on 07-Jan-2019 (Mon)

If Ceteris Paribus, a company with high operating leverage will have a large change in operating income for a small rise in sales. Therefore, during times of expansionary growth levels, a highly leveraged company will have higher earnings growth than a company with less leverage. The opposite will be the case during an economic contraction.

Current assets includes cash, account receivables, inventories, prepaid expenses and short-term marketable securities. Inventories are less liquid than any other current assets and accordingly will have an effect on the company's ability to remain solvent in the short term.

With 3 / 10 net 30 The cost of trade credit on the due date will be (1 + (0.03 / 1-0.03)) ^(365 / 30–10) – 1= 0.7434 = 74.3%

Business risk is the uncertainty regarding the operating income of a company. This uncertainty is caused by fixed operating costs of the business. So EBIT indicates operating income and is closely monitored for operating risk analysis.

Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.

We have to convert the yields of U.S. treasury and CD into bond equivalent yields. The other is in BEY.

Security 1 = discount on U.S. treasury bill = discount yield * (60 / 360) = 0.383% discount = 100*0.383% = 0.383 market price = 100-0.383 = 99.62 HPY = (100 / 99.62)-1 = 0.381% BEY = (0.381) * (365 / 60) = 2.32%

BEY of Security 2 = (0.65%) × (365 / 30) = 7.91%

BEY of Security 3 = 3.65%

So Security 2 (Bank CD) has the best BEY.