Advanced Corporate Finance
Pre-Test Questions
Course Introduction
Advanced Corporate Finance explores the complex financial decisions facing modern corporations, focusing on valuation, capital structure, payout policy, mergers and acquisitions, risk management, and corporate governance. Students will analyze theoretical frameworks and apply quantitative techniques to real-world cases, developing the ability to assess investment opportunities, optimize financial strategies, and understand the interplay between corporate actions and capital markets. Emphasis is placed on critical thinking, financial modeling, and the evaluation of current research and trends in corporate finance.
Recommended Textbook
Corporate Finance 7th Canadian Edition by Jaffe
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1515 Verified Questions
1515 Flashcards
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) If a firm has debt outstanding the contingent claim of an equity shareholder is:
A) equal to the payment to the debtholders
B) equal to the firm cash flows minus the fixed debt payment if the residual cash flows are positive
C) equal to the firm cash flows minus the fixed debt payment whether positive or negative
D) equal to the debt payment plus the residual cash flow of the firm.
Answer: B
Q2) The Splitz Corporation has borrowed $5 million in debt with a promise to repay $5.5 million in one year.The corporation had 10 million shares outstanding worth $2 each at the time of the borrowing.Splitz earns $6 million during the year.What is the debtholder's contingent claim; how much do the debtholders receive; and,how much do the equity holders receive?
A) 5.5; 6; 20.
B) 5; 5.5; 0.
C) 5; 5.5; 20.
D) 5.5; 5.5; .5.
Answer: D
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Page 3
Chapter 2: Accounting Statements and Cash Flow
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Sample Questions
Q1) Noncash items refer to:
A) the credit sales of a firm.
B) the accounts payable of a firm.
C) the costs incurred for the purchase of intangible fixed assets.
D) expenses charged against revenues that do not directly affect cash flow.
E) all accounts on the Statement of Financial Position other than cash on hand.
Answer: D
Q2) The primary distinction between tangible and intangible assets is that:
A) intangible assets have a physical existence while tangible assets do not.
B) intangible assets do not have a physical existence while tangible assets do.
C) since tangible assets do not have a physical existence they do not show up on the balance sheet.
D) since intangible assets do not have a physical existence they do not show up on the balance sheet.
Answer: B
Q3) The Simmons Company reported retained earnings in 2013 of $4750.In 2014,Simmons earned $1120 before taxes and paid a dividend of $730.Simmon's tax rate is 34%.What is Simmons' retained earnings?
Answer: $4750 + $1120(1 - .34)- $730 = $4759.20
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Page 4
Chapter 3: Financial Planning and Growth
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Sample Questions
Q1) The process of combining smaller projects into a large budget for planning purposes is called:
A) aggregation.
B) consolidation.
C) accumulation.
D) capital allocation.
Answer: A
Q2) Financial planning models frequently assume that many variables are proportional to:
A) economic growth.
B) industry growth.
C) interest rates.
D) company sales.
Answer: D
Q3) Assuming the following ratios are constant,what is the sustainable growth rate?
Answer: 11ea8884_9833_4980_a96f_4dae6e5f362d_TB5261_00 Growth Rate 11ea8884_9833_7091_a96f_53a432279411_TB5261_11
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) The first or basic principle of finance dictates that an individual will invest in a project if:
A) they are made better off in the financial markets.
B) they are unable to adjust their savings and consumption in the financial markets.
C) the project is at least as desirable as what is available in the financial markets.
D) the interest rate for borrowing and lending is not equal.
Q2) If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.How much will the current shareholders earn.?
Q3) The present value of future cash flows minus initial cost is called:
A) the future value of the project.
B) the net present value of the project.
C) the equivalent sum of the investment.
D) the initial investment risk equivalent value.
Q4) The financial market rate is 5%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)NPV = -42,000 + (46,900/1.05)= -
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Page 6
Chapter 5: The Time Value of Money
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Q1) Your aunt,in her will,left you the sum of $5,000 a year forever with payments starting immediately.However,the news is better.She has specified that the amount should grow at 5% per year to maintain purchasing power.Given an interest rate of 12%,what is the PV of the inheritance?
Q2) The discount rate is adjusted:
A) upward to reflect higher risk and to increase the future cash flows.
