International Corporate Finance
Chapter Exam Questions
Course Introduction
International Corporate Finance explores the financial management strategies and challenges faced by multinational corporations operating in a global environment. The course covers topics such as foreign exchange markets, international financial markets and instruments, currency risk management, cross-border capital budgeting, international financing strategies, and the impact of international taxation and regulation. Students will also examine the implications of political and economic risks, as well as ethical considerations in global financial decision-making. By integrating theory with real-world case studies, the course equips students with the analytical tools and practical skills necessary to make informed financial decisions in an international context.
Recommended Textbook
Corporate Finance 6th Canadian Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Corporate securities are contingent claims because:
A) they don't represent a direct claim on the firm.
B) the firm may be bought out.
C) the securities value is derived from the total value of the firm.
D) book value can be negative.
Answer: C
Q2) The Harlow Corporation has promised to pay its debtholders an amount of $2,700 over the next year. The firm's shareholders hold claim to whatever is left after the debtholders' claims have been satisfied. Calculate Harlow's debt and equity level if its assets total $1100 at the end of the year. Recalculate for asset levels of $2,200 and $6,000.
Answer: If assets total $1100: Value of Debt = $1100, Value of Equity =$0
If assets total $2200: Value of Debt = $2200, Value of Equity =$0
If assets total $6000: Value of Debt = $2700, Value of Equity = $3300
Q3) A financial manager's most important job is to create value from capital budgeting, financing, and liquidity activities. Explain how financial managers create value.
Answer: Buy assets that generate more than their cost.
Sell financial securities that raise more cash than they cost. Minimize cash payouts to non-investors, ie., taxes to governments.
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Page 3
Chapter 2: Accounting Statements and Cash Flow
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Q1) The primary distinction between tangible and intangible assets is that:
A) intangible assets have a physical existence while tangible assets do not.
B) intangible assets do not have a physical existence while tangible assets do.
C) since tangible assets do not have a physical existence they do not show up on the balance sheet.
D) since intangible assets do not have a physical existence they do not show up on the balance sheet.
Answer: B
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) The Simmons Company reported retained earnings in 2009 of $4750. In 2010, Simmons earned $1120 before taxes and paid a dividend of $730. Simmon's tax rate is 34%. What is Simmons' retained earnings.
Answer: $4750 + $1120(1-.34) - $730 = $4759.20
Q4) What is the change in the net working capital from 2009 to 2010?
Answer: ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335
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Chapter 3: Financial Planning and Growth
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Q1) 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.
Q2) The addition to retained earnings for the financial planning period is equal to:
A) Net Income + Taxes - Dividends.
B) Net Income - Dividends.
C) Net income + Depreciation - Dividends.
D) Sales - Dividend.
Answer: B
Q3) The sustainable growth rate will be equivalent to the internal growth rate when:
A) a firm has no debt.
B) the growth rate is positive.
C) the plowback ratio is positive but less than 1.
D) a firm has a debt-equity ratio exactly equal to 1.
E) net income is greater than zero.
Answer: A
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) An individual has income of $10,000 in period 0 and $25,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $10,500 in period 1. The market interest rate is 8%. What is the maximum possible consumption in period 1 if the individual consumes $20,000 in period 0 and the individual follows the NPV rule?
Q2) An individual has income of $35,000 in period 0 and $40,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1. What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?
A) $26,000.
B) $26,667.
C) $44,000.
D) $44,720.
Q3) According to the net present value rule, an investment should be made if:
A) the net present value has no risk
B) the net present value is greater than the cost of investment
C) the net present value is greater than present value
D) the net present value is more desired than consumption
E) the net present value is positive.
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Chapter 5: The Time Value of Money
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Q1) In the equation, NPV = -Cost + PV, the term Cost is the:
A) current value of the commitment fee today.
B) current value of the terminal cash flow.
C) initial cash outflow.
D) present value of the variable costs.
Q2) The potential owner/managers of the yet to be formed new In-Line Blade Company are evaluating the prospects for the business. The new equipment is expected to be $5.5 million and have after tax cashflows of $400,000 for the first two years, $750,000 in the next two years, and $1,200,000 thereafter indefinitely. The owners estimate that they require a 15% rate of return. What is the value of the In-Line Blade Company; should they go forward with the investment?
