1) A firm’s cost of capital is the required rate of return on the firm’s average project.
2) Interest rate parity theory states that the forward premium or discount should be
equal and opposite in sign to the difference in the national interest rates for securities of
the same maturity.
3) One potential rationale for paying dividends is that the payment of dividends
indirectly results in a closer monitoring of management’s investment activities, hence
lowering agency costs.
4) A company’s capital structure mix is based on the proportion of fixed versus variable
costs in its optimal production process.
5) Beta is a measurement of the relationship between a security’s returns and the general
market’s returns.
6) A corporation’s debt capacity is the maximum proportion of debt that the corporation
can include in its capital structure and still maintain its lowest composite cost of capital.
7) A project’s annual free cash flow is the change in operating cash flow less any change
in net working capital and less any change in capital spending.
8) The cash conversion cycle is a measure of a firm’s effectiveness in managing its
working capital.
9) The firm financed completely with equity capital has a cost of capital equal to the
required return on common stock.
10) Common stock cannot be worth less than its book value.
11) A mortgage bond is secured by a lien on real property.
12) When repaying an amortized loan, the interest payments increase over time due to
the compounding process.
13) A zero balance account permits divisions to disburse funds while maintaining
centralized control of several bank accounts.
14) The characteristic line for any well-diversified portfolio is horizontal.