B) upward to reflect higher risk and to reduce the future cash flows.
C) downward to reflect higher risk and to increase the future cash flows.
D) downward to reflect higher risk and to reduce the future cash flows.
Q3) You have a sub-contracting job with a local manufacturing firm.Your agreement calls for annual payments of $50,000 for the next five years.At a discount rate of 12%,what is this job worth to you today?
A) $180,238.81
B) $201,867.47
C) $210,618.19
D) $223,162.50
E) $224,267.10
Q4) What is meant by "amortizing a loan"?
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Page 7
Chapter 6: How to Value Bonds and Stocks
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Sample Questions
Q1) Which of the following statements is true?
A) The spot rate is a weighted average of the yields to maturity.
B) The spot rate is always higher than the yield to maturity.
C) The yield to maturity is a weighted average of spot rates.
D) The yield to maturity is always higher than the spot rate.
Q2) A firm's value increases when it invests in projects that have:
A) a rate of return less than the discount rate.
B) a rate of return equal to the discount rate.
C) a rate of return greater than the discount rate.
D) a rate of return equal to or less than the discount rate.
Q3) The expectations hypothesis states that the forward rate over second period is:
A) set to the spot rate expected to prevail over the second period.
B) equal to the first period spot rate.
C) always greater than the spot rate in period one.
D) always greater than the period 3 forward rate.
Q4) In the above problem,the yield to maturity of the 2 year bond is:
A) 21%.
B) 18%.
C) 12%.
D) 11%.
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) You are considering a project with the following data: Internal rate of return 8.7%
Profitability ratio .98
Net present value -$393
Payback period 2.44 years
Required return 9.5%
Which one of the following is correct given this information?
A) The discount rate used in computing the net present value must have been less than 8.7%.
B) The discounted payback period will have to be less than 2.44 years.
C) The discount rate used to compute the profitability ratio was equal to the internal rate of return.
D) This project should be accepted based on the profitability ratio.
E) This project should be rejected based on the internal rate of return.
Q2) The profitability index is the ratio of:
A) average net income to average investment.
B) internal rate of return to current market interest rate.
C) net present value of cash flows to internal rate of return.
D) net present value of cash flows to average accounting return.
E) present value of cash flows to initial investment cost.
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Chapter 8: Net Present Value and Capital Budgeting
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Sample Questions
Q1) A project's operating cash flow will increase when:
A) the depreciation expense increases.
B) the sales projections are lowered.
C) the interest expense is lowered.
D) the net working capital requirement increases.
E) the earnings before interest and taxes decreases.
Q2) A firm purchases a new truck for $30,000.It will be depreciated over 5 years at $6,000 per year.If the tax rate is 30% what is the time 0 cash flow?
A) -$6,000
B) -$21,000
C) -$30,000
D) -$28,200
Q3) One of the key differences between corporate finance and financial accounting courses is:
A) the focus on cash flows instead of earnings.
B) the focus on marginal tax rates versus average tax rates.
C) the role of total income flow versus incremental flows.
D) the focus on corporate avarice versus stewardship.
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Sample Questions
Q1) In the present-value break-even the EAC is used to:
A) determine the opportunity cost of investment.
B) allocate depreciation over the life of the project.
C) allocate the initial investment at its opportunity cost over the life of the project.
D) determine the contribution margin to fixed costs.
Q2) Including the option to expand in your project analysis will tend to:
A) extend the duration of a project but not affect the project's net present value.
B) increase the net present value of a project.
C) decrease the net present value of a project.
D) have no effect on either a project's cash flows or its net present value.
Q3) As the degree of sensitivity of a project to a single variable rises,the:
A) lower the forecasting risk of the project.
B) smaller the range of possible outcomes given a pre-defined range of values for the input.
C) more attention management should place on accurately forecasting the future value of that variable.
D) lower the maximum potential value of the project.
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) If the average return on common stocks was 13.3%,the average Treasury bill rate was 3.8%,and the average inflation rate was 3.2% what would be the expected nominal and approximate real market return for common stocks if the Treasury bill rate is expected to be 5.5% and the inflation rate is 4.1%?
A) 9.5%, 13.6%.
B) 13.6%, 9.5%.
C) 15.90%, 10.9%.
