Corporate Finance
Final Exam Questions
Course Introduction
Corporate Finance is an essential course that explores the principles, strategies, and tools used by firms to make financial decisions that maximize corporate value. The course covers key topics such as capital budgeting, risk and return analysis, cost of capital, capital structure, dividend policy, financial planning, and working capital management. Students will learn to evaluate investment opportunities, analyze financial statements, understand the role of financial markets and institutions, and apply quantitative techniques to real-world corporate finance problems. Through case studies and practical examples, the course provides a solid foundation for understanding how financial decisions impact a companys strategic direction, performance, and value creation.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) In countries like France and Germany,
A)managers have often made business decisions with regard to maximizing market share to the exclusion of other goals.
B)managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
C)managers have often regarded the prosperity and growth of their combines, or families of related firms, as their critical goal.
D)managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.
Answer: B
Q2) What is the relative price of wheat in North Dakota prior to trade in Case II?
A)2 bushels of wheat = ½ bottle of beer
B)½ bushel of wheat = 2 bottles of beer
C)1 bushel of wheat = ½ bottle of beer
D)1 bushel of wheat = 2 bottles of beer
Answer: D
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Chapter 2: International Monetary System
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Q1) To pave the way for the European Monetary Union,the member countries of the European Monetary System agreed to achieve a convergence of their economies.Which of the following is NOT a condition of convergence:
A)keep the ratio of government budget deficits to GDP below 3 percent.
B)keep gross public debts below 60 percent of GDP.
C)achieve a high degree of price stability.
D)maintain its currency at a fixed exchange rate to the ERM.
Answer: D
Q2) Special Drawing Rights (SDR)are
A)an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF.
B)a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of.
C)used in addition to gold and foreign exchanges, to make international payments.
D)all of the above
Answer: D
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Chapter 3: Balance of Payments
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Q1) The central bank of the United States is
A)the New York Fed.
B)the Federal Reserve System.
C)the EXIM bank.
D)none of the above-the U.S.does not have a central bank.
Answer: B
Q2) The balance of payments records
A)only international trade, (exports and imports).
B)only cross-border investments (FDI and portfolio investment).
C)not only international trade, (exports and imports) but also cross-border investments.
D)none of the above
Answer: C
Q3) If the interest rate rises in the U.S.while other variables remain constant
A)capital inflows into the U.S.will increase.
B)capital inflows into the U.S.may not materialize.
C)capital will flow out of the U.S.
D)none of the above
Answer: A
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Chapter 4: Corporate Governance Around the World
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Q1) The key strengths of the public corporation is/are
A)their capacity to allow efficient risk sharing among many investors.
B)their capacity to raise large amounts of funds at relatively low cost.
C)their capacity to consolidate decision-making.
D)all of the above
Q2) Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
A)by moving to a better county.
B)by listing their stocks in countries with strong investor protection.
C)by voluntarily complying with the provisions of the U.S.Sarbanes-Oxley Act.
D)having a press conference and promising to be nice to their investors.
Q3) One way to measure the value of private benefits of control
A)is to measure the difference in value between non-voting shares and voting shares.
B)is to measure the value of the "block premium" the value difference between the price per share paid for a control block of shares versus the exchange price of regular shares.
C)both a and b
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Chapter 5: The Market for Foreign Exchange
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Q1) Suppose you observe the following exchange rates: 1 = $1.45; £1 = $1.90.Calculate the euro-pound exchange rate.
A) 1.3103 = £1.00
B)£1.3333 = 1.00
C) 2.00 = £1
D) 3 = £1
Q2) What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.
A) 0.5386/CHF
B) 0.5389/CHF
C) 0.5463/CHF
D) 0.5466/CHF
Q3) Using the table above,what is the bid price of pounds in terms of euro?
A) 1.3371/£
B) 1.3378/£
C)£0.7475/
D)£0.7479/
Q4) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
Q5) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) According to the monetary approach,what matters in exchange rate determination are
A)the relative money supplies.
B)the relative velocities of monies.
C)the relative national outputs.
D)all of the above
Q2) As of today,the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?
A) 1.00 = $1.2379
B) 1.00 = $1.2623
C) 1.00 = $0.9903
D)$1.00 = 1.2623
Q3) A higher U.S.interest rate (i<sub>$</sub> \(\uparrow\))will result in
A)a stronger dollar.
B)a lower spot exchange rate (expressed as foreign currency per U.S.dollar).
C)both a and b
D)none of the above
Q4) If you had borrowed $1,000,000 and traded for euro at the spot rate,how many do you receive?
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Today's settlement price on a Chicago Mercantile Exchange (CME)Yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME Yen contract is ¥12,500,000).If you have a long position in one futures contract,the changes in the margin account from daily marking-to-market,will result in the balance of the margin account after the third day to be
A)$1,425.
B)$1,675.
C)$2,000.
D)$3,425.
Q2) Calculate the hedge ratio.
