Introduction to Corporate Finance Exam Solutions
Course Introduction
Introduction to Corporate Finance provides students with a foundational understanding of the financial principles and practices used by organizations to manage their resources. The course covers essential topics such as time value of money, risk and return, capital budgeting, cost of capital, and the analysis of financial statements. Students will explore methods for valuing stocks and bonds, making capital investment decisions, and understanding the impact of market structures on corporate financial strategy. Through real-world examples and case studies, participants will develop practical skills in financial decision-making and gain insights into how corporate finance contributes to organizational success.
Recommended Textbook Corporate Finance 7th Canadian Edition by Jaffe
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) 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 cash flows if less than the fixed claim.
B) debt holders will receive the maximum of the firm cash flows 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
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
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Chapter 2: Accounting Statements and Cash Flow
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Q1) Under IFRS 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
Q2) Which of the following is not included in the computation of operating cash flow?
A) Earnings before interest and taxes.
B) Interest paid.
C) Depreciation.
D) Current taxes.
Answer: B
Q3) The primary source of the firm's cash flow is usually:
A) net income.
B) tax credits.
C) earnings before interest and depreciation minus taxes.
D) capital spending after taxes.
E) working capital requirements.
Answer: C
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Page 4
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) A firm has a fixed debt-to-equity ratio and dividend policy.Assets and net income are proportional to sales,and new equity will not be issued.Which of the following statements is most correct?
A) Almost any growth rate is theoretically possible.
B) Only one growth rate is possible.
C) The firm cannot grow.
D) The firm's growth rate must be less than some maximum.
Answer: B
Q3) Assuming the following ratios are constant,what is the sustainable growth rate?
Answer: 11ea8884_9833_4980_a96f_4dae6e5f362d_TB5261_00 Growth Rate 11ea8884_9833_7091_a96f_53a432279411_TB5261_11
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) The separation theorem says that:
A) expected return of a portfolio is separate from its variance. Investment decisions can be made separately from consumption decisions.
B) lending decisions can be made jointly with borrowing decisions.
C) systematic risk and unsystematic risk should be considered separately.
D) variance of a portfolio is separate from its covariance.
Q2) Suppose that the market interest rate falls to 5%.What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects? D.
Period 1 consumption is $1,620 + $2,400 + $910 = $4,930
Q3) A financial instrument,by its possession,that entitles the holder to receive the payments are called:
A) principal instruments.
B) interest only instruments.
C) registered instruments.
D) bearer instruments.
Q4) Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)
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Chapter 5: The Time Value of Money
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Q1) Which of the following statements is true?
A) Regardless of the value of the interest rate, increasing the compounding frequency will decrease the future value.
B) Regardless of the value of the interest rate, increasing the compounding frequency will increase the future value.
C) There is a relationship between the future value of investment and the effect of compounding frequency. At high interest rates, increases in compounding frequency will decrease the future value.
D) There is a relationship between the future value of investment and the effect of compounding frequency. At low interest rates, increases in compounding frequency will decrease the future value.
Q2) An annuity:
A) is a debt instrument that pays no interest.
B) is a stream of payments that varies with current market interest.
C) is a series of equal payments through time.
D) has no value.
Q3) An investment today of $3300 is worth $10,000 in 8 years.At what rate has your investment been growing (annually)over the 8 years?
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Chapter 6: How to Value Bonds and Stocks
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Q1) The P/E ratio is a multiple of earnings that investors pay for a stock.The P/E is __________ related to growth,__________ related to the discount rate,and __________ related to the stock's risk.
A) positively; positively; negatively.
B) negatively; positively; positively.
C) positively; negatively; negatively.
D) negatively; negatively; positively.
Q2) ABC Imports paid a $1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share of this stock worth to you today if the appropriate discount rate is 14%?
A) $7.14
B) $7.50
C) $11.11
D) $11.67
E) $12.25
Q3) A level coupon bond:
A) pays the same principal every period.
B) pays the same taxes every period.
C) is a zero coupon annuity.
