Free Basic Finance Questions and Answers — Questions and Answers
Question 1: What determines the greatest number in a series of numbers?
- MAXIMUM(B1:B3)
- MAX(B1:B3) (Correct answer)
- HIGHEST(B1:B3)
- HIGH(B1:B3)
Correct answer: MAX(B1:B3)
In spreadsheet software like Microsoft Excel, the `MAX` function is specifically designed to find the largest numerical value within a specified range of cells. The syntax `MAX(B1:B3)` correctly identifies the highest number among the cells B1, B2, and B3. Other options like `MAXIMUM` or `HIGHEST` are not standard Excel functions for this purpose.
Question 2: The cash method of accounting disregards.
- Expenses
- payables (Correct answer)
- revenue
- cash
Correct answer: payables
The cash method of accounting recognizes revenues only when cash is received and expenses only when cash is paid out. It disregards non-cash transactions, meaning items like accounts payable (money owed to suppliers) and accounts receivable (money owed by customers) are not recorded until the actual cash exchange occurs. Therefore, payables are disregarded until settled in cash.
Question 3: Regular interest payment to bondholders is termed coupon interest
- face value
- coupon (Correct answer)
- principal
- yield
Correct answer: coupon
The regular interest payment made by a bond issuer to its bondholders is known as the coupon payment. This term originated from physical bond certificates that historically had detachable coupons, each representing an interest payment. The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of its face value.
Question 4: The money an investor receives for assuming a risk is known as return.
- arbitage
- risk premium (Correct answer)
- risk free rate
- option value
Correct answer: risk premium
A risk premium is the additional return an investor expects to receive, or actually receives, for taking on a higher level of risk compared to a risk-free investment. It serves as compensation for bearing the uncertainty associated with a riskier asset. Investors demand this premium to justify investing in assets with greater potential for loss.
Question 5: What is the purpose of financial markets?
- Control inflation
- Allocate savings effeciently (Correct answer)
- Increase the price of common stocks
- lower the yield on bonds
Correct answer: Allocate savings effeciently
Financial markets serve as crucial intermediaries that facilitate the efficient allocation of capital from savers (those with surplus funds) to borrowers (those who need funds for investment). They enable businesses to raise capital for growth and individuals to invest their savings, thereby channeling resources to their most productive uses in the economy. This efficient allocation drives economic growth and development.
Question 6: Calculations involve dividing the price/ratio by the cash flow/share ratio.
- Price to cash flow ratio (Correct answer)
- Divided to stock ratio
- Cash flow to price ratio
- Sales to growth ration
Correct answer: Price to cash flow ratio
The Price to Cash Flow (P/CF) ratio is a valuation metric used to compare a company's share price to its operating cash flow per share. It is calculated by dividing the current share price by the operating cash flow per share. This ratio helps investors assess how much they are paying for a company's cash-generating ability, often considered a more reliable measure of value than earnings.
Question 7: Currently, 2:5 Rs. is the current liability. Net working capital is equal to .
- Rs.(-)18,000 (Correct answer)
- Rs.(-)45,000
- Rs.45,000
- Rs.18,000
Correct answer: Rs.(-)18,000
Net working capital is calculated as Current Assets minus Current Liabilities. If the ratio of Current Assets to Current Liabilities is 2:5, and assuming a common scenario where Current Liabilities are, for example, Rs. 30,000 (making 5 units equal to 30,000, so 1 unit = 6,000), then Current Assets would be 2 units, or Rs. 12,000. Therefore, Net Working Capital = Rs. 12,000 - Rs. 30,000 = Rs. (-)18,000.
Question 8: What makes an excel pivot table unique
- None of these
- It is a tool for data summarization (Correct answer)
- It is a table having data but organized horizontally
- It is a table for computing financial pivot values
Correct answer: It is a tool for data summarization
An Excel PivotTable is a powerful data summarization tool that allows users to reorganize and summarize selected columns and rows of data from a larger dataset. It enables quick analysis, reporting, and visualization of data by grouping, counting, summing, or averaging information in various ways. This unique ability to dynamically aggregate and present data makes it invaluable for business intelligence and reporting.
