Applied Corporate Finance
Final Exam
Course Introduction
Applied Corporate Finance explores the principles and practical applications of financial decision-making within corporations. The course examines key topics such as capital structure, cost of capital, dividend policy, risk management, mergers and acquisitions, and valuation techniques. Students learn to analyze real-world financial data, evaluate investment opportunities, and implement strategies for maximizing shareholder value. Through case studies and problem-solving exercises, the course emphasizes the use of financial theory to inform corporate finance decisions, preparing students for roles in corporate finance, banking, consulting, and financial management.
Recommended Textbook Corporate Finance 7th Canadian Edition by Jaffe
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Agency costs refer to:
A) the total dividends paid to stockholders over the lifetime of a firm.
B) the costs that result from default and bankruptcy of a firm.
C) corporate income subject to double taxation.
D) the costs of any conflicts of interest between stockholders and management.
E) the total interest paid to creditors over the lifetime of the firm.
Answer: D
Q2) Time preference refers to the fact that:
A) corporations match current assets with current liabilities to minimize the chance of bankruptcy.
B) corporations match both current and long-term assets with current and long-term liabilities to minimize the change of bankruptcy.
C) investors prefer current cash flows to future cash flows.
D) investors seek to time cash flows to minimize tax liabilities.
Answer: C
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Chapter 2: Accounting Statements and Cash Flow
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Q1) The cash flow of the firm is defined as the cash flow of the assets.This cash flow must be equal to:
A) cash flow to equity minus cash flow to debtholders.
B) cash flow to debtholders minus cash flow to equity.
C) cash flow from changes in working capital plus cash flow to equity.
D) cash flow to equity plus cash flow to debtholders.
Answer: D
Q2) The Lo-Gro Co.in 2014 had equity of $15 million,net income of $1,800,000 of which 60% was paid out as dividends.The sustainable growth rate for the Lo-Gro Co.is:
A) 0.48%.
B) 4.80%.
C) 0.72%.
D) 7.20%.
Answer: B
Q3) What is the change in the net working capital from 2013 to 2014?
Answer: ($7,310 - $2,570)- ($6,225 - $2,820)= $1,335
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Chapter 3: Financial Planning and Growth
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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) A firm wishes to maintain a growth rate of 12% per year and a dividend payout of 10%.The ratio of total assets to sales is constant at 1.5,and profit margin is 10%.What must be the debt-to-equity ratio?
A) 0.52
B) 0.67
C) 0.79
D) 0.84
Answer: C
Q3) A firm wishes to maintain a growth rate of 4% per year,a debt-to-equity ratio of .26,and a dividend payout of 40%.If the profit margin is 10%,and next year's sales are projected at $500,what is the total asset projection?
Answer: 11ea8884_9833_7093_a96f_ab88922ce4cb_TB5261_11 ; X = 975.00
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) One of the functions of financial intermediaries is to make sure the market clears.This means:
A) setting the appropriate interest rates.
B) recording the parties to the transactions.
C) making sure the total amount to be lent equals the total amount to be borrowed.
D) minimizing the spread between rates.
Q2) 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)= -
Q3) An individual has income of $15,000 in period 0 and $20,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,500 in period 1.The market interest rate is 8%.What is the maximum possible consumption in period 0 if the individual consumes $26,000 in period 1?
Q4) If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)
Q5) Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)
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Chapter 5: The Time Value of Money
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Q1) Joe,a freshman in college,needs $55,000 in 4 years to buy the car of his dreams.If his investments earn 6% interest per year,how much must he invest today to have that amount at graduation? If he invested once a year for four years beginning today until the end of the 4 years how much must he invest?
Q2) Find the present value of $5325.00 to be received in one period if the rate is 6.50%.
A) $5,000.00
B) $5,071.43
C) $5,671.13
D) $5,591.25
Q3) Which of the following amounts is closest to the end value of investing $7,500 for 2 1/2 years at an effective annual interest rate of 12.36%? Interest is compounded semiannually.
