Intermediate Corporate Finance
Exam Review
Course Introduction
Intermediate Corporate Finance builds upon foundational finance concepts to deepen students understanding of key financial management decisions within corporations. The course covers advanced topics such as capital structure, dividend policy, corporate valuation techniques, mergers and acquisitions, risk management, and options in corporate finance. Through case studies, problem-solving exercises, and real-world applications, students will learn to analyze financial data, make investment decisions, and assess the impact of financial strategies on firm value. This course is designed for students seeking to enhance their analytical skills and prepare for careers in finance, banking, or corporate management.
Recommended Textbook
Corporate Finance 6th Canadian Edition by Stephen A.
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Ross
Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Financial markets are composed of:
A) Capital markets and equity markets.
B) Capital markets and debt markets.
C) Capital markets and money markets.
D) Equity markets and money markets.
Answer: C
Q2) A corporate security can be viewed as a contingent claim on the firm. This means that:
A) debt holders will receive their payoff from the firm based on their fixed claim or the firm cashflows if less than the fixed claim
B) debtholders will receive the maximum of the firm cashflows or the fixed claim
C) no payoff will be made unless the firms makes more than the fixed claim of the debt
D) no debt payoff will be made if there is an equity payoff.
Answer: A
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Chapter 2: Accounting Statements and Cash Flow
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Q1) For any individual period the firm cashflows are a circular flow of funds, this means A) the cashflows are always invested in fixed assets
B) that cashflows are always in a spiral away from the firm
C) that firm cashflows must be borrowed externally to be reinvested in the economy D) that all cashflows generated by the firm must equal the cashflows paid to the creditors and shareholders.
Answer: D
Q2) Under GAAP the value of all the firm's assets are reported at:
A) Carrying value or market value.
B) Book value or liquidation value.
C) Market value or Carrying value.
D) Book value or Carrying value.
Answer: D
Q3) Pion Inc. reported current assets of $80 and fixed assets of $150 as of December 31. The company, as of December 31, also reports current liabilities of $72 and long-term liabilities of $149. Calculate Pion's shareholder's equity.
Answer: ($80 + $150) - ($72 + $149) = $9
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Page 4
Chapter 3: Financial Planning and Growth
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Sample Questions
Q1) In estimating pro-forma balance sheets, projected retained earnings are computed as present retained earnings plus:
A) projected retained earnings and cash dividends.
B) projected retained earnings plus debt.
C) projected retained earnings plus assets.
D) projected net income minus cash dividends.
E) projected net income earnings minus debt.
Answer: D
Q2) Why is it important for managers to understand the importance of both the internal and the sustainable rates of growth?
Answer: One reason that causes firms to go out of business is the lack of external funding to support the growth of the firm. Understanding the implications of both the internal and sustainable growth rates can help management know when to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that growth.
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) The following statement, that the value of an investment to an individual is not dependent on consumption preferences, is called the:
A) marginal rate of substitution
B) separation theorem
C) value additivity principle
D) investor's dilemma
Q2) You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a payoff $433,000 at the end of the year. If the market rate is 8.25% what is the net present value?
A) $33,000.
B) $433,000
C) $0.00
D) $23,100
E) $30,485.
Q3) Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)
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Page 6
Chapter 5: The Time Value of Money
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Q1) A mortgage instrument pays $1.5 million at the end of each of the next two years. An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded semiannually. Which of the following amounts is closest to what the investor should pay for the mortgage instrument?
A) $1.28 million.
B) $1.39 million.
C) $2.67 million.
D) $2.72 million.
Q2) Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?
A) $3,163.
B) $3,283.
C) $3,263.
D) $3,287.
E) $3,317.
Q3) There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.
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Chapter 6: How to Value Bonds and Stocks
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Q1) What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.
A) $17.00
B) $9.52
C) $10.88
D) $12.24
Q2) Queen and Bees, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?
A) $953.28
B) $963.88
C) $1,108.16
D) $1,401.26
E) $1,401.86
Q3) A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.
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8
Chapter 7: Net Present Value and Other Investment Rules
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Q1) An investment project has the cashflow stream of -250, 75, 125, 100, and 50. The cost of capital is 12%. What is the discount payback period?
A) 2.5 years.
B) 2.7 years.
C) 3.38 years.
D) 1.40 years.
E) 1.25 years.
Q2) An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has:
A) a large initial investment with moderate positive cash flows over a very long period of time.
B) a very large negative cash flow at the termination of the project.
C) most of the cash flow at the beginning of the project.
D) All projects approved by the payback period rule will be accepted by the NPV rule.
