Business Finance
Question Bank
Course Introduction
Business Finance provides students with a comprehensive understanding of the financial decisions faced by businesses, including the acquisition, allocation, and management of financial resources. The course covers fundamental concepts such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and sources of financing. Through real-world case studies and practical examples, students learn how financial managers plan, invest, and control company finances to maximize value and ensure long-term sustainability. The course also introduces tools and techniques for effective financial decision-making in a dynamic business 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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Sample Questions
Q1) 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
Q2) Do you think agency problems arise in sole proprietorships and/or partnerships? Answer: Agency conflicts typically arise when there is a separation of ownership and management of a business.In a sole proprietorship and a small partnership,such separation is not likely to exist to the degree it does in a corporation.However,there is still potential for agency conflicts.For example,as employees are hired to represent the firm,there is once again a separation of ownership and management.
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3
Chapter 2: Accounting Statements and Cash Flow
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Sample Questions
Q1) Based on the following information,calculate stockholders equity: cash = $5.00 accounts payable = $12.00 other current liabilities = $65.00 accounts receivable = $20.00 inventory = $50.00 net fixed assets = $175.00 long-term debt = $40.00
Answer: ($5 + $20 + $50 + $175)- ($12 + $65 + $40)= $133
Q2) Midget Co.has a profit margin on sales of 4% and a ROE of 18%.If Midget's debt-to-equity ratio is .8,what is the total asset turnover ratio?
A) 2.500.
B) 5.625.
C) 2.000.
D) 10.125.
Answer: A
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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Sample Questions
Q1) A firm wishes to maintain a growth rate of 15% per year while maintaining a debt-to-equity ratio of 1.0,a profit margin of 20% and a dividend payout of 60%.What level of asset efficiency must it achieve?
Answer: .15 = 11ea8884_9833_7092_a96f_d3248d40ed5f_TB5261_11 .15 = .16/(T - .16)
T = 1.2267
Therefore TA turnover is .815 or must generate 81.5 cents worth of sales for each dollar in assets.
Q2) State the assumptions that underlie the sustainable growth rate and interpret what the sustainable growth rate means.
Answer: The usual assumptions are: Costs and assets increase proportionately with sales,the dividend payout ratio is fixed (or is given),the current debt-equity ratio is optimal,and no new equity sales are possible.The sustainable growth rate is the maximum rate at which sales can increase with the restriction that no new equity sales are possible and long-term debt increases only in an amount that keeps the debt-equity ratio fixed.
Q3) Assuming the following ratios are constant,what is the sustainable growth rate?
Answer: 11ea8884_9833_4980_a96f_4dae6e5f362d_TB5261_00 Growth Rate 11ea8884_9833_7091_a96f_53a432279411_TB5261_11
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) Diagrams illustrating the consumption choices for a corporation show the two period trade-off as originating in the northwest quadrant,or (-X,Y),because:
A) corporations have a tendency to waste resources.
B) unlike an individual, corporations have no consumption endowment.
C) each investor cannot maximize their own consumption.
D) people differ in tastes and preferences.
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) An individual has $60,000 income in period 0 and $30,000 income in period 1.If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%,what is the maximum amount of consumption in period 0?
A) $50,000
B) $70,185
C) $71,000
D) $61,880
Page 6
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) An annuity:
A) is a debt instrument that pays no interest.
B) is a stream of payments that varies with current market interest.
C) is a series of equal payments through time.
D) has no value.
Q2) Your parents are giving you $100 a month for four years while you are in college.At a 6% discount rate,what are these payments worth to you when you first start college?
A) $3,797.40
B) $4,167.09
C) $4,198.79
D) $4,258.03
E) $4,279.32
Q3) An equal stream of payments that lasts forever is:
A) a growing annuity.
B) a zero coupon bond.
C) a perpetuity.
D) valueless.
Q4) An investment today of $3300 is worth $10,000 in 8 years.At what rate has your investment been growing (annually)over the 8 years?
