Corporate Finance
Midterm Exam
Course Introduction
Corporate Finance explores the fundamental principles and techniques used by organizations to manage their financial resources. The course covers the analysis of financial statements, capital budgeting, valuation of assets and firms, risk assessment, cost of capital, financial planning, and strategies for funding through debt, equity, and hybrid instruments. Students learn how financial decisions impact firm value and performance, and examine topics such as mergers and acquisitions, dividend policy, capital structure, and corporate governance. Through case studies and practical applications, the course develops analytical skills essential for making sound corporate financial decisions.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
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Page 2
Chapter 1: Globalization and the Multinational Corporation
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Sample Questions
Q1) Why might setting up production facilities abroad lead to expanded sales in local markets?
Answer: When a firm such as a multinational produces abroad,it can more easily monitor market developments,adapt its products and production schedules,and provide more comprehensive after-sales services.Establishing local production facilities also demonstrates a greater commitment to the local citizens and the markets.It can also assure a stable supply of resources.This is particularly important for firms who produce intermediate goods for sale to other countries.
Q2) What is the name of the international organization that fosters monetary and financial cooperation and serves as a bank for central banks?
A) WTO
B) EU
C) World Bank
D) Bank for International Settlements
Answer: D
Q3) Institutional investors play important roles in financial markets.Explain.
Answer: Institutional investors such as insurance companies,retirement funds,and mutual funds have the ability to help determine security prices,the cost of equity and debt.
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Page 3
Chapter 2: The Foreign Exchange Market
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Sample Questions
Q1) If you were trading currency in the New York currency market,the exchange rate between two currencies not expressed in U.S.dollars would be known as the ________ quote.
A) direct
B) indirect
C) cross-rate
D) European
Answer: C
Q2) What is the name of the computer network in which member banks globally send and receive messages pertaining to foreign exchange transactions?
A) Fed funds
B) SWIFT
C) CHIPS
D) The Automated Clearing House (ACH)
Answer: B
Q3) Describe how an exchange rate is like a market price?
Answer: The direct quote for a currency is the local currency price (numerator)of one unit of foreign currency (denominator).
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4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Sample Questions
Q1) What is a forward-forward swap?
Answer: A forward-forward swap involves either the purchase of foreign currency at a short maturity forward against the sale of the same amount of foreign currency at a longer maturity forward,or the sale of foreign currency at the short maturity forward against the purchase of the same amount of foreign currency at a longer maturity forward.
Q2) From the perspective of the MNC,the most important purpose of the forward markets is the process of ________.
A) hedging
B) arbitraging
C) speculating
D) preventing default
Answer: A
Q3) One of the major reasons for the existence of the forward market is to ________.
A) provide a location for all currency traders to assemble and trade
B) manage currency risk especially risk associated with a transaction
C) hedge transactions involving foreign currency that occurred in the past
D) prevent default in the transaction
Answer: B
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Chapter 4: The Balance of Payments
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Q1) As the real value of the dollar rises,the balance on the current account is likely to
A) increase
B) decrease
C) stay the same
D) move with the capital account adjustments factor
Q2) If a nation's income exceeds its spending,then
A) savings will exceed domestic investment.
B) the nation must run a current account surplus.
C) the nation must run a capital account deficit.
D) all of the above.
Q3) The three major accounts of the ________ are the current account,the capital account and the official settlements account.
A) balance of payments
B) balance of trade
C) trade surplus
D) trade deficit
Q4) If a U.S.non-profit makes a large gift to an Israeli agency,how is it handled in the balance of payments?
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Chapter 5: Exchange Rate Systems
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Sample Questions
Q1) The phenomenon of foreign currency driving out local currencies as a means of payment and a savings vehicle is known as ________.
A) seigniorage
B) dollarization
C) sterilization
D) devaluation
Q2) In the ________ exchange rate system,the currency has limited flexibility and the rate is kept within a fixed band.
