Financial Management Exam Preparation Guide
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices involved in effective financial decision-making within organizations. It covers key topics such as financial analysis, planning and forecasting, capital structure, investment decisions, working capital management, and valuation of financial assets. The course emphasizes the application of analytical tools and techniques to assess financial health, manage resources efficiently, and maximize shareholder value. Through case studies and real-world examples, students gain practical skills in budgeting, risk management, and strategic financial planning, preparing them for roles in corporate finance, banking, and investment management.
Recommended Textbook
International Financial Management Canadian Perspective 3rd Edition by Don Brean
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) What is the specific Canadian perspective on international finance?
Answer: Canada has very close commercial ties to the United States.Ninety percent of Canadians live within 100 km of the US border,Canada and the US generate the largest bilateral volume of trade in the world.Eighty-five percent of exports are shipped to the United States.Money and capital flows freely back and forth across the Canada-US border,leading to highly integrated stock and bond markets.Both countries,together with Mexico,are part of NAFTA (the North American Free Trade Agreement).Thus,international transactions by Canadian firms are largely transactions with the US.Nevertheless,Canada maintains its independence,own currency,central bank and the like,and therefore has its unique perspective on international finance.
Q2) The "Big Bang" refers to:
A) Deregulation of the Japanese stock market
B) Deregulation of the German stock market
C) Deregulation of the British stock market
D) Deregulation of the Mexican stock market
Answer: C
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Chapter 2: International Monetary System
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Q1) The Chinese renminbi is currently pegged to the US dollar at a rate of 8.28 to 1.The renminbi is considered to be undervalued (that is the exchange rate should be lower).Graphically illustrate the external adjustment mechanism.What happens to the Chinese foreign exchange reserves?
Answer: 11ea6d20_7567_5a7d_b3c7_ed35e3c5bebf_TB1772_00 At an exchange rate of renminbi 8.28/$,there will be an excess supply of the dollar which the Chinese government can buy up.Therefore,the Chinese foreign exchange reserves are increasing.
Q2) Gresham's law is most applicable to which of the following monetary system?
A) Bimetallism
B) Classical Gold Standard
C) Bretton Woods System
D) Flexible exchange rate regime
Answer: A
Q3) Bretton Woods system:
A) is an example of a fixed exchange rate regime
B) is an example of a flexible exchange rate regime
C) gave birth to the introduction of the Euro
D) was used to smooth transition from bimetallism to the classical gold standard
Answer: A
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Page 4
Chapter 3: Balance of Payments
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Q1) If BCA = BKA = $100 mn,then it must be true that
A) BRA = 0
B) BRA > 0
C) BRA < 0
D) BCA = BRA
Answer: C
Q2) The reserve account of the Balance of Payments records:
A) the stock of foreign exchange held by the public
B) changes in foreign exchange reserves held by the government
C) the stock of gold held by foreign governments
D) changes in foreign exchange reserves held by foreign governments
Answer: B
Q3) Invisible trade refers to:
A) services that avoid tax payments
B) underground economy
C) legal, consulting, and engineering services
D) tourist expenditures, only
Answer: C
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Chapter 4: The Market for Foreign Exchange
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Q1) Intervention in the foreign exchange market is the process of:
A) A central bank requiring the commercial banks of that country to trade at a set price Difficulty.
B) Commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
C) A central bank buying or selling its currency in order to influence its value.
D) The government of a country prohibiting transactions in one or more currencies.
Q2) Which of the following is true given the following quotes for foreign exchange: 1.69-1.71$/£; 1.44-1.46$/ ; 1.14-1.16 /£
A) Triangular arbitrage is not possible
B) Triangular arbitrage is possible and it involves exchanging $ for £
C) Triangular arbitrage is possible and it does not involve exchanging £ for $
D) Triangular arbitrage is possible and it involves exchanging £ for $, $ for and for $
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Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) When Interest Rate Parity (IRP)does not hold:
A) there is a high degree of inflation.
B) the financial markets are in equilibrium.
C) there are opportunities for covered interest arbitrage.
D) there are no opportunities for arbitrage.
Q2) When Interest Rate Parity (IRP)holds between two different countries X and Y,your decision to invest your money will:
A) be indifferent between country X and country Y.
B) not involve forward hedging.
