Question: Which of the following statement is correct?

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Question:

Which of the following statement is correct?

a. When the degree of risk associated with future cash flows goes down, the stock price also goes down.

b. In a limited partnership, the general partners usually participate actively in the management of the business, whereas limited partners usually do not.

c. When firms spend time and money to monitor and reduce agency problems, we call these outlays of time and money as principal benefits.

d. All the answers are incorrect.

e. A business owned by one person is called a corporation.

Answer:

When the degree of risk associated with future cash flows goes down, the stock price also goes up. this is because required rate of return decrease due to lowering the risk. In a limited partnership, the general partners usually not participate actively in the management of the business.

Agency problem is defined as a conflict arise between Principle (Shareholder) and agent of company (managers). the egency problem harm the shareholder in term of decrease in worth of shareholder or loss of control in company. So, When firms spend time and money to monitor and reduce agency problems, we call these outlays of time and money as principal benefits.

Option (C) is correct answer.

Question:

Which of the following statement is correct?

a. All the answers are incorrect.

b. Dividends reduces the book value of gross assets to give the firm’s net investment in plant and equipment.

c. Goods produced but not sold are considered accounts receivable.

d. On the balance sheet, the firm’s assets are listed in order of their liquidity.

e. Long-term liabilities are liabilities that are due within one year.

Answer:

Dividend are portion of net income that company pays to its shareholder. total Net inocme is divided in two parts, one part is paid to its shareholder as dividend and other part company keep with itself as retained earnings.

Balance sheet is represent what comapny owns and what its owes at one point of time.usually On the balance sheet, the firm’s assets are listed in order of their liquidity. most liquid assets are reported first and least liquid in last.

Option (D) is correct answer.

Question:

Which of the following statement is incorrect?

a. Return on Assets ratio measures the contribution of net income per average dollar invested in the firm’s assets, and it is a measure of the efficiency of the firm’s assets in producing earnings.

b. The inventory turnover ratio is equal to Sales divided by Inventory, and tells us how efficiently the firm converts inventory to sales.

c. Most of the answers are correct.

d. Debt ratios measure how the market value of a company’s stock compares with its accounting values.

e. The total asset turnover ratio is equal to Sales divided by Total Assets, and measures how efficiently a firm utilizes its assets.

Answer:

Return on Assets ratio measures the contributionof net income per average dollar invested in the firm’s assets, and it is a measure of the efficiency of the firm’s assets in producing earnings. The inventory turnover ratio is equal to Sales divided by Inventory, and tells us how efficiently the firm converts inventory to sales.

Debt to assets ratio provide information about percentage of total assets of company financed with debt. It means how much percentage of total assets finance by debt. If debt to Assets ratio is high, it means there is high chance of insolvency and risk.

So, Option (D) is not correct.

Question:

Which of the following statement is incorrect?

a. Business risk type of risk is magnified by the degree to which the firm relies on fixed operating expenses in producing sales.

b. Diversifiable risk arises due to market risk factors such as the inflation and real gross domestic product changes.

c. Most of the answers are correct.

d. The CAPM is used to determine the appropriate required rate of return for projects of different degrees of risk.

e. We can use the capital asset pricing model (CAPM) to calculate the appropriate required rate of return for an investment project given its degree of risk as measured by beta.

Answer:

CAPM model is use for determine required rate of return for projects of different degrees of risk. here risk means market risk, CAPM model use market risk that is beta to determine  appropriate required rate of return.

Business risk type of risk is magnified by the degree to which the firm relies on fixed operating expenses in producing sales..

Diversifiable risk arises due to internal factor of company that can be reduce or eliminate by diversification.  Diversifiable risk is also called firm specific risk.

So, Option (B) is not correct.

Question:

Which of the following statement is correct?

a. Commercial paper are safe because the corporations could print up all the dollars it needs to pay off its obligations.

b. Brokers are obligated to find “suitable investments” for their clients as a fiduciary.

c. All the answers are incorrect.

d. Firms usually invest proceeds from money market securities sales in long-term assets such as buildings and production equipment.

e. Commercial paper is often used when firms are doing business internationally because it eliminates the worry that the lender will have to travel to a foreign country to collect on a debt.

Answer:

Option (d) is correct

Question:

Which of the following statement is incorrect?

a. Corporations are separate legal entities and they are owned by stockholders, who are responsible for the firm’s debts only to the extent of their investment.

b. The agency problem exists when the interests of a firm’s managers (the agents) are in conflict with those of the firm’s owners (the principals).

c. Most of the answers are correct.

d. The sales are not the same as cash inflows because businesses often sell goods and services on credit, and thus no cash changes hands at the time of the sale.

e. A business owned by one person is called a corporation.

Answer:

Corporations is considered as separate legal entities and they are owned by stockholders, who are responsible for the firm’s debts only to the extent of their investment. Agency problem is defined as a conflict arise between Principle (Shareholder) and agent of company (managers).

Sale and cash flow are twodifferent value because company sale some or most of its product on credit. if company sale all its product on cash basis then cash flow would be equal to sale.

A business owned by one person is called a proprieter business.

Option (E) is incorrect.

Question:

Which of the following statement is incorrect?

a. Most of the answers are correct.

b. Net profits after taxes is considered as the sources of cash and thus it increases the firm’s cash.

c. The firm’s investment in Fixed Assets reflects its long-term capital base and these assets are primarily composed of Gross Plant and Equipment.

d. Long-term liabilities are usually due within one year.

e. Because depreciation is tax deductible, it affects cash flow and therefore the greater a firm’s depreciation, the greater its cash flow.

Answer:

Option (a) is correct

Question:

Which of the following statement is incorrect?

a. Most of the answers are correct.

b. Short-term securities, a maturity of one year or less, are traded in the money market.

c. The bonds issued by state and local governments are known as treasury bonds.

d. A banker’s acceptance is a short-term debt instrument that is guaranteed for payment by a commercial bank.

e. Investment banking firms help businesses and state and local governments sell their securities to the public.

Answer:

Short term securities are those securities whose maturity is less than year and maximum for one year. Short term securities are traded in money market which is also considered as short term securities market.  The bonds issued by state and local governments are known as treasury bonds. treasury bond return is considered as risk free because it is backed by statement or national government.

A banker’s acceptance is a short-termdebt instrument that is guaranteed for payment by a commercial bank. Investment banking firms help businesses and state and local governments sell their securities to the public.

So, all of the option are correct.

Question:

Which of the following statement is correct?

a. All the answers are incorrect.

b. Business risk occurs when companies borrow money and incur interest charges that show up as fixed expenses on their income statements.

c. Standard deviation is a measure of non-diversifiable risk.

d. Financial risk arises primarily because of the fixed interest payments firms must make to their long-term creditors (debt capital).

e. Most investors enjoy risk taking whenever they can, even though they are never compensated for accepting risk.

Answer:

when companies borrow money and incur interest charges that show up as fixed expenses on their income statements​, then it is called leverage or financial risk. Standard deviation is measure of diversifiable risk that is the risk that can be reduce or eliminate by diversification.

Financial risk the risk that is associated by excess use of debt in its capital structure. So, Financial risk arises primarily because of the fixed interest payments firms must make to their long-term creditors (debt capital).

Option (D) is correct answer.

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