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Chapter 6: How to Value Bonds and Stocks
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Q1) The P/E ratio is a multiple of earnings that investors pay for a stock.The P/E is __________ related to growth,__________ related to the discount rate,and __________ related to the stock's risk.
A) positively; positively; negatively.
B) negatively; positively; positively.
C) positively; negatively; negatively.
D) negatively; negatively; positively.
Q2) What can you deduce about forward rates of interest if the liquidity-preference hypothesis of the term structure is correct?
A) The forward rate is less than investor's expectations of next years one year interest rate.
B) The forward rate is greater than investor's expectations of next years one year interest rate.
C) The forward rate is equal to investor's expectations of next years one year interest rate.
D) The forward rate is equal to the risk-free interest rate.
Q3) Given the following set of spot rates:
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8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A project will have more than one IRR if:
A) the IRR is positive.
B) the IRR is negative.
C) the NPV is zero.
D) the cash flow pattern exhibits more than one sign change.
E) the cash flow pattern exhibits exactly one sign change.
Q2) 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.
Q3) The Balistan Rug Company is considering investing in a new loom that will cost $12,000.The new loom will create positive end of year cash flow of $5,000 for the next 3 years.The internal rate of return for this project is:
A) between 10% and 15%.
B) between 15% and 20%.
C) between 20% and 25%.
D) between 25% and 30%.
E) less than 10%.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Q1) Marshall's & Co.purchased a corner lot in Montreal five years ago at a cost of $640,000.The lot was recently appraised at $810,000.At the time of the purchase,the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking.The company now wants to build a new retail store on the site.The building cost is estimated at $1.2 million.What amount should be used as the initial cash flow for this building project?
A) $1,200,000
B) $1,840,000
C) $1,890,000
D) $2,010,000
E) $2,060,000
Q2) The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow to $400,000 per year.The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:
A) the press cost of $250,000 and total cash flow of $400,000.
B) the change in cash flow of $67,000 versus the price cost of $250,000.
C) the current cash flow of $333,000 and the price cost of $250,000.
D) the opportunity cost of the facility of $333,000.
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Page 10
Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Sample Questions
Q1) The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.
A) operational
B) leveraged
C) accounting
D) cash
E) present value
Q2) 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.
Q3) Fixed production costs are:
A) directly related to labor costs.
B) measured as cost per unit of time.
C) measured as cost per unit of output.
D) dependent on the amount of goods or services produced.
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Page 11
Chapter 10: Risk and Return: Lessons From Market History
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Q1) The normal distribution is a theoretical distribution for a population.The distribution can be used to estimate how risky a cash flow or return is.If the mean is 12% and the standard deviation is 22.6%,what is the range of possible returns for a 2 standard deviation change and what percentage of all observations would fall within 2 standard deviations?
A) 24%, 68%.
B) 24%, 96%.
C) 90%, 68%.
D) 90%, 96%.
Q2) If the average return on common stocks was 13.3%,the average Treasury bill rate was 3.8%,and the average inflation rate was 3.2% what would be the expected nominal and approximate real market return for common stocks if the Treasury bill rate is expected to be 5.5% and the inflation rate is 4.1%?
A) 9.5%, 13.6%.
B) 13.6%, 9.5%.
C) 15.90%, 10.9%.
D) 14.6%, 9.1%.
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?
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Page 12
Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Sample Questions
Q1) Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML.(Be sure to indicate where the market portfolio is on your graph.)Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.
Q2) The total number of variance and covariance terms in portfolio is N<sup>2</sup>.How many of these would be (including non-unique)covariances? A) N.
B) N<sup>2.</sup>
C) N<sup>2</sup> - N. D) N<sup>2</sup> - N/2.
Q3) A portfolio is made up of 75% of stock 1,and 25% of stock 2.Stock 1 has a variance of .08,and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.
Q4) The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels; explain why it is so.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?
