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2. Time-value of money is based on the belief that a dollar that will be
received at some future date is worth more than a dollar today.
3. Holders of equity have claims on both income and assets that are
secondary to the claims of creditors.
4. The possibility that the issuer of a bond will not pay the contractual
interest or principal payments as scheduled is called maturity risk.
5. The breakeven point in dollars can be computed by dividing the
contribution margin into the fixed operating costs.
Multiple-choice (1point each)
6. The ________ is the extent of an asset's risk. It is found by subtracting
the pessimistic outcome from the optimistic outcome
7. ________ measure(s) the risk of a capital budgeting project by
estimating the NPVs associated with the optimistic, most likely, and
pessimistic cash flow estimates
8. If a firm uses an aggressive financing strategy,
9. The two major sources of short-term financing are
10. At the operating breakeven point, ________ equals zero.
Problems (show your work)
(1 Point)
11. Xiao Li wishes to accumulate $50,000 by the end of 10 years by
making equal annual end-of-year deposits over the next 10 years. If Xiao