Financial Markets and Institutions
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Course Introduction
Financial Markets and Institutions explores the structure, function, and operation of financial markets and the various institutions that facilitate the flow of funds in the economy. The course examines the roles of banks, investment firms, insurance companies, mutual funds, and other financial intermediaries, analyzing how they interact within money and capital markets. Students will learn about financial instruments, market efficiency, interest rate determination, risk management, and the impact of regulation. The course also addresses current issues and global trends in financial systems, equipping students with a foundational understanding of how financial markets and institutions contribute to economic development and stability.
Recommended Textbook Fundamentals of Corporate Finance Global 3rd Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest?
Answer: 1. The threat of a hostile takeover
2. Shareholder initiatives
3. Performance based compensation
Q2) Which of the following is/are an advantage of incorporation?
A)Access to capital markets
B)Limited liability
C)Unlimited life
D)All of the above
Answer: D
Q3) Which of the following organization forms accounts for the greatest number of firms in the U.S.?
A)"S" corporation
B)Limited partnership
C)Sole proprietorship
D)"C" corporation
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) When using the book value of equity, the debt to equity ratio for Luther in 2012 is closest to:
A)0.43
B)2.29
C)2.98
D)3.57
Answer: B
Q2) Luther Corporation's share price is $39 and the company has 20 million shares outstanding. Its excess cash in 2012 is $23.4. If EBIT is 41.2 and tax rate is 35%, its Return on Invested Capital in 2009 is closest to:
A)0.104
B)0.064
C)0.038
D)0.068
Answer: D
Q3) What are the four financial statements that all public companies must produce?
Answer: 1. Balance Sheet or Statement of Financial Position
2. Income Statement
3. Statement of Cash Flows
4. Statement of Changes in Shareholder's Equity
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Due to a pre-existing contract, Recycle America Inc. has the opportunity to acquire 10,000 pounds of scrap aluminum and 2,500 pounds of scrap lead for $10,750. If the current market price for scrap aluminum is $0.83 per pound and the current market price for lead is $1.06 per pound, then the added benefit (cost)to you if you acquire this metal is:
A)($200)
B)$200
C)($1,925)
D)$1,925
Answer: B
Q2) Suppose you will receive $500 in one year and the risk-free interest rate (r<sub>f</sub>)is 5%. The equivalent value today is closest to:
A)$475
B)$476
C)$500
D)$525
Answer: B
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Page 5
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Chapter 4: The Time Value of Money
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Q1) You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to:
A)9%
B)8%
C)8.5%
D)10%
Q2) Since your first birthday, your grandparents have been depositing $1000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to:
A)$25,645
B)$36,465
C)$12,659
D)$18,000
Q3) In terms of present value, how much will Joe receive for selling the family business?
Q4) The future value at retirement (age 65)of your savings is:
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Chapter 5: Interest Rates
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Q1) The effective annual rate for a credit card that charges a 19.9% APR compounded daily is closest to:
A)18.15%
B)19.9%
C)22.0%
D)24.2%
Q2) Which of the following statements is FALSE?
A)The actual return kept by an investor will depend on how the interest is taxed.
B)The equivalent after-tax interest rate is r(1 - ).
C)The highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities.
D)It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
Q3) Dagny's monthly payments are closest to:
A)$1,110
B)$1,800
C)$2,215
D)$2,245
Q4) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Valuing Bonds
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Q1) A key difference between sovereign default and corporate bonds is:
A)unlike a corporation, a country facing difficulty meeting its financial obligations is can not default.
B)unlike corporate debt, sovereign debt prices are not inverse to yields.
C)unlike a corporation, any country can turn to the EMU to pay off its debts.
D)unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.
Q2) Which of the following statements is FALSE?
A)The principal or face value of a bond is the notional amount we use to compute the interest payments.
B)Payments are made on bonds until a final repayment date, called the term date of the bond.
C)The coupon rate of a bond is set by the issuer and stated on the bond certificate.
D)The promised interest payments of a bond are called coupons.
Q3) What is the relationship between a bond's price and its yield to maturity?
Q4) Plot the zero-coupon yield curve (for the first five years).
Q5) If its YTM does not change, how does a bond's cash price change between coupon payments?
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Chapter 7: Investment Decision Rules
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Q1) Which of the following statements is FALSE?
