1) Stock repurchases do not alter a company’s capital structure since all of the
purchased shares are retired and no longer outstanding.
2) A method for estimating a project’s beta that attempts to identify publicly traded
firms engage solely in the same business as the project is called the pure play method.
3) The time value of money is the opportunity cost of passing up the earning potential
of a dollar today.
4) The independence hypothesis suggests that the total market value of the firm’s
outstanding securities is unaffected by its capital structure.
5) The stock valuation model D1/(rcs – g) requires the stock to grow at a rate greater
than the required return; otherwise, the stock is worthless.
6) Transaction balances are used to meet the regular cash needs of the firm, not
irregular outflows that will be handled with speculative balances.
7) Determining how a firm should raise money to fund its long-term investments is
referred to as capital structure decisions.
8) Financial structure is another term for capital structure.
9) In a lockbox system, customer payments are collected directly by the bank and
deposited immediately in the corporation’s account.
10) A common method of evaluating a firm’s financial ratios is to compare the current
values of the firm’s ratios to its own ratios from prior periods. This is referred to as
trend analysis.
11) A small, family-owned corporation would be more likely to use the
contribution-to-firm risk criteria rather than the systematic risk to evaluate capital
budgeting projects.
12) Working capital refers to investment in current assets, while net working capital is
the difference between current assets and current liabilities.
13) A revolving credit agreement is a legally binding agreement between a borrower
and lender.
14) If the sales growth rate is greater than zero, then the discretionary financing needed
will also be greater than zero.
15) Purchasing supplies on credit and paying for them 45 days later is an example of
discretionary financing.
16) Preferred stock is less risky than common stock, but more risky than debt.