Finance 320 Exam 1

Nominal interest rate =

(real risk-free interest rate + inflation premium + default-risk premium + maturity-risk premium + liquidity-risk premium)

Which of the following securities will likely have the highest liquidity​ premium? Question content area bottom Part 1 A. Aaa−rated corporate bond maturing in 2015 not actively traded B. U.S. Treasury bond maturing in 2027 C. Bbb−rated corporate bond maturing in 2020 actively traded on a major exchange D. U.S. Treasury bill

A. Aaa−rated corporate bond maturing in 2015 not actively traded

Company A reports sales of​ $100,000 and net income of​ $15,000. Company B reports sales of​ $100,000 and net income of​ $10,000. Therefore Question content area bottom Part 1 A. Company​ A's cash flow may be higher or lower than Company​ B's cash flow even though​ A's net income is higher. B. Company​ B's accounts receivable must be higher than Company​ A's accounts receivable. C. Company B is creating less value for its shareholders than Company A. D. Company​ A's cash flow is​ $5,000 more than Company​ B's cash flow.

A. Company​ A's cash flow may be higher or lower than Company​ B's cash flow even though​ A's net income is higher.

Question content area top Part 1 We use which two terms​ interchangeably? Question content area bottom Part 1 ​(Select the best choice​ below.) A. Earnings before interest and taxes​ (EBIT) and operating income. B. Income from capital gains and operating income. C. Income after financing activities and operating income. D. Gross profit and earnings before interest and taxes​ (EBIT).

A. Earnings before interest and taxes​ (EBIT) and operating income.

The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to​ issue? Question content area bottom Part 1 A. common stock B. preferred stock C. corporate bonds D. all of the above

A. common stock

Question content area top Part 1 All of the following measure liquidity EXCEPT Question content area bottom Part 1 A. operating return on assets. B. inventory turnover. C. current ratio. D. acid−test ratio.

A. operating return on assets

A​ "normal" yield curve is Question content area bottom Part 1 A. upward sloping. B. downward​ sloping, then upward sloping. C. downward sloping. D. upward​ sloping, then downward sloping.

A. upward sloping.

Financial analysis Question content area bottom Part 1 A. uses historical financial statements to measure a​ company's performance and in making financial projections of future performance. B. relies on generally accepted accounting principles to make comparisons between companies valid. C. is accounting record−keeping using generally accepted accounting principles. D. uses historical financial statements and is thus useful only to assess past performance.

A. uses historical financial statements to measure a​ company's performance and in making financial projections of future performance.

Question content area top Part 1 What is the term for a graphical representation of the relationship between interest rates and the maturities of debt​ securities? Question content area bottom Part 1 A. yield curve B. maturity chart C. inflationary expectations D. term curve

A. yield curve

Which of the following would be considered to be a primary market​ transaction? ​(Select the best choice​ below.) A. An investor purchasing Paypal stock on Nasdaq. B. A new issue of stock by Transport Solar.. C. Texas Instruments repurchasing some its own stock from an investor. D. An investor selling Ford stock on the NYSE.

B. A new issue of stock by Transport Solar..

Looking at an income​ statement, sales​ revenue, minus cost of goods sold and operating​ expenses, is equal to which of the​ following? Question content area bottom Part 1 ​(Select the best choice​ below.) A. Net Profit. B. EBIT. C. Net income available to preferred shareholders. D. Retained earnings.

B. EBIT.

Why is the​ acid-test or quick ratio considered to be a more refined measure of​ liquidity? Question content area bottom Part 1 ​(Choose the best​ answer.) A. It is a quicker calculation to make. B. Inventory is not included in the numerator of the​ acid-test or quick ratio because inventory is generally the least liquid of the​ firm's current assets. C. Cash is the most liquid current asset. D. It measures how quickly cash and other liquid assets flow through the company.

B. Inventory is not included in the numerator of the​ acid-test or quick ratio because inventory is generally the least liquid of the​ firm's current assets.

