Capital Budgeting
Exam Answer Key
Course Introduction
Capital Budgeting explores the principles, techniques, and processes used by organizations to evaluate and select long-term investment projects. The course examines various methods for assessing the feasibility and profitability of capital expenditures, including net present value (NPV), internal rate of return (IRR), payback period, and profitability index. Students will learn to analyze cash flows, manage risk, and incorporate both quantitative and qualitative factors in capital investment decisions. Emphasis is placed on practical application, strategic alignment with organizational goals, and ethical considerations in capital budgeting processes.
Recommended Textbook
Corporate Finance 12th Edition by Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The treasurer and the controller of a corporation generally report to the:
A)board of directors.
B)chairman of the board.
C)chief executive officer.
D)president.
E)chief financial officer.
Answer: E
Q2) Which one of these characteristics best describes the primary advantage of being a limited partner rather than a general partner?
A)Entitlement to a larger portion of the partnership's income
B)Day-to-day management control of the business
C)Profits free of any income taxation
D)Overall control of the partnership
E)Personal financial liability limited to the capital invested
Answer: E
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) If a firm's financial managers successfully meet their primary goal,then the firm's:
A)debts will exceed its equity.
B)market value will exceed its book value.
C)net working capital will exceed its long-term debt.
D)carrying value will exceed its market value.
E)equity will exceed its assets.
Answer: B
Q2) An increase in treasury stock:
A)increases the total equity of the firm.
B)is the result of a firm issuing new shares of stock to the federal government.
C)increases the number of shares outstanding.
D)results from a repurchase of outstanding shares of stock.
E)requires repayment at some point in the future.
Answer: D
Q3) Why is cash flow management important?
Answer: Generally Accepted Accounting Principles (GAAP)allow significant subjective decisions to be made in many key areas.The use of cash flow as a metric to evaluate a company comes from the idea that there is less subjectivity involved and therefore,it is harder to spin the numbers.
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Chapter 3: Financial Statements and Cash Flow
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Sample Questions
Q1) Last year,Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20.This year,the price-earnings ratio is 18 and the earnings per share is $1.20.Based on this information,it can be stated with certainty that:
A)the price per share decreased.
B)the earnings per share decreased.
C)investors are paying a lower price per share this year as compared to last year.
D)investors are receiving a higher rate of return this year.
E)the investors' outlook for the firm has improved.
Answer: E
Q2) Discount Mart has $876,400 in sales with a profit margin of 3.8 percent.There are 32,500 shares of stock outstanding at a market price per share of $21.60.What is the price-earnings ratio?
A)23.40
B)22.60
C)19.21
D)21.08
E)18.47
Answer: D
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Sara is the recipient of a trust that will pay her $500 on the first day of each month,starting immediately and continuing for 40 years.What is the value of this inheritance today if the applicable discount rate is 7.3 percent,compounded monthly?
A)$76,811.30
B)$67,557.52
C)$89,204.04
D)$78,192.28
E)$80,006.09
Q2) Ted purchased an annuity today that will pay $1,000 a month for five years.He received his first monthly payment today.Allison purchased an annuity today that will pay $1,000 a month for five years.She will receive her first payment one month from today.Which one of the following statements is correct concerning these two annuities?
A)Both annuities are of equal value today.
B)Allison's annuity is an annuity due.
C)Ted's annuity has a higher present value than Allison's.
D)Allison's annuity has a higher present value than Ted's.
E)Ted's annuity is an ordinary annuity.
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) You are considering a project with an initial cost of $4,300.What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year for Years 1 to 4,respectively?
A)2.04 years
B)2.36 years
C)2.89 years
D)3.04 years
E)3.36 years
Q2) Roy's Welding projects cash flows of $13,500,$20,400,and $32,900 for Years 1 to 3 for a project with an initial cost of $45,000.What is the profitability index given an assigned discount rate of 15 percent?
A).92
B).97
C)1.03
D)1.08
E)1.14
Q3) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why IRR has some limitations NPV does not.
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Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) For this year,Wilbert's Cakes has costs of $187,400,depreciation of $32,700,interest expense of $14,800,dividends paid of $5,600,taxes of $17,600,and an operating cash flow of $101,900.What is the sales amount?