A)In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
B)The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
C)If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
D)If the cost of capital estimate is more than the IRR, the NPV will be positive.
Q2) If the discount rate for project B is 15%, then what is the NPV for project B?
Q3) The NPV profile
A)shows the payback period - the point at which NPV is positive.
B)shows the internal rate of return - the point at which NPV is zero.
C)shows the NPV over a range of discount rates.
D)B and C are correct.
Q4) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Which of the following statements is FALSE?
A)Because only the tax consequences of depreciation are relevant for free cash flow, we should use the depreciation expense that the firm will use for tax purposed in our free cash flow forecasts.
B)A firm generally identifies its marginal tax rate by determining the tax bracket that it falls into based on its overall level of pre-tax income.
C)Free Cash Flow = (Revenues - Costs)× (1 - <sub>c</sub>)- Capital ExpendituresNWC + <sub>c</sub> × Depreciation.
D)Net working capital is the difference between current liabilities and current assets.
Q2) Which of the following statements is FALSE?
A)The ultimate goal in capital budgeting is to determine the effect of the decision to take a particular project on the firm's cash flows.
B)To the extent that overhead costs are fixed and will be incurred in any case, they are incremental to the project and should be included in the capital budgeting analysis.
C)Unlevered Net Income = (Revenue - Costs - Depreciation)× (1 - <sub>c</sub>).
D)Earnings are not cash flows.
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Chapter 9: Valuing Stocks
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Q1) Assuming that Novartis AG (NVS)has an EPS of $3.35, based upon the P/E ratios for its competitors, the highest expected stock price for Novartis is closest to:
A)$31.86
B)$44.35
C)$51.09
D)$62.60
Q2) What are some common multiples used to value stocks?
Q3) Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year. If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%, then the value of a share of VBS stock is closest to:
A)$25.00
B)$40.00
C)$15.40
D)$11.10
Q4) Monsters Inc. is a utility company that recently paid a common stock dividend of $2.35 per share. Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Suppose an investment is equally likely to have a 35% return or a - 20% return. The expected return for this investment is closest to:
A)7.5%
B)15%
C)5%
D)10%
Q2) The expected return on security with a beta of 1.2 is closest to:
A)4.8%
B)8.0%
C)8.8%
D)9.6%
Q3) Which of the following statements is FALSE?
A)Beta measures the sensitivity of a security to market wide risk factors.
B)Volatility measures total risk, while beta measures only systematic risk.
C)The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security.
D)Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market.
Q4) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Consider a portfolio consisting of only Duke Energy and Microsoft. The percentage of your investment (portfolio weight)that you would place in Duke Energy stock to achieve a risk-free investment would be closest to:
A)15%
B)40%
C)23%
D)10%
Q2) Suppose that California Gold Mining's expected return is 2%. Then California Gold Mining's alpha is closest to:
A)-3%
B)-13%
C)7%
D)-11%
Q3) The expected return on the precious metals fund is closest to:
A)-3%
B)4%
C)1%
D)10%
Q4) Calculate the correlation between Stock Y's and Stock Z's returns .
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Chapter 12: Estimating the Cost of Capital
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Q1) Trucks R' Us has a market capitalization of $142 billion, $78 billion in BB rated debt, and $10 billion in cash. If Trucks R' Us' equity beta is 1.68, then their underlying asset beta is closest to:
A)1.00
Q2) Wyatt Oil's average historical excess return is closest to:
A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%
Q3) The equity cost of capital for "Miney" is closest to:
A)6.30%
B)7.50%
C)9.30%
D)9.75%
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Which of the following statements is FALSE?
A)It is not actually necessary to identify the efficient portfolio itself. All that is required is to identify a collection of portfolios from which the efficient portfolio can be constructed.
B)Although we might not be able to identify the efficient portfolio itself, we know some characteristics of the efficient portfolio.
C)An efficient portfolio can be constructed from other diversified portfolios.
D)An efficient portfolio need not be well diversified.
Q2) Portfolio "B":
A)is less risky than the market portfolio.
B)is overpriced.
C)has a positive alpha.
D)falls above the SML.
Q3) Portfolio "C":
A)is less risky than the market portfolio.
B)has a relatively lower expected return than predicted.
C)is underpriced.
