1) Floating lien agreements are the least secure form of inventory collateral.
2) Once the weighted average cost of capital (WACC) is determined then all projects of
average risk will be compared to the original WACC regardless of the size of the capital
budget.
3) A corporation needing cash sells securities to investors in the secondary market.
4) In break-even analysis, semivariable costs are segregated into their fixed and variable
components over the relevant range of output.
5) Preferred stock is traded in the money market, while common stock is traded in the
capital market.
6) Investors expect to receive the highest returns from government-issued securities
because the government will not default on securities that it has issued.
7) The firm’s cost of capital is important when evaluation the firm’s overall value, but
should not be used to evaluate individual projects which have their own unique
characteristics.
8) Over the relevant range of output, fixed costs remain unchanged.
9) Given taxes and bankruptcy costs exist, as financial increases, the weighted average
cost of capital first decreases and then increases.
10) The procedure by which significant changes may be made to a partnership, such as
admission of a new partner or termination of the partnership, are governed by each state
so no partnership agreement is needed.
11) A bank is legally obligated to provide credit under a revolving credit agreement, but
not under a line of credit.
12) Many firms today continue to use the payback method but also employ the NPV or
IRR methods especially when large projects are being analyzed.
13) Free cash flow calculations can be broken down into three parts: cash flows from
operations, cash flows associated with working-capital requirements, and financing
cash flows relating to interest and dividend payments.
14) Increases in inventory and accounts receivable expected to occur if a proposed
advertising campaign is undertaken are examples of sunk costs.