A)$264,200
B)$269,800
C)$306,900
D)$322,100
E)$324,200
Q2) Pete's Garage just purchased some equipment at a cost of $650,000.What is the proper methodology for computing the depreciation expense for Year 3 if the equipment is classified as 5-year property for MACRS? The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Ignore bonus depreciation.
A)$650,000(1 .20)(1 .32)(1 .192)
B)$650,000(1 .20)(1 .32)
C)$650,000(1 .20)(1 .32)(.192)
D)$650,000(1 .192)
E)$650,000(.192)
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Chapter 7: Risk Analysis, real Options, and Capital Budgeting
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Sample Questions
Q1) The investment timing decision relates to:
A)how long the cash flows last once a project is implemented.
B)the preferred starting date of a new project.
C)how frequently the cash flows of a project occur.
D)how many times a project can be expanded.
E)how long a project should operate before an abandonment decision can be implemented.
Q2) The projections for a new one-year project show sales of 8,500 units,± 5 percent; variable costs per unit of $28.62,± 3 percent; and fixed costs of $164,000,± 3 percent.Depreciation is $62,000 and the tax rate is 23 percent.The sale price is $55 a unit,± 2 percent.The company bases its sensitivity analysis on the expected scenario.What is the operating cash flow for a sensitivity analysis using total fixed costs of $170,000?
A)$62,406.67
B)$58,219.90
C)$61,311.07
D)$56,017.10
E)$52,048.80
Q3) What is the benefit of scenario analysis if it does not produce a definitive accept or reject decision for a proposed project?
Page 9
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) Define what is meant by interest rate risk.Also,assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future.What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction?
Q2) Interest rate risk ________ as the time to maturity decreases and ________ as the coupon rate decreases.
A)decreases; increases B)decreases; decreases C)increases; increases D)increases; decreases E)increases; is unaffected
Q3) The bonds issued by Manson and Son bear a coupon of 6 percent,payable semiannually.The bond matures in 15 years and has a $1,000 face value.Currently,the bond sells at par.What is the yield to maturity?
A)5.87 percent
B)5.97 percent
C)6.00 percent
D)6.09 percent
E)6.17 percent
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Page 10
Chapter 9: Stock Valuation
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Sample Questions
Q1) Russell's has annual revenue of $387,000 with costs of $216,400.Depreciation is $48,900 and the tax rate is 21 percent.The firm has debt outstanding with a market value of $182,000 along with 9,500 shares of stock that is selling at $67 a share.The firm has $48,000 of cash of which $29,500 is needed to run the business.What is the firm's EV/EBITDA ratio?
A)5.57
B)4.69
C)3.39
D)3.93
E)6.20
Q2) Rudy's stock is currently valued at $28.40 a share.The firm had earnings per share of $1.86 last year and projects earnings of $2.09 a share for next year.What is the trailing twelve month price-earnings ratio?
A)13.59
B)14.38
C)12.84
D)16.67
E)15.27
Q3) Explain the differences between a market order,a limit order,and a stop order.
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Chapter 10: Lessons From Market History
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Sample Questions
Q1) Based on historical market performance,what can we conclude about the relationship between return and risk?
Q2) The standard deviation of small-company stocks:
A)had an average value of about 20 percent for the period 1926 to 2017.
B)is roughly equivalent to the standard deviation on stocks of all sizes.
C)is about ten times as large as the standard deviation of U.S.Treasury bills.
D)is less than the standard deviation on large-company stocks.
E)produces a narrow normal distribution curve.
Q3) You purchased 300 shares of stock at a price of $37.23 per share.Over the last year,you have received total dividend income of $351.What is the capital gains yield if your total return is 11.47 percent?
A)8.33 percent
B)7.26 percent
C)9.39 percent
D)9.50 percent
E)7.67 percent
Q4) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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Chapter 11: Return, risk, and the Capital Asset Pricing Model
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Sample Questions
Q1) Explain in words what beta is and why it is an important tool of security valuation.
Q2) Stock A has an expected return of 17.8 percent,and Stock B has an expected return of 9.6 percent.However,the risk of Stock A as measured by its variance is 3 times that of Stock B.If the two stocks are combined equally in a portfolio,what would be the portfolio's expected return?
