D365 Financial Management II - Set 4 - Part 1

Correct Answer: To increase potential returns by using debt

Financial leverage allows a company to use borrowed funds to increase its returns on investment, although it also increases financial risk.

Correct Answer: Current ratio

The current ratio measures a company’s ability to pay short-term obligations with its current assets.

Correct Answer: The cost of raising funds through debt and equity

Cost of capital is the cost a company incurs to raise funds, which can include debt, equity, or both.

Correct Answer: Convertible

Convertible preferred stock gives the holder the option to convert it into a certain number of common shares.

Correct Answer: The interest rate the bond issuer agrees to pay annually

The coupon rate is the percentage of the bond’s face value that the issuer will pay annually to the bondholder.

Correct Answer: The stock price is 20 times higher than the company's earnings per share

The P/E ratio compares a company's current stock price to its earnings per share (EPS).

Correct Answer: A national recession

Systematic risk affects the entire market, such as economic downturns, and cannot be mitigated by diversification.

Correct Answer: The total value of a company’s outstanding shares of stock

Market capitalization is calculated by multiplying the stock price by the number of outstanding shares.

Correct Answer: The stock is undervalued

A P/B ratio of less than 1 suggests that the stock is trading for less than its book value, which may indicate an undervaluation.

Correct Answer: To reduce overall risk by spreading investments across different assets

Diversification spreads risk across various investments, reducing the impact of poor performance in one area.

Correct Answer: The bond is selling for more than its face value

When a bond trades at a premium, it is selling for more than its face value, often because its coupon rate is higher than current interest rates.

Correct Answer: The percentage of sales that becomes net profit

Net profit margin is a profitability ratio that shows the percentage of revenue left after all expenses are deducted.

Correct Answer: Preferred stockholders receive fixed dividends

Preferred stockholders receive fixed dividends and are prioritized over common stockholders for dividend payments.

Correct Answer: To buy and sell stocks and other securities on behalf of investors

Stockbrokers execute buy and sell orders for stocks and other securities for their clients.

Correct Answer: $200,000

Accounts receivable turnover = Sales / Average accounts receivable. Rearranging, Average accounts receivable = Sales / Accounts receivable turnover. In this case: $1,000,000 / 5 = $200,000.

Correct Answer: The risk-adjusted return of an investment

The Sharpe ratio measures the return of an investment compared to its risk, helping investors understand risk-adjusted performance.

Correct Answer: Secured bond

A secured bond is backed by collateral, such as real estate or other assets, which reduces the risk to investors.

Correct Answer: Decreases retained earnings

When a company pays dividends, it reduces its retained earnings because part of the profits is distributed to shareholders.

Correct Answer: The first time a company sells its stock to the public

An IPO is the process by which a private company offers its stock to the public for the first time.

Correct Answer: Operating margin

Operating margin measures a company’s efficiency by showing the percentage of revenue remaining after covering operating expenses.