Business Finance
Exam Bank
Course Introduction
Business Finance is a foundational course that explores the principles and practices involved in managing a firm's financial resources. The course introduces students to key concepts such as time value of money, risk and return, capital budgeting, financial analysis, and working capital management. Emphasizing both theoretical understanding and practical application, students learn to interpret financial statements, evaluate investment opportunities, assess financing options, and make informed decisions to optimize a company's financial performance. Through case studies and real-world examples, the course prepares students to address the financial challenges faced by businesses in a dynamic economic environment.
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) In terms of the balance sheet model of the firm,the value of the firm in financial markets is equal to:
A) tangible fixed assets plus intangible fixed assets.
B) sales minus costs.
C) cash inflow minus cash outflow.
D) the value of the debt plus the value of the equity.
E) the value of the debt minus the value of the equity.
Answer: C
Q2) The balance sheet is made up of what five key components:
A) fixed assets, current liabilities, long term debt, tangible current assets and shareholders equity.
B) intangible fixed assets, current liabilities, long term debt, net income and current assets.
C) fixed assets, long term debt, current assets, current liabilities and shareholders equity. D) current assets, fixed assets, long term debt, shareholders equity and retained earnings.
Answer: C
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Chapter 2: Accounting Statements and Cash Flow
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Q1) According to IFRS,revenue is recognized as income when:
A) a contract is signed to perform a service or deliver a good.
B) the transaction is complete and the goods or services delivered.
C) payment is received.
D) income taxes are paid.
Answer: B
Q2) Fixed assets can be either tangible or intangible.Intangible assets are:
A) property, plant and equipment.
B) can be converted to cash in the normal course of business.
C) can be very valuable, although they have no physical presence, such as trademarks or patents.
D) are highly liquid.
Answer: C
Q3) 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
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Chapter 3: Financial Planning and Growth
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Q1) If a firm holds the dividend payout,the debt to equity ratio and outstanding shares constant while maintaining income and assets proportional to sales,the plug variable is:
A) short term debt.
B) retained earnings.
C) sustainable growth.
D) long term debt.
E) accounts receivable.
Answer: C
Q2) If a firm bases its growth projection on the rate of sustainable growth,and shows positive net income,then the:
A) fixed assets will have to increase at the same rate, regardless of the current capacity level.
B) number of common shares outstanding will increase at the same rate of growth.
C) debt-equity ratio will have to increase.
D) debt-equity ratio will remain constant while retained earnings increase.
E) fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.
Answer: D
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5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) Corporate managers can maximize shareholder wealth by choosing positive NPV projects because:
A) all investors have the same preferences.
B) the unhappy shareholders can sell off shares.
C) the separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences.
D) managers are wiser than shareholders regarding investments.
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 less than present value.
D) the net present value is more desired than consumption.
E) the net present value is positive.
Q3) Components of a loan which is fully paid back are:
A) the interest and financial market payments.
B) the principle repayment and the down payment.
C) the interest payment and principal repayment.
D) the down payment and interest payment.
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Chapter 5: The Time Value of Money
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Q1) The future value table provides the factors for the:
A) compound interest rate for 1/N periods for a specified interest rate.
B) compound value of a dollar for 1/N periods for a specified interest rates.
C) single value of a dollar for N periods for a specified interest rate.
D) simple interest rate for N periods.
Q2) 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?
Q3) Tina is able to pay $160 a month for five years for a car.If the interest rate is 4.9%,how much can Tina afford to borrow to buy a car?
A) $6,961.36
B) $8,499.13
C) $8,533.84
D) $8,686.82
E) $9,588.05
Q4) What is meant by "amortizing a loan"?
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Chapter 6: How to Value Bonds and Stocks
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Q1) The newly issued bonds of the Cain Corp.offer a 6% coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:
A) equal to 3%.
B) greater than 3% but less than 4%.
C) equal to 6%.
D) greater than 6% but less than 7%.
E) equal to 12%.
Q2) Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this stock is 9%.What is the amount of the last dividend paid by Weisbro and Sons?
A) $.77
B) $.80
C) $.84
D) $.87
E) $.88
Q3) Explain why some bond investors are subject to liquidity risk and/or default risk.How does each of these risks affect the yield of a bond?
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) It will cost $3,000 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?
A) 0.83 years.
B) 1.14 years.
C) 1.83 years.
D) 2.14 years.
E) 2.83 years.
