim on assets than preferred stock
D) It is less risky than bonds

161. What is the formula for calculating the net present value (NPV) of an investment?

A) Sum of future cash flows minus the initial investment
B) Present value of future cash flows divided by the initial investment
C) Initial investment minus the present value of future cash flows
D) Sum of cash flows divided by the discount rate

162. The cost of equity capital is:

A) Equal to the company’s dividend rate
B) The return required by shareholders for the company’s stock
C) A fixed percentage of the company’s sales
D) Lower than the cost of debt in most cases

163. Which financial statement provides a snapshot of a company’s financial position at a specific point in time?

A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of shareholders’ equity

164. A firm’s current ratio is an indicator of its:

A) Ability to meet short-term obligations with its short-term assets
B) Profitability from core operations
C) Cash flow from financing activities
D) Efficiency in managing long-term investments

165. The principle of “compounding” refers to:

A) The process of finding the present value of future cash flows
B) The way interest on a loan is calculated at a constant rate over time
C) The accumulation of interest on both the initial principal and previously earned interest
D) The method of calculating returns based on the expected inflation rate

166. A company’s dividend payout ratio is calculated by:

A) Dividing net income by dividends paid
B) Dividing dividends paid by net income
C) Subtracting retained earnings from net income
D) Dividing cash flow from operations by dividends paid

167. A company’s return on equity (ROE) is calculated by:

A) Dividing net income by total assets
B) Dividing net income by total equity
C) Dividing dividends by total equity
D) Dividing sales by total equity

168. The primary reason why companies issue bonds instead of stocks is:

A) Bonds provide more control to shareholders
B) Bonds do not require the company to share ownership
C) Bonds allow the company to avoid paying taxes
D) Bonds offer a higher return for investors than stocks

169. The use of the debt-equity ratio helps a firm:

A) Calculate the optimal dividend payout
B) Determine how much debt it is using in relation to its equity
C) Identify its total capital available for investment
D) Estimate its cost of capital

170. The main purpose of the cash flow statement is to:

A) Provide an overview of the company’s assets and liabilities
B) Show the company’s profitability over a specific period
C) Reveal the company’s cash inflows and outflows during a period
D) Calculate the company’s return on investment

171. The risk-free rate is typically represented by:

A) The yield on long-term government bonds
B) The return on a company’s equity
C) The return on corporate bonds
D) The rate of return on real estate investments

172. What does a company’s quick ratio measure?

A) The company’s ability to pay off short-term liabilities with its most liquid assets
B) The company’s profitability ratio compared to its competitors
C) The company’s ability to generate cash flow from operations
D) The company’s earnings relative to its stock price

173. Which of the following is an example of a non-cash item on a company’s financial statements?

A) Cash from operations
B) Depreciation expense
C) Cash dividends paid
D) Short-term debt

174. The concept of “opportunity cost” in capital budgeting refers to:

A) The cost of the next best alternative investment that is forgone by choosing the current investment
B) The total cost of a project, including all variable and fixed costs
C) The amount of capital that is spent on projects with the lowest risk
D) The future expected value of an investment in today’s terms

175. Which of the following is a potential benefit of debt financing over equity financing?

A) Debt increases the ownership control of shareholders
B) Debt interest is tax-deductible
C) Debt does not need to be repaid over time
D) Debt eliminates the risk of bankruptcy

176. The payback period method is most appropriate when:

A) The investment involves significant long-term benefits that are difficult to estimate
B) The company wants to minimize short-term risk
C) The company is focused on maximizing profits over the long term
D) The company is evaluating projects with a high degree of uncertainty

177. What is the effect of increasing the interest rate on the present value of future cash flows?

A) It increases the present value
B) It decreases the present value
C) It has no effect on the present value
D) It makes future cash flows irrelevant

178. The capital asset pricing model (CAPM) is used to:

A) Estimate the expected return on a stock based on its risk and the market’s return
B) Calculate the market value of a company’s assets
C) Determine the company’s capital structure
D) Measure the volatility of stock prices over time

179. Which of the following best describes “systematic risk”?

A) Risk associated with the overall market or economy
B) Risk associated with a specific firm or industry
C) Risk that can be eliminated through diversification
D) Risk related to a company’s day-to-day operations

180. The primary reason for a company to perform financial forecasting is to:

A) Improve its stock price by making predictions about future earnings
B) Assess future cash flows, plan investments, and manage liquidity
C) Determine the maximum possible dividends it can pay to shareholders
D) Determine how much debt it should issue to fund operations

 

181. In financial terms, what does the term “liquidity” refer to?

A) The company’s ability to pay dividends
B) The ability of a company to convert assets into cash quickly
C) The degree to which a company is leveraged
D) The rate at which a company earns profits

182. What is the key difference between the net present value (NPV) and the internal rate of return (IRR)?

A) NPV is used to evaluate capital budgeting projects, while IRR is used to evaluate stock investments
B) NPV represents the total return on investment, while IRR shows the break-even point in terms of project cost
C) NPV gives a dollar amount, while IRR gives a percentage return
D) NPV assumes reinvestment at the cost of capital, while IRR assumes reinvestment at the IRR

183. What is meant by “capital budgeting”?

A) The process of choosing between debt and equity financing
B) The decision process for funding long-term investments in assets
C) The allocation of funds for daily operational expenses
D) The process of allocating funds for marketing campaigns

184. What is a “coupon rate” in bond terminology?

A) The rate of return an investor can expect to earn based on current market prices
B) The fixed interest rate paid by a bond issuer to bondholders
C) The total amount of interest paid by the company annually
D) The rate of return the bondholder will receive at maturity

185. What is the purpose of the dividend discount model (DDM)?

A) To calculate the cost of equity capital
B) To determine the present value of a company’s future dividend payments
C) To estimate the internal rate of return for stock investments
D) To calculate a company’s earnings per share

186. The “time value of money” concept suggests that:

A) A dollar received today is worth more than a dollar received in the future
B) Future payments are worth more than current ones
C) Money grows exponentially over time
D) Time has no effect on the value of money

187. Which of the following best describes the “cost of capital” for a company?

A) The rate of return a company must earn on its investments to meet the expectations of its investors
B) The interest rate charged by a company on its outstanding debts
C) The percentage of the company’s sales that is used to pay for operating expenses
D) The value of the company’s equity capital

188. The “current ratio” is calculated by:

A) Dividing current assets by current liabilities
B) Dividing current liabilities by current assets
C) Subtracting current liabilities from current assets
D) Adding current liabilities to current assets

189. Which of the following is a characteristic of preferred stock?

A) It typically has voting rights
B) It guarantees a fixed dividend payout
C) It carries less risk than common stock
D) It is not redeemable

