1) A corporation with $1 million in retained earnings at the end of the year could easily
pay a dividend of $500,000.
2) Long-term debt is generally less costly than short-term debt, but also results in more
illiquidityhence, the risk/return tradeoff.
3) In order to reduce agency costs, managers may decrease dividends, thus shifting the
focus of investors to future capital gains than can only be attained by a well-run
corporation.
4) Company unique risk can be virtually eliminated with a portfolio consisting of
approximately 20 securities.
5) A balance sheet reflects the current market value of a firm’s assets and liabilities.
6) The EBIT-EPS indifference point is the level of production at which the company’s
EBIT equals its EPS.
7) An investor’s required rate of return for a common stock can be estimated by
summing the stock’s dividend yield and annual growth rate, assuming the growth rate is
constant over time.
8) A preferred stock that pays an annual dividend of $10, has a par value of $100, and
has a required return of 5% will be valued at $200.
9) The average cost of capital is the appropriate rate to use when evaluating new
investments, even though the new investments may be in a higher risk class.
10) The value of a bond is inversely related to changes in the investor’s present required
rate of return.
11) The percent of sales forecasting method works well because it accounts for
economies of scale in assets such as inventory.