Financial Analysis and Decision Making
Practice Questions
Course Introduction
Financial Analysis and Decision Making introduces students to the essential concepts and tools needed to evaluate an organizations financial health and support effective business decisions. The course covers fundamental topics such as interpreting financial statements, ratio analysis, cash flow management, budgeting, forecasting, and capital investment appraisal. Emphasis is placed on applying analytical techniques to assess profitability, liquidity, solvency, and operational efficiency. Through case studies and practical examples, students learn how to use financial information to develop strategies, allocate resources, and assess risks, preparing them to make sound, evidence-based decisions in a dynamic business environment.
Recommended Textbook Principles of Corporate Finance 12th Edition by Richard Brealey
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Chapter 1: Introduction to Corporate Finance
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Q1) Which of the following is not a financial asset?
A)Common stock
B)Bank loans
C)Preferred stock
D)Buildings
Answer: D
Q2) Real assets of a corporation are claims on their financial assets.
A)True
B)False
Answer: False
Q3) The following are examples of tangible assets except
A)machinery only.
B)machinery and office buildings only.
C)training courses for employees only.
D)machinery, office buildings, and warehouses only.
Answer: C
Q4) Explain the term corporation.
Answer: A corporation is a legal entity and has an existence of its own. Generally, large businesses are organized as corporations.
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Chapter 2: How to Calculate Present Values
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Q1) According to the net present value rule, an investment in a project should be made if the
A)net present value is greater than the cost of investment.
B)net present value is greater than the present value of cash flows.
C)net present value is positive.
D)net present value is negative.
Answer: C
Q2) If the future value annuity factor at 10 percent and five years is 6.1051, calculate the equivalent present value annuity factor.
A)6.1051
B)3.7908
C)6.7156
D)4.8127
Answer: B
Q3) The rate of return is also called the
A)discount rate only.
B)discount rate and hurdle rate only.
C)discount rate, hurdle rate, and opportunity cost of capital.
D)discount rate and opportunity cost of capital only.
Answer: C
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Chapter 3: Valuing Bonds
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Sample Questions
Q1) If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.
A)True
B)False
Answer: True
Q2) Generally, a bond can be valued as a package of
A)annuity and perpetuity only.
B)perpetuity and single payment only.
C)annuity and single payment only.
D)annuity, perpetuity, and single payment.
Answer: C
Q3) For many years, real rates of interest tended to fluctuate more wildly than nominal rates of interest.
A)True
B)False
Answer: False
Q4) The yield to maturity on a bond is really its internal rate of return.
A)True
B)False
Answer: True
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Chapter 4: The Value of Common Stocks
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Sample Questions
Q1) Explain the term secondary market.
Q2) A company forecasts growth of 6 percent for the next five years and 3 percent thereafter.Given last year's free cash flow was $100, what is its horizon value (PV looking forward from year 4) if the company cost of capital is 8 percent?
A)$0
B)$1,672
C)$2,000
D)$2,676
Q3) Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2.If the required rate of return on the stock is 15 percent, what is the current value of the stock?
A)$28.20
B)$32.17
C)$32.00
D)$29.18
Q4) Discuss the general principle at work in valuing a common stock.
Q5) Discuss the term price-earnings (P/E) ratio.
Q6) Briefly explain the major types of exchanges prevalent in the United States.
Page 6
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Chapter 5: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.
A)$2.40 million
B)$1.20 million
C)$0.80 million
D)$0.20 million
Q2) Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.
A)14.6 percent
B)16.4 percent
C)18.2 percent
D)22.1 percent
Q3) Soft rationing may be used to control managerial behavior.
A)True
B)False
Q4) Briefly explain the term hard rationing.
Q5) Discuss some of the advantages of using the payback method.
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Chapter 6: Making Investment Decisions With the Net
Present Value Rule
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Q1) The real cash flow occurring in year 2 is $60,000.If the inflation rate is 5 percent per year and the real rate of interest is 2 percent per year, calculate the nominal cash flow for year 2.
A)$60,000
B)$62,424
C)$66,150
D)$63,654
Q2) The Important point(s) to remember while estimating the cash flows of a project
A)is that only cash flow is relevant.
B)are cash flow is relevant and always estimate cash flows on an incremental basis.