190. What is a “call provision” in bond agreements?

A) A feature that allows bondholders to exchange bonds for equity
B) A clause that allows the issuer to redeem the bond before its maturity date
C) A term that sets the bond’s interest rate
D) A feature that provides for annual bond interest adjustments

191. What is the “discount rate” used in present value calculations?

A) The rate at which future cash flows are adjusted to their present value
B) The rate at which the company issues bonds
C) The expected return on a company’s stock
D) The interest rate that is paid on a company’s long-term debt

192. A “bear market” refers to:

A) A market where stock prices are generally rising
B) A market with stable and predictable stock prices
C) A market where stock prices are generally falling
D) A market with extremely high volatility

193. In capital budgeting, the “payback period” method calculates:

A) The total return of an investment over its entire life
B) The time it takes for a project to repay its initial investment
C) The amount of profits generated per year
D) The expected interest rate of an investment

194. A “bull market” is characterized by:

A) A rapid decline in stock prices
B) A consistent rise in stock prices
C) Stable stock prices with low volatility
D) Investors’ fear of further losses in stock prices

195. What is the main limitation of the payback period method in capital budgeting?

A) It does not consider the time value of money
B) It assumes that cash flows will be uniform throughout the investment’s life
C) It requires a detailed analysis of market trends
D) It only works for projects with low levels of risk

196. What is the function of the financial leverage in capital structure?

A) It determines the optimal capital mix between debt and equity
B) It represents the rate of return required by equity investors
C) It helps a company set its dividend policy
D) It determines the company’s ability to generate operating income

197. “Asset management ratios” are used to evaluate:

A) The ability of a company to meet its short-term obligations
B) The effectiveness of a company in using its assets to generate sales
C) The risk associated with a company’s debt structure
D) The total equity value of a company

198. What is “diversification” in the context of portfolio management?

A) Investing in a single asset to maximize returns
B) Spreading investments across various assets to reduce risk
C) Focusing on high-risk assets to maximize returns
D) Minimizing the total number of investments in a portfolio

199. The risk-adjusted return is used to:

A) Evaluate the performance of a stock relative to its market risk
B) Determine the market’s willingness to invest in a company
C) Calculate the expected return of government bonds
D) Measure the company’s profitability

200. Which of the following is a characteristic of a “liquidity risk”?

A) The risk that an investor cannot sell an asset at its market value
B) The risk that interest rates will rise unexpectedly
C) The risk of losing money on long-term investments
D) The risk that the company cannot meet its debt obligations

201. What does the “modigliani-miller theorem” state about capital structure?

A) The value of a company is affected by its capital structure in a perfect market
B) Capital structure decisions do not affect the value of a firm in perfect markets
C) The value of a company increases as more debt is added to the capital structure
D) Companies should avoid debt financing due to its high-risk nature

202. A company’s “retained earnings” represents:

A) The amount of profits distributed as dividends to shareholders
B) The total amount of sales generated by the company
C) The portion of profits not paid out as dividends and kept for reinvestment
D) The total cash flow from operating activities

203. The “capital asset pricing model (CAPM)” is used to:

A) Estimate the return on equity for a firm
B) Predict the future price of a stock
C) Calculate the required return for an investment based on its risk
D) Estimate the future earnings of a company

204. In the context of business finance, “risk” refers to:

A) The likelihood of making a profit from an investment
B) The chance of incurring a loss or failing to achieve the expected return
C) The amount of return generated by an investment
D) The volatility of stock prices in the market

205. The “cost of equity” is typically calculated using:

A) The dividend discount model (DDM) or the capital asset pricing model (CAPM)
B) The debt-to-equity ratio
C) The weighted average cost of capital (WACC)
D) The return on assets (ROA)

 

206. What is the primary objective of financial management in a firm?

A) To maximize the firm’s profits
B) To maximize the firm’s stock price
C) To minimize operational costs
D) To achieve the highest possible dividends for shareholders

207. What does “cost of debt” represent for a company?

A) The total amount a company must pay to its creditors each year
B) The interest rate the company pays on its borrowings, adjusted for taxes
C) The rate of return on the company’s equity investments
D) The cost of issuing new stock to investors

208. Which of the following is a major benefit of issuing bonds over stocks?

A) Bonds are less expensive than stocks to issue
B) Interest payments on bonds are tax-deductible
C) Bonds provide more control over the company compared to stocks
D) Stockholders have a higher priority in liquidation compared to bondholders

209. The “weighted average cost of capital (WACC)” is used to:

A) Estimate the company’s future earnings
B) Calculate the cost of equity for a company
C) Determine the overall cost of capital, considering both debt and equity
D) Set the price of new stock issuances

210. What does the “dividend payout ratio” measure?

A) The total dividends paid relative to the company’s sales
B) The proportion of earnings paid out as dividends
C) The total amount of dividends available for reinvestment
D) The proportion of profits reinvested into the business

211. The “efficient market hypothesis” suggests that:

A) Stock prices are always accurate reflections of a company’s value
B) Stock prices are never accurate and reflect market manipulation
C) Investors should focus on timing the market to maximize profits
D) Stock prices can be predicted with certainty

212. What is the “primary market” in finance?

A) A market where stocks are traded between investors
B) A market where bonds are issued and sold for the first time
C) A market for trading foreign currencies
D) A market where used securities are sold to new buyers

213. In the context of investment, what does “systematic risk” refer to?

A) The risk associated with a specific company or industry
B) The risk associated with the market as a whole
C) The risk of losing money in a particular investment
D) The risk related to interest rate changes

214. What does “market capitalization” of a company represent?

A) The amount of debt a company holds
B) The total value of a company’s outstanding shares of stock
C) The total profits generated by a company in a year
D) The value of the company’s real estate holdings

215. Which of the following financial statements is used to evaluate a company’s profitability?

A) Balance sheet
B) Statement of cash flows
C) Income statement
D) Statement of shareholders’ equity

216. A company’s “quick ratio” is used to:

A) Measure the company’s ability to cover short-term liabilities with its most liquid assets
B) Calculate its debt-to-equity ratio
C) Estimate the company’s market value
D) Determine its long-term profitability

217. The term “financial leverage” refers to:

A) The ability of a company to use debt to increase its return on equity
B) The ability to generate profits from equity investments
C) The amount of dividends a company can afford to pay
D) The ability to repay short-term debt obligations

218. In the context of finance, “return on equity” (ROE) measures:

A) The total revenue generated by the company
B) The amount of dividends paid to shareholders
C) The profit a company generates with the funds invested by its shareholders
D) The market value of a company’s assets

219. Which of the following is a key characteristic of “preferred stock”?

A) It grants voting rights in shareholder meetings
B) It is less risky than common stock due to fixed dividends
C) It can be converted into bonds
D) It provides higher dividends than common stock but is not paid before common stock