A) $7,531
B) $8,427
C) $9,818
D) $9,469
E) $10,122
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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Q1) A firm is known as a 'Cash Cow':
A) because it has several good growth opportunities.
B) because it pays out all of its non-growing earnings.
C) because dividends are growing at a rapid rate.
D) because the discount rate is extremely low.
Q2) Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.These dividends are expected to grow at a rate of 5% in the foreseeable future.The required rate of return is 11%.
A) $20.45
B) $21.48
C) $37.50
D) $39.38
E) $47.70
Q3) 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.
Q4) Given the following set of spot rates:
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Q2) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
Q3) Using the internal rate of return rule,a conventional project should be accepted if the internal rate of return is:
A) only equal to the current weighted average cost of capital.
B) greater than the current weighted average cost of capital.
C) less than the current weighted average cost of capital.
D) negative.
E) positive.
Q4) Which of the following does not characterize NPV?
A) NPV is the simplest of all investment rules.
B) NPV incorporates all relevant information.
C) NPV uses all of the project's cash flows.
D) NPV discounts all future cash flows.
Q5) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
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Chapter 8: Net Present Value and Capital Budgeting
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Q1) What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?
A) 12.00%
B) 2.00%
C) 12.35%
D) 1.90%
Q2) The value of a previously purchased building used by a proposed project is an example of a(n):
A) sunk cost.
B) opportunity cost.
C) erosion.
D) fixed cost.
Q3) You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n)_____ cost.
A) opportunity
B) fixed
C) incremental
D) sunk
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Q1) 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.
Q2) The Adept Co.is analyzing a proposed project.The company expects to sell 2,500 units,give or take 10%.The expected variable cost per unit is $8 and the expected fixed costs are $12,500 (including depreciation).Cost estimates are considered accurate within a plus or minus 5% range.The depreciation expense is $4,000.The sale price is estimated at $16 a unit,give or take 2%.The company bases its sensitivity analysis on the expected case scenario What is the amount of the fixed cost per unit under the pessimistic case scenario?
A) $4.55
B) $5.00
C) $5.83
D) $6.02
E) $6.55
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) List 2 shortcomings of using value at risk (VaR)as a risk management tool.
Q2) The Alpha stock you bought for $26.75 a year ago is now selling for $32.50.Alpha also paid you $2.25 in dividends.What would your dollar return be from this stock?
A) $7.75
B) $8.00
C) $8.25
D) $5.75
Q3) The average compound return earned per year over a multi-year period is called the _____ average return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
Q4) A stock has returns of 3%,18%,-24%,and 16% for the past four years.Based on this information,what is the 95% probability range for any one given year?
Q5) Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate?
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) The variances of IS and DS are:
A) .0145; .00038.
B) .011584; .000304.
C) .006454; .000154.
D) .0008068; .000193.
Q2) You want your portfolio beta to be 1.20.Currently,your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6.You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset.How much should you invest in the risk-free asset?
A) $0
B) $140
C) $200
D) $320
Q3) A portfolio will usually contain:
A) only one riskless asset.
B) only one risky asset.
C) two or more assets.
D) no assets.
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13
Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) The unexpected return on a security,U,is made up of:
A) market risk and systematic risk.
B) systematic risk and idiosyncratic risk.
C) idiosyncratic risk and unsystematic risk.
D) expected return and market risk.
E) expected return and idiosyncratic risk.
Q2) Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:
A) the expected part of the announcement.
B) market inefficiency.
C) the innovation or unexpected part of the announcement.
D) the systematic risk.
Q3) Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:
A) security betas explaining systematic factor relationships.
B) finding regularities and relations in past market data.
C) there being no true explanations of pricing relationships.
D) always being able to find the exception to the rule.