C)are to always estimate cash flows on an incremental basis and to be consistent in the treatment of inflation.
D)are cash flow is relevant, always estimate cash flows on an incremental basis, and be consistent in the treatment of inflation.
Q3) Briefly explain how the cost of excess capacity is taken into consideration.
Q4) When calculating cash flows, one should consider all incidental effects.
A)True
B)False
Page 8
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Chapter 7: Introduction to Risk and Return
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Q1) Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent.If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?
A)10 percent
B)20 percent
C)16 percent
D)14 percent
Q2) Briefly explain how diversification reduces risk.
Q3) As the number of stocks in a portfolio is increased,
A)unique risk decreases and approaches zero.
B)market risk decreases.
C)unique risk decreases and becomes equal to market risk.
D)total risk approaches zero.
Q4) If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107, what is the standard error?
A)4.23 percent
B)1.91 percent
C)0.47 percent
D)19.8 percent
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Chapter 8: Portfolio Theory and the Capital Asset Pricing Model
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Q1) Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent.Calculate the expected return for Microsoft.
A)12.04 percent
B)15.66 percent
C)13.94 percent
D)8.65 percent
Q2) One would expect a stock with a beta of 1.25 to increase in returns
A)25 percent more than the market in up markets.
B)25 percent more than the market in down markets.
C)125 percent more than the market in up markets.
D)125 percent more than the market in down markets.
Q3) Suppose the beta of Amazon is 2.2, the risk-free rate is 5.5 percent, and the market risk premium is 8 percent.Calculate the expected rate of return for Amazon.
A)15.8 percent
B)14.3 percent
C)35.2 percent
D)23.1 percent
Q4) Explain the term efficient portfolio.
Q5) Briefly explain the term security market line.
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Chapter 9: Risk and the Cost of Capital
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Q1) A firm's cost of equity can be estimated using the
A)Fama-French three-factor model.
B)capital asset pricing model (CAPM).
C)arbitrage pricing theory (APT).
D)All of the options are correct.
Q2) The historical returns for the past three years for Stock B and the stock market portfolio are Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent.Calculate the average return for Stock B and the market portfolio.
A)Stock B: 16 percent; market portfolio: 14 percent
B)Stock B: 14 percent; market portfolio: 16 percent
C)Stock B: 24 percent; market portfolio: 12 percent
D)Stock B: 12 percent; market portfolio: 16 percent
Q3) Discuss why one might use an industry beta to estimate a company's cost of capital.
Q4) Which of the following types of projects have average total risk?
A)Speculative ventures
B)New products
C)Expansions of existing business
D)Cost improvements
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Chapter 10: Project Analysis
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Q1) You obtain the following data for year 1: Revenue = $43; variable costs = $30; depreciation = $3; tax rate = 30 percent.Calculate the operating cash flow for the project for year 1.
A)$7
B)$10
C)$13
D)$16
Q2) Monte Carlo simulation is a tool intended to consider all possible combinations of variables.
A)True
B)False
Q3) In constructing a Monte Carlo simulation model of an investment project, one typically ignores possible interdependencies between variables.
A)True
B)False
Q4) Postaudits are conducted before the start of projects.
A)True
B)False
Q5) Why is sensitivity analysis less realistic than Monte Carlo simulation?
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Chapter 11: Investment Strategy and Economic Rents
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Q1) Suppose the current price of gold is $600 per ounce.The price of gold is expected to grow 4 percent per year for the foreseeable future.If the appropriate discount rate is 10 percent, then the current value of gold per ounce is
A)less than $600 per ounce.
B)$600 per ounce.
C)greater than $600 per ounce.
D)Not enough information is provided.
Q2) A firm that expects long-run economic rents from a particular project is likely ignoring the effects of competition.
A)True
B)False
Q3) The NPV of a project can be thought of as the present value of its A)economic rents.
B)profits.
C)revenues.
D)salvage value.
Q4) Briefly explain the effect of competition on economic rents.
Q5) Discuss how you would react if you were presented with a project that had a high positive NPV.
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Chapter 12: Agency Problems Compensation and Performance Measurement
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Q1) According to the survey of senior managers by Graham, Harvey, and Rajgopal, senior managers admitted to the following:
A)adjusting their firms' operations and investments in order to manage earnings.
B)decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets.
