D364 Financial Management - Set 4 - Part 2

Correct Answer: Cash flow decreases

An increase in accounts receivable represents sales that have not yet been collected in cash, which reduces cash flow from operations.

Correct Answer: 0.625

The debt ratio is calculated as Total Liabilities / Total Assets. In this case: $500,000 / $800,000 = 0.625.

Correct Answer: Preferred stockholders have priority over common stockholders in dividend payments

Preferred stockholders are entitled to receive dividends before common stockholders and have a higher claim on assets in the event of liquidation.

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

The dividend payout ratio measures the proportion of a companys earnings that are paid out as dividends to shareholders.

Correct Answer: 7.2%

The SGR is calculated as ROE Retention Ratio. In this case: 12% 60% = 7.2%.

Correct Answer: Voting rights

Common stockholders typically have voting rights, while preferred stockholders usually do not. Common stockholders do not have priority over bonds or preferred stock in the event of bankruptcy or dividend payments.

Correct Answer: $600

The total interest payment is calculated as Annual Coupon Payment Number of Years. In this case: ($1,000 6%) 5 = $600.

Correct Answer: Bond prices decrease

When market interest rates increase, the prices of existing bonds decrease because their fixed coupon payments become less attractive compared to new bonds with higher rates.

Correct Answer: To reduce unsystematic risk

Diversification reduces unsystematic (company-specific) risk by spreading investments across different assets, thus reducing the overall risk of the portfolio.

Correct Answer: 0.5

The debt-to-equity ratio is calculated as Total Liabilities / Total Equity. Total Equity = $800,000 - $500,000 = $300,000. Therefore, Debt-to-Equity = $500,000 / $300,000 = 0.5.

Correct Answer: To determine the minimum return a company needs to justify an investment

WACC represents the average rate a company must pay to finance its assets, considering both debt and equity, and serves as a hurdle rate for investment decisions.

Correct Answer: 0.43

The debt-to-equity ratio is calculated as Total Liabilities / Total Equity. In this case: $300,000 / $700,000 = 0.43.

Correct Answer: The mixture of debt and equity used to finance a companys operations

Capital structure refers to the combination of debt and equity that a company uses to finance its operations and growth.

Correct Answer: Maximizing shareholder wealth

The primary goal of financial management for a publicly traded company is to maximize shareholder wealth, typically through increasing stock price and dividends.

Correct Answer: 1.25

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. In this case: ($200,000 + $300,000 - $100,000) / $400,000 = 1.25.

Correct Answer: Accounts payable

Accounts payable is a spontaneous source of financing because it arises naturally from business operations and doesnt require formal arrangements like issuing bonds or stock.

Correct Answer: 0.4

The debt-to-equity ratio is calculated as Market Value of Debt / Market Value of Equity. In this case: $400,000 / $1,000,000 = 0.4.

Correct Answer: Financial leverage increases

Financial leverage refers to the use of debt to finance a companys assets. As a company takes on more debt, its financial leverage increases.

Correct Answer: 12.4%

Using CAPM, Expected Return = Risk-Free Rate + Beta (Market Return - Risk-Free Rate). In this case: 3% + 1.2 (10% - 3%) = 12.4%.

Correct Answer: EPS increases

When a company repurchases shares, the number of shares outstanding decreases, which increases the earnings per share, assuming net income remains constant.