Applied Corporate Finance
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Course Introduction
Applied Corporate Finance explores the practical application of financial theory to real-world corporate decision-making. The course covers key topics such as capital budgeting, financial analysis, capital structure, risk management, and valuation, with a focus on how financial managers use quantitative and qualitative tools to maximize firm value. Through case studies and practical exercises, students learn to evaluate investment opportunities, assess financing options, and balance risk and return considerations in corporate environments. The course emphasizes strategic financial planning and the impact of financial decisions on organizational goals in dynamic market conditions.
Recommended Textbook Corporate Finance 6th Canadian Edition by Stephen
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Page 2
A. Ross
Chapter 1: Introduction to Corporate Finance
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Q1) Value is created and recognized over time if:
A) cash raised is invested in the investment activities of the firm.
B) funds are raised in the capital markets.
C) cash paid to investors, shareholders and bondholders, is greater than cash raised in the financial markets.
D) Management pursues activities to reduce taxes to zero.
Answer: C
Q2) If a firm has debt outstanding the contingent claim of an equityholder is:
A) equal to the payment to the debtholders
B) equal to the firm cashflows minus the fixed debt payment if the residual cashflows are positive
C) equal to the firm cashflows minus the fixed debt payment whether positive or negative
D) equal to the debt payment plus the residual cashflow of the firm.
Answer: B
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Chapter 2: Accounting Statements and Cash Flow
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Q1) Mirotronic Co. has an average receivables turnover of 4 times. Sales are $20,000. What is the collection period?
A) 91.25 days
B) 90 days
C) 1.37 days
D) 21.92 days
Answer: B
Q2) The Lo-Gro Co. in 2010 had equity of $15 million, net income of $1,800,000 of which 60% was paid out as dividends. The ROE and retained earnings for the Lo-Gro Co. are:
A) 1.2%; $720,000.
B) 4.8%; $720,000.
C) 12%; $1,080,000.
D) 12%; $720,000.
Answer: D
Q3) What is the change in the net working capital from 2009 to 2010?
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) A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2. The dividend payout is .2, and the ratio of total assets to sales is constant at 1.2. What must the profit margin be?
A) 10.00%.
B) 9.09%.
C) 11.11%.
D) 8.00%.
Answer: A
Q2) 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
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) An individual has income of $10,000 in period 0 and $25,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $10,500 in period 1. The market interest rate is 8%. What is the maximum possible consumption in period 1 if the individual consumes $20,000 in period 0 and the individual follows the NPV rule?
Q2) According to the net present value rule, an investment should be made if:
A) the net present value has no risk
B) the net present value is greater than the cost of investment
C) the net present value is greater than present value
D) the net present value is more desired than consumption
E) the net present value is positive.
Q3) Financial markets develop to accommodate _________ between individuals.
A) trade and barter
B) barter and lending
C) borrowing and lending
D) lending and trade
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%. How much will the current shareholders earn.?
Page 6
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Chapter 5: The Time Value of Money
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Q1) Which of the following amounts is closest to the end value of investing $5,000 for 14 months at a stated annual interest rate of 6 percent compounded monthly?
A) $5,352.
B) $5,362.
C) $5,350.
D) $5,293.
E) $6,183.
Q2) The present value of a set of cash flows is:
A) the sum of the present value of the individual cash flows.
B) the sum of individual cash flows which are then discounted.
C) not equal to the sum of the present value of the individual cash flows. D) always greater than the present value of the investment.
Q3) Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is the value of the growing perpetuity?
A) $667
B) $693
C) $1,200
D) $1,248
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Chapter 6: How to Value Bonds and Stocks
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Q1) A pure discount bond:
A) has no face value.
B) pays interest annually.
C) pays interest semiannually.
D) pays no coupon.
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 risk of this company suggests that future cash flows should be discounted at a rate of 11%.
A) $39.375
B) $37.50
C) $21.48
D) $20.45
Q3) The discount rate in equity valuation is composed entirely of:
A) the dividends paid and the capital gains yield.
B) the dividend yield and the growth rate.
C) the dividends paid and the growth rate.
D) the capital gains earned and the growth rate.
