Chapter 1 Practice Questions Flashcards
The best place to look for a current list of the long-term debts a company must repay is its:
A. Prospectus
B. Form 144
C. Balance sheet
D. Income statement
C
An investor calculating the investing merits of a payment or payments not yet received might potentially use all of the following except:
A. Present value
B. Net present value
C. Future value
D. Internal rate of return
Answer: C
Future value can be used to determine the value of an asset already held by a company or investor, not one that will be received in the future. An investor that is interested in determining the investment merit of a future payment or stream of payments might use a present value, net present value, or internal rate of return calculation.
The risk of an investment underperforming or losing value due to an increase in the cost of borrowing money is known as:
A. Inflation risk
B. Interest rate risk
C. Regulatory risk
D. Political risk
Answer: B. Investments with locked-in rates of interest are subject to drops in value if newer, similar securities are issued that have higher interest rates. The investments with locked-in interest rates are also subject to an increase in value if newer securities are issued with lower rates. Inflation risk is the risk that an investor’s portfolio will not outpace inflation and her purchasing power will erode as a result. Regulatory risk is the risk that laws will change endangering a company’s profits. Political risk is the risk that instability in local or national politics could hurt investments located within those areas.
All of the following would be increased risks associated with investing in the bonds of smaller, less established healthcare companies except:
A. Business risk
B. Regulatory risk
C. Liquidity risk
D. Systematic risk
Answer: D.The broad risk associated with investing in a market (whether it is the stock market or bond market) cannot be completely avoided without ceasing to invest in that market altogether. The size of the company that issues the securities in a portfolio does not change the fact that the broad bond market is susceptible to
My ABC Company sells personalized ABC books and has a current ratio of 4:1. If the company has $40,000 in current assets, how much working capital does it have?
A. $40,000
B. $30,000
C. $10,000
D. $160,000
Answer: B.If the current ratio is 4:1 (4 to 1), My ABC Company would have four times as many current assets as current liabilities, or $10,000 in current liabilities (working capital = current assets – current liabilities ($40,000 – $10,000 = $30,000)).
A company has the following income statement items:
» Sales $100 million
» COGS $50 million
» Operating expenses $20 million
» Taxes $10 million
» Net income $20 million
What is the company’s bottom line profit margin?
A. 20%
B. 40%
C. 50%
D. 100%
Answer: A.The formula for the bottom line profit margin is net income / sales. Thus, the net income profit margin for this company is $20 million / $100 million = 20%
A company with only common shares of stock has the following information:
» Assets: $100 million
» Liabilities: $80 million
» Net income: $30 million
» Number of shares: $10 million
» Share price: $15
What is the book value of the company?
Answer: C.The book value of a company is the value of its assets minus its liabilities. In this case $100 million – $80 million = $20 million
All of the following might be used by a technical analysis except:
A. A moving average
B. The interest coverage ratio
C. The short interest ratio
D. The number of odd-lot purchases made
Answer: B.The interest coverage ratio is used by analysts who use fundamental analysis to examine whether an individual company can meet its short-term goals.
Which of the following would indicate a downward trend for a technical analyst?
A. Breakout after a double bottom pattern
B. Short-term moving average (20-day) moves above a long-term average (100-day)
C. Decrease in the short interest ratio
D. Decrease in the number of odd lots
Answer: C.A breakout after a double bottom pattern indicates an upward trend is coming. When the short-term moving average (20-day) moves above a long-term average (100-day), it also indicates an upward trend. A decrease in odd lots indicates an upward trend because technical analysts assume that buyers of odd lots are always behind the trends. The short interest ratio is the number of short positions divided by the average daily trading volume. A decrease in the short interest ratio indicates a downward trend, because fewer short sellers need to close out their short positions with long positions.