A) The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.
B) The price will change little, since the impact is primarily in the future.
C) The price will change little, since the market considers this information unimportant.
D) The price will change little, since the market considers this information untrue.
E) The price will change little, since the market has already included this information in the security's price.
Q2) 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.
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Page 14
Chapter 13: Risk,return,and Capital Budgeting
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Q1) Comparing two otherwise equal firms,the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.
A) equal to
B) significantly less
C) slightly less
D) greater
Q2) Explain the factors that determine beta and how an asset beta can differ from equity betas.
Q3) Companies that have highly cyclical sales will have a:
A) low beta if sales are highly dependent on the market cycle.
B) high beta if sales are highly dependent on the market cycle.
C) high beta if sales are independent of the market cycle.
D) low beta if sales are independent of the market cycle.
Q4) The beta of a security provides:
A) an estimate of the market risk premium.
B) an estimate of the slope of the CML.
C) an estimate of the slope of the SML.
D) an estimate of the systematic risk of the security.
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Page 15
Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) 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.
Q2) Which of the following is not true about serial correlation?
A) It measures the correlation between the current return on a security and the current return on another security.
B) It involves only one security.
C) Positive serial correlation indicates a tendency for continuation.
D) Negative serial correlation indicates a tendency toward reversal.
E) Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.
Q3) 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
Q4) Define the three forms of market efficiency.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Based on historical experience,which of the following best describes the "pecking order" of long-term financing strategy in Canada?
A) Long-term debt first, new common equity, internal financing last.
B) Long-term debt first, internal financing, new common equity last.
C) Internal financing first, new common equity, long-term borrowing last.
D) Internal financing first, long-term borrowing, new common equity last.
Q2) Technically speaking,a long-term corporate debt offering that features a specific attachment to property is generally called a:
A) debenture.
B) bond.
C) long-term liability.
D) preferred liability.
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) 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) A key assumption of MMs Proposition I (no taxes)is:
A) that financial leverage increases risk.
B) that individuals can borrow on their own account at rates less than the firm.
C) that individuals must be able to borrow on their own account at rates equal to the firm.
D) managers are acting to maximize the value of the firm.
Q2) 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.
Q3) The interest tax shield is a key reason why:
A) the required rate of return on assets rises when debt is added to the capital structure.
B) the value of an unlevered firm is equal to the value of a levered firm.
C) the net cost of debt to a firm is generally less than the cost of equity.
D) the cost of debt is equal to the cost of equity for a levered firm.
E) firms prefer equity financing over debt financing.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) 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.
Q2) Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?
Q3) 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?
Q4) 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.
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) A project has a NPV,assuming all equity financing,of $1.5 million.To finance the project,debt is issued with associated floatation costs of $60,000.The floatation costs can be amortized over the project's 5 year life.The debt of $10 million is issued at 10% interest,with principal repaid in a lump sum at the end of the fifth year.If the firm's tax rate is 34%,calculate the project's APV.
Q2) The value of a project to a levered firm is equal to the unlevered firm project value plus the:
A) costs of financial distress, minus floatation costs, plus taxes, plus debt financing subsidies.
B) tax subsidies, minus floatation costs, plus debt financing subsidies.
C) tax subsidies, plus floatation costs, minus financial distress costs, plus debt financing subsidies.
D) taxes paid, minus floatation costs, plus financial distress costs, plus debt financing subsidies.
Q3) Discuss the adjusted present value,the flow to equity and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) Which of the following is true?
A) A 10% stock dividend would increase stockholder wealth by $5 if the current price of stock is $50 (ignoring transaction costs).
B) Stock dividends are not true dividends.
C) Stock splits involve a small increase (splintering) in total stock outstanding.
D) The most common dividend policy involves regular cash payments with year-end bonuses.
Q2) A firm has a market value equal to its book value.Currently,the firm has excess cash of $600 and other assets of $5,400.Equity is worth $6,000.The firm has 500 shares of stock outstanding and net income of $900.What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?
