Introduction to Finance Exam Review
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and practices that govern financial decision-making in both personal and corporate contexts. The course covers key topics such as the time value of money, financial markets and institutions, risk and return, investment analysis, and budgeting. Students will learn to interpret financial statements, assess financial performance, and explore the frameworks used to evaluate investment opportunities and financing options. Emphasis is placed on practical applications and developing analytical skills necessary for sound financial management.
Recommended Textbook
Corporate Finance 7th Canadian Edition by Jaffe
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32 Chapters
1515 Verified Questions
1515 Flashcards
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The Splitz Corporation has borrowed $5 million in debt with a promise to repay $5.5 million in one year.The corporation had 10 million shares outstanding worth $2 each at the time of the borrowing.Splitz earns $6 million during the year.What is the debtholder's contingent claim; how much do the debtholders receive; and,how much do the equity holders receive?
A) 5.5; 6; 20.
B) 5; 5.5; 0.
C) 5; 5.5; 20.
D) 5.5; 5.5; .5.
Answer: D
Q2) Do you think agency problems arise in sole proprietorships and/or partnerships?
Answer: Agency conflicts typically arise when there is a separation of ownership and management of a business.In a sole proprietorship and a small partnership,such separation is not likely to exist to the degree it does in a corporation.However,there is still potential for agency conflicts.For example,as employees are hired to represent the firm,there is once again a separation of ownership and management.
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Page 3
Chapter 2: Accounting Statements and Cash Flow
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Sample Questions
Q1) According to IFRS,revenue is recognized as income when:
A) a contract is signed to perform a service or deliver a good.
B) the transaction is complete and the goods or services delivered.
C) payment is received.
D) income taxes are paid.
Answer: B
Q2) In the Statement of Financial Position assets are:
A) all relatively illiquid.
B) listed at current market value.
C) listed at market value as of the most recent fiscal year.
D) listed at cost.
Answer: D
Q3) The Hi-Lite Corp.had a profitable year and their ROE was 14.4%.The company paid out $1.20 of their earnings of $3.00 for the year.The market price of their stock at year end was $28.What was Hi-Lite's price-earnings ratio?
A) 23.33.
B) 9.33.
C) 4.03.
D) 12.10.
Answer: B
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Chapter 3: Financial Planning and Growth
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Sample Questions
Q1) One key reason a long term financial plan is developed is because:
A) the plan determines your financial policy.
B) the plan determines your investment policy.
C) there are direct connections between achievable corporate growth and the financial plan.
D) there is unlimited growth possible in a well-developed financial plan.
Answer: C
Q2) A firm follows the objective of maximizing sales growth.Is maximizing growth always consistent with the shareholders objective and can a firm always achieve this objective if they are at the desired financial relationships for payout,debt to equity and asset structure.
Answer: No,goals are not the same--shareholders wealth maximization is achieved through positive NPV investment.Increased sales do not necessarily mean increase value.
- Fixed relationships only allow for a set growth rate.
- If desired growth is different than sustainable growth then relationships must change.
- Higher growth means more financing
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)
Q2) The financial market rate is 5%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)NPV = -42,000 + (46,900/1.05)= -
Q3) Financial markets develop to accommodate _________ between individuals.
A) trade and barter
B) barter and lending
C) borrowing and lending
D) lending and trade
Q4) Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)
Q5) If the market interest rate is 11%,what is the optimal investment? What is maximum consumption in period 1 if the individual takes on the optimal set of investment projects and consumes all other period 0 income?
D.
Period 1 consumption is $2,400 + $910 = $3,310
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) The present value table provides the factors for the:
A) simple interest rate for N periods.
B) discount value of a dollar for N periods for a specified interest rate.
C) discount value of a dollar for 1/N periods for a specified interest rate.
D) simple interest value of an investment for N periods.
E) simple interest value of an investment for 1/N periods.
Q2) Which of the following amounts is closest to the end value of investing $5,000 for 14 months at a stated annual interest rate of 6 percent compounded monthly?
A) $5,352
B) $5,362
C) $5,350
D) $5,293
E) $6,183
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.
Q4) If you invest $100,000 today at 12% per year over the next 15 years,what is the most you can spend in equal amounts out of the fund each year over that time.
