1) The after-tax cost of equity equals one minus the marginal tax rate times the required
rate of return on common stock.
2) A call provision allows the issuing firm the opportunity to avoid rising interest rates
by calling investors and asking for more cash.
3) A U.S. corporation investing in a foreign corporation by purchasing stock on a
foreign stock exchange is an example of direct foreign investment.
4) One way to improve a company’s cash conversion cycle is to increase its days sales
outstanding.
5) Zero balance accounts permit centralized control over cash outflows while
maintaining divisional disbursing authority.
6) If project A generates $10 million of free cash flow over its five year useful life and
project B generates $8 million of free cash flow over its useful life, then Project A will
have a shorter payback period than Project B, assuming both projects require the same
initial investment.
7) International Financial Reporting Standards (IFRS) is a set of principle-based
accounting standards that were established by the International Accounting Standards
Board (IASB).
8) Although under normal operating conditions preferred shareholders do not have
voting rights, protective provision generally allow for voting rights in the event of
nonpayment of preferred dividends.
9) One of the problems associated with maximization of total current stock value is that
it ignores the timing of a project’s return.
10) Capital structure is the mix of the long-term sources of funds used by the firm.
11) The primary sources of collateral for secured loans are accounts receivable and
inventory.
12) Beta represents the average movement of a company’s stock returns in response to a
movement in the market’s returns.
13) Short-term debt has a greater risk of illiquidity than long-term debt because it must
be rolled over more frequently and its use creates more uncertainty concerning future
interest rates.
14) Because fixed costs do not vary with a firm’s revenues, firm’s with high levels of
fixed cost enjoy lower levels of operating risk because their costs are more certain,
making budgeting easier.
15) If a firm’s tax rate increases then its weighted average cost of capital increases also.
16) According to accrual accounting, revenues are recognized when earned and
expenses are recognized when incurred.
17) Shareholder wealth maximization means maximizing the price of the existing
common stock.
18) A narrow spread indicates efficiency in the spot exchange market.
19) Ratios that examine profit relative to investment are useful in evaluating the overall
effectiveness of the firm’s management.
20) A common stock with an expected dividend growth rate of zero would be valued in
the same way as preferred stock, that is, the expected dividend divided by the required
return.