D) 14.6%, 9.1%.
Q2) You bought 100 shares of stock at $20 each.At the end of the year,you received a total of $400 in dividends,and your stock was worth $2,500 total.What was your total dollar return?
A) $900.
B) $500.
C) $400.
D) $2,500.
Q3) Capital gains are defined as:
A) the change in the firm's dividend payout over year.
B) assets sold at prices greater than their purchasing price.
C) assets sold at prices less than their purchasing price.
D) taxes collected by Federal but not by State governments.
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Sample Questions
Q1) The standard deviation of a portfolio will tend to increase when:
A) a risky asset in the portfolio is replaced with Treasury bills.
B) short-term bonds are replaced with Treasury Bills.
C) the portfolio concentration in a single cyclical industry increases.
D) the weights of the various diverse securities become more evenly distributed.
Q2) When stocks with the same expected return are combined into a portfolio:
A) the expected return of the portfolio is less than the average expected return of the stocks.
B) the expected return of the portfolio is greater than the average expected return of the stocks.
C) the expected return of the portfolio is equal to the average expected return of the stocks.
D) there is no relationship between the expected return of the portfolio and the expected return of the stocks.
Q3) The means of IS and DS are:
A) 4.4%; 4.6%.
B) 5.5%; 5.75%.
C) 10%; 6%.
D) 4%; 6%.
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Page 13
Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?
A) The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.
B) The price will change little, since the impact is primarily in the future.
C) The price will change little, since the market considers this information unimportant.
D) The price will change little, since the market considers this information untrue.
E) The price will change little, since the market has already included this information in the security's price.
Q2) To estimate the cost of equity capital for a firm using APT or CAPM,it is necessary to have:
A) company financial leverage, beta, and the market risk premium.
B) company financial leverage, beta, and the risk-free rate.
C) beta, company financial leverage, and the industry beta.
D) beta, company financial leverage, and the market risk premium.
E) beta, the risk-free rate, and the market risk premium.
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Page 14
Chapter 13: Risk,return,and Capital Budgeting
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Sample Questions
Q1) A firm with cyclical earnings is characterized by:
A) revenue patterns that vary with the business cycle.
B) high levels of debt in their capital structures.
C) high fixed costs.
D) high price per unit.
E) low contribution margins.
Q2) Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:
A) low betas.
B) high betas.
C) zero betas.
D) negative betas.
Q3) When using the cost of debt,the relevant number is the:
A) pre-tax cost of debt since most corporations pay taxes at the same tax rate.
B) pre-tax cost of debt since it is the actual rate the firm is paying bondholders.
C) post-tax cost of debt since dividends are tax deductible.
D) post-tax cost of debt since interest is tax deductible.
Q4) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Sample Questions
Q1) According to the efficient market hypothesis,financial markets fluctuate daily because they:
A) are inefficient.
B) slowly react to new information.
C) are continually reacting to new information.
D) offer tremendous arbitrage opportunities.
Q2) If the market is weak form efficient:
A) semistrong form efficiency must not hold.
B) strong form efficiency must hold.
C) semistrong form efficiency may hold.
D) semistrong form efficiency must hold.
Q3) The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.
A) weak
B) strong
C) semistrong
Q4) Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only about 15%.Is your cousin's performance a violation of market efficiency?
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Long-term debt is sometimes called:
A) secured debt.
B) subordinated debt.
C) funded debt.
D) capital debt.
Q2) Financial deficits are created when:
A) profits and retained earnings are greater than the capital-spending requirement.
B) profits and retained earnings are less than the capital-spending requirement.
C) profits and retained earnings are equal to the capital-spending requirement.
D) profits and retained earnings are greater than or equal to the capital-spending requirement.
Q3) Technically speaking,a long-term corporate debt offering that features a specific attachment to property is generally called a:
A) debenture.
B) bond.
C) long-term liability.
D) preferred liability.
Q4) From this information,calculate Enstat's book value per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) MM Proposition I with taxes supports the theory that:
A) there is a positive linear relationship between the amount of debt in a levered firm and its value.
B) the value of a firm is inversely related to the amount of leverage used by the firm.
C) the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
D) a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
E) a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.
Q2) How many shares will be purchased?
A) 93.75 shares.
B) 66.67 shares.
