Finance for Non-Finance Managers Business Finance and Funding 2 — Questions and Answers
Question 1: What is a dividend?
- A fee paid to the company's lenders
- A portion of profits distributed to shareholders (Correct answer)
- A penalty for early loan repayment
- An expense deducted from revenue
Correct answer: A portion of profits distributed to shareholders
A dividend is a payment made by a company to its shareholders out of its profits or reserves.
Question 2: Which financial metric measures a company's ability to service its debt from operating earnings?
- Return on equity
- Earnings per share
- Interest coverage ratio (Correct answer)
- Price-to-earnings ratio
Correct answer: Interest coverage ratio
The interest coverage ratio = EBIT ÷ Interest Expense, showing how many times the company can cover its interest payments from operating profit.
Question 3: What does EBITDA stand for?
- Earnings Before Income Tax, Depreciation, and Amortization
- Earnings Before Interest, Taxes, Depreciation, and Amortization (Correct answer)
- Equity Before Interest, Taxes, Debt, and Assets
- Expenses Before Income Tax, Deductions, and Adjustments
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA measures core operating profitability before non-cash charges (depreciation, amortization) and financing costs.
Question 4: Initial Public Offering (IPO) refers to:
- The first time a private company sells shares to the public on a stock exchange (Correct answer)
- A company's first loan from a commercial bank
- The first dividend payment made to shareholders
- A merger between two publicly listed companies
Correct answer: The first time a private company sells shares to the public on a stock exchange
An IPO is the process by which a private company raises capital by offering shares to the public for the first time on a stock exchange.
Question 5: Which of the following best describes a bond?
- An ownership stake in a company
- A debt instrument where the issuer borrows money and pays interest to bondholders (Correct answer)
- A type of derivative used to hedge currency risk
- An agreement to buy goods at a fixed future price
Correct answer: A debt instrument where the issuer borrows money and pays interest to bondholders
A bond is a fixed-income debt security where the issuer borrows capital from investors and pays periodic interest (coupon) until maturity.
Question 6: Gearing (financial leverage) is considered HIGH when:
- The company finances mostly through equity
- A large proportion of the company's capital comes from debt (Correct answer)
- The company has no long-term liabilities
- Retained earnings exceed total debt
Correct answer: A large proportion of the company's capital comes from debt
A highly geared company has a large proportion of debt in its capital structure, increasing financial risk and fixed interest obligations.
Finance for Non-Finance Managers Business Finance and Funding 2
What is a dividend?