Financial Analysis
Practice Exam
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the skills and knowledge necessary to evaluate the financial health and performance of businesses. The course covers key concepts such as ratio analysis, cash flow analysis, trend analysis, and financial forecasting. Students learn how to interpret financial statements, assess profitability, liquidity, solvency, and operational efficiency, and make informed decisions based on quantitative data. Through practical case studies and real-world examples, students apply analytical tools and techniques to assess company value, identify risks, and support strategic planning in both corporate and investment contexts.
Recommended Textbook
Corporate Finance 12th Edition by Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following business types is best suited to raising large amounts of capital?
A)Sole proprietorship
B)Limited liability company
C)Corporation
D)General partnership
E)Limited partnership
Answer: C
Q2) Which one of these accounts is included in net working capital?
A)Copyright
B)Manufacturing equipment
C)Common stock
D)Long-term debt
E)Inventory
Answer: E
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Chapter 2: Financial Statements and Cash Flow
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Q1) Which one of the following statements concerning liquidity is correct?
A)Liquid assets generally earn higher rates of return than fixed assets.
B)If you can sell an asset next year at a price equal to its actual value,the asset is highly liquid.
C)Liquid assets are defined as those assets obtained within the past year.
D)The less liquidity a firm has,the lower the probability the firm will encounter financial difficulties.
E)Balance sheet accounts are listed in order of decreasing liquidity.
Answer: E
Q2) Awnings Inc.has beginning net fixed assets of $234,100 and ending net fixed assets of $243,600.Assets valued at $42,500 were sold during the year.Depreciation was $62,500.What is the amount of net capital spending?
A) $42,500
B)$9,500
C)$72,000
D)$53,000
E)$29,500
Answer: C
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Chapter 3: Financial Statements and Cash Flow
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Q1) Two Sisters Dresses has net working capital of $43,800,net fixed assets of $232,400,net income of $43,900,and current liabilities of $51,300.The tax rate is 21 percent and the profit margin is 9.3 percent.How many dollars of sales are generated from every $1 in total assets?
A)$1.44
B)$1.32
C)$1.73
D)$.97
E)$1.06
Answer: A
Q2) Days' sales in inventory is measured as:
A)inventory turnover plus 365 days.
B)inventory turnover times 365 days.
C)inventory divided by cost of goods sold,times 365 days.
D)365 days divided by the inventory.
E)365 days divided by the inventory turnover.
Answer: E
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Page 5
Chapter 4: Discounted Cash Flow Valuation
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Q1) The government imposed a fine on a firm that requires a payment of $100,000 today,$150,000 one year from today,and $200,000 two years from today.The government will hold the funds until the final payment is collected and then donate the entire amount to charity.How much will be donated if the government pays 3 percent interest on the held funds?
A)$475,000
B)$460,590
C)$447,174
D)$451,050
E)$474,407
Q2) What is the annual percentage rate on a loan that charges interest of 1.65 percent per quarter?
A)6.50 percent
B)6.45 percent
C)6.54 percent
D)6.60 percent
E)6.72 percent
Q3) Explain the net present value formula and also explain what the net present value represents.
NPV = Cost + PV
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) Assume you use all available methods to evaluate projects.If there is a conflict in the indicated accept/reject decision between two mutually exclusive projects due to the IRR-based indicator,you should:
A)accept both projects if both are acceptable according to NPV.
B)combine both projects into one larger project.
C)ignore the IRR and rely on the decision indicated by the NPV method.
D)base the final decision on the payback method.
E)reject both projects due to ambiguity in the decision-making process.
Q2) The internal rate of return for an investment project is best defined as the:
A)discount rate that causes the net present value to equal zero.
B)difference between the market rate of interest and the discount rate.
C)market rate of interest less the risk-free rate.
D)minimum project acceptance rate set by management.
E)maximum rate that can be earned for a project to be accepted.
Q3) Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,some financial decision-makers continue to use less desirable measures such as the payback method.Why do you think this is the case?
