1) If the future value of annuity A is greater than the future value of annuity B, then the
present value of annuity A must also be greater than the present value of annuity B.
2) Financial ratios cannot be used to evaluate the creation of shareholder wealth
because they are based on accounting numbers that reflect historical cost and not
current market values.
3) Interest payments on debt are not included in a project’s incremental cash flows, but
are instead accounted for in the project’s discount rate.
4) Common-size balance sheets are balance sheets of companies with almost identical
total assets (within 2% of each other).
5) Financing with new common stock is generally more costly than financing with
retained earnings due to increasing tax rates.
6) The risk-return tradeoff is seen in many areas of finance.
7) Argentina experienced a period of extremely high inflation relative to its trading
partners and Argentina’s currency decreased in value. This is an example of purchasing
power parity theory.
8) If preferred stock pays a $5 annual dividend and sells for $50 the cost of preferred
stock financing is 10% since dividends are not tax deductible and preferred stock is sold
without flotation costs.
9) Cash flows and profits are synonymous; in other words, higher cash flows equal
higher profits.
10) Cash budgets are completed only on an annual basis because shorter periods of time
are too variable and uncertain for meaningful results.
11) The profitability index is the ratio of the company’s net income (or profits) to the
initial outlay or cost of a capital budgeting project.
12) U.S. Treasury Bills are exempt from federal, state, and local income taxes.
13) Operating leverage is the responsiveness of a firm’s EBIT to changes in sales
revenues.
14) An investment earning simple interest is preferred over an investment earning
compound interest because the simplicity adds value.
15) Shareholders react to poor investment or dividend decisions by causing the total
value of the firm’s stock to fall, and they react to good decisions by bidding the price of
the stock up.
16) Companies with the largest cash balances reduce their risk of insolvency and thus
maximize the value of the companies for their shareholders.