A) $3,872,122; yes.
B) $446,148; yes.
C) -$2,000,000; no.
D) $943,596; yes.
E) $105,185; yes.
Q3) There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.
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Page 7
Chapter 6: How to Value Bonds and Stocks
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Q1) 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.
Q2) Consider a bond which pays 7% semi-annually and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk. What is this bond's price?
A) $942.50
B) $911.52
C) $941.74
D) $1064.81
Q3) The dividend growth rate is equal to the product of what two ratios?
A) ROA, current ratio.
B) ROE, retention ratio.
C) PM, ROA.
D) ROA, ROE.
Q4) A forward rate prevailing from period three through to period four can be:
A) readily observed in the market place.
B) extracted from high coupon bonds.
C) extracted from spot rates with 2 and 3 year maturities.
D) extracted from spot rates with 3 and 4 years to maturity.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) Suppose that a project has a cash flow pattern (-$2,000, $25,000, -$25000) Its IRR is given by
A) 12%
B) 9% or 1040%
C) 25%or 250%
D) 4100%
Q2) The discounted payback rule states that you should accept projects:
A) which have a discounted payback period that is greater than some pre-specified period of time.
B) if the discounted payback is positive and rejected if it is negative.
C) only if the discounted payback period equals some pre-specified period of time.
D) if the discounted payback period is less than some pre-specified period of time.
Q3) Payback is frequently used to analyze independent projects because:
A) nit considers the time value of money.
B) all relevant cash flows are included in the analysis.
C) it is easy and quick to calculate.
D) it is the most desirable of all the available analytical methods from a financial perspective.
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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) Ben's Border Café is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?
A) $4,000
B) $4,500
C) $6,000
D) $7,500
E) $8,500
Q3) This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is $225 million. If the test is successful, which has a 65% chance, the company will spend another $800 million to put the productive capabilities in place. The expected cashflows after tax for a successful project are $225 million each year for the next six years with a probability of .8; there is a 20% chance of a zero NPV. If the test fails the cashflows associated with continuing through the sixth year is $125 million per year after tax. The company uses a 12% discount rate for these types of projects. Draw and label the decision tree. Explain what decisions management would make at each node upon their realization.
Q2) 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.
Q3) In order to make a decision with a decision tree:
A) one starts furthest out in time to make the first decision.
B) One must begin at time 0.
C) Any path can be taken to get to the end.
D) Any path can be taken to get back to the beginning.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) The characteristic line is graphically depicted as:
A) the plot of the relationship between beta and expected return
B) the plot of the returns of the security against the beta
C) the plot of the security against the market index returns
D) the plot of the beta against the market index returns
Q2) The variance and standard deviation of GenLabs returns are:
A) 428.75; 20.71
B) 71.46; 8.45
C) 939.58; 30.65
D) 1127.50; 33.58
Q3) The expected return on GenLabs is:
A) 20.5
B) 12.5
C) 8.5
D) 3.3
Q4) Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.
Page 12
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common is:
A) 3.2%.
B) 4.0%.
C) 7.2%.
D) 8.0%.
E) 9.0%.
Q2) The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:
A) the capital market line which shows that all investors will only invest in the riskless asset.
B) the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
C) the security market line which shows that all investors will invest in the riskless asset only.
D) the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) The unexpected return on a security, U, is made up of:
A) market risk and systematic risk.
B) systematic risk and idiosyncratic risk.
C) idiosyncratic risk and unsystematic risk.
D) expected return and market risk.
E) expected return and idiosyncratic risk.
Q2) The acronym CAPM stands for:
A) Capital Asset Pricing Model.
B) Certain Arbitrage Pressure Model.
C) Current Arbitrage Prices Model.
D) Cumulative Asset Price Model.
Q3) The betas along with the factors in the APT adjust the expected return for:
A) calculation errors.
B) unsystematic risks.
C) spurious correlations of factors.
D) differences between actual and expected levels of factors.
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Chapter 13: Risk, Return, and Capital Budgeting
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Q1) One Caveat of using EVA as a measure of performance measurement is managers
A) may not have incentive to work hard.