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Chapter 13: Risk,return,and Capital Budgeting
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Q1) If the CAPM is used to estimate the cost of equity capital the expected excess market return is equal to:
A) the return on the stock minus the risk-free rate.
B) the difference between the return on the market and the risk-free rate.
C) the beta times the market risk premium.
D) the beta times the risk-free rate.
E) the market rate of return.
Q2) The beta of a portfolio of the firm's debt and equity:
A) is equal to the sum of all the betas.
B) is equal to the sum of all the betas weighted by their market value weight.
C) is greater than the beta of each component.
D) is always less than zero.
Q3) Suppose that the Simmons Corporation's common stock has a beta of 1.6.If the risk-free rate is 5% and the market risk premium is 4%,the expected return for Simmons' common is:
A) 4.0%.
B) 5.0%.
C) 5.6%.
D) 10.6%.
E) 11.4%.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) If you excel in analyzing the future outlook of firms,you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.
A) weak
B) semistrong
C) strong
Q2) The Pan Fries Company just announced a new model of their cooker which will reduce cooking time and fat absorption.The price reaction of their stock is listed below.Calculate the abnormal return behavior,graph it and explain the behavior.
Q3) Under the concept of an efficient market a random walk in stock prices means that:
A) there is no driving force behind price changes.
B) technical analysts can predict future price movements to earn excess returns.
C) the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.
D) the unexplained portion of price change in one period that cannot be explained by expected return, can only be explained by the unexplained portion of price change in a prior period.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) If Enstat was to put their firm in place today the cost of the assets are estimated to be $9.5 million.The stock price is currently $120 per share and there is no debt outstanding.Calculate the market-to-book value and Tobin's Q ratio.How well is Enstat being managed.
Q2) Corporations try to create hybrid securities that look like equity but are called debt because:
A) bankruptcy costs are eliminated or reduced.
B) these securities have lower risk than debt.
C) both debt interest expense is tax deductible; and these securities have lower risk than debt.
D) both debt interest expense is tax deductible; and bankruptcy costs are eliminated.
Q3) If a group other than management solicits the authority to vote shares to replace management,a _____ is said to occur.
A) proxy fight
B) stockholder derivative action
C) tender offer
D) vote of confidence
Q4) From this information,calculate Enstat's book value per share.
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Page 17
Chapter 16: Capital Structure: Basic Concepts
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Q1) The Nantucket Nugget is unlevered and is valued at $640,000.Nantucket is currently deciding whether including debt in their capital structure would increase their value.The current cost of equity is 12%.Under consideration is issuing $300,000 in new debt with an 8% interest rate.Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue.There are currently 32,000 shares outstanding and their effective marginal tax bracket is zero.What will Nantucket's new WACC be?
Q2) In an EPS- EBIT graphical relationship,the slope of the debt ray is steeper than the equity ray.The debt ray has a lower intercept because:
A) more shares are outstanding for the same level of EBIT.
B) the break-even point is higher with debt.
C) a fixed interest charge must be paid even at low earnings.
D) the amount of interest per share has only a positive effect on the intercept.
E) the higher the interest rate the greater the slope.
Q3) The firm's capital structure refers to:
A) the way a firm invests its assets.
B) the amount of equity or capital in the firm.
C) the amount of dividends a firm pays.
D) the way in which a firm's assets are financed.
E) how much cash the firm holds.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) The possibility of bankruptcy has a negative effect on the value of the firm because:
A) increased bankruptcy risk lowers value.
B) reorganization is costless but risk is not.
C) a bankruptcy has real costs associated with it.
D) value enhancing strategies are no longer available.
Q2) Given a situation where the corporate tax rate is 34%,and the personal tax rate on dividends is 28%,what must the personal tax rate on interest be to achieve the Miller equilibrium?
Q3) The value of a firm in financial distress is diminished if the firm:
A) has no bankruptcy risk.
B) is declared solvent and does not undergo financial reorganization.
C) is a partnership.
