Corporate Finance
Review Questions
Course Introduction
Corporate Finance explores the fundamental principles and techniques used to manage a firm's financial resources. The course examines key topics such as capital budgeting, cost of capital, financial statement analysis, risk and return, capital structure, dividend policy, and working capital management. Students learn to evaluate investment opportunities, analyze financial performance, and make strategic decisions regarding the acquisition and use of funds within a corporation. Emphasis is placed on understanding the financial decision-making process and its impact on firm value, with real-world applications and case studies enhancing practical comprehension.
Recommended Textbook
International Financial Management 7th Edition by Cheol S. Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) If the international price of beer is one keg of beer = 1 bottle of whiskey, how much whiskey will Northern Ireland consume? Each country completely specializes and 500 kegs of beer are traded for 500 bottles of whiskey.
A)1,000 bottles
B)1,200 bottles
C)500 bottles
D)600 bottles
Answer: A
Q2) The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly to
A)circumvent trade barriers.
B)reduce transportation costs.
C)reduce transactions costs.
D)both a and b
Answer: A
Q3) Which state has an absolute advantage in producing wheat in Case I?
A)South Dakota
B)North Dakota
C)Neither state
Answer: A
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Chapter 2: International Monetary System
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Q1) Generally speaking, a country would be more prone to asymmetric shocks
A)the more diversified and less trade-dependent its economy is.
B)the less diversified and more trade-dependent its economy is.
C)the less diversified and less trade-dependent its economy is.
D)the more diversified and more trade-dependent its economy is.
Answer: B
Q2) The Exchange Rate Mechanism (ERM) is
A)the procedure by which ERM member countries collectively manage their exchange rates.
B)based on a "parity-grid" system, which is a system of par values among ERM countries.
C)a and b
D)none of the above
Answer: C
Q3) 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
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Page 4
Chapter 3: Balance of Payments
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Q1) Current account includes
A)(i), (ii), and (iii)
B)(ii), (iii), and (vii)
C)(iv), (v), and (vii)
D)(i), (v), and (vi)
Answer: B
Q2) BCA stands for
A)the balance on the current account.
B)the balance on the capital account.
C)the balance on the official reserves.
D)net imports.
Answer: A
Q3) As of 2011 gold accounted for
A)90 percent of the total reserve assets held by IMF member countries.
B)70 percent of the total reserve assets held by IMF member countries.
C)approximately 50 percent of the total reserve assets held by IMF member countries.
D)less than one percent of the total reserve assets held by IMF member countries.
Answer: D
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5
Chapter 4: Corporate Governance Around the World
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Q1) Private benefits of corporate control will tend to be higher in
A)French civil law countries than in English common law countries.
B)English common law countries than in French civil law countries.
C)French civil law countries than in Scandinavian civil law countries.
D)English common law countries than in German civil law countries.
Q2) One of the objectives of corporate governance reform is to,
A)introduce expensive and burdensome accounting reforms.
B)strengthen the protection of outside investors from expropriation by managers and controlling insiders.
C)provide taxpayer financing for corporate raiders to strengthen the discipline of the marketplace.
D)none of the above
Q3) Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.
A)This is a potential conflict of interest for both parties.
B)This is normal and even a desirable situation since it allows for efficient information sharing between the firms.
C)There is a potential conflict for the shareholders of the two firms.
D)All of the above are true.
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Page 6
Chapter 5: The Market for Foreign Exchange
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Q1) Suppose you observe the following exchange rates: 1 = $1.50; ¥120 = $1.00. Calculate the euro-pound exchange rate.
A)¥133.33 = 1.00
B) 1.00 = ¥180
C)¥80 = 1.00
D) 1 = £2.50
Q2) The world's largest foreign exchange trading center is A)New York.
B)Tokyo.
C)London.
D)Hong Kong.
Q3) Suppose the spot ask exchange rate, S<sup>a</sup>($|£), is $1.90 = £1.00 and the spot bid exchange rate, S<sup>b</sup>($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?
A)$1,000,000
B)$52,910.05
C)$100,000
D)$52,631.58
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Page 7
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per that that satisfies IRP from the perspective of a customer who borrowed 1m, traded for dollars at the spot rate and invested at i<sub>$</sub> = 4%.
Q2) If you had 1,000,000 and traded it for USD at the spot rate, how many USD will you get?
Q3) Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/ and the one-year forward exchange rate, is $1.16/ . Assume that an arbitrageur can borrow up to $1,000,000.
A)This is an example where interest rate parity holds.
