1) When considering a firm’s financial decision alternative, financial managers should
accept only those actions that are expected to increase the firm’s profitability.
2) The required return on an asset is an increasing function of its nondiversifiable risk.
3) Because preferred stock is a form of ownership and has no maturity date, its claims
on income and assets are secondary to those of the firm’s creditors.
4) The risk-free rate is the lowest rate of interest charged by the nation’s leading banks
on business loans to their most important and reliable business borrowers.
5) An outlay for advertising and management consulting is considered to be a fixed
asset expenditure.
6) Commercial banks advise firms on major transactions such as mergers or financial
restructurings.
7) A sophisticated capital budgeting technique that can be computed by subtracting a
project’s initial investment from the present value of its cash inflows discounted at a
rate equal to a firm’s cost of capital is called profitability index.
8) Business risk is the risk to the firm of being unable to cover required financial
obligations.
9) As the ratio of current assets to total assets increases, a firm’s risk increases.
10) The income statement is a financial summary of a firm’s operating results during a
specified period while the balance sheet is a summary statement of a firm’s financial
position at a given point in time.
11) In EOQ model, the average inventory is defined as the order quantity divided by 2.
12) Uncorrelated assets have correlation coefficient close to zero.
13) If a firm relaxes its credit standards, the volume of accounts receivable increases
and so does the firm’s carrying cost.