B) may overstate earnings.
C) may cut back production
D) none of the above.
Q2) The beta of a portfolio of the firm's debt and equity:
A) is equal to the sum of all the betas.
B) is equal to the sum of all the betas weighted by their market value weight.
C) is greater than the beta of each component.
D) is always less than zero.
Q3) If the project beta, IRR co-ordinates plot above the SML the project should be:
A) accepted because it is overvalued.
B) accepted because it is undervalued.
C) rejected because it is overvalued
D) rejected because it is undervalued.
Q4) The beta of a firm is more likely to be high under what two conditions:
A) high cyclical business activity and low operating leverage.
B) high cyclical business activity and high operating leverage.
C) low cyclical business activity and low financial leverage.
D) low cyclical business activity and low operating leverage.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise. This contrary evidence happens because:
A) markets are inefficient and unsure of the real value of the events.
B) death is inevitable and market prices are random.
C) things simply happen.
D) the value of the founding executive was a negative to the firm.
Q2) Suppose that firms with unexpectedly high earnings earn abnormally high returns for several months after the announcement. This would be evidence of:
A) efficient markets in the weak form.
B) inefficient markets in the weak form.
C) efficient markets in the semi-strong form.
D) inefficient markets in the semi-strong form.
E) inefficient markets in the strong form.
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.
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) A grant of authority allowing someone else to vote shares of stock that you own is called a:
A) power-of-share authorization.
B) proxy.
C) share authority grant (SAG).
D) restricted conveyance.
Q2) Tree Top Toys needs to finance their new production facility for spyglasses. The cost is $12 million. They expect to payout $6 million or 40% of their net cashflow. Any external financing will be raised 80% borrowings and the remainder equity. Unfortunately, the company has no internal excess short-term funds to use. How much total equity cashflow will be used?
A) $0.6 million.
B) $2.4 million.
C) $9.0 million.
D) $9.6 million.
E) $3.0 million.
Q3) From this information, calculate Enstat's book value per share.
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) An levered firm is a company that:
A) is financed by common stock.
B) has some debt in the capital structure.
C) has all equity in the capital structure.
D) has no debt in the capital structure.
Q2) The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet:
A) places assets on the right hand side.
B) places liabilities on the left-hand side.
C) does not equate the right hand with the left-hand side.
D) lists items in terms of market values, not historical costs.
E) uses the market rate of return.
Q3) 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%.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 10%
Personal tax rate on income from stocks: 50%
A) -$0.188.
B) $0.340.
C) $0.633.
D) -$0.050.
Q2) In Miller's model, when the quantity (1-T<sub>c</sub>)(1-T<sub>s</sub>) = (1-T<sub>b</sub>), then:
A) the firm should hold no debt.
B) the value of the levered firm is greater than the value of the unlevered firm.
C) the tax shield on debt is exactly offset by higher personal taxes paid on interest income.
D) the tax shield on debt is exactly offset by higher levels of dividends.
E) the tax shield on debt is exactly offset by higher capital gains.
Q3) Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) A very large firm has a debt beta of zero. If the cost of equity is 11%, and the risk-free rate is 5%, the cost of debt is:
A) 5%.
B) 6%.
C) 11%.
D) 15%.
Q2) The Free-Float Company, a company in the 36% tax bracket, has a total capital structure breakdown of 40% riskless debt and 60% equity. The beta of the equity is 1.4, and the asset beta is:
A) .98
B) 1.22
C) 1.40
D) 1.11
E) 1.26
Q3) The term B x rbgives:
A) total cost of debt per year.
B) total cost of equity per year.
C) unit cost of debt.
D) unit cost of equity.
E) weighted average cost of capital.
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Chapter 19: Dividends and Other Payouts
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Q1) On the date of record the stock price drop is:
A) a full adjustment for the dividend payment.
B) a partial adjustment for the dividend payment because of the tax effect.
C) zero because it happened on ex-dividend date.
D) zero because it happens on payment date.
Q2) Homemade dividends are described by Modigliani and Miller to be:
A) the dividend one pays oneself to avoid risky stocks.