B)This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C)This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D)None of the above
Q4) If you had 1,000,000 and traded it for USD at the spot rate, how many USD will you get?
Q5) If you borrowed 1,000,000 for one year, how much money would you owe at maturity?
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Yesterday, you entered into a futures contract to buy 62,500 at $1.50/ . Your initial margin was $3,750 (= 0.04 × 62,500 × $1.50/ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call?
A)$1.4720/
B)$1.5280/
C)$1.500/
D)None of the above
Q2) Yesterday, you entered into a futures contract to buy 62,500 at $1.50 per . Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted?
A)$1.5160 per .
B)$1.208 per .
C)$1.1920 per .
D)$1.4840 per .
Q3) Verify that the dollar value of your put option equals the dollar value of your call. Your answer is worth zero points if it does not include currency symbols ($, )!
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9
Chapter 8: Management of Transaction Exposure
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Q1) An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of
A)paying or collecting early.
B)paying or collecting late.
C)paying late, collecting early.
D)paying early, collecting late.
Q2) Suppose that the exchange rate is 1.25 = £1.00. Options (calls and puts) are available on the London exchange in units of 10,000 with strike prices of £0.80 = 1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of 1.25 = £1.00. For a French firm to hedge a £100,000 receivable,
A) buy 10 call options on the pound with a strike in euro.
B) buy 8 put options on the pound with a strike in euro.
C) buy 10 put options on the pound with a strike in euro.
D) buy 8 call options on the euro with a strike in pounds.
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) Developing multiple production sites in a variety of countries,
A)can create an excess capacity problem.
B)can lead to underutilization of domestic plants.
C)can lead to domestic job losses.
D)all of the above
Q2) When the domestic currency is strong or expected to become strong,
A)this could erode the competitive position of the firm's exports.
B)this could erode the competitive position of the firm's import competition.
C)the firm should consider locating production facilities in a foreign country where costs are low.
D)both a and c
Q3) A firm with a highly elastic demand for its products
A)will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold.
B)will be able to raise prices following unfavorable changes in the exchange rate without significantly lowering the quantity sold.
C)can easily pass increased costs on to consumers.
D)will sell about the same amount of product regardless of price.
Q4) Estimate your exposure (b) to the exchange risk.
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Chapter 10: Management of Translation Exposure
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Q1) A balance sheet hedge seeks to
A)eliminate any mismatch of net assets and net liabilities denominated in the same currency.
B)transfer accounting exposure to transaction exposure.
C)create cumulative translation adjustment.
D)none of the above
Q2) Under which accounting method are most income statement accounts are translated at the average exchange rate for the period?
A)Current/noncurrent method
B)Monetary/nonmonetary method
C)Temporal method
D)Current rate method
Q3) Which of the above statements pertain to FASB 8?
A)(i)
B)(i) and (ii)
C)(iii) and (iv)
D)(i), (ii), and (iii)
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Chapter 11: International Banking and Money Market
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Q1) ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A)$50,000
B)$100,000
C)$118,000
D)$120,000
Q2) In reference to capital requirements,
A)bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans.
B)bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky assets to reduce the probability of bank failure.
C)most bank regulators agree with the doctrine of "less is more".
D)none of the above
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Chapter 12: International Bond Market
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Q1) Eurobonds are usually
A)bearer bonds.
B)registered bonds.
C)bulldog bonds.
D)foreign currency bonds.
Q2) Bonds with equity warrants
A)are really the same as convertible bonds if the prestated price of exercising the warrant is the par value of the bond.
B)can be viewed as straight debt with a call option (technically a warrant) attached.
C)can only be exercised on coupon dates.
D)typically are convertible as well.
Q3) "Samurai" bonds are
A)dollar-denominated foreign bonds originally sold to U.S. investors.
B)yen-denominated foreign bonds originally sold in Japan.
C)pound sterling-denominated foreign bonds originally sold in the U.K.
D)none of the above
Q4) Eurobonds sold in the United States may not be sold to U.S. citizens.
A)True
B)False
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Chapter 13: International Equity Markets
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Q1) Factors affecting international equity returns are
A)macroeconomic variables that influence the overall economy.
B)exchange rate changes.
C)the industrial structure of the country.
D)all of the above
Q2) In general, Standard & Poor's Emerging Markets Data Base classified a stock market as "emerging" if
A)it is located in a low- or middle-income economy as defined by the World Bank.
B)its investable market capitalization is low relative to its most recent GNI figures.
C)either a or b
D)none of the above
Q3) As a measure of "liquidity",
A)generally, the lower the turnover, the greater the liquidity of a secondary stock market.
