1) The market price of a firm’s common stock equals the sum of all equity accounts as
reported in its balance sheet (common stock + paid-in capital + retained earnings)
divided by the number of shares outstanding.
2) The chief financial officer (CFO) is responsible for overseeing financial planning,
corporate strategic planning, and controlling the firm’s cash flow.
3) Lock-box arrangements yield benefits for all companies regardless of the size of
sales or customer remittance checks.
4) Ratios of almost all companies are easily comparable because all public companies
prepare their financial reports based upon generally accepted accounting principles.
5) The market value weights are preferred when calculating a firm’s weighted average
cost of capital.
6) A firm’s stock price may decline by less than 50% after a 2 for 1 stock split if the
reduction in price moves the stock into its optimal trading range.
7) The control hypothesis suggests that shareholders prefer an increase in the firm’s debt
in order to reduce the agency costs associated with excessive free cash flow.
8) Safety stock may be included into the EOQ model to alleviate problems caused by
violation of the assumptions of constant demand and instantaneous delivery.
9) An investor who requires an 18% percent return for a stock that pays no dividends
and requires a 12% return for a stock that pays its entire return from dividends may be
following the bird-in-the-hand dividend theory.
10) 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.
11) The internal rate of return is the discount rate that equates the present value of the
project’s free cash flows with the project’s initial cash outlay.
12) A bond with a par value of $1,000 is listed in the Wall Street Journal at a price of
100.50. This bond is selling for $1,005.
13) A firm’s dividend policy includes two basic components: the dividend payout ratio
and dividend stability.
14) Corporations that are heavily committed to investments in fixed assets that are
expected to produce cash flow over many years generally favor long-term debt to the
extent that they borrow.
15) Fixed assets are assets whose balances will remain the same throughout the year.
16) If a firm currently has excess capacity, then using the percent of sales method to
forecast its fixed asset balance will likely result in an overestimate of the fixed asset
balance and an inflated amount of discretionary financing needed.
17) Other things equal, higher net profit margins mean higher discretionary financing
needed.
18) Transactions in common stock occur in the money market, due to the large amount
of money involved in such transactions.