220. In financial terms, “capital structure” refers to:

A) The way in which a company allocates profits between dividends and reinvestment
B) The mix of debt and equity that a company uses to finance its operations
C) The type of assets a company holds
D) The growth rate of a company’s earnings

221. “Diversification” helps to reduce:

A) Systematic risk
B) Unsystematic risk
C) The risk of inflation
D) The cost of capital

222. The “yield to maturity” (YTM) of a bond is:

A) The total return an investor can expect if the bond is held until maturity
B) The current yield of the bond based on its market price
C) The interest rate at which the bond’s price equals its face value
D) The rate at which the bond’s dividends are paid to the investor

223. What is a “bullish” market sentiment?

A) A market where investors expect stock prices to rise
B) A market where stock prices are unpredictable
C) A market where stock prices are falling
D) A market with low volatility

224. What is the “capital asset pricing model” (CAPM) primarily used for?

A) To calculate the net present value of an investment
B) To determine the required return on an asset based on its risk
C) To calculate the optimal portfolio allocation
D) To predict the future price of a stock

225. The “cost of equity” can be estimated using:

A) The dividend discount model (DDM) or the capital asset pricing model (CAPM)
B) The weighted average cost of capital (WACC)
C) The net present value (NPV) method
D) The payback period method

226. Which of the following is the main purpose of the “income statement”?

A) To show the company’s assets and liabilities
B) To determine the company’s liquidity position
C) To measure the company’s profitability over a specific period
D) To calculate the company’s market value

227. What is the “book value” of a company’s stock?

A) The market price of the stock
B) The total assets of the company divided by the number of shares outstanding
C) The expected dividends per share
D) The intrinsic value of the company’s operations

228. The term “leverage ratio” refers to:

A) The amount of debt a company has relative to its equity
B) The company’s return on equity
C) The number of assets owned by the company
D) The amount of dividends paid relative to stock price

229. What is a “debt covenant” in the context of business finance?

A) A clause that allows a company to pay back debt early without penalties
B) A set of rules that a borrower must follow to avoid defaulting on debt
C) A provision that increases the interest rate on the loan after a certain period
D) A guarantee that the company will meet certain profit targets

230. What is the purpose of the “statement of cash flows”?

A) To report the profitability of the company
B) To show the company’s revenue and expenses
C) To track the movement of cash into and out of the business
D) To display the changes in the company’s stock price

 

231. What is the primary objective of capital budgeting?

A) To determine the appropriate level of dividends to distribute
B) To evaluate potential investment projects and select the ones that maximize shareholder value
C) To assess the overall profitability of a company
D) To determine the company’s liquidity position

232. Which of the following represents the concept of “time value of money”?

A) Money’s value increases as inflation rises
B) Money available today is worth more than the same amount in the future
C) Money loses its value over time
D) Future money has the same value as present money

233. In the context of bonds, what is meant by “coupon rate”?

A) The rate at which the bond’s price appreciates over time
B) The rate of interest the bond issuer pays to the bondholder
C) The total return the bondholder receives at maturity
D) The tax rate applied to bond interest

234. What is a “capital structure” of a company?

A) The mixture of short-term and long-term debt the company holds
B) The combination of debt and equity financing the company uses to fund its operations
C) The physical assets owned by the company
D) The percentage of earnings the company distributes as dividends

235. Which of the following would increase a company’s weighted average cost of capital (WACC)?

A) A decrease in the company’s stock price
B) An increase in the company’s debt
C) A reduction in the company’s cost of equity
D) A decrease in the risk-free interest rate

236. What does “cost of equity” reflect?

A) The minimum return required by shareholders on their investment in the company
B) The interest rate charged by creditors for loans
C) The cost of capital for a company’s debt
D) The profit margin achieved by the company

237. The “payback period” is used to:

A) Measure the profitability of an investment
B) Calculate the time it takes for an investment to recover its initial cost
C) Determine the net present value (NPV) of an investment
D) Calculate the risk of an investment

238. The “net present value” (NPV) method is used to:

A) Estimate the total revenue of a project over its life
B) Determine the amount of debt needed to finance a project
C) Evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows
D) Measure the market value of the investment project

239. A “risk-free rate” is typically represented by:

A) The expected return on a company’s stock
B) The rate of return on government bonds, such as U.S. Treasury bonds
C) The average market return
D) The rate of return on high-risk investments

240. Which of the following is an example of “systematic risk”?

A) Risk that is specific to a company or industry
B) Risk of changes in interest rates affecting all investments in the market
C) Risk of a company’s management making poor decisions
D) Risk related to the company’s liquidity position

241. What does the “dividend discount model” (DDM) calculate?

A) The price of a stock based on its expected dividends and the required rate of return
B) The company’s growth rate over time
C) The return on equity of the company
D) The total earnings of the company over the next fiscal year

242. In a competitive market, the price of a stock reflects:

A) Only the company’s earnings
B) The investor’s expectations of the company’s future performance
C) The company’s historical stock price trends
D) The amount of debt the company has

243. The “current ratio” is used to measure:

A) The company’s ability to pay off its short-term liabilities with its current assets
B) The company’s profitability over a given period
C) The company’s efficiency in utilizing its assets
D) The relationship between the company’s debt and equity

244. Which of the following is true about “preferred stock”?

A) It represents a form of debt for the company
B) It has no dividend payments
C) It has a higher claim on company assets than common stock in case of liquidation
D) It does not provide voting rights to shareholders

245. The “profitability index” (PI) is used to:

A) Measure the financial risk of an investment
B) Calculate the ratio of the present value of future cash flows to the initial investment
C) Determine the total revenue of a project
D) Assess the liquidity position of a company

246. The term “liquidity” in finance refers to:

A) The amount of debt a company has relative to its equity
B) The company’s ability to meet its short-term obligations with its current assets
C) The profitability of a company
D) The number of shares outstanding for a company

247. Which of the following would likely cause a stock price to rise?

A) A decrease in the company’s earnings
B) A decrease in the dividend payout
C) A favorable earnings report that exceeds analyst expectations
D) An increase in interest rates

248. The “modigliani-miller theorem” (MM theorem) suggests that:

A) The value of a firm is affected by its capital structure in perfect markets
B) The value of a firm is independent of its capital structure in perfect markets
C) The cost of equity decreases as a firm increases its debt
D) The firm’s value is solely determined by its earnings

249. The “internal rate of return” (IRR) is used to:

A) Determine the future value of an investment
B) Calculate the risk of an investment project
C) Estimate the rate of return that would make the net present value (NPV) of an investment equal to zero
D) Calculate the tax impact on an investment

