1) If a firm’s projects differ in risk, then one way of handling this problem is to evaluate
each project with the appropriate risk-adjusted discount rate.
2) If the market is in equilibrium, then an option must sell at a price that is exactly equal
to the difference between the stock’s current price and the option’s strike price.
3) If the shape of the curve depicting a firm’s WACC versus its debt ratio is more like a
sharp “V”, as opposed to a shallow “U”, it will be easier for the firm to maintain a
steady dividend in the face of varying investment opportunities or earnings from year to
year.
4) A firm will use spontaneous funds to the extent possible; however, due to credit
terms, contracts with workers, and tax laws there is little flexibility in their usage.
5) To determine the amount of additional funds needed (AFN), you may subtract the
expected increase in liabilities, which represents a source of funds, from the sum of the
expected increases in retained earnings and assets, both of which are uses of funds.
6) Synchronization of cash flows is an important cash management technique, as proper
synchronization can reduce the required cash balance and increase a firm’s profitability.
7) A firm’s capital structure does not affect its calculated free cash flows, because FCF
reflects only operating cash flows.
8) The CEO of D’Amico Motors has been granted some stock options that have
provisions similar to most other executive stock options. If D’Amico’s stock
underperforms the market, these options will necessarily be worthless.
9) If a firm’s marginal tax rate is increased, this would, other things held constant, lower
the cost of debt used to calculate its WACC.
10) Companies with relatively high assets-to-sales ratios require a relatively large
amount of new assets for any given increase in sales; hence, they have a greater need
for external financing. There are currently no alternatives for these types of firms to
lower their asset requirements.