A)13.37 percent
B)13.70 percent
C)15.75 percent
D)12.41 percent
E)14.55 percent
Q3) The correlation between Stocks A and B is computed as the:
A)covariance between A and B divided by the standard deviation of A times the standard deviation of B.
B)standard deviation of A divided by the standard deviation of B.
C)standard deviation of AB divided by the covariance between A and B.
D)variance of A plus the variance of B divided by the covariance of AB.
E)square root of the covariance of AB.
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) A factor,as used in APT,is a variable that:
A)represents a nondiversifiable risk.
B)affects the returns of risky assets in an unsystematic fashion.
C)correlates the returns of a risky asset with those of a risk-free asset.
D)measures the response of a specific asset to a systematic risk.
E)represents a firm-specific risk.
Q2) Which one of the following statements is true?
A)A well-diversified portfolio has negligible systematic risk.
B)A well-diversified portfolio has negligible unsystematic risk.
C)An individual security has negligible systematic risk.
D)An individual security has negligible unsystematic risk.
E)Both a well-diversified portfolio and an individual security have negligible unsystematic risk.
Q3) In a multifactor model,explain what a factor represents and the role that beta plays in relation to factors.How do factors and betas affect the actual return?
Q4) Explain the conceptual differences in the theoretical development of the CAPM and the APT.
Q5) Verbally describe a graph that illustrates the one-factor model.
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Chapter 13: Risk, cost of Capital, and Valuation
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Sample Questions
Q1) When valuing a firm financed with debt and equity,the individual cash flows should be discounted using:
A)the market rate of return.
B)the average of the DDM and CAPM costs of equity.
C)(1 + WACC)<sup>T</sup>.
D)(1 + CAPM)<sup>T</sup>.
E)(r g).
Q2) Sound Systems has 200 shares of common stock outstanding at a market price of $37 a share.The firm recently paid an annual dividend in the amount of $1.20 per share and has a dividend growth rate of 4 percent.The firm also has 5 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par.The bonds have a coupon rate of 6 percent and a yield to maturity of 6.7 percent.All interest is tax deductible.If the tax rate is 21 percent,what is the weighted average cost of capital?
A)5.93 percent
B)6.87 percent
C)6.37 percent
D)6.54 percent
E)7.08 percent
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) If the financial markets are efficient,then investors should expect their investments in those markets to:
A)earn extraordinary returns on a routine basis.
B)generally have positive net present values.
C)generally have zero net present values.
D)produce arbitrage opportunities on a routine basis.
E)produce negative returns on a routine basis.
Q2) Which one of the following statements is correct concerning market efficiency?
A)Markets tend to be more efficient when the frequency of price changes diminishes.
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 newly issued shares of stock.
E)New information will gradually be reflected in a stock's price to avoid spooking investors.
Q3) Explain why in an efficient market all investments have an expected NPV of zero.
Q4) Explain the risk that often accompanies the behavioral concept of familiarity.
Q5) Define the three forms of market efficiency.
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Chapter 15: Long-Term Financing
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Q1) Identify three key duties of a bond trustee.
Q2) Financial economists prefer to use market values rather than book values when measuring debt ratios because market values are:
A)more stable than book values.
B)a better reflection of current information.
C)net of taxes.
D)used by Standard & Poor's to measure credit worthiness. E)most commonly required by bond covenants.
Q3) Analysts estimate that one year from today,a bond has a probability of 40 percent of being priced at $950 and a probability of 60 percent of being priced at $1,050.The bond is also callable at any time at $1,010.What is the expected value of this bond in one year?
A)$995
B)$980
C)$1,000
D)$1,010
E)$986
Q4) Explain some of the means by which a select group of shareholders can retain control over a corporation while still raising equity capital outside of their group.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent.The debt-equity ratio is .60 and the tax rate is 21 percent.What is Rosita's unlevered cost of capital?
A)11.83 percent
B)12.07 percent
C)13.97 percent
D)14.08 percent
E)14.60 percent
Q2) MM Proposition I with no tax supports the argument that:
A)business risk determines the return on assets.
B)the cost of equity rises as leverage rises.
C)it is completely irrelevant how a firm arranges its finances.
D)a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E)financial risk is determined by the debt-equity ratio.
Q3) Based on MM Propositions,with and without taxes,how much time should a financial manager spend analyzing the capital structure of his firm?
Q4) Explain homemade leverage and why it matters.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Wigdor Manufacturing is currently all-equity financed,has an EBIT of $2 million and has a corporate tax rate of 21 percent.Louis,the company's founder,is the lone shareholder.All earnings are paid out as dividends to Louis.If the firm were to convert $4 million of equity into debt,the cost would be 10 percent and Louis would hold all the debt.Assume Louis pays personal taxes on interest income at a rate of 37 percent but pays taxes on dividends at a rate of 20 percent.Calculate the total cash flow to Louis after he pays personal taxes if the firm is unlevered and if it is levered.
Q2) Describe some of the sources of business risk and financial risk.Do financial decision makers have the ability to "trade off" one type of risk for another type of risk?
Q3) In a world with taxes and financial distress,when a firm is operating with the optimal capital structure the:
A)debt-equity ratio will be minimized.
B)weighted average cost of capital will be maximized.
C)firm will be all-equity financed.
D)required return on assets will be at its maximum point.
E)overall benefits of debt have all been realized.
Q4) What is the pecking order theory and what are the implications that arise from this theory?
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The appropriate cost of debt to the firm is the:
A)pretax market cost of debt.
B)levered equity rate.
C)aftertax market borrowing rate.
D)pretax coupon rate.
E)aftertax coupon rate.
Q2) Kelso's is valued at $5.8 million,has riskless debt of $2.3 million outstanding,and has an equity beta of 1.81.What is the asset beta if there are no taxes?
A)1.11
B)1.86
C)1.15
D)1.09
E)1.71
Q3) The cost of equity for an all-equity firm is designated as:
A)R<sub>s.</sub>
B)R<sub>D.</sub>
C)R<sub>S</sub>(1 t<sub>C</sub>)<sub>.</sub>
D)R<sub>0.</sub>
E)R<sub>0</sub>(1 t<sub>C</sub>).
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Q4) Explain why the flow to equity approach uses levered,not unlevered,cash flows.
Chapter 19: Dividends and Other Payouts
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Q1) In a reverse stock split the:
A)number of shares outstanding increases and the owners' equity decreases.
B)firm buys back existing shares of stock on the open market.
C)firm sells new shares of stock on the open market.
D)number of shares outstanding decreases while the book value of owners' equity is unchanged.
E)shareholders make a cash payment to the firm.
Q2) Stock splits are often used to:
A)adjust the market price of a stock such that it falls within a preferred trading range.
B)decrease the excess cash held by a firm.
C)increase both the number of shares outstanding and the market price per share.
D)increase the total equity of a firm.
E)adjust the debt-equity ratio such that it falls within a preferred range.
Q3) Financial managers:
A)are reluctant to cut dividends.
B)tend to ignore past dividend policies.
C)tend to prefer cutting dividends every time quarterly earnings decline.
D)prefer cutting dividends over incurring flotation costs.
E)place little emphasis on dividend policy consistency.
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Chapter 20: Raising Capital
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Q1) Lasko's has 250,000 shares of stock outstanding,$400,000 in perpetual annual earnings,and a discount rate of 16 percent.The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000.How many new shares must be issued to fund the new project? Ignore taxes.
A)34,653
B)33,928
C)35,000
D)36,028
E)34,209
Q2) Security issues that are governed by Regulation A are:
A)distributed solely among current company employees and directors.
B)sold in full to a single purchaser.
C)those that only include securities currently held by corporate insiders.
D)limited such that only current shareholders can purchase them.
E)valued at less than $5 million.
Q3) Identify and explain the key differences between public issues of debt and direct private long-term debt financing.
Q4) Identify six components that comprise the total costs associated with issuing securities.
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Chapter 21: Leasing
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Q1) A lease has a term of 5 years with annual payments of $6,400.The asset would cost $45,000 to buy and would be depreciated straightline to a zero salvage value over 5 years.The actual salvage value is zero.If the firm has a tax rate of 21 percent,what is the incremental cash flow in Year 5 of leasing rather than purchasing?
A) $4,224
B) $3,198
C) $6,946
D) $7,250
E) $6,880
Q2) Assume the net present value of a lease relative to a purchase is $150.This indicates that the:
A)purchase price is less than the reduction in optimal debt level if leasing.
B)lease is preferred.
C)optimal lease payment is $150 per period.
D)net advantage of leasing is negative.
E)lease provides an advantage only to the lessor.
Q3) Explain the characteristics of both operating and financial leases.
Q4) Explain the term "bargain purchase price option" and identify at least one application of that term.
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Chapter 22: Options and Corporate Finance
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Q1) You wrote ten put option contracts on JIG stock with a strike price of $40 and an option price of $.40.What is your total profit on this investment if the price of JIG is $41.05 on the option expiration date?
A)$6,450
B)$5,650
C)$400
D) $5,650
E) $6,450
Q2) A ________ is a derivative security that gives the owner the right,but not the obligation,to buy an asset at a fixed price for a specified period of time.
A)futures contract
B)call option
C)put option
D)swap
E)forward contract
Q3) 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?
Q4) How do options apply to capital budgeting? Explain and provide an example.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Which one of the following is not included as an input for the Black-Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value
E)Continuously compounded interest rate
Q2) Which one of these is not a reason why executives place less value on employee stock options than their face value would indicate?
A)The option's value depends on the stock price exceeding the exercise price.
B)Options must generally be held for a period of time.
C)Options may create a highly undiversified portfolio for the executive.
D)Options always create taxable income for the executive when granted.
E)Options could be out of the money.
Q3) Under risk neutrality,the expected return on an asset will equal:
A)the market risk premium.
B)the market rate of return.
C)zero.
D)the risk-free rate of interest.
E)the asset beta times the market risk premium.
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) Aztec's convertible bonds each have a face value of $1,000 and a market value of $1,041.25.Each bond can be exchanged 25 shares of stock.The stock is selling for $41.54 a share.The straight bond value is $1,010.What is the option value per bond?
A)$0
B)$2.75
C)$3.08
D)$38.50
E)$.11
Q2) Convertible bonds:
A)are secured by shares of common stock.
B)require conversion on or before the bond's maturity date.
C)grant the owner the option of receiving either cash or shares of stock on conversion.
D)are generally issued by firms that have lower bond ratings than the average firm.
E)are generally granted seniority over all other bonds.
Q3) Explain why there is neither a "Free Lunch" nor an "Expensive Lunch" when convertible bonds are issued.
Q4) Why are warrants and convertibles issued?
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Chapter 25: Derivatives and Hedging Risk
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Q1) Interest rate swaps allow one party to exchange a:
A)floating interest rate for a fixed rate.
B)fixed interest rate for a lower fixed rate.
C)floating interest rate for a lower floating rate.
D)floating interest rate for a one-time immediate cash payment.
E)fixed interest rate for a one-time future cash payment.
Q2) To protect against interest rate risk,the mortgage banker who has committed to lending funds but has yet to raise those funds should:
A)buy futures,as this position will hedge losses if rates rise.
B)sell futures,as this position will hedge losses if rates rise.
C)sell futures,as this position will add to his gains if rates rise.
D)buy futures,as this position will add to his gains if rates rise.
E)avoid the futures market.
Q3) Mortgage bankers earn income principally by:
A)speculating in Treasury futures.
B)collecting interest on long-term mortgages.
C)offsetting long and short hedge positions in Treasury futures.
D)charging origination and servicing fees.
E)hedging all interest rate risk.
Q4) Explain why credit default swaps act like an insurance policy.
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Chapter 26: Short-Term Finance and Planning
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Q1) Jordan and Sons has an inventory period of 48.6 days,an accounts payable period of 36.2 days,and an accounts receivable period of 29.3 days.Management is considering offering a discount of 5 percent if its credit customers pay for their purchases within 10 days.This discount is expected to reduce the receivables period by 17 days.If the discount is offered,the operating cycle will decrease from ________ days to ________ days.
A)28.3; 11.3
B)77.9; 60.9
C)28.3; 45.3
D)77.9; 94.9
E)54.2; 37.2
Q2) The length of time between the payment for inventory and the collection of cash from receivables is called the:
A)operating cycle.
