1) The hedging principle implies that permanent asset investments not financed by
spontaneous sources should be financed with permanent sources, and temporary
investments not financed by spontaneous sources should be financed with temporary
sources.
2) Most major countries in the world have agreed on fixed exchange rates in order to
facilitate international trade.
3) The benefits derived from reduced mail and processing floats must be greater than
the bank fees associated with a lockbox system or else a firm would be better off
without the lockbox.
4) The rate of return available on the next best investment alternative for the saver
refers to the opportunity cost of funds.
5) When Firm X makes the decision to pay dividends, they also make the decision not
to reinvest the cash in the firm.
6) Common stockholders’ equity equals common stock issued minus treasury stock.
7) Earnings before taxes, or taxable income, is equal to operating income minus
financing costs.
8) The existence of taxes can directly affect a common shareholder’s preference for
capital gains or dividend income.
9) The mutually exclusive project with the highest positive NPV will also have the
highest IRR.
10) A firm increases the risks of insolvency by keeping relatively large amounts of
money tied up in marketable securities.
11) Beta represents the average movement of a company’s stock returns in response to a
movement in the market’s returns.
12) The expected rate of return implied by a given market price equals the required rate
of return for investors at the margin.
13) Notes payable is a spontaneous source of financing.
14) A call provision allows the issuing firm the opportunity to avoid rising interest rates
by calling investors and asking for more cash.
15) An EBIT-EPS analysis allows the decision maker to visualize the impact of
different financing plans on EPS over a range of EBIT levels.
16) Overhead costs are sometimes incremental cash flows and other times are
considered sunk costs.
17) The sole proprietorship has no legal business structure separate from its owner.