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Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital.The project is expected to produce annual sales of $110,000 with associated costs of $70,000.The project has a life of 4 years.The company ignores bonus depreciation and instead uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 21 percent.What is the annual operating cash flow for this project?
A)$31,600
B)$43,200
C)$27,000
D)$35,800
E)$40,000
Q2) A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n)________ project.
A)sunk cost
B)opportunity
C)cost-cutting
D)revenue-cutting
E)revenue-generating
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Chapter 7: Risk Analysis, real Options, and Capital Budgeting
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Sample Questions
Q1) The Meldrum Co.expects to sell 3,000 units,± 15 percent,of a new product.The variable cost per unit is $8,± 5 percent; annual fixed costs are $12,500,± 5 percent; annual depreciation is $4,000; and the sale price is $18 a unit,± 2 percent.What is the amount of the fixed cost per unit under the pessimistic scenario?
A)$4.17
B)$4.66
C)$5.15
D)$5.35
E)$6.02
Q2) Simulation analysis is based on assigning a ________ and analyzing the results.
A)narrow range of values to a single variable
B)narrow range of values to multiple variables simultaneously
C)wide range of values to a single variable
D)wide range of values to multiple variables simultaneously
E)single value to each of the variables
Q3) Explain the primary benefit of sensitivity analysis and explain why that benefit cannot be realized by conducting scenario analysis.
Q4) Other than quantifying the potential NPV of a project,what other benefits do decision trees offer to managers?
Page 9
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Chapter 8: Interest Rates and Bond Valuation
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Q1) If a bond's yield to maturity is less than its coupon rate,the bond will sell at a ________,and increases in market interest rates will:
A)discount; decrease this discount.
B)discount; increase this discount.
C)premium; decrease this premium.
D)premium; increase this premium.
E)premium; not affect this premium.
Q2) The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.
Q3) The yield to maturity:
A)that is expected will be realized any time a bond is sold.
B)will exceed the coupon rate when the bond is selling at a premium.
C)equals the current yield for all annual coupon bonds.
D)can only be realized if a bond is purchased on the issue date at par value.
E)equals both the current yield and the coupon rate for par value bonds.
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Chapter 9: Stock Valuation
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Q1) The dividend yield on Alpha's common stock is 5.2 percent.The company just paid a $2.10 dividend.The rumour is that the dividend will be $2.30 next year.The dividend growth rate is expected to remain constant at the current level.What is the required rate of return on Alpha's stock?
A)14.72 percent
B)12.31 percent
C)18.29 percent
D)20.01 percent
E)24.21 percent
Q2) Jaxon's has total revenue of $418,300,earnings before interest and taxes of $102,600,depreciation of $59,200,and a tax rate of 21 percent.The firm is all-equity financed with 15,000 shares outstanding at a book value of $38.03 a share and a price-to-book ratio of 3.2.What is the firm's EV/EBITDA ratio if the firm has excess cash of $49,300?
A)9.67
B)11.28
C)8.39
D)9.15
E)10.98
Q3) Explain the differences between a market order,a limit order,and a stop order.
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Chapter 10: Lessons From Market History
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Q1) Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2017? Rank from highest to lowest volatility.
A)Large-company stocks,intermediate-term government bonds,long-term government bonds
B)Small-company stocks,long-term corporate bonds,large-company stocks
C)Long-term government bonds,long-term corporate bonds,small-company stocks
D)Small-company stocks,large-company stocks,long-term corporate bonds
E)Long-term corporate bonds,large-company stocks,U.S.Treasury bills
Q2) Three years ago,you purchased a stock at a price of $33.48.The stock paid annual dividends of $.60 per share.Today,the stock is worth $35.20 per share.What is your holding period return?
A)10.03 percent
B)6.93 percent
C)10.51 percent
D)5.14 percent
E)6.59 percent
Q3) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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Chapter 11: Return, risk, and the Capital Asset Pricing Model
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Q1) A portfolio consists of three stocks.There are 540 shares of Stock A valued at $24.20 share,310 shares of Stock B valued at $48.10 a share,and 200 shares of Stock C priced at $26.50 a share.Stocks A,B,and C are expected to return 8.3 percent,16.4 percent,and 11.7 percent,respectively.What is the expected return on this portfolio?