E) The payback period rule and the NPV rule cannot be used to evaluate the same type of projects.
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Chapter 8: Net Present Value and Capital Budgeting
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Q1) Which of the following is not a relevant item to consider in cash flow estimation?
A) a change in current assets invested in the project.
B) a change in current liabilities to finance new inventories.
C) regular meeting fees for the board of directors incurred when the go-no go decision is made.
D) any net changes in working capital over the life of the investment.
Q2) Deflation in prices will have a ________ impact on the NPV of a project by:
A) negative; reducing the value of the future cashflows.
B) zero; not being able to re-adjust your cashflow estimates.
C) Negative; increasing the current cost of the investment.
D) positive; increasing the value of future cashflows.
Q3) The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?
A) $10,213.35.
B) $12,372.00.
C) $9,777,77.
D) $9,105.23.
E) $13,285.83.
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions. Discuss why and how scenario analysis is used in addition to sensitivity analysis.
Q2) The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options. Explain two different options that management may have, what they are, and how they would influence market value.
Q3) The Marx Brewing Company recently installed a new bottling machine. The machine's initial cost is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years. The machine's per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling price per unit is $1.50. Marx's tax rate is 34%, and it uses a 16% discount rate. If Marx sells 2500 units what is the accounting profit and contribution margin for Marx Brewing?
Q4) In the present-value break-even the EAC is used to:
A) determine the opportunity cost of investment.
B) allocate depreciation over the life of the project.
C) allocate the initial investment at its opportunity cost over the life of the project.
D) determine the contribution margin to fixed costs.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) If IS and DS are combined in a portfolio with 50% invested in each, the expected return and risk would be:
A) 5.625%; 37.2%
B) 4.5%; 5.48%
C) 8.0%; 8.2%
D) 5.0%; 0%
E) 4.5%; 0%
Q2) A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio, the expected return on the portfolio and the market?
A) 1.19; 6.57; 6
B) 1.19; 7.14; 6
C) 1.19; 10.14; 9
D) 1.25; 10.5; 6
E) 1.25; 10.5; 9
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Sample Questions
Q1) The elements in the off-diagonal positions of the Variance Covariance matrix are:
A) covariance's.
B) security selections.
C) variances.
D) security weights.
Q2) The dominant portfolio with the lowest possible risk measures is:
A) the efficient frontier.
B) The minimum variance portfolio.
C) The upper tail of the efficient set.
D) The tangency portfolio.
Q3) If you have a portfolio of two risky stocks which turns out to have no diversification. The reason you have no diversification is:
A) the returns are too small
B) the returns move perfectly opposite of one another
C) the returns are too large to offset
D) the returns move perfectly with one another
E) the returns are completely unrelated to one another
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
13
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.5. The portfolio has a beta of:
A) 0.00.
B) 0.50.
C) 0.75.
D) 1.00.
E) 1.50.
Q2) The single factor APT model that resembles the market model uses _____________ as the single factor:
A) arbitrage fees
B) GNP E) the risk-free return
C) the inflation rate
D) the market return
Q3) In normal market conditions if a security has a negative beta,:
A) the security always has a positive return.
B) the security has an expected return above the risk-free return.
C) the security has an expected return less than the risk-free rate.
D) the security has an expected return equal to the market portfolio.
Page 14
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Chapter 13: Risk, Return, and Capital Budgeting
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Q1) The of all equity firm versus the of the same firm with leverage is different
A) by the impact of business risk.
B) by the of the assets.
C) because the of the assets are not exposed to financial leverage.
D) because the of the assets are exposed to financial leverage.
Q2) Two stock market based costs of liquidity that affects the cost of capital are the:
A) bid-ask spread and the specialist spread.
B) market impact cost and the brokerage costs.
C) investor opportunity cost and the brokerage costs.
D) bid-ask spread and the market impact costs.
Q3) Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return for Simmons' common is:
A) 4.0%.
B) 5.0%.
C) 5.6%.
D) 10.6%.
E) 11.4%.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) In examining the issue of whether the choice of accounting methods affects stock prices, studies have found that:
A) accounting depreciation methods can significantly affect stock prices.
B) switching depreciation methods can significantly affect stock prices.
C) accounting changes that increase accounting earnings also increases stock prices.
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information.
Q2) The Nu-Tux Seat Company has an expansion opportunity and is considering selling their 100,000 share investment in Slip-Cover currently worth $2 million or raising other external funding. The share price has been holding in a narrow range day to day. If Nu-Tux decides to unload their holding is there any concern about getting the full $2 million, aside from investment banker/brokerage fees. Explain these concerns about market behavior and cite the evidence.
