1) Operating leverage is measured as the responsiveness of the firm’s earnings before
interest and taxes relative to fluctuations in sales.
2) The discounted payback period takes the time value of money into account in that it
uses discounted free cash flows rather than actual undiscounted free cash flows in
calculating the payback period.
3) The modified internal rate of return represents the project’s internal rate of return
assuming that intermediate cash flows from the project can be reinvested at the project’s
required return.
4) A firm’s bond rating would be favorably affected if they have a low use of financial
leverage (debt).
5) Borrowing funds using short-term debt, such as commercial paper, and using the
proceeds to invest in long-term investments, creates a re-financing risk that can force
firm’s to sell assets at distressed prices if financing becomes unavailable.
6) If the demand for a new bond issue increases, it is likely that the coupon rate will be
adjusted upward by the issuing company.
7) Zero balance accounts reduce disbursing float.
8) The guiding rule in deciding if a free cash flow is incremental is to look at the
company with, versus without, the new project.
9) When fixed costs are part of a firm’s cost structure, the percent of sales method will
understate net income and overstate discretionary financing needed, if sales are
increasing.
10) The future value of an annuity will increase if the interest rate goes up, but the
present value of the same annuity will decrease as the interest rate goes up.
11) If external financing needed cannot be obtained due to poor market conditions, a
firm could reduce the amount needed by increasing its retention ratio.
12) Two projects are mutually exclusive if the accept/reject decision for one project has
no impact on the accept/reject decision for the other project.
13) Both compensating balances and discounting interest increase the effective interest
rate on a loan.
14) A project with a NPV of zero should be rejected since even the returns on U.S.
Treasury bill are greater than zero.
15) The initial outlay includes the cost of purchasing the asset and getting is
operational, but this excludes any training costs for employees which should be
included as part of differential cash flows over the life of the project.
16) The chief financial officer (CFO) is responsible for overseeing financial planning,
corporate strategic planning, and controlling the firm’s cash flow.
17) A stock split is defined as a stock dividend exceeding 25%.