True/False: Write T If The Statement Is True And F If It Is

Truefalse Write T If The Statement Is True And F If The Statemen

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. (Worth 0.25 points each or 2.5 points for this section)

1) For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

2) Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time.

3) The aggressive financing strategy is a strategy by which the firm finances its current assets with short-term funds and its fixed assets with long-term funds.

4) Combining negatively correlated assets can reduce the overall variability of returns.

5) A portfolio that combines two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

6) In general, exchange rate risk is easier to protect against than political risk.

7) In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

8) The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.

9) The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

10) Accounts payable result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser's liability to the seller.

Paper For Above instruction

The set of statements provided encompasses fundamental principles in finance and investment, covering areas such as interest calculations, portfolio management, financial strategies, and international risk assessment. These statements serve as an essential review of core concepts that underpin financial decision-making and risk management in both domestic and global contexts.

Firstly, it is important to recognize the anatomy of future value calculations. Statement 1 correctly posits that, given a positive interest rate, the future value (FV) of an initial sum increases over time. This is rooted in the principle of compound interest, where the accumulation of interest results in exponential growth as the period lengthens (Brealey, Myers, & Allen, 2020). As an example, investing $100 at an interest rate of 5% over ten years would generate a higher FV than over five years, emphasizing the importance of time in wealth accumulation.

Statement 2's assertion that future value is the valuation of a future amount at present by applying compound interest encapsulates the inverse relationship between present value and future value. It underscores the concept that a sum to be received in the future is worth less today, discounted at the appropriate rate—which is quantifiable through present value calculations (Fabozzi et al., 2019). Understanding this relationship is critical for evaluating investment opportunities and making informed financial decisions.

The third statement highlights a common financing strategy known as aggressive financing, where firms fund current assets with short-term debt and fixed assets with long-term debt. While this approach can enhance returns due to the mismatch in maturities, it increases liquidity and refinancing risks. As per the traditional view, aggressive strategies are riskier but may be advantageous when confidence in cash flows is high, and the market conditions are favorable (Ross, Westerfield, & Jaffe, 2021).

Portfolio diversification is a cornerstone of risk management, as highlighted in statement 4. Negative correlation among assets reduces overall portfolio volatility because declines in one asset may be offset by gains in another. Modern portfolio theory emphasizes combining assets with low or negative correlations to optimize the risk-return profile (Markowitz, 1952). For example, stocks and bonds tend to have different responses to economic events, which helps stabilize total returns.

Statement 5 accentuates the limitation of portfolios with assets that are perfectly positively correlated: they cannot reduce risk below the level of the least risky asset. Diversification's benefits diminish when correlations approach one, and investors should consider assets with lower or negative correlations to achieve effective risk reduction (Elton & Gruber, 1995).

In international finance, exchange rate risk is often more manageable compared to political risk, as suggested in statement 6. Hedging instruments such as forward contracts and options allow firms to mitigate currency fluctuations relatively easily, whereas political risks involve unpredictable factors like expropriation or nationalization, making them harder to hedge effectively (Shapiro, 2017).

The selection of mutually exclusive projects with varying lifespans introduces the importance of the project duration, contradicting statement 7. When projects are not identical in duration, the timing of cash flows significantly impacts the decision-making process and valuation, especially for long-term projects (Ross, Westerfield, & Jaffe, 2021). Ignoring project durations can lead to suboptimal investment choices.

The EBIT-EPS analysis often focuses on maximizing earnings per share rather than wealth maximization, as described in statement 8. While EPS is a useful measure, it may not account for the total value created for shareholders, especially when considering leverage, risk, and investment opportunities (Brealey et al., 2020).

Statement 9 accurately identifies principal risks associated with international cash flows. Business and financial risks stem from operational and market variables; inflation and exchange rate risks result from macroeconomic changes; and political risks arise from government actions or instability—each requiring different mitigation strategies (Shapiro, 2017).

Finally, account payable liabilities originate from routine purchases of inventory or services where formal promissory notes are not required, meaning liability recognition is based on contractual obligations without specific debt documentation, confirming statement 10.

Conclusion

Understanding these foundational principles allows financial professionals to make informed investment, funding, and risk management decisions. Recognizing the interplay between time value of money, diversification, and international risks is essential in crafting strategies that optimize returns while mitigating exposure to adverse factors.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance. McGraw-Hill Education.
• Elton, E. J., & Gruber, M. J. (1995). Modern Portfolio Theory and Investment Analysis. Wiley.
• Fabozzi, F. J., Frentzas, N., & Bloomberg, L. (2019). Foundations of Financial Markets and Institutions. Pearson.
• Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
• Ross, S. A., Westerfield, R., & Jaffe, J. (2021). Corporate Finance. McGraw-Hill Education.
• Shapiro, A. C. (2017). Multinational Financial Management. Wiley.