Question content area Part 1 Which of the following is NOT a benefit provided by the existence of organized security​ exchanges? ​(Select the best choice​ below.) A. Helping businesses raise new capital B. Keeping​ long-term bond prices below 8 percent C. Establishing and publicizing fair security prices D. A continuous market

B. Keeping​ long-term bond prices below 8 percent

Interpret the information in the popup​ window, .Operating income (EBIT) $954 Depreciation expense 60 Tax expense (320) After-tax cash flows from operations $694 Increase in net working capital: Increase in current assets $(899) Increase in accounts payable 175 Increase in net working capital $(724) Change in long-term assets: Decrease in fixed assets 2,161 Free cash flows $2,131 Financing cash flows Interest paid to lenders $(364) Repayment of long-term debt (850) Repurchase of common stock (1,024) Common stock dividends (1,341) Financing cash flows $(3,579)..​, regarding Maness​ Corporation's free cash flows and financing cash flows. Which of the following statements are​ true? ​ (Select all the choices that​ apply.) A. Madness Corporation had a positive cash flow from a reduction in its net working capital. B. Maness Corporation had two sources of positive cash flows that contributed to a large payout to the investors. C. Maness Corporation used some of its cash to retire​ long-term debt and repurchase stock. D. Madness Corporation had negative cash flows from​ operations, and the firm was being seriously upsized by increasing its fixed assets.

B. Maness Corporation had two sources of positive cash flows that contributed to a large payout to the investors. C. Maness Corporation used some of its cash to retire​ long-term debt and repurchase stock.

Question content area top Part 1 Which of the following streams of income is not impacted or affected by how a firm is financed or raises​ money, that​ is, whether it uses debt or​ equity? Question content area bottom Part 1 ​(Select the best choice​ below.) A. Income before tax B. Operating income C. Net working capital D. Net profit after tax but before dividends

B. Operating income

Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the​ company's current​ ratio? Question content area bottom Part 1 A. The company collects​ $500,000 of its accounts receivable. B. The company writes a​ $30,000 check to pay off some existing accounts payable. C. The company sells​ $1 million of inventory on credit. D. The company pays back​ $50,000 of its long−term debt.

B. The company writes a​ $30,000 check to pay off some existing accounts payable.

Question content area Part 1 What are profit​ margins? What are the different types of profit​ margins? ​(Select the best choice​ below.) A. The profit margins are the​ profits-to-sales relationships. Three types are cost profit​ margin, fixed profit​ margin, and net profit margin. B. The profit margins are the​ profits-to-sales relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin. C. The profit margins are the​ profits-to-assets relationships. Three types are current profit​ margin, gross profit​ margin, and net profit margin. D. The profit margins are the​ profits-to-assets relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin.

B. The profit margins are the​ profits-to-sales relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin.

When comparing inventory turnover​ ratios, other things being​ equal, Question content area bottom Part 1 A. higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet. B. a higher inventory turnover is preferred to improve liquidity. C. higher inventory turnover results from an increase in the selling price of the product. D. a lower inventory turnover is preferred in order to keep inventory costs low.

B. a higher inventory turnover is preferred to improve liquidity.

When evaluating an investment​ project, which of the following best describes the financial information needed by the decision​ maker? Question content area bottom Part 1 A. incremental cash flows before taxes so the decision will not be biased by a tax code that may change in the future B. after−tax incremental cash flows to the company as a whole C. after−tax accounting profits D. pre−tax accounting profits adjusted for any accounting method changes

B. after−tax incremental cash flows to the company as a whole

In order to reduce agency​ problems, managers may be provided compensation that includes Question content area bottom Part 1 A. incentive pay for achieving higher sales than last year. B. an option to buy the​ company's stock. C. a fixed salary so​ managers' pay is not at​ risk, allowing managers to focus on the​ company's business. D. a bonus based on the level of profit achieved during the year.

B. an option to buy the​ company's stock.

It is important for managers of corporations to act ethically​ ___________. ​(Select the best choice​ below.) A. because a violation of ethics will be punished by the law B. because it is important for a business to be trusted by​ investors, customer and the public if it is to succeed C. because business managers must answer to a higher authority D. because ethical behavior is its own justification

B. because it is important for a business to be trusted by​ investors, customer and the public if it is to succeed

Question content area top Part 1 A corporate financial manager trying to maximize shareholder value Question content area bottom Part 1 A. can safely ignore ethics as long as no laws are broken. B. is concerned with ethics because unethical behavior destroys​ trust, and businesses cannot function without a certain degree of trust. C. is not concerned with ethics but rather with writing iron−clad contracts. D. must behave ethically in order to stay out of jail.