E) the capital gains earned and the dividends paid.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has:
A) a large initial investment with moderate positive cash flows over a very long period of time.
B) a very large negative cash flow at the termination of the project.
C) most of the cash flow at the beginning of the project.
D) All projects approved by the payback period rule will be accepted by the NPV rule.
E) The payback period rule and the NPV rule cannot be used to evaluate the same type of projects.
Q2) The NPV rule and PI give the same results when there is no conflict. In the case of capital rationing, explain the potential conflict and the way it should be solved with supporting examples.
Q3) A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is not true?
A) NPV is positive if the interest rate is less than 10%.
B) NPV is negative if the interest rate is less than 10%.
C) NPV is zero if the interest rate is equal to 10%.
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Chapter 8: Net Present Value and Capital Budgeting
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Q1) Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
A) $200
B) $1,500
C) $2,200
D) $3,500
E) $4,200
Q2) Milton Toy Co. recorded sales of $2500 and costs of $1,875. Net accounts receivable rose by $350 and net accounts payable declined by $240. What were cash sales minus cash costs?
A) $625.
B) $35.
C) $(110).
D) $90.
Q3) This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?
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Chapter 9: Risk Analysis, Real Options, and Capital
Budgeting
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Q1) In a decision tree, the NPV to make the yes/no decision is dependent on:
A) only the cashflows from successful path.
B) on the path where the probabilities add up to one.
C) all cashflows and probabilities.
D) only the cashflows and probabilities of the successful path.
Q2) An investigation of the degree to which NPV depends on assumptions made about critical variables is called a(n)
A) operating analysis
B) sensitivity analysis
C) marginal benefit analysis
D) decision tree analysis.
Q3) Scenario analysis is different than sensitivity analysis:
A) as no economic forecasts are changed.
B) as several variables are changed together.
C) because scenario analysis deals with actual data versus sensitivity analysis which deals with a forecast.
D) because it is short and simple.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q2) Illustrate and explain the impact of adding securities to a portfolio assuming the securities are of average correlation with each other. see Figure 10.7 note that as N increases portfolio risk decreases as N gets large portfolio risk approaches the market risk
Q3) If you have a portfolio of two risky stocks which turns out to have no diversification. The reason you have no diversification is:
A) the returns are too small
B) the returns move perfectly opposite of one another
C) the returns are too large to offset
D) the returns move perfectly with one another
E) the returns are completely unrelated to one another
Q4) The characteristic line is graphically depicted as:
A) the plot of the relationship between beta and expected return
B) the plot of the returns of the security against the beta
C) the plot of the security against the market index returns
D) the plot of the beta against the market index returns
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) For a highly diversified equally weighted portfolio, the portfolio variance is:
A) the average covariance.
B) the average expected value.
C) the average variance.
D) the weighted average expected value.
E) the weighted average variance.
Q2) Which one of the following would indicate a portfolio is being effectively diversified?
A) an increase in the portfolio beta
B) a decrease in the portfolio beta
C) an increase in the portfolio rate of return
D) a decrease in the portfolio standard deviation
Q3) The opportunity set of portfolios is:
A) all possible return combinations of those securities
B) all possible risk combinations of those securities
C) all possible risk-return combinations of those securities
D) the best or highest risk-return combination
E) the lowest risk-return combination
Q4) Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?
13
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) The acronym CAPM stands for:
A) Capital Asset Pricing Model.
B) Certain Arbitrage Pressure Model.
C) Current Arbitrage Prices Model.
D) Cumulative Asset Price Model.
Q2) A factor is a variable that:
A) affects the returns of risky assets in a systematic fashion.
B) affects the returns of risky assets in an unsystematic fashion.
C) correlates with risky asset returns in a unsystematic fashion.
D) does not correlate with the returns of risky assets in an systematic fashion.
Q3) If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, <sub>I</sub>, would result in a change in any security return of:
A) 9.2%
B) 3.2 <sub>I</sub>.
C) -3.2 <sub>I</sub>
D) 3.0%
E) 6.2 <sub>I</sub>
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Chapter 13: Risk, Return, and Capital Budgeting
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Q1) One Caveat of using EVA as a measure of performance measurement is managers
A) may not have incentive to work hard.
