Answer Options:
a. True
b. False
Answer: b. False
Question: The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm.
Answer Options:
a. True
b. False
Answer: a. True
Question: A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.
Answer Options:
a. True
b. False
Answer: a. True
Question: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
Answer Options:
a. True
b. False
Answer: a. True
Question: The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.
Answer Options:
a. True
b. False
Answer: b. False
Question: Because money has time value, a cash sale is always more profitable than a credit sale.
Answer Options:
a. True
b. False
Answer: b. False
Question: An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.
Answer Options:
a. True
b. False
Answer: a. True
Question: The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.
Answer Options:
a. True
b. False
Answer: b. False
Question: The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
Answer Options:
a. True
b. False
Answer: b. False
Question: Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm’s profitability.
Answer Options:
a. True
b. False
Answer: a. True
Question: Accruals arise automatically from a firm’s operations and are “free” capital in the sense that no explicit interest must normally be paid on accrued liabilities.
Answer Options:
a. True
b. False
Answer: a. True
Question: The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income.
Answer Options:
a. True
b. False
Answer: b. False
Question: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
Answer Options:
a. True
b. False
Answer: a. True
Question: If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
Answer Options:
a. True
b. False
Answer: b. False
Question: The next-to-last line on the income statement shows the firm’s earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called “the bottom line.”
Answer Options:
a. True
b. False
Answer: b. False
Question: A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
Answer Options:
a. True
b. False
Answer: a. True