C) depend on which country initiated the IRP.
D) not involve the foreign exchange rates.
Q3) The main approaches to forecasting exchange rates are:
A) Efficient market, Fundamental, and Technical approaches.
B) Efficient market and Non-Technical approaches.
C) Efficient market and Fundamental approaches only.
D) Fundamental and Non-Technical approaches.
Q4) Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?
7
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Chapter 6: International Banking and Money Market
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Q1) ABC Bank (seller)has made a "three against six" Forward Rate Agreement (FRA),with XYZ Bank (buyer)with the following characteristics:
Notional Amount = $1,000,000
Settlement Rate = 4%
Agreement Rate = 5%
Actual number of days in the three-month agreement period = 91
a)When is this agreement settled?
b)Who pays whom?
c)What is the dollar amount of the settlement?
Q2) Find the VAR for a portfolio of $100M with daily standard deviation on return of 0.5% over 30-day period.Note: z<sub>1%</sub> = 2.326
A) Below $5M
B) Between $5M and $10M
C) Between $10M and $20M
D) Above $20M
Q3) How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?
Q4) Explain Eurocommerical papers.
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Page 8
Chapter 7: International Bond Market
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Q1) A five-year Floating-rate note (FRN)has coupons referenced to six-month dollar LIBOR,and pays coupon interest semiannually.Assume that the current six-month LIBOR is 6 percent.If the risk premium above LIBOR that the issuer must pay is 1/8 percent,the next period's coupon rate on a $1,000 face value FRN will be:
A) $29.375.
B) $30.000.
C) $30.625.
D) $61.250.
Q2) ABC Corporation,a Canadian firm,wants to float a bond issue in the United Kingdom.Which choices does the company have? Discuss the main characteristics of each option.What do you recommend?
Q3) An underwriting syndicate consists of all of the following except:
A) lead manager
B) managing group
C) underwriting syndicate
D) managing syndicate
Q4) What happens to the present value of the bonds in 4.,if the implied yield to maturity increases by 1%?
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Page 9
Chapter 8: International Equity Markets
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Q1) The major national stock market index for the Tokyo stock exchange is the
A) FTSE 100
B) DAX
C) Hang Seng
D) Nikkei 225
Q2) Assume that Nestle shares are trading at SF 300 in Zurich and $51 in New York.Each share equals 4 ADRs.The current exchange rate is SF1.5/$.If transaction costs are $1 per ADR,can you make an arbitrage profit?
Q3) Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share)are trading for $40 on the New York Stock exchange.There is no arbitrage possible.What is the current SF/US$ exchange rate?
A) SF 0.8/$
B) SF 1/$
C) SF 1.25/$
D) SF 4/$
Q4) Assume that Accor shares are trading at A$2.5 in Sydney and $28 in New York.Each ADR equals 20 shares.The current exchange rate is A$1.5/$.In the absence of transaction costs,can you make an arbitrage profit?
Q5) What factors go into the decision to cross-list on a foreign exchange?
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Chapter 9: Futures and Options on Foreign Exchange
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Q1) In reference to the derivatives market,a "speculator": A) attempts to profit from a change in the futures price. B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position. C) plays a zero-sum game.
D) passes off the risk of price variation to other player, who is better able, or at least more willing, to bear this risk.
Q2) Assume that the spot Euro is $1.2000 and the six-months forward rate is $1.2100.Determine the minimum price for which a six-month American put should sell for.The strike price is $1.1900 and the annualized six-month Eurodollar rate is 4%.
Q3) The value of a European call will increase with all of the following except:
A) the spot exchange rate.
B) the exercise price. C) time to maturity.
D) the foreign interest rate.
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11
Chapter 10: Interest Rate and Currency Swaps
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Q1) The following information is given: \(\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \\
&\text { Borrowing Cost } & \text { Borrowing Cost }\\
\text { X Company: } & 5 \% & \text { LIBOR } \\
\text { Y Company: } & 7 \% & \text { LIBOR }+1.3
\end{array}\) Both parties want to engage in an interest rate swap.Assume that S Bank will arrange for an interest rate swap between X Company and Y Company for 0.1%.Also,assume that X Company gets 2/3 of the interest savings available.
a)Which company has a better credit rating?
b)What is the quality spread differential?
c)What is X Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
d)What is Y Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
e)Illustrate the cash flows from this swap.Assume that X Company pays LIBOR to S Bank.