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Page 7
Chapter 6: How to Value Bonds and Stocks
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Sample Questions
Q1) A bond is listed in the Financial Post as a 8.800 of September 22/25.This bonds pays:
A) $88.25 in July and January.
B) $44 in July and January.
C) $88.25 in July.
D) $88 in July.
Q2) Angelina's made two announcements concerning its common stock today.First,the company announced that its next annual dividend has been set at $2.16 a share.Secondly,the company announced that all future dividends will increase by 4% annually.What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?
A) $21.60
B) $22.46
C) $27.44
D) $34.62
E) $36.00
Q3) Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.
Q4) Given the following set of spot rates:
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) Which of the following correctly orders the investment rules of average accounting return (AAR),internal rate of return (IRR),and net present value (NPV)from the most desirable to the least desirable?
A) AAR, IRR, NPV.
B) AAR, NPV, IRR.
C) IRR, AAR, NPV.
D) NPV, AAR, IRR.
E) NPV, IRR, AAR.
Q2) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
Q3) A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively.What is the discounted payback period if the required rate of return is 8%?
A) 2.05 years
B) 2.13 years
C) 2.33 years
D) 3.00 years
E) never
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9
Chapter 8: Net Present Value and Capital Budgeting
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Sample Questions
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) You have been asked to evaluate an infinitely-lived project.Sales in the first year are projected to be $100.Costs are projected at $50.There is no depreciation,and the tax rate is 30%.The real required return is 10%.The inflation rate is projected to be 8%.Sales and costs will increase at the rate of inflation.The project costs $300.What is the NPV?
A) $142.03
B) $36.36
C) $71.72
D) $50.00
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Page 10
Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Sample Questions
Q1) The Adept Co.is analyzing a proposed project.The company expects to sell 2,500 units,give or take 10%.The expected variable cost per unit is $8 and the expected fixed costs are $12,500.Cost estimates are considered accurate within a plus or minus 5% range.The depreciation expense is $4,000.The sale price is estimated at $16 a unit,give or take 2%.The company bases its sensitivity analysis on the expected case scenario. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $17.Using this value,the earnings before interest and taxes will be:
A) $4,000.
B) $6,000.
C) $8,500.
D) $10,000.
E) $18,500.
Q2) An investigation of the degree to which NPV depends on assumptions made about critical variables is called a(n)
A) operating analysis.
B) sensitivity analysis.
C) marginal benefit analysis.
D) decision tree analysis.
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11
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) 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%
Q2) You bought 100 shares of stock at $20 each.At the end of the year,you received a total of $400 in dividends,and your stock was worth $2,500 total.What was total dollar capital gain and total dollar return?
A) $400; $500.
B) $400; $900.
C) $500; $900.
D) $900; $2,500.
Q3) Capital gains are defined as:
A) the change in the firm's dividend payout over year.
B) assets sold at prices greater than their purchasing price.
C) assets sold at prices less than their purchasing price.
D) taxes collected by Federal but not by State governments.
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Page 12
Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Sample Questions
Q1) Systematic risk is measured by:
A) the mean.
B) beta.
C) the geometric average.
D) the standard deviation.
Q2) The means of IS and DS are:
A) 4.4%; 4.6%.
B) 5.5%; 5.75%.
C) 10%; 6%.
D) 4%; 6%.
Q3) A portfolio is made up of 75% of stock 1,and 25% of stock 2.Stock 1 has a variance of .08,and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.
Q4) 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.
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13
Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Three factors likely to occur in the APT model are:
A) unemployment, inflation, and current rates.
B) inflation, GNP, and interest rates.
C) current rates, inflation and change in housing prices.
D) unemployment, college tuition, and GNP.
Q2) A criticism of the CAPM is that it:
A) ignores the return on the market portfolio.
B) ignores the risk-free return.
C) requires a single measure of systematic risk.
D) utilizes too many factors.
Q3) Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:
A) the expected part of the announcement.
B) market inefficiency.
C) the innovation or unexpected part of the announcement.
D) the systematic risk.
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Page 14
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Chapter 13: Risk,return,and Capital Budgeting
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Sample Questions
Q1) The Tenplen Corporation has an asset beta of 1.05 and a debt beta of .8.The debt portion of the capital structure in market terms is .375.Tenplen has a zero tax rate.What is the equity beta?
