1) If the before-tax cost of debt is 7% and the firm has a 40% marginal tax rate, the
after-tax cost of debt is 2.8%.
2) Credit terms of 1/10 net 30 means that the buyer may take a 10% discount (1/10)if
the bill in paid within 30 days.
3) EOQ model recommendations may be replaced by anticipatory buying during
periods of high inflation.
4) In order to reduce discretionary financing needed, a profitable company could
decrease its dividend payout ratio.
5) Two key components of a prudent capital structure are the debt maturity composition
and the debt to equity composition.
6) The T-bill return is used in the CAPM model as the risk free rate.
7) An income statement reports the firm’s revenues and expenses for a specific period of
time such as one year.
8) A project that is very sensitive to the selection of a discount rate will have a steep net
present value profile.
9) Yields on various financial instruments tend to be positively correlated with maturity.
10) Investment banking firms are prohibited from selling securities due to conflicts of
interest.
11) A bond is a long-term promissory note issued by the firm.
12) The hedging principle involves matching the cash flow from an asset with the cash
flow requirements of the financing used.
13) A negotiable certificate of deposit is a marketable receipt for funds deposited in a
bank for a period of one to 18 months.
14) The purpose of maintaining a raw materials inventory is to integrate the purchasing
and production functions.
15) Venture capitalists typically provide funds to high-risk start up companies but take
no active role in their management.
16) There is no difference on an economic basis between a stock dividend and a stock
split.
17) Convertible bonds decrease in value whenever the price of the company’s stock
increases.
18) Corporate managers should accept investment projects that maximize profits in the
short run because of the time value of money.
19) If the interest rate is positive, then the future value of an annuity due will be greater
than the future value of an ordinary annuity.
20) Purchasing power parity suggests that interest rates in different countries will adjust
so that each currency will have the same purchasing power.