C)adjusting their firms' operations and investments in order to manage earnings and decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets.
D)adjusting their firms' operations and investments in order to manage earnings; decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings target; and deferring or rejecting investment projects with positive NPVs in order to meet earnings targets.
Q2) An example of an entrenching investment is a manager that expands the scope of his or her operation.
A)True
B)False
Q3) Define the term economic income.
Q4) Briefly explain the term qualified opinion issued by the auditors.
Q5) What are some of the agency problems associated with capital budgeting?
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Chapter 13: Efficient Markets and Behavioral Finance
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Q1) Weak-form efficiency implies that past stock returns
A)form patterns that tend to repeat.
B)are major inputs to investors for forming trading strategies.
C)do not help to predict future returns.
D)are difficult to explain.
Q2) A random walk process for a single stock consists of the toss of a fair coin at the end of each day.If the outcome is heads, the stock price increases by 1.25 percent.If the outcome is tails, the stock price decreases by 0.75 percent.What is the drift of such a process?
A)+1.25 percent
B)-0.75 percent
C)+0.25 percent
D)+2 percent
Q3) The statement that stock prices follow a random walk implies that
A)successive price changes are independent of each other.
B)successive price changes are positively related and successive price changes are negatively related.
C)the autocorrelation coefficient is either +1 or -1.
D)successive price changes are negatively related.
Q4) List the five lessons of market efficiency.
Page 15
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Chapter 14: An Overview of Corporate Financing
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Q1) Generally, nonfinancial U.S.corporations have financed their capital expenditures through
A)issuance of new equity.
B)issuance of debt.
C)increases in working capital.
D)internally generated cash.
Q2) If you own 1,000 shares of common stock of a firm and there are five directors being elected, what is the maximum number of votes you can cast for a particular director under cumulative voting?
A)5,000
B)1,000
C)200
D)5
Q3) A corporate bond that can be exchanged for a fixed number of shares of stock is called a
A)callable bond.
B)debenture.
C)convertible bond.
D)warrant.
Q4) Indicate the major sources of finance available to corporations.
Page 16
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Chapter 15: How Corporations Issue Securities
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Q1) Mezzanine financing must come in the third stage.
A)True
B)False
Q2) New Image Corporation has 1,000,000 shares outstanding.It wishes to issue 500,000 new shares using rights issue.How many (North American) rights are needed to buy one new share?
A)One right/share
B)Two rights/share
C)Three rights/share
D)Four rights/share
Q3) When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a(an)
A)rights offering.
B)general art offering.
C)private placement.
D)unseasoned issue.
Q4) Discuss the advantages of shelf registration.
Q5) Briefly explain the term private placement.
Q6) Explain the need for a firewall between underwriters and analysts.
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Chapter 16: Payout Policy
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Q1) Suppose that there are no taxes, transactions costs, or other market imperfections.Which of the following actions is most likely to make shareholders better off?
A)Increase dividends.
B)Reduce share repurchases.
C)Announce that dividends will not change for at least three years.
D)Eliminate negative-NPV projects.
Q2) Briefly describe the leftists' point of view on dividends and taxes.
Q3) Adoption of Rule 10b-18 by the SEC has protected firms from being prosecuted for manipulating their share price through share repurchases.
A)True
B)False
Q4) Briefly explain how the imputation tax system works in Australia by providing an example.Assume a 30 percent corporate tax rate and a 15 percent marginal tax rate for the investor.
Q5) Generally, investors interpret the announcement of a decrease in dividends as
A)bad news, and the stock price drops.
B)good news, and the stock price increases.
C)a nonevent that does not affect the stock prices.
D)very good news, and the stock price jumps up.
Page 18
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Chapter 17: Does Debt Policy Matter
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Q1) The law of conservation of value implies that
A)the mix of common stock and preferred stock does not affect the value of the firm.
B)the mix of long-term and short-term debt does not affect the value of the firm.
C)the mix of secured and unsecured debt does not affect the value of the firm.
D)the mix of common stock and preferred stock does not affect the value of the firm, the mix of long-term and short-term debt does not affect the value of the firm, and the mix of secured and unsecured debt does not affect the value of the firm.
Q2) Which of the following is true?