A) 0.80.
B) 0.90.
C) 1.05.
D) 1.20.
E) 0.40.
Q2) What is the market value of debt and its' net cost to the firm?
A) 9,642,857; 8.4%.
B) 9,642,857; 12%.
C) 6,750,000; 8.4%.
D) 6,750,000; 12%.
E) 4,725,000; 12%.
Q3) The NPV formula for risky projects evaluates __________ using the __________.
A) riskless discount rate; expected incremental cashflows.
B) certain cashflows; risk-free discount rate.
C) expected incremental cashflows; risk-free discount rate.
D) certain cashflows; risky discount rate.
E) expected incremental cashflows; risky discount rate.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Sample Questions
Q1) Serial correlation studies generally show that:
A) semi-strong efficiency is supported.
B) the relationships are significant and can be used to predict price in the next period.
C) the correlations are small relative to both the estimation errors and transactions costs.
D) patterns exist in the data that can be exploited.
Q2) Which of the following is not true about serial correlation?
A) It measures the correlation between the current return on a security and the current return on another security.
B) It involves only one security.
C) Positive serial correlation indicates a tendency for continuation.
D) Negative serial correlation indicates a tendency toward reversal.
E) Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.
Q3) Suppose your cousin invests in the stock market and doubles her money in a single year while the market,on average,earned a return of only about 15%.Is your cousin's performance a violation of market efficiency?
Q4) Define the three forms of market efficiency.
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) From this information,calculate Enstat's book value per share.
Q2) Not paying the dividends on a cumulative preferred issue may result in:
A) preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.
B) additional voting rights are granted to common stockholders if dividends are in arrears.
C) full payment of dividends to common shareholders.
D) both preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid; and additional voting rights are granted to common stockholders if dividends are in arrears.
E) both voting rights are granted to preferred stockholders if preferred dividends are in arrears; and no payment of dividends to common shareholders.
Q3) The written agreement between a corporation and its bondholders is called the:
A) collateral agreement.
B) deed.
C) indenture.
D) deed of conveyance.
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Chapter 16: Capital Structure: Basic Concepts
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Sample Questions
Q1) MM Proposition I with no tax supports the argument that:
A) business risk determines the return on assets.
B) the cost of equity rises as leverage rises.
C) it is completely irrelevant how a firm arranges its finances.
D) a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E) financial risk is determined by the debt-equity ratio.
Q2) Suppose the tax authorities allow firms to deduct their interest expense from operating income.Both firm U and firm L are in the 34% tax bracket.Show what happens to the market value of both firms if the debt held by firm L is permanent.
Q3) A firm has zero debt in its capital structure.Its overall cost of capital is 10%.The firm is considering a new capital structure with 60% debt.The interest rate on the debt would be 8%.Assuming there are no taxes or other imperfections,its cost of equity capital with the new capital structure would be:
A) 9%.
B) 14%.
C) 13%.
D) 10%.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) What three factors are important to consider in determining a target debt to equity ratio?
A) Taxes, asset types, and pecking order and financial slack.
B) Asset types, uncertainty of operating income, and pecking order and financial slack.
C) Taxes, financial slack and pecking order, and uncertainty of operating income.
D) Taxes, asset types, and uncertainty of operating income.
Q2) The free cash flow hypothesis states:
A) that firms with greater free cash flow will pay more in dividends reducing the risk of financial distress.
B) that firms with greater free cash flow should issue new equity to force managers to minimize wasting resources and to work harder.
C) that issuing debt requires interest and principal payments reducing the potential of management to waste resources.
D) that issuing equity reduces the potential of management to waste resources.
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) The acceptance of a capital budgeting project is usually evaluated on its own merits.That is,capital budgeting decisions are treated separately from capital structure decisions.In reality,these decisions may be highly interwoven.This may result in:
A) firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.
B) never considering capital budgeting projects on their own merits.
C) corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.
D) firms accepting some negative NPV all equity projects because changing capital structure adds enough positive leverage tax shield value to create a positive NPV.
E) firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.
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 ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is called (a):
A) MM Proposition I.