A) currency board
B) floating exchange rate
C) target zone
D) pegged exchange rate system
Q3) For a fixed exchange rate system to work successfully,the government that oversees its operations must be able to make tight budget and monetary policies prevail from the beginning.Agree or disagree and explain why.
Q4) How would a target zone system or a pegged exchange rate system that has been in place mask the true currency risk?
Q5) Describe the Bretton Woods currency system?
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Chapter 6: Interest Rate Parity
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Q1) Which one of the following would be the most logical reason to use a synthetic forward contract to hedge?
A) forward contracts are not available in the currency of choice
B) when time horizons are short, forward contracts can be expensive
C) the underlying transaction is too risky
D) the underlying transaction gives you an asset
Q2) If interest rate parity is satisfied,there are no opportunities for covered interest arbitrage.What does this imply about the relationship between spot and forward exchange rates when the foreign currency money market investment offers a higher return than the domestic money market investment?
Q3) Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S.dollars.
Q4) When there are no intervening cash flows between the time a deposit is made and the maturity of the deposit,the interest rates are said to be ________.
A) discount rate
B) compound interest rate
C) covered interest rate
D) spot interest rates
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Page 8
Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) What is the name given to the risk associated with an asset's return arising from the covariance of the return on a large,well-diversified portfolio?
A) covariance
B) systematic risk
C) idiosyncratic risk
D) risk premium
Q2) If you were attempting to forecast the forward exchange rate for a particular horizon such as 90 days,how would the forward exchange rate be an unbiased predictor of the future spot exchange rate?
Q3) To construct the uncertain yen-denominated return from investing one yen in the Swiss franc,what is your first step?
A) convert from yen into Swiss francs in the spot market
B) convert from Swiss francs into yen in the forward market
C) invest in the Swiss money market
D) convert from Swiss francs into yen at the future spot rate
Q4) It is often argued that forward exchange rates should be unbiased predictors of future spot exchange rates.When the foreign exchange market is efficient,forward rates are not able to be an unbiased predictor.Is this true or false?
Page 9
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) Which one of the following reasons for violations of the Law of One Price is the most obvious?
A) tariffs on imports
B) banking rules
C) industrial policies
D) exchange rate controls
Q2) When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.
A) purchasing power parity
B) interest rate parity
C) the Fisher effect
D) the International Fisher effect
Q3) When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.
A) currency supply
B) currency demand
C) purchasing power parity
D) one price
Q4) Explain what is meant by the real exchange rate?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) Why does the strategy of pricing-to-market depend on the assumption of market segmentation?
Q2) Research indicates that the optimal plan for exporter firms to follow when the currency of a country depreciates is to
A) only increase the price of the good or service being exported in the foreign country relatively to the percentage of the depreciation.
B) only increase the price of the good or service being exported in the foreign country by the full percentage of the depreciation.
C) maintain a given foreign currency price in order to maintain its market share while losing some profit.
D) increase a given foreign currency price in order to maintain its profit while losing sales to foreign rivals.
Q3) In the face of a currency depreciation,if the firm maintains its foreign currency price,it will ________.
A) lose its market share but gain profits
B) lose its market share and lose profits
C) maintain its market share and gain profits
D) maintain its market share but lose profits
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11
Chapter 10: Exchange Rate Determination and Forecasting
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Q1) Whereas other forecasters use macroeconomic data to forecast future exchange rates,________ techniques focus entirely on historical financial data.
A) equilibrium condition
B) parity condition
C) rational expectations
D) technical analysis
Q2) This statistic is calculated by taking the square root of the average squared forecast errors.
A) the mean absolute error
B) the standard deviation
C) the mode
D) the root mean squared error
Q3) ________ techniques are typically based on formal economic models of exchange rate determination.
A) Technical analysis
B) Fundamental analysis
C) Exchange rate forecasting
D) Mean absolute error
Q4) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
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Chapter 11: International Debt Financing
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Sample Questions
Q1) Which of the following represent liabilities to a bank?
A) deposits it accepts from its customers and securities it buys
B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital
C) the borrowing it does in security markets and the loans it provides
D) loans to customers
Q2) Why are eurocredits not offered by any one bank?