A)12.50 percent
B)11.67 percent
C)12.78 percent
D)12.47 percent
E)11.87 percent
Q2) A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security Two.Security One has a standard deviation of 6 percent.Security Two has a standard deviation of 12 percent.The securities have a coefficient of correlation of .62.What is the portfolio variance?
A).006946
B).007295
C).007157
D).008104
E).007506
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) As used in the market model,the symbol " " represents:
A)unsystematic risk.
B)beta.
C)systematic risk.
D)a stock's response to systematic risk.
E)the expected change in GNP.
Q2) The general purpose of identifying multiple factors in the APT model is to:
A)identify the top three factors that have the largest impact on the market rate of return.
B)identify and eliminate all systematic risks from a portfolio.
C)identify the quantity of each factor that is needed to reduce a portfolio's risk,as measured by beta,to a level equal to that of the overall market.
D)reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security.
E)reduce the slope of the security market line,thereby reducing portfolio risk.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and the APT.
Q4) Verbally describe a graph that illustrates the one-factor model.
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Chapter 13: Risk, cost of Capital, and Valuation
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Q1) The Upper Tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45.The cost of floating equity is 9.5 percent and the flotation cost of debt is 6.6 percent.What should the firm use as their weighted average flotation cost?
A)8.01 percent
B)8.51 percent
C)8.33 percent
D)7.76 percent
E)8.60 percent
Q2) The Neptune Company offers network communications systems to computer users.The company is planning a major investment expansion but is unsure of the cost of equity capital as it has no publicly-traded equity.Your assignment is to determine an appropriate equity cost.List and explain the steps you will need to take to complete this assignment.
Q3) A firm with high operating leverage has:
A)low fixed costs in its production process.
B)high variable costs in its production process.
C)high fixed costs in its production process.
D)high total costs per unit.
E)low total costs per unit.
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Page 15
Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Your best friend works in the finance office of the Delta Corporation.You are aware this friend trades Delta stock based on information he overhears in the office but which is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best ________ form efficient.
A)weak
B)semiweak
C)semistrong
D)strong
E)perfect
Q2) Event studies attempt to determine:
A)the influence of information released to the market on stock prices in days surrounding the information's release.
B)if the market is at least weak form efficient.
C)whether the market is semi strong or strong form efficient.
D)the correlation between the returns on two diverse securities.
E)the optimal time to release new information to the public.
Q3) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
Page 16
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Chapter 15: Long-Term Financing
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Q1) There are five seats on the board of directors of Atlas Corp.up for election.The firm has 120,000 shares of stock outstanding and uses cumulative voting.Each share is granted one vote per open seat.How many shares must you control if you want to guarantee your election to the board assuming no one else votes for you?
A)24,000
B)23,999
C)20,001
D)20,000
E)24,001
Q2) Unsecured corporate debt is commonly referred to as:
A)an indenture.
B)a debenture.
C)deferred debt.
D)protected debt.
E)collateralized debt.
Q3) Explain the main differences between debt and equity.
Q4) Explain some of the means by which a select group of shareholders can retain control over a corporation while still raising equity capital outside of their group.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000.A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent.The applicable tax rate is 21 percent.What is the value of the levered firm?
A)$996,421
B)$907,679
C)$1,184,929
D)$910,818
E)$1,191,506
Q2) A general rule for managers to follow is to set the firm's capital structure such that the firm's:
A)size is maximized.
B)value is maximized.
C)bondholders are secured.
D)suppliers of raw materials are satisfied.
E)dividend payout is maximized.
Q3) Based on MM Propositions,with and without taxes,how much time should a financial manager spend analyzing the capital structure of his firm?
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Which one of these represents a difference between business entities in Japan and in the United States?
A)Lenders in Japan frequently also take ownership positions in firms to which they lend.
B)Debt-equity ratios tend to be higher in the U.S.than they are in Japan.
C)There tends to be greater agency issues between stockholders and bondholders in Japan as compared to the U.S.
