1) The market value of any real or financial asset, including stocks, bonds, or art work
purchased in hope of selling it at a profit, may be estimated by determining future cash
flows and then discounting them back to the present.
2) The cash flows associated with common stock are more difficult to estimate than
those related to bonds because stock has a residual claim against the company versus a
contractual obligation for a bond.
3) Classified stock differentiates various classes of common stock, and using it is one
way companies can meet special needs such as when owners of a start-up firm need
additional equity capital but don’t want to relinquish voting control.
4) The total return on a share of stock refers to the dividend yield less any commissions
paid when the stock is purchased and sold.
5) Exchange rates influence a multinational firm’s inventory policy because changing
currency values can affect the value of inventory.
6) A bond that is callable has a chance of being retired earlier than its stated term to
maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond
should have a lower yield to maturity than an otherwise identical noncallable bond.
7) According to the nonconstant growth model discussed in the textbook, the discount
rate used to find the present value of the expected cash flows during the initial growth
period is the same as the discount rate used to find the PVs of cash flows during the
subsequent constant growth period.
8) One advantage of the payback method for evaluating potential investments is that it
provides information about a project’s liquidity and risk.
9) Different borrowers have different risks of bankruptcy, and bankruptcy is costly to
lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of
going bankrupt.
10) A firm’s profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout
ratio is 40%. If the firm is operating at less than full capacity, then sales could increase
to some extent without the need for external funds, but if it is operating at full capacity
with respect to all assets, including fixed assets, then any positive growth in sales will
require some external financing.