1) Convertibility is a common feature of common stock; it allows the common
stockholders to convert their common shares into preferred shares or into bonds.
2) The internal rate of return is the discount rate that equates the present value of the
project’s future free cash flows with the project’s initial outlay.
3) Intangible assets such as copyrights and goodwill are not included on the balance
sheet because they are impossible to value objectively.
4) According to the Altman model, multiple discriminant analysis indicates that those
applicants with a Z score below 2.7 have a significant probability of filing for
bankruptcy within a year.
5) The efficiency of foreign currency markets is assured, in large measure, by the
process of arbitrageurs.
6) Preferred dividends are paid with before-tax dollars because the dividend rate is
known, whereas common stock dividends are paid with after-tax dollars.
7) A certificate of deposit that pays 9.8% compounded monthly is better than a similar
certificate of deposit that pays 10% compounded only once per year.
8) The cost of debt capital is obtained by substituting the net proceeds per bond for the
bond price in the bond valuation equation and solving for the required return.
9) Credit terms of 2/10, net 30 have a lower effective cost than credit terms of 2/10, net
60 because in the first case the loan will be repaid sooner.
10) The amount that can be obtained on an inventory loan depends on both the
marketability and perishability of the items in the inventory.
11) The firm’s total investment in current assets should be financed with temporary
sources of financing.
12) As long as a firm has a positive level of retained earnings, it can pay a dividend.
13) A compound annuity involves depositing or investing a single sum of money and
allowing it to compound for a certain number of years.
14) Compared with other developed countries, the U.S. is particularly reliant on foreign
trade for self-subsistence.
15) A negotiable certificate of deposit is a marketable receipt for funds deposited in a
bank for a period of one to 18 months.
16) DuPont analysis indicates that the return on equity may be boosted above the return
on assets by using leverage (debt).
17) Exchange rate fluctuations do not increase the riskiness of foreign portfolio
investments because changes in exchange rates are compensated for by changes in
interest rates and investment returns.
18) Expected dividends and share repurchases are the cash flow that underlies stock
valuation.