Corporate Finance
Practice Questions
Course Introduction
Corporate Finance explores the fundamental principles and strategies that guide the financial decision-making processes within organizations. This course examines key concepts such as capital budgeting, financing and investment decisions, cost of capital, risk management, dividend policies, and valuation of assets and firms. Through analysis of real-world case studies and quantitative models, students learn how corporations optimize the deployment of their resources, raise capital, and create value for stakeholders. The course aims to equip students with analytical skills and tools necessary for evaluating financial performance, structuring deals, and understanding the implications of financial markets for corporate strategy.
Recommended Textbook
International Financial Management 6th Edition by Cheol
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Page 2
S. Eun Bruce G. Resnick
Chapter 1: Globalization and the Multinational Firm
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Q1) An MNC may gain from its global presence by
A)spreading R&D expenditures and advertising costs over their global sales.
B)pooling global purchasing power over suppliers.
C)utilizing their technological and managerial know-how globally with minimum additional costs.
D)all of the above are potential gains
Answer: D
Q2) Now suppose that Southern workers are paid 1 per day but the Northern workers receive a raise to £2 per day.Will trade be possible at the exchange rate you found in the question before the last question?
A)True
B)False
Answer: False
Q3) A multinational firm can be defined as a firm that
A)invests short-term cash inflows in more than one currency.
B)has sales affiliates in several countries.
C)is incorporated in more than one country.
D)incorporated in one country that has production and sales operations in several other countries.
Answer: D
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Chapter 2: International Monetary System
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Q1) The European Monetary System (EMS)has the chief objective(s)
A)to establish a "zone of monetary stability" in Europe.
B)to coordinate exchange rate policies vis-à-vis the non-EMS currencies.
C)to pave the way for the eventual European monetary union.
D)all of the above
Answer: D
Q2) The euro zone is remarkably comparable to the United States in terms of A)population size.
B)GDP.
C)international trade share.
D)all of the above
Answer: A
Q3) The Bretton Woods system was named after A)the treasury secretary of the United States in 1945, Bretton Woods.
B)Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out.
C)none of the above.
Answer: B
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Chapter 3: Balance of Payments
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Q1) When the balance-of-payments accounts are recorded correctly,the combined balance of the current account,the capital account,and the reserves account must be A)equal in magnitude to the country's national debt.
B)zero.
C)equal in magnitude to the Trade Deficit or Surplus.
D)none of the above
Answer: B
Q2) The "J-curve effect" shows
A)the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.
B)the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.
C)the trade balance's lack of responsiveness to the exchanges rate changes.
D)none of the above
Answer: A
Q3) The United States is considered
A)a net creditor nation.
B)a net debtor nation.
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) The Cadbury Code of Best Practice
A)is the U.N.equivalent of the Sarbanes-Oxley Act.
B)is voluntary, but firms that fail to comply must explain why they choose not to comply.
C)has the force of law, like the Sarbanes-Oxley Act.
D)none of the above
Q2) The board of directors may grant stock options to managers in order to
A)save executive compensation costs.
B)use as a substitute for bonus.
C)align the interest of managers with that of shareholders.
D)none of the above
Q3) When company ownership is diffuse,
A)a "free rider" problem discourages shareholder activism.
B)the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management.
C)few shareholders have a strong enough incentive to incur the costs of monitoring management.
D)both a) and c) are correct
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Chapter 5: The Market for Foreign Exchange
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Q1) Most interbank trades are
A)speculative or arbitrage transactions.
B)simple order processing for the retail client.
C)overnight loans from one bank to another.
D)brokered by dealers.
Q2) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
Q3) If the $/ bid and ask prices are $1.50/ and $1.51/ ,respectively,the corresponding /$ bid and ask prices are
A) 0.6667 and 0.6623.
B)$1.51 and $1.50.
C) 0.6623 and 0.6667.
D)cannot be determined with the information given.
Q4) The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 forward premium is 8 percent.What is the outright spot exchange rate?
A)SF1.30/$
B)SF1.35/$
C)SF1.25/$
D)None of the above
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 technical approach,what matters in exchange rate determination is A)the past behavior of exchange rates.
B)the velocity of money.
C)the future behavior of exchange rates.
D)the beta.
Q2) Interest Rate Parity (IRP)is best defined as
A)When a government brings its domestic interest rate in line with other major financial markets.
B)When the central bank of a country brings its domestic interest rate in line with its major trading partners.
C)An arbitrage condition that must hold when international financial markets are in equilibrium.
D)None of the above
Q3) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
Q4) If you had borrowed $1,000,000 and traded for euro at the spot rate,how many do you receive?
Q5) There is (at least)one profitable arbitrage at these prices.What is it?