B) the re-arrangement of the firm's dividend stream as management needs.
C) the re-arrangement of the firm's dividend stream by the investor in their holdings by buying or selling stock.
D) the present value of all dividends to be paid.
Q3) If both dividends and capital gains are currently taxed at the same ordinary income tax rate, the effect of the tax is different because:
A) capital gains are actually taxed, while dividends are taxed on paper only.
B) dividends are actually taxed, while capital gains are taxed on paper only.
C) dividends are taxable when distributed while capital gains are deferred until the stock is sold.
D) capital gains are taxable when distributed while dividends are deferred until the stock is sold.
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Chapter 20: Issuing Equity Securities to the Public
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Q1) 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.
Q2) The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.
Q3) A new public equity issue from a company with equity previously outstanding is called a/an:
A) initial public offering.
B) seasoned equity issue.
C) unseasoned equity issue.
D) private placement.
E) syndicate.
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Chapter 21: Long-Term Debt
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Q1) From the corporate perspective callable bonds may have value over non-callable bonds because:
A) the corporation has the option to control market interest rates.
B) interest rates may rise prohibiting the holders from earning higher returns.
C) call prices vary inversely with the interest rates.
D) the corporation has the option to call the bond if interest rates fall.
E) the corporation has the option to call the bond if interest rates rise.
Q2) Zeros are bonds that:
A) have zero maturity.
B) have zero call dates.
C) have zero sinking funds.
D) have zero coupon rates.
Q3) What is the correct coupon amount if the bond is priced to sell at par?
A) $65.00.
B) $75.42.
C) $82.50.
D) $87.86.
Q4) What is the bond's value today if the coupon is set at $70?
Q5) If the bond is priced at $1,000, what is the cost to the firm of the call provision?
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Chapter 22: Leasing
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Q1) Debt displacement is associated with leases because:
A) all assets not purchased with equity use debt financing.
B) debt is always a cheaper source of financing and is lost as leasing is used.
C) ICA3065 and the CCRA mandate debt displacement.
D) lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.
Q2) 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>.
Q3) What is the NPV of the lease?
A) -$309.69.
B) -$295.04.
C) -$305.39.
D) -$111.69.
Q4) What are the cashflows in years 1 through 8?
Q5) Calculate the NPV of the lease versus the purchase decision.
Q6) What is the discount rate to be used?
Q7) Should the asset be purchased or leased? Support your answer.
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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) Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due. In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cash flow of the firm is greater than $10 million?
A) The option is in-the-money and the stockholders earn the difference between the cash flow and the bondholder's promised payment.
B) The option is in-the-money and the bondholders earn the entire cash flow.
C) The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow.
D) The option is out-of-the-money, and the stockholders make up the difference so that the bondholders receive full payment.
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) 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.
Q2) Rejecting an investment today forever may not be a good choice because:
A) the size of the firm will decline.
B) there are always errors in the estimation of NPVs.
C) the option value is negative.
D) the company's foregoing the future rights or option to the investment.
Q3) The NPV approach must be:
A) augmented by added analysis if there are a few imbedded options.
B) augmented by added analysis if a decision has significant imbedded options.
C) jettisoned if there are any embedded options.
D) computed carefully to identify the options.
Q4) Why would the company pay the executive in options as opposed to salary?
Q5) If Mr. Maxim earned $500,000 in regular annual salary why might why might he prefer to have $1,500,000 in straight salary versus salary and options?
Q6) What is the value of Mr. Maxim's options?
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Chapter 25: Warrants and Convertibles
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Q1) Which of the following would not describe the difference between warrants and call options?
A) Warrants are issued by firms whereas call options are issued by individuals.
B) Call options have an exercise price whereas warrants do not.
C) Exercising of warrants creates dilution whereas exercising all options does not.
D) When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.
Q2) A convertible bond is selling for $800. It has 10 years to maturity, a $1000 face value, and a 10% coupon paid semi-annually. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $31.375 per share. Determine the bond's option premium.
Q3) The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:
A) $25.
B) $40.
C) $100.
D) $20.