D) is an annuity over the life of the bond.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) If there is a conflict between mutually exclusive projects due to the IRR,one should:
A) drop the two projects immediately.
B) spend more money on gathering information.
C) depend on the NPV as it will always provide the most value.
D) depend on the AAR because it does not suffer from these same problems.
Q2) If a project is assigned a required rate of return equal to zero,then:
A) the timing of the project's cash flows has no bearing on the value of the project.
B) the project will always be accepted.
C) the project will always be rejected.
D) whether the project is accepted or rejected will depend on the timing of the cash flows.
Q3) A mutually exclusive project is a project whose:
A) acceptance or rejection has no effect on other projects.
B) NPV is always negative.
C) IRR is always negative.
D) acceptance or rejection effects other projects.
Q4) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Q1) You have been asked to evaluate 2 pollution control devices.The wet scrub costs $100 to set up and $50 per year to operate.It must be completely replaced every 3 years,and it has no salvage value.The dry scrub device costs $200 to set up and $30 per year to operate.It lasts for 5 years and has no salvage value.Assuming that pollution control equipment is replaced as it wears out,which device do you recommend if the cost of capital is 10%?
A) Dry scrub, the EAC is $11.00.
B) Wet scrub, the EAC is $90.21.
C) Dry scrub, the EAC is $82.76.
D) Wet scrub, the EAC is $9.79.
E) Dry scrub, the EAC is $124.34.
Q2) The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow to $400,000 per year.The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:
A) the press cost of $250,000 and total cash flow of $400,000.
B) the change in cash flow of $67,000 versus the price cost of $250,000.
C) the current cash flow of $333,000 and the price cost of $250,000.
D) the opportunity cost of the facility of $333,000.
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Q1) The accounting profit break-even point occurs when:
A) the total revenue curve cuts the total cost curve.
B) the total revenue curve cuts the fixed cost curve.
C) the variable cost curve cuts the total cost curve.
D) the total revenue curve cuts the variable cost curve.
Q2) The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.
A) operational
B) leveraged
C) accounting
D) cash
E) present value
Q3) All else equal,the contribution margin must increase as:
A) both the sales price and variable cost per unit increase.
B) the fixed cost per unit declines.
C) the variable cost per unit declines.
D) sales price per unit declines.
E) the sales price minus the fixed cost per unit increases.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Excelsior share are currently selling for $25.00 each.You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share.What was your percentage rate of return?
A) 10.42%
B) 4.17%
C) 6.25%
D) 110.42%
E) 104.67%
Q2) Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%.If the returns are normally distributed,the approximate probability of receiving a return greater than 72%,or less than -48% is:
A) greater than 99%
B) greater than 95%
C) less than 5%
D) less than 1%
Q3) List 2 shortcomings of using value at risk (VaR)as a risk management tool.
Q4) Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate?
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Page 12
Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Sample Questions
Q1) The covariance between the IS and DS returns is:
A) .00187.
B) .00240.
C) .00028.
D) .000056.
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.
Q3) The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels; explain why it is so.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) In a portfolio of risky assets the response to a factor,F<sub>i</sub>,can easily be determined by:
A) summing the weighted <sub>i</sub> s and multiplying by the innovation in F<sub>i</sub>.
B) summing the F<sub>i</sub> s.
C) adding the average weighted expected returns.
D) Summing the weighted random errors.
Q2) A security that has a beta of zero will have an expected return of:
A) zero.
B) the market risk premium.
C) the risk free rate.
D) less than the risk free rate but not negative.
E) less than the risk free rate which can be negative.
Q3) To estimate the required return for a security using APT or CAPM,it is necessary to have:
A) last period's return, beta, and the standard deviation.
B) last period's return, beta, and the risk-free rate.
C) beta, the market risk premium, and the risk-free rate.
D) beta, last period's return, and the standard deviation.
Page 14
E) beta, last period's return, and the market risk premium.
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Chapter 13: Risk,return,and Capital Budgeting
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Sample Questions
Q1) Beta is useful in the calculation of:
A) the company's variance.
