D364 Financial Management - Set 5 - Part 1

Correct Answer: To raise capital for the company

When a company issues new stock in the primary market, it is raising new capital by selling shares directly to investors.

Correct Answer: A model that assesses a stock's expected return based on its beta

CAPM determines a stock’s expected return by considering the risk-free rate, market return, and the stock’s beta (systematic risk).

Correct Answer: The company has more debt than equity

A debt-to-equity ratio greater than 1.0 indicates that the company is using more debt than equity to finance its operations.

Correct Answer: The bond is selling at a premium

When a bond is priced above its face value, it is selling at a premium, typically because its coupon rate is higher than the current market interest rates.

Correct Answer: $60

Stock price is calculated as EPS × P/E ratio. In this case: $5 × 12 = $60.

Correct Answer: To determine the percentage of earnings paid as dividends

The dividend payout ratio shows what percentage of a company’s earnings are distributed to shareholders as dividends.

Correct Answer: $400,000

Equity is calculated as Total Assets - Total Liabilities. In this case: $1,000,000 - $600,000 = $400,000.

Correct Answer: 6.8%

Using CAPM, Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). In this case: 2% + 0.8 × (8% - 2%) = 6.8%.

Correct Answer: The company has sufficient liquidity to cover short-term liabilities

A current ratio above 1.0 indicates that the company has more current assets than current liabilities, suggesting good liquidity.

Correct Answer: The price of a company’s stock relative to its sales

The P/S ratio compares the company’s stock price to its sales revenue, providing insight into how much investors are paying for each dollar of sales.

Correct Answer: $10

Stock price is calculated as Market Value of Equity / Shares Outstanding. In this case: $5,000,000 / 500,000 = $10.

Correct Answer: 12.0%

The SGR is calculated as ROE × (1 - Payout Ratio). In this case: 20% × (1 - 0.40) = 12.0%.

Correct Answer: Purchasing equipment

Investing activities include transactions related to the purchase or sale of long-term assets, such as equipment.

Correct Answer: $1,000

The total interest payment is calculated as Face Value × Coupon Rate × Number of Years. In this case: $1,000 × 5% × 10 = $1,000.

Correct Answer: The proportion of debt to equity used to finance the company

The debt-to-equity ratio measures the relative proportion of debt and equity financing used by the company.

Correct Answer: 2.00

The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $2,000,000 - $1,500,000 = $500,000. Therefore, Equity Multiplier = $2,000,000 / $500,000 = 2.00.

Correct Answer: A shareholder sells stock to another investor on an exchange

Secondary market transactions involve the trading of previously issued securities between investors, such as buying or selling stocks on an exchange.

Correct Answer: It accounts for the time value of money

NPV considers the time value of money by discounting future cash flows to present value, providing a comprehensive measure of a project’s profitability.

Correct Answer: $320,000

The debt ratio is calculated as Total Debt / Total Assets. Rearranging the formula, Total Debt = Debt Ratio × Total Assets. In this case: 0.40 × $800,000 = $320,000.

Correct Answer: $300,000

The current ratio is calculated as Current Assets / Current Liabilities. Rearranging the formula, Current Assets = Current Ratio × Current Liabilities. In this case: 2.0 × $150,000 = $300,000.