A)b<sub>D</sub> > b<sub>A</sub> > b<sub>E</sub>
B)b<sub>E</sub> > b<sub>A</sub> > b<sub>D</sub>
C)b<sub>A</sub> > b<sub>E</sub> > b<sub>D</sub>
D)b<sub>A</sub> > b<sub>D</sub> > b<sub>E</sub>
Q3) According to Modigliani and Miller Proposition II, the rate of return required by debtholders linearly increases as the firm's debt-equity ratio increases.
A)True
B)False
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Chapter 18: How Much Should a Corporation Borrow
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Q1) According to Rajan and Zingales, debt ratios of individual companies depend on
A)size: Large firms have higher debt ratios; and tangible assets: Firms with high ratios of fixed assets to total assets have higher debt ratios.
B)size: Large firms have higher debt ratios; tangible assets: Firms with high ratios of fixed assets to total assets have higher debt ratios; and profitability: More profitable firms have lower debt ratios.
C)size: Large firms have higher debt ratios; tangible assets: Firms with high ratios of fixed assets to total assets have higher debt ratios; profitability: More profitable firms have lower debt ratios; and market to book: Firms with higher ratios of market-to-book value have lower debt ratios.
D)size: Large firms have higher debt ratios; tangible assets: Firms with high ratios of fixed assets to total assets have higher debt ratios; profitability: More profitable firms have lower debt ratios; market to book: Firms with higher ratios of market-to-book value have lower debt ratios; and market structure: Firms with monopoly power have higher debt ratios.
Q2) A firm nearing bankruptcy has an incentive to issue more high-risk debt.
A)True B)False
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Chapter 19: Financing and Valuation
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Q1) One should determine the after-tax weighted average cost of capital by A)multiplying the weighted average after-tax cost of debt by the weighted average cost of equity.
B)adding the weighted average before-tax cost of debt to the weighted average cost of equity.
C)adding the weighted average after-tax cost of debt to the weighted average cost of equity.
D)dividing the weighted average before-tax cost of debt to the weighted average cost of equity.
Q2) The market value of short-term debt is very close to the book value of debt for healthy firms.
A)True
B)False
Q3) If expected long-term growth is constant, the firm's horizon value at period H is given by PVH = (FCF<sub>H</sub> <sub>+</sub> <sub>1</sub>)/(WACC - g).
A)True
B)False
Q4) What method would you tend to use for evaluating international projects?
Q5) Briefly explain how APV can be used for valuing a business.
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Chapter 20: Understanding Options
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Q1) The owner of a regular exchange-listed call-option on a stock
A)has the right to buy 100 shares of the underlying stock at the exercise price.
B)has the right to sell 100 shares of the underlying stock at the exercise price.
C)has the obligation to buy 100 shares of the underlying stock at the exercise price.
D)has the obligation to sell 100 shares of the underlying stock at the exercise price.
Q2) A profit diagram implicitly neglects the time value of money.
A)True
B)False
Q3) The value of a call option is positively related to the following:
A)underlying stock price.
B)risk-free rate.
C)time to expiration.
D)underlying stock price, risk-free rate, time to expiration, and volatility of the underlying stock price.
Q4) Explain the main differences between position diagrams and profit diagrams.
Q5) Explain the difference between a European option and an American option.
Q6) Why would an option holder almost never exercise an option early?
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Chapter 21: Valuing Options
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Q1) Suppose ABCD's stock price is currently $50.In the next six months it will either fall to $40 or rise to $80.What is the current value of a six-month call option with an exercise price of $50? The six-month risk-free interest rate is 2 percent (periodic rate).
A)$2.40
B)$15
C)$8.25
D)$8.09
Q2) If the value of d2 is -0.5, then the value of N(d2) is
A)0.1915.
B)0.6915.
C)0.3085.
D)0.8085.
Q3) The delta of a put option always equals
A)the delta of an equivalent call option.
B)the delta of an equivalent call option with a negative sign.
C)the delta of an equivalent call option minus one.
D)the delta of an equivalent call option plus one.
Q4) Give an example of an option equivalent investment using common stock and borrowing.
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Chapter 22: Real Options
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Q1) Which of the following are examples of real options?