Q2) The Walker Landscaping Company can purchase a piece of equipment for $3,600.The asset has a two-year life,will produce a cashflow of $600 in the first year and $4200 in the second year.The interest rate is 15%.Calculate the project's discounted payback and Profitability Index assuming steady cashflows.Should the project be taken? If the accounting rate of return was positive,how would this affect your decision?
Q3) Accepting positive NPV projects benefits the stockholders because:
A) it most easily understood valuation process.
B) the value of the expected cashflows are equal to the cost.
C) the value of the expected cashflows are greater than the cost.
D) it is the most easily calculated.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Q1) The incremental cash flow from projects for a company is computed as the:
A) net operating cash flow generated by the project, less any sunk costs and erosion costs.
B) sum of the incremental operating cash flow and after-tax salvage value of the project.
C) net income generated by the project, plus the annual depreciation expense.
D) sum of the incremental operating cash flow, capital spending, and change in net working capital of the project.
E) sum of the sunk costs, opportunity costs, and erosion costs of the project.
Q2) A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n):
A) sunk cost.
B) opportunity cost.
C) erosion.
D) fixed cost.
Q3) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Q1) 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.
Q2) Sensitivity analysis helps you determine the:
A) range of possible outcomes given possible ranges for every variable.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value given the best and the worst possible situations.
D) degree to which a project is reliant upon the fixed costs.
Q3) At stage 2 of the decision tree it shows that if a project is successful the payoff will be $53,000 with a 2/3 chance of occurrence.There is also the 1/3 chance of a -$24,000 payoff.The cost of getting to stage 2 (1 year out)is $44,000.The cost of capital is 15%.What is the NPV of the project at stage 1?
A) -$13,275
B) -$20,232
C) $2,087
D) $7,536
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Page 11
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) List 2 shortcomings of using value at risk (VaR)as a risk management tool.
Q2) The Zolo Co.just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share.If the stock price remains constant,then:
A) the capital gains yield will decrease.
B) the capital gains yield will increase.
C) the dividend yield will increase.
D) the dividend yield will also remain constant.
E) neither the capital gains yield nor the dividend yield will change.
Q3) Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate?
Q4) The market portfolio of common stocks earned 14.7% last year.Treasury bills earned 5.7% on average last year.The average inflation rate was 4.0%.What was the real return on equities?
A) 5.0%.
B) 9.0%.
C) 9.7%.
D) 10.7%.
E) 12.6%.
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Page 12
Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) Systematic risk is measured by:
A) the mean.
B) beta.
C) the geometric average.
D) the standard deviation.
Q2) The expected return on GenLabs is:
A) 20.5%
B) 12.5%
C) 8.5%
D) 3.3%
Q3) A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security C has an expected return of 8% and a standard deviation of 6%. Security B has an expected return of 10% and a standard deviation of 10%. The securities have a coefficient of correlation of .6. Which of the following values is closest to portfolio return and variance?
A) .095; .001675.
B) .095; .0072.
C) .100; .00849.
D) .090; .0081.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) Assuming that the single factor APT model applies,the beta for the market portfolio is:
A) zero.
B) one.
C) the average of the risk free beta and the beta for the highest risk security.
D) impossible to calculate without collecting sample data.
Q2) Style portfolios are characterized by:
A) their stock attributes; P/Es less than the market P/E are value funds.
B) their systematic factors, higher systematic factors are benchmark portfolios.
C) their stock attributes; higher stock attribute factors are benchmark portfolios.
D) their systematic factors, P/Es greater than the market are value portfolios.
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.
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Page 14
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Chapter 13: Risk,return,and Capital Budgeting
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Q1) For a multi-product firm,if a project's beta is different from that of the overall firm,then:
A) the CAPM can no longer be used.
B) the project should be discounted using the overall firm's beta.
C) the project should be discounted at a rate commensurate with its own beta.
D) the project should be discounted at the market rate in all cases.
E) the project should be discounted at the T-bill rate in all cases.
Q2) A firm with high operating leverage is characterized by _________ while one with high financial leverage is characterized by _____________.
A) low fixed cost of production; low fixed financial costs
B) high variable cost of production; high variable financial costs
C) high fixed costs of production; high fixed financial costs
D) low costs of production; high fixed financial costs
E) high fixed costs of production; low variable financial costs
Q3) Two stock market based costs of liquidity that affects the cost of capital are the:
A) bid-ask spread and the specialist spread.
B) market impact cost and the brokerage costs.
C) investor opportunity cost and the brokerage costs.
D) bid-ask spread and the market impact costs.
