Question

1. On its balance sheet at the end of the year a company had $5,460 of common stock, $7,800 of long term bonds, and $8,580 of retained earnings. During the year the company had $1,278 of net income. What is the company's return on equity? Do not round your intermediate calculations.

A. 12.41%

B. 11.99%

C. 8.65%

D. 9.23%

E. 9.10%

2. The primary elements of a company's credit policy are (1) credit period, (2) discounts offered to customers, (3) credit standards, and (4) collection policy.

A. True

B. False

3. Which of the following statements best describes what you should expect if you randomly select stocks and add them to your investment portfolio?

A. Adding more stocks will reduce the portfolio's diversifiable risk

B. Adding more stocks will increase the portfolio's expected rate of return

C. Adding more stocks will reduce the systematic risk

D. Adding more stocks will have no effect on the portfolio's risk

E. Adding more stocks will increase the portfolio's market risk

Answer 1

1. The Return on equity is :

= Net income/ Equity

Equity = Common stock + retained earnings

= $5,460 + $8,580

= $14,040

= $1278/ $14.040

= 9.1%

So, the correct option is option E

2. It is a TRUE statement.

So, the correct option is option A.

The elements of a company's credit policy are :

• Credit period
• Discounts offered
• Collection policy
• Credit standards

3. Adding more stocks in the portfolio will reduce the portfolio's diversifiable risk. As stocks are randomly selected, the correlation between them is low this results in lower unsystematic risk and higher return.

So, the correct option is option A.