1) Anticipatory buying occurs because of an anticipated decrease in interest rates.
2) When preparing pro forma financial statement, the income statement must be
prepared first because the projected retained earnings balance on the balance sheet is
based on the expected net income.
3) Security markets are considered to be perfect when firms can issue securities at no
cost and the investor incurs no brokerage commissions.
4) The required rate of return reflects the costs of funds needed to finance a project.
5) The funds needed to satisfy the precautionary motive are entirely held in cash.
6) Many financial managers believe the payback period is of limited usefulness because
it ignores the time value of money; hence, it is referred to as the discounted payback
period.
7) The cost of capital is the rate that must be earned on an investment project if the
project is to increase the value of the common shareholders’ investment.
8) Forward contracts are usually quoted for periods greater than 1 year.
9) In the percent of sales method, a company’s asset requirements are based on the
company’s projected sales level.
10) A firm’s stock price may decline by less than 50% after a 2 for 1 stock split if the
reduction in price moves the stock into its optimal trading range.
11) Major sources of secured credit include commercial banks, finance companies, and
factors.
12) A short-term T-bill’s rate of return should be used in the CAPM formula to
determine the cost of equity capital regardless of the length of the project under
consideration.
13) Transactions in the futures markets involve current payments for goods which will
be delivered at some future agreed upon date.
14) As a corporation’s investment opportunities increase, the dividend payout ratio
should decrease so that the corporation can avoid flotation costs.
15) The profitability index provides an advantage over the net present value method by
reporting the present value of benefits per dollar invested.
16) Accounting information is used in financial ratio analysis because it is theoretically
the best data to guide financial decision-making.