Corporate Finance
Review Questions
Course Introduction
Corporate Finance explores the fundamental principles and analytical tools used by businesses to make key financial decisions. The course covers topics such as capital budgeting, valuation of financial assets, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Through case studies and real-world examples, students learn how corporate managers evaluate investment opportunities, raise funds, manage financial risks, and seek to maximize shareholder value while considering ethical and regulatory frameworks. The course equips students with the knowledge and skills to apply financial concepts in both small and large organizational settings.
Recommended Textbook
Corporate Finance 1st European Edition by David Hillier
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) The owners of a limited liability company prefer:
A)being taxed like a corporation.
B)having liability exposure similar to that of a sole proprietor.
C)being taxed personally on all business income.
D)having liability exposure similar to that of a general partner.
E)being taxed like a corporation with liability like a partnership.
Answer: C
Q2) Which one of the following statements is correct?
A)Both partnerships and corporations incur double taxation.
B)Both sole proprietorships and partnerships are taxed in a similar fashion.
C)Partnerships are the most complicated type of business to form.
D)Both partnerships and corporations have bylaws.
E)All types of business formations have limited lives.
Answer: B
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3
Chapter 2: Corporate Governance
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Q1) In a limited partnership:
A)each limited partner's liability is limited to his net worth.
B)each limited partner's liability is limited to the amount he put into the partnership.
C)each limited partner's liability is limited to his annual salary.
D)there is no limitation on liability; only a limitation on what the partner can earn.
E)None of the above.
Answer: B
Q2) The articles of incorporation:
A)can be used to remove company management.
B)are amended annually by the company shareholders.
C)set forth the number of shares that can be issued.
D)set forth the rules by which the corporation regulates its existence.
E)can set forth the conditions under which the firm can avoid double taxation.
Answer: C
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4
Chapter 3: Financial Statement Analysis and Long-Term Planning
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Q1) The total assets are 900,the non-current assets are 600,non-current liabilities is 500,and short-term ebt is 200.What is the amount of net working capital?
A) 0
B) 100
C) 200
D) 300
E) 400
Answer: B
Q2) Art's Boutique has sales of £640,000 and costs of £480,000.Interest expense is
£40,000 and depreciation is £60,000.The tax rate is 34%.What is the net income?
A)£20,400
B)£39,600
C)£50,400
D)£79,600
E)£99,600
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Q1) Your mother helped you start saving £25 a month beginning on your 10<sup>th</sup> birthday.She always made you make your deposit on the first day of each month just to "start the month out right." Today,you turn 21 and have £4,482.66 in your account.What is your rate of return on your savings?
A)5.25%
B)5.29%
C)5.33%
D)5.36%
E)5.50%
Q2) Janet plans on saving £3,000 a year and expects to earn 8.5%.How much will Janet have at the end of twenty-five years if she earns what she expects?
A)£219,317.82
B)£230,702.57
C)£236,003.38
D)£244,868.92
E)£256,063.66
Q3) There are three factors that affect the future value of an annuity.Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.
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Page 6
Chapter 5: How to Value Bonds and Shares
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Q1) A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.
A)Treasury
B)municipal
C)floating-rate
D)junk
E)zero coupon
Q2) Latcher AB is a relatively new firm that is still in a period of rapid development.The company plans on retaining all of its earnings for the next six years.Seven years from now,the company projects paying an annual dividend of .25 a share and then increasing that amount by 3% annually thereafter.To value this equity as of today,you would most likely determine the value of the share _____ years from today before determining today's value.
A)4
B)5
C)6
D)7
E)8
Q3) What are the components of the required rate of return on a share of equity?
Briefly explain each component.
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Chapter 6: Net Present Value and Other Investment Rules
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Q1) The Walker Landscaping Company can purchase a piece of equipment for £3,600.The asset has a two-year life,will produce a cash flow of £600 in the first year and £4,200 in the second year.The interest rate is 15%.Calculate the project's payback assuming steady cash flows.Also calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.
Q2) A project produces annual net income of £9,500,£12,500,and £15,500 over the three years of its life,respectively.The initial cost of the project is £260,400.This cost is depreciated straight-line to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 7%?
A)4.80%
B)7.32%
C)8.97%
D)9.60%
E)10.27%
Q3) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
Q4) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
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Chapter 7: Making Capital Investment Decisions
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Q1) Tax shield refers to a reduction in taxes created by:
A)a reduction in sales.
B)an increase in interest expense.
C)noncash expenses.
D)a project's incremental expenses.
E)opportunity costs.
Q2) The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:
A)after-tax depreciation savings.