B. is concerned with ethics because unethical behavior destroys​ trust, and businesses cannot function without a certain degree of trust.

A basis point is equal to Question content area bottom Part 1 A. one−half of one percent. B. one−hundredth of one percent. C. one−tenth of one percent. D. one percent.

B. one−hundredth of one percent.

A financial manager is evaluating a project which is expected to generate profits of​ $100,000 per year for the next 10 years. The project should be accepted if Question content area bottom Part 1 A. the cost of the project is more than the present value of​ $100,000 per year for 10 years. B. the present value of the​ project's cash inflows exceeds the present value of the​ project's cash outflows. C. the cost of the project is less than​ $1,000,000. D. this​ project's expected profits are higher than any other projects the corporation has available.

B. the present value of the​ project's cash inflows exceeds the present value of the​ project's cash outflows.

Question content area top Part 1 The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by​ 5%, but the​ company's cash flows are not changed. If capital markets are​ efficient, then Question content area bottom Part 1 A. the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles. B. the stock price will not be affected by the accounting change. C. the stock price will increase only if the accounting change will also result in higher profits in the next year. D. the stock price will increase due to higher profits.

B. the stock price will not be affected by the accounting change.

To measure​ value, the concept of time value of money is used Question content area bottom Part 1 A. to determine the interest rate paid on corporate debt. B. to bring the future benefits and costs of a​ project, measured by its cash​ flows, back to the present. C. to bring the future benefits and costs of a​ project, measured by its expected​ profits, back to the present. D. to ensure that expected future profits exceed current profits today.

B. to bring the future benefits and costs of a​ project, measured by its cash​ flows, back to the present.

Baker Corp. is required by a debt agreement to maintain a current ratio of at least​ 2.5, and​ Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas​ season, and will pay for the inventory with short−term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal​ $15 million? Question content area bottom Part 1 A. ​$6.00 million B. ​$1.67 million C. ​$0.50 million D. ​$4.50 million

B. ​$1.67 million

Earnings per share BLANK1 divided by BLANK2 and dividends per share are BLANK3 divided by BLANK4.

BLANK1 = net income BLANK2 = the number of shares outstanding BLANK3 = dividends BLANK4 = the number of shares outstanding

Question content area Part 1 What are the two major categories of flotation​ costs? ​(Select the best choice​ below.) I.​ Underwriters' spread II. Issuing Costs III. Commisions IV. Taxes A. I and III B. II and III C. I and II D. I and IV

C. I and II

The current ratio of a firm would be increased by which of the​ following? Question content area bottom Part 1 A. Inventories are sold on a credit basis. B. Inventories are sold for cash. C. Land held for investment is sold for cash. D. Equipment is​ purchased, financed by a long−term debt issue.

C. Land held for investment is sold for cash.

All of the following are equity accounts on a balance sheet EXCEPT Question content area bottom Part 1 A. common stock. B. retained earnings. C. cash. D. paid−in capital.

C. cash.

Over the period 1926 to​ 2014, the standard deviation of returns has been the greatest for which of the​ following? Question content area bottom Part 1 A. corporate bonds B. government bonds C. common stocks D. Treasury bills

C. common stocks

The gross profit margin will increase when which of the following​ decreases: Question content area bottom Part 1 ​(Select the best choice​ below.) A. depreciation expense B. interest expense C. cost of goods sold D. both A and B

C. cost of goods sold

Executive compensation in the United States Question content area bottom Part 1 A. is well below levels in Europe and Asia. B. is dominated by performance−based compensation that ensures fair and just pay for corporate executives. C. is dominated by performance−based compensation designed to reduce agency problems. D. cannot be linked to stock prices as this would create a conflict of interest with existing shareholders.