B) capital structure irrelevancy.
C) homemade leverage.
D) homemade dividends.
Q2) The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
Q3) Distributions to shareholders from capital are called:
A) earnings dividends.
B) a stock split.
C) liquidating dividends.
D) stock dividends.
E) regular cash dividends.
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Chapter 20: Issuing Equity Securities to the Public
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Q1) An equity issue sold directly to the public is called:
A) a rights offer.
B) a general cash offer.
C) a restricted placement.
D) a fully funded sales.
E) a standard call issue.
Q2) 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.
Q3) In a best-efforts offering the investment banker makes their money primarily by:
A) earning the spread between the buying and offering price.
B) earning a commission on each share sold.
C) earning the discount between the buying and offering price.
D) charging a flat fee for all services.
Q4) If the Ex-Rights price were set at $7.90,would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
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Page 22
Chapter 21: Long-Term Debt
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Q1) As a part of a bond issue,a corporation makes annual payments into an account managed by a trustee for the purpose of repurchasing bonds.This arrangement is called:
A) a call provision.
B) a sinking fund.
C) a funding provision.
D) a trust maintenance fund.
Q2) Debt ratings issued by companies such as Moody's and Standard and Poor's depend on:
A) the probability of firm default and protection given in indenture in case of default.
B) how large the company is and the number of restrictive covenants.
C) the size of the fee paid by the issuer and their industry.
D) the issue size, type of issue and their industry.
Q3) Floating rate bonds are bonds with:
A) floating par values tied to the stock par value.
B) floating maturities tied to the expected corporate life.
C) floating call provisions indexed by relative interest rates.
D) floating coupon rates tied to an interest rate index.
Q4) What is the bond's value today if the coupon is set at $70?
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Chapter 22: Leasing
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Q1) The reason the CRA is most concerned about lease contracts is:
A) firms that lease generally pay no taxes.
B) that leasing usually leads to bankruptcy.
C) that leases can be set up solely to avoid taxes.
D) because leasing leads to off-balance-sheet-financing.
Q2) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
A) -$100,000
B) $15,000
C) -$15,000
D) -$125,000
Q3) 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 CRA 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.
Q4) Calculate the NPV of the lease versus the purchase decision.
Q5) Should the asset be purchased or leased? Support your answer.
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) Use the Black-Scholes model to determine the option price for the May 35 call for Nibblers as of April 18,2015.The expiration date for this option is May 18,2015.The annualized interest rate on a T-bill that matures that same day is 3.0%.Nibblers stock closed at 36.The historic variance for Nibblers is .25.Assume a 365 day year.
Q2) 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
Q3) In general,an option gives the holder the right to exercise at the ______ price through the ______ date.
A) strike; inception.
B) American; inception.
C) European; expiration.
D) strike; expiration.
Q4) 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) 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.
Q2) 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?
Q3) What is the value of a call option?
A) $3.14
B) $5.86
C) C)$4.26
D) $5.62
E) $6.16
Q4) 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.
Q5) What is the value of Mr.Maxim's options?
Q6) Why would the company pay the executive in options as opposed to salary? Page 26
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Chapter 25: Warrants and Convertibles
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Q1) A convertible bond is selling for $993.It has 15 years to maturity,a $1,000 face value,and a 8% coupon paid semi-annually.Similar non-convertible bonds are priced to yield 8.5%.The conversion ratio is 20.The stock currently sells for $47.50 per share.Calculate the convertible bond's option value.
Q2) Concerning convertible bonds,which of the following statements is not correct?
A) A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.
B) Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.
C) If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.
D) Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.
Q3) Warrants are most often issued in combination with:
A) new publicly placed common stock.
B) new privately placed common stock.
C) new publicly placed debt.
D) new privately placed debt.
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Chapter 26: Derivatives and Hedging Risk
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Q1) Calculate the duration of a 7-year $1,000 zero-coupon bond with a current price of $399.63 and a yield to maturity of 14%.
Q2) Two key features of futures contracts that make them more in demand than forward contracts are:
A) futures are traded on exchanges and must be marked to the market.
B) futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions.
C) futures are marked to the market and allow delivery flexibility.
D) futures are traded in liquid markets and are marked to the market.
