Mlp Unit # 1 – Accounting and Finance

Satisfactory Essays
Unit # 1 – Accounting and Finance
1. A convertible bond is one which
a. can be exchanged for shares of stock
b. may be called ahead of maturity date by the issuer
c. has a maturity less than 90 days
d. makes no coupon payments and is initially priced at a deep discount

2. The Statement of Cash Flows addresses
a. assets, liabilities, and equity
b. dividends and retained earnings
c. operating, investing, and financing activities
d. working capital and float

3. The cash flow for three investments are:

Year1 Year2 Year3 Year4

A $8000 $0 $0 $0
B $2000 $2000 $2000 $2000
C $0 $0 $4000 $4000
D $4000 $4000 $0 $0

Which of these has the highest present value?
a. A
b. B
c. C
d. D

4. Opportunity cost is
a. cost which has already been incurred and cannot be recovered
b. the value of the best alternative foregone when a choice is made between two investments
c. the cost incurred by the next unit of production
d. the difference between book value and market value for an asset

5. The constant growth model (or “dividend discount model”) of stock valuation is based upon the premise that
a. the value of a stock is purely a function of supply and demand conditions in the market
b. a stock’s dividends are inherently more valuable than a bond’s interest payments
c. a company with a healthy cash flow will generally reduce its dividends over time
d. the value of a stock is the present value of the future dividends

6. When using Net Present Value (NPV) to make an investment decision, a project is acceptable if NPV is
a. Equals zero (modified)
b. Equals the desired rate of return.
c. Greater than zero.
d. Less than zero.

7. Absorption costing is required to be used for financial accounting because
a. It is the simplest cost allocation method
b. It is required by the tax laws
c. It was the first method developed
d. It is required by GAAP

Use the following information to answer the next three questions: JKL Pet

You May Also Find These Documents Helpful

  • Powerful Essays

    Dividend Decision

    • 2110 Words
    • 9 Pages

    15.4 Dividend Irrelevance Theory: Miller and Modigliani Model 15.5 Stability of Dividends 15.6 Forms of Dividends 15.7 Stock Split 15.8 Summary Terminal Questions Answers to SAQs and TQs 15.1 Introduction Dividends are that portion of a firm’s net earnings paid to the shareholders. Preference shareholders are entitled to a fixed rate of dividend irrespective of the firm’s earnings. Equity holders’ dividends fluctuate year after year. It depends on what portion of earnings is to be retained by the firm and what portion is to be paid off. As dividends are distributed out of net profits, the firm’s decisions on retained earnings have a bearing on the amount to be distributed. Retained earnings constitute an important source of financing investment requirements of a firm. However, such opportunities should have enough growth potential and sufficient profitability. There is an inverse relationship between these two – larger retentions, lesser dividends and vice versa. Thus two constituents of net profits are always competitive and conflicting. Dividend policy has a direct influence on the two components of shareholders’ return – dividends and capital gains. A low payout and high retention may have the effect of accelerating earnings growth. Investors of growth companies realize their money in the form of capital gains. Dividend yield will be low for such companies. The influence of dividend policy on future capital gains is to happen in…

    • 2110 Words
    • 9 Pages
    Powerful Essays
  • Powerful Essays

    The resulting NPV indicates that the project should be accepted and the investor should expect a return on equity of 38.87%. The NPV provides the investor with an expectation of what all future cash inflows will be worth in today’s dollars. The profitability index is closely related to the NPV. It evaluates the project’s feasibility based on future cash flows compared to initial costs. In general, a project is deemed a valid investment if this ratio is over 1. For this investment opportunity the profitability index indicates that it should be accepted.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
  • Satisfactory Essays

    BGA1 Task 4

    • 343 Words
    • 2 Pages

    Net present value (NPV) method is used to decide whether or not a company should take on a new project or acquisition. The formula for NPV is the difference between the present value of a project’s cash inflows and its cash outflows. To calculate the present values the future cash flows are discounted using the time value of money method. For the project to be accepted the NPV should be positive, because it means the return is greater than the required rate of return; or zero, because that means the return is equal to the required rate of return. However, if negative the project should be rejected, because its return is less than the required rate of return. This required rate of return is also referred to as the cost of capital.…

    • 343 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that…

    • 8840 Words
    • 36 Pages
    Powerful Essays
  • Good Essays

    Bird in Hand

    • 688 Words
    • 3 Pages

    Where the constant dividend growth rate is denoted by g, r is the investor’s required rate of return, and D1, represents the next dividend payments. Thus the lower r is in relation to the value of the dividend payment D1, the greater the share’s value. In the investor’s view, according to Linter and Gordon, r, the return from the dividend, is less risky than the future growth rate g.…