B) may overstate earnings.
C) may cut back production
D) none of the above.
Q2) What is the market value of debt and its' net cost to the firm?
A) 9,642,857; 8.4%
B) 9,642,857; 12%
C) 6,750,000; 8.4%
D) 6,750,000; 12%
E) 4,725,000; 12%
Q3) What is the firm's WACC?
A) 10.44%
B) 13.16%
C) 14.24%
D) 19.04%
E) 14.28%
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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Q1) 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?
Q2) The model, P<sub>t</sub> = P<sub>t-1</sub> + Expected Return + Random error, supports the weak form of the efficient market hypothesis if:
A) the random error can be predicted by past prices.
B) there is correlation between random errors period to period.
C) the random errors are unrelated from one period to the next period.
D) the expected return is not based on the security's risk.
Q3) Which one of the following statements is correct concerning market efficiency?
A) Real asset markets are more efficient than financial markets.
B) If a market is efficient, arbitrage opportunities should be common.
C) In an efficient market, some market participants will have an advantage over others.
D) A firm will generally receive a fair price when it sells shares of stock.
Q4) Explain why it is that in an efficient market, investments have an expected NPV of zero.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Moose Momentos had equity accounts in 2010 as follows: Common Stock ($1 Par Value) $120,000
Retained Earnings 32,000
Total Shareholder's Equity is equal to
A) $90,000.
B) $92,000.
C) $122,000.
D) $152,000.
Q2) From this information, calculate Enstat's book value per share.
Q3) Debt that may be extinguished before maturity is referred to as:
A) sinking-fund debt.
B) debentures.
C) callable debt.
D) indenture debt.
Q4) A grant of authority allowing someone else to vote shares of stock that you own is called a:
A) power-of-share authorization.
B) proxy.
C) share authority grant (SAG).
D) restricted conveyance.
Page 17
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Chapter 16: Capital Structure: Basic Concepts
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Q1) A general rule for managers to follow is to set the firms capital structure such that:
A) the firm's value is minimized.
B) the firm's value is maximized.
C) the firm's bondholders are made well off.
D) the firms suppliers of raw materials are satisfied.
E) the firms dividend payout is maximized.
Q2) In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:
A) the conservation of energy principle.
B) MM Proposition I that leverage is invariant to market value.
C) MM Proposition II that the cost of equity is always constant.
D) MM Proposition I that the market value of the firm is invariant to the capital structure.
E) MM Proposition III that there is no risk associated with leverage in a no tax world.
Q3) Given a level of operating income of $2,500, show the specific strategy that Mike has in mind.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Establishing a capital structure for a firm is not simple. Although financial theory guides the process, there is no simple formula. List and explain four main items that one should consider in determining the capital structure.
Q2) Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:
A) by all investors in the firm.
B) debtholders only because if default occurs interest and principal payments are not made.
C) equityholders because debtholders will pay less providing less cash for the equityholders.
D) management because if the firm defaults they will lose their jobs.
Q3) Studies have found that firms with high proportions of intangible assets are likely to use ____________ debt compared with firms with low proportions of intangible assets.
A) more
B) the same amount of
C) less
D) either more or the same amount of
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) If the WACC is used in valuing a LBO:
A) the WACC remains constant because of the final target debt ratio desired.
B) the flotation costs must be added to the total UCF.
C) the WACC must be recalculated as the debt is repaid and the cost of capital increases.
D) the tax shields of debt are not available because the corporation is no longer publicly traded.
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.
Q3) In calculating the NPV using the Flow-To-Equity approach the discount rate:
A) is the all equity cost of capital.
B) is the cost of equity for the levered firm.
C) is the all equity cost of capital minus the weighted average cost of debt.
D) is the weighted average cost of capital.
E) is the all equity cost of capital plus the weighted average cost of debt.
Page 20
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Chapter 19: Dividends and Other Payouts
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Q1) A firm plans to pay dividends of $12.50 at time 0 and $14 at time 1. Ignoring transaction costs and assuming that the investor can earn 8% on investments, which statement is true?
A) An investor can spend up to $25.46 from dividends at time 0, and without decreasing the present value of all dividends received.