D)Bondholders in Japan are prohibited from also being shareholders in the same firm.
E)The debt-equity ratios for firms in Japan and in the U.S.tend to be relatively equal.
Q2) Which one of these lowers cash flows?
A)Decreased use of leverage
B)Decreased costs
C)Increased sales due to an improved economy
D)The associated costs of bankruptcy
E)A decrease in the interest rate charged on debt
Q3) What is the pecking order theory and what are the implications that arise from this theory?
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19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) Discuss the adjusted present value,the flow to equity,and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.
Q2) The adjusted present value method (APV),the flow to equity (FTE)method,and the weighted average cost of capital (WACC)method produce equivalent results,but each can have difficulties making computation impossible at times.Given this,which one of these is a correct statement?
A)The WACC method is preferred when evaluating a leveraged buyout.
B)The APV method is the most commonly used method in actual practice.
C)Use the FTE method when the level of debt is known over a project's life.
D)Use the WACC method when the level of debt is known over a project's life.
E)The WACC method is appropriate when the target debt-to-value ratio applies over a project's life.
Q3) In calculating NPV using the flow-to-equity approach the discount rate is the:
A)all-equity cost of capital.
B)cost of equity for the levered firm.
C)all-equity cost of capital minus the weighted average cost of debt.
D)weighted average cost of capital.
E)all-equity cost of capital plus the weighted average cost of debt.
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Q4) Explain why the flow to equity approach uses levered,not unlevered,cash flows.
Chapter 19: Dividends and Other Payouts
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Q1) Which one of the following is cited as an argument favoring a high dividend payout?
A)Flotation costs involved with a new securities issue
B)High personal tax rates relative to corporate rates
C)Desire to maintain constant dividends over time
D)Restrictive covenant on dividend payouts contained in a bond indenture agreement
E)Agency costs related to excess cash reserves
Q2) From a tax-paying investor's point of view,a stock repurchase:
A)is equivalent to a cash dividend.
B)is more desirable than a cash dividend.
C)has the same tax effects as a cash dividend.
D)is more highly taxed than a cash dividend.
E)creates a tax liability even if the investor does not sell any of the shares he owns.
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.
Q4) Explain what a targeted repurchase is and why a firm might do a repurchase of this type.
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Chapter 20: Raising Capital
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Q1) Negotiated offers generally:
A)are used as a last resort.
B)involve an underwriting syndicate.
C)result in higher issue costs than do competitive offers.
D)involve only large issuers.
E)reduce the probability an issue will be successful.
Q2) The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction.The firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300 shares at $22; and 5,500 shares at $21.Ignoring all costs,how much will the firm receive from this auction?
A)$110,000
B)$105,000
C)$138,600
D)$112,500
E)$247,800
Q3) What are venture capitalists and what is their role in raising capital for firms?
Q4) Discuss what a Dutch auction is and how it works.
Q5) Discuss the stages of venture capital financing,defining each in detail.
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Chapter 21: Leasing
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Q1) A machine that costs $280,000 would be depreciated using the straightline method by a leasing firm over a period of 3 years.Both the book value and the market value would be zero at the end of the 3 years.Both the lessor and the lessee have a tax rate of 21 percent.What is the NPV of the lease relative to the purchase to the lessor if the applicable pretax cost of borrowing is 7 percent and the lease payments are set at $102,100 annually for 3 years?
A) $1,025.58
B) $9,658.92
C)$411.67
D)$882.09
E)$0
Q2) The appropriate discount rate that a lessee should use to value a financial lease is the:
A)lessee's aftertax weighted average cost of capital.
B)lessor's aftertax cost of borrowing.
C)lessee's aftertax cost of secured borrowing.
D)capitalization rate stated in the lease contract.
E)current U.S.Treasury T-bill rate.
Q3) Explain the characteristics of both operating and financial leases.
Q4) Discuss some of the pros and cons of leasing.
Page 23
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Chapter 22: Options and Corporate Finance
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Q1) You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10.Today,the option expires when the underlying stock is selling for $34.30 a share.Ignoring trading costs and taxes,what is your total profit on this investment?
