17. superior profits can be made by investing in companies : a. that are fortuna
ID: 2798429 • Letter: 1
Question
17. superior profits can be made by investing in companies :
a. that are fortunate and able
b. that have a good potential to unseat industry leaders.
c. with capable management
d. active in a broad array of growth industries
18. when an investor sells a common stock short:
a. he/she expects to lose if the price goes down
b. he/ she stands to gain if the stock goes up in price.
c.He/ she expects to repurchase the shares later at a lower price/
d. he/she expects to gain if the price goes up
19. from the standpoint of taxes, investors will benefit from:
a. deferring taxes to the future if tax rates will be higher in the future.
b. realizing greater gains via stock repurchases as opposed to receiving the same gains as dividends
c. selling appreciated shares to meet cash needs instead of borrowing against them.
21. if a company has a P/E ratio of 14, required rate of return of 12% and dividend yield of 3.5%, what is the rate of return growth due to capital appreciation?
a. 15.50%
b. 8.50%
c. 7.00%
d. 2.00%
22. A company currently has a debt – equity ratio of 1.25. Common shareholder’s equity is $4,000,000, consisting of 1.5 million shares outstanding with a current price of $28/ share. Part of the company’s debt currently outstanding is $1,000,000 of convertible bonds. Each $ 1,000 par value bond can be converted into 50 common shares at any time during the next three years. The coupon rate on the bonds is 6 percent with interest paid annually. If all convertible bonds are covered, the company’s debt-capital ratio is closed to:
a. 42.6% b. 44.4% c. 80.0 % d. 90.0%
Explanation / Answer
17.) Superior profits can be made by investing in companies that are active in a broad array of growth industries. These industries participate in the sector growth and realize earnings growth. In this way they can reinvest those amounts which leads to increase in the stock price.
Hence Option-d is the right answer.
18.) When an investor sells a common stock short, then He/ she is expected to repurchase the shares later at a lower price. In this way, he will be able to realize the gains made from Short-Selling.
Hence Option-c is the right answer.
19.) From the standpoint of taxes, investors will benefit from selling appreciated shares to meet cash needs instead of borrowing against them.
Hence Option-c is the right answer.
21.) P/E ratio = 14
Required rate of return = 12%
Dividend yield = 3.5%
Earnings Yield =1/(P/E Ratio) =1/14 =0.0714 or 7.14%
Payout ratio =Dividend Yield/Earnings Yield =3.50/7.14 =49%
The nearest answer will be chosen i.e. Option-c
22.) Shares outstanding = 1.5 million
Current price = $28/ share
Common shareholder’s equity = $4,000,000
Debt/Equity =1.25
Debt =1.25 x $4,000,000 = $5,000,000
Converted Shares = $1,000,000/$1,000x50 = 50,000
New Equity Issued = $1,000,000 (To buy converted shares against bonds)
New Debt = $5,000,000 -1,000,000 = $4,000,000
New Debt/Capital ratio = Debt/(Debt + Equity) = $4,000,000/($4,000,000+$5,000,000) = 44.4%
Hence, Option-b is the right answer.
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