Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best defines the capitalization rate in the context of investments in securities?

The interest rate charged by banks for short-term loans.

The percentage of a company's earnings paid out as dividends.

The rate of return used to convert an investment's expected future income into a present value.

The rate at which a company issues new shares to the public.

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Verified step by step guidance

Understand the concept of capitalization rate: In the context of investments, the capitalization rate (often referred to as 'cap rate') is a financial metric used to determine the rate of return on an investment based on its expected future income.

Recognize its purpose: The capitalization rate is primarily used to convert an investment's expected future income into its present value. This helps investors assess the value of an investment relative to its income-generating potential.

Differentiate from other terms: The capitalization rate is not the interest rate charged by banks for loans, nor is it the percentage of earnings paid out as dividends. It is also unrelated to the rate at which a company issues new shares.

Relate to formula: The capitalization rate is often calculated using the formula:

R = \frac{I}{V}

, where

R

is the capitalization rate,

I

is the expected income, and

V

is the present value of the investment.

Apply the definition: Based on the explanation, the correct definition of capitalization rate is 'The rate of return used to convert an investment's expected future income into a present value.'