Question

1) The higher the days sales outstanding (DSO) the more positive the cash flow from operations :

a. True

b. False

2) To calculate the current price of a bond paying semiannual coupons, an investor needs to:

1. Use half the number of years for the number of payments made

b. Use double the number of years for the number of payments made

Please answer with explanation.

Answer 1

1). False - Days sales outstanding or average collection period indicates the number of days, a company takes to collect on credit sales. The higher the number of days is, the lower will be the cash flow from operations as the company would be taking more days to collect on sales.

2). To calculate the current price of a bond paying semi-annual coupons, an investor needs to use double the number of years for the number of payments made. Since the bond pays coupons twice a year, so number of payments made in one year is 2. Hence, total number of payments made for a bond with maturity of N years becomes 2*N or double the number of years.