D364 Financial Management - Set 4 - Part 3

Correct Answer: 2.0

The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $600,000 - $300,000 = $300,000. Therefore, Equity Multiplier = $600,000 / $300,000 = 2.0.

Correct Answer: 1.25

The current ratio is calculated as Current Assets / Current Liabilities. In this case: $500,000 / $400,000 = 1.25.

Correct Answer: Share price multiplied by the number of outstanding shares

Market capitalization is calculated as the current share price multiplied by the number of outstanding shares, representing the total market value of the firms equity.

Correct Answer: $400,000

The debt ratio is calculated as Total Debt / Total Assets. Rearranging the formula: Total Debt = Debt Ratio Total Assets. In this case: 0.4 $1,000,000 = $400,000.

Correct Answer: To forecast cash inflows and outflows over a period of time

A cash budget forecasts a companys cash inflows and outflows over a specific period to ensure sufficient liquidity to meet its obligations.

Correct Answer: The average rate a company must pay to finance its assets

WACC represents the average cost of financing a companys assets, taking into account both debt and equity financing.

Correct Answer: $100

The stock price is calculated as P/E ratio EPS. In this case: 20 $5 = $100.

Correct Answer: Financial risk increases

Increased financial leverage, which refers to the use of debt, increases the companys financial risk because it must meet debt obligations regardless of profitability.

Correct Answer: 2.0

The equity multiplier is calculated as Total Assets / Total Equity. Total Equity = $600,000 - $400,000 = $200,000. Therefore, Equity Multiplier = $600,000 / $200,000 = 3.0.

Correct Answer: It provides an easy comparison of multiple projects profitability

The IRR method allows comparison of different projects by calculating the return rate that makes the NPV of a project zero, offering a simple way to assess profitability.