D364 Financial Management - Set 4 - Part 1

Correct Answer: It allows the issuer to redeem the bond before maturity

Callable bonds give issuers the right to redeem the bond early, typically to refinance at lower interest rates when market rates decrease.

Correct Answer: $10

Book value per share is calculated as Total Equity / Shares Outstanding. In this case: $2,500,000 / 250,000 = $10.

Correct Answer: Current ratio

The current ratio measures a company's ability to meet its short-term liabilities with its short-term assets, making it a key liquidity ratio.

Correct Answer: It increases ROE but with higher risk

High financial leverage amplifies ROE when returns are positive but increases the risk of large losses when returns are negative.

Correct Answer: The stock is 50% more volatile than the market

A beta of 1.5 indicates that the stock is 50% more volatile than the market, meaning it tends to increase or decrease by 1.5 times the market’s movements.

Correct Answer: 80%

The retention ratio is calculated as (Net Income - Dividends) / Net Income. In this case: ($500,000 - $100,000) / $500,000 = 80%.

Correct Answer: High-Yield Bonds

High-yield bonds, also known as junk bonds, offer higher returns than other bonds due to the greater risk of default.

Correct Answer: Inventory

The quick ratio excludes inventory from current assets to provide a more conservative measure of liquidity, whereas the current ratio includes inventory.

Correct Answer: 20%

ROA is calculated as Net Income / Total Assets. In this case: $200,000 / $1,000,000 = 20%.

Correct Answer: Fixed dividends

Preferred stock typically pays fixed dividends and has priority over common stockholders in receiving dividends and assets in the event of liquidation.

Correct Answer: $50

The stock price is calculated as P/E ratio × EPS. In this case: 15 × $4 = $60.

Correct Answer: 5.26%

The current yield is calculated as Annual Coupon Payment / Current Price. In this case: ($1,000 × 5%) / $950 = 5.26%.

Correct Answer: Reject the project

If the IRR is lower than the required rate of return, the project does not meet the company’s return expectations and should be rejected.

Correct Answer: 4.2%

The after-tax cost of debt is calculated as Cost of Debt × (1 - Tax Rate). In this case: 6% × (1 - 0.30) = 4.2%.

Correct Answer: To protect investors from fraudulent financial reporting

The Sarbanes-Oxley Act (SOX) was enacted to enhance transparency and accountability in corporate financial reporting, primarily to prevent fraud.

Correct Answer: $60

The annual interest payment is calculated as Face Value × Coupon Rate. In this case: $1,000 × 6% = $60 per year.

Correct Answer: The company’s efficiency in collecting receivables

The accounts receivable turnover ratio measures how efficiently a company collects payments from its customers, indicating how quickly receivables are converted into cash.

Correct Answer: $1,000,000

COGS is calculated as Inventory Turnover × Average Inventory. In this case: 8 × $150,000 = $1,200,000.

Correct Answer: Money today is worth more than money in the future

The time value of money states that a dollar today is worth more than a dollar in the future because of its earning potential over time.

Correct Answer: 7.5%

WACC is calculated as (Weight of Debt × After-tax Cost of Debt) + (Weight of Equity × Cost of Equity). In this case, WACC = (0.5 × 5% × (1 - 0.30)) + (0.5 × 10%) = 7.5%.