B)depreciable basis.
C)depreciation tax shield.
D)operating cash flow.
E)after-tax salvage value.
Q3) Which one of the following will decrease net working capital of a firm?
A)a decrease in trade payables
B)an increase in inventory
C)a decrease in trade receivables
D)an increase in the firm's checking account balance
E)a decrease in non-current assets
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Page 9
Chapter 8: Risk Analysis, Real Options, and Capital Budgeting
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Q1) A project has earnings before interest and taxes of 5,750,fixed costs of 50,000,a selling price of 13 a unit,and a sales quantity of 11,500 units.Depreciation is 7,500.What is the variable cost per unit?
A) 6.75
B) 7.00
C) 7.25 D) 7.50
E) 7.75
Q2) In a decision tree,the NPV to make the yes/no decision is dependent on:
A)only the cash flows from successful path.
B)on the path where the probabilities add up to one.
C)all cash flows and probabilities.
D)only the cash flows and probabilities of the successful path.
E)None of the above.
Q3) Monte Carlo simulation is:
A)the most widely used by executives.
B)a very simple formula.
C)is more complex than sensitivity or scenario analysis.
D)the oldest capital budgeting technique.
E)None of the above.
Page 10
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Chapter 9: Risk and Return: Lessons From Market History
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Q1) The variance of returns is computed by dividing the sum of the:
A)squared deviations by the number of returns minus one.
B)average returns by the number of returns minus one.
C)average returns by the number of returns plus one.
D)squared deviations by the average rate of return.
E)squared deviations by the number of returns plus one.
Q2) If the expected return on the market is 16%,then using the historical risk premium on large shares of 8.6%,the current risk-free rate is:
A)4.6%
B)7.4%
C)8.4%
D)10.6%
E)12.6%
Q3) A portfolio of large company shares would contain which one of the following types of securities?
A)equity of the firms which represent the smallest 20% of the companies
B)government treasury bills
C)long-term corporate bonds
D)equities of firms included in the FTSE 100 index
E)long-term government bonds
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Chapter 10: Return and Risk: The Capital Asset Pricing Model
Capm
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Q1) The Capital Market Line is the pricing relationship between:
A)efficient portfolios and beta.
B)the risk-free asset and standard deviation of the portfolio return.
C)the optimal portfolio and the standard deviation of portfolio return.
D)beta and the standard deviation of portfolio return.
E)None of the above.
Q2) Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML.(Be sure to indicate where the market portfolio is on your graph.)Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.
Q3) A share with an actual return that lies above the security market line:
A)has more systematic risk than the overall market.
B)has more risk than warranted based on the realized rate of return.
C)has yielded a higher return than expected for the level of risk assumed.
D)has less systematic risk than the overall market.
E)has yielded a return equivalent to the level of risk assumed.
Q4) Why are some risks diversifiable and some nondiversifiable?
Give an example of each.
Q5) Explain in words what beta is and why it is important.
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Chapter 11: Factor Models and the Arbitrage Pricing Theory
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Q1) Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production.In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively.However,actual growth in these factors turn out to be 1%,-2%,and 2%.The factor betas are given by b<sub>EX</sub> = 1.8,b<sub>I</sub> = 0.7,and b<sub>IP</sub> = 1.0.If the expected return on the equity is 6%,and no unexpected news concerning the equity surfaces,calculate the equity's total return.
A)2.95%
B)4.95%
C)6.55%
D)7.40%
E)8.85%
Q2) The unexpected return on a security,U,is made up of:
A)market risk and systematic risk.
B)systematic risk and idiosyncratic risk.
C)idiosyncratic risk and unsystematic risk.
D)expected return and market risk.
E)expected return and idiosyncratic risk.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Chapter 12: Risk, cost of Capital, and Capital Budgeting
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Q1) Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:
A)low betas.
B)high betas.
C)zero betas.
D)negative betas.
E)None of the above.
Q2) Given the sample of returns of Top Black Tar plc and the FTSE 100 index,calculate Top Black's correlation.What can be said about the relationship of Top Black and the market return behavior?
Q3) The weighted average cost of capital for a firm is the:
A)discount rate which the firm should apply to all of the projects it undertakes.
B)overall rate which the firm must earn on its existing assets to maintain the value of its equity.
C)rate the firm should expect to pay on its next bond issue.
D)maximum rate which the firm should require on any projects it undertakes.
E)rate of return that the firm's preference shareholders should expect to earn over the long term.
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14
Chapter 13: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) Under the concept of an efficient market,a random walk in stock prices means that:
A)there is no driving force behind price changes.
