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Homework answers / question archive / 1) Which of the following statements is CORRECT? A

1) Which of the following statements is CORRECT? A

Accounting

1) Which of the following statements is CORRECT?

A. In the statement of cash flows, a decrease in inventories is reported as a use of cash.

B. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.

C. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.

D. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.

E. In the statement of cash flows, depreciation charges are reported as a use of cash.

2. Which of the following statements is CORRECT?

A. If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.

B. If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

C. If a coupon bond is selling at par, its current yield equals its yield to maturity.

D. If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

E. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

3. Which of the following statements is most CORRECT?

A. Warrants have an option feature but convertibles do not.

B. Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.

C. The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.

D. The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.

E. One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.

4. BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?

A. The exercise price of the option is increased.

B. BLW's stock price suddenly increases.

C. The life of the option is increased, i.e., the time until it expires is lengthened.

D. The Federal Reserve takes actions that increase the risk-free rate.

E. BLW's stock price becomes more risky (higher variance).

5. Taylor Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

A. Project A, which is of average risk and has a return of 9%.

B. Project B, which is of below-average risk and has a return of 8.5%.

C. Project C, which is of above-average risk and has a return of 11%.

D. All of the projects should be accepted.

E. None of the projects should be accepted.

6. To finance the construction of a new plant, Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock. The firm currently has an EPS of $5.40 and a P/E ratio of 10, with 1,200,000 shares outstanding. If the firm wants its ex-rights price to be $50, what subscription price must it set on the new shares?

A. $29.55

B. $50.00

C. $41.80

D. $33.78

E. $39.28

7. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

A. A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.

B. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

C. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

D. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

E. If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

8. Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

A. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

B. Use cash to reduce accounts payable.

C. Borrow using short-term notes payable and use the proceeds to reduce accruals.

D. Use cash to reduce accruals. E. Use cash to reduce short-term notes payable.

9. The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the conversion value of the bond?

A. $783.75

B. $866.25

C. $825.00

D. $744.56

E. $707.33

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