D364 Financial Management - Set 2 - Part 2

Correct Answer: 3 years

The payback period is the time it takes to recover the initial investment. In this case, $100,000 per year for 3 years will recover the $300,000 investment.

Correct Answer: Preferred stockholders receive dividends before common stockholders

Preferred stockholders have priority over common stockholders when it comes to dividend payments, but typically do not have voting rights.

Correct Answer: $200,000

Gross profit is calculated as Sales - COGS. In this case: $500,000 - $300,000 = $200,000.

Correct Answer: To manage and hedge financial risks

Derivatives are financial instruments used primarily to hedge against risks such as fluctuations in interest rates, currency exchange rates, or commodity prices.

Correct Answer: Corporate Bonds

Corporate bonds are long-term debt instruments traded in capital markets. Treasury Bills, CDs, and Commercial Paper are short-term instruments traded in money markets.

Correct Answer: Treasury Bonds

Treasury bonds are issued by the U.S. government and are considered to have the lowest risk of default compared to corporate, municipal, or high-yield bonds.

Correct Answer: Cash available for distribution to shareholders and creditors after all reinvestment needs have been met

Free cash flow is the cash left over after a company has funded its operating expenses and capital expenditures, available for distribution to investors.

Correct Answer: 1.67

The current ratio is calculated as Current Assets / Current Liabilities. In this case: $50,000 / $30,000 = 1.67.

Correct Answer: A companys CEO resigns

Unsystematic risk is company-specific, such as a CEO resignation, and can be diversified away. Systematic risks, like inflation and interest rates, affect the entire market.

Correct Answer: To evaluate the minimum return required on investments

The cost of capital represents the minimum return a company must earn on its investments to satisfy both debt and equity investors.

Correct Answer: 7.2%

The sustainable growth rate is calculated as ROE Retention Ratio. In this case: 12% 40% = 4.8%.

Correct Answer: Paying dividends to shareholders

Financing activities include transactions with creditors and shareholders, such as paying dividends, issuing stock, or repaying debt.

Correct Answer: 20%

Operating leverage amplifies the effect of changes in sales on operating income. With an operating leverage of 2, a 10% increase in sales results in a 20% increase in operating income.

Correct Answer: $600

The annual interest payment is $1,000 6% = $60. Over 10 years, the bondholder will receive $60 10 = $600 in total interest.

Correct Answer: Current Ratio

The current ratio measures a companys ability to meet short-term obligations with its current assets, making it a short-term liquidity ratio.

Correct Answer: 0.67

The debt-to-equity ratio is calculated as Total Debt / Total Equity. In this case: $400,000 / $600,000 = 0.67.

Correct Answer: 7.4%

WACC is calculated as (Weight of Debt After-tax Cost of Debt) + (Weight of Equity Cost of Equity). In this case, WACC = (0.5 6% (1 - 0.30)) + (0.5 10%) = 7.4%.

Correct Answer: The price investors are willing to pay for each dollar of a companys earnings

The P/E ratio measures how much investors are willing to pay for each dollar of earnings, helping assess the valuation of a companys stock.

Correct Answer: Statement of Cash Flows

The statement of cash flows provides detailed information on cash inflows and outflows from operating, investing, and financing activities over a specific period.

Correct Answer: Equity increases

Issuing new shares increases the companys equity because it raises capital by selling ownership stakes in the company.