C) 50.00 shares.
D) 83.33 shares.
Q3) Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Issuing debt instead of new equity in a closely held firm more likely:
A) causes the owners-managers to work less hard and shirk their duties as they have less capital at risk.
B) causes the owner-managers to consume more perquisites because the cost is passed to the debtholders.
C) causes both more shirking and perquisite consumption since the government provides a tax shield on debt.
D) cause agency costs to fall as owner-managers do not need to worry about other shareholders.
E) cause the owner-manager to reduce shirking and perquisite consumption as the excess cashflow must be used to meet debt payments.
Q2) Conflicts of interest between stockholders and bondholders are known as:
A) trustee costs.
B) financial distress costs.
C) dealer costs.
D) agency costs.
E) underwriting costs.
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19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The value of a project to a levered firm is equal to the unlevered firm project value plus the:
A) costs of financial distress, minus floatation costs, plus taxes, plus debt financing subsidies.
B) tax subsidies, minus floatation costs, plus debt financing subsidies.
C) tax subsidies, plus floatation costs, minus financial distress costs, plus debt financing subsidies.
D) taxes paid, minus floatation costs, plus financial distress costs, plus debt financing subsidies.
Q2) The all equity cost of capital for flat Rock Grinding is 15% and the company has set a target debt to value ratio of 50%.The current cost of debt for a firm of this risk is 11% and the corporate tax rate is 34%.Calculate the WACC for the Flat Rock Grinding Corporation.
Q3) The acronym APV stands for:
A) applied present value.
B) all purpose variable.
C) accepted project verified.
D) adjusted present value.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) If stockholders care about taxes,then stocks should attract clienteles based on dividend yields.Surveys support this by showing that the highest dividend yield stocks are held by investors in the:
A) highest tax bracket.
B) average tax bracket.
C) lowest tax bracket.
D) slightly higher than average tax bracket.
Q2) The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:
A) information content effect.
B) clientele effect.
C) efficient markets hypothesis.
D) MM Proposition I.
Q3) On the date of record the stock price drop is:
A) a full adjustment for the dividend payment.
B) a partial adjustment for the dividend payment because of the tax effect.
C) zero because it happened on ex-dividend date.
D) zero because it happens on payment date.
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Chapter 20: Issuing Equity Securities to the Public
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Q1) Empirical evidence suggests that upon announcement of a new equity issue,current stock prices generally:
A) drop, perhaps because the new issue reflects management's view that common stock is currently overpriced.
B) remain about the same since an efficient market anticipates a new equity issue.
C) increase, perhaps because the issues are associated with positive NPV projects.
D) increase, because the market supply is always less than demand.
E) increase, because underwriters exercise their green shoe option.
Q2) In a best-efforts offering the investment banker makes their money primarily by:
A) earning the spread between the buying and offering price.
B) earning a commission on each share sold.
C) earning the discount between the buying and offering price.
D) charging a flat fee for all services.
Q3) If the Ex-Rights price were set at $7.90,would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
Q4) What are venture capitalists and what is their role in raising capital for firms?
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Page 22
Chapter 21: Long-Term Debt
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Q1) Zeros are bonds that:
A) have zero maturity.
B) have zero call dates.
C) have zero sinking funds.
D) have zero coupon rates.
Q2) A public issue of bonds approved by the board of directors (and shareholders if necessary)can be sold when:
A) the registration statement has been filed with the OSC and the syndicate is set.
B) the investment banker's have accepted the offer for sale and have held it for 20 days from announcement.
C) the registration statement has been filed with the OSC, approved and the 20 day waiting period has elapsed.
D) the role of the trustee has been determined and an indenture has been written and signed.
Q3) If the bond is priced at $1,000,what is the cost to the firm of the call provision?
Q4) If the bond sells for par today,what is the coupon?
Q5) If the bond sells for par today,what is the coupon?
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Page 23
Chapter 22: Leasing
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Q1) Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000:
A) capital leases do not have to be put on the balance sheet only financial leases do.
B) Asset-Machinery $700,000; Liabilities-Long term debt $700,000 because of debt displacement.
C) Asset-Assets under capital lease $700,000; Liabilities-Obligations under capital lease $700,000.
D) Assets-Assets under capital lease $700,000; Liabilities-Long term debt $700,000 because of debt displacement.
