4. True or False judge. 1\' 10-10\') (D An individual can save and invest ?? :in

Question

4. True or False judge. 1' 10-10') (D An individual can save and invest ?? :in a corporation only by lending money to it or by purchasing additional shares. (2) Based on generally accepted accounting principles, assets are recorded on the balance at their current market : value. ? 3 Net working capital is determined from the difference To calculate present value, we discount the future 5)A Treasury bond' s bid price will be lower than the (6) Sustainable growth rates can be estimated by Projects with an NPV of zero decrease shareholders' between current assets and current liabilities. value by some interest rate r, the discount rate. ask price. multiplying a firm's ROE by its dividend payout ratio. wealth by the cost of the project. opposed to cash flow. ? (7) (9)Market risk can be eliminated in a stock portfolio ? through diversification. (10) A dividend does not accompany stocks that are purchased on the ex-dividend date.

Explanation / Answer

1) False.

Individual can even save and invest in corporation by purchasing debentures, bonds, etc.

2) False.

As per GAAP, Fixed Assets are recored at Cost less depreciation except Land and Current assets are only recorded at Current market price.

3) True.

Net Working Capital is the difference between company's Current assets and Current Liabilities.

That is:

Net Working Capital = (Current Assets) – (Current Liabilities)

OR

Net Working Capital = (Cash and Cash Equivalents) + (Marketable Investments) + (Trade Accounts Receivable) + (Inventory) – (Trade Accounts Payable)

4) False.

Future cash flow is discounted not by some interest rate. It is the Interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve's discount window which is called discount rate, r.

5) False.

Treasury Bond's bid price will be higher than ask price.

6) False.

Sustainable growth rate can be estimated by multiplying ROE by Retention ratio and not by dividend payout ratio.

Sustainable growth rate= ROE x (1 - dividend-payout ratio)

OR ROE x Retention Ratio

7) False.

Project with Zero NPV neither decrease nor increase the wealth of shareholder. However the wealth would tend to be stagnant over a period of time.

8) False.

Capital Busgeting analysis focuses on cash flow as opposed to profits.

9) False.

Market risk (Both Systematic and Un-Systematic risk) can't be eliminated by diversification. Only Unsystematic risk can be eliminated or reduced by diversification.

10) True.

If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

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