1) The tighter the probability distribution of its expected future returns, the greater the
risk of a given investment as measured by its standard deviation.
2) An increase in any current asset must be accompanied by an equal increase in some
current liability.
3) Under the CAPM, the required rate of return on a firm’s common stock is determined
only by the firm’s market risk. If its market risk is known, and if that risk is expected to
remain constant, then analysts have all the information they need to calculate the firm’s
required rate of return.
4) The aging schedule is a commonly used method for monitoring receivables.
5) Assuming that their NPVs based on the firm’s cost of capital are equal, the NPV of a
project whose cash flows accrue relatively rapidly will be more sensitive to changes in
the discount rate than the NPV of a project whose cash flows come in later in its life.
6) Junk bonds are high risk, high yield debt instruments. They are often used to finance
leveraged buyouts and mergers, and to provide financing to companies of questionable
financial strength.
7) For capital budgeting and cost of capital purposes, the firm should assume that each
dollar of capital is obtained in accordance with its target capital structure, which for
many firms means partly as debt, partly as preferred stock, and partly common equity.
8) The capital intensity ratio is the amount of assets required per dollar of sales and it
has a major impact on a firm’s capital requirements.
9) The primary reason the annual report is important in finance is that it is used by
investors when they form expectations about the firm’s future earnings and dividends,
and the riskiness of those cash flows.