1) If a company offers a cash discount for early payment, this will most likely increase
its cash conversion cycle since it will have to pay out more cash to its customers.
2) If a firm does not have enough money to pay any common stock dividends, it is
technically in default to the common shareholders.
3) The existence of a forward-spot differential creates an arbitrage opportunity that will
eliminate the differential almost immediately.
4) Financial ratios are useful for measuring performance because maximizing the return
on equity for common shareholders is the primary goal of financial managers.
5) In measuring cash flows we are interested only in the incremental or incremental
after-tax cash flows that are attributed to the investment proposal being evaluated.
6) One weakness of the times interest earned ratio is that it includes only the annual
interest expense as a finance expense and ignores other financing items such as lease
payments that must be paid.
7) Total assets must always equal the sum of temporary, permanent, and spontaneous
sources of financing.
8) Debentures are expected to have a lower yield than secured bonds because the
debentures are more risky and therefore less desirable.
9) A share of preferred stock that pays the same annual dividend forever is an example
of a perpetuity.
10) The moderate view of capital structure theory allows for the tax-deductibility of
interest expense.
11) One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt
financing.