Q2) This lease would be classified as a(n):
A) operating lease because the asset will be obsolete.
B) operating lease because there is not amortization.
C) leveraged lease because it is being financed.
D) financial lease because the lease life is greater than 75% of the economic life.
E) sale and leaseback because the company gets full use of the asset.
Q3) What are the cashflows in years 1 through 8?
Q4) What is the discount rate to be used?
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Which one of the following statements correctly describes your situation as the owner of an American call option?
A) You are obligated to buy at a set price at any time up to and including the expiration date.
B) You have the right to sell at a set price at any time up to and including the expiration date.
C) You have the right to buy at a set price only on the expiration date.
D) You are obligated to sell at a set price if the option is exercised.
E) You have the right to buy at a set price at any time up to and including the expiration date.
Q2) An in-the-money put option is one that:
A) has an exercise price greater than the underlying stock price.
B) has an exercise price less than the underlying stock price.
C) has an exercise price equal to the underlying stock price.
D) should not be exercised at expiration.
E) should not be exercised at any time.
Q3) Explain how the value of a firm can be viewed as an option.How can the call and put views be resolved?
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) Why would the company pay the executive in options as opposed to salary?
Q2) The Alger Co.operates a bauxite mine.The mine can produce 800,000 tons a year.The mine is currently closed and will cost $12 million to open it.When should the mine be opened?
A) At a net bauxite price after extraction/production costs equal to $15.00 per ton before discounting and valuing extended options.
B) At a net bauxite price after extraction/production costs greater than $15.00 per ton before discounting and valuing extended options.
C) If the mineable bauxite is available then the mine should be open because the cash breakeven is less than $15.00 per ton.
D) If mineable bauxite exists at any price close to $15.00 per ton if bauxite prices are high volatile.
Q3) Executives cannot exercise their options for a fixed period of time,this is the:
A) investing period.
B) freeze-out period.
C) valuation period.
D) guaranteed growth period.
E) strike period.
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Chapter 25: Warrants and Convertibles
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Q1) A convertible bond is selling for $800.It has 10 years to maturity,a $1000 face value,and a 10% coupon.Similar nonconvertible bonds are priced to yield 14%.The conversion price is $50 per share.The stock currently sells for $31.375 per share.The conversion premium is:
A) 37.25%.
B) 43.33%.
C) 59.36%.
D) 66.67%.
Q2) Illustrate and explain how a convertible bond value is based on both debt and equity value.What is the option value?
Q3) What is the conversion price?
A) $25.00
B) $33.33
C) $35.00
D) $1,000.00
Q4) What is the conversion value of the bond?
A) $25
B) $770
C) $40
D) $1000
27
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Chapter 26: Derivatives and Hedging Risk
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Q1) In the practical use of credit default swaps,there:
A) is no organized exchange or template for the agreement.
B) is an organized exchange or template for the agreement.
C) are laws making them illegal in Canada.
D) are limits to the amount of borrowing of both parties.
Q2) A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?
A) 5 contracts.
B) 50 contracts.
C) 500 contracts.
D) 5,000 contracts.
E) 50,000 contracts.
Q3) Duration of a coupon paying bond with same maturity is:
A) equal to its number of payments.
B) less than a zero coupon bond.
C) equal to the zero coupon bond.
D) equal to its maturity.
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 27: Short-Term Finance and Planning
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Q1) A firm currently has a 36 day cash cycle.Assume that the firm changes its operations such that it decreases its receivables period by 4 days,increases its inventory period by 1 day and decreases its payables period by 2 days.What will the length of the cash cycle be after these changes?
A) 31 days
B) 33 days
C) 35 days
D) 37 days
E) 38 days
Q2) The accounts payable deferred period for 2014 is (use average payables):
A) 10.39.
B) 9.02.
C) 8.94.
D) 7.96.
E) 7.75.
Q3) Assets are classified as current or long term based on:
A) age of the asset.
B) whether the asset is a physical good or not.
C) the liquidity of the asset.
D) whether the asset is based on fair market value or not.
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Chapter 28: Cash Management
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Q1) The target cash balance is reached when:
A) the interest on any marketable security throw-off is maximized.