B)technical analysts can predict future price movements to earn excess returns.
C)the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.
D)the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period.
E)None of the above.
Q2) The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable
Q3) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
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Chapter 14: Long-Term Financing: An Introduction
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Q1) A share certificate often has a stated value on it.This amount is the:
A)book value.
B)stated book value.
C)subordinated liquidation value.
D)par value.
E)None of the above.
Q2) Capital surplus usually refers to:
A)the equity's par value.
B)last year's retained earnings.
C)book value per share.
D)the amount of directly contributed equity capital in excess of par value.
E)treasury stock.
Q3) Financial deficits are created when:
A)profits and retained earnings are greater than the capital-spending requirement.
B)profits and retained earnings are less than the capital-spending requirement.
C)profits and retained earnings are equal to the capital-spending requirement.
D)All of the above.
E)None of the above.
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16
Chapter 15: Capital Structure: Basic Concepts
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Q1) Consider two firms,U and L,both with 50,000 in assets.Firm U is unlevered,and firm L has 20,000 of debt that pays 8% interest.Firm U has 1,000 shares outstanding,while firm L has 600 shares outstanding.Mike owns 20% of firm L and believes that leverage works in his favor.Steve tells Mike that this is an illusion,and that with the possibility of borrowing on his own account at 8% interest,he can replicate Mike's payout from firm L.Given a level of operating income of 2,500,show the specific strategy that Mike has in mind.After seeing Steve's analysis,Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?
Q2) Financial leverage impacts the performance of the firm by:
A)increasing the volatility of the firm's EBIT.
B)decreasing the volatility of the firm's EBIT.
C)decreasing the volatility of the firm's net income.
D)increasing the volatility of the firm's net income
E)None of the above.
Q3) The weighted average cost of capital is invariant to the use of leverage under MM conditions of no taxes.Graph the relationship of the weighted average cost of capital and leverage; be sure to include the cost of equity and debt.Explain why this relationship holds.
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Page 17
Chapter 16: Capital Structure: Limits to the Use of Debt
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Q1) Which of the following is not empirically true when formulating capital structure policy?
A)Some firms use no debt.
B)Most corporations have low debt-asset ratios.
C)There are no differences in the capital-structure of different industries.
D)Debt levels across industries vary widely.
E)Debt ratios in most countries are considerably less than 100%.
Q2) The explicit costs,such as the legal expenses,associated with corporate default are classified as _____ costs.
A)flotation
B)beta conversion
C)direct bankruptcy
D)indirect bankruptcy
E)unlevered
Q3) Wigdor Manufacturing is currently all equity financed,had EBIT of £2 million,and is in the 34% tax bracket.Louis,the company's founder,is the lone shareholder.If the firm were to convert £4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt?
Compare this to Louis' total cash flow if the firm remains unlevered.
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Page 18
Chapter 17: Valuation and Capital Budgeting for the Levered Firm
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Q1) Felix Filter maintains a debt-equity ratio of .6.The cost of equity for Richardson Corp.is 16%,the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital?
A)8.38%
B)11.02%
C)12.89%
D)13.00%
E)14.12%
Q2) Tip-Top Paving has an equity cost of capital of 16.97%.The debt to value ratio is .6,the tax rate is 34%,and the cost of debt is 11%.What is the cost of equity if Tip-Top was unlevered?
A)0.08%
B)3.06%
C)14.0%
D)16.97%
E)None of the above.
Q3) A loan of 10,000 is issued at 15% interest.Interest on the loan is to be repaid annually for 5 years,and the non-amortized principal is due at the end of the fifth year.Calculate the NPV of the loan if the company's tax rate is 34%.
Page 19
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Chapter 18: Dividend and Other Payouts
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Q1) The date by which a shareholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:
A)ex-rights date.
B)ex-dividend date.
C)date of record.
D)date of payment.
E)declaration date.
Q2) The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares is called (a):
A)perfect foresight model.
B)MM Proposition I.
C)capital structure irrelevancy.
D)homemade leverage.
E)homemade dividend policy.
Q3) It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy.Explain the logic behind this conclusion.Next,describe three real-world factors that may cause one dividend policy to be preferable to another.
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Page 20
Chapter 19: Equity Financing
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Q1) A new public equity issue from a company with equity previously outstanding is called a(n):
A)initial public offering.
B)seasoned equity issue.
C)unseasoned equity issue.
D)private placement.
E)syndicate.
