1) The profitability index is the ratio of the present value of the future free cash flows to
the initial investment.
2) One of the virtues of the percent-of-sales method is the precision of the estimate of
future financing needs.
3) Depreciation expense produces a cash inflow equal to the depreciation expense
multiplied by the firm’s marginal tax rate.
4) Financial ratios are useful for evaluating performance but should not be used for
making financial projections.
5) The more debt a company uses to finance its assets, the lower will be its operating
income due to higher interest expense.
6) For any individual project, if the project is acceptable based on its internal rate of
return, then the project will also be acceptable based on its modified internal rate of
return.
7) The present value of a $100 perpetuity discounted at 5% is $5,000.
8) One advantage of organized stock exchanges is increased stock price volatility
resulting from the efficient exchange of pricing information.
9) The EOQ model calculates the size of the firm’s inventory given its expected usage,
carrying costs, and ordering costs.
10) One method used to monitor the collections of accounts receivable is aging.
11) A bond that matures in 5 years has less interest rate risk than a bond that matures in
25 years because regardless of changes in interest rates, the bond can be redeemed for
face value 20 years earlier.
12) The retained earnings balance on IBM’s balance sheet at the end of 2010 is equal to
IBM’s 2010 net income minus dividends paid in 2010 .
13) Short-term debt provides a more flexible form of financing than long-term debt.
14) Historically, price appreciation, or capital gains yield, has accounted for a greater
portion of returns on common stocks than dividend payments.
15) An investor who requires an 18% percent return for a stock that pays no dividends
and requires a 12% return for a stock that pays its entire return from dividends may be
following the bird-in-the-hand dividend theory.