Question

True/False

All else the same, if a company’s interest rate on its borrowings goes down, its coverage ratio will go up.

Banks receive interest on their customer deposits.

Banks are required to pay interest on all deposits.

Certificates of Deposit are a type of time deposit.

Certificates of Deposit are a type of demand deposit

Corporate profits tax is applied to a corporation’s profits after dividends have been subtracted.

You can buy a company’s stock when the company issues shares or when an existing investor sells his/her shares.

The purpose of capital requirements is to make sure that banks are earning a minimum return on equity capital.

The purpose of capital requirements is to make sure that banks can withstand defaults by their (borrower) customers.

Demand deposits are more liquid than cash.

ABC Company has cash on its balance sheet. It decides to use the cash to purchase equipment. Compared to the original situation, ABC’s leverage ratio is higher.

ABC Company has cash on its balance sheet. It decides to use the cash to purchase equipment. Compared to the original situation, ABC’s leverage ratio is lower.

Banks can own bonds but cannot issue them.

When you deposit your salary into your checking account, you are lending money to the bank.

An underwriter is the corporation’s secretary. He/she signs his/her name on all corporate documents directly under the president’s signature.

Compensating balances refer to the compensation a bank pays to its corporate clients for holding deposits at the bank.

The S.E.C. sets minimum capital requirements for all public corporations.

Banks only make loans; they do not purchase securities.

If a company’s price-per-share increases, its book value goes up.

“Double taxation” refers to the I.R.S. first taxing a corporation’s revenue and then its profits.

A Eurodollar deposit involves depositing euros in an offshore bank and the bank creating a dollar deposit in return.

A bank is deficient in capital by $25 MM. It can cure the deficiency by borrowing $25 million in the inter-bank market and holding the funds in cash.

If a company borrows $1MM (from a bank) at a rate of 12% for one month beginning today, it will pay $10,000 in interest.

A trucking company plans to buy 100,000 gallons of diesel fuel in January. It can remove its risk by entering today into a (physical delivery) forward contract with a counterparty to buy the fuel at $2.50/gallon.

A trucking company plans to buy 100,000 gallons of diesel fuel in January. It can remove its risk by entering today into a (cash settled) forward contract at $2.50/gallon, whereby it receives from the counterparty the difference between 2.50 and the spot price in January (x100,000) if the spot price is above 2.50, and pays the difference if it is below 2.50. x

Toys-4-U corporation has $5 million in assets and $1 million in debt. Its leverage ratio is 1.25.

Toys-4-U corporation has $5 million in assets and $1 million in debt. The ratio of its debt to equity is .25.

Suppose two counterparties enter into a forward contract to buy/sell a stock. All the specifics of the agreement are entered into the contract except the purchase/sale price.

A company begins the week with a leverage ratio of 1.25. During the week it issues additional (common) shares and uses the funds to purchase equipment (with no other changes). Its leverage ratio at the end of the week remains 1.25. x

A company begins the week with a leverage ratio of 1.25. During the week it issues additional (common) shares and uses the funds to purchase equipment (with no other changes). Its leverage ratio at the end of the week is greater than 1.25.

A company begins the week with a book value-per-share of $25. During the week it issues additional (common) shares at a price-per-share of $21. Compared to its (total) book value as of the beginning of the week, its new (total) book value is lower.

A company begins the week with a book value-per-share of $25. During the week it issues additional (common) shares at a price-per-share of $21. Compared to its (total) book value as of the beginning of the week, its new (total) book value is higher.

The further down the “corporate cash waterfall” you stand, the more risk you face of not receiving the money you expect or are promised.

XYZ company has a book value of $1billion and it has ten million shares outstanding, of which you own one hundred. The company splits each share into two. The total market value of your shares is now higher. x

XYZ company has a book value of $1billion and it has ten million shares outstanding, of which you own one hundred. The company splits each share into two. The total book value of your shares is now higher. x

Answer 1

All else the same, if a company’s interest rate on its borrowings goes down, its coverage ratio will go up. - TRUE.
Since interest coverage ratio= cash flow from operations/ interest expense, as interest expense goes down, coverage ratio will increase.

Banks receive interest on their customer deposits.- FALSE. Banks pays interest on customer deposits not receive.

Banks are required to pay interest on all deposits.- FALSE. an example is current account in which Banks do not pay interest.

Certificates of Deposit are a type of time deposit.- TRUE. These are more or less interchangeable words.

I can only answer 4 subparts. Please do rate me and mention doubts, if any, in the comments section.