A)The option to expand if an investment project succeeds only
B)The option to expand if an investment project succeeds and the option to wait (and learn) before investing
C)The option to expand if an investment project succeeds, the option to wait (and learn) before investing, and the option to shrink or abandon a project
D)The option to expand if an investment project succeeds, the option to wait (and learn) before investing, the option to shrink or abandon a project, and the option to vary the mix of output or the firm's production methods
Q2) Which of the following conditions might lead a financial manager to delay a positive-NPV project? (Assume that project NPV-if undertaken immediately-is held constant.)
A)The risk-free interest rate falls.
B)Uncertainty about future project value increases.
C)The first cash inflow generated by the project is higher than previously thought.
D)Investment required for the project increases.
Q3) Briefly explain how temporary abandonment can be thought of as a complex option.
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Chapter 23: Credit Risk and the Value of Corporate Debt
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Q1) Briefly explain the term credit scoring.
Q2) Use the following data: ROA = 10%; Total liabilities = 90% of assets; EBITDA = 10% of liabilities.Calculate the relative chance of failure using the following model: Log (relative chance of failure) = -6.445 - 1.192 ROA + 2.307 (liabilities/assets)0.346(EBITDA/liabilities).
A)1.70 percent
B)1.09 percent
C)0.16 percent
D)None of the options are correct.
Q3) The median total debt ratio (Total debt/(total debt + equity in %) for industrial firms with an A rating is
A)12.4 percent.
B)28.3 percent.
C)37.5 percent.
D)38.6 percent.
Q4) Define the term credit risk.
Q5) Briefly explain the term junk bonds.
Q6) Briefly explain the model developed by Beaver, McNichols, and Rhie to predict the chance of failure of a firm.
Page 25
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Chapter 24: The Many Different Kinds of Debt
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Q1) Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.
A)True
B)False
Q2) A Yankee bond will be denominated in A)U.S.dollars.
B)British pounds.
C)Japanese yen.
D)Euros.
Q3) The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is a A)nonrecourse covenant.
B)recourse covenant.
C)positive covenant.
D)negative covenant.
Q4) Loan guarantees are valuable methods for propping up the value of debt without up-front cash.
A)True B)False
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Chapter 25: Leasing
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Q1) A firm is considering leasing.The firm can borrow at 9 percent, and the marginal corporate tax rate is 30 percent.What is the discount rate for valuing the lease?
A)9 percent
B)30 percent
C)2.7 percent
D)6.3 percent
Q2) What happens to the NPV of leasing if the lease payments increase?
Q3) If the lessor borrows most of the purchase price of a leased asset, the lease is called a
A)leveraged lease.
B)sale and lease-back.
C)financial lease.
D)nonrecourse lease.
Q4) Leasing is more likely to be advantageous when the lessor's tax rate is substantially higher than the lessee's.
A)True
B)False
Q5) What advantage does a sale-lease-back to a SPE have?
Q6) What happens to the NPV of leasing if the tax rate increases?
Page 27
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Chapter 26: Managing Risk
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Q1) For commodity futures, (Futures price) x (1 + r<sub>f</sub>)^t = spot price - net convenience yield.
A)True
B)False
Q2) For financial futures, Futures price = (spot price)/(1 + r<sub>f</sub> - y)^t.
A)True
B)False
Q3) If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60, what is your profit per bushel? (Ignore transaction costs.)
A)-$3.60
B)$0.15
C)$3.60
D)-$0.15
Q4) A type of risk peculiar to a forward contract is called A)market risk.
B)duration risk.
C)currency risk.
D)counterparty risk.
Q5) In bearing risk, what disadvantages do insurance companies face?
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Chapter 27: Managing Risk
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Q1) Briefly explain the term economic exposure.
Q2) The Mexican economy is predicted to average double-digit inflation over the next two years at 10 percent per year. The inflation forecast for the United States for the same period is 4 percent per year. If the current exchange rate is $0.091/peso, what is the expected exchange rate two years from now?
A)$0.08604/peso
B)$0.08134/peso
C)$0.10180/peso
D)$0.09625/peso
Q3) Purchasing power parity implies that any differences in inflation rates will be offset by a change in the exchange rate.
A)True
B)False
Q4) What is wrong with the following news report? "Today the dollar ended the trading session stronger."
Q5) In general, the countries with the highest interest rates also have the highest inflation rates.
A)True
B)False
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Chapter 28: Financial Analysis
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Q1) Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80.Calculate the debt ratio.