B) the companies discount rate.
C) the company's standard deviation.
D) unsystematic risk.
E) the risk free-rate or the market rate.
Q2) The cost of equity for Gruwom Corp.is 8.4%.If the return to the market is 10% and the risk-free rate is 5%,then the equity beta is:
A) 0.48.
B) 1.25.
C) 0.68.
D) 1.68.
Q3) Suppose the Barges Corporation's common stock has an expected return of 12%.Assume that the risk-free rate is 5%,and the market risk premium is 6%.If no unsystematic influence affected Barges' return,the beta for Barges is:
A) 1.00.
B) 1.17.
C) 1.20.
D) 2.50.
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Page 15
Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) Individuals that continually monitor the financial markets seeking mispriced securities:
A) tend to make substantial profits on a daily basis.
B) tend to make the markets more efficient.
C) are never able to find a security that is temporarily mispriced.
D) are always quite successful using only well-known public information as their basis of evaluation.
Q2) Ritter's study of Initial Public Offerings (IPOs)showed that the post offering stock performance was:
A) less than the control group by about 3.3% in the five years following the IPO.
B) incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average.
C) immaterial to the pricing of the IPO because future market performance is unknown at issuance.
D) equal across IPOs, irrespective of risk or which year they were issued.
Q3) Define the three forms of market efficiency.
Q4) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) The market value of the ownership of the firm equals:
A) the market price of the stock times the number of shares outstanding.
B) the sum of the market price of the bonds and the stock.
C) the par value of the stock times the number of shares outstanding.
D) the market price of the stock minus the retained earnings.
Q2) There are 3 directors seats up for election.If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director,this is illustrative of:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
Q3) A stock certificate often has a stated value on it.This amount is the:
A) book value.
B) stated book value.
C) subordinated liquidation value.
D) par value.
Q4) Preferred Stock,as a hybrid security,presents somewhat of a puzzle as to why they are issued.What elements give rise to the puzzle and how is it explained?
Q5) From this information,calculate Enstat's book value per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) A general rule for managers to follow is to set the firms capital structure such that:
A) the firm's value is minimized.
B) the firm's value is maximized.
C) the firm's bondholders are made well off.
D) the firms suppliers of raw materials are satisfied.
E) the firms dividend payout is maximized.
Q2) A firm has zero debt in its capital structure.Its overall cost of capital is 9%.The firm is considering a new capital structure with 40% debt.The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%,its cost of equity capital with the new capital structure would be?
A) 10.32%.
B) 11.20%.
C) 11.00%.
D) 13.95%.
Q3) 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 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.
Q2) The pecking order states how financing should be raised.In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signals on security overvaluation the firm's first rule is to:
A) finance with internally generated funds as there is no market interaction.
B) always issue debt then the market won't know when management thinks the security is overvalued.
C) reduce asymmetry before any financing activity.
D) increase the financial slack to reduce the reliance on internally generated funds.
Q3) Establishing a capital structure for a firm is not simple.Although financial theory guides the process,there is no simple formula.List and explain four main items that one should consider in determining the capital structure.
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The acronym APV stands for:
A) applied present value.
B) all purpose variable.
C) accepted project verified.
D) adjusted present value.
Q2) A firm is valued at $6 million and has debt of $2 million outstanding.The firm has an equity beta of 1.8 and a debt beta of .42.The beta of the overall firm is:
A) 1.20.
B) 1.34.
C) 1.00.
D) 1.11.
Q3) 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%.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) 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.
Q2) You own 300 shares of Abco,Inc.stock.The company has stated that it plans on issuing a dividend of $.60 a share one year from today and then issuing a final liquidating dividend of $2.20 a share two years from today.Your required rate of return is 9%.Ignoring taxes,what is the value of one share of this stock today?
A) $2.36.
B) $2.40.
C) $2.62.
D) $2.80.
E) $2.85.