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12
Chapter 11: International Portfolio Investment
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Sample Questions
Q1) A Canadian investor buys shares in DaimlerChrysler on the New York Stock Exchange when the stock's price and the exchange rate were US$40 and US$0.70/C$ respectively.One year later the investor sells the shares for US$41 and the exchange rate is US$0.80/$.
a)Calculate the investor's annual percentage rate of return in terms of the U.S.dollars. b)Calculate the investor's annual percentage rate of return in Canadian dollars.
Q2) In May 2003 when the exchange rate was Yen 110/$,Nissan Motor Company invested ¥1,100,000,000 in pure-discount U.S.bonds and liquidated the investment one year later when the exchange rate was Yen 105/$.The Yen rate of return earned on this investment was 10%.
a)Calculate the dollar amount that the bonds were sold at. b)Calculate the dollar rate of return of this investment.
Q3) Calculate the investor's annual percentage rate of return in Canadian dollars.(Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)
A) -13.14%
B) -3.19%
C) 3.19%
D) 13.14%
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Page 13
Chapter 12: Management of Economic Exposure
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Q1) Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.4/euro,all else equal?
Q2) Operating exposure can be managed by:
A) flexible sourcing policy.
B) diversification of the market.
C) financial hedging.
D) all of these.
Q3) The expected value of the investment in Canadian dollars is:
A) $3,000.
B) $4,950.
C) $5,155.
D) $5,550.
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Chapter 13: Management of Transaction Exposure
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Q1) Fashion Shoes Inc.manufactures its shoes in Milano,Italy.The company just received an order from the United States for USD 1 million to be received in one year.The current spot rate is EUR 1/USD and the 1 year forward rate is EUR 1.01/USD.The current interest rates are 4% in the United States and 5% in Italy.A call option on the US dollar is available with a strike price of EUR 1.01/USD and a premium of EUR 0.03 and a put option is available with a strike price of EUR 1/USD and a premium of EUR 0.025/USD.Determine the net proceeds from a forward hedge and an options hedge.Which option should Fashion Shoes use?
Q2) Pile-of-Bones Inc.,headquartered in Regina,just bought snowblowers for US $100,000 to be paid in 90 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Pile-of-Bones Inc.You check with your banker and find out the following: The current spot rate is C$1.35/US$ and the 90-day forward rate is C$1.36/US$.The interest rates are 5% in the United States and 6% in Canada.
a)What are the net payables if Pile-of-Bones uses a forward hedge?
b)What are the net payables if Pile-of-Bones uses a money market hedge?
c)Which type of hedge should Pile-of-Bones use?
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Chapter 14: Management of Translation Exposure
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Q1) Translation exposure is defined as:
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.
D) ex post and ex ante currency exposures.
Q2) The "reporting currency" is:
A) the currency of the primary economic environment in which the entity operates.
B) the currency in which the MNC prepares its consolidated financial statements.
C) a currency that is not the parent firm's home country currency.
D) None of these.
Q3) Explain the major differences between translating financial statements for self-sustaining foreign operations and for integrated foreign operations.
Q4) Explain the differences between an integrated foreign operation and a self-sustaining foreign operation.
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Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Transfer risk refers to the risk which arises from the uncertainty about:
A) the host's country's policies affecting the local operations of an MNC.
B) the host's country's policy regarding ownership and control of local operations.
C) cross-border flows of capital, payment, know-how, and the like.
D) None of these.
Q2) Corruption is all of the following except:
A) a type of political risk.
B) illegal for Canadians abroad.
C) illegal in Canada.
D) Not a serious problem.
Q3) The following are barriers to trade except:
A) Tariffs
B) Transportation costs
C) Telecommunications
D) Import taxes
Q4) Explain the role of market imperfections in FDI.
Q5) How can firms establish a wholly owned subsidiary in a foreign country? What are the advantages and disadvantages of each method?
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Q6) How can Export Development Canada (EDC)help firms to deal with political risk?
Chapter 16: International Capital Structure and the Cost of Capital
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Q1) Which of the following statements is correct?
A) If international financial markets are integrated, the market portfolio in the CAPM formula represents the world market portfolio.
