1) Earnings available to common shareholders represents income that may be
reinvested in the firm or distributed to its owners.
2) Ratios are used to standardize financial information, thereby making it easier to
interpret.
3) At an annual interest rate of 9%, an initial sum of money will double approximately
every 8 years.
4) As of year-end 2012, the great economic recession in the United States that began in
2007 has NOT officially ended.
5) In the United States, financial statements are prepared following the Financial
Accounting Standards Board’s generally accepted accounting principles (GAAP).
6) If the interest rate is positive, a six-year ordinary annuity of $500 per year must have
a present value over $3,000.
7) The after-tax cost of debt is equal to one minus the marginal tax rate times the yield
to maturity on the firm’s outstanding debt.
8) In a sole proprietorship, the owner is personally responsible without limitation for
the liabilities incurred.
9) Over time, there has been a high correlation between actual rates of return on
securities and the securities’ standard deviations of returns.
10) When repaying an amortized loan, the interest payments increase over time due to
the compounding process.
11) Organized stock exchanges provide the benefits of a continuous market, fair
security pricing, and helping businesses raise new capital.
12) If a company offers a cash discount for early payment, this will most likely increase
its cash conversion cycle since it will have to pay out more cash to its customers.
13) Accounts payable and accrued expenses are known as discretionary sources of
financing.
14) The initial step in any effective cash management program is cash flow forecasting.
15) Accounting profits are used to make capital budgeting decisions because generally
accepted accounting principles ensure that profits are the best measure of a company’s
economic activity.
16) The trade-off associated with holding large amounts of cash and marketable
securities is increased liquidity offset by a reduction in the overall rate of return.
17) Although interest rates are generally higher on long-term debt, using more
long-term debt rather than short-term debt can reduce the risk of illiquidity and decrease
uncertainty related to interest rate changes.
18) According to the “bird-in-the-hand” dividend theory, the required return for a stock
that pays its entire return from dividends is higher than the required return for a
high-growth stock that pays no dividend.
19) Terminal cash flows are always positive because they result from the shutting down
of a project with the sale of any assets with remaining value.
20) It is never appropriate to compare nominal rates unless they include the same
number of compounding periods per year.