--Company A has a current ratio of 1.5 and quick ratio of 1.0. Company B has a c
ID: 2773068 • Letter: #
Question
--Company A has a current ratio of 1.5 and quick ratio of 1.0. Company B has a current ratio of 2.0 and quick ratio of 1.1. Company A has better liquidity than Company B.
--A treasury bond is a government issued bond.
--The coupon rate multiplied by par is the amount of money the bond holder will receive each year from the bond issuer.
--A beta of 1.2 would equate to the market as a whole.
T/F
--The higher the standard deviation the higher the risk.
--The present value for a project with a cost of capital of 11% and expected cash flows of $5000 per year for the next 5 years is $3695.90.
--An EBIT of $5,000,000, interest expense of $1,000,000, tax rate 40%, and 50% dividend payout would yield an increase to retained earnings of $1,200,000
Explanation / Answer
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Calculation based:
a) The present value for a project with a cost of capital of 11% and expected cash flows of $5000 per year for the next 5 years is $3695.90
False (F) is the answer.
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Explanation:
The formula for calculating present value of cash flows is given below:
Present Value = Cash Flow Year 1/(1+Rate)^1 + Cash Flow Year 2/(1+Rate)^2 + Cash Flow Year 3/(1+Rate)^3 + Cash Flow Year 4/(1+Rate)^4 + Cash Flow Year 5/(1+Rate)^5
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Using the information provided in the question, we get,
Present Value = 5,000/(1+11%)^1 + 5,000/(1+11%)^2 + 5,000/(1+11%)^3 + 5,000/(1+11%)^4 + 5,000/(1+11%)^5 = $18,479.49
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b) An EBIT of $5,000,000, interest expense of $1,000,000, tax rate 40%, and 50% dividend payout would yield an increase to retained earnings of $1,200,000
True (T) is the answer.
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Explanation:
The calculation is shown in the following table:
Statement T/F Explanation Company A has a current ratio of 1.5 and quick ratio of 1.0. Company B has a current ratio of 2.0 and quick ratio of 1.1. Company A has better liquidity than Company B F Company B has better liquidity than Company A as ideal current ratio is 2:1 and ideal quick ratio is 1:1. Company B has better ratios than Company A and therefore, it is more liquid. A treasury bond is a government issued bond. T Treasury bond is a debt instrument issued for a period of more than 10 years by the Government to raise funds. Interest is paid semi-annually on such bonds. These bonds are generally considered risk free bonds. The coupon rate multiplied by par is the amount of money the bond holder will receive each year from the bond issuer. T The annual interest received by a bondholder is calculating by multiplying the par value of the bond with the coupon rate. It is an obligation on the part of the issuer to pay interest periodically on bonds. A beta of 1.2 would equate to the market as a whole. F A beta of 1.2 would indicate that the stock is more volatile than the market. A beta of 1 would equate to the market as a whole, that is, the stock moves in line with the market. The higher the standard deviation the higher the risk. T Standard deviation is a measure of risk. It is generally seen that volatile stocks have higher standard deviations as the risk associated with investments in such stocks is higher.Related Questions
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