1) Long-term loan agreements always contain provisions, or covenants, that constrain
the firm’s future actions. Short-term credit agreements are just as restrictive in order to
protect the interest of the lender.
2) The slope of the SML is determined by investors’ aversion to risk. The greater the
average investor’s risk aversion, the steeper the SML.
3) Determining whether a firm’s financial position is improving or deteriorating requires
analyzing more than the ratios for a given year. Trend analysis is one method of
measuring changes in a firm’s performance over time.
4) If the IRR of normal Project X is greater than the IRR of mutually exclusive (and
also normal) Project Y, we can conclude that the firm should always select X rather than
Y if X has NPV > 0.
5) If the United States is running a deficit trade balance with China, then in a free
market we would expect the value of the Chinese yuan to depreciate against the U.S.
dollar.