A) $1.20.
B) $1.50.
C) $1.80.
D) $2.00.
E) $2.40.
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Chapter 20: Issuing Equity Securities to the Public
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Q1) The Schraeder Corporation has 20,000 shares outstanding at $20 each.They expect to raise $200,000 by a rights offering with a subscription price of $25.How many rights must you turn in to get a new share?
A) 1.25.
B) 1.50.
C) 2.00.
D) 2.50.
Q2) To determine the value of a rights the stockholder needs to know what two pieces of information in addition to the current stock price:
A) the subscription price and the number of rights needed to acquire a new share.
B) the amount of new equity to be raised and the detachment date.
C) the amount of new equity to be raised and standby fee.
D) the detachment date and the subscription price.
Q3) What are venture capitalists and what is their role in raising capital for firms?
Q4) If the Ex-Rights price were set at $7.90,would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
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Page 22
Chapter 21: Long-Term Debt
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Q1) A bond has a call provision.The call provision allows the ________ to _________ the bonds before maturity.
A) investor; sell back
B) trustee; buyback
C) issuer; call
D) investor; call
E) trustee; sell back
Q2) Studies have shown that around the announcement of bond rating changes:
A) bond values increase, and equity values decrease.
B) bond values decrease, and equity values increase.
C) bond values increase, and equity values do not change.
D) bond values decrease, and equity values do not change.
E) no unusual behavior occurs in bond or equity values.
Q3) A description of property used as security and the details of the protective covenants are:
A) key terms in a rights agreement.
B) the basic terms of a bond.
C) key parts of a typical bond indenture.
D) key parts of a typical bond debenture.
Q4) 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) What is the after-tax cash flow from leasing in year 0?
A) -$300,000
B) -$495,000
C) -$852,000
D) -$948,000
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 relative to the after-tax cash flow from purchasing in years 1-3?
A) $15,000
B) $33,667
C) $2,750
D) $1,500
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Which of the following statements is true?
A) Both call and put options are in the money if the stock price is above the exercise price.
B) Both call and put options are in the money if the stock price is below the exercise price.
C) Call options are in the money if the stock price is above the exercise price. Put options are in the money if the stock price is below the exercise price.
D) Call options are in the money if the stock price is below the exercise price. Put options are in the money if the stock price is above the exercise price.
Q2) 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.
Q3) Use the Black-Scholes model to determine the option price for a call option which will expire in 1 year.The strike price is 17.50,and the current stock price is 20.The appropriate measure of volatility is 1.The interest rate on a T-bill that matures in one year is 7%.
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) 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?
Q2) 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.
Q3) Calculate N(d<sub>1</sub>).
A) 0.5054
B) 0.6508
C) 0.6983
D) 0.7047
E) 0.8096
Q4) The CEO of NuValue was granted 1,000,000 options.The stock price at the time of the granting of the options was $45 and the options are at the money.The risk free rate was 5% and the options expire in 5 years.The variance on the stock is .04.What is the value of the options contract? If he had negotiated a larger salary and only 10,000 options,what would be the value of the options contract?
Page 26
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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) Concerning convertible bonds,which of the following statements is not correct?
A) The value of a convertible bond will generally be greater than its straight bond value. B) The value of a convertible bond will generally be greater than its conversion value. C) The difference between the conversion value and the straight bond value is the conversion or option premium.
D) The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond.
Q3) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
Q4) Why are warrants and convertibles issued?
Q5) Illustrate and explain how a convertible bond value is based on both debt and equity value.What is the option value?
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Chapter 26: Derivatives and Hedging Risk
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Q1) If rates in the market fall between now and one month from now,the mortgage banker:
A) loses as the mortgages are sold at a discount.
B) gains as the mortgages are sold at a discount.
C) loses as the mortgages are sold at a premium.
D) gains as the mortgages are sold at a premium.