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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Page 21
Chapter 20: Issuing Equity Securities to the Public
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Q1) Empirical evidence suggests that upon announcement of a new equity issue,current stock prices generally:
A) drop, perhaps because the new issue reflects management's view that common stock is currently overpriced.
B) remain about the same since an efficient market anticipates a new equity issue.
C) increase, perhaps because the issues are associated with positive NPV projects.
D) increase, because the market supply is always less than demand.
E) increase, because underwriters exercise their green shoe option.
Q2) Assuming everything else is constant,if a stock's old price is $25 and the ex-rights or new stock price is $19,then the value of the right is:
A) $6.00.
B) -$6.00.
C) impossible to determine without the subscription price.
D) impossible to determine without the number of rights needed to buy one share.
Q3) 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.
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Page 22
Chapter 21: Long-Term Debt
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Q1) Bonds below BBB or Baa are called:
A) income bonds.
B) deep-discount bonds.
C) zero coupon bonds.
D) investment grade bonds.
Q2) If a bond was issued at par,the quoted price of the bond will not necessarily equal the par value of the bond after issuance because:
A) time to maturity has shortened and the company is older.
B) time to maturity has shortened and interest has accrued.
C) interest has accrued and the company is older.
D) market interest rates have changes and/or interest has accrued.
E) market interest rates have changes and the company is older.
Q3) 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.
Q4) What is the bond's value today if the coupon is set at $100?
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Chapter 22: Leasing
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Q1) An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.
A) leveraged; direct
B) sales and leaseback; sales-type
C) capital; sales-type
D) direct; sales-type
Q2) What is the after-tax cash flow in years 1 through 5?
A) $126,600
B) $198,000
C) $269,400
D) $287,250
Q3) In a lease arrangement,the user of the asset is:
A) the lesser.
B) the lessee.
C) the lessor.
D) the leaser.
Q4) What is the discount rate to be used?
Q5) What are the cashflows in years 1 through 8?
Q6) Calculate the NPV of the lease versus the purchase decision.
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) You own a call option with time to expiration.The common stock is selling for $15 and your exercise price is $12,this option:
A) must be sold to the writer.
B) is in-the-money.
C) is out-of-the-money.
D) must be offset by a put.
Q2) Pay-off diagrams for a call options versus stock prices are called:
A) vertical tower diagrams.
B) hockey stick diagrams.
C) fulcrum diagrams.
D) cumulative frequency diagrams.
Q3) You hold a put option on a stock with a strike price of $23.The stock is selling for $25.What is the approximate minimum value of the put option?
A) $23
B) $25
C) $2
D) $0
Q4) Explain how the value of a firm can be viewed as an option.How can the call and put views be resolved?
25
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) What is d<sub>1</sub>?
A) .1842
B) .4102
C) .4583
D) 0.5196
E) .5412
Q2) Options are granted to top corporate executives because:
A) executives will make better business decision in line with benefiting the shareholders.
B) executive pay is at risk and linked to firm performance.
C) options are tax-efficient and taxed only when they are exercised.
D) All of the choices are correct.
Q3) A financial manager who does not follow the general constraints of the NPV rule may:
A) accept a negative project for fear of losing an investment opportunity.
B) accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.
C) option the project to another firm.
D) not take a positive NPV project even if the NPV is adequate reward to forego the option.
Page 26
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Chapter 25: Warrants and Convertibles
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Q1) Why are warrants and convertibles issued?
Q2) 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.
Q3) An "equity kicker" most often refers to a:
A) bond with conversion privileges.
B) preferred stock offering with conversion privileges.
C) warrant.
D) lettered common stock.
Q4) Based on empirical studies,firms tend to call convertible bonds when the conversion value is:
A) less than the conversion price.
B) greater than the straight bond value.
C) greater than the call price.
D) less than the face value.
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Chapter 26: Derivatives and Hedging Risk
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Q1) A forward contract is described by:
A) agreeing today to buy a product at a later date at a price to be set in the future.
B) agreeing today to buy a product today at its current price.
C) agreeing today to buy a product at a later date at a price set today.
