D364 Financial Management - Set 2 - Part 3

Correct Answer: 83.3%

The retention ratio is calculated as (Net Income - Dividends) / Net Income. In this case: ($300,000 - $50,000) / $300,000 = 83.3%.

Correct Answer: To raise capital without diluting common shareholders voting rights

Preferred stock allows companies to raise capital without giving preferred shareholders voting rights, thereby preserving the voting power of common shareholders.

Correct Answer: Zero

When the IRR equals the companys cost of capital, the NPV of the project is zero, meaning the project earns just enough to cover its costs but generates no additional value.

Correct Answer: Treasury Bonds

Treasury bonds are low-risk, government-backed securities that provide stable returns, making them ideal for risk-averse investors.

Correct Answer: It accounts for all cash flows and time value of money

NPV takes into account all future cash flows and discounts them to present value, providing a comprehensive measure of a projects profitability.

Correct Answer: 1.0

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. In this case: ($5,000 - $2,000) / $2,000 = 1.0.

Correct Answer: Preferred Stock

Preferred stock is considered a hybrid security because it has characteristics of both equity (ownership) and debt (fixed dividends).

Correct Answer: The sensitivity of a companys pre-tax profits to changes in sales

DFL measures the effect of changes in operating income on pre-tax profits, showing how sensitive a companys profits are to its leverage.

Correct Answer: High profitability in good times and significant losses in bad times

High operating leverage means a company has high fixed costs, so its profits are more sensitive to changes in sales. This leads to high profits when sales are good but larger losses when sales decline.

Correct Answer: To outline the terms and conditions of a bond issue

A bond indenture is a legal document that outlines the specific terms and conditions of a bond issue, including the coupon rate, maturity date, and any covenants.