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Chapter 26: Derivatives and Hedging Risk
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Q1) On March 1, you contract to take delivery of 1 ounce of gold for $415. The agreement is good for any day up to April 1. Throughout March, the price of gold hit a low of $385 and hit a high of $435. The price settled on March 31 at $420, and on April 1<sup>st</sup> you settle your futures agreement at that price. Your net cash flow is:
A) -$30.00.
B) $20.00.
C) $5.00.
D) -$15.00.
E) -$20.00.
Q2) Duration of a coupon paying bond is:
A) equal to its number of payments.
B) less than a zero coupon bond.
C) equal to the zero coupon bond.
D) equal to its maturity.
Q3) A derivative is a financial instrument whose value is determined by:
A) regulatory body such as the FTC.
B) a primitive or underlying asset.
C) hedging a risk
D) hedging a speculation.
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Chapter 27: Short-Term Finance and Planning
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Q1) The inventory turnover ratio for 20101 is (use average inventory):
A) 2.96.
B) 3.06.
C) 3.17.
D) 5.87.
E) 6.01.
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) Costs that fall with increases in the level of investment in current assets are called:
A) current asset costs.
B) fixed costs.
C) flexible costs.
D) liquid capital costs.
E) shortage costs.
Q4) A. What is the cash cycle for White Bluffs, Inc. if all sales are credit sales.
B. If you knew that Accounts Payables were $4884 last year, what effect would this have on your estimate of the cash cycle. Show and explain why.
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Chapter 28: Cash Management
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Q1) The target cash balance is reached when:
A) the interest on any marketable security throw-off is maximized.
B) the interest foregone from not investing in an equivalent amount of Treasury bills is minimized.
C) the value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
D) the liquidity value is greater than interest foregone on an equivalent amount of Treasury bills.
Q2) Examples of cash disbursements do not include:
A) wages.
B) payment of raw materials.
C) taxes.
D) dividends
E) sales of assets.
Q3) What is the firm's collection float?
A) $10,500.
B) -$7,200.
C) $1,800.
D) -$1,800.
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Chapter 29: Credit Management
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Q1) The net credit period for a company with terms of 3/10 net 60 is:
A) 50 days.
B) 60 days.
C) 10 days.
D) 57 days.
Q2) Risk is incorporated into the decision to grant credit by:
A) decreasing the discount rate.
B) altering the credit period.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.
Q3) Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers, which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price. The appropriate discount rate is 1% a month. Determine the probability of payment that would make Edgeworth indifferent between granting credit and the present policy.
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Chapter 30: Mergers and Acquisitions
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Q1) Dexter Department Stores has a market value of $400 million and 20 million shares outstanding. Walnut Stores has a market value of $134 million and 13.4 million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top management of Dexter's have determined that due to the synergies between the firms the combination will worth $667 million. Dexter expect to pay a $67 million premium for Walnut Stores. If Dexter were to make an offer of $201 million in stock for Walnut what would the exchange ratio be?
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.
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Chapter 31: Financial Distress
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Q1) 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.
Q2) Steel Pony decides to reorganize and assumes the "going concern" value of the firm is a strong and reliable estimate. Management feels that for the firm to have a stable financial structure and for any plan to be acceptable to the current senior debtholders the new debt can not represent more than twice equity and be made up of 40% senior debt. Determine the distribution of new securities under the reorganization. Assuming all creditors are treated according to APR.
Q3) Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amounts to 5%, determine the distribution of the proceeds under the rules of absolute priority.
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Chapter 32: International Corporate Finance
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Q1) The U.S. inflation rate for the coming year is 2%. The German inflation rate for the coming year is 42%. You can buy 1.7 D-marks with 1 U.S. dollar today. Based on relative purchase power parity, how many D-marks will you be able to buy with 1 dollar in 1 year?
Q2) A Eurobond investor prefers this market to the Yankee bond market because:
A) these bonds are registered.
B) the bonds are in bearer form.
C) an agent is used to transfer ownership.
D) income is taxed directly.
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.
Q4) Swiss franc denominated bonds issued in Switzerland. by a French company are called:
A) Eurobonds.
B) Foreign bonds.
C) European Original Issue (EOI) bonds.
D) American Depository Bonds (ADBs).
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