1) The balance sheet is a financial statement that measures the flow of funds into and
out of various accounts over time, while the income statement measures the firm’s
financial position at a point in time.
2) A firm that bases its capital budgeting decisions on either NPV or IRR will be more
likely to accept a given project if it uses accelerated depreciation than if it uses
straight-line depreciation, other things being equal.
3) Free cash flows should be discounted at the firm’s weighted average cost of capital to
find the value of its operations.
4) The four primary elements in a firm’s credit policy are (1) credit standards, (2)
discounts offered, (3) credit period, and (4) collection policy.
5) The lower the firm’s tax rate, the lower will be its after-tax cost of debt and also its
WACC, other things held constant.
6) A firm’s peak borrowing needs will probably be overstated if it bases its monthly
cash budget on the assumption that both cash receipts and cash payments occur
uniformly over the month but in reality receipts are concentrated at the beginning of
each month.
7) Funds acquired by the firm through retaining earnings have no cost because there are
no dividend or interest payments associated with them, and no flotation costs are
required to raise them, but capital raised by selling new stock or bonds does have a cost.