B)generally, the higher the turnover, the greater the liquidity of a secondary stock market.
C)the more a financial asset gurgles when shook the greater the liquidity.
D)none of the above
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q2) In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because
A)it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments.
B)it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts.
C)none of the above
Q3) In a currency swap
A)it may be the case that two counterparties have equivalent credit ratings.
B)it may be the case that firms have a comparative advantage in borrowing in their domestic markets.
C)both a and b
D)none of the above
Q4) What are the IRP 1-year and 2-year forward exchange rates?
Q5) Explain how this opportunity affects which swap firm B will be willing to participate in.
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Chapter 15: International Portfolio Investment
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Q1) U.S.-based mutual funds known as country funds.
A)Invest in the government securities of different sovereign governments, giving risk-free portfolios effective exchange rate diversification.
B)Invests exclusively in stocks of a single country.
C)Invests exclusively in government securities of a single country.
D)None of the above
Q2) Regarding the mechanics of international portfolio diversification, which statement is true?
A)Security returns are much less correlated across countries than within a county.
B)Security returns are more correlated across countries than within a county.
C)Security returns are about as equally correlated across countries as they are within a county.
D)None of the above
Q3) The stock market of country A has an expected return of 5%, and a standard deviation of expected return of 8%. The stock market of country B has an expected return of 15% and a standard deviation of expected return of 10%. Find the Global Minimum Variance Portfolio.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar, a British auto maker.
A)This is an example of cross-border M&A.
B)This was a Greenfield investment.
C)both a and b
D)none of the above
Q2) Intangible assets are often hard to package and sell to foreigners
A)because they usually default on the contracts that they sign.
B)As a result, there is more FDI than there might otherwise be.
C)Because property rights in intangible assets are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available.
D)both b and c
Q3) In the early 1980s, Honda, the Japanese automobile company, built an assembly plant in Marysville, Ohio, and began to produce cars for the North American market. As the production capacity at the Ohio plant expanded, Honda began to export its U.S.-manufactured cars to Japan.
A)True
B)False
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) 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
Q2) The parent company should decide the financing method for its own subsidiaries
A)with a view toward minimizing the parent's overall cost of capital.
B)by copying the norms of the host country.
C)with a view toward gaming the bankruptcy system of the host country.
D)none of the above
Q3) For most countries and most firms, the domestic country beta
A)can be no lower than its world beta.
B)is normally much smaller than the world beta.
C)is normally much much higher than the world beta.
D)is exactly equal to the world beta.
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Page 19
Chapter 18: International Capital Budgeting
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Q1) What is CF1 in dollars?
Q2) The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. Calculate the weighted average cost of capital.
A)33.33%
B)8.09%
C)9.02%
D)16.5%
E)None of the above
Q3) Which of the following statements is false about "borrowing capacity"?
A)it is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans.
B)it creates tax shields for APV analysis regardless of how the project is actually financed.
C)is synonymous to the "project debt".
D)is based on the firm's optimal capital structure.
Q4) Find the NPV in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S<sub>1</sub>( |£) = 2.20 per £.
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Page 20
Chapter 19: Multinational Cash Management
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Q1) On blocked funds strategy is
A)transferring personnel from corporate headquarters to the subsidiary offices.
B)using the national airlines of the host country when possible for the international travel of all MNC executives.
C)holding business conferences of the MNC in the host country, where all expenses are paid by the local subsidiary.
D)all of the above
Q2) 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
Q3) Several international banks offer multilateral netting software packages. These packages
A)calculate the net currency positions of each affiliate.
B)can integrate the netting function with foreign exchange exposure management.
C)only work on the Mac platform.
D)both a and b
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Page 21
Chapter 20: International Trade Finance
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Q1) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q2) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q3) If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?
Q4) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q5) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
Q6) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q7) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q8) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q9) 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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Page 22
Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) The foreign tax credit method followed by the United States is
A)to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax authorities on foreign-source income.
B)in place for the purpose of avoiding double taxation.
C)both a and b
D)none of the above
Q2) Value-added tax (VAT) is
A)a direct national tax levied on the value added in the production of a good (or service) as it moves through various stages of production.
B)an indirect national tax levied on the value added in the production of a good (or service) as it moves through various stages of production.
C)the equivalent of imposing a national sales tax.
D)both b and c
Q3) In a growing economy, the VAT would raise prodigious amounts of money
A)in a way almost invisible to tax-paying voters.
B)in a way obvious to tax-paying voters.
C)but would discourage savings.
D)none of the above
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