B) If international financial markets are integrated, the market portfolio in the CAPM formula represents the domestic market portfolio.
C) If international financial markets are divided, the market portfolio in the CAPM formula represents the domestic market portfolio.
D) If international financial markets are divided, the market portfolio in the CAPM formula represents the world market portfolio.
Q2) Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%. (Do not round intermediate calculations and round your final answer to nearest whole percent)
A) 28%
B) 38%
C) 46%
D) 50%
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18
Chapter 17: International Capital Budgeting
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Q1) The "net present value" of a capital project is calculated by using:
A) (i), (ii), and (iii).
B) (ii), (iv), and (vi).
C) (i), (iii), (v), and (vii).
D) (iv), (v), (vi), and (vii).
Q2) Which cash flows are relevant for the international capital budgeting analysis?
Q3) The ABC Company,a U.S.based MNC,plans to establish a subsidiary in Ecuador to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Ecuador is estimated to be ECS 8,500 million,of which ECS 6,500 million is to be financed at a below-market rate of interest arranged by the Ecuador's government.The proposed project will increase the borrowing capacity by:
A) ECS 1,215 million
B) ECS 2,215 million
C) ECS 3,215 million
D) ECS 4,215 million
Q4) Is it possible that a project has a positive APV from the subsidiary's perspective and a negative APV from the parent's perspective?
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Chapter 18: Multinational Cash Management
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Q1) Using the national airlines of the host country that has enforced exchange rate controls is an example of:
A) direct negotiation.
B) export creation.
C) blocked funds.
D) creative thinking.
Q2) Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?
Q3) Which of the factors affect the optimal transfer pricing?
A) Import duties.
B) Differential income tax rates.
C) The existence of block funds.
D) All of these factors affect the optimal transfer pricing.
Q4) Which of the following helps to reduce the optimal size of the precautionary cash balances?
A) Transfer pricing.
B) Centralized cash depositary.
C) Differential income tax rates.
D) None of these.
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Chapter 19: Exports and Imports
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Q1) A direct exchange of goods between two parties is called:
A) barter.
B) counterpurchase.
C) buy-back.
D) offset.
Q2) International trade is more difficult and risky from the exporter's perspective than is domestic trade because:
A) the exporter may not be familiar with the buyer, and thus not know if the importer is a good credit risk.
B) if the merchandise is exported abroad and the buyer does not pay, it may prove difficult, if not impossible, for the exporter to have any legal recourse.
C) political instability makes it risky to ship merchandise abroad certain to parts of the world.
D) All of these.
Q3) The time from acceptance to maturity on a banker's acceptance (B/A)is 90 days,the importing bank's acceptance commission is 1 percent and the B/A's discounted value at the time of acceptance is $1,000,000.What is the 90-day B/A rate if the value at maturity is $1,034,000?
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Chapter 20: International Tax Environment
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Q1) A foreign branch is:
A) an extension of the parent and is not an independently incorporated firm separate from the parent.
B) an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C) either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation.
D) None of these.
Q2) A controlled foreign corporation (CFC)is:
A) a foreign corporation established as an affiliate of a U.S. corporation for the purpose of "buying" from the U.S. corporation property for resale and use abroad.
B) a foreign subsidiary that has more than 50 percent of its voting equity owned by U.S. shareholders.
C) is a separate domestic U.S. corporation actively engaged in business in a U.S. possession (Puerto Rico and the U.S. Virgin Islands).
D) one that has no "overall limitation" as regards to its foreign tax credits.
Q3) What are the major ways in which countries levy taxes?
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Chapter 21: Corporate Governance Around the World
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Q1) Agency problems may be alleviated by:
A) incentive contracts.
B) debt.
C) market for corporate control.
D) All of these.
Q2) English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because:
A) the former countries tend to be more democratic than the latter.
B) the former countries tend to protect property rights better than the latter.
C) the former countries tend to have more separation of power than the latter.
D) All of these.
Q3) Commercial legal systems of most countries are derived from four legal origins.Which of the following is not one of them?
A) English Common law.
B) French Common law.
C) German Common law.
D) Italian common law.
Q4) Discuss the major advantage and key weakness of a public corporation.
Q5) Explain the agency problem and how it can be remedied.
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