250. A “company’s beta” measures:

A) The correlation between the company’s stock price and the overall market
B) The risk-free rate of return for the company
C) The company’s return on equity
D) The company’s dividend payout ratio

251. What is a “call option” in finance?

A) A contract giving the holder the right to sell a stock at a specified price within a specified time
B) A contract allowing the holder to purchase a stock at a specified price within a specified time
C) A financial derivative that tracks the price of an underlying asset
D) A type of bond that pays fixed interest over its life

252. The “price-to-earnings” (P/E) ratio is calculated by:

A) Dividing the company’s total assets by its stock price
B) Dividing the company’s market price per share by its earnings per share
C) Dividing the company’s net income by its revenue
D) Dividing the company’s dividends by its stock price

253. The “value at risk” (VaR) is a measure used to:

A) Estimate the probability of a company defaulting on its debt
B) Estimate the potential loss in value of an asset or portfolio under normal market conditions
C) Determine the optimal portfolio allocation
D) Calculate the liquidity of an investment

254. Which of the following is a type of “derivative” in finance?

A) Stocks
B) Bonds
C) Options
D) Dividends

255. What does the “cost of capital” represent?

A) The total cost of financing for a company, including both debt and equity
B) The minimum amount of capital needed for operations
C) The earnings generated from an investment project
D) The amount of debt that the company can issue

256. A “bull market” refers to a market in which:

A) Stock prices are expected to decline
B) Stock prices are expected to remain stable
C) Stock prices are expected to rise
D) Stock prices are highly volatile

257. The “efficient frontier” is a concept used in:

A) Cost of capital calculation
B) Investment portfolio management
C) Capital budgeting decisions
D) Financial statement analysis

258. Which of the following is an example of a “non-systematic” risk?

A) Changes in the interest rate affecting all stocks
B) A company’s management making poor investment decisions
C) Inflation affecting the entire economy
D) A recession affecting all industries

259. What is the “diversification effect” in an investment portfolio?

A) The decrease in risk resulting from investing in assets that are not perfectly correlated
B) The increase in potential return from investing in high-risk assets
C) The ability to increase liquidity by holding more cash
D) The process of minimizing debt in the portfolio

260. The “modigliani-miller proposition” with taxes suggests that:

A) The firm’s value is unaffected by its capital structure
B) Debt financing increases the firm’s value due to the tax shield on interest payments
C) Equity financing increases the firm’s value
D) The firm should avoid debt to maximize value

 

261. What is the “capital asset pricing model” (CAPM) used to calculate?

A) The cost of debt
B) The expected return on an investment given its risk compared to the overall market
C) The total value of a company’s equity
D) The cost of equity for a company

262. In the context of capital budgeting, what does the “discount rate” represent?

A) The interest rate charged on company loans
B) The required rate of return for an investment project
C) The expected return on a company’s stock
D) The rate of return earned by a company’s equity holders

263. The “profit margin” ratio is used to assess:

A) The company’s ability to cover its long-term debt obligations
B) The profitability of the company by showing the percentage of revenue that turns into profit
C) The company’s ability to pay off short-term liabilities
D) The efficiency of the company in utilizing its assets

264. Which of the following is considered a “capital expenditure” (CapEx)?

A) Routine maintenance of a company’s machinery
B) Purchasing a new building to expand operations
C) Paying off short-term liabilities
D) Paying wages to employees

265. What is the primary goal of a “managerial finance” course?

A) To learn how to calculate taxes for businesses
B) To understand the behavior of financial markets
C) To develop skills for managing a company’s finances and maximizing shareholder value
D) To study accounting standards and practices

266. Which of the following best describes “market efficiency”?

A) The speed at which a company responds to market changes
B) The ability of a company to maximize its profit margins
C) The extent to which stock prices reflect all available information
D) The ability to produce goods and services with the lowest cost

267. The “net present value” (NPV) rule suggests that an investment project should be accepted if:

A) The NPV is greater than zero
B) The NPV is less than zero
C) The payback period is less than five years
D) The cost of capital is lower than the internal rate of return

268. A company’s “operating cash flow” (OCF) represents:

A) The total cash received from sales
B) The cash generated by the company’s core operations, excluding financing and investing activities
C) The net income generated from investing activities
D) The amount of capital raised from issuing stock

269. What is the “dividend yield”?

A) The percentage return on a stock based on its earnings
B) The ratio of a company’s dividends to its stock price
C) The company’s total dividend payout for the year
D) The proportion of a company’s profits paid out to shareholders

270. In the context of financial statements, what is “earnings per share” (EPS)?

A) The total earnings of the company divided by the number of shares outstanding
B) The total revenue of the company divided by the number of shares outstanding
C) The earnings generated from each sale made by the company
D) The total dividends paid divided by the number of shares outstanding

271. The “time value of money” concept is based on the assumption that:

A) Money has the same value over time
B) Money has a lower value over time due to inflation
C) Money’s value increases over time
D) Money is only valuable in the future

272. A “leveraged buyout” (LBO) occurs when:

A) A company buys another company using a combination of debt and equity
B) A company sells its assets to reduce debt
C) A company issues new stock to fund expansion
D) A company acquires assets through its retained earnings

273. What is the main purpose of “financial analysis”?

A) To determine the company’s tax liability
B) To evaluate the company’s financial performance and position for decision-making
C) To determine the market price of a company’s stock
D) To calculate the company’s future dividends

274. “Risk-adjusted return” is:

A) The return on an investment after adjusting for its risk
B) The total return earned from an investment, regardless of its risk
C) The return on an investment without considering taxes
D) The return on an investment based on historical performance

275. The “free cash flow” (FCF) is defined as:

A) The total amount of cash generated by a company’s financing activities
B) Cash flow available to equity holders after meeting all operating expenses, taxes, and capital expenditures
C) The total cash paid to shareholders as dividends
D) Cash flow generated from the sale of assets

276. The “cost of debt” is typically lower than the “cost of equity” because:

A) Debt holders take more risk than equity holders
B) Debt interest is tax-deductible, which lowers the overall cost
C) Debt holders expect a higher return than equity holders
D) Equity holders have a guaranteed return, while debt holders do not

277. What does the “beta” coefficient measure in finance?

A) The company’s market capitalization
B) The risk of a security relative to the market as a whole
C) The return on investment in the market
D) The company’s liquidity position

278. “Beta” is greater than 1 if a stock is:

A) Less volatile than the overall market
B) Equally volatile as the overall market
C) More volatile than the overall market
D) Unaffected by market fluctuations

279. What does “diversification” in portfolio management aim to achieve?

A) Maximize returns by investing in a single high-performing asset
B) Minimize risk by investing in a range of assets with different risk profiles
C) Increase liquidity by focusing on short-term investments
D) Concentrate on investments within a single industry to increase returns

