Introduction to Finance Practice Questions
Course Introduction
Introduction to Finance provides a foundational understanding of the principles and practices that underpin the world of finance. This course covers essential topics such as the time value of money, risk and return, financial markets and institutions, valuation of securities, and the basics of capital budgeting. Students will explore how individuals, businesses, and governments allocate resources over time and manage financial risks. Through practical examples and real-world applications, the course equips learners with the analytical tools necessary for sound financial decision-making, preparing them for advanced study and professional careers in finance and related fields.
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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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 $5 million during the year. What is the debtholder's contingent claim; how much does the debtholder receive; and, how much do the equity holders receive.
A) 5; 5.5; 20.
B) 5.5; 5; 0.
C) 5; -.5; 20.
D) -.5; 5; 0.
Answer: B
Q2) The decision to incorporate must consider the fact that earnings will be taxed at both the corporate and personal levels. Since this is disadvantageous, provide three reasons why one may want to incorporate.
Answer: Easier access to capital markets. Retention of funds for reinvestment opportunities. Market pricing and trading of securities.
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Chapter 2: Accounting Statements and Cash Flow
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Sample Questions
Q1) Donny Dell Inc. had a days in inventory of 5 (based on 365 days). The inventory turnover was:
A) 5
B) 60
C) 73
D) can not be figured without the inventory value
Answer: C
Q2) 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
Q3) The balance sheet is based on which following equality:
A) Fixed Assets (Stockholder's equity + Current Assets
B) Assets (Liabilities + Stockholder's equity
C) Assets (Current Long Term Debt + Retained earnings
D) Fixed Asset (Liabilities + Stockholder's equity
Answer: B
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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Sample Questions
Q1) A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2. The dividend payout is .2, and the ratio of total assets to sales is constant at 1.2. What must the profit margin be?
A) 10.00%.
B) 9.09%.
C) 11.11%.
D) 8.00%.
Answer: A
Q2) A firm wishes to maintain a growth rate of 15% per year while maintaining a debt-to-equity ratio of 1.0, a profit margin of 20% and a dividend payout of 60%. What level of asset efficiency must it achieve?
Answer: .15 = 11ea82ec_bb76_8272_aa40_0dfffd802dd2_TB5615_11
.15 = .16/(T-.16) T =1.2267
Therefore TA turnover is .815 or must generate 81.5 cents worth of sales for each dollar in assets.
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) 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) = -
Q2) Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:
A) choosing the highest net income projects.
B) investing at the market rate of return.
C) buying shares back from investors.
D) following the NPV rule to choose investments
Q3) The following statement, that the value of an investment to an individual is not dependent on consumption preferences, is called the:
A) marginal rate of substitution
B) separation theorem
C) value additivity principle
D) investor's dilemma
Q4) 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?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) A "little seven" accounting firm offers to pay you a year-end bonus of $5,000 for 3 years if you will accept employment with them and stay for the entire 3-year period. Which of the following amounts is closest to the present value of the bonus if the interest rate is 10%?
A) $5,000.
B) $11,270.
C) $12,434.
D) $15,000.
E) $31,576.
Q2) Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?
A) $15.45
B) $15.97
C) $16.65
D) $17.09
E) $21.67
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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Chapter 6: How to Value Bonds and Stocks
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Q1) Suppose that an investor disagrees with market expectations and feels that the forward rate prevailing in the market is higher than what it should be, then the investor can make profit by
A) selling a bond now and buying it up later.
B) selling a bond now
C) Buying a bond now
D) Buying a bond now and selling it later.
Q2) Stand Still Co. has been earning $1 per share on 400,000 shares, and paying out all of the earnings. The discount rate for a company of this risk is 10%. The company has an investment opportunity with a cost of $1,500,000 and expects to earn $230,000 after taxes, but they must reinvest 35% of these earnings to continue to maintain the expansion in earnings. What is the value of the company without the investment and what is the value with the investment?
A) $200,000; $1,500,000
B) $4,000,000; $6,600,000
C) $4,000,000; $4,610,390
D) $400,000; $15,000,000
Q3) Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity, a 10% coupon rate, and a return of $1,000 at maturity.