C. is dominated by performance−based compensation designed to reduce agency problems.

The​ long-run goal of the firm is to ​(Select the best choice​ below.) A. increase sales regularly. B. hold large quantities of cash. C. maximize shareholder wealth. D. maximize earnings per share

C. maximize shareholder wealth.

Benkart Corporation has sales of​ $5,000,000, net income of​ $800,000, total assets of​ $2,000,000, and​ 100,000 shares of common stock outstanding. If​ Benkart's P/E ratio is​ 12, what is the​ company's current stock​ price? Question content area bottom Part 1 A. ​$60 per share B. ​$360 per share C. ​$96 per share D. ​$240 per share

C. ​$96 per share

In looking at Chacko​ Inc.'s income statement you find the​ following: sales of​ $52,000,000; income tax of​ $1,880,000; operating expenses of​ $9,000,000; cost of goods sold of​ $36,000,000; and interest expense of​ $800,000. Given this​ information, calculate Chacko​ Inc.'s gross profit margin. Question content area bottom Part 1 Chacko​ Inc.'s gross profit margin is ​ (Select the best choice​ below.) A. ​69.2%. B. ​8.3%. C. ​30.8%. D. ​13.5%.

C. ​30.8%.

Over long periods of​ time, BLANK tend to have higher​ "real rate of​ return." ​

Common Stocks

The Walker Corporation has current assets of​ $15,000, inventories of​ $7,000, and a current ratio of 2.5. What is the Walker​ Corporation's quick or acid test​ ratio? Question content area bottom Part 1 ​(Choose the best​ answer.) A. 0.86 B. 0.74 C. 2.14 D. 1.33

D. 1.33

Question content area Part 1 Why is it so hard to find extremely profitable​ projects? ​(Select the best choice​ below.) A. To find high profit​ projects, you must locate imperfections in the market that are not currently being taken advantage of. B. If an industry is generating large​ profits, then new entrants are​ attracted, driving down profits. C. To find high profit​ projects, the product or service must be differentiated​ and/or have a cost advantage over the competition. D. All of the above.

D. All of the above.

Question content area top Part 1 Investors want a return that satisfies the following​ expectation(s): Question content area bottom Part 1 A. A return for delaying consumption B. An additional return for taking on risk C. An additional return for accepting dividends rather than capital gains D. Both A and B.

D. Both A and B.

Question content area Part 1 According to Principle​ 3, how should investors decide where to invest their​ money? ​(Select the best choice​ below.) A. By determining the highest return. B. By determining the expected EPS. C. By determining the lowest return. D. By determining if the return is more than expected given the level of risk.

D. By determining if the return is more than expected given the level of risk.

Which of the following is not included when computing earnings before taxes or​ EBT? Question content area bottom Part 1 ​(Select the best choice​ below.) A. Cost of goods sold B. Marketing expenses C. Depreciation expense D. Dividends

D. Dividends

The current ratio of a firm would be decreased by which of the​ following? Question content area bottom Part 1 A. Equipment is​ purchased, financed by a long−term debt issue. B. Land held for investment is sold for cash. C. Inventories are sold for cash. D. Inventories are sold on a long−term credit basis.

D. Inventories are sold on a long−term credit basis.

Which of the following represents the correct ordering of returns over the period 1926 to 2014​ (from lowest to highest​ return)? Question content area bottom Part 1 A. common​ stocks, long−term government​ bonds, long−term corporate​ bonds, Treasury bills B. Treasury​ bills, common​ stocks, long−term corporate​ bonds, long−term government bonds C. long−term corporate​ bonds, Treasury​ bills, long−term government​ bonds, common stocks D. Treasury​ bills, long−term government​ bonds, long−term corporate​ bonds, common stocks

D. Treasury​ bills, long−term government​ bonds, long−term corporate​ bonds, common stocks

If a CEO names his or her friends an family to the board of directors and then pays them quite a bit above the​ norm, this would be an example of the​ _______. ​(Select the best choice​ below.) A. preemptive right B. majority voting feature C. proxy fights D. agency problem

D. agency problem

The expected return on a riskless asset is greater than zero due to Question content area bottom Part 1 A. an expected return for opportunity costs. B. irrational investors who believe risk is always present. C. an expected return for taxes. D. an expected return for delaying consumption.

D. an expected return for delaying consumption.

Question content area top Part 1 The real rate of return is the return earned above the Question content area bottom Part 1 A. default risk premium. B. risk−adjusted return. C. variability of returns measured by standard deviation. D. inflation risk premium.

D. inflation risk premium

Williams Inc. has a current ratio equal to​ 3, a quick ratio equal to​ 1.8, and total current assets of​ $6 million.​ Williams' inventory balance is Question content area bottom Part 1 A. ​$4,800,000. B. ​$2,000,000. C. ​$4,000,000. D. ​$2,400,000.