280. The “price-to-book” (P/B) ratio compares:

A) The market price of a company’s stock to its book value
B) The market price of a company’s stock to its earnings per share
C) The company’s total debt to its equity value
D) The company’s revenue to its expenses

281. What is the primary purpose of the “statement of cash flows”?

A) To provide a detailed report on the company’s profitability
B) To show how changes in the balance sheet and income statement affect cash
C) To show how much money the company has in its bank accounts
D) To track the issuance of stock and dividends

282. “Risk-free rate” refers to:

A) The return on an asset that is subject to default risk
B) The return on a portfolio with maximum diversification
C) The return on an investment that has no risk of financial loss, often represented by government bonds
D) The return on a risky investment

283. A “bull market” is characterized by:

A) A long period of stock price decline
B) A period when stock prices are generally rising
C) A time when companies focus on reducing their capital expenditures
D) A time when interest rates are increasing significantly

284. Which of the following best defines “capital budgeting”?

A) The process of determining the company’s market value
B) The process of evaluating and selecting long-term investments that are in line with the company’s goal of maximizing shareholder wealth
C) The decision-making process regarding dividend payouts
D) The allocation of funds between short-term and long-term debt

285. “Financial leverage” refers to:

A) The ability of a company to generate profits without taking on debt
B) The use of debt in a company’s capital structure to increase the potential return to shareholders
C) The use of equity financing to fund operations
D) The total amount of capital invested in the business

286. A “weighted average cost of capital” (WACC) of 8% means:

A) The company’s debt is more expensive than its equity
B) The company’s equity and debt have an equal cost
C) The company’s overall cost of financing (debt + equity) is 8%
D) The company’s equity financing is cheaper than debt financing

287. What does “asset allocation” involve?

A) Choosing the right investment strategy for maximizing returns
B) Deciding how to divide a portfolio’s assets across various asset classes such as stocks, bonds, and cash
C) Allocating company assets for dividend distribution
D) Deciding the amount of debt to use for financing operations

288. Which of the following statements about “financial statements” is true?

A) They provide historical information about a company’s financial performance and position
B) They are only used for tax purposes
C) They are prepared on a quarterly basis by the government
D) They do not reflect the company’s future financial performance

289. “Operating leverage” refers to:

A) The ability to pay off debt with equity
B) The extent to which a company uses fixed costs in its operations
C) The use of debt to finance business operations
D) The ratio of debt to equity in the company’s capital structure

290. Which of the following best defines “economic value added” (EVA)?

A) A measure of the company’s profitability relative to its stock price
B) The difference between the company’s actual return and its cost of capital
C) The amount of capital invested in the business
D) The total value of an investment after accounting for taxes

 

291. What is the “internal rate of return” (IRR)?

A) The discount rate that equates the present value of cash inflows with the present value of cash outflows
B) The maximum return an investor can achieve on a project
C) The rate of return required by shareholders
D) The company’s overall cost of capital

292. In finance, “liquidity” refers to:

A) The company’s ability to generate profits
B) The ease with which assets can be converted into cash without significant loss of value
C) The amount of cash a company has on hand
D) The value of a company’s equity

293. A “sinking fund” is:

A) A fund set aside to finance new investments
B) A reserve created to repay a bond or debt obligation over time
C) A fund for short-term operational expenses
D) A reserve for emergencies only

294. What is “working capital”?

A) Total assets minus total liabilities
B) Current assets minus current liabilities
C) Total revenue minus total expenses
D) Fixed assets minus depreciation

295. The “debt-to-equity ratio” is used to measure:

A) A company’s overall profitability
B) The proportion of debt and equity used to finance the company’s assets
C) The company’s efficiency in using its equity
D) The ability of the company to cover its short-term liabilities

296. Which financial statement shows the “retained earnings” of a company?

A) The balance sheet
B) The income statement
C) The statement of cash flows
D) The statement of shareholders’ equity

297. “Payout ratio” refers to:

A) The percentage of earnings distributed as dividends to shareholders
B) The percentage of retained earnings reinvested in the business
C) The total dividend paid divided by the company’s net income
D) The dividend per share divided by the market price per share

298. In capital budgeting, “mutually exclusive projects” are:

A) Projects that must be undertaken together
B) Projects that compete with each other, where accepting one means rejecting the other
C) Projects with similar expected cash flows
D) Projects that require the same amount of initial investment

299. The “quick ratio” is also known as:

A) The acid-test ratio
B) The current ratio
C) The leverage ratio
D) The profitability ratio

300. What is a “bond’s yield to maturity” (YTM)?

A) The coupon payment divided by the current price of the bond
B) The total return an investor can expect if the bond is held until it matures
C) The face value of the bond divided by its price
D) The annual interest payment on the bond

301. What does “cash conversion cycle” measure?

A) The number of days it takes for a company to pay its suppliers
B) The time taken to convert raw materials into cash through sales
C) The time taken for customers to pay their invoices
D) The time it takes for a company to generate profits

302. Which is a “primary market” transaction?

A) When shares are sold on a stock exchange
B) When a company issues new shares to the public for the first time
C) When an investor sells bonds to another investor
D) When a company repurchases its shares from shareholders

303. “Operating income” is also known as:

A) Net profit
B) EBIT (Earnings Before Interest and Taxes)
C) EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
D) Gross profit

304. What does “compounding” refer to in finance?

A) Calculating future value by adding simple interest
B) Calculating the value of an investment where interest earns additional interest over time
C) The process of determining present value from future cash flows
D) The reinvestment of dividends into additional shares of stock

305. A company’s “leverage ratio” indicates:

A) Its reliance on debt to finance its operations
B) Its ability to generate revenue
C) Its level of operating expenses
D) Its profitability compared to competitors

306. A “perpetuity” is:

A) A cash flow that grows indefinitely
B) A series of equal cash flows that continue forever
C) A short-term investment instrument
D) A dividend payment made annually

307. What is the main benefit of using “scenario analysis” in financial planning?

A) It simplifies decision-making by considering only one outcome
B) It evaluates the impact of different possible scenarios on a project’s financial performance
C) It focuses solely on reducing risks
D) It avoids the need for complex financial calculations

308. What is “amortization” in the context of loans?

A) The gradual repayment of a loan through scheduled payments
B) The interest charged on the outstanding balance of a loan
C) The total amount of interest paid over the loan’s life
D) The reduction of a loan’s interest rate over time

309. “Market capitalization” is calculated by:

A) Multiplying the stock price by the total number of shares outstanding
B) Dividing total revenue by the company’s net income
C) Adding the company’s total liabilities and equity
D) Subtracting total liabilities from total assets