    • 688 Words
    • 3 Pages
    Good Essays
  • Best Essays

    Lintner (1956) was the first empirical study on dividend policy, he revealed that dividend add value to the shares of a firm. The turning point in theoretical modeling of dividend was the brilliant paper of Modigliani and Miller (1961) of dividend Irrelevance. Since the postulation of dividend irrelevance, financial economists have argued via two major schools of thought; those who believe dividend is relevant and those that believe dividend is not relevant. Despite the theories by academics to examine dividend policy, the dividend picture is still puzzling.…

    • 4738 Words
    • 11 Pages
    Best Essays
  • Satisfactory Essays

    (2) Explain briefly the dividend irrelevance theory that was put forward by Modigliani and Miller. What were the key assumptions underlying their theory?…

    • 554 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Mm Approach

    • 405 Words
    • 2 Pages

    With the help of this valuation model we will create a arbitrage process, i.e., replacement of amount paid as dividend by the issue of fresh capital. The arbitrage process involves two simultaneous…

    • 405 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Stock Valuation

    • 1347 Words
    • 6 Pages

    The Dividend Discount Model is a simple and convenient way of valuing stocks but it is extremely sensitive to the inputs for the growth rate. Used incorrectly, it can yield misleading or even absurd results, since, as the growth rate converges on the discount rate, the value goes to infinity.…

    • 1347 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Dividend Discount Model

    • 4288 Words
    • 18 Pages

    Dividend Discount Models 1. The intrinsic value, denoted V0, of a share of stock is defined as the present value of all cash payments to the investor in the stock, including dividends as well as the proceeds from the ultimate sale of the stock, discounted at the appropriate risk-adjusted interest rate, k. Whenever the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market price, the stock is considered undervalued and a good investment. 2. Dividend Discount Model: Stock valuation model that solves for the value of a common stock as the present value of future dividends expected to be received. 3. The dividend discount model holds that the price of a share of stock should equal the present value of all future dividends per share, discounted at an interest rate commensurate with the risk of the stock. 4. The constant growth dividend discount model is best suited for firms that are expected to exhibit stable growth rates over the foreseeable future. In reality, however, firms progress through lifecycles. In early years, attractive investment opportunities are ample and the firm responds with high plowback ratios and rapid dividend growth. Eventually, however, growth rates level off to more sustainable values. Threestage growth models are well-suited to such a pattern. These models allow for an initial period of rapid growth, a final period of steady dividend growth, and a middle, or transition, period in which the dividend growth rate declines from its initial high rate to the lower sustainable rate. 5. Problems of dividend-based valuations:  investors tend to have very different expectations from…

    • 4288 Words
    • 18 Pages
    Good Essays
  • Better Essays

    Mba/540 Risk Analysis

    • 862 Words
    • 4 Pages

    The net present value is defined as the section suggested calculating the difference between the sum of the present values of the project 's future cash flows and the initial cost of the project (Ross, Westerfield, & Jaffe, 2005, p.144). The NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today to the value of that same dollar in the…

    • 862 Words
    • 4 Pages
    Better Essays
  • Powerful Essays

    Chapter 7

    • 1492 Words
    • 6 Pages

    1. Which of the following statements is CORRECT?a. The constant growth model takes into consideration the capitalgains investors expect to earn on a stock.STATEMENT A is true because the expected growth rate is also the expected capitalgains yield.b. Two firms with the same expected dividend and growth rates must alsohave the same stockprice.c. It is appropriate to use the constant growth model to estimate a stock 'svalue even if itsgrowth rate is never expected to become constant.d. If a stock has a required rate of return rs = 12%, and if its dividend isexpected to grow at aconstant rate of 5%, this implies that the stock’s dividend yield is also 5%.e. The price of a stock is the present value of all expected future dividends,discounted at thedividend growth rate.2. Stocks A and B have the following data. Assuming the stock market is efficientand the stocks are in equilibrium, which of the following statements is CORRECT?A B…

    • 1492 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    505 Quiz 1

    • 852 Words
    • 3 Pages

    Miller, M. and Modigiliani, F. (1961), Dividend policy, growth, and the valuation of shares. Journal of Business, 34, 411-433…

    • 852 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    a. Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. Which NPV of the three should be used?…

    • 1409 Words
    • 6 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Optimal Capital Budget

    • 370 Words
    • 2 Pages

    d. Assuming that the projects are nondivisible and have average risk, which project should be accepted, and what is the size of the optimal capital budget?…

    • 370 Words
    • 2 Pages
    Satisfactory Essays