Problem 1: For the risk-seeking manager, no change in return would be required for an increase in risk.
Problem 2: For the risk-averse manager, the required return decreases for an increase in risk.
Problem 3: For the risk-indifferent manager, no change in return would be required for an increase in risk.
Problem 4: Most managers are risk-averse, since for a given increase in risk they require an increase in return.
Problem 5: The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.
Problem 6: The real utility of the coefficient of variation is in comparing assets that have equal expected returns.
Problem 7: An investment that guarantees its holder $100 return and another investment that earns $0 or $200 with equal chances (i.e., an average of $100) over the same period have equal risk.
Problem 8: Real rate of interest is the actual rate of interest charged by the suppliers of funds and paid by the demanders.
Problem 9: The longer the maturity of a Treasury (or any other) security, the smaller the interest rate risk.
Problem 10: A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
Problem 11: The nominal rate of interest is the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders have no liquidity preference and all outcomes are certain.
Problem 12: An inverted yield curve is an upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
Problem 13: Although Treasury securities have no risk of default or illiquidity, they do suffer from "maturity risk"-the risk that interest rates will change in the future and thereby impact longer maturities more than shorter maturities.
Problem 14: Liquidity preference theory suggests that for any given issuer, long-term interest rates tend to be higher than short-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer-term securities; causes the yield curve to be upward-sloping.
Problem 15: Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
Problem 16: The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.
Problem 17: Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.
Problem 18: Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid in additional shares of preferred stock prior to the payment of dividends to common stockholders.
Problem 19: Preferred stock is often considered a quasi-debt since it yields a fixed periodic payment.
Problem 20: The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.
Problem 21: Cumulative preferred stocks are not preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.
Problem 22: The breakeven cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.
Problem 23: Projects with a small chance of being acceptable and a broad range of expected cash flows are more risky than projects having a high chance of being acceptable and a narrow range of expected cash flows.
Problem 24: In capital budgeting, risk refers to the chance that a project has a high degree of variability of the initial investment.
Problem 25: Sensitivity analysis is a behavioral approach that uses a number of possible values for a given variable to assess its impact on a firm's return.
Problem 26: Sensitivity analysis is a statistically based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.
Problem 27: Scenario analysis is an approach that uses a number of possible values for a given variable in order to assess its impact on a firm's return.
Problem 28: Simulation is an approach that evaluates the impact on return of simultaneous changes in a number of variables.
Problem 29: Generally, increases in leverage result in increased return and risk.
Problem 30: Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.
Problem 31: The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.
Problem 32: Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.
Problem 33: Operating leverage is concerned with the relationship between the firm's sales revenue and its operating expenses.
Problem 34: Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.
Problem 35: Total leverage is concerned with the relationship between the firm's sales revenue and its common stock earnings per share.
Problem 36: A firm that is unable to pay its bills as they come due is technically insolvent.
Problem 37: The short-term financial management is concerned with management of the firm's current assets and current liabilities.
Problem 38: In the short-term financial management, the goal is to manage each of the firm's current assets and current liabilities in order to achieve a balance between profitability and risk that contributes to the firm's value.
Problem 39: Working capital represents the portion of the firm's investment that circulates from one form to another in the long-term conduct of business.
Problem 40: In general, the more a firm's current assets cover its short-term obligations, the better able it will be to pay its bills as they come due.
Problem 41: The more predictable its cash inflows, the more net working capital a firm needs.
Problem 42: As the ratio of current assets to total assets increases, the firm's risk increases.