Lesson #9 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

Market capitalization is calculated by using:

✅ The price per share and the total number of outstanding shares.
❌ The dividends of a company.
❌ The total number of employees of a company.
❌ The earnings of a company.

Explanation:
Market capitalization = Share Price × Number of Outstanding Shares. It reflects the market value of a company’s equity.

Question 2

The greater an investor’s ownership in a corporation is, the greater:

❌ is the amount of taxes to be paid by the company.
❌ is the total number of shares he/she owns with respect to the total number of shares outstanding.
❌ is the profitability of the company.
✅ is the total number of shares he/she owns.

Explanation:
Higher ownership simply means the investor owns more shares, not that company profits or taxes change automatically.

Question 3

A firm must make its dividend payments to __________ before it makes any dividend payments to its ___________.

✅ preferred shareholders → common shareholders
❌ bondholders → preferred shareholders
❌ its Chief Executive Officer → preferred shareholders
❌ the members of the board → bondholders

Explanation:
Dividends are paid first to preferred shareholders, then to common shareholders. Bondholders receive interest, not dividends.

Question 4

The basic corporate charter: (Select all that apply)

✅ does not say that the firm ever has to raise debt. The board decides.
❌ says that the firm must pay dividends during its lifetime.
❌ says that the firm must repurchase some of its shares beyond a certain threshold of issuance.
✅ does not say that the firm ever has to issue warrants, convertible debt, or any other debt securities.

Explanation:
Corporate charters usually provide flexibility, leaving financing decisions to the board.

Question 5

In the Pecking Order Theory, companies prioritize financing as:

❌ (1) Debt, (2) Internal financing, (3) Equity
✅ (1) Internal financing, (2) Debt issuance, (3) Equity
❌ (1) Equity, (2) Debt issuance, (3) Internal financing
❌ (1) Equity, (2) Internal financing, (3) Debt

Explanation:
Firms prefer internal funds first, then debt, and issue equity only as a last resort.

Question 6

A dilution is:

❌ The issuance of new debt by a company.
✅ A reduction in the ownership percentage of a share caused by the issuance of new shares.
❌ An increase in ownership percentage caused by new shares.
❌ A sale of an investor’s shares.

Explanation:
Dilution occurs when new shares are issued, reducing existing shareholders’ ownership percentages.

Question 7

A share repurchase is: (Select all that apply)

❌ A program by which investors buy back their previously sold shares.
✅ The reverse of a dilution.
✅ An alternative to paying dividends to return cash to investors.
✅ A program by which a company buys back its own shares from the market or shareholders.

Explanation:
Share buybacks reduce outstanding shares, increase ownership concentration, and are often used instead of dividends.

Question 8

The price-to-earnings (P/E) ratio: (Select all that apply)

❌ Measures funds provided by creditors vs owners.
❌ Indicates the percentage of profit paid as dividends.
✅ Shows how much investors are willing to pay for each dollar of earnings.
✅ Shows the number of years of earnings implied by the current share price.

Explanation:
The P/E ratio reflects valuation expectations and growth outlook.

Question 9

Generally, a reduction in dividends is interpreted as:

❌ Good news with stock price increase.
✅ Bad news with often a stock price drop.
❌ A non-event.
❌ A sign of future increase in profitability.

Explanation:
Dividend cuts often signal financial trouble or weaker future prospects, leading to negative market reactions.

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