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Page 15
Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) The Nu-Tux Seat Company has an expansion opportunity and is considering selling their 100,000 share investment in Slip-Cover currently worth $2 million or raising other external funding.The share price has been holding in a narrow range day to day.If Nu-Tux decides to unload their holding is there any concern about getting the full $2 million,aside from investment banker/brokerage fees.Explain these concerns about market behavior and cite the evidence.
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) You have observed an apparent,yet odd,increase stock prices when companies have spun-off divisions.You have just collected the data on 50 such events.The average beta (market value weighted)is 1.15 for this group.
Q4) Explain why it is that in an efficient market,investments have an expected NPV of zero.
Q5) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
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Page 16
Chapter 15: Long-Term Financing: an Introduction
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Q1) If a debenture is subordinated,it:
A) has a higher priority status than specified creditors.
B) is secondary to equity.
C) must give preference to the specified creditor in the event of default.
D) has been issued because the company is in default.
Q2) There are 3 directors seats up for election.If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director,this is illustrative of:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
Q3) A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):
A) custodial account.
B) sinking fund.
C) retirement fund.
D) irrevocable trustee fund.
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) Eigner Engineering is currently unlevered with 2,000 shares outstanding and assets valued at $50,000.The company expects operating income in the current period to be $6,000.Suppose that the company can exchange 400 shares of stock for $10,000 in debt paying 10% interest.From the standpoint of EPS,would the exchange be wise? Assume no taxes.
Q2) The JumpStart Corporation is unlevered and valued at $500,000.JumpStart has 200,000 shares outstanding.The company announces that in the near future it will issue $200,000 of debt and buy back $200,000 of stock.If the firm is in the 34% tax bracket,how many shares of stock will be repurchased?
Q3) The reason that MM Proposition I does not hold in the presence of corporate taxation is because:
A) levered firms pay less taxes compared with identical unlevered firms.
B) bondholders require higher rates of return compared with stockholders.
C) earnings per share are no longer relevant with taxes.
D) dividends are no longer relevant with taxes.
Q4) Suppose the tax authorities allow firms to deduct their interest expense from operating income.Both firm U and firm L are in the 34% tax bracket.Show what happens to the market value of both firms if the debt held by firm L is permanent.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) 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
Q2) The TrunkLine Company will earn $60 if it does well.The debtholders are promised payments of $35 if the firm does well.If the firm does poorly the repayment will be $20 because of the dead weight cost of bankruptcy,expected earnings will be $30.The probability of the firm performing poorly or well is 50%.If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
A) $32.50.
B) $27.50.
C) $25.00.
D) $29.55.
E) $35.00.
Q3) Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) Floatation costs are incorporated into the APV framework by:
A) adding them into the all equity value of the project.
B) subtracting them from the all equity value of the project.
C) incorporating them into the WACC.
D) disregarding them.
Q2) The Tip-Top Paving Co.has an equity cost of capital of 16.97% The debt to value ratio is .6 and a cost of debt of 11%.What is the cost of equity if Tip-Top was unlevered?
A) 3.06%
B) 14.73%
C) 0.08%
D) 16.97%
Q3) The flow-to-equity (FTE)approach in capital budgeting is defined to be the:
A) discounting all cash flows from a project at the overall cost of capital.
B) scale enhancing discount process.
C) discounting of the levered cashflows to the equity holders for a project at the required return on equity.
D) the dividends and capital gains that may flow to a shareholders of any firm.
E) discounting of the unlevered cashflows of a project from a levered firm at the WACC.
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Chapter 19: Dividends and Other Payouts
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Q1) 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.
Q2) If dividends are taxed at higher rates than are capital gains,then high dividend payout stocks should sell at lower prices,everything else equal,compared to low dividend paying stocks.One implication of this is that investors in _____ tax brackets will tend to prefer high dividend payout stocks.
A) slightly higher than average
B) average
C) slightly lower than average
D) zero
Q3) Asquith and Mullins studied a sample of firms that either paid their first ever cash dividend or initiated a dividend after a 10 year period of no dividends.Healey,Palepu and Michaely,and Thaler and Womack found stock prices to fall when dividends are.Explain how these positive and negative stock price results fit with the dividend irrelevance argument of MM and the opposing effects of taxes and current income needs on stock price if future earnings are held constant.
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Page 21
Chapter 20: Issuing Equity Securities to the Public
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Q1) Smith in evaluating issuance costs from underwritten issues,rights issues with standby underwriting and a pure rights issues found that 90 percent of the issues are underwritten which was the most expensive method.This is done because:
A) investment bankers know more than CFOs and they may buy the issue at an agreed price and disburse the funds sooner.
