1) The free cash flow valuation model is based on the same principle as dividend
valuation models; that is, the value of a share of stock is the present value of future cash
flows.
2) The conversion value is the value of a convertible security as measured by the
market price of the common stock into which it can be converted.
3) In computing after-tax operating cash flows, only operating costs but not financing
costs must be deducted from any cash inflows received.
4) Incremental cash flows represent the additional cash flows expected as a direct result
of the proposed project.
5) A normal probability distribution is a symmetrical distribution whose shape
resembles a bell-shaped curve.
6) The net current asset investment (NCAI) is defined as the change in current assets
minus the change in sum of the accounts payable and accruals.
7) Agency problem arises when managers deviate from the goal of maximization of
shareholder wealth by placing their personal goals ahead of the goals of shareholders.
8) The Euromarket provides multinational companies with an external opportunity to
borrow or lend funds with the additional feature of less government regulation.
9) The net proceeds used in calculation of the cost of long-term debt are funds actually
received from the sale after paying for flotation costs and taxes.
10) If a firm increases its cash discount period, the firm’s investment in accounts
receivable due to non-discount takers now paying earlier is expected to decrease.
11) Before paying dividends, a subsidiary must pay federal and state taxes on its
earnings.
12) In the case of liquidation, common stockholders are paid first, followed by
preferred stockholders, followed by bondholders.
13) To a buyer, an asset’s value represents the minimum price that he or she would pay
to acquire it.
14) Longer the maturity, higher is the cost of a bond.