Q2) The Holyoke Corporation has 120,000 shares outstanding with a current market price of 8.10 per share.The company needs to raise an additional 36,000 to finance new expenditures,and has decided on a rights issue.The issue will allow current shareholders to purchase one additional share for 20 rights at a subscription price of 6 per share. Calculate the ex-rights price that would make a new shareholder indifferent between buying shares at the old share price and exercising the rights or buying the shares ex-rights.
Q3) Lamar Inc.is attempting to raise 5,000,000 in new equity with a rights offering.The subscription price for the 125,000 new shares will be 40 per share.The equity currently sells for 50 per share and there are 250,000 shares outstanding.What will the price per share be if all rights are exercised?
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Page 21
Chapter 20: Debt Financing
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Q1) A firm wishes to issue a perpetual callable bond.The current interest rate is 7%.Next year,the interest rate will be 6.5% or 8.25% with equal probability.The bond is callable at 1,075,and it will be called if the interest rate drops to 6.5%. What is the cost of the call provision to the firm if the bond sells for 1,000 today?
A) -71.43
B) 0.00
C) 77.43
D) 178.57
E)None of the above.
Q2) Short-term debt is sometimes referred to as:
A)secured debt.
B)hybrid debt.
C)unfunded debt.
D)equity.
E)None of the above.
Q3) The choice of whether a private placement or a public bond issue is undertaken depends on many factors.Three elements of primary concern are registration,interest rates and covenants.How do these affect the choice and why might a private placement be chosen?
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Page 22
Chapter 21: Leasing and Off-Balance-Sheet Financing
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Q1) Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:
A)lenders are concerned about the firm's total liabilities and related cash flow.
B)debt displacement occurs with leasing.
C)less future debt can be raised for a growing firm when a lease is used.
D)All of the above.
E)None of the above.
Q2) An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.
A)leveraged; direct
B)sales and leaseback; sales-type
C)capital; sales-type
D)direct; sales-type
E)None of the above
Q3) Sardinas Sardines has assets valued at £10 million and equity of £10 million.The firm recently leased new equipment worth £1 million.Present the balance sheet under two conditions; the lease is judged to be an operating lease,and the lease is judged to be a capital lease.
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Chapter 22: Options and Corporate Finance
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Q1) What is the value of a 9-month call with a strike price of 45 given the Black-Scholes Option Pricing Model and the following information?
Share price 48
Exercise price 45
Time to expiration .75
Risk-free rate .05
N(d<sub>1</sub>).718891
N(d<sub>2</sub>).641713
Q2) The intrinsic value of a put is equal to the:
A)lesser of the strike price or the share price.
B)lesser of the share price minus the exercise price or zero.
C)lesser of the share price or zero.
D)greater of the strike price minus the share price or zero.
E)greater of the share price minus the exercise price or zero.
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24
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Walter Maxim,the CEO of Digital Storage Devices has been granted options on 300,000 shares.The equity is currently trading at £27 a share and the options are at the money.The volatility of the equity has been about .15 on an annual basis over the last several years.The option mature in 5 years,become exercisable in 3 years,and the risk free rate is 4%.
What is the value of Mr.Maxim's options?
Q2) Why would the company pay the executive in options as opposed to salary?
Q3) The risk-neutral probabilities for an asset,with a current value equal to the present value of future payoffs are:
A)given by the probability of each state occurring.
B)given by the value of the underlying asset under good news and the risk free rate.
C)given by the value of the underlying asset under good news and bad news.
D)given by the value of the underlying asset under good news,bad news,and the risk free rate.
E)None of the above.
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Chapter 24: Warrants and Convertibles
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Q1) Concerning convertible bonds,which of the following statements is not correct?
A)A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.
B)Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.
C)If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value,the difference would be referred to as the option value.
D)Since convertible bonds will be exchanged for ordinary equity,convertible bonds are generally not callable.
E)More than one of the above is incorrect.
Q2) A convertible bond is selling for 1,222.70.It has 10 years to maturity,a 1,000 face value,and a 10% coupon paid semi-annually.Similar non-convertible bonds are priced to yield 8%.The conversion ratio is 40.The equity currently sells for 30.125 per share.Calculate the convertible bond's option value.
Q3) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
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Chapter 25: Financial Risk Management With Derivatives
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Q1) A derivative is a financial instrument whose value is determined by:
A)regulatory body such as the FTC.
B)a primitive or underlying asset.
C)hedging a risk.
D)hedging a speculation.
E)None of the above.
Q2) Interest rate and currency swaps allow one party to exchange a:
A)floating interest rate or currency value for a fixed value over the contract term.
B)fixed interest rate or currency value for a lower fixed value over the contract term.
