C214 Financial Management Practice Questions - Set 3 - Part 3

Correct Answer: c) Market-wide risk that affects all stocks

Systematic risk, also known as market risk, affects the entire economy or market and cannot be eliminated through diversification.

Correct Answer: c) To reduce overall risk

Diversification reduces overall portfolio risk by spreading investments across various assets, helping to minimize the impact of any single poor-performing asset.

Correct Answer: c) Treasury bonds

Treasury bonds are issued by the federal government and are subject to federal income tax, unlike municipal bonds, which are typically exempt from federal taxes.

Correct Answer: b) Bond prices decrease

When the market interest rate exceeds the bond’s coupon rate, the bond becomes less attractive, and its price decreases.

Correct Answer: b) To evaluate the potential outcomes under different scenarios

Sensitivity analysis evaluates a project’s financial outcomes under various conditions, such as pessimistic, forecasted, and optimistic scenarios, to assess risks.

Correct Answer: b) The stock is overvalued

When the market price of a stock exceeds its intrinsic value, the stock is considered overvalued, indicating that it may not be a good buy.

Correct Answer: a) Convertible bond

Convertible bonds allow bondholders to convert their bonds into shares of the issuing company’s stock, giving them an opportunity to participate in potential stock price appreciation.

Correct Answer: c) The quick ratio excludes inventory from current assets

The quick ratio is a more stringent measure of liquidity than the current ratio because it excludes inventory from current assets, focusing on assets that are more easily converted to cash.

Correct Answer: c) Capital budgeting

Capital budgeting involves making long-term investment decisions, such as purchasing new equipment or entering new markets, to ensure future growth and profitability.

Correct Answer: a) The amount of fixed costs in a company’s operations

Operating leverage refers to the extent to which a company relies on fixed costs in its operations. Higher operating leverage means that fixed costs are a larger portion of total costs, making the company more sensitive to changes in sales.