Q3) A put option on $15,000 with a strike price of 10,000 is the same thing as a call option on 10,000 with a strike price of $15,000.
A)True
B)False
Q4) Find the risk neutral probability of an "up" move.
Q5) Draw the tree.
Q6) If the call finishes out-of-the-money what is your portfolio cash flow?
Q7) If the call finishes in-the-money what is your portfolio cash flow?
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Chapter 8: Management of Transaction Exposure
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Q1) If a firm faces progressive tax rates,
A)they should spread income out across time and subsidiaries.
B)they should focus on maximizing income in one division or subsidiary.
C)they should manage their income recognition without regard to their taxes.
D)none of the above
Q2) A call option on £1,000 with a strike price of 1,250 is equivalent to
A)a put option on 1,250 with an exercise price of 1,000.
B)a portfolio of options: a put on 1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.
C)a put option on £1,000 with an exercise price of 1,250.
D)both a and b
Q3) Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months),but insists upon paying in pounds instead of dollars.
A)The customer essentially wants you to discount your price by the value of a put option on pounds.
B)The customer essentially wants you to discount your price by the value of a call option on pounds.
C)None of the above
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Chapter 9: Management of Economic Exposure
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Q1) The firm may not be able to pass through changes in the exchange rate
A)in markets with low product differentiation.
B)in markets with high price elasticities.
C)both a and b
D)none of the above
Q2) On the basis of regression Equation \(P = a + b \times S + e\) we can decompose the variability of the dollar value of the asset,Var(P),into two separate components
Var(P)= b<sup>2</sup> * Var(S)+ Var(e) The second term in the right-hand side of the equation,Var(e)represents
A)the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.
B)captures the residual part of the dollar value variability that is independent of exchange rate movements.
C)none of the above
Q3) Generally speaking,a firm is subject to high degrees of operating exposure
A)when its costs are sensitive to exchange rate changes.
B)when its prices are sensitive to exchange rate changes.
C)when either its cost or its price is sensitive to exchange rate changes.
D)none of the above
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Chapter 10: Management of Translation Exposure
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Q1) With regard to foreign currency translation methods used by foreign MNCs, A)foreign currency translation methods are generally only used by U.S.-based MNCs since foreign firms have a built in hedge by being foreign.
B)are generally the same methods used by U.S.-based firms.
C)are exactly the same methods used by U.S.-based firms since GAAP is GAAP.
D)none of the above are true statements.
Q2) 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 above
Q3) The "functional currency" is defined in FASB 52 as
A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)both b and c
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Page 12
Chapter 11: International Banking and Money Market
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Q1) The core of the international money market is
A)the Eurocurrency market.
B)the market for foreign exchange.
C)the futures forwards and options markets on foreign exchange.
D)none of the above
Q2) Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called
A)international service banks.
B)investment banks.
C)commercial banks.
D)merchant banks.
Q3) Offshore banks
A)are frequently located on old oil drilling platforms located in international waters.
B)are often located in "pariah" countries like North Korea and Iran.
C)operate as branches or subsidiaries of the parent bank.
D)none of the above
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Chapter 12: International Bond Market
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Q1) Find the present value of a 2-year Treasury bond that pays a semi-annual coupon,has a coupon rate of 6%,a yield to maturity of 5%,a par value of $1,000 when the yield to maturity is 5%.
A)$1,018.81
B)$1,231.15
C)$699.07
D)none of the above
Q2) Zero coupon bonds
A)have no interest income.
B)are sold at a premium to par value.
C)gave only capital gains income.
D)both a and c
Q3) Two major clearing systems for international bond transactions are
A)Euroclear and Clearstream International.
B)Euroclear and Clearasil.
C)Deutsche Börse Clearing and Cedel International.
D)None of the above
Q4) Eurobonds sold in the United States may not be sold to U.S.citizens.
A)True
B)False
Page 14
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Chapter 13: International Equity Markets
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Q1) Solnik (1984)examined the effect of exchange rate changes,interest rate differentials,the level of the domestic interest rate,and changes in domestic inflation expectations.He found that
A)international monetary variables had only weak influence on equity returns in comparison to domestic variables.
B)international monetary variables had a stronger influence on equity returns in comparison to domestic variables.
C)international monetary variables had no influence at all on equity returns.
D)none of the above
Q2) Changes in exchange rates
A)explain a larger portion of the variability foreign bond indexes than foreign equity indexes.
B)do not affect all foreign equity markets equally.
C)do affect dollar-denominated foreign equity returns, but this risk can be hedged. D)all of the above
Q3) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Suppose that the swap that you proposed in question 2 is now 4 years old (i.e.there is exactly one year to go on the swap).The fourth payment has already been made.If the spot exchange rate prevailing in year 4 is $1.8778 = 1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = 1,what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:
Q2) What would be the interest rate?
Q3) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q4) Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.
A)LIBOR + ½ percent
B)LIBOR
C)LIBOR - ½ percent
D)None of the above
Q5) Explain how this opportunity affects which swap firm B will be willing to participate in.