B) An investor can spend up to $27.50 from dividends at time 0, and without decreasing the present value of all dividends received.
C) An investor can spend up to $25.46 from dividends at time 0, but will decrease the present value of all dividends received.
D) An investor can spend up to $27.50 from dividends at time 0, but will decrease the present value of all dividends received.
Q2) A dividend is usually a cash distribution from:
A) current earnings or accumulated retained earnings
B) the capital surplus account
C) common stock account
D) liquidated capital
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21
Chapter 20: Issuing Equity Securities to the Public
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Q1) Which of the following is not normally an example of the services offered by investment bankers?
A) Aiding in the sale of securities
B) Facilitating mergers
C) Acting as brokers to both individuals and institutional clients
D) Offering checking accounts to corporations
Q2) Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing entrepreneurs give:
A) a high interest rate debt instrument and control.
B) an equity position and usually board of director positions.
C) up the right to have an initial public offering.
D) control to a court appointed trustee.
Q3) A new public equity issue from a company with equity previously outstanding is called a/an:
A) initial public offering.
B) seasoned equity issue.
C) unseasoned equity issue.
D) private placement.
E) syndicate.
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Chapter 21: Long-Term Debt
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Q1) Floating rate bonds are bonds with:
A) floating par values tied to the stock par value.
B) floating maturities tied to the expected corporate life.
C) floating call provisions indexed by relative interest rates.
D) floating coupon rates tied to an interest rate index.
Q2) Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:
A) not being in default if a coupon payment is omitted due to a lack of corporate income.
B) lacking the smell of death from financial distress.
C) being easier to sell in the marketplace given the lower risk of default.
D) not having any agency costs between bondholders and stockholders.
Q3) The main difference between an open-end and closed-end mortgage trust indenture is:
A) the mutual fund carries a no load fee.
B) security can be diminished as an open-end trust indenture allows for unlimited bond issuance.
C) security can be diminished as a closed-end trust indenture allows for unlimited bond issuance.
D) the mortgage trust company does not have any security.
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Chapter 22: Leasing
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Q1) In a lease arrangement, the user of the asset is:
A) the lesser.
B) the lessee.
C) the lessor.
D) the leaser.
Q2) What is the appropriate discount rate for valuing the lease?
A) 12.12%.
B) 8.0%.
C) 5.28%.
D) 2.72%.
Q3) 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.
Q4) Should the asset be purchased or leased? Support your answer.
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) You have entered into a call option contract for 1 period. The stock is selling for $28, you borrowed 412 at 8% and the delta is .6. What is the cost of the call?
A) $8.89.
B) $16.00.
C) $5.69.
D) $9.60.
Q2) Options can be used to explain how the choice of a project can determine investor value. Options are also useful in evaluating alternatives open within a project choice, such as investing now or delaying. Give an example of how options can be used in investment timing.
Q3) 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.
Q4) Explain the rationale behind the statement that equity is a call option on the firm's assets. When would a shareholder allow the call to expire?
Page 25
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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) What is the value of a call option?
A) $4.14
B) $4.86
C) $5.13
D) $5.62
E) $6.16
Q3) The volatility of interest rates affect the value of the project by:
A) increasing the value as volatility increase.
B) increasing the value as volatility decrease.
C) decreasing the value as volatility increase.
D) interest rate volatility does not affect value.
Q4) Why would the company pay the executive in options as opposed to salary?
Q5) What is the value of Mr. Maxim's options?
Page 26
Q6) If Mr. Maxim earned $500,000 in regular annual salary why might why might he prefer to have $1,500,000 in straight salary versus salary and options?
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Chapter 25: Warrants and Convertibles
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Q1) Which of the following would harm the position of a warrant holder?
A) a stock split of 3 for 1.
B) a large stock dividend of 20%.
C) a large cash dividend.
D) listing of the warrants on the NYSE.
Q2) If all warrants are exercised, what will your fraction of ownership be if you owned 2,000 shares originally.
A) 13.33%
B) 12.12%
C) 13.07%
D) 14.04%
Q3) A convertible bond has a 8% coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $20 7/8 per share. Similar nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:
A) $835.00.
