Corporate Finance
Textbook Exam Questions
Course Introduction
Corporate Finance is a comprehensive exploration of the financial principles and analytical tools that drive business decision-making within corporations. The course covers key topics such as capital budgeting, risk and return, valuation of assets and firms, cost of capital, capital structure, dividend policy, and working capital management. Through a blend of theoretical frameworks and real-world case studies, students learn how financial managers maximize firm value, assess investment opportunities, and manage financial risks. The course also emphasizes fiscal responsibility, ethical considerations, and the impact of global financial markets on corporate strategy.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) The goal of a multinational corporation (MNC) is
A) The minimization of taxes remitted from foreign subsidiaries.
B) The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
C) The maximization of shareholder wealth.
D) The maximization of social benefits resulting from actions such as the employment of foreign managers.
Answer: C
Q2) Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.
A)True
B)False
Answer: True
Q3) If markets were perfect, then labor and other costs of production would be easily transferable.
A)True
B)False
Answer: True
Page 3
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.
A) low; small
B) high; small
C) low; large
D) high; large
Answer: C
Q2) Exporting of products by one country to other countries at prices below cost is called elasticity.
A)True
B)False
Answer: False
Q3) The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.
A)True
B)False
Answer: True
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Chapter 3: International Financial Markets
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Sample Questions
Q1) ____ is not a factor that affects the bid/ask spread.
A) Order costs
B) Inventory costs
C) Volume
D) All of the above factors affect the bid/ask spread
Answer: D
Q2) The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.
A) 48.90
B) 146.70
C) 55.21
D) none of the above
Answer: B
Q3) A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.
A)True
B)False
Q2) If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.
A) appreciate; direct B) depreciate; direct C) appreciate; indirect D) depreciate; indirect
Q3) Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.
A) increase; increase B) increase; decline C) decline; decline D) decline; increase
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Page 6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be.
A) higher; less
B) higher; more
C) lower; less
D) lower; more
Q2) The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:
A) 0 percent.
B) 25 percent.
C) 50 percent.
D) 150 percent.
E) none of the above
Q3) Options can be traded on an exchange or over the counter.
A)True
B)False
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7
Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.
A) inward shift in demand for; outward shift in supply of B) inward shift in demand for; inward shift in supply of C) outward shift in supply of; outward shift in demand for D) outward shift in supply of; inward shift in demand for
Q2) Which of the following is not true regarding the Mexican peso crisis?
A) Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been.
B) Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.
C) In December of 1994, the central bank of Mexico allowed the peso to float freely.
D) The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities.
E) All of the above are true.
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Which of the following is an example of triangular arbitrage initiation?
A) Buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.
B) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.
C) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.
D) Converting funds to a foreign currency and investing the funds overseas.
Q2) The yield curve of every country has its own unique shape.
A)True
B)False
Q3) The interest rate in South Africa is 8%. The interest rate in the U.S. is 5%. The South African forward rate should exhibit a premium of about 3%.
A)True
B)False
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:
A) the nominal interest rates of both countries are the same.
B) the inflation rates of both countries are the same.
C) the exchange rates of both countries will move in a similar direction against other currencies.
D) none of the above
Q2) According to the international Fisher effect (IFE):
A) the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
B) the exchange rate adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
C) the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
D) the percentage change in the foreign spot exchange rate will be negative if foreign interest rate is lower than the local interest rate.
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?
A) fundamental forecasting.
B) market-based forecasting.
C) technical forecasting.
D) mixed forecasting.
Q2) If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.
A) lower; sell; upward
B) lower; sell; downward
C) higher; sell; upward
D) higher; sell; downward
Q3) The most sophisticated forecasting techniques provide consistently accurate forecasts.
A)True
B)False
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11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.
A)True
B)False
Q2) Economic exposure can affect:
A) MNCs only.
B) purely domestic firms only.
C) A and B
D) none of the above
Q3) Which of the following operations benefits from appreciation of the firm's local currency?
A) borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
B) receiving earnings dividends from foreign subsidiaries.
C) purchasing supplies locally rather than overseas.
D) exporting to foreign countries.
Q4) A reduction in hedging will probably reduce transaction exposure.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:
A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) zero.
Q2) Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
A) sell euros forward
B) purchase euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged
Q3) Most MNCs can completely hedge all of their transactions.
A)True
B)False
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13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) ____ represents any impact of exchange rate fluctuations on a firm's future cash flows.
A) Translation exposure
B) Economic exposure
C) Transaction exposure
D) None of the above
Q2) Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.
A) positive; positively
B) positive; negatively
C) negative; positively
D) B and C
E) none of the above
Q3) All MNCs are subject to translation exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.
A)True
B)False
Q2) The most important cost-related motive for direct foreign investment is diversification across product markets.
A)True
B)False
Q3) When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.
A)True
B)False
Q4) Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.
A) increases; decreases B) decreases; increases C) increases; increases D) none of the above
Q2) The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.
A)True
B)False
Q3) If a parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.
A)True
B)False
Q4) In multinational capital budgeting, depreciation is treated as a cash outflow. A)True
B)False
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Page 16
Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) A previously undertaken project in a foreign country may no longer be feasible because:
A) interest rates have declined.
B) the MNC's cost of capital has decreased.
C) the host government has increased its tax rates substantially.
D) exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Q2) The initial outlay for a project in a foreign country may decline if property values in that country decline.
A)True
B)False
Q3) The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.
A)True
B)False
Q4) An MNC should periodically reassess its investments to determine whether to divest them.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) A micro-assessment of country risk:
A) is adjusted for the particular business of the firm involved.
B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above
Q2) U.S.-based MNCs could avoid country risk by simply avoiding international business.
A)True
B)False
Q3) Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis?
A) Adjusting the discount rate upward
B) Adjusting the input variables to estimate the sensitivity of the project's NPV
C) Adjusting the political risk rating to obtain a more favorable NPV
D) Country risk should be ignored in capital budgeting, since it is a subjective analysis.
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
A) Private placements
B) Domestic equity offerings
C) Global equity offerings
D) Global debt offerings
Q2) The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
A) 8.4%
B) 11.4%
C) 10%
D) None of the above
Q3) The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.
A)True
B)False
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap between two parties.
A) ultraparty
B) broker
C) counterparty
D) none of the above
Q2) ____ swaps are often used by companies to hedge against ____ rate risk.
A) Currency; interest
B) Interest; interest
C) Interest; exchange
D) Currency; exchange
E) B and D
Q3) A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
A)True
B)False
Q4) Many MNCs simultaneously swap interest payments and currencies.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
A)True
B)False
Q2) A banker's acceptance is a draft drawn on and accepted by a(n) ____.
A) bank
B) importer
C) exporter
D) none of the above
Q3) ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
A) A standby L/C
B) A transferable L/C
C) Assignment of proceeds
D) None of the above
Q4) Under prepayment, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
A)True
B)False
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Chapter 20: Short-Term Financing
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Q1) A risk-averse firm would prefer to borrow ____ when the expected financing costs are similar in a foreign country as in the local country.
A) locally
B) in the foreign country
C) either A or B
D) part of the funds locally, and part from the foreign country
Q2) Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?
A) Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan.
B) Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan.
C) A U.S. firms has net receivables in Cyprus pounds.
D) A and C.
E) None of the above
Q3) The interest rate of euronotes is based on the T-bill rate.
A)True
B)False
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Chapter 21: International Cash Management
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Q1) In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.
A)True
B)False
Q2) A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.
A)True
B)False
Q3) Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the deposit is covered by a forward sale of dollars.
A) 10%.
B) 8%.
C) 2%.
D) cannot answer without more information
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