D)has a negative alpha.
Q4) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to:
A)$0
B)$50,000
C)$90,000
D)$40,000
Q2) Galt's asset beta (ie the beta of its operating assets)is closest to:
A)1.1
B)1.2
C)1.3
D)1.4
Q3) Prior to any borrowing and share repurchase, RC's EPS is closest to:
A)$0.60
B)$1.00
C)$1.20
D)$0.50
Q4) Suppose you own 10% of the equity of Without. What is another portfolio you could hold that would provide you with the same exact cash flows?
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Chapter 15: Debt and Taxes
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Q1) Which of the following statements is FALSE?
A)Given a 35% corporate tax rate, for every $1 in new permanent debt that the firm issues, the value of the firm increases by $0.65.
B)The firm's marginal tax rate may fluctuate due to changes in the tax code and changes in the firm's income bracket.
C)Many large firms have a policy of maintaining a certain amount of debt on their balance sheets.
D)Typically, the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding, changes in the interest rate on that debt, and the risk that the firm may default and fail to make an interest payment.
Q2) KAHR Incorporated will have EBIT this coming year of $45 million. It will also spend $18 million on total capital expenditures and increases in net working capital, and have $9 million in depreciation expenses. KAHR is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%. If the interest rate on new KAHR debt is 8%, how much should KAHR borrow today if they want to maximize there interest tax shield?
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Chapter 16: Financial Distress, Managerial Incentives, and Information
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Q1) Assume that in the event of default, 20% of the value of MI's assets will be lost in bankruptcy costs. Suppose that at the start of the year, MI has no debt outstanding, but has 5.6 million shares of stock outstanding. If MI issues debt of $125 million due next year and uses the proceeds to repurchase shares, the share price following the announcement of the repurchase will be closest to:
A)$23.90
B)$23.75
C)$25.00
D)$5.15
Q2) List five general categories of indirect costs associated with bankruptcy.
Q3) In an agency problem known as asset substitution, the agency cost is paid by:
A)the debt holders, since if the risky project is not successful debt holders will lose all their money.
B)the debt holders, since if the risky project is successful debt holders will receive less money.
C)the equity holders, since the strategy has a negative expected payoff.
D)the equity holders, since they will lose all their money whether or not the project is successful.
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Chapter 17: Payout Policy
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Q1) If Wyatt Oil distributes the $70 million as a share repurchase, then its debt-to-equity ratio after the share repurchase will be closest to:
A)0.9
B)1.0
C)1.1
D)1.4
Q2) The effective dividend tax rate for a pension fund in 1999 is closest to:
A)40%
B)20%
C)0%
D)25%
Q3) A(n)________ is the most common way that firms repurchase shares.
A)targeted repurchase
B)Dutch auction share repurchase
C)tender offer
D)open market share repurchases
Q4) Calculate the effective tax disadvantage for retaining cash in 1999, 2001, and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Consider the following equation: r<sub>wacc</sub> = r<sub>U</sub><sub>c</sub>dr<sub>D</sub>
The term<sub> </sub>r<sub>U</sub> in this equation is:
A)the firm's unlevered cost of debt.
B)the firm's cost of debt.
C)the project's unlevered cost of capital.
D)the project's debt to value ratio.
Q2) Suppose that to fund this new project, Aardvark borrows $120 with the principal to be paid in three equal installments at the end each year. The present value of Aardvark's interest tax shield is closest to:
A)$5.15
B)$5.00
C)$5.90
D)$5.25
Q3) Based upon the three comparable firms, calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
Q4) Calculate the present value of the interest tax shield provided by Omicron's new project.
Q5) Calculate the debt capacity of Omicron's new project for years 0, 1, and 2.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko require in 2008?
A)1,702 units
B)1,323 units
C)1,505 units
D)1,914 units
Q2) What is the purpose of the sensitivity analysis?
Q3) Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko require in 2009?
A)1,505 units
B)1,115 units
C)1,323 units
D)1,702 units
Q4) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation enterprise value of Ideko in 2010 is closest to:
A)$152.8 million
B)$272.8 million
C)$301.7 million
D)$181.7 million
Chapter 20: Financial Options
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Q1) Which of the following statements is FALSE?
A)The intrinsic value of an option is the value it would have if it expired immediately.