Question 9: This is what the cost of retained earnings is.
- Cost of term loans
- Cost of equity (Correct answer)
- Cost of Debt
- Cost of bank loan
Correct answer: Cost of equity
Retained earnings represent the portion of a company's net income that is not distributed as dividends but is instead reinvested in the business. The cost of retained earnings is essentially the opportunity cost for shareholders, as they forgo current dividends for future growth. Since retained earnings belong to the shareholders, their cost is considered equal to the cost of common equity, as both represent funds provided by equity holders.
Question 10: A business will have favorable leverage if its __are greater than its debt expense.
- Interest
- Earnings (Correct answer)
- Equity
- Debt
Correct answer: Earnings
Favorable financial leverage occurs when a company's earnings generated from assets financed by debt are greater than the cost of that debt, primarily interest payments. In such a scenario, the use of debt magnifies the returns to shareholders, as the company earns more from the borrowed funds than it pays in interest. This positive difference enhances the company's profitability and shareholder value.
Question 11: The ___provides investors with a window into the company.
- Syndicate offer
- Propectus (Correct answer)
- Shelf rule
- IPO
Correct answer: Propectus
A prospectus is a formal legal document that provides detailed information about an investment offering, such as stocks, bonds, or mutual funds, to potential investors. It contains comprehensive details about the company's financial performance, management, risks, and the terms of the offering. This document is crucial for investors to make informed decisions and gain a transparent understanding of the company and its securities.
Question 12: what asset class is goodwill?
- Long term
- Intagible (Correct answer)
- Current
- Fixed
Correct answer: Intagible
Goodwill is an intangible asset that arises when a company acquires another company for a price higher than the fair market value of its identifiable net assets. It represents the non-physical assets of a business, such as brand reputation, customer loyalty, strong management, and proprietary technology, that contribute to its value. Unlike tangible assets, goodwill cannot be physically touched or seen.
Question 13: Conflicts between managers' and shareholders' interests are referred to as
- agency problem (Correct answer)
- management problem
- area of the board of directors
- risk
Correct answer: agency problem
The agency problem arises when there is a conflict of interest between the principals (shareholders) and their agents (managers) in a company. Managers, as agents, are expected to act in the best interests of shareholders, but they may sometimes prioritize their own goals, such as personal compensation or job security, over maximizing shareholder wealth. This divergence of interests can lead to suboptimal decisions for the company.
Question 14: The capital market line is which of the following?
- both of these (Correct answer)
- all of these
- Capital allocation line of a market portfolio
- capital allocation line of a risk free asset
Correct answer: both of these
The Capital Market Line (CML) in finance represents the relationship between risk and return for efficient portfolios. It is essentially the Capital Allocation Line (CAL) when the risky portfolio is the market portfolio, combining a risk-free asset with the market portfolio. Therefore, it encompasses both the capital allocation line of a market portfolio and the capital allocation line of a risk-free asset, illustrating the optimal risk-return trade-off for investors.
Question 15: A company's investment decision is also known as the
- None of these
- Financing decision
- Capital budgeting decision (Correct answer)
- Liquidity decision
Correct answer: Capital budgeting decision
A company's investment decision, also known as capital budgeting, involves deciding which long-term assets or projects the company should invest in. These decisions typically involve significant capital outlays and have long-term implications for the company's profitability and growth. Capital budgeting aims to select projects that will maximize shareholder wealth by generating returns greater than their cost.
Question 16: When a forward contract is exchanged, it is referred to as
- future contract (Correct answer)
- spot contract
- put option
- call option
Correct answer: future contract
A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date. When these forward contracts are standardized in terms of quantity, quality, and delivery date, and are traded on an organized exchange, they are referred to as futures contracts. Futures contracts are also marked to market daily and guaranteed by a clearinghouse.
Free Basic Finance Questions and Answers
What determines the greatest number in a series of numbers?