A)$2,900
B) $1,100
C)$700
D)$1,100
E) $2,900
Q2) A purely financial merger:
A)increases shareholder value but does not affect bondholders.
B)decreases both bondholder and shareholder values.
C)transfers bondholder value to shareholders.
D)increases bondholder value but does not affect shareholder value.
E)reduces shareholder value while increasing bondholder value.
Q3) Suppose XYZ is priced at $125 a share.The 150 call has six months to expiration and is quoted at $.05.Why do you suppose investors would be willing to purchase a call that is so far out of the money?
Q4) How do options apply to capital budgeting? Explain and provide an example.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) If an infinite number of intervals is applied to the binomial option pricing model,then the value of a call is equal to:
A)the risk-free rate of return.
B)zero.
C)the exercise price.
D)the Black-Scholes model's call value.
E)the stock price.
Q2) The price of oil is currently at $24 but you expect it to either increase by 18 percent or decrease by 7 percent over the next 6 months.The 6-month risk-free rate of interest is 1.98 percent.What is the probability that the price will increase?
A)32.47 percent
B)36.03 percent
C)38.06 percent
D)35.92 percent
E)37.94 percent
Q3) Why is straight NPV analysis flawed as compared to models that include option pricing in the analysis?
Q4) Why would a company pay an executive in options as opposed to salary?
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:
A)risk affects the two value components of these securities in opposing ways.
B)if the firm turns out to be high risk,both the option premium and the straight bond value will be high.
C)generally only well-established,high-grade companies issue these instruments.
D)the equity value is dependent on current risks rather than future risks.
E)these securities generally carry significant restrictive covenants.
Q2) The gain on a call is computed as:
A)[Firm's value net of debt + Exercise price(N<sub>w</sub>)]/(N + N<sub>w</sub>).
B)[Firm's value net of debt + Exercise price(N<sub>w</sub>)]/N.
C)Firm's value net of debt/N Exercise price.
D)Firm's value net of debt/(N + N<sub>w</sub>) Exercise price.
E)(Firm's value net of debt Exercise price)/N.
Q3) Identify five factors that help determine the value of a warrant above its lower limit.
Q4) Explain how a noncallable convertible bond's value is determined.
Q5) Discuss the factors that management must consider before calling a convertible bond.
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Chapter 25: Derivatives and Hedging Risk
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Q1) Which one of these parties would generally have the most reason to take a short hedge position in the agricultural futures market?
A)A local bakery
B)A wheat farmer
C)A major breakfast food company
D)A beverage maker
E)An international investor
Q2) Derivatives can be used to either hedge or speculate.These strategies:
A)increase risk in both cases.
B)decrease risk in both cases.
C)spread or minimize risk in both cases.
D)offset risk by hedging and increase risk by speculating.
E)offset risks by speculating and increase risk by hedging.
Q3) A forward contract is described as agreeing today to either purchase or sell an asset or security:
A)at a later date at a price to be set in the future.
B)today at the current market price.
C)at a later date at a price set today.
D)if it is advantageous to do so in the future.
E)with delivery today and payment in the future.
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Chapter 26: Short-Term Finance and Planning
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Q1) Young's had a beginning accounts payable balance of $42,900 and an ending accounts payable balance of $44,800.Sales for the period were $770,000 and costs of goods sold were $598,000.If the operating cycle is 129 days,how long is the firm's cash cycle?
A)102.24 days
B)79.35 days
C)97.13 days
D)81.19 days
E)107.78 days
Q2) Cash increases when:
A)long-term debt decreases.
B)equity decreases.
C)current liabilities decrease.
D)accounts payable increases.
E)fixed assets increase.
Q3) Compensating balances are often included as a requirement for a line of credit.These balances provide income to banks but add to the cost of financing for the borrower.Why,then,would borrowers agree to such an arrangement?
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Chapter 27: Cash Management
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Q1) Probably the most sensible cash management policy would be to maintain:
A)sufficient cash on hand to meet all ordinary business needs plus some excess cash to invest in marketable securities as a precautionary measure.
