1) Capital budgeting decisions are based on free cash flow because free cash flow better
reflects when money is received and available for reinvestment than account profits.
2) A direct quote of $1.9887 dollars to buy one U.K. pound corresponds to an indirect
quote of .9887 pounds per one dollar.
3) If a company in a perfect capital market decreased its dividend per share, an investor
would be forced to sell his common stock at a depressed price.
4) In general, interest rates are short-term debt are higher than interest rates on
long-term debt because the borrower has less time to repay the loans, and hence the risk
to the lender is higher.
5) Common stockholders may use financial ratios to monitor manager actions to help
lessen agency problems.
6) At an annual interest rate of 9%, an initial sum of money will double approximately
every 8 years.
7) The competitive bid purchase is largely confined to railroad, public utility, and
municipal bond issues.
8) Floating lien agreements are the least secure form of inventory collateral.
9) An all-stock portfolio is more risky than a portfolio consisting of all bonds.
10) Convertible bonds are debt securities that can be converted into a firm’s stock at a
prespecified price.
11) Preferred stock is less risky than common stock, but more risky than debt.
12) Three types of arbitrage are simple arbitrage, rectangular arbitrage, and
covered-expense arbitrage.
13) Portfolio performance is determined mainly by stock selection and market timing,
with less emphasis on asset allocation.