Question
IBM Corporation's current ratio is 0.5, while Apple Inc.'s current ratio is 1.5. Both firms want to window dress their coming end-of-year financial statements. As
IBM Corporation's current ratio is 0.5, while Apple Inc.'s current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
- a. Only IBM Corporation's current ratio will be increased.
- b. The current ratios of both firms will be increased.
- c. The current ratios of both firms will be decreased.
- d. The transactions will not affect the current ratios.
- e. Only Apple Inc.'s current ratio will be increased.
Uncle Sam would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies his criteria?
- a. AAA bond with 10 years to maturity.
- b. AAA bond with 5 years to maturity.
- c. BBB bond with 5 years to maturity.
- d. BBB bond with 10 years to maturity.
Stock X has a beta of 1.2 and a standard deviation of 20 percent. Stock Y has a beta of 0.8 and a standard deviation of 25 percent. The correlation coefficient between two stocks is 0.30. Portfolio P is a $100,000 portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y. Which of the following statements is most correct? (Assume that the required return is determined by the Security Market Line or CAPM.)
- a. Stock Y has a higher required rate of return than stock X.
- b. Portfolio P has a standard deviation of 22.5 percent.
- c. Portfolio P has a beta equal to 1.0.
- d. Statements a and b are correct.
- e. Statements a and c are correct.
You have developed the following data on three stocks:
Stock / Stan. Deviation / Beta
A / 0.29 / 0.53
B / 0.28 / 0.55
C / 0.26 / 0.66
If you are a risk minimizer, you should choose Stock _____ if it is to be held in isolation and Stock _____ if it is to be held as part of a well-diversified portfolio.
- a. A; A
- b. A; B
- c. B; A
- d. C; A
- e. C; B
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