1) The use of risk-adjusted discount rates is based on the concept that investors require
a higher rate of return for more risky projects.
2) A project’s net present value profile shows how sensitive the project is to the choice
of a discount rate.
3) Common stockholders demand a return on the price paid for their common stock, but
since retained earnings on the balance sheet are merely “on paper” they do not require a
return on earnings that have been retained.
4) In an international trade contract involving one buyer and one seller, both parties
may be exposed to exchange rate risk if the contract is denominated in a third currency.
5) The Beta of a T-bill is zero.
6) The investment banker performs three basic functions: (1) underwriting, (2)
distributing, and ( advising.
7) A direct quote of $1.6 per British Pound in the United States is equivalent to a direct
quote of .625 British Pounds per U.S. dollar in Great Britain.
8) In terms of risk, preferred stock is safer than common stock because it has a prior
claim on assets and income.
9) An acceptable project should have a net present value greater than or equal to zero
and a profitability index greater than or equal to one.
10) In general, the required rate of return is a function of (1) the time value of money,
(2) the risk of an asset, and ( the investor’s attitude toward risk.
11) An income statement reports a firm’s cumulative revenues and expenses from the
inception of the firm through the income statement date.
12) While many factors contributed to the financial crisis of 2007 and beyond, it is safe
to say that real estate loans were NOT much of a contributing factor.