The return on an investment in stock depends on both dividends and capital gains.
Net working capital is the difference between current assets and current liabilities.
Blanket inventory loans are illustrative of secured, short-term credit.
An investment is expected to generate $1,000,000 each year for 4 years. If the firm’s
cost of funds is 10%, what is the maximum amount the firm should pay for the
investment?
If a firm has a large amount of operating leverage, that suggests its earnings may be
volatile.
Even if the interest rate is only 1%, a lump sum of $1,000 today is preferred to $100 a
year for 10 years.
Repurchase agreements establish a specified price at which the asset will be bought in
the future.
If an issue of securities is overpriced, the underwriters may let the price fall to sell the
securities.
The buyers (the longs) and not the sellers (the shorts) must make margin payments
when speculating with futures contracts.
Hedgers enter commodity futures contracts because the contracts offer leverage.
Preferred stock dividends are not a tax deductible expense for the firm.
If goods cost $1,000 and the terms of credit are 2/15, n45, the firm does not have to pay
until the 45th day.
A brokerage firm that offers to buy and sell a stock at specified bid and ask prices is
“making a market.”
Treasury bills are short-term debt issued by the federal government.
The use of short-term instead of long-term debt financing tends to increase both
earnings and risk.
Higher levels of sales are associated with increased holding of cash when regression
analysis is used to estimate a firm’s need for funds.
A higher standard deviation for an investment’s cash inflows is associated with greater
risk.