1) Available yields on financial securities depend on their financial risk, interest rate
risk, liquidity, and taxability.
2) An investor’s required rate of return for a common stock can be estimated by
summing the stock’s dividend yield and annual growth rate, assuming the growth rate is
constant over time.
3) Financing activities have no impact on the income statement, but rather are reflected
in changes in long-term debt and short-term debt on the balance sheet.
4) Sunk costs are cash outflows that will occur regardless of the current accept/reject
decision, and therefore should be excluded from the analysis.
5) 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.
6) Return on equity is driven by (1) the spread between the operating return on assets
and the interest rate, and ( changes in the debt ratio.
7) Interest Rate Parity theory states that interest rates must be the same in all countries
using floating exchange rates or else international markets will not be in equilibrium.
8) The asked rate is also known as the selling rate or the offer rate.
9) IRR should not be used to choose between mutually exclusive projects.
10) Common stock does not mature.
11) The cost of debt measures the cost of a bank loan, while the cost of preferred stock
is used as a proxy for the cost of a new bond issue.
12) The syndicate can be thought of as a wholesaler of securities and the dealer
organization as a retailer of securities.