1) In order to profit from an expected near-term increase in the relative value of the
British pound versus the U.S. dollar, an investor would be wise to maintain a short
position in pounds, then sell when the pound rises in relative value.
2) The present value of an annuity increases as the discount rate increases.
3) Operating leverage means financing a portion of a firm’s earnings per share with
debt.
4) If the expected growth rate for dividends is zero, then the value of common stock
will be equal to the current dividend.
5) Given the constant growth dividend valuation model, the expected percentage
growth in value of a stock is equal to the capital gains yield for that stock.
6) The control hypothesis suggests that shareholders prefer an increase in the firm’s debt
in order to reduce the agency costs associated with excessive free cash flow.
7) A CEO concerned about variability of earnings per share may try to offset high
operating leverage with a capital structure that is mostly debt in order to take advantage
of the interest tax shield.
8) If a bond has a market value that is higher than its par value, then the required return
on the bond must be less than the bond’s coupon rate.
9) Using the percent of sales method, projected common stock on the 2010 pro forma
balance sheet is equal to (Common Stock 2009/Sales 2009) times Projected Sales
2010 .
10) Financial leverage is typically more under the control of management than is
operating leverage because the nature of the product often dictates the type of
production process needed.
11) Stocks listed on the New York Stock Exchange must be traded exclusively on the
NYSE in order to maintain the high standards set by the exchange.
12) If a company sells bonds and uses the proceeds to buy back common stock, the
company’s financial leverage with increase.
13) Operating leverage is easier to control and manage than financial leverage because
operating leverage deals with the internal workings of the company while financing
deals with outside parties.