1) Discretionary financing needed is equal to projected total assets minus projected total
liabilities.
2) A firm’s dividend policy includes two basic components: the dividend payout ratio
and the profit retention ratio.
3) Financial ratios are used by personnel in marketing, human resources, and other
groups within a firm, not just by the finance and accounting personnel.
4) The after-tax cost of equity equals one minus the marginal tax rate times the required
rate of return on common stock.
5) Shareholder selection committees select potential board of director nominees
ensuring that board members will monitor management sufficiently to protect
shareholder interests.
6) Shareholder wealth maximization means maximizing the price of the existing
common stock.
7) The less-risky investment is always the more desirable choice.
8) 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.
9) A revolving credit agreement is a legally binding agreement between a borrower and
lender.
10) The Capital Asset Pricing Model may be used to estimate the cost of retained
earnings.
11) Long-term debt is generally less costly than short-term debt, but also results in more
illiquidityhence, the risk/return tradeoff.
12) According to the CAPM, for each unit of Beta an asset’s required rate of return
increases by the market’s risk premium.
13) Above the EBIT-EPS indifference point a more heavily levered financial plan will
produce greater EPS.
14) The more debt a company uses to finance its assets, the lower will be its operating
income due to higher interest expense.