D. ​$2,400,000.

Your firm has the following income statement​ items: sales of​ $25000; income tax of​ $2,500; operating expenses of​ $3,800; cost of goods sold of​ $13,000; and interest expense of​ $2,000. What is the amount of the​ firm's EBIT? Question content area bottom Part 1 ​(Select the best choice​ below.) A. ​$6,200 B. ​$3,700 C. ​$5,700 D. ​$8,200

D. ​$8,200

Advantages of the corporation include ​ (Select the best choice​ below.) A. transferability of ownership. B. unlimited liability. C. ability of the corporation to raise capital. D. double taxation of dividend income. E. A and C. F. A and B.

E. A and C

Question content area Part 1 Disadvantages of the partnership are ​(Select the best choice​ below.) A. expense of formation. B. lack of permanence. C. double taxation of income. D. unlimited liability. E. b and d. F. a and d.

E. b and d.

Maximizing shareholder wealth means maximizing the ​ (Select the best choice​ below.) A. value of the​ firm's investments. B. value of the​ firm's cash. C. value of the​ firm's assets. D. value of the​ firm's profits. E. market value of the​ firm's common stock.

E. market value of the​ firm's common stock.

Question content area top Part 1 Financial ratios are useful for evaluating performance but should not be used for making financial projections. Question content area bottom Part 1 True False

False

The risk−return trade−off implies that the return on a riskless asset must be zero. Question content area bottom Part 1 True False

False

Question content area top Part 1 ​(Evaluating liquidity​) The Tabor Sales Company had a gross profit margin​ (gross profits÷​sales) of 30.7 percent and sales of ​$9.3 million last year.​ Seventy-five percent of the​ firm's sales are on credit and the remainder are cash sales.​ Tabor's current assets equal ​$2.7 ​million, its current liabilities equal ​$314,000​, and it has ​$98,000 in cash plus marketable securities. a. If​ Tabor's accounts receivable are ​$562,500​, what is its average collection​ period? b. If Tabor reduces its average collection period to 18 ​days, what will be its new level of accounts​ receivable? c. ​Tabor's inventory turnover ratio is 9.6 times. What is the level of​ Tabor's inventories?

If​ Tabor's accounts receivable are ​$562,500​, its average collection period is 29.44 days b. If Tabor reduces its average collection period to 18 days, its new level of accounts receivable will be $343972 c. If​ Tabor's inventory turnover ratio is 9.6 times, the level of​ Tabor's inventories is $671343

​(Preparing an income statement​) Prepare an income statement and a​ common-sized income statement from the following information. Sales ​$525,625 Cost of goods sold 199,257 General and administrative expense 61,889 Depreciation expense 8,181 Interest expense 11,136 Income taxes 98,065 ​(Click on the icon located on the​ top-right corner of the data table above in order to copy its contents into a spreadsheet.​)

Look at CH3 Homework Question 10 study that question.

​"The price/book ratio indicates that the shareholders believe that the​ company's shares are worth more than twice their historical cost value on the balance​ sheet." TRUE or FALSE

TRUE

​(Calculating the​default-risk premium​) At​present, 10-year Treasury bonds are yielding 4.3​% while a​10-year corporate bond is yielding 6.4​%. If the​liquidity-risk premium on the corporate bond is 0.5​%, what is the corporate​ bond's default-risk​premium? Note that a Treasury security should have no​default-risk premium and​liquidity-risk premium.

The corporate​ bond's default-risk premium is 1.6​%.

(Evaluating liquidity​) Aylward Inc. currently has ​$2,173,000 in current assets and ​$838,000 in current liabilities. The​company's managers want to increase the​firm's inventory, which will be financed by a​short-term note with the bank. What level of inventories can the firm carry without its current ratio falling below 2.2​?

The cost of the additional inventory financed with the​ short-term note is $274500

​(Computing earnings per share​) If ABC Company earned $280,000 in net income and paid cash dividends of $40,000​, what are​ABC's earnings per share if it has 80,000 shares​outstanding?

The earnings per share of ABC Company is ​$3.5

​(Computing earnings per share​) If ABC Company earned $310,000 in net income and paid cash dividends of $50,000​, what are​ABC's earnings per share if it has 90,000 shares​outstanding?