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Find the dollar value today of a 1-period at-the-money call option on ¥300,000.The spot exchange rate is ¥100 = $1.00.In the next period,the yen can increase in dollar value by 15 percent or decrease by 15 percent.The risk free rate in dollars is i<sub>$</sub> = 5%; The risk free rate in yen is i<sub>¥</sub> = 1%.
Q2) Find the risk-neutral probability of an "up" move FOR YOUR TREE.Hint: you can't recycle your risk neutral probability from the call option.
Q3) An investor believes that the price of a stock,say IBM's shares,will increase in the next 60 days.If the investor is correct,which combination of the following investment strategies will show a profit in all the choices? (i)- buy the stock and hold it for 60 days
(ii)- buy a put option
(iii)- sell (write)a call option
(iv)- buy a call option
(v)- sell (write)a put option
A)(i), (ii), and (iii)
B)(i), (ii), and (iv)
C)(i), (iv), and (v)
D)(ii) and (iii)
Q4) Calculate the current /£ spot exchange rate.
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Page 9
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) Suppose that the exchange rate is 1.25 = £1.00. Options (calls and puts)are available on the Philadelphia exchange in units of 10,000 with strike prices of $1.60/ 1.00.
Options (calls and puts)are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.
For a U.S.firm to hedge a 100,000 receivable,
A)buy 10 call options on the euro with a strike in dollars.
B)buy 10 put options on the pound with a strike in dollars.
C)sell 10 call options on the euro with a strike in dollars.
D)sell 8 put options on the pound with a strike in dollars.
E)both a) and b)
F)both c) and d)
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Chapter 9: Management of Economic Exposure
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Q1) Managing operating exposure
A)is a short-term tactical issue.
B)is a long-term issue, like selecting a site for a factory.
C)is relatively unimportant, since most MNCs have a built-in hedge.
D)none of the above
Q2) The link between the home currency value of a firm's assets and liabilities and exchange rate fluctuations is
A)asset exposure.
B)operating exposure.
C)both a) and b)
D)none of the above
Q3) The variance of the exchange rate is:
A)0.001968
B)0.002969
C)0.003968
D)0.004968
Q4) Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Q5) Estimate your exposure (b)to the exchange risk.
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Chapter 10: Management of Translation Exposure
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Q1) The underlying principle of the current/noncurrent method is that assets and liabilities should be translated based on their maturity.
A)Current assets and liabilities are converted at the current exchange rate in effect when the cash flow associated with the asset or liability actually occurred.Non-current assets and liabilities are translated at the historical exchange rate that prevailed when the asset was recognized.
B)Current assets and liabilities, which by definition have a maturity of one year or less, are converted at the current exchange rate.Non-current assets and liabilities are translated at the historical exchange rate.
C)All assets and liabilities are converted at the current exchange rate.
D)None of the above
Q2) With regard to translation exposure versus operating exposure
A)upper management should be more concerned with translation exposure.
B)any discussion really involves speculation about foreign exchange rate changes.
C)upper management should be more concerned with operating exposure.
D)none of the above
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Chapter 11: International Banking and Money Market
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Q1) Edge Act banks
A)can accept foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign currencies, and engage in investment banking activities with U.S.citizens involving foreign securities.
B)are federally chartered subsidiaries of U.S.banks that are physically located in the United States and are allowed to engage in a full range of international banking activities.
C)can underwrite securities, but can only be located in states on the edge of the U.S. D)both a) and b)
Q2) An Offshore banking center is
A)a country whose banking system is organized to permit external accounts beyond the normal economic activity of the county.
B)is external to any government, frequently located on old oil drilling platforms located in international waters.
C)a country like North Korea.
D)none of the above
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Chapter 12: International Bond Market
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Q1) Global bond issues
A)can save U.S.issuers 20 basis points relative to domestic bonds, all else equal.
B)tend to have increased liquidity relative to Eurobonds or domestic bonds.
C)have been partially facilitated by rule 144A.
D)all of the above
Q2) Publicly traded Yankee bonds must
A)meet the same regulations as U.S.domestic bonds.
B)meet the same regulations as Eurobonds if sold to Europeans.
C)meet the same regulations as Samurai bonds if sold to Japanese.
D)none of the above
Q3) Unlike a bond issue,in which the entire issue is brought to market at once,_______ is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.
A)a Euro-medium term note issue
B)bearer bond
C)a Euro-long term note issue
D)a Euro-short term note issue
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Chapter 13: International Equity Markets
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Sample Questions
Q1) A market order
A)is an instruction from a customer to a broker to buy or sell at the best price available when the order is received (immediately).
B)is an instruction from a customer to a broker to buy or sell in a particular market (e.g.NYSE).
C)is always and everywhere "fill or kill".
D)is always and everywhere "good till cancelled".
Q2) Macroeconomic factors affecting international equity returns include A)exchange rate changes.
B)interest rate differentials.
C)changes in inflationary expectations.
D)all of the above
Q3) A specialist on the NYSE
A)is obliged to fill limit orders if they are more favorable than the specialist's posted bid and ask quotes.