Q2) Two key features of futures contracts that make them more in demand than forward contracts are:
A) futures are traded on exchanges and must be marked to the market.
B) futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions.
C) futures are marked to the market and allow delivery flexibility.
D) futures are traded in liquid markets and are marked to the market.
Q3) A derivative is a financial instrument whose value is determined by:
A) a regulatory body such as the FTC.
B) a primitive or underlying asset.
C) hedging a risk.
D) hedging a speculation.
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 27: Short-Term Finance and Planning
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Q1) The cash cycle is defined as the time between:
A) the arrival of inventory in stock and when the cash is collected from receivables.
B) selling the product and posting the accounts receivable.
C) selling the product and collecting the accounts receivable.
D) cash disbursements and cash collection.
E) the arrival of inventory and cash collection.
Q2) ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer.The firm is now changing its policy and only producing a product when it receives an actual order from a customer.All else equal,this change will:
A) increase the operating cycle.
B) lengthen the accounts receivable period.
C) shorten the accounts payable period.
D) decrease the cash cycle.
E) decrease the inventory turnover rate.
Q3) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
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Chapter 28: Cash Management
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Q1) The difference between bank cash and book cash is called:
A) float.
B) disbursement float.
C) net float.
D) collection float.
Q2) Efficient funds management attempts to reduce mailing and clearing time.Two methods do this by:
A) moving collections and deposits closer together in concentration banks; and moving surplus funds quickly by wire transfers.
B) moving mailing points to cross country locations and using depository drafts to transfer funds.
C) drawing checks against zero balance accounts and using cross country mailing.
D) wiring funds to zero balance accounts and using lockboxes in many cities.
Q3) 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)?
Q4) The net float of a firm is made up of disbursement float and collection float.Discuss the three components of collection float and how they would work against the firm.
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Chapter 29: Credit Management
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Q1) Which of the following statements is not true?
A) Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered.
B) When a trade acceptance is discounted in the secondary market it becomes a market acceptance.
C) Sight drafts require immediate payment.
D) Trade acceptances arise when a bank guarantees payment on a commercial draft.
Q2) The Rapid Roller Co.offers terms of 3/15 net 45.The aging schedule for their customers is as follows:
Q3) 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%.
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Chapter 30: Mergers and Acquisitions
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Q1) What is the cost of acquiring A if the V and A merge? V is worth $450 and has 100 shares outstanding.A has a market value of $375 and has 40 shares outstanding.V to acquire A will swap 80 shares of V for the 40 shares of A. V believes the combination of VA was worth $925.
A) $325
B) $100
C) $36
D) $0
Q2) An acquisition may take place because of a real or perceived strategic advantage.An example of a strategic advantage would be:
A) an aircraft manufacturer buying a laser guidance company for possible advanced flight control without pilots.
B) a manufacturer integrating their supply by acquiring downline.
C) a corporation completing a spin-off.
D) a corporation out-sourcing to achieve cost economies.
Q3) 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) Which of the following statements about private workouts of financial distress is NOT true?
A) Senior debt is replaced with junior debt.
B) Debt may be replaced by equity.
C) Private workouts account for about three quarters of all reorganizations.
D) Top management is dismissed or take pay reduction many times.
Q2) How much 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%
Q3) How much should the secured creditors receive?
A) $1,000,000
B) $1,500,000
C) $1,250,000
D) $1,333,333
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Chapter 32: International Corporate Finance
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Q1) The cross rate is the:
A) exchange rate between the US dollar and other currency.
B) exchange rate between two currencies generally other than the US dollar.
C) rate converting the direct rate into the indirect rate.
D) the attitude of the agent at the exchange kiosk.
Q2) The European Currency Unit (ECU)is (a):
A) measure of how well the European Community keeps up with the times.
B) basket of 30 European currencies.
C) money on deposit in financial centers outside the country whose currency is involved.
D) the nickname for NATO troops from Europe.
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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