Q3) Insider trading does not offer any advantages if the financial markets are:
A) weak form efficient.
B) semiweak form efficient.
C) semistrong form efficient.
D) strong form efficient.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, then the stock features:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
Q2) If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.
A) proxy fight
B) stockholder derivative action
C) tender offer
D) vote of confidence
Q3) Long-term debt is often called:
A) secured debt.
B) subordinated debt.
C) funded debt.
D) capital debt.
Q4) Rework the shareholder's equity as it appears on the books if the company issues 40,000 new share of common at $70 per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) What is its cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 12%.
A) 22.0%.
B) 18.4%.
C) 17.44.
D) 19.6%.
Q2) Financial leverage impacts the performance of the firm by:
A) increasing the volatility of the firm's EBIT. B) decreasing the volatility of the firm's EBIT. C) decreasing the volatility of the firm's net income. D) increasing the volatility of the firm's net income
Q3) The JumpStart Corporation is unlevered and valued at $500,000. JumpStart has 200,000 shares outstanding. The company announces that in the near future it will issue $200,000 of debt and buy back $200,000 of stock. If the firm is in the 34% tax bracket, how many shares of stock will be repurchased?
Q4) Mike tells Steve that while his analysis looks good on paper, Steve will never be able to borrow at 8%, but would have to pay a more realistic rate of 12%. If Mike is right, what will Steve's payout be?
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where:
A) the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield.
B) the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield.
C) the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield.
D) distress costs as well as debt tax shields are zero.
E) distress costs as well as debt tax shields are maximized.
Q2) When small companies issue large stock offerings, we can expect owner managers to:
A) increase both leisure time and work related amenities.
B) decrease both leisure time and work related amenities.
C) increase leisure time but decrease work related amenities.
D) decrease leisure time and increase work related amenities.
E) decrease leisure time but keep work related amenities the same.
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The Telescoping Tube Company is planning to put a manufacturing facility in place to build observatory quality but recreational scale telescopes. The systematic risk of this project alone is 25% greater than they currently manage. The company has a target debt to value ratio of 35%. The of the assets currently managed is .8 and they face a 36% tax rate. The initial investment cost is $4,200,000 and the expected cashflows after tax are $1,200,000 per year for 6 years. The risk-free rate is 5% and you believe the historical market risk premium of 8.5% is a reasonable estimate.
A. What is the all equity value of the investment?
B. What is the added value if the company finances this project with $682,044 worth of 16% debt which requires an interest payment until maturity when the full principle is due.
C. If the Albanic County Board of Commissioners approaches the Telescoping Tube Company with an offer to raise the needed $682,044 debt capital as 15% perpetual debt, should the company accept the offer?
Q2) A loan of $10,000 is issued at 15% interest. Interest on the loan is to be repaid annually for 5 years, and the non-amortized principal is due at the end of the fifth year. Calculate the NPV of the loan if the company's tax rate is 34%.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) The empirical evidence on the relationship between the expected return on stocks and their dividend yields show:
A) conclusive evidence that dividends should be set as low as possible.
B) conclusive evidence that dividends should be set as high as possible.
C) conclusive evidence that dividends don't matter.
D) inconclusive evidence; some show evidence that high dividend payouts are best, others show the opposite.
E) inconclusive evidence, although all studies show that high dividend payouts are best.
Q2) Investing in preferred stock in other companies might be an attractive use of the firm's cash because:
A) preferred stock is less risky than common stock.
B) holders of preferred stock usually receive promised payments.
C) preferred stock has a special tax advantage in this case.
D) preferred stock has no maturity.
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. Next, describe three real-world factors that may cause one dividend policy to be preferable to another.
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21
Chapter 20: Issuing Equity Securities to the Public
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Q1) Which of the following statements is true?
A) The subscription price is generally above the old stock price.
B) The subscription price is generally above the ex-rights price.
C) The subscription price is generally below the old stock price.
D) The ex-rights price is generally above the old stock price.
Q2) An equity issue sold to the firm's existing stockholders is called:
A) a rights offer.
B) a general cash offer.
C) a private placement.
D) an underpriced issue.
E) an investment banker's issue.
Q3) For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is:
A) $5.
B) $13.
C) $17.
D) $18.
E) $20.
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Page 22
Chapter 21: Long-Term Debt
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Q1) What is the bond's value today if the coupon is set at $70?
Q2) If the bond is priced at $1,000, what is the cost to the firm of the call provision?
Q3) An Income bond is unique in at least one characteristic. Explain what is different about income bonds and why they exist. Why are they not more popular?
