1) The cost of preferred stock to a firm must be adjusted to an after-tax figure because
70% of dividends received by a corporation may be excluded from the receiving
corporation’s taxable income.
2) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is
their argument that the value of the firm is determined only by its basic earning power
and its business risk.
3) A proxy is a document giving one party the authority to act for another party,
including the power to vote shares of common stock. Proxies can be important tools
relating to control of firms.
4) Managers should under no conditions take actions that increase their firm’s risk
relative to the market, regardless of how much those actions would increase the firm’s
expected rate of return.
5) The exercise value is also called the strike price, but this term is generally used when
discussing convertibles rather than financial options.
6) The form of organization for a business is not an important issue, as this decision has
very little effect on the income and wealth of the firm’s owners.
7) Suppose Walker Publishing Company is considering bringing out a new finance text
whose projected revenues include some revenues that will be taken away from another
of Walker’s books. The lost sales on the older book are a sunk cost and as such should
not be considered in the analysis for the new book.
8) Uncertainty about the exact lives of assets prevents precise maturity matching in an
ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex
ante (expected) basis.