D) both is declared bankrupt and proceeds to be liquidated; and is a partnership. E) both is declared bankrupt and proceeds to be liquidated; and is declared insolvent and undergoes financial reorganization.
Q4) Describe some of the sources of business risk and financial risk.Do financial decision makers have the ability to "trade off" one type of risk for the other?
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Page 19
Chapter 18: Valuation and Capital Budgeting for the
Levered
Firm
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Q1) The APV method is comprised of the all equity NPV of a project and the NPV of financing effects.The four side effects are:
A) tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress and cost of debt financing.
B) cost of issuing new securities, cost of financial distress, tax subsidy of debt and other subsidies to debt financing.
C) cost of issuing new securities, cost of financial distress, tax subsidy of dividends and cost of debt financing.
D) subsidy of financial distress, tax subsidy of debt, cost of other debt financing and cost of issuing new securities.
Q2) To calculate the adjusted present value,you:
A) multiply the additional effects by the all equity project value.
B) add the additional effects of financing to the all equity project value.
C) divide the project's cash flow by the risk-free rate.
D) divide the project's cash flow by the risk-adjusted rate.
E) add the risk-free rate to the market portfolio when B equals 1.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) If both dividends and capital gains are currently taxed at the same ordinary income tax rate,the effect of the tax is different because:
A) capital gains are actually taxed, while dividends are taxed on paper only.
B) dividends are actually taxed, while capital gains are taxed on paper only.
C) dividends are taxable when distributed while capital gains are deferred until the stock is sold.
D) capital gains are taxable when distributed while dividends are deferred until the stock is sold.
Q2) An investor is more likely to prefer a high dividend payout if a firm:
A) has high flotation costs.
B) has few, if any, positive net present value projects.
C) has lower tax rates than the investor.
D) has a stock price that is increasing rapidly.
E) offers high capital gains which are taxed at a favorable rate.
Q3) Which one of the following is an argument in favor of a low dividend policy?
A) the tax on capital gains is deferred until the gain is realized.
B) few, if any, positive net present value projects are available to the firm.
C) a preponderance of stockholders have minimal taxable income.
D) corporate tax rates exceed personal tax rates.
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Page 21
Chapter 20: Issuing Equity Securities to the Public
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Q1) The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital.There are currently 50 million shares outstanding with an estimated market price of $60 each.The corporate officers are debating whether to use a rights offering (with or without a standby underwriting)or have the issue fully underwritten.The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue.List and explain three advantages/disadvantages of each method.
Q2) Assuming everything else is constant,when a stock goes ex-rights its price should:
A) decrease since the investor who purchases the shares is losing an option.
B) increase since the corporation no longer has the right to force the stockholder to convert.
C) remain the same since an efficient market would anticipate this change.
D) increase since the investor who purchases the shares is gaining an option.
Q3) 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.
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22
Chapter 21: Long-Term Debt
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Q1) If the bond is priced at $1,000,what is the cost to the firm of the call provision?
Q2) What is the bond's value today if the coupon is set at $70?
Q3) The price of a $1,000 face value bond is usually quoted:
A) in dollars and cents.
B) in thousands of dollars.
C) in percentage of face.
D) in principal amount.
Q4) Most debentures are issued by _________ companies and are _______
A) utility and railroad; secured by a pledge on specific assets.
B) industrial and finance; unsecured general obligations.
C) utility and railroad; unsecured general obligations.
D) industrial and finance; secured by a pledge on specific assets.
Q5) The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:
A) a nonrecourse covenant.
B) a recourse covenant.
C) a negative covenant.
D) a positive covenant.
Q6) If the bond sells for par today,what is the coupon?
Page 23
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Chapter 22: Leasing
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Q1) If the lessor borrows much of the purchase price of a leased asset,the lease is called:
A) a leveraged lease.
B) a sale-and-leaseback.
C) a capital lease.
