Question

In: Finance

TRUE / FALSE 1. Both interest expense and dividends are tax deductible 2. The APR (or...

TRUE / FALSE

1. Both interest expense and dividends are tax deductible

2. The APR (or “nominal rate”) is always equal to the equivalent annual rate (EAR)

3. Companies often go public to raise capital for expansion

4. The three types of cash flows on the Statement of Cash Flows are operating, investing and financing.

5. Equity holders have unlimited upside, while bondholders can only get their coupon    payments and face value of the bond as returns.

6. Both operating expenditures and capital expenditures are multi-year investments.

7. Net Present Value represents the present value of all cash flows from an investment, minus the initial outlays.

8. Liquid markets typically have large bid / ask spreads for trades.

9. Assuming interest rates are positive, the future value of $1 today will always be greater than $1

Solutions

Expert Solution

1 answer) False
Explanation: The interest expense is paid on debt and treated as an allowable expense for tax purpose, and the dividends are paid from the retained earnings accounts and not treated tax-deductible

2 answer) False:
Explanation: The nominal interest rate is calculated based on simple interest and the equivalent annual rate is calculated on compounding concept

3 answer) True
Explanation: The companies registered with the stock exchange can issue their shares to the public to subscribe and capital generated from the stock issue is utilized on growth opportunities and capital investments

4 answer) True
Explanation: The cash flows shows the cash inflows and outflows during the period and classified into cash flow from operating activities, investing activities, and financing activities

5 answer) True

Explanation: the bond are classified as a liability in the balance sheet and paid interest and principal amount, but the equity holders are owners of the company and receive dividends without any limit

jeff jeffy answered 1 year ago
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