1) The optimal distribution policy strikes that balance between current dividends and
capital gains that maximizes the firm’s stock price.
2) When considering two mutually exclusive projects, the firm should always select the
project whose internal rate of return is the highest, provided the projects have the same
initial cost. This statement is true regardless of whether the projects can be repeated or
not.
3) Suppose you are the president of a small, publicly-traded corporation. Since you
believe that your firm’s stock price is temporarily depressed, all additional capital funds
required during the current year will be raised using debt. In this case, the appropriate
marginal cost of capital for use in capital budgeting during the current year is the
after-tax cost of debt.
4) The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is
lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.
5) The annual report contains four basic financial statements: the income statement,
balance sheet, statement of cash flows, and statement of stockholders’ equity.
6) It is extremely difficult to estimate the revenues and costs associated with large,
complex projects that take several years to develop. This is why subjective judgment is
often used for such projects along with discounted cash flow analysis.
7) If debt is to be used to finance a project, then when cash flows for a project are
estimated, interest payments should be included in the analysis.
8) Loans from commercial banks generally appear on balance sheets as notes payable.
A bank’s importance is actually greater than it appears from the dollar amounts shown
on balance sheets because banks provide nonspontaneous funds to firms.
9) A revolving credit agreement is a formal line of credit. The firm must generally pay a
fee on the unused balance of the committed funds to compensate the bank for the
commitment to extend those funds.
10) A firm’s peak borrowing needs will probably be overstated if it bases its monthly
cash budget on the assumption that both cash receipts and cash payments occur
uniformly over the month but in reality payments are concentrated at the beginning of
each month.