310. The “payback period” measures:

A) The time it takes for an investment to generate enough cash flow to recover its initial cost
B) The total return on an investment
C) The length of time a company holds its cash reserves
D) The time taken for a project to break even

311. What is “default risk”?

A) The risk of a company losing market share
B) The risk that a borrower will fail to make required payments
C) The risk of a decline in the value of an investment
D) The risk of currency exchange fluctuations

312. A “callable bond” gives the issuer the right to:

A) Convert the bond into equity
B) Repay the bond before its maturity date
C) Increase the coupon rate during the bond’s life
D) Require bondholders to sell their bonds at market price

313. What is the purpose of a “credit rating agency”?

A) To provide financial advice to investors
B) To assess the creditworthiness of debt issuers
C) To manage the stock market
D) To monitor inflation rates

314. “Inventory turnover” measures:

A) The number of times a company sells and replaces its inventory during a period
B) The total value of inventory sold in a year
C) The amount of profit generated from inventory sales
D) The time it takes to reorder inventory

315. What is the “risk premium”?

A) The additional return required to compensate for investment risk compared to a risk-free rate
B) The return on a risk-free investment
C) The amount of money invested in high-risk projects
D) The cost of insuring an investment against loss

316. “Economic depreciation” refers to:

A) The loss in value of an asset due to market conditions
B) The allocation of an asset’s cost over its useful life
C) The reduction in asset value due to wear and tear
D) The loss in an investment’s purchasing power

317. What does “financial intermediation” involve?

A) Direct lending between individuals and businesses
B) Financial institutions facilitating the flow of funds between savers and borrowers
C) The government directly funding investments
D) Investors managing their portfolios independently

318. What is the “coupon rate” of a bond?

A) The annual interest paid on the bond as a percentage of its face value
B) The current market price of the bond
C) The total interest paid over the bond’s life
D) The yield to maturity of the bond

319. Which of the following is a “derivative”?

A) Common stock
B) A financial instrument whose value is derived from the value of an underlying asset
C) A government-issued bond
D) A real estate investment trust (REIT)

320. The “plowback ratio” represents:

A) The percentage of earnings retained by the company for reinvestment
B) The proportion of dividends paid to shareholders
C) The percentage of total revenue reinvested in the business
D) The rate at which debt is repaid

 

321. The main purpose of the “capital structure” decision is to:

A) Maximize the firm’s liquidity
B) Minimize the cost of capital while maximizing the value of the firm
C) Minimize risk associated with investments
D) Increase the firm’s short-term profitability

322. Which of the following represents a “diversifiable risk”?

A) A global recession
B) A labor strike at a specific company
C) Changes in the interest rate by the central bank
D) An increase in inflation rates

323. What is the “primary purpose” of financial markets?

A) To regulate financial institutions
B) To facilitate the allocation of capital from savers to borrowers
C) To provide businesses with investment advice
D) To monitor the value of companies

324. The “time value of money” concept is based on the principle that:

A) Money loses value over time due to inflation
B) A dollar today is worth more than a dollar in the future due to its earning potential
C) Future cash flows are more certain than present cash flows
D) Interest rates have no effect on the value of money

325. A “bond’s coupon payment” refers to:

A) The annual interest payment based on the bond’s face value
B) The bond’s maturity value
C) The market price of the bond
D) The amount paid to purchase the bond

326. What is the main function of a “financial intermediary”?

A) To match borrowers and lenders
B) To provide investment advice to firms
C) To directly lend money to governments
D) To regulate financial transactions

327. What is the “current yield” of a bond?

A) The annual coupon payment divided by the bond’s market price
B) The bond’s face value divided by its market price
C) The bond’s yield to maturity
D) The bond’s annual coupon payment divided by its face value

328. In financial terms, “beta” measures:

A) The volatility of a stock compared to the overall market
B) The expected return on an investment
C) The total risk of a portfolio
D) The correlation between two investments

329. A project has a profitability index (PI) of 1.2. This indicates that:

A) The project is expected to generate a 20% return on investment
B) The project will break even
C) The project’s present value of inflows exceeds the initial investment by 20%
D) The project has an internal rate of return of 20%

330. What does the “weighted average cost of capital” (WACC) represent?

A) The average cost of all assets owned by the firm
B) The average rate of return the firm must earn to satisfy all investors
C) The firm’s return on equity
D) The cost of debt only

331. Which of the following represents a “fixed cost”?

A) Direct materials used in production
B) Monthly rent for the company’s building
C) Commission paid to sales staff
D) Costs of goods sold

332. What is the “effective annual rate” (EAR)?

A) The simple interest rate over one year
B) The nominal rate adjusted for compounding over a year
C) The coupon rate on a bond
D) The rate of return on equity investments

333. The “modigliani-miller theorem” suggests that:

A) A firm’s value is independent of its capital structure in a perfect market
B) A firm should always prefer equity financing over debt
C) The weighted average cost of capital increases with leverage
D) A firm’s dividend policy does not affect its stock price

334. A “secured bond” is:

A) A bond backed by specific collateral
B) A bond with a high credit rating
C) A bond that pays higher interest
D) A bond issued without collateral

335. Which financial ratio measures “profitability”?

A) Current ratio
B) Debt-to-equity ratio
C) Return on equity (ROE)
D) Quick ratio

336. The “payback period” fails to consider:

A) The time required to recover an investment
B) The total cash inflows from a project
C) The time value of money
D) The profitability of a project

337. A “stock split” is undertaken to:

A) Increase the price of shares
B) Decrease the number of shares outstanding
C) Make shares more affordable to investors
D) Increase the firm’s equity capital

338. A “zero-coupon bond” is a bond that:

A) Pays no periodic interest and is sold at a discount to face value
B) Pays annual interest equal to its face value
C) Pays interest only at maturity
D) Is issued at its face value with no additional returns

339. The “cash flow statement” primarily shows:

A) The financial position of a company at a specific date
B) The changes in cash and cash equivalents over a period
C) The company’s profitability
D) The equity structure of the company

340. What is the purpose of “capital budgeting”?

A) To monitor operational expenses
B) To evaluate and select long-term investment projects
C) To assess the company’s liquidity position
D) To determine the cost of financing short-term assets

341. The “Sharpe ratio” is used to:

A) Measure a portfolio’s performance relative to risk-free investments
B) Measure the volatility of a stock
C) Determine the intrinsic value of a stock
D) Compare fixed-income securities

342. The “DuPont formula” is primarily used to analyze:

A) A company’s cost of equity
B) The components of return on equity (ROE)
C) A company’s operating cash flow
D) The time value of money

343. A company’s “operating leverage” is primarily influenced by:

A) The proportion of fixed costs to variable costs
B) The level of short-term financing used
C) The amount of cash reserves available
D) The company’s dividend payout policy