B) investment bankers can increase the price received by increasing confidence in the issue, they will buy the issue at an agreed upon price and disburse the cash sooner.
C) investment bankers provide other services including price counsel, increase public confidence and provide funds to the issuer sooner.
D) investment bankers know how to price the issue, would not need to set as low as a price as the subscription price and provide price counsel.
Q2) What are venture capitalists and what is their role in raising capital for firms?
Q3) The evidence on IPO sales is varied from issue to issue,but there are three common themes; underpricing,underperformance,and the reasons for going public.Explain these three themes.
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Chapter 21: Long-Term Debt
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Q1) What is the correct coupon amount if the bond is priced to sell at par?
A) $65.00.
B) $75.42.
C) $82.50.
D) $87.86.
Q2) A positive covenant to an indenture or loan agreement would:
A) set a condition the company must follow such as not pledge any assets to other lenders.
B) set a condition that the trustee can eliminate sinking fund payments.
C) allow the trustee to call the bonds in.
D) allow the company to pay dividends only semi-annually.
E) set a condition that the company must follow such as providing regular (periodic) financial statements to the lender.
Q3) Debt ratings issued by companies such as Moody's and Standard and Poor's depend on:
A) the probability of firm default and protection given in indenture in case of default.
B) how large the company is and the number of restrictive covenants.
C) the size of the fee paid by the issuer and their industry.
D) the issue size, type of issue and their industry.
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Page 23
Chapter 22: Leasing
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Q1) What is the appropriate discount rate for valuing the lease?
A) 2.72%
B) 5.28%
C) 8.00%
D) 12.12%
Q2) An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.
A) leveraged; direct
B) sales and leaseback; sales-type
C) capital; sales-type
D) direct; sales-type
Q3) An advantage of leasing is that the lessee does not own the asset and can cancel:
A) only financial leases.
B) only operating leases.
C) only capital leases.
D) any kind of leases anytime.
Q4) What are the cashflows in years 1 through 8?
Q5) What is the discount rate to be used?
Q6) Calculate the NPV of the lease versus the purchase decision.
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Suppose a situation exists where you can purchase a share of stock for $25,purchase a put option on the stock for $3,and write a call option against the stock for $4.Also suppose that holding these three positions guarantees a payoff of $30 one year from today.If the risk free rate is 20%,does put-call parity hold? If not,then what new price of the put option would allow put-call parity to hold?
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) You own a call option with time to expiration.The common stock is selling for $15 and your exercise price is $12,this option:
A) must be sold to the writer.
B) is in-the-money.
C) is out-of-the-money.
D) must be offset by a put.
Q4) Explain how the value of a firm can be viewed as an option.How can the call and put views be resolved?
Page 25
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) Rejecting an investment today forever may not be a good choice because:
A) the size of the firm will decline.
B) there are always errors in the estimation of NPVs.
C) the option value is negative.
D) the company's foregoing the future rights or option to the investment.
Q2) The NPV approach must be:
A) augmented by added analysis if there are a few embedded options.
B) augmented by added analysis if a decision has significant embedded options.
C) jettisoned if there are any embedded options.
D) computed carefully to identify the options.
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.
Q4) What is the value of Mr.Maxim's options?
Q5) 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?
Page 26
Q6) Why would the company pay the executive in options as opposed to salary?
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Chapter 25: Warrants and Convertibles
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Q1) A firm has 2,000 shares of stock and 200 warrants outstanding.The warrants are about to expire,and all of them will be exercised.The market value of the firm's assets is $14,000,and the firm has no debt.Each warrant gives the owner the right to buy 1 share at $5.What is the warrant's effective exercise price?
Q2) A convertible bond is selling for $1222.70.It has 10 years to maturity,a $1,000 face value,and a 10% coupon paid semi-annually.Similar non-convertible bonds are priced to yield 8%.The conversion ratio is 40.The stock currently sells for $30.125 per share.Calculate the convertible bond's option value.
Q3) BrightView Windows issued warrants with an exercise price of $17 for one share per warrant.On May 1,BrightView's common stock is at $20 per share.The lower and upper limits on the warrant value on May 1 are:
A) $0 and $17.
B) $17 and $20.
C) $3 and $17.
D) $0 and $3.
E) $3 and $20.
Q4) Why are warrants and convertibles issued?
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Chapter 26: Derivatives and Hedging Risk
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Q1) 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.
Q2) A Treasury Note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate.The $1,000 face value is returned at maturity.If the effective annual yield for all maturities is 7 percent annually,what is the current price of the Treasury Note?