C)floating interest rate or currency value for a lower floating value over the contract term.
D)fixed interest rate position for a currency position over the contract term.
E)None of the above.
Q3) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
Q4) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the markets function?
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Chapter 26: Short-Term Finance and Planning
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Q1) Wislon has an inventory turnover rate of 15,a trade payables period of 54 days and a trade receivables period of 37 days.What is the length of the cash cycle?
A)-7.33 days.
B)-2.00 days.
C)2.00 days.
D)6.50 days.
E)7.33 days.
Q2) A flexible short-term financial policy:
A)is associated with firms where the carrying costs are considered to be less than the shortage costs.
B)applies mostly to firms where the shortage costs tend to be less than the carrying costs.
C)applies only to firms that strictly limit their credit sales.
D)tends to decrease the amount of current assets held by a firm.
E)is designed to utilize short-term external financing to fund all of the seasonal increases in current assets.
Q3) Restrictive short-term financial policies regarding current asset management include three basic actions.List and briefly describe each action.
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Chapter 27: Cash Management
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Q1) The lower cash limit,L,and the upper limit,H,are:
A)set by the firm and solved in the Miller-Orr model respectively.
B)both are solved for in the Miller-Orr model.
C)both set by the firm and only the target cash balance is solved for in the Miller-Orr model .
D)two random variables and need not be solved for.
E)None of the above.
Q2) A firm uses the Miller-Orr model with a minimum balance of 10,a maximum of 80,and a target balance of 40.If the cash balance was to hit 10,what would the firm do?
A)Buy 10 in marketable securities.
B)Buy 30 in marketable securities.
C)Sell 30 in marketable securities.
D)Sell 60 in marketable securities.
E)None of the above.
Q3) During the month you receive 4 cheques,one for 100,two for 200,and one for 500.They are delayed for 2 days,4 days,and 8 days respectively.What is your average daily collection float (a month has 30 days)?
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Chapter 28: Credit Management
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Q1) A commercial draft is useful to a seller because:
A)a specific payment amount and time are set.
B)the customer's bank has the buyer sign the draft before releasing the invoices.
C)the seller gets a credit commitment from a customer before the goods are delivered.
D)All of the above.
E)None of the above.
Q2) If 25% of the customers pay on day 10 and 75% pay on day 30,the average collection period is:
A)15 days.
B)20 days.
C)25 days.
D)30 days.
E)40 days.
Q3) Aggie Corporation has been asked by its customers to grant them a 2% discount if they pay their bill within 15 days.The purchase size of the average order is £75,000.Normally,the customer pays within 30 days with no discount.Aggie 's cost of debt capital is 12%.Should the request be granted?
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Chapter 29: Mergers and Acquisitions
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Q1) The complete absorption of one company by another,wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity,is called a: A)merger.
B)consolidation.
C)tender offer.
D)spinoff.
E)divestiture.
Q2) Which of the following represent potential tax gains from an acquisition?
I.a reduction in the level of debt
II.an increase in surplus funds
III.the use of net operating losses
IV.an increased use of leverage
A)I and IV only.
B)II and III only.
C)III and IV only.
D)I and III only.
E)II,III,and IV only.
Q3) Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 30: Financial Distress
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Q1) A firm in financial distress that reorganizes:
A)continues to run the business as a going concern.
B)must have acceptance of the plan by the creditors.
C)may distribute new securities to creditors and shareholders.
D)All of the above.
E)None of the above.
Q2) The management of Magic Mobile Homes has proposed to reorganize the firm.The proposal is based on a going-concern value of 2 million.The proposed financial structure is 750,000 in new mortgage debt, 250,000 in subordinated debt and 1,000,000 in new equity.All creditors,both secured and unsecured,are owed 2.5 million euros.Secured creditors have a mortgage lien for 1,500,000 on the factory.The corporate tax rate is 34%.How much should the secured creditors receive?
A) 1,000,000
B) 1,250,000
C) 1,333,333
D) 1,500,000
E)None of the above.
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Chapter 31: International Corporate Finance
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Q1) Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per euro?
A)The exchange rate moves opposite to the value of the euro.
B)The exchange rate rises when the eurozone inflation rate is higher than the foreign country's.
C)When a foreign currency appreciates in value it strengthens relative to the euro.
D)The exchange rate falls as the euro strengthens.
E)The exchange rate is unaffected by differences in the inflation rates of the two countries.
Q2) The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost _____ in Canada if the exchange rate is C$1 = $.7349.
A)$266.67
B)$293.23
C)$505.09
D)$542.93
E)$566.67
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