Question

1. The cash flows associated with common stocks are generally more difficult to estimate than the cash flows associated with bonds.

A. True

B. False

2. What is a firm's cash conversion cycle based on the following information?

Inventory Conversion Period = 47 days

Receivables Collection Period = 17 days

Payables Deferral Period = 25 days

A. 46 days

B. 30 days

C. 45 days

D. 37 days

E. 39 days

3. A bond issued by the U.S. federal government is a ________.

A. treasury bond

B. municipal bond

C. corporate bond

D. foreign bond

E. convertible bond

Answer 1

1. The correct answer is True.

The cash flows associated with common stocks are generally more difficult to estimate than the cash flows associated with bonds as the bonds are fixed interest payable instrument which is decided well in advance and is known to the bond holder. He receives fixed interest annually which is also charge against profit i.e the firm has to pay the interest amount irrespective of the profit earned. But in case of stock holders they have the residual claim over the profit. Also the dividend paid are appropriation of profits not charge against profit i.e in case of loss no dividends are paid. Equity share's dividend rate is also not fixed. In case of the firm earns higher profits they get higher returns and in case of loss they get no dividend.

Therefore, the cash flows associated with common stocks are generally more difficult to estimate than the cash flows associated with bonds.

2. Correct answer is E. 39 days.

cash conversion cycle = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

= 47 + 17 - 25

= 39 days

3. The correct answer is A. treasury bond

A bond issued by the U.S. federal government is a treasury bond.

Hope it helps !