1) In the case of insolvency, the claims of debt are honored prior to those of common
stock and after those of preferred stock.
2) Once the weighted average cost of capital (WACC) is determined then all projects of
average risk will be compared to the original WACC regardless of the size of the capital
budget.
3) Timelines are used for simple time value of money problems, but cannot be used for
more complex problems.
4) An investment project is acceptable if the total cash received over the life of the
project exceeds the total cash spent over the life of the project.
5) Bonds generally have a maturity date while preferred stocks do not.
6) The current yield is greater than the coupon rate for a bond selling above par value.
7) A major risk in using commercial paper for short-term financing is the inflexible
repayment schedule.
8) The more difficult it is to estimate a firm’s cash flow needs, the greater the need to
carry higher precautionary balances.
9) Changes in depreciation expense do not affect operating income because
depreciation is a non-cash expense.
10) Financial ratios are often reported by industry or line of business because
differences in the type of business can make ratio comparisons uninformative or even
misleading.
11) Forward contracts are usually quoted for periods greater than 1 year.
12) TRL, Inc. has spent $2,000,000 in nonrefundable engineering fees in contemplation
of building a convention center and the additional costs to complete the project are
$18,000,000. The present value of all benefits the center will produce in its lifetime are
$19,000,000, so TRL should not build the convention center.