1) Because ratios are historic, they have minimal value to an investor.
2) During the 1930s, financial practice revolved around such topics as the preservation
of capital, maintenance of liquidity, the reorganization of financially troubled
corporations, and bankruptcy.
3) The primary issuers of convertible bonds are smaller than top-grade companies.
4) After a merger has been announced, subsequent cancellation generally causes the
potential acquiree’s stock to decline in value.
5) Interest expense is deductible before taxes and therefore has an after-tax cost equal to
the interest paid times (1 – tax rate).
6) Agency theory examines the relationship between companies and their customers.
7) The conversion premium is equal to the market price (or value) minus the conversion
value.
8) Cash balances are usually determined by the amount of cash flowing through the
firm on a yearly basis.
9) The DuPont system of analysis emphasizes that profit generated by assets can be
derived by a combination of profit margin and asset turnover.
10) Discounted at 10%, $1,000 received at the end of each year for three years is worth
less than $2,700 received today.
11) A pro forma balance sheet needs data from the prior balance sheet and the cash
budget.
12) Stock prices for Amazon and eBay managed to avoid the turbulent price movements
that followed the collapse of the Internet bubble.
13) The floating rate feature on preferred stock causes more volatility in its price.
14) The stock market far exceeds the bond market in terms of size of new capital raised.
15) The NASDAQ Small-Cap Market is composed of smaller regionally based
companies that often remain controlled by their founders so that fewer shares are
available to the public.
16) Dividing operating profit by shares outstanding produces earnings per share.
17) Cash flow is used for a net present value analysis, and earnings are used for an IRR
and payback analysis.
18) When the inflation rate is zero, the present value of $1 is identical to the future
value of $1.
19) A firm that does not earn the cost of capital in the short run will probably be in
bankruptcy.