1) Firms hold cash balances in order to complete transactions (both routine and
precautionary) that are necessary in business operations and as compensation to banks
for providing loans and services.
2) Net working capital is defined as current assets divided by current liabilities.
3) Because money has time value, a cash sale is always more profitable than a credit
sale.
4) Total net operating capital is equal to net fixed assets.
5) When estimating the cost of equity by use of the DCF method, the single biggest
potential problem is to determine the growth rate that investors use when they estimate
a stock’s expected future rate of return. This problem leaves us unsure of the true value
of rs.
6) The coefficient of variation, calculated as the standard deviation of expected returns
divided by the expected return, is a standardized measure of the risk per unit of
expected return.
7) Changes in net working capital should not be reflected in a capital budgeting cash
flow analysis because capital budgeting relates to fixed assets, not working capital.
8) Operating plans sketch out broad approaches for realization of the firm’s strategic
vision. These plans usually are developed for a period no longer than a 1-year time
horizon because detail is “lost” by extending out the time horizon by more than 1 year.
9) The trade-off theory states that the capital structure decision involves a tradeoff
between the costs and benefits of debt financing.