344. Which method is commonly used to evaluate “mutually exclusive projects”?

A) Net present value (NPV)
B) Current ratio analysis
C) Dividend discount model (DDM)
D) Earnings per share (EPS) analysis

345. What does “interest rate risk” refer to?

A) The risk that a borrower will default on loan payments
B) The risk of bond prices falling due to rising interest rates
C) The risk of changes in foreign exchange rates
D) The risk associated with variable costs

346. “Preferred stock” is different from common stock because:

A) It does not pay dividends
B) It gives shareholders voting rights
C) It has priority in dividend payments and liquidation
D) It cannot be traded in secondary markets

347. Which of the following is a “real option” in finance?

A) The right to sell a stock at a specific price
B) The flexibility to expand a project in the future
C) A bondholder’s right to convert the bond into equity
D) The ability to sell shares at market value

348. A company’s “free cash flow” (FCF) is calculated by:

A) Deducting operating expenses from net income
B) Subtracting capital expenditures from operating cash flows
C) Adding depreciation to gross profit
D) Subtracting dividends paid from net cash flows

349. What does the “plowback ratio” indicate?

A) The percentage of net income retained by the company
B) The dividend yield of a stock
C) The proportion of net income paid as dividends
D) The company’s return on assets

350. A “money market instrument” is typically:

A) A long-term debt instrument
B) A short-term, highly liquid investment
C) A derivative security
D) A type of equity investment

 

351. Which of the following is an example of “systematic risk”?

A) A CEO scandal at a major company
B) A global pandemic affecting markets worldwide
C) Bankruptcy of a competitor in the same industry
D) A product recall for a specific firm

352. A company’s “cost of equity” represents:

A) The interest rate paid on loans
B) The minimum return required by equity investors
C) The dividend yield paid to shareholders
D) The total return on all assets

353. The “yield to maturity” (YTM) of a bond is:

A) The annual coupon payment divided by the bond’s market price
B) The return the investor will earn if the bond is held until maturity
C) The bond’s face value divided by its current price
D) The bond’s coupon rate

354. What is the “goal of financial management” in a corporation?

A) Maximize the firm’s market share
B) Maximize shareholder wealth
C) Minimize operational costs
D) Increase annual revenue

355. A “perpetuity” is:

A) A cash flow stream that continues indefinitely
B) A cash flow stream that increases by a fixed percentage each year
C) A fixed-term investment with periodic payments
D) A loan with no maturity date

356. Which of the following best describes “capital rationing”?

A) Allocating limited capital to the most profitable projects
B) Issuing additional shares to raise funds
C) Reducing operational expenses to maximize cash flows
D) Investing only in projects with a short payback period

357. What is the formula for calculating “net present value” (NPV)?

A) Total cash inflows – Total cash outflows
B) Present value of inflows – Initial investment
C) Internal rate of return – Discount rate
D) Future value ÷ Present value

358. The “internal rate of return” (IRR) is defined as the discount rate that:

A) Maximizes the company’s net income
B) Makes the net present value (NPV) of a project equal to zero
C) Ensures profitability of a project
D) Minimizes the payback period

359. What does “working capital management” focus on?

A) Long-term capital investments
B) Managing current assets and liabilities
C) Increasing shareholder equity
D) Allocating capital for new projects

360. “Leverage” in finance refers to:

A) The proportion of fixed assets to total assets
B) The use of debt to finance a company’s operations or assets
C) The amount of cash flow generated by the company
D) The equity financing ratio

361. What is the “discounted payback period”?

A) The time it takes for an investment to pay back its initial cost, adjusted for the time value of money
B) The time it takes for an investment to break even
C) The duration over which an investment generates profit
D) The same as the regular payback period

362. Which of the following is an advantage of “debt financing”?

A) Interest expense is tax-deductible
B) It reduces financial risk
C) It does not require collateral
D) Dividends are not mandatory

363. A “dividend reinvestment plan” (DRIP) allows investors to:

A) Use their dividend payments to purchase additional shares of stock automatically
B) Avoid paying taxes on dividends
C) Receive dividends in cash instead of stock
D) Increase dividend payouts over time

364. What is the primary objective of “capital allocation”?

A) Minimize the firm’s risk exposure
B) Ensure optimal utilization of resources
C) Reduce operational costs
D) Increase the dividend payout ratio

365. Which of the following is an example of an “efficient market”?

A) A market where stock prices reflect all available information
B) A market with minimal transaction costs
C) A market dominated by institutional investors
D) A market with highly volatile prices

366. Which financial ratio measures a company’s “liquidity”?

A) Price-to-earnings (P/E) ratio
B) Quick ratio
C) Return on assets (ROA)
D) Debt-to-equity ratio

367. The “debt-to-equity ratio” is used to measure:

A) The company’s profitability
B) The proportion of debt used relative to equity
C) The short-term liquidity of a company
D) The value of a firm’s shares

368. What is the “current ratio” formula?

A) Current assets ÷ Current liabilities
B) Current liabilities ÷ Current assets
C) Total assets ÷ Total liabilities
D) Current liabilities ÷ Total equity

369. The “payback period” is most useful when:

A) Evaluating projects with similar time horizons
B) Calculating the present value of cash flows
C) Assessing long-term profitability
D) Comparing projects with different risk profiles

370. A project with a “positive NPV” should be:

A) Rejected because it is risky
B) Accepted because it adds value to the firm
C) Accepted only if its IRR is higher than the discount rate
D) Rejected because it exceeds the cost of capital

371. The “treasury yield curve” represents:

A) The relationship between bond yields and maturity dates
B) The volatility of stock prices
C) The risk-free interest rate for a specific period
D) The annualized return on equity investments

372. In a “primary market”:

A) New securities are issued directly to investors
B) Securities are traded among existing shareholders
C) Only government bonds are issued
D) No financial intermediaries are involved

373. What does the “price-to-earnings (P/E) ratio” measure?

A) The profitability of a company
B) The amount investors are willing to pay for each dollar of earnings
C) The efficiency of asset utilization
D) The company’s leverage

374. A “callable bond” allows the issuer to:

A) Repurchase the bond before its maturity date
B) Convert the bond into equity
C) Increase the bond’s interest payments
D) Transfer the bond to another investor

375. Which of the following is an example of “cash flow from operating activities”?

A) Sale of fixed assets
B) Interest received on investments
C) Issuance of shares
D) Repayment of debt

376. The “gross profit margin” measures:

A) Net profit as a percentage of sales
B) Gross profit as a percentage of sales
C) Gross profit minus operating expenses
D) Net income divided by total assets

377. A “convertible bond” is:

A) A bond that can be converted into a specified number of shares
B) A bond with a floating interest rate
C) A bond backed by government securities
D) A bond that pays interest annually