B)about 90 percent of the firm's ordinary cash needs in cash and delay payment on the remaining 10 percent.
C)enough cash on hand to meet any potential demand for cash.
D)a zero-cash balance and transfer funds semi-monthly to pay bills.
E)twice the amount of cash on hand that would be typically indicated based on the firm's normal cash flows.
Q2) UpTown Beverages has a checkbook balance of $132,462.However,when the financial manager looks up the firm's account on the bank's website,the balance that appears is $147,918.What is the net float? Is the net float a collection float or a disbursement float?
A) $15,456; collection float
B) $15,456; disbursement float
C)$15,456; collection float
D)$15,456; disbursement float
E)$0; neither collection nor disbursement float
Q3) Processing float
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Chapter 28: Credit and Inventory Management
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Q1) Which one of the following statements is false as it relates to considerations firms use when establishing a credit policy?
A)A firm that supplies a perishable product will tend to offer restrictive credit terms.
B)A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C)Lengthening the credit period effectively reduces the price paid by the customer.
D)Small accounts,associated with firms that find it difficult to acquire a line of credit,tend to receive longer credit periods.
E)Larger accounts tend to receive more favorable credit terms.
Q2) At the optimal inventory level,the:
A)inventory is held to its daily minimum level.
B)inventory is maintained at a level equal to one week's production needs.
C)carrying costs equal the restocking costs.
D)inventory opportunity costs are zero.
E)shortage costs are eliminated.
Q3) Explain how inventory is managed under an ABC inventory system.
Q4) Explain the purpose of a safety stock and how this relates to reorder points.
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Chapter 29: Mergers,acquisitions,and Divestitures
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Q1) Firm A and Firm B join to create Firm AB.This is an example of:
A)a tender offer.
B)an acquisition of assets.
C)an acquisition of stock.
D)a consolidation.
E)a merger.
Q2) The empirical evidence strongly indicates that the stockholders of the target firm realize wealth gains while the stockholders in the acquiring firm gain little,if anything,from an acquisition.Although there exists no definitive answer as to why this is the case,several possible explanations have been proposed.List and explain three possible explanations for the minimal returns to the acquiring firm's stockholders.
Q3) When evaluating an acquisition,you should:
A)concentrate on book values and ignore market values.
B)focus on the total cash flows of the merged firm.
C)include synergies.
D)ignore any one-time acquisition fees or transaction costs.
E)ignore any potential changes in management.
Q4) Explain the purpose of a standstill agreement and the basics of how it works.
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Chapter 30: Financial Distress
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Q1) Flow-based insolvency is defined as:
A)a balance sheet measurement.
B)a negative equity position.
C)a negative cash flow in any one period.
D)a negative net profit for the year.
E)an insufficient operating cash flow to meet current obligations.
Q2) Periods of financial distress are most associated with:
A)continued increases in earnings.
B)steady growth.
C)dividend reductions.
D)increasing growth rates.
E)decreasing production costs.
Q3) Credit scoring models are used by lenders to determine:
A)the best discount to offer each customer.
B)the appropriate price to charge each customer.
C)the optimal debt-equity ratio for the firm.
D)a borrower's credit risk.
E)the percentage of their loan that will be repaid in a bankruptcy.
Q4) There are a number of ways firms can deal with financial distress.Identify at least 5 of these.
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Chapter 31: International Corporate Finance
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Q1) The home currency approach:
A)generally produces more reliable results than those found using the foreign currency approach.
B)requires an applicable exchange rate for every time period for which there is a cash flow.
C)uses the current risk-free nominal rate to discount all the cash flows related to a project.
D)stresses the use of the real rate of return to compute the net present value (NPV)of a project.
E)converts the foreign-denominated NPV into the dollar-denominated NPV.
Q2) Assume the expected inflation rate in Switzerland is 2.2 percent while it is 1.6 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 3.7 percent.What real rate of return should you expect on a risk-free Swiss security?
A)2.0 percent
B)2.1 percent
C)3.0 percent
D)3.5 percent
E)3.1 percent
Q3) What is triangle arbitrage?
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