Question

1. Consider a cash flow of $100,000 promised in five years by the U.S, Treasury. Because there is no risk of default, its present value equals $100,000. (T/F)
2. A company begins the week with a leverage ratio of 1.25. During the week it issues additional (common) shares and uses the funds to purchase equipment (with no other changes). Its leverage ratio at the end of the week is greater than 1.25. (T/F)
3. Like common, preferred shareholders are paid from profits, not from revenue. (T/F)
4. Because of its different risk characteristics from ordinary preferred stock, cumulative preferred (of the same firm) should present a higher expected return. (T/F)
5. A company experienced a loss (profits less than zero). It will necessarily default on its contractual obligations. (T/F)
6. The higher the profits tax rate, the lower after-tax ROE compared to before-tax. (T/F)
7. The greater the percent of fixed cost in a business’s total cost structure, the more operational leverage it has. (T/F)
8. For a given profit margin and turnover ratio, a greater leverage ratio results in a higher ROE. (T/F)

Answer 1

Thank you for your patience. Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

1. Consider a cash flow of $100,000 promised in five years by the U.S, Treasury. Because there is no risk of default, its present value equals $100,000.

False.

2. A company begins the week with a leverage ratio of 1.25. During the week it issues additional (common) shares and uses the funds to purchase equipment (with no other changes). Its leverage ratio at the end of the week is greater than 1.25.

False.

3. Like common, preferred shareholders are paid from profits, not from revenue. (T/F)

True.

4. Because of its different risk characteristics from ordinary preferred stock, cumulative preferred (of the same firm) should present a higher expected return.

False.

5. A company experienced a loss (profits less than zero). It will necessarily default on its contractual obligations.

False.

6. The higher the profits tax rate, the lower after-tax ROE compared to before-tax.

True.

7. The greater the percent of fixed cost in a business’s total cost structure, the more operational leverage it has.

True.

8. For a given profit margin and turnover ratio, a greater leverage ratio results in a higher ROE.

True.