B)A European option cannot be worth less than its American counterpart.
C)Put options increase in value as the stock price falls.
D)A put option cannot be worth more than its strike price.
Q2) Which of the following best describes Galt's debt using a call option?
A)Long $700 million in the firm's assets and Short a call option with a $700 strike price
B)Short $700 million in the firm's assets and Long a call option with a $700 strike price
C)Long $700 million in the firm's assets and Short a call option with a $200 strike price
D)Short $700 million in the firm's assets and Long a call option with a $200 strike price
Q3) Rose Industries is currently trading for $47 per share. The stock pays no dividends. A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45. If the risk-free interest rate is 6% per year, then calculate the price of a one-year European put option on Luther with a strike price of $45.
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Chapter 21: Option Valuation
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Q1) Using the binomial pricing model, calculate the price of a two-year call option on Kinston stock with a strike price of $9.
Q2) Construct a binomial tree detailing the option information and payoffs for a call option with a $20 strike price that expires in one year.
Q3) Consider a one-year, at-the-money call option on Taggart stock. The effect on the price of this call option of an increase in the volatility from 25% to 40% is closest to:
A)$0.70 increase
B)$1.70 decrease
C)$2.30 increase
D)$2.80 increase
Q4) The risk neutral probability of a down state for KD Industries is closest to:
A)37.5%
B)62.5%
C)40.0%
D)60.0%
Q5) Using risk neutral probabilities, calculate the price of a two-year put option on Kinston stock with a strike price of $9.
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Chapter 22: Real Options
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Q1) If you are not awarded the government contract and your sales decrease by 25%, then the value of your plant will be closest to:
A)-$1 million
B)$5 million
C)$8 million
D)$0
Q2) Which of the following statements is FALSE?
A)Aside from the current NPV of the investment, other factors affect the value of an investment and the decision to wait.
B)The option to wait is most valuable when there is a great deal of uncertainty regarding what the value of the investment will be in the future.
C)The smaller the cost of waiting, the less attractive the option to delay becomes.
D)It is always better to wait to invest unless there is a cost to doing so.
Q3) Assuming that Kinston has the ability to sell the prototype in year one for $300,000, draw a decision tree detailing the Kinston Industries Mountain Bike Project.
Q4) Can value be created by waiting for uncertainty to resolve?
Q5) Describe the two factors that affect the value of an investment timing option?
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Chapter 23: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A)After deciding to go public, managers of the company work with an underwriter, an investment banking firm that manages the offering and designs its structure.
B)The shares that are sold in the IPO may either be new shares that raise new capital, known as a secondary offering, or existing shares that are sold by current shareholders (as part of their exit strategy), known as a primary offering.
C)Many IPOs, especially the larger offerings, are managed by a group of underwriters.
D)At an IPO, a firm offers a large block of shares for sale to the public for the first time.
Q2) The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to:
A)$20.6 million
B)$21.6 million
C)$21.1 million
D)$20.9 million
Q3) What will the proceeds from the IPO be if Luther is selling 1.1 million shares?
Q4) How much money did Luther raise?
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25
Chapter 24: Debt Financing
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Q1) Which of the following statements is FALSE?
A)The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic, so bond traders often quote the yield to call.
B)The yield to call (YTC)is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity.
C)We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full.
D)Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond, the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart.
Q2) Suppose that in January 2001, the U.S. Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%. On the date of issue the consumer price index (CPI)was 175.1. In January 2006, the CPI had increased to 198.3. What coupon payment was made on this bond in January 2006?
Q3) What is the Yield to Maturity (YTM)on this bond?
Q4) What is the Yield to Maturity (YTM)on this bond?
Q5) What is the Yield to Call (YTC)on this bond?
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Chapter 25: Leasing
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Q1) Which of the following statements is FALSE?
A)Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements)to be additional sources of leverage.
B)By carefully avoiding the four criteria that define a operating lease for accounting purposes, a firm can avoid listing the long-term lease as a liability.
C)Because a lease is equivalent to a loan, the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet.
D)For most large corporations, the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.
Q2) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
Q3) Is St. Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?
Q4) Calculate the monthly lease payments for a four year $1.00 out lease of the Bulldozer.