Q3) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
Q4) If a financial institution has equated the dollar effects of interest rate risk on the assets with the dollar effects on the liabilities,it has engaged in:
A) a long hedge.
B) a short hedge.
C) a protected swap.
D) immunizing interest rate risk.
Q5) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 27: Short-Term Finance and Planning
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Q1) A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:
A) compensating balance.
B) cleanup loan.
C) letter of credit.
D) line of credit.
Q2) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
Q3) The inventory turnover for the Sneeky Company is 8 times and its day's sales outstanding is 55.What is the operating cycle for Sneeky given a 365-day year.
A) 63.00
B) 6.86
C) 100.63
D) 46.98
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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) 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.
Q3) If a firm has achieved its target cash balance the net present value is:
A) positive because the cash balance is positive.
B) zero because increasing the cash balance increases the interest cost.
C) negative because the cash balance has a financing cost.
D) positive because decreasing the cash decreases the cost of illiquidity.
Q4) Your firm receives 40 checks per month.Of these,10 are for $1,200 and 30 are for $500.The delay for the $1,200 checks is 4 days; the $500 checks are delayed 6 days.What is the weighted average delay?
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Chapter 29: Credit Management
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Q1) The Rapid Roller Co.offers terms of 3/15 net 45.The aging schedule for their customers is as follows:
Q2) The Torval Company made a credit sale of $15,000.The invoice was sent today with the terms,3/15 net 60.This customer normally pays at the net date.If your opportunity cost of funds is 9% the expected payment is worth how much today?
A) $13,761.47
B) $14,789.00
C) $15,000.00
D) $15,214.47
Q3) Selling goods and services on credit is:
A) an investment in a customer.
B) necessary because customers cannot pay for the goods.
C) a decision independent of customers.
D) permissible if your bank lends the money.
Q4) 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.
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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) An acquisition may take place because of a real or perceived strategic advantage.An example of a strategic advantage would be:
A) an aircraft manufacturer buying a laser guidance company for possible advanced flight control without pilots.
B) a manufacturer integrating their supply by acquiring downline.
C) a corporation completing a spin-off.
D) a corporation out-sourcing to achieve cost economies.
Q3) The value of synergy is estimated by the equation:
A) V<sub>A</sub> + V<sub>B</sub> - Revenue.
B) V<sub>AB</sub> - V<sub>A</sub> - V<sub>B</sub>.
C) V<sub>AB</sub> - V<sub>B</sub> - Taxes.
D) V<sub>A</sub> - V<sub>B</sub> - Costs.
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Chapter 31: Financial Distress
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Q1) Insolvency can be defined as:
A) not having cash.
B) being illiquid.
C) an inability to pay one's debts.
D) an inability to increase one's debts.
E) the present value of payments being less than assets.
Q2) Whether bankruptcy is entered either voluntarily or involuntarily,the major difference by CCCA and Bankruptcy and Insolvency Act is:
A) that liquidation occurs in CCCA but reorganization is the objective under Bankruptcy and Insolvency Act.
B) that there is no priority of claims under Chapter CCCA.
C) that liquidation occurs in Bankruptcy and Insolvency Act but reorganization is the objective under CCCA.
D) that no lawyers fees are necessary under Bankruptcy and Insolvency Act.
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.
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Chapter 32: International Corporate Finance
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Q1) The 90-day risk-free rate in the U.S.is 3%.The spot exchange rate between the U.S.and Japan is 1 dollar for 133 yen.The 90-day forward exchange rate is 1 dollar for 135 yen.What is the Japanese 90-day risk-free rate?
Q2) A bottle of Dom Perignon is selling for 550FF in Paris and the exchange rate is $0.167/FF.The champagne is selling for $95 on average in the U.S.exclusive of transportation cost.The price in the U.S.is:
A) priced just right.
B) is $3.15 undervalued.
C) is $3.15 overvalued.
D) the Law of One Price does not hold for special commodities like champagne.
Q3) The acronym LIBOR stands for:
A) London Interbank Offered Rate.
B) Lending Institution Bank Receipt.
C) Leading Indicator Borrowing Rate.
D) Loan Interest Bank Order Receipt.
Q4) Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
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