Sample Questions and Answers
Which of the following is the primary objective of financial analysis?
Maximizing shareholder wealth
B. Determining the firm’s cash flow
C. Evaluating financial decisions
D. Identifying accounting errors
Answer: A
Financial planning primarily focuses on:
Estimating future cash flows
B. Maximizing asset valuation
C. Increasing short-term liabilities
D. Managing tax compliance
Answer: A
What does the capital structure of a company refer to?
The proportion of debt and equity used to finance the company’s operations
B. The company’s product lines
C. The market share
D. The number of shareholders
Answer: A
In working capital management, a company focuses on:
Maximizing its fixed assets
B. Managing its short-term assets and liabilities
C. Increasing its total liabilities
D. Ensuring long-term financing
Answer: B
The DuPont analysis is used to break down which financial metric?
Net profit margin
B. Return on equity
C. Gross profit
D. Operating income
Answer: B
Which of the following is an example of a current asset?
Long-term debt
B. Property, plant, and equipment
C. Accounts receivable
D. Retained earnings
Answer: C
The primary role of financial markets is to:
Maximize employee salaries
B. Facilitate the buying and selling of financial securities
C. Regulate inflation
D. Establish tax rates
Answer: B
A firm with high financial leverage means it has:
A high proportion of equity financing
B. More debt relative to equity financing
C. Little to no debt financing
D. Higher cash reserves
Answer: B
The working capital of a company is defined as:
Total assets minus total liabilities
B. Current assets minus current liabilities
C. Fixed assets minus current liabilities
D. Net income minus expenses
Answer: B
Which financial statement provides a snapshot of a company’s financial position at a specific point in time?
Income statement
B. Cash flow statement
C. Balance sheet
D. Statement of stockholders’ equity
Answer: C
What does the price-to-earnings (P/E) ratio measure?
The market price of a company’s stock relative to its earnings per share
B. The total revenue of the company
C. The company’s market share
D. The company’s total assets
Answer: A
Which of the following is a method of asset evaluation?
Depreciation
B. Discounted cash flow
C. Asset turnover ratio
D. Earnings before interest and taxes (EBIT)
Answer: B
Which of the following is true of the net present value (NPV) method?
It is primarily used to assess the risk of a project
B. It calculates the total cost of capital for a project
C. It considers the time value of money
D. It does not consider future cash flows
Answer: C
The risk-return tradeoff suggests that:
The higher the risk, the lower the return
B. The higher the risk, the higher the potential return
C. Risk has no relation to return
D. Risk is irrelevant in investment decisions
Answer: B
Which of the following is a characteristic of a high-risk investment?
Low expected return
B. Low standard deviation
C. High expected return
D. High current assets
Answer: C
In financial planning, forecasting future sales is important because:
It helps to manage working capital
B. It ensures lower taxes
C. It provides insight into market share
D. It affects asset valuation only
Answer: A
Capital budgeting decisions typically involve evaluating:
Long-term investments or projects
B. Short-term financing
C. The capital structure
D. Day-to-day operations
Answer: A
The cost of capital refers to:
The interest rate paid on debt
B. The return required by equity investors
C. The total operating expenses of the firm
D. The tax rate applied to the firm’s profits
Answer: B
Which of the following is NOT a form of financial analysis?
Liquidity analysis
B. Profitability analysis
C. Asset turnover analysis
D. Tax rate analysis
Answer: D
Which of the following is the best measure of a company’s operational efficiency?
Return on assets
B. Return on equity
C. Gross profit margin
D. Current ratio
Answer: A
What is a key feature of a company’s capital structure?
The balance of long-term debt, equity, and short-term liabilities
B. The total value of the company’s assets
C. The company’s total market capitalization
D. The stockholder’s dividend payout ratio
Answer: A
What does the quick ratio measure?
The company’s ability to pay off short-term liabilities without relying on inventory
B. The total value of long-term debt
C. The company’s profitability
D. The overall market valuation
Answer: A
The financial concept of ‘leverage’ refers to:
The use of borrowed funds to finance investments
B. The equity financing used by the company
C. The company’s tax obligations
D. The company’s operational efficiency
Answer: A
The efficient market hypothesis states that:
Stock prices are influenced by market sentiment
B. It is impossible to consistently outperform the market using expert analysis
C. Company earnings drive stock prices
D. Financial markets are inefficient and driven by speculation
Answer: B
The cost of equity is calculated by:
Using the formula for the weighted average cost of capital
B. Discounting future dividends
C. Adding the risk-free rate and the market premium
D. Using the capital asset pricing model (CAPM)
Answer: D
A company’s debt-to-equity ratio indicates:
The total amount of debt the company has
B. The proportion of debt used to finance the company
C. The profitability of the company
D. The company’s ability to pay dividends
Answer: B
The term “working capital” is synonymous with:
Cash flow
B. Short-term financial health
C. Market share
D. Fixed asset management
Answer: B
What is a capital expenditure (CapEx)?
An expense related to day-to-day operations
B. A purchase of long-term assets such as equipment or property
C. An ongoing operating expense
D. A financial obligation such as loan repayment
Answer: B
Which of the following ratios measures a company’s ability to meet its short-term obligations with its most liquid assets?
Current ratio
B. Quick ratio
C. Debt ratio
D. Return on equity
Answer: B
The term “diversification” in investment refers to:
Investing in a wide variety of assets to reduce risk
B. Concentrating investments in a single asset class
C. Focusing on long-term bonds
D. Reducing investment in stocks
Answer: A
31. The primary objective of financial management is to:
Maximize profits
B. Maximize the firm’s value to its shareholders
C. Minimize risk
D. Minimize costs
Answer: B
32. Which of the following is considered a non-operating activity on the income statement?
Revenue from sales
B. Interest income
C. Cost of goods sold
D. Wages expense
Answer: B
33. A firm is said to have a “highly liquid” position when:
It has high current liabilities
B. It has large amounts of long-term debt
C. It can easily convert its assets to cash
D. It maintains low levels of working capital
Answer: C
34. The payback period method of capital budgeting:
Considers the time value of money
B. Measures the time it takes for an investment to recover its initial cost
C. Is based on the net present value
D. Measures profitability
Answer: B
35. Which of the following is a limitation of using the net present value (NPV) method for capital budgeting?
It ignores the time value of money
B. It requires a discount rate to be chosen
C. It cannot be used for mutually exclusive projects
D. It is too simple to apply to large projects
Answer: B
36. The weighted average cost of capital (WACC) is used to:
Determine the minimum return a company must earn to satisfy its debt and equity investors
B. Calculate the total cost of operating expenses
C. Predict future cash flows
D. Measure the risk associated with a project
Answer: A
37. A firm’s capital structure is considered optimal when:
It minimizes the weighted average cost of capital
B. It maximizes the number of shares outstanding
C. It maintains a 50/50 debt-equity ratio
D. It maximizes interest expense
Answer: A
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