A) They are typically regulated by the government to exclude single banks.
B) They are typically very large and banks prefer to share the risk with other banks.
C) The denominations are too large for any one bank's ability to fund the loan.
D) Single banks are less likely to profit from them.
Q3) ________ is the packaging of assets or obligations such as mortgages or car loans,into securities for sale to third parties.
A) Eurocredits
B) Floating-rate notes
C) Asset securitization
D) Demutualization
Q4) How is the final payment made for a dual-currency bond?
Q5) What are the major features of the proposed Basel III?
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Chapter 12: International Equity Financing
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Q1) The stock markets of developing countries are often referred to as ________,and the young stock markets of the least developed countries are called ________.
A) external equity markets, frontier markets
B) emerging markets, frontier markets
C) external equity markets, emerging markets
D) emerging markets, undeveloped markets
Q2) What are the costs of cross-listing?
A) It exploits growth opportunities with additional foreign capital.
B) It reduces the cost of capital.
C) It increases the stock price.
D) It costs money paid in exchange fees and it may impose a high level of examination on the company's managers.
Q3) In deciding where to invest your money,you read that Italy looks like it's well positioned to capitalize on the opening of Central Europe,especially since many of the countries joined Italy in the European Union.But the U.K.is experiencing weak growth high interest rates,and high inflation.Which of the two countries would be more attractive to invest in? Explain.
Q4) What is a price-driven trading system?
Q5) How are ADRs differentiated?
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Chapter 13: International Capital Market Equilibrium
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Q1) ________ trade on the ________ equity market and represent a ________ portfolio that may invest in the world markets ________ restricted to a region.
A) Open-end funds, local, fixed, never
B) Closed-end funds, local, fixed, sometimes
C) Open-end funds, foreign, variable, often
D) Closed-end funds, foreign, variable, always
Q2) According to the CAPM how is the risk premium on an individual security calculated?
Q3) Of the following G7 countries,which market returns have the highest correlation with U.S.returns?
A) Japan
B) Canada
C) France
D) U.K.
Q4) What is the name given to the variance that cannot be diversified away?
A) nonsystematic covariance
B) market covariance
C) nonsystematic variance
D) systematic variance
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Chapter 14: Country and Political Risk
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Q1) The discount rate in capital budgeting need not be adjusted for political risk.Agree or disagree and explain why.
Q2) Which one of the following is a method to minimize the chance that political risk events will adversely affect the firm?
A) focus on the long term
B) rely on common available supplies
C) use local resources
D) refuse to bargain with the government
Q3) Which one of the following do MNCs use to lower the cost of their investment into a country?
A) foreign bond markets
B) international banks
C) debt-equity swaps
D) long-term forward contracts
Q4) Suppose you are the Minister of Labor in Brazil and your government is proposing to raise the minimum wage to raise the income of the poorer workers and thereby offset the effects of other economic policies that man adversely impact them.Others in the cabinet are concerned about the effects of the policy will have on employment and competitiveness.What is your response to them?
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Chapter 15: International Capital Budgeting
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Q1) Of what importance are good management practices as they relate to working capital?
Q2) When discounting cash flows,it is important that only the ________,after-tax cash flows be used.
A) monthly
B) annual
C) incremental
D) total
Q3) Adjusted net present value is developed using the following steps: first,discount the cash flows of the all-equity firm,second,add the value of the financial side effects,and,third,
A) add the salvage value of the project.
B) add the value of any growth options that arise during the project.
C) add financing costs.
D) add cash flows from project financing such as bank loans.
Q4) What is meant by the cannibalization of an export market?
Q5) What is an interest subsidy? How do you calculate the value of an interest subsidy?
Q6) How does the role of underwriting affect the issuing of securities?
Q7) Based on their computation what is the difference between EBIT and NOPLAT?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) The Capital Asset Company has accepted a project for investment.It can be assumed that the firm is earning its WACC and the rate of return on the project
A) should equal the plowback ratio
B) would be irrelevant
C) is the same or greater
D) is the same or less
Q2) Which of the following statements is true concerning a firm's financial distress?