Q4) Put provisions in bonds allow:
A) the issuer to call the bond at par on the coupon payment date.
B) the holder to redeem the bond at par at the coupon payment date.
C) the issuer to extend the maturity of the bond.
D) the holder to extend the maturity of the bond.
E) the issuer to change the coupon rate at the coupon payment date.
Q5) Studies have shown that around the announcement of bond rating changes:
A) bond values increase, and equity values decrease.
B) bond values decrease, and equity values increase.
C) bond values increase, and equity values do not change.
D) bond values decrease, and equity values do not change.
E) no unusual behavior occurs in bond or equity values.
Q6) An income bond is unique in at least one characteristic. Explain what is different about income bonds and why they exist. Why are they not more popular?
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Chapter 22: Leasing
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Q1) What is the appropriate discount rate for valuing the lease?
A) 12.12%.
B) 8.0%.
C) 5.28%.
D) 2.72%.
Q2) The Canadian Universities sell medical equipments and used the proceeds to improve its financial position. The University then leased the equipments back in order to continue to use these facilities. This is an example of:
A) an operating lease.
B) a short-term lease.
C) a sale and leaseback.
D) a fully amortized lease.
Q3) The price or lease payment that the lessee sets as their bound is known as:
A) the present value of the tax shields.
B) the reservation payment, L<sub>MIN</sub>.
C) the present value of operating savings.
D) the reservation payment, L<sub>MAX</sub>.
Q4) What is the discount rate to be used?
Q5) Calculate the NPV of the lease versus the purchase decision.
Q6) What are the cashflows in years 1 through 8?
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) If the time to expiration of the underlying stock decreases, then the:
A) value of the put option will increase, but the value of the call option will decrease.
B) value of the put option will decrease, but the value of the call option will increase.
C) value of both the put and call option will increase.
D) value of both the put and call option will decrease.
E) value of both the put and call option will remain the same.
Q2) You can realize the same value as that derived from stock ownership if you:
A) sell a put option and invest at the risk-free rate of return.
B) buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.
C) sell a put and buy a call on a stock as well as invest at the risk-free rate of return.
D) lend out funds at the risk-free rate of return and sell a put option on the stock.
Q3) Explain how the value of a firm can be viewed as an option. How can the call and put views be resolved?
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) The call option on a dividend paying stock compared to a non-dividend paying stock is:
A) more valuable because of the extra dividend payment.
B) equal in value because cash dividends are paid on stock only.
C) less valuable because cash dividends are paid on stock only.
D) less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.
Q2) Corporations by rewarding executives with large option positions:
A) cause the executives to hold highly undiversified portfolios.
B) put the firm in a risky position to pay off the options.
C) cause the value of the stock to fall because the options are theft.
D) are really valueless because most options are never exercised.
Q3) What is d<sub>1</sub>?
A) .1842
B) .4102
C) .4583
D) .4909
E) .5412
Q4) What is the value of Mr. Maxim's options?
Q5) Why would the company pay the executive in options as opposed to salary?
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Chapter 25: Warrants and Convertibles
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Q1) Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value?
Q2) If all warrants are exercised, what will your fraction of ownership be if you owned 2,000 shares originally.
A) 13.33%
B) 12.12%
C) 13.07%
D) 14.04%
Q3) What is the conversion price?
A) 35
B) 770
C) 28.57
D) 1000
Q4) A convertible bond has an option value which is equal to:
A) the market value of the convertible bond minus the straight bond value. B) The market value of the convertible bond minus the conversion value.
C) the market value of the convertible bond minus the conversion premium.
D) the market value of the convertible bond minus the maximum of the straight bond value or conversion value.
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Chapter 26: Derivatives and Hedging Risk
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Q1) If a firm sells a floor at 6% this will:
A) will pay the holder the LIBOR interest below the 6%.
B) pay the firm 6% on their purchase.
C) will pay the holder the LIBOR interest above 6%.
D) limit the amount of borrowing to 6% of assets.
Q2) You have taken a short position in a futures contract on corn at $2.60 per bushel.
Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. Before you can reverse your position in the futures market on the fifth day you are notified to accept delivery. What will you receive on delivery and what is the net amount you receive in total?
A) $2.60; $2.70
B) $2.70; -$0.10
C) $2.70; $2.60
D) $2.60; $0.10
E) $2.60; -$0.10
Q3) Credit default swaps:
A) will pay the holder the LIBOR interest rate.
B) pay the borrower the LIBOR interest rate.
C) are like insurance against a loss of value if the firm defaults on a bond.