D) a nonrecourse lease.
Q2) The WACC is not used in the lease versus purchase decision because:
A) the WACC was used in the decision to acquire the asset, this is only a financing decision.
B) the WACC is used only when a lease alone is considered and not a lease versus purchase.
C) the WACC does not include the lease cost of capital and therefore should not be used.
D) tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.
Q3) What is the after-tax cash flow from leasing in year 0?
A) -$6,950
B) -$700
C) -$7,650
D) -$4,865
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Page 24
Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) A call gives the owner the right:
A) and the obligation to buy an asset at a given price.
B) and the obligation to sell an asset at a given price.
C) but not the obligation to buy an asset at a given price.
D) but not the obligation to sell an asset at a given price.
Q2) Explain how the value of a firm can be viewed as an option.How can the call and put views be resolved?
Q3) Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?
A) Both changes cause the price of the put option to decrease.
B) Both changes cause the price of the put option to increase.
C) The volatility normally will have a positive effect on the price of the put option, but the lower price of the stock will cause the price of the put option to increase.
D) The volatility normally will have a negative effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease.
E) Volatility has no direct effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease.
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Page 25
Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) Corporations by rewarding executives with large option positions:
A) cause the executives to hold highly undiversified portfolios.
B) put the firm in a risky position to pay off the options.
C) cause the value of the stock to fall because the options are theft.
D) are really valueless because most options are never exercised.
Q2) The CFO of NuValue was granted 1,000,000 options.The stock price at the time of the granting of the options was $20 and the options are at the money.The risk free rate was 4% and the options expire in 5 years.The variance on the stock is .05.What is the value of her options contract? If she had negotiated a larger salary and only 10,000 options,what would be the value of the options contract?
Q3) The risk-neutral probabilities for an asset,with a current value equal to the present value of future payoffs are:
A) given by the probability of each state occurring.
B) given by the value of the underlying asset under good news and the risk free rate.
C) given by the value of the underlying asset under good news and bad news.
D) given by the value of the underlying asset under good news, bad news, and the risk free rate.
Q4) Why would the company pay the executive in options as opposed to salary?
Page 26
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Chapter 25: Warrants and Convertibles
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Q1) Based on empirical studies,firms tend to call convertible bonds when the conversion value is:
A) less than the conversion price.
B) greater than the straight bond value.
C) greater than the call price.
D) less than the face value.
Q2) The exercise of warrants creates new shares which:
A) increases the total number of shares but does not affect share value.
B) increases the total number of shares which reduces the individual share value.
C) does not change the number of shares outstanding similar to options.
D) increases share value because cash is paid into the firm at the time of warrant exercise.
Q3) The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.The conversion ratio is:
A) 40.
B) 25.
C) 100.
D) 50
Q4) Why are warrants and convertibles issued?
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Chapter 26: Derivatives and Hedging Risk
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Q1) 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.
Q2) Duration of a pure discount bond:
A) is equal to its half-life.
B) is less than a zero coupon bond.
C) is equal to the liabilities hedged.
D) equal to its maturity.
Q3) What new asset duration will immunize the statement of financial positionif the duration of the liabilities are 1.111?
Q4) LIBOR stands for:
A) Luasanne Interest Basis Offered Rate
B) Libido Over Redline.
C) London Interbank Offered Rate.
D) London Interagency Overt Rate.
Q5) Calculate the duration of a 7-year $1,000 zero-coupon bond with a current price of $399.63 and a yield to maturity of 14%.
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Chapter 27: Short-Term Finance and Planning
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Q1) Flexible short term financial policies are not characterized by:
A) liberal credit policies.
B) large amounts of inventory held.
C) quick delivery services for customers.
D) high levels of production stoppages.
Q2) The accounts receivable turnover ratio for 2014 is (use average accounts receivable):
A) 2.88.
B) 21.35.
C) 15.43.
D) 29.53.