B)is obliged to fill limit orders at the specialist's posted bid and ask quotes.
C)is actually a computer program, not a human.
D)both a) and c)
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Chapter 14: Interest Rate and Currency Swaps
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Q1) A major risk faced by a swap dealer is mismatch risk.This is
A)the probability floating rates and exchange rates will NOT move together.
B)the difficulty in finding a second counterparty for a swap that the bank has agreed to take with another party.
C)the probability that both counterparties default.
D)none of the above
Q2) Amortizing currency swaps
A)the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
B)incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged.
C)both a) and b)
D)none of the above
Q3) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.
Q4) What would be the interest rate?
Q5) What would be the interest rate?
Q6) What are the IRP 1-year and 2-year forward exchange rates?
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Chapter 15: International Portfolio Investment
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Q1) If the investor hedges the exchange rate risk when investing internationally
A)the risk-return efficiency is likely to be superior.
B)the expected return to the U.S.dollar investor is approximately the same whether the investor hedges the exchange rate risk in the investment, or remains unhedged.
C)to the extent that the investor establishes an effective hedge to eliminate exchange rate uncertainty, the risk will be reduced.
D)all of the above
Q2) Find the expected return of a portfolio with half invested in A and half invested in B.
Q3) Assume that the correlation of expected return between security A and B is 0.2.Calculate the standard deviation of expected return of a portfolio that has half of its money invested in A and half in B.
Q4) Systematic risk is
A)nondiversifiable risk.
B)the risk that remains even after investors fully diversify their portfolio holdings.
C)both a) and b)
D)none of the above
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) What kind of integration is vertical integration?
A)When the government outlaws discrimination against both short and tall people.
B)When two firms join together in a conglomerate merger.
C)When two firms related in the production process are owned by the same firm, as in a plywood manufacturer owning a logging company.
D)All of the above
Q2) As a mode of FDI entry,cross-border M&A offers two key advantages over Greenfield investments:
A)speed and access to proprietary assets.
B)firms bolster their competitive positions in the world market by acquiring special assets from other firms or using their own assets on a larger scale.
C)firms can better leverage their intangible assets and on a larger scale.
D)none of the above
Q3) As a mode of entry into a foreign market,cross-border acquisition
A)involves building new production facilities in a foreign country.
B)offer faster speed over Greenfield investment.
C)can offer access to proprietary assets.
D)both b) and c)
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 5.
A)3/4
B)7/9
C)4/5
D)9/11
E)5/6
Q2) One explanation for foreign equity ownership restrictions
A)is to make it difficult or impossible for foreigners to gain control of a domestic company.
B)is to expropriate wealth from domestic shareholders.
C)is the arguments in favor of free trade.
D)none of the above
Q3) For a firm confronted with a fixed schedule of possible new investments,any policy that lowers the firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth of the firm's shareholders.One such policy is
A)internationalizing the firm's capital budgeting opportunities.
B)internationalizing the firm's cost of capital.
C)investing in riskier projects financed with debt.
D)none of the above
Page 19
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Chapter 18: International Capital Budgeting
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Q1) Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.
Q2) Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only 30-year loan at 8.0 percent APR with annual payments.Note that eight percent is less than the 10 percent that they normally borrow at.What is the NPV of the loan?
A)$198,469
B)$53,979.83
C)$102,727.55
D)$1,334,851.09
E)None of the above
Q3) Compute the NPV at the two possible prices of gold.
Q4) The required return on equity for an all-equity firm is 10.0%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the new cost of capital if this firm changes capital structure.
A)14.93%
B)8.67%
C)7.40%
D)None of the above
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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 above
Q2) Mislocated funds are defined as:
A)Funds being found in the wrong account.
B)Funds being denominated in the wrong currency.
C)Funds being invested with the wrong maturity.
D)None of the above
Q3) Fill out the following figure with the initial situation shown in the table.
Q4) Fill out the following figure with the initial situation shown in the table.
Q5) Using your results to the last question,use bilateral netting to simplify.
Q6) Fill out the following figure with the initial situation shown in the table.
Q7) Using your results to the last question,use multilateral netting to simplify.
Q8) Using your results to the last question,use bilateral netting to simplify.
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Chapter 20: International Trade Finance
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Q1) The armed forces of ____________ leads all government agencies in countertrade.
A)The United States
B)Great Britain
C)China
D)The Philippines
Q2) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
Q3) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q4) 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.Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
A)$200,000
B)$100,000
C)$25,000
D)$75,000
Q5) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
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Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) The underlying principle of tax equity is that
A)all similarly situated taxpayers should participate in the cost of operating the government according to the same rules.
B)all similarly situated taxpayers should participate in the cost of operating the government on an equal basis.
C)none of the above
Q2) Capital import neutrality
A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D)none of the above
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