D) limit the amount of borrowing of all parties in the credit default swap.
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Chapter 27: Short-Term Finance and Planning
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Q1) Assets are classified as current or long term based on:
A) age of the asset.
B) whether the asset is a physical good or not.
C) the liquidity of the asset.
D) Whether the asset is based on fair market value or not.
Q2) . What is the operating cycle for White Bluffs, Inc. if all sales are on credit?
B. If you knew that Accounts Receivables were $3,250 the prior year, what effect would this have on your estimate of the operating cycle. Show and explain why.
Q3) The most common way to finance a temporary cash deficit is the use of:
A) banker's acceptances.
B) call options.
C) commercial paper.
D) unsecured bank loans.
Q4) In a loan arranged through the assignment of accounts receivable the lender:
A) accepts the actual receivable to be collected.
B) has a lien on the receivables and recourse to the borrower.
C) assumes full risk of default.
D) all of the above.
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Chapter 28: Cash Management
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Q1) When a firm writes a check, there is an immediate decrease in _____ cash, but no immediate change in _____ cash.
A) bank, collected
B) ledger, book
C) bank, ledger
D) book, bank
Q2) Checks written by the firm are said to generate:
A) collection float.
B) ledger float.
C) disbursement float.
D) book float.
Q3) What is the firm's net float?
A) $300.
B) -$3,300.
C) $3,300.
D) -$300.
Q4) The net float of a firm is made up of disbursement float and collection float. Discuss the three components of collection float and how they would work against the firm.
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Page 30
Chapter 29: Credit Management
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Q1) The carrying value of its account receivable is $700,000 and the average collection period is 45 days. The firm's credit sales per day are:
A) $15,555.56.
B) $23,333.33.
C) $4,666,666.67.
D) $700,000.
Q2) Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?
A) No, because the $7000 cost is too high.
B) No, because a $200 loss is minor.
C) Yes, because the net gain is $30,000.
D) Yes, because the net gain is $23,000.
E) Yes, because the net gain is $193,000.
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Chapter 30: Mergers and Acquisitions
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Q1) The Turf-Top Lawn Mower Company has acquired the Quick Clean Power Snow Shovel Company. Turf-Top has agreed to pay $600 in cash, the money was raised through a new debt issue. All liabilities will be paid off. The balance sheets of both companies are at market values which are also the book values before the combination. Construct the new balance sheet for this purchase. How has the position of TTLM shareholders changed?
Q2) Firms A and B, both of which are 100% equity, are going to merge. Before the merger, Firm A (100 shares outstanding) is worth $15,000. Firm B (50 shares outstanding) is worth $10,000. The combined firm is worth $30,000. Firm A will pay $11,500 in cash for Firm B.
What is the NPV of the merger to Firm A?
Q3) Suppose that Exxon-Mobil acquired Schlumberger, an exploration/drilling company. Ignoring potential antitrust problems, this merger would be classified as a:
A) monopolistic merger.
B) vertical merger.
C) conglomerate merger.
D) horizontal merger.
Q4) Bondholders can be made better off in a merger, this is known as the co-insurance effect. Explain how this can happen using an example.
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Page 32
Chapter 31: Financial Distress
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Q1) Which of the following statements about private workouts of financial distress is NOT true?
A) Senior debt is replaced with junior debt.
B) Debt may be replaced by equity.
C) Private workouts account for about three quarters of all reorganizations.
D) Top management are dismissed or take pay reduction many times.
Q2) What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?
A) $1,000,000.
B) $583,333.
C) $35,714.
D) $0.
Q3) Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action:
A) cash payments are delayed to creditors.
B) the market value of the stock declines by 50%.
C) the firm's operating cash flow are insufficient to pay current obligations.
D) cash distributions are eliminated because the board of directors considers the surplus account to be low.
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Page 33
Chapter 32: International Corporate Finance
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Q1) In foreign exchange markets the swap rate is:
A) the volume of currency traded in a day.
B) the rate of profit made on any transaction.
C) the nightlife of the stereotypical Frenchman.
D) the difference in the foreign exchange rates on a roundtrip agreement to buy and sell a currency.
Q2) Financial Accounting Standard Statement Number 52 requires that most assets and liabilities be translated at the current exchange rate. Gains and losses are recorded:
A) against shareholder's equity.
B) as a normal part of income.
C) as an extraordinary item against income.
D) as a footnote to the statements.
E) only on the income tax statements.
Q3) Underwriters of Eurobonds sell the bonds on a:
A) best-efforts basis.
B) best-efforts, all or none basis.
C) firm commitment basis.
D) regular basis to governments.
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