The earnings per share of ABC Company is $3.44

​(Inflation and interest rates​) What would you expect the nominal rate of interest to be if the real rate is 3.8 percent and the expected inflation rate is 6.5 ​percent?

The nominal rate of interest is 10.55​%

(Evaluating profitability​) The Malia Corporation had sales in 2015 of ​$69 ​million, total assets of ​$50 ​million, and total liabilities of $24 million. The interest rate on the​company's debt is 6.1 percent and its tax rate is 30 percent. The operating profit margin was 11.5 percent. What were the​company's operating income and net​income? What was the operating return on assets and return on​equity? Assume that interest must be paid on all of the debt

The operating income was ​$7935000 The net income was ​$4529700 The operating return on assets was 15.9% The return on equity was 17.4%

(Real interest​rates: approximation method​) You are considering investing money in Treasury bills and wondering what the real​risk-free rate of interest is.​Currently, Treasury bills are yielding 4.5% and the future inflation rate is expected to be 2.1% per year. Ignoring the cross product between the real rate of interest and the inflation​rate, what is the real ​risk-free rate of ​interest?

The real​ risk-free rate of interest is 2.4%

​(Computing income taxes​) The William B. Waugh Corporation is a regional Toyota dealer. The firm sells new and used trucks and is actively involved in the parts business. During the most recent​year, the company generated sales of $3.12 million. The combined cost of goods sold and the operating expenses were ​$2.15 million.​Also, ​$416,000 in interest expense was paid during the year. Calculate the​corporation's tax liability by using the corporate tax rate structure in the popup​window Corporate Tax Rates ​ 15% ​$0—​$50,000 ​ 25% ​$50,001—​$75,000 ​ 34% ​$75,001—​$10,000,000 ​ 35% over​ $10,000,000 Additional​ surtax: • ​5% on income between​ $100,000 and​ $335,000 • ​3% on income between​ $15,000,000 and​ $18,333,333

The​ corporation's tax liability is ​$188360

(Price book​) ​Chang, Inc.'s balance sheet shows a​stockholders' equity-book value​(total common​equity) of ​$750,500. The​firm's earnings per share is ​$3.02​, resulting in a​price/earnings ratio of 12.25X. There are 54,000 shares of common stock outstanding. What is the​price/book ratio? What does this indicate about how shareholders view​Chang, Inc.?

The​ price/book ratio is 2.66

(Corporate income tax​) Fighting Dyer Inc. had taxable income of ​$20.5 million. Calculate Fighting​Dyer's federal income taxes by using the corporate tax rate structure in the popup​window,Corporate Tax Rates ​ 15% ​$0—​$50,000 ​ 25% ​$50,001—​$75,000 ​ 34% ​$75,001—​$10,000,000 ​ 35% over​ $10,000,000 Additional​ surtax: • ​5% on income between​ $100,000 and​ $335,000 • ​3% on income between​ $15,000,000 and​ $18,333,333

Total tax due is ​$7175000

Over​ time, there has been a high correlation between actual rates of return on securities and the​ securities' standard deviations of returns. Question content area bottom Part 1 True False

True

Question content area top Part 1 A basis point is equal to one​ one-hundredth of a percentage point. ​(Select the best choice​ below.) A. True B. False

True

Question content area top Part 1 An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time. Question content area bottom Part 1 True False

True

The sole proprietorship has no legal business structure separate from its owner. Question content area bottom Part 1 True False

True

The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns. Question content area bottom Part 1 True False

True

Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting​ numbers, but accounting numbers are used because they are more readily available. Question content area bottom Part 1 True False

True

(​Market-value ratios​) Garret Industries has a​ price/earnings ratio of 20.68X. a. If​ Garret's earnings per share is ​$1.89​, what is the price per share of​ Garret's stock? b. Using the price per share you found in part a​, determine the​ price/book ratio if​ Garret's equity book value per share is $8.82.

a. The price per share of​ Garret's stock is $39.09 b. ​Garret's​ price/book ratio is 4.43X

liquidity-risk premium

is estimated at 8 basis points (0.08%)* *example

maturity-risk premium

is estimated by the difference between the average yields on 30-year treasury bonds and 3-month treasury bills

default-risk premium

is estimated by the difference between the average yields on Aaa-rated bonds and 3--year treasury bonds

inflation-risk premium

is estimated by the inflation rate

real risk-free rate of interest

is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate