Corporate Finance (Advanced)
Midterm Exam
Course Introduction
Corporate Finance (Advanced) delves into the strategic financial practices of corporations, focusing on complex decision-making processes related to capital structure, valuation, mergers and acquisitions, risk management, and corporate governance. The course explores advanced analytical methods and quantitative tools to evaluate investment opportunities, optimize financial performance, and understand market dynamics. Through case studies and real-world applications, students will develop the expertise to address challenges in raising capital, dividend policy formulation, and corporate restructuring, preparing them for leadership roles in finance within global organizations.
Recommended Textbook
International Financial Management 8th Edition by Cheol Eun
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Page 2
Chapter 1: International Monetary System
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Q1) On January 1,1999,an epochal event took place in the arena of international finance when
A)all EU countries adopted a common currency called the euro.
B)eight of 15 EU countries adopted a common currency called the euro.
C)nine of 15 EU countries adopted a common currency called the euro.
D)eleven of 15 EU countries adopted a common currency called the euro.
Answer: D
Q2) Prior to the Argentine Peso Crisis
A)Argentina had a "dirty float" where the government allowed the exchange rate to float within wide bands.
B)Argentina had a currency board arrangement with the peso pegged to the U.S.dollar at parity.
C)the Argentine government defaulted on its international debts.
D)weakening of the U.S.dollar led the Argentine government to abandon dollarization.
Answer: D
Q3) In the years leading to the collapse of the Bretton Woods system
A)it became clear that the dollar was undervalued.
B)it became clear that the dollar was overvalued.
Answer: B
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Page 3
Chapter 2: Globalization and the Multinational Firm
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Q1) The Nestlé Corporation,a well-known Swiss MNC,used to issue two different classes of common stock,bearer shares and registered shares,and foreigners were allowed to hold only
A)registered shares.
B)bearer shares.
C)voting shares.
D)convertible shares.
Answer: B
Q2) The common monetary policy for the euro zone is now formulated by
A)the Bundesbank in Germany.
B)the Federal Reserve Bank.
C)the World Bank.
D)the European Central Bank.
Answer: D
Q3) What major dimension sets apart international finance from domestic finance?
A)Foreign exchange and political risks
B)Market imperfections
C)Expanded opportunity set
D)all of the options
Answer: D
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Chapter 3: Balance of Payments
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Sample Questions
Q1) If a country must make a net payment to foreigners because of a balance-of-payments deficit,the country should
A)either increase its official reserve assets or borrow anew from foreigners.
B)either run down its official reserve assets or borrow anew from foreigners.
C)either run down its official reserve assets or lend more foreigners.
D)none of the options
Answer: B
Q2) A country experiencing a significant balance-of-payments surplus would be likely to A)expand imports,offering marketing opportunities for foreign enterprises.
B)refrain from imposing foreign exchange restrictions.
C)expand exports,offering international marketing opportunities for domestic enterprises.
D)expand imports,offering marketing opportunities for foreign enterprises,and refrain from imposing foreign exchange restrictions.
Answer: D
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Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) After a hostile takeover,
A)the existing management team is usually fired.
B)the existing management team is usually retained at a higher wage.
C)the target company usually mounts a takeover defense.
D)none of the options
Q2) One implication of the Sarbanes-Oxley Act is that companies must appoint independent "financial experts" to their committees.Which of the major components is associated with this objective?
A)Accounting regulation
B)Audit committee
C)Internal control assessment
D)Executive responsibility
Q3) The goal of greater accounting transparency
A)is to impose more rules and harsher penalties for their violation.
B)is to reduce the information asymmetry between corporate insiders and the public.
C)is to discourage managerial self-dealings.
D)is to reduce the information asymmetry between corporate insiders and the public,as well as discourage managerial self-dealings.
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Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Consider the following spot and forward rate quotations for the Swiss franc.
S($/SFr)= 0.85
F<sub>1</sub>($/SFr)= 0.86
F<sub>2</sub>($/SFr)= 0.87
F<sub>3</sub>($/SFr)=0.88
Which of the following is true?
A)The Swiss franc is definitely going to be worth more dollars in six months.
B)The Swiss franc is probably going to be worth less in dollars in six months.
C)The Swiss franc is trading at a forward discount.
D)The Swiss franc is trading at a forward premium.
Q2) Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.
A) 1.25/£1.00
B)$1.25/£1.00
C)£1.25/ 1.00
D) 0.80/£1.00
Q3) Indirect exchange rate quotations from the U.S.perspective are
A)the price of one unit of the foreign currency in terms of the U.S.dollar.
B)the price of one U.S.dollar in the foreign currency.
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Page 7
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) Decision-making for multinational corporations formulating international sourcing,production,financing,and marketing strategies depends,primarily,on
A)risk management techniques.
B)expertise of staff attorneys.
C)luck.
D)forecasting exchange rates as accurately as possible.
Q2) Use the information below to answer the following question.
\(\begin{array}{rccccc}
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \\
S_{0}(\$ / ) & \$ 1.45= 1.00 &i \$ & 4\% \\
F_{360}(\$ / ) & \$ 1.48= 1.00& i & 3\%
\end{array}\) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
Q3) The random walk hypothesis suggests that
A)the best predictor of the future exchange rate is the current exchange rate.
B)the best predictor of the future exchange rate is the current forward rate.
C)the best predictors of the future exchange rate are the current exchange rate and the current forward rate.
D)none of the options
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) Consider an option to buy 12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
\( \begin{array}{lll}
&spot Rates&Risk-tree Rates\\
S_{0}(\$ / ) & \$ 1.60= 1.00&i \$ 3.00 \% \\
S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i 4.00 \% \\
S_{0}\left( /£)\right. & 1.25=£ 1.00&i £4.00 \% \end{array}
\) Calculate the hedge ratio.
Q2) With currency futures options the underlying asset is A)foreign currency.
B)a call or put option written on foreign currency.
C)a futures contract on the foreign currency.
D)none of the options
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Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) With any successful hedge,
A)you are guaranteed to lose money on one side.
B)you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C)you are guaranteed to lose money on one side,but you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
D)none of the options
Q2) Your firm has a British customer that is willing to place a $1 million order,but wants to pay in pounds instead of dollars.The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00.The lead time on the order is such that payment is due in one year.What is the fairest exchange rate to use?
A)$1.85 = £1.00
B)$1.8750 = £1.00
C)$1.90 = £1.00
D)none of the options
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) In recent years,
A)the U.S.dollar has appreciated substantially against most major currencies of the world,especially against the euro.
B)the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.
C)the U.S.dollar has maintained its value against most major currencies of the world,especially against the euro.
D)none of the options
Q2) A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can
A)not mitigate the effects of exchange rate changes.
B)lessen the effect of exchange rate changes by sourcing from where input costs are low.
C)focus on selling commodity products with product differentiation.
D)pursue a strategy of increasing its products price elasticity of demand.
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Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) Since fixed assets and inventory are usually carried at historical costs,
A)the temporal method and the monetary/nonmonetary methods will typically provide the same translation.
B)the current rate method and the monetary/nonmonetary methods will typically provide the same translation.
C)the temporal method and the current/noncurrent methods will typically provide the same translation.
D)none of the options
Q2) Which of the following is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows?
A)Current/noncurrent method
B)Current rate method
C)Current/future method
D)Short/long term method
Q3) Translation exposure,
A)is not entity specific,rather it is currency specific.
B)is not currency specific,rather it is entity specific.
C)involves restatement from Italian to French.
D)none of the options
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Page 12
Chapter 11: International Banking and Money Market
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Q1) The most widely used futures contract for hedging short-term U.S.dollar interest rate risk is
A)the Eurodollar contract.
B)the Euroyen contract.
C)the EURIBOR contract.
D)none of the options
Q2) A forward rate agreement (FRA)is a contract between two banks
A)that allows the Euro bank to hedge the interest rate risk in mismatched deposits and credits.
B)in which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest rates fall below an agreed rate,and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate.
C)that is structured to capture the maturity mismatch in standard-length Euro deposits and credits.
D)all of the options
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Chapter 12: International Bond Market
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Sample Questions
Q1) A potentially significant factor in slowing or preventing a deterioration of sovereign creditworthiness in times of stress is (are)
A)stringent monetary policy.
B)flexible monetary policy.
C)large credit lines.
D)liquid assets.
Q2) U.S.security regulations require Yankee bonds and U.S.corporate bonds sold to U.S.citizens to be
A)municipal bonds.
B)registered bonds.
C)bearer bonds.
D)none of the options
Q3) When the bond sells at par,the implicit /$ exchange rate at maturity of a Euro/U.S.dollar dual currency bond that pays $651.25 at maturity per 1,000,is
A) 1.54/$1.00.
B) 1.22/$1.00.
C) 1.79/$1.00.
D) 1/$1.00.
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14
Chapter 13: International Equity Markets
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Sample Questions
Q1) The turnover velocity percentages for 75 of the stock exchanges beginning with 2011 were measured.Over 40 percent of the exchanges,in most years,had in excess of
A)15 percent turnover per month.
B)25 percent turnover per month.
C)30 percent turnover per month.
D)75 percent turnover per month.
Q2) A limit order
A)is an instruction from a customer to a broker to buy or sell in at a particular price (or better).
B)can be a "day order"-that is the order is cancelled if not executed during that day's trading.
C)can be "good-till-cancelled."
D)all of the options
Q3) Generally,the higher the turnover ratio,
A)the less liquid the secondary stock market,indicating ease in trading.
B)the more liquid the secondary stock market,indicating ease in trading.
C)the more liquid the primary stock market,indicating ease in trading.
D)the more efficient the stock market is.
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Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
\[\begin{array} { l l l } & \$ & £ \\
\text { A } & \$ 6 \% & £5 \% \\
B & \$7 \% & £ 4\%
\end{array}\] The IRP 1-year and 2-year forward exchange rates are \(F _ { 1 }\) ($ £)= \(\frac { \$ 2.00 \times ( 1.06 ) }
}\) \(F _ { 2 }\) ($ £)= \(\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }\) = \(\frac { \$ 2.0777 } { £ 1.00 }\) USD pounds
\[\begin{array} { c c c c }
\text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \\
6\% & 6.1 \% & 4 \%& 4 .1\%
\end{array}\] Explain how this opportunity affects which swap firm B will be willing to participate in.
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Page 16
Chapter 15: International Portfolio Investment
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Q1) With regard to the past performance of U.S.-based closed-end country funds
A)most investors who can invest directly in foreign markets without incurring excessive costs are advised to do so.
B)NAVs offer superior diversification opportunities compared to the CECFs.
C)most investors who can invest directly in foreign markets without incurring excessive costs are advised to do so,and NAVs offer superior diversification opportunities compared to the CECFs.
D)none of the options
Q2) With regard to the OIP,
A)the composition of the optimal international portfolio is identical for all investors,regardless of home country.
B)the OIP has more return and less risk for all investors,regardless of home country.
C)the composition of the optimal international portfolio is identical for all investors of a particular country,whether or not they hedge their risk with currency futures contracts.
D)none of the options
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) While there is no comprehensive theory of FDI,many existing theories emphasize
A)imperfections in product markets.
B)imperfections in capital markets.
C)imperfections in labor markets.
D)all of the options
Q2) Firms that have intangible assets with a public good property tend to invest directly in foreign countries.This is
A)in order to use these assets on a larger scale.
B)to avoid the misappropriation that may occur while transacting in foreign countries through the market mechanism.
C)in order to use these assets on a larger scale,and to avoid the misappropriation that may occur while transacting in foreign countries through the market mechanism.
D)none of the options
Q3) The United States is the largest initiator,of FDI.The largest recipient of FDI is
A)also the United States.
B)France.
C)Germany.
D)China.
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Chapter 17: International Capital Structure and the Cost of Capital
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Sample Questions
Q1) Solve for the weighted average cost of capital. \(\begin{aligned}
17.20 \% &=K_{1} \\
6 / 7 &=\lambda \\
8.0 \% &=i \\
40.0 \% 0 &=\tau
\end{aligned}\)
A)7.00 percent
B)6.89 percent
C)6.73 percent
D)6.57 percent
Q2) A recent study of MNCs suggests that when a foreign subsidiary's obligations cannot be met with locally generated revenues,
A)parent firms bail out their subsidiaries regardless of circumstances.
B)that parent firms routinely allow subsidiaries to default.
C)most subsidiaries are financed almost entirely with banker's acceptances.
D)none of the options
Q3) In the real world,does the cost of capital differ among countries?
A)Yes
B)No
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Chapter 18: International Capital Budgeting
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Q1) Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = 1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
What is CF5 in dollars?
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Chapter 19: Multinational Cash Management
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Q1) With regard to cash management systems in practice,studies suggest that the benefits of a multilateral netting system include
A)the decrease in the expense associated with funds transfer,which in some cases can be over $1,000 for a large international transfer of foreign exchange.
B)the savings in administrative time.
C)the reduction in intra company float,which is frequently as high as five days,even for wire transfers.
D)all of the options
Q2) Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency,limiting conversion to other currencies,an MNC's frustrated remittance of profits from a subsidiary would be
A)blocked funds.
B)stopped funds.
C)constipated funds.
D)money down the toilet.
Q3) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False
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Chapter 20: International Trade Finance
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Q1) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days.The importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4 percent.
Determine the amount the exporter will receive if he holds the B/A until maturity.
Q2) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90 days.Further assume that the importing bank's acceptance commission is 1 percent and that the market rate for 90-day B/As is 3.0 percent.The bond equivalent yield that the exporter pays in discounting the B/A is
A)3.05 percent.
B)3.01 percent.
C)3.07 percent.
D)none of the options
Q3) In a forfaiting transaction,the forfait is usually
A)the importer.
B)the exporter.
C)the bank.
D)the title to the goods,or the bill of lading.
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Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) Tax evasion is more difficult under a VAT because
A)at each stage in the production process producers have an incentive to obtain documentation from the previous stage that the VAT was paid in order to get the greatest tax credit possible.
B)customers can't convince retailers to sell things without a receipt.
C)the cost of record keeping under a VAT system imposes an economic hardship on small businesses.
D)none of the options
Q2) The foreign tax credit method followed by the United States is
A)to grant the parent firm credit against its U.S.tax liability for taxes paid to foreign tax authorities on foreign-source income.
B)in place for the purpose of avoiding double taxation.
C)to grant the parent firm credit against its U.S.tax liability for taxes paid to foreign tax authorities on foreign-source income,and is in place for the purpose of avoiding double taxation.
D)none of the options
Q3) An income tax is a direct tax.
A)True
B)False
Page 23
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