Q3) If you bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading of $2.52,$2.57,$2.62,$2.68,and $2.70.What would the mark to market sequence be?
A) -.08, .05, .05, .06, .02
B) .08, -.05, -.05, -.06, -.02
C) .08, .03, -.02, -.06, -.10
D) -.08, -.03, .02, .06, .10
E) .10
Q4) What new asset duration will immunize the statement of financial positionif the duration of the liabilities are 1.111?
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Chapter 27: Short-Term Finance and Planning
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Q1) The definition of cash in terms of other statement of financial position items is:
A) long term debt minus equity minus net working capital (excluding cash) minus fixed assets.
B) long term debt minus equity plus net working capital (excluding cash) minus fixed assets.
C) long term debt minus equity plus net working capital(excluding cash) plus fixed assets.
D) long term debt plus equity minus net working capital(excluding cash) minus fixed assets.
E) long term debt plus equity minus net working capital(excluding cash) plus.
Q2) Costs that fall with increases in the level of investment in current assets are called:
A) current asset costs.
B) fixed costs.
C) flexible costs.
D) liquid capital costs.
E) shortage costs.
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Chapter 28: Cash Management
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Q1) A sensible cash management policy would be to:
A) have enough cash on hand to meet ordinary course of business and some excess cash to invest in marketable securities as a precautionary measure.
B) have nearly enough cash on hand to meet ordinary course of business.
C) have enough cash on hand to meet any potential demand for cash.
D) have a zero cash balance and charge all expenditures.
Q2) What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
Q3) 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.
Q4) Marketability risk is synonymous with:
A) maturity risk.
B) default risk.
C) liquidity risk.
D) interest rate risk.
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Chapter 29: Credit Management
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Q1) Which of the following is not one of the "five Cs of Credit" for credit scoring?
A) Capability
B) Capacity
C) Capital
D) Character
E) Conditions
Q2) Ali Storage Company projects 800 customers next year.Of these,600 have been profitable and have never defaulted on past obligations,while 200 have not been profitable.All of the unprofitable accounts are expected to default if given credit.Ali can pay $0.40 to an agency that will tell them whether a customer has been profitable.If Ali's price per unit is $10,and its cost per unit is $6,should they allow the credit check to be performed? Assume a discount rate of 1%.
Q3) The Rapid Roller Co.offers terms of 3/15 net 45.The aging schedule for their customers is as follows:
Q4) 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.
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Chapter 30: Mergers and Acquisitions
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Q1) 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.
Q2) Cowboy Curtiss' Cowboy Hat Company recently completed a merger.When valuing the combined firm after the merger,which of the following is an example of the type of common mistake that can occur?
A) The use of market values in valuing either of the new firm.
B) The inclusion of cash flows that are incremental to the decision.
C) The use of its own correct discount rate when valuing the cash flows of the entire company.
D) The inclusion of all relevant transactions cost associated with the acquisition.
Q3) What is the NPV from the merger of V and A? V was worth $450 and A had a market value of $375.V acquired A for $425 because they thought the combination of VA was worth $925.
A) $0
B) $50
C) $450
D) $425
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Chapter 31: Financial Distress
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Q1) Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?
A) Cash payments are delayed to creditors.
B) The market value of the stock declines by 50%.
C) The firm's operating cash flows are insufficient to pay current obligations.
D) Cash distributions are eliminated because the board of directors considers the surplus account to be low.
Q2) 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.
Q3) How much should the unsecured creditors receive?
A) $1,000,000
B) $500,000
C) $750,000
D) $667,000
Q4) Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amounts to 5%,determine the distribution of the proceeds under the rules of absolute priority.
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Chapter 32: International Corporate Finance
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Q1) The acronym LIBOR stands for:
A) London Interbank Offered Rate.
B) Lending Institution Bank Receipt.
C) Leading Indicator Borrowing Rate.
D) Loan Interest Bank Order Receipt.
Q2) The direct spot exchange rate for British pounds is 1.4329.The 180 day risk-free rates in the U.S.and Britain are 4.5% and 5.2%,respectively.What is the direct forward exchange rate?
A) 1.4281
B) 1.4234
C) 1.4425
D) 1.4368
Q3) International corporations that borrow capital in the foreign country for investment face:
A) exchange rate risk on the investment.
B) exchange rate risk on the residual financing.
C) cross rate risk on exports.
D) exchange rate risk on the borrowing.
E) swap rate risk on the repurchase.
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