1) Three of the most common options that can add value to a capital budgeting project
are the option to delay the project, the option to expand the project, and the option to
abandon the project.
2) Operating return on assets is equal to the operating profit margin times total asset
turnover.
3) The hedging principle involves the use of hedge funds to manage the firm’s working
capital.
4) When Firm X makes the decision to pay dividends, they also make the decision not
to reinvest the cash in the firm.
5) According to the CAPM, for each unit of Beta an asset’s required rate of return
increases by the market’s return.
6) A company’s cost of capital is equal to a weighted average of its investors’ required
returns.
7) A bond with a coupon rate of 8% will also have a yield to maturity of 8%.
8) Financial risk applies to both the additional variability in earnings available to
common shareholders and the additional chance of insolvency caused by the use of
financial leverage.
9) Investments in capital markets in foreign countries are motivated by the desire to
earn higher returns and reduce risk through international diversification.
10) One weakness of the times interest earned ratio is that it includes only the annual
interest expense as a finance expense and ignores other financing items such as lease
payments that must be paid.
11) How managers choose to finance the business does not affect the rate of return to
shareholders because the rate of return is based on how the company uses the assets it
has, not whether or not they paid for the assets with debt or equity.
12) It is commonly accepted that the industry average for a ratio is the ideal goal for a
financial manager to achieve.
13) The annual cash budget not only shows the amount of financing needed for the
year, but also when the funds will be needed.
14) Two advantages of financing with current liabilities are flexibility and lower interest
cost.
15) In a replacement decision, the initial outlay is equal to the cost of the new asset less
the reduction in depreciation from elimination of the old asset.
16) A major source of long-term capital overseas is in the Eurocurrency market.