B)inventory period.
C)accounts receivable period.
D)accounts payable period.
E)cash cycle.
Q3) Identify the three primary characteristics of a restrictive short-term financial policy.
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28
Chapter 27: Cash Management
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Q1) Processing float; time it takes the receiving firm to process incoming mail,prepare the bank deposit,and take the deposit to the bank
Q2) Financial managers frequently broaden their definition of cash to include:
A)currency,bank checking accounts,as well as stock and bond investments.
B)currency,bank checking accounts,and bond investments.
C)cash,bond investments,bank checking accounts,and short-term marketable securities.
D)currency,bank checking accounts,and short-term marketable securities.
E)cash and bank accounts only.
Q3) Availability float Collection float includes:
Q4) Determining the appropriate cash balance involves assessing the trade-off between:
A)income and diversification.
B)the benefits and costs of liquidity.
C)balance sheet strength and transaction needs.
D)short-term and long-term investment returns.
E)cash needs and cash preferences.
Q5) Mail float
Q6) Explain why money market preferred stock appeals to corporations.
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Chapter 28: Credit and Inventory Management
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Q1) Baked Potatoes has total annual sales of 846,000 units,a carrying cost per unit of $1.64 per year,and restocking costs of $31 per order.Each inventory item has an average cost of $2.39.What is the average dollar value of the firm's inventory if it always orders the most economical quantity?
A)$6,758
B)$7,008
C)$7,409
D)$6,218
E)$6,411
Q2) All the following can provide credit information about a customer except: A)the customer's financial statements. B)credit reports.
C)the customer's current payment history with the seller. D)the amount of goods the customer desires to purchase. E)banks.
Q3) There are generally considered to be five key factors that should be evaluated when trying to determine if a customer will pay.Write five questions that a credit manager should answer when reviewing a credit application that would address these factors.
Q4) Explain the purpose of a safety stock and how this relates to reorder points.
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Chapter 29: Mergers,acquisitions,and Divestitures
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Q1) For the acquiring firm,diversification:
A)will automatically produce gains.
B)will reduce both risk and debt capacity.
C)may or may not provide financial benefits.
D)will provide risk reduction for all shareholders' portfolios.
E)may result in a risk-free firm.
Q2) Principal is acquiring Secondary Companies for $38,000 in cash.Principal has 4,500 shares of stock outstanding at a market price of $31 a share.Secondary has 1,600 shares of stock outstanding at a market price of $22 a share.Neither firm has any debt.The net present value of the acquisition is $2,400.What is the price per share of Principal after the acquisition?
A)$31.00
B)$30.78
C)$31.53
D)$32.10
E)$31.94
Q3) Sometimes the management of a target firm fights a takeover attempt even when that attempt appears to be in the best interest of the shareholders.Why would management take this stance?
Q4) Explain the purpose of a standstill agreement and the basics of how it works.
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Chapter 30: Financial Distress
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Q1) Periods of financial distress are most associated with:
A)continued increases in earnings.
B)steady growth.
C)dividend reductions.
D)increasing growth rates.
E)decreasing production costs.
Q2) The key intuition of a Z-score model like Altman's is that:
A)only publicly traded firms can be evaluated.
B)one will be just as well off by guessing on default rates.
C)all corporations will default at least once.
D)financial profiles of bankrupt and non-bankrupt firms are very different one year prior to bankruptcy.
E)privately traded firms disclose better financial information to lenders.
Q3) Insolvency can be defined as:
A)not having cash.
B)having less cash than the firm needs for one year.
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.
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Chapter 31: International Corporate Finance
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Q1) An agreement to trade currencies based on the exchange rate set today for settlement within two business days is called a(n)________ trade.
A)swap
B)option
C)futures
D)forward
E)spot
Q2) Assume the spot market exchange rate for $1 is currently A$1.2902.Also assume the expected inflation rate is 3.3 percent in Australia compared to the U.S.rate of 2.8 percent.What is the expected exchange rate one year from now if relative purchasing power parity exists?
A)A$1.2837
B)A$1.2062
C)A$1.2286
D)A$1.2967
E)A$1.1484
Q3) How well do you think relative purchasing power parity and uncovered interest parity behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?
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