1) If the increase in net working capital is recovered entirely at the end of the project
then it may be ignored.
2) The information effect suggests dividend policy matters because dividends act as a
persuasive communications tool, signaling investors about the financial condition of the
firm.
3) Other things equal, in imperfect markets a firm that maintains a stable dividend will
have a lower required rate of return on its equity.
4) Jones Blanket Company sells blankets for $25 each. The variable cost of each
blanket is $10. If fixed cost is $4,500,000 then the break-even point is 300,000 units.
5) A corporation that increases it net profit margin will need less discretionary
financing, other things being equal.
6) A corporation’s debt capacity is the maximum proportion of debt that the corporation
can include in its capital structure and still maintain its lowest composite cost of capital.
7) If we invest money for 10 years at 8 percent interest, compounded semiannually, we
are really investing money for 20 six-month periods, and receiving 4 percent interest
each period.
8) A project’s annual free cash flow is the change in operating cash flow less any change
in net working capital and less any change in capital spending.
9) The firm’s best financial structure is determined by finding the capital structure that
minimizes the firm’s cost of capital.
10) Portfolio performance is determined mainly by stock selection and market timing,
with less emphasis on asset allocation.
11) Financial ratios are used by personnel in marketing, human resources, and other
groups within a firm, not just by the finance and accounting personnel.
12) In terms of trade credit, default costs vary indirectly with the quality of the
customer.
13) Public perception and reputation do not affect stock prices, which are strictly a
function of dividends and required returns.
14) Commercial centers for foreign exchange exist only in New York and London in
order to make it possible for arbitrage to work.
15) Financial intermediaries issue their own indirect securities and use the proceeds to
purchase the direct securities of other economic units.
16) The speed of the collections process is determined by three types of float: mail
float, processing float, and transit float.
17) Because common stock represents a residual interest in the corporation, the value of
common stock is equal to the total firm value less the firm’s outstanding debt.
18) Total risk equals systematic risk plus unsystematic risk.
19) The risk-return tradeoff leads to two objectives: (1) keep enough cash on hand to
make necessary payments, and (2) reduce investments in idle cash to a minimum.