A)0.50
B)0.55
C)0.56
D)0.60
Q2) Assume the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $50.Calculate the payout ratio.
A)10 percent
B)5 percent
C)60 percent
D)8.3 percent
Q3) What are the different categories of financial ratios?
Q4) Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10.Calculate the cash coverage ratio.
A)7
B)5
C)4.7
D)14
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Chapter 29: Financial Planning
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Q1) Last year, Foley Inc.reported total assets of $500, equity of $400, net income of $100, dividends of $50, and earnings retained in the period of $50.What is Foley Inc.'s sustainable growth rate?
A)17.5 percent
B)30 percent
C)10 percent
D)12.5 percent
Q2) Among models used to develop a financial plan, the following is the simplest: A)percentage of sales model.
B)regression model.
C)computer simulation model.
D)optimization model.
Q3) Strategy B, as portrayed in Chapter 29, implies that the firm is a short-term lender during a part of the year and a short-term borrower during the rest of the year.
A)True
B)False
Q4) Which model do firms typically use to prepare a pro forma long-term financial plan?
Q5) Discuss the process of preparing a short-term financial plan.
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Chapter 30: Working Capital Management
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Q1) A commercial draft is simply an order to pay.
A)True
B)False
Q2) Briefly describe the basic electronic funds transfer systems.
Q3) If a firm grants credit with terms of 3/10, net 30, the customer
A)must pay a penalty of 3 percent when payment is made in more than 10 days after the sale.
B)must pay a penalty for 10 percent when payment is made in more than 3 days after the sale.
C)receives a discount of 3 percent when payment is made in less than 10 days after the sale.
D)receives a discount of 10 percent when payment is made in less than 3 days after the sale.
Q4) Which of the following countries is the heaviest user of checks?
A)The United States
B)The UK
C)Brazil
D)Canada
Q5) List some of the different money market instruments available for short-term investments.
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Chapter 31: Mergers
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Q1) When a merger of two firms is achieved by one firm, automatically assuming all the assets and all the liabilities of the other firm, such a merger requires
A)no shareholder meeting to vote.
B)the approval of at least 50 percent of the stockholders (or as specified by corporate charters or state laws) of each firm.
C)that the management of the two firms be tossed out.
D)that the target firm search for alternative suitors.
Q2) Two companies can sensibly be considered for a merger if they have complementary resources.
A)True
B)False
Q3) Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different
A)production processes.
B)production processes and accounting methods.
C)corporate cultures.
D)production processes, accounting methods, and corporate cultures.
Q4) Discuss the difficulties associated with a typical merger.
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33
Chapter 32: Corporate Restructuring
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Q1) In carve-out transactions,
A)shares of the new company are given to the shareholders of the parent company.
B)shares of the new company are sold in a public offering.
C)shares of the new company are bought by borrowing or issuing junk bonds.
D)None of these options are correct.
Q2) In the case of the RJR Nabisco LBO, the gain in market value for RJR stockholders was several times more than the
A)estimated value of additional interest tax shields generated by the LBO.
B)estimated losses to RJR bondholders as a result of drastic decline in bond ratings.
C)estimated value of additional interest tax shields generated by the LBO and the estimated losses to RJR bondholders as a result of drastic decline in bond ratings.
D)The gain in market value was never determined.
Q3) The Securities and Exchange Commission (SEC) usually plays an important role in the reorganization of large public companies by ensuring that all relevant and material information is disclosed to creditors before they vote on the proposed reorganization plan.
A)True
B)False
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Chapter 33: Governance and Corporate Control Around the World
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Q1) For a given country, which conditions will favor the formation of conglomerates?
A)Limited financial markets and poor investor protection
B)Poor investor protection, difficulty accessing international capital markets, and limited and transparent government
C)Limited financial markets, difficulty accessing international capital markets, and limited and transparent government
D)Limited financial markets, poor investor protection, and difficulty accessing international capital markets
Q2) In financial institution-based systems, individual investors hold corporate debt and equity in the following ways:
A)directly.
B)directly and indirectly through banks.
C)indirectly through other financial intermediaries.
D)All of the options are correct.
Q3) Dual-class equity occurs frequently in A)the United States.
B)Brazil and Sweden.
C)Canada and Germany.
D)All of the options are correct.
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