A) During periods of financial distress, the firm's managers are more likely to invest in risky projects.
B) During periods of financial distress, the firm's managers are less likely to invest in risky projects.
C) During periods of financial distress, the firm's managers are more likely to invest in corporate acquisitions.
D) During periods of financial distress, the firm's managers are more likely to seek firms to merge with.
Q3) Explain how to calculate the rate of return on invested capital?
Q4) What is the U.S.tax treatment of interest paid on a foreign currency loan?
Page 18
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?
Q2) It is appropriate for the costs of hedging to be borne by the ________ department of the multinational corporation.
A) marketing
B) treasury
C) legal
D) shipping
Q3) How can hedging increase the value of a firm?
A) by reducing its liabilities
B) by reducing its future income taxes
C) by increasing its interest expense
D) by increasing its headquarter expense
Q4) When a firm is unprofitable it generates a ________ that allows it to offset the losses that were incurred against future income.
A) tax credit
B) itemized deductions
C) tax-loss carry-forward
D) a write-down
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Chapter 18: Financing International Trade
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Q1) The Export-Import Bank of the U.S.is the only independent U.S.government corporation whose sole purpose is to support ________ in their efforts to conduct international trade.
A) U.S. exporters
B) U.S. importers
C) both U.S. exporters and importers
D) potential U.S. importers
Q2) What is the name of the company that purchases the accounts receivable of other firms?
A) shipping company
B) common carrier
C) export factor
D) insurance carrier
Q3) When an exporter plans to sell internationally,which one of the following would be considered most often?
A) be paid as late as possible
B) be paid in advance
C) who has title to the goods
D) countries where additional legal complexities exist
Q4) Explain the fundamental financing problem in international trade?
Page 20
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Chapter 19: Managing Net Working Capital
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Q1) When a multinational engages in a process where it intentionally minimizes the firm's taxes when it repatriates funds,it is known as ________.
A) bilateral netting
B) lagging accounts payable
C) leading accounts receivable
D) tax planning
Q2) What is the name of the condition that arises when the government of a foreign country makes the nation's currency inconvertible?
A) controlled exchange rates
B) managed currency
C) blocked funds
D) expropriation
Q3) When the parent lends to an affiliate in order to circumvent blocked fund policies of governments in affiliate countries,a financial intermediary is often used such as a(n)________.
A) eurobank
B) investment bank
C) netting center
D) international bank
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Chapter 20: Foreign Currency Futures and Options
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Q1) The original or first seller of the option is known as the ________.
A) option broker
B) writer
C) option commission merchant
D) clearing member
Q2) Suppose the current spot rate for the pound is $01.7427.A put option with an exercise price of $01.7550 is said to be
A) in-the-money.
B) out-of-the-money.
C) at-the-money.
D) past breakeven.
Q3) Suppose that XYZ International Company has purchased a Swiss francs futures contract (contact size is SFr 125,000)at a price of $0.8250 at $0.83.If the spot rate for the Swiss franc at the date of settlement is SFr = $0.8250,what is the Company's gain or loss on the contract?
Q4) What effects does "marking to market" have on futures contracts?
Q5) Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge with a forward contract in a bidding situation?
Q6) What does it mean for an American option to be "in the money"?
Page 22
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) The nature of swap contracts is usually based on the best practices suggested by the ________,
A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) International Swap and Derivatives Association
D) Securities Exchange Commission
Q2) A(n)________ allows a multinational corporation to change the currency of denomination of its debts.
A) interest rate swap
B) currency swap
C) currency option contract
D) currency future contract
Q3) The ________ is the amount of basis points added to the yield to maturity on a government bond corresponding to that maturity to get the fixed interest rate of an interest rate swap.
A) swap spread
B) all-in cost
C) right of offset
D) yield to call
Q4) Describe how a back-to-back loan is used.
Page 23
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