D) agreeing today to buy a product if and only if its price rises above the exercise price today at its current price.
Q2) A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:
A) decrease the duration of its assets.
B) increase the duration of its assets.
C) decrease the duration of its liabilities.
D) do nothing, i.e., keep the duration of its liabilities equal to the duration of its assets.
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) The inventory turnover ratio for 2014 is (use average inventory):
A) 2.96.
B) 3.06.
C) 3.17.
D) 5.87.
E) 6.01.
Q2) A flexible short-term financial policy:
A) increases the likelihood that a firm will face financial distress. B) incurs an opportunity cost due to the rate of return that applies to short-term assets. C) advocates a smaller investment in net working capital than a restrictive policy does. D) increases the probability that a firm will earn high returns on all of its assets. E) utilizes short-term financing to fund all of the firm's assets.
Q3) A firm borrows $7 million through a credit line and is required to keep $350,000 as a compensating balance.The credit line carries a 11% interest rate.Calculate the effective interest rate on the loan if it is repaid after 1 year.
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Chapter 28: Cash Management
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Q1) Which of the following is not true of float management?
A) Float management involves controlling the collection and disbursement of cash.
B) An objective of float management is to speed up the collection float.
C) An objective of float management is to slow down disbursement float.
D) Float management will succeed if the firm can collect late and pay early.
Q2) 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
Q3) Checks written by the firm are said to generate:
A) collection float.
B) ledger float.
C) disbursement float.
D) book float.
Q4) Aesbrook Airlines currently has $2.4 million on deposit with its bank.Aesbrook pays its fuel bill by writing a check for $1.1 million.Calculate the company's book cash and bank cash after it writes the check.
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Chapter 29: Credit Management
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Q1) If a firm refuses to offer credit the NPV of the transaction is:
A) the cash revenues received minus the cost paid in time period 0.
B) the discounted value of the revenues from time period 0.
C) the net cash flow from the future payments to be received.
D) determined by all of these factors.
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) Delta PDA Distributors has an investment in accounts receivable of $2,750,000.Daily credit sales are $118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days,what is the Average collection period that Delta maintains?
A) 31 days
B) 40 days
C) 37 days
D) 19 days
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Chapter 30: Mergers and Acquisitions
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Q1) In a merger with an exchange of stock,when the premerger prices are used to calculate the exchange ratio,the true cost of the merger:
A) is less than the number of shares received times the original market price. B) is equal to the number of shares received times the original market price. C) is greater than the number of shares received times the original market price.
D) Unchanged from the premerger value.
Q2) Firm A is acquiring Firm B for $25,000 in cash.Firm A has 2,000 shares of stock outstanding at a market value of $21 a share.Firm B has 1,200 shares of stock outstanding at a market price of $17 a share.Neither firm has any debt.The net present value of the acquisition is $1,500.What is the price per share of Firm A after the acquisition?
A) $21.00
B) $21.25
C) $21.75
D) $22.00
E) $22.50
Q3) 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) 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 cannot 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.
Q2) 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.
Q3) Bankruptcy reorganizations are used by management to:
A) forestall the inevitable liquidation in all cases.
B) provide time to turn the business around.
C) allow the courts' time to set up an administrative structure.
Q4) 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 is dismissed or take pay reduction many times.
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Chapter 32: International Corporate Finance
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Q1) You want to import $45,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.0218?
A) 1,843,010Rs
B) 2,032,018Rs
C) 2,064,220Rs
D) 2,075,002Rs
E) 2,076,289Rs
Q2) If the direct rate for French francs (FF)is $.143 and the direct rate for Australian dollars (A$)is $0.44,what must the cross rate between A$ and FF be to prevent triangular arbitrage?
A) FF3.08
B) FF0.063
C) FF15.89
D) FF0.325
Q3) The two terms Purchasing Power Parity (PPP)and Relative Purchasing Power Parity (RPPP)are similar but not synonymous.Explain these two,their differences and why differences in exchange rates in the market may vary from the values implied by PPP or RPPP.
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