Q6) What are the IRP 1-year and 2-year forward exchange rates?
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Page 16
Chapter 15: International Portfolio Investment
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Q1) You invested $100,000 in British equities.The stock's price was £50 and the exchange rate was £0.50/$1.00.At selling time,one year after purchase,they were £45 and £0.60/$1.00.Assume the investor sold £50,000 forward at the forward exchange rate of £0.55/$1.00.The dollar rate of return would be:
A)-27.27%
B)1.09%
C)28.00%
D)-9.09%
Q2) The less correlated the securities in a portfolio,
A)the lower the portfolio risk.
B)the higher the portfolio risk.
C)the lower the unsystematic risk.
D)the higher the diversifiable risk.
Q3) Advantages of investing in mutual funds known as country funds include:
A)Speculation in a single foreign market at minimum cost.
B)Using them as building blocks of a personal international portfolio.
C)Diversification into emerging markets that are otherwise practically inaccessible.
D)All of the above
Q4) Find the Global Minimum Variance Portfolio.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Firms become multinational
A)when they undertake foreign direct investments (FDI).
B)with the establishment of new production facilities in foreign countries such as Honda's Ohio plant.
C)when they become involved in mergers with and acquisitions of existing foreign businesses.
D)all of the above
Q2) The key factors that are important in a firm's decision to invest overseas are
A)trade barriers, imperfect labor market, and intangible assets.
B)vertical integration, product life cycle, and shareholder diversification services.
C)profit maximization, global prestige, and competition.
D)both a and b
Q3) Country risk refers to
A)political risk.
B)credit risk, and other economic performances.
C)every risk except political risk.
D)both a and b
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Page 18
Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United States.This suggests that
A)the cost of capital can be lower in Japan than in the United States, but only if international financial markets are not fully integrated.
B)the cost of capital can be lower in Japan than in the United States, even if international financial markets are fully integrated.
C)the cost of capital will be higher in Japan than in the United States, even if international financial markets are fully integrated.
D)none of the above
Q2) The Nestlé episode shows
A)that political risk can exist in a country like Switzerland, long considered a haven from such risk.
B)the pricing to market phenomenon exists.
C)it is possible to expropriate wealth from one group of shareholders and transfer it to another group.
D)all of the above
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Chapter 18: International Capital Budgeting
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Q1) Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate falls to S<sub>1</sub>($| )= $1.40 per .
Q2) Find the NPV in euro for the American firm if they wait one year to undertake the project after the exchange rate falls to S<sub>1</sub>($| )= $1.40 per .Assume that i doesn't change.
Q3) Your banker quotes the euro-zone risk-free rate at i<sub> </sub> = 5% and the U.S.risk free rate at i<sub>$</sub> = 4%.Find the value of the option and thereby the correct value of the bond to a U.S.investor.
Q4) What is the levered after-tax incremental cash flow for year 0?
A)-$1,010,000
B)-$1,000,000
C)-$660,000
D)-$2,100,000
E)None of the above
Q5) What is the euro-denominated IRR of this project?
Q6) The hedge fund manager notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.
Q7) What is the euro-denominated IRR of this project?
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Find the net cash flow in (out of)the German affiliate.
A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above
Q2) Fill out the following figure with the initial situation shown in the table.
Q3) Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency,limiting conversion to other currencies,a 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.
Q4) A centralized cash management system with a cash pool can reduce the investment the MNC has in precautionary cash balances,saving the firm money.
Multiple Choice Questions
A)True
B)False
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Chapter 20: International Trade Finance
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Q1) There are several types of countertrade transactions:
A)none of which involve the use of money.
B)in each type, the seller provides the buyer with goods or services in return for a reciprocal promise from the seller to purchase goods or services from the buyer.
C)in each type, the seller provides the buyer with goods or services in return for a reciprocal promise from the buyer to stand ready to sell goods or services to the buyer.
D)none of the above
Q2) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q3) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q4) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q5) Arguments in favor of countertrade include benefits such as
A)conservation of cash or hard currency.
B)improvement of trade imbalances.
C)maintenance of export prices.
D)all of the above
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Page 22
Chapter 21: International Tax Environment and Transfer Pricing
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Q1) When the income tax rate in the host country is greater than the tax rate in the parent country,
A)it is beneficial to follow a high markup policy on transferred goods and services from the parent to a foreign affiliate.
B)it is beneficial to follow a low markup policy on transferred goods and services from the parent to a foreign affiliate.
C)transfer pricing will not affect the total tax liability, net of foreign tax credit offsets.
D)none of the above
Q2) A withholding tax is
A)an indirect tax.
B)a direct tax.
Q3) The current marginal U.S.income tax rate is positioned
A)pretty well in the middle of the rates assessed by the majority of other countries.
B)towards the upper end of the rates assessed by the majority of other countries.
C)towards the lower end of the rates assessed by the majority of other countries.
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