1) The profit and loss (income) statement is compiled on a cash basis.
2) A project’s contribution to firm risk is relevant for undiversified investors or when
bankruptcy costs exist.
3) After a stock split of 2:1, each investor will have twice the number of shares, but the
same percentage ownership in the firm that he had before the split.
4) Ratio analysis enhances our understanding of three basic attributes of performance:
liquidity, profitability, and the ability to create shareholder value.
5) The required rate of return for an asset is equal to the risk-free rate plus a risk
premium.
6) The retention ratio is equal to 1 minus the dividend payout ratio.
7) If a project is acceptable using the IRR criterion, it will also be acceptable using the
MIRR criterion.
8) Exceptions to purchase power parity exist if arbitrage opportunities are limited by
characteristics such as perishability or high transportation costs.
9) Capital rationing generally leads to higher stock prices as management is doing the
best job it can in selecting only the best capital budgeting projects.
10) Exchange rate risk exists in international trade contracts denominated in a foreign
currency, but not in foreign portfolio investments, because the returns on investment
securities are adjusted automatically for differences in exchange rates.
11) Preferred stock is referred to as a hybrid security because it has many characteristics
of both common stock and bonds.
12) Compared with other developed countries, the U.S. is particularly reliant on foreign
trade for self-subsistence.
13) If two projects are mutually exclusive then the IRR is more important than the NPV
in deciding the project that should be chosen.
14) John has to pay $1,000 per month for his mortgage for another 5 years, but he is
considering paying the mortgage off in one lump sum. John cannot calculate the present
value of the payments using the annuity formulas because his payments are monthly
and not once per year.
15) Additional Paid in Capital on the balance sheet equals the amount paid by investors
for the company’s common stock that exceeds the market price of the stock at the time
of purchase.
16) Mutually exclusive projects have more than one IRR.
17) Many financial managers believe the payback period is of limited usefulness
because it ignores the time value of money; hence, it is referred to as the discounted
payback period.
18) Exchange rate risk exists for a party to a contract if the contract is denominated in a
foreign currency.
19) As of year-end 2012, the great economic recession in the United States that began in
2007 has NOT officially ended.