378. The “agency problem” arises when:

A) There is a conflict of interest between management and shareholders
B) A company borrows too much debt
C) The firm fails to issue dividends
D) Investors demand higher returns than the firm can generate

379. What does “operating cash flow” represent?

A) Cash generated from the firm’s core business operations
B) Cash flows from investing and financing activities
C) Net income minus depreciation expenses
D) Total cash inflows during a period

380. A “hedge” in finance is used to:

A) Maximize the potential return on investments
B) Minimize the risk of adverse price movements
C) Increase the company’s profitability
D) Protect against bankruptcy

 

381. Which of the following best describes “market risk”?

A) Risk specific to an individual company or industry
B) Risk inherent to the entire market or economy
C) Risk that can be diversified away
D) Risk associated with changes in management

382. A firm’s “beta” coefficient measures:

A) Its liquidity relative to competitors
B) Its sensitivity to market risk
C) The firm’s profitability ratio
D) Its current financial leverage

383. If the interest rate increases, the present value of a future cash flow:

A) Increases
B) Decreases
C) Remains the same
D) Becomes unpredictable

384. What is “arbitrage”?

A) Buying and selling of securities to exploit price differences across markets
B) The process of underwriting securities for a new issue
C) The practice of reinvesting dividends for growth
D) The risk of fluctuations in foreign exchange rates

385. A “diversified portfolio” reduces:

A) Systematic risk
B) Unsystematic risk
C) Both systematic and unsystematic risk
D) Neither systematic nor unsystematic risk

386. A “zero-coupon bond”:

A) Pays no interest but is sold at a deep discount
B) Pays interest semi-annually at a zero rate
C) Matures without repaying the principal
D) Converts into equity at maturity

387. The “capital asset pricing model” (CAPM) is primarily used to:

A) Evaluate a project’s payback period
B) Calculate the expected return on an investment
C) Assess the value of intangible assets
D) Measure a company’s solvency

388. The “current yield” of a bond is:

A) Annual coupon payment ÷ Bond’s market price
B) Annual coupon payment ÷ Bond’s face value
C) Bond’s market price ÷ Face value
D) Bond’s yield to maturity ÷ Annual coupon payment

389. What does the “efficient frontier” represent in portfolio management?

A) The set of portfolios that offers the highest return for a given level of risk
B) The set of portfolios with the highest level of risk
C) The optimal allocation of fixed and current assets
D) The point at which diversification no longer reduces risk

390. Which of the following is an example of “operating leverage”?

A) Using debt to finance asset purchases
B) A high proportion of fixed costs relative to variable costs
C) Investing heavily in inventory
D) Reducing expenses by outsourcing operations

391. In capital budgeting, the “profitability index” (PI) is calculated as:

A) Net present value ÷ Initial investment
B) Present value of future cash inflows ÷ Initial investment
C) Total cash inflows ÷ Total cash outflows
D) Internal rate of return ÷ Net present value

392. What is the main limitation of the “payback period” method?

A) It ignores cash flows beyond the payback period
B) It overestimates the profitability of long-term projects
C) It cannot compare projects of different sizes
D) It fails to account for the time value of money

393. The “risk-free rate of return” is typically represented by:

A) A highly-rated corporate bond yield
B) The yield on a 10-year government treasury bond
C) The average return on the stock market
D) The discount rate used in NPV calculations

394. What is the “weighted average cost of capital” (WACC)?

A) The average interest rate paid on all liabilities
B) The cost of debt multiplied by the cost of equity
C) The average rate of return required by investors
D) The overall return required to finance the company’s assets

395. “Compound interest” differs from “simple interest” because:

A) Interest is only earned on the principal amount
B) Interest is earned on both the principal and previously earned interest
C) It applies only to short-term investments
D) It is unaffected by changes in the interest rate

396. A “protective covenant” in a bond agreement:

A) Allows bondholders to convert bonds into equity
B) Restricts certain actions by the borrower to protect bondholders
C) Guarantees a fixed coupon payment
D) Ensures that the bond is secured by collateral

397. What is “financial leverage”?

A) The use of short-term financing to meet operational needs
B) The use of debt to increase potential returns to equity holders
C) The amount of equity financing used relative to debt
D) The degree of control exercised by creditors

398. The “times interest earned” ratio measures:

A) The company’s ability to pay its short-term liabilities
B) The company’s ability to meet interest payments on debt
C) The percentage of revenue spent on interest
D) The cost of borrowing compared to net income

399. A project has an initial investment of $50,000 and generates annual cash inflows of $15,000 for 5 years. What is the “payback period”?

A) 3 years
B) 3.33 years
C) 4 years
D) 5 years

400. The “modigliani-miller theorem” suggests:

A) Dividend policy is irrelevant in a perfect market
B) Debt is always preferable to equity financing
C) Share prices depend solely on capital structure
D) Firms should maximize their dividends to increase shareholder value

401. Which financial metric measures “shareholder value creation”?

A) Earnings before interest and taxes (EBIT)
B) Economic value added (EVA)
C) Operating cash flow (OCF)
D) Gross profit margin

402. Which of the following factors would decrease “working capital”?

A) Increasing inventory levels
B) Collecting receivables faster
C) Paying off short-term liabilities
D) Delaying payment to suppliers

403. The “price/book ratio” is commonly used to evaluate:

A) A company’s market value relative to its book value
B) A company’s profitability over a period of time
C) The liquidity of a firm’s assets
D) The debt levels of a company

404. “Hedging” against currency risk is most commonly done using:

A) Equity swaps
B) Options and futures contracts
C) Mutual funds
D) Bonds

405. Which of the following is NOT part of “capital budgeting”?

A) Assessing project risk
B) Estimating project cash flows
C) Choosing between equity or debt financing
D) Evaluating the time value of money

406. A company’s “payout ratio” measures:

A) Dividends paid as a percentage of earnings
B) Total cash flows paid to suppliers
C) Net income retained within the company
D) Dividends paid as a percentage of total assets

407. The “quick ratio” excludes which of the following?

A) Cash
B) Accounts receivable
C) Inventory
D) Marketable securities

408. The “capital market line” (CML) represents:

A) The relationship between risk and return for efficient portfolios
B) The risk-free rate in relation to systematic risk
C) The price of capital relative to debt
D) The performance of a single security

409. Which of the following is an example of “internal financing”?

A) Issuing new shares of stock
B) Retaining earnings within the company
C) Taking a bank loan
D) Selling bonds

410. What does “diversification” aim to achieve in a portfolio?

A) Minimize all forms of risk
B) Reduce unsystematic risk
C) Eliminate systematic risk
D) Increase returns without increasing risk

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