B) $918.56.
C) $1,000.00.
D) $1570.11.
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Chapter 26: Derivatives and Hedging Risk
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Q1) Duration of a coupon paying bond 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 is a measure of:
A) the yield to maturity of a bond.
B) the coupon yield of a bond.
C) the price of a bond.
D) the effective maturity of a bond.
Q3) What new asset duration will immunize the balance sheet if the duration of the liabilities are 1.111?
Q4) The buyer of a forward contract:
A) will be taking delivery of the good(s) today at today's price.
B) will be making delivery of the good(s) at a later date at that date's price.
C) will be making delivery of the good(s) today at today's price.
D) will be taking delivery of the good(s) at a later date at pre-specified price.
Q5) 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) 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.
Q2) A firm that is buying something from a supplier may effectively arrange for the bank to pay the outstanding bill using a:
A) banker's acceptance.
B) certificate of deposit.
C) commercial paper.
D) forward option.
E) letter of payment.
Q3) The most common way to finance a temporary cash deficit is the use of: A) banker's acceptances.
B) call options.
C) commercial paper.
D) unsecured bank loans.
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Chapter 28: Cash Management
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Q1) During the month you receive 4 checks, one for $100, two for $200, and one for $500. They are delayed for 2 days, 4 days, and 8 days respectively. What is your average daily collection float (a month has 30 days)?
Q2) What is the firm's collection float?
A) $10,500.
B) -$7,200.
C) $1,800.
D) -$1,800.
Q3) What is the total fixed order cost for a month based on the firm's current practice?
A) $75.60
B) $55.60
C) $37.80
D) $29.17
Q4) Examples of cash disbursements do not include:
A) wages.
B) payment of raw materials.
C) taxes.
D) dividends
E) sales of assets.
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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) Which of the following is not true concerning considerations in setting a credit policy?
A) A firm that supplies a perishable product will tend to offer restrictive credit terms.
B) A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C) Lengthening the credit period effectively reduces the price paid by the customer.
D) Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to receive longer credit periods.
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Chapter 30: Mergers and Acquisitions
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Q1) The value of synergy is estimated by the equation:
A) VA+ VB- Revenue.
B) VAB- VA- VB.
C) VAB- VB- Taxes.
D) VA- VB- Costs.
Q2) If two leveraged firms merge, the cost of debt for the new firm will generally be lower than it was for the two firms as separate entities. One reason for this is:
A) strategic fits.
B) net operating losses.
C) surplus funds.
D) co-insurance.
Q3) Dissatisfied shareholders of the acquired firm in a merger can:
A) decide not to tender their shares.
B) exercise their appraisal rights and demand their shares be purchased at fair value.
C) decide not to vote for the current management by proxy.
D) do nothing and are stuck with the outcome.
Q4) 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.
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Chapter 31: Financial Distress
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Q1) Insolvency can be defined as:
A) not having cash.
B) being illiquid.
C) an inability to pay one's debts.
D) an inability to increase one's debts.
E) the present value of payments being less than assets.
Q2) 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) no lawyers fees are necessary under Bankruptcy and Insolvency act.
Q3) Stock-based insolvency is a:
A) income statement measurement.
B) balance sheet measurement.
C) only a book value measurement.
D) income statement and balance sheet measurement.
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Chapter 32: International Corporate Finance
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Q1) What kind of trade would involve settling a foreign exchange transaction today?
A) Spot trade.
B) Futures trade.
C) Forward trade.
D) Triangle trade.
Q2) Suppose the spot exchange rate is 2 U.S. dollars per British pound. The forward exchange rate is 1.9 dollars per pound. Which of the following is true?
A) The U.S. inflation rate is lower. D) U.S. interest rates are lower.
B) The pound is selling at a premium.
C) The pound is selling at a discount.
Q3) Suppose it takes 3.2 DM francs to buy 1 U.S. dollar. The direct exchange rate is:
A) .3125.
B) .4550.
C) 2.20.
D) 3.20.
Q4) Suppose that Walkman stereos sell in the U.S. for $40, but sell in Germany for DM 87.5. Under the law of one price, what must be the number of dollars needed to purchase a D mark?
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