E) 34.58.
Q3) The cash cycle for 2014 is:
A) 140.27 days.
B) 50.71 days.
C) 94.55 days.
D) 81.65 days.
E) 98.74 days.
Q4) Restrictive short-term financial policies regarding current asset management include three basic actions.List and briefly describe each action.
Page 29
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Chapter 28: Cash Management
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Q1) Firms would need to hold zero cash when:
A) transactions related needs are greater than cash inflows.
B) transactions related needs are less than cash inflows.
C) transactions related needs are not perfectly synchronized with cash inflows.
D) transactions related needs are perfectly synchronized with cash inflows.
Q2) The most common cash management technique used to speed up collections is:
A) concentration banking.
B) wire transfers.
C) lockbox systems.
D) in-house processing.
Q3) 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.
Q4) Marketability risk is synonymous with:
A) maturity risk.
B) default risk.
C) liquidity risk.
D) interest rate risk.
Q5) What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
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Chapter 29: Credit Management
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Q1) Which of the following statements is true?
A) Customers in high tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
B) Customers in high tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
C) Customers in low tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
D) Customers in low tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
E) Taxes have an effect on the propensity to grant credit, but no effect on the propensity to use credit.
Q2) Robinson Rollingpin Corporation has been asked by its customers to please grant them a 2% discount if they pay their bill within 15 days.The purchase size of each order is $75,000.Normally,the customer pays within 30 days with no discount.Robinson's cost of debt capital is 12%.Should the request be granted?
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Chapter 30: Mergers and Acquisitions
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Q1) If the acquiring firm and acquired firm are not related to each other,then the acquisition is known as a(an):
A) consolidation.
B) aggregation.
C) takeover.
D) conglomerate acquisition.
Q2) Dexter Department Stores has a market value of $400 million and 20 million shares outstanding.Walnut Stores has a market value of $134 million and 13.4 million shares outstanding.Dexter is deciding to acquire Walnut Stores.The top management of Dexter's have determined that due to the synergies between the firms the combination will worth $667 million.Dexter expect to pay a $67 million premium for Walnut Stores.If Dexter offers 10 million shares in exchange for the 13.4 million shares of Walnut,what will the after acquisition stock price of Dexter be?
Q3) Bondholders can be made better off in a merger,this is known as the co-insurance effect.Explain how this can happen using an example.
Q4) Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 31: Financial Distress
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Q1) How much and what percentage of their claim will the unsecured creditors receive,in total?
A) $290,909; 36.36%
B) $300,000; 37.50%
C) $600,000; 75.00%
D) $100,000; 12.50%
Q2) Stock-based insolvency is a(an):
A) income statement measurement.
B) balance sheet measurement.
C) book value measurement.
D) income statement and balance sheet measurement.
Q3) Whether bankruptcy is entered either voluntarily or involuntarily,the major difference by CCCA and Bankruptcy and Insolvency Act is:
A) that liquidation occurs in CCCA but reorganization is the objective under Bankruptcy and Insolvency Act.
B) that there is no priority of claims under Chapter CCCA.
C) that liquidation occurs in Bankruptcy and Insolvency Act but reorganization is the objective under CCCA.
D) that no lawyers fees are necessary under Bankruptcy and Insolvency Act.
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Chapter 32: International Corporate Finance
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Q1) When the German mark is quoted as $.52 this quote is a(n):
A) triangular rate.
B) indirect rate.
C) direct rate.
D) cross rate.
Q2) If a country is experiencing higher inflation than another country,in general,the currency of the first country will _______ with respect to the currency of the second country.
A) do nothing
B) appreciate
C) depreciate
D) impossible to tell without values
E) stabilize.
Q3) Assume that the Euro is selling in the spot market for $1.10.Simultaneously,in the 3-month forward market the Euro is selling for $1.12.Which one of the following statements correctly describes this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The Euro is selling at a premium relative to the dollar.
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