1) Flotation costs are typically greater in the secondary market than in the primary
market.
2) Because fixed costs do not vary with a firm’s revenues, firm’s with high levels of
fixed cost enjoy lower levels of operating risk because their costs are more certain,
making budgeting easier.
3) Common-size balance sheets are balance sheets of companies with almost identical
total assets (within 2% of each other).
4) Transaction balances are used to meet the regular cash needs of the firm, not
irregular outflows that will be handled with speculative balances.
5) Financial structure is equal to non-interest bearing liabilities, such as accounts
payable and accruals, plus capital structure, which includes short- and long-term debt,
preferred stock, and common equity.
6) The most relevant form of growth for valuing a firm’s common stock is internal
growth.
7) If project A generates $10 million of free cash flow over its five year useful life and
project B generates $8 million of free cash flow over its useful life, then Project A will
have a shorter payback period than Project B, assuming both projects require the same
initial investment.
8) Speculative cash balances are held to take advantage of uncertain profit-making
opportunities.
9) Accounting information is used in financial ratio analysis because it is theoretically
the best data to guide financial decision-making.
10) If sales double, the break-even model assumes that total variable costs will double.
11) When capital rationing exists, the divisibility of projects is ignored and projects are
funded in order of their PI’s or IRR’s.
12) An investment banker assumes underwriting risk in both negotiated purchases and
privileged subscriptions with standby agreements.