B) the interest foregone from not investing in an equivalent amount of Treasury bills is minimized.
C) the value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
D) the liquidity value is greater than interest foregone on an equivalent amount of Treasury bills.
Q2) Your firm receives 10 checks per month.Of these,6 are for $1,000 and 4 are for $500.The delay for the $1,000 checks is 5 days,and the $500 checks are delayed 8 days.
Q3) If a firm has achieved its target cash balance the net present value is:
A) positive because the cash balance is positive.
B) zero because increasing the cash balance increases the interest cost.
C) negative because the cash balance has a financing cost.
D) positive because decreasing the cash decreases the cost of illiquidity.
Q4) Your firm receives 40 checks per month.Of these,10 are for $1,200 and 30 are for $500.The delay for the $1,200 checks is 4 days; the $500 checks are delayed 6 days.What is the weighted average delay?
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Page 30
Chapter 29: Credit Management
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Q1) Which of the following statements is not true?
A) An aging schedule shows only overdue accounts.
B) An aging schedule shows the probability that a 67-day account will be unpaid when it is a 68-day account.
C) Average collection period data is somewhat flawed if sales are seasonal.
D) Collection efforts may involve legal action.
E) Investments in accounts receivable equal average daily sales times average collection period.
Q2) When credit is granted to another firm this gives rise to a(n):
A) accounts receivable and is called a consumer credit.
B) credit due and is called an installment note.
C) accounts receivable and is called trade credit.
D) trade receivable and is called an installment note.
Q3) Factoring refers to:
A) determining the aging schedule of the firm's accounts receivable.
B) the sale of a firm's accounts receivable to a financial institution.
C) the determination of the average collection period.
D) scoring a customer based on the 5 C's of credit.
Q4) The Rapid Roller Co.offers terms of 3/15 net 45.The aging schedule for their customers is as follows:
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Chapter 30: Mergers and Acquisitions
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Q1) Compensation paid to top management in the event of a takeover is called a:
A) poison pill.
B) golden parachute.
C) self-tender.
D) buyout.
Q2) One company wishes to acquire another.Which of the following forms of acquisition does not require a formal vote by the shareholders of the acquired firm?
A) Merger
B) Acquisition of stock
C) Acquisition of assets
D) Consolidation
Q3) Chucky Chester Inc.takes over Billy Bob Burgers from Billy himself for $1 million in cold cash.Billy started the company years ago on an investment of $50,000 in plant and equipment which has long been paid off.The machinery has no accounting value today.Consider the takeover price as fair market value for the equipment.Calculate the tax consequences of the merger,assuming that Chucky Chester decides not to write-up the machinery.Both Billy and Chucky are in the 28% tax bracket.
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Chapter 31: Financial Distress
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Q1) Which of the following statements about private workouts of financial distress is NOT true?
A) Senior debt is replaced with junior debt.
B) Debt may be replaced by equity.
C) Private workouts account for about three quarters of all reorganizations.
D) Top management is dismissed or take pay reduction many times.
Q2) How much should the secured creditors receive?
A) $1,500,000
B) $2,000,000
C) $2,300,000
D) $3,000,000
Q3) Bankruptcy reorganizations are used by management to:
A) forestall the inevitable liquidation in all cases.
B) provide time to turn the business around.
C) allow the courts' time to set up an administrative structure.
Q4) How much should the unsecured creditors receive?
A) $300,000
B) $500,000
C) $1,000,000
D) $2,300,000
Page 33
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Chapter 32: International Corporate Finance
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Q1) Financial Accounting Standard Statement Number 52 requires that most assets and liabilities be translated at the current exchange rate.Gains and losses are recorded:
A) against shareholder's equity.
B) as a normal part of income.
C) as an extraordinary item against income.
D) as a footnote to the statements.
E) only on the income tax statements.
Q2) "A commodity costs the same regardless of what currency is used to purchase it." This is a statement of:
A) the law of one price (LOP).
B) relative purchasing power parity (RPPP).
C) the first principle of international finance.
D) the conservation of currency value.
Q3) The two terms Purchasing Power Parity (PPP)and Relative Purchasing Power Parity (RPPP)are similar but not synonymous.Explain these two,their differences and why differences in exchange rates in the market may vary from the values implied by PPP or RPPP.
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