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Chapter 26: Working Capital Management
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Q1) Which of the following money market investments is a short-term, unsecured debt obligation issued by a large corporation. The minimum denomination is $25,000, but most have a face value of $100,000 or more?
A)Banker's Acceptance
B)Commercial Paper
C)Repurchase Agreement
D)Certificates of Deposit (CD)
E)Treasury Bill
Q2) Which of the following statements is FALSE?
A)Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time.
B)Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable.
C)Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (COD)or cash before delivery (CBD).
D)If the accounts payable outstanding is 40 days and the terms are 2/10, net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties.
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Chapter 27: Short-Term Financial Planning
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Q1) Which of the following firms is likely to have the highest short-term financing needs?
A)A pharmaceutical manufacturer
B)A grocery store
C)An electric utility
D)A toy store
Q2) A a written, legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum, regardless of the financial condition of the firm (unless the firm is bankrupt)as long as the firm satisfies any restrictions in the agreement is called:
A)a bridge loan.
B)a single, end-of-period-payment loan.
C)a short-term mortgage loan.
D)a committed line of credit.
Q3) Which of the following is NOT a specific financing option for temporary working capital?
A)Secured financing
B)Commercial paper
C)Bank loans
D)Treasury bills
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Page 29
Chapter 28: Mergers and Acquisitions
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Q1) Which of the following statements is FALSE?
A)All else being equal, larger firms, because they are more diversified, have an increased probability of bankruptcy.
B)To justify a takeover based on operating losses, management would have to argue that the tax savings are over and above what the firm would save using carryback and carryforward provisions.
C)It is possible to combine two companies with the result that the earnings per share of the merged company exceed the premerger earnings per share of either company, even when the merger itself creates no economic value.
D)When an acquirer buys a private target, it provides the target's owners with a way to reduce their risk exposure by cashing out their investment in the private target and reinvesting in a diversified portfolio.
Q2) You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is FALSE?
A)Researchers have hypothesized that boards with a majority of outside directors are better monitors of managerial effort and actions.
B)Studies have found that firms with independent boards make fewer value-creating acquisitions but are more likely to act in shareholders' interests if targeted in an acquisition.
C)One early study showed that a board was more likely to fire the firm's CEO for poor performance if the board had a majority of outside directors.
D)Although the firm's stock price increases on the announcement of its addition of an independent board member, the increased firm value appears to come from the potential for the board to make better decisions on acquisitions and CEO turnover rather than from improvements in the firm's operating performance.
Q2) Backdating refers to:
A)choosing the strike price of a stock option retroactively.
B)choosing the exercise date of the stock option retroactively.
C)choosing the share conversion ratio retroactively.
D)choosing the grant date of a stock option retroactively.
Q3) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
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Chapter 30: Risk Management
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Q1) Assuming that your firm will purchase insurance, what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?
Q2) In December 2005, the spot exchange rate for the British Pound was $1.7188/£. Suppose that at the same time the on-year interest rate in the United States was 4.85% and the one-year interest rate in Great Britain was 3.15%. Based on these rates, what forward exchange rate is consistent with no arbitrage.
Q3) Which of the following statements regarding futures contracts is FALSE?
A)Both the buyer and the seller can get out of the contract at any time by selling it to a third party at the current market price.
B)Futures prices are not prices that are paid today. Rather, they are prices agreed to today, to be paid in the future.
C)Futures contracts are traded anonymously on an exchange at a publicly observed market price and are generally very illiquid.
D)Traders are required to post collateral, called margin, when buying or selling commodities using futures contracts.
Q4) What is the actuarially fair cost of full insurance?
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32
Chapter 31: International Corporate Finance
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Q1) Assuming that the Irish and Japanese subsidiaries did not exist, the U.S. tax liability on the Mexican subsidiary would be closest to:
A)$0
B)$9 million
C)$39 million
D)$106 million
Q2) What is the pound present value of the project?
Q3) Using the covered interest parity condition, the calculated three-year forward rate F<sub>3 </sub>is closest to:
A)$1.8568/£
B)$1.9161/£
C)$1.8961/£
D)$1.8764/£
Q4) Assuming that the Irish and Mexican subsidiaries did not exist, the U.S. tax liability on the Japanese subsidiary would be closest to:
A)$0
B)$81 million
C)$103 million
D)$106 million
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