1) Advantages of the payback period include that it is easy to calculate, easy to
understand, and that it is based on cash flows rather than on accounting profits.
2) An example of a Eurobond is a bond issued in Asia by a U.S. Corporation with
interest and principal payments made in U.S. dollars.
3) The interest earned on U.S. Treasury bills is subject to state and local income taxes.
4) If the stock market is efficient, then investors do not need to read the Wall Street
Journal or research companies before they select which stocks to buy because market
prices already reflect all publicly available information.
5) Break-even analysis ignores fixed costs because fixed costs do not change.
6) As the required rate of return of an investment decreases, the market price of the
investment decreases.
7) The three major components responsible for variation in a company’s income stream
are business risk, operating risk, and financial risk.
8) A reasonable estimate of the market risk premium based on historical data and expert
opinion is between 5% and 7%.
9) A fast-growing company with many high net present value projects may maximize
shareholder wealth by NOT paying a dividend.
10) Spontaneous financing is financing obtained at the last minute due to poor financial
planning.
11) The Wall Street Journal bond quotes indicate that the net close for a bond with a
$1,000 par value is 100. The closing price for that bond was $100.75.
12) Earnings available to common shareholders is equal to a corporation’s positive net
cash flow over a given period, typically one year.
13) The bid price is the price that a dealer will pay for a security; the asked price is the
price at which she will sell a security.