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) The internal rate of return may be defined as:
A) the discount rate that makes the NPV cash flows equal to zero.
B) the difference between the market rate of interest and the NPV.
C) the market rate of interest less the risk-free rate.
D) the project acceptance rate set by management.
Q2) Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
Q3) 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.
Q4) The NPV rule and PI give the same results when there is no conflict. In the case of a mutually exclusive set of investments, explain the potential conflict and the way it should be solved with supporting examples.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Sample Questions
Q1) Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
A) $200
B) $1,500
C) $2,200
D) $3,500
E) $4,200
Q2) Cash revenues in a particular year are equal to sales less:
A) the change in capital investment.
B) the change in accounts payable.
C) the change in NWC.
D) the change in accounts receivable.
Q3) Interest expense is typically excluded in the project cashflow because:
A) all projects are always financed only by equity
B) taxes can not be adjusted for the correct debt rate
C) the discount rate or WACC reflects the cost of debt
D) the analysis is too crude to handle debt impacts
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Chapter 9: Risk Analysis, Real Options, and Capital
Budgeting
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Sample Questions
Q1) The Mini-Max Company has the following cost information on their new prospective project. Fixed costs are $200/year. (Initial investment is $700)
Variable costs: $3/unit.
Depreciation: $140/year.
Price: $8/unit.
Discount rate: 12%.
Project life: 3 years.
Tax rate: 34%.
Calculate the present value break-even point.
A) 68.00 units/year.
B) 113.27 units/year.
C) 84.42 units/year.
D) 75 units/year.
Q2) 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.
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) If IS and DS are combined in a portfolio with 50% invested in each, the expected return and risk would be:
A) 5.625%; 37.2%
B) 4.5%; 5.48%
C) 8.0%; 8.2%
D) 5.0%; 0%
E) 4.5%; 0%
Q2) A portfolio 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.
Q3) You have plotted the data for two securities over time on the same graph, ie., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:
A) no correlation at all.
B) a weak negative correlation.
C) a strong negative correlation.
D) a strong positive correlation.
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Page 12
Chapter 11: Risk and Return: the Capital Asset Pricing Model
Capm
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Q1) When a security is added to a portfolio the appropriate return and risk contributions are:
A) the expected return of the asset and its standard deviation.
B) the most probable return and the beta.
C) the expected return and the beta.
D) the most probable return and its standard deviation.
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) Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Q2) Assuming that the single factor APT model applies, the beta for the market portfolio is:
A) zero.
B) one.
C) the average of the risk free beta and the beta for the highest risk security.
D) impossible to calculate without collecting sample data.
Q3) If company A makes a new product discovery and their stock rises 5% this will have:
A) no effect on Company B's stock price because it is a systematic risk element.
B) no effect on Company B's stock price because it is an unsystematic risk element.
C) a large effect on Company B's stock price because it is a systematic risk element.
D) a large effect on Company B's stock price because it is an unsystematic risk element.
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Chapter 13: Risk, Return, and Capital Budgeting
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Sample Questions
Q1) XYZ INC has several divisions and the one managed by Dr. Donaldson has asset base of $4 million and earnings after taxes is $2 million. A new project would earn $2 million per year on an investment of $3 million. If the new project is on, Mr. Donaldson's bonus should not be based on
A) EVA
B) ROA
C) Sales
D) Accounting profits
E) Cash flows
Q2) The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.
A) variance, covariance
B) covariance, variance
C) standard deviation, variance
D) expected return, variance
E) expected return, covariance
Q3) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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15
Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) In examining the issue of whether the choice of accounting methods affects stock prices, studies have found that:
A) accounting depreciation methods can significantly affect stock prices.
B) switching depreciation methods can significantly affect stock prices.
C) accounting changes that increase accounting earnings also increases stock prices.
D) accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information.
Q2) The Nu-Tux Seat Company has an expansion opportunity and is considering selling their 100,000 share investment in Slip-Cover currently worth $2 million or raising other external funding. The share price has been holding in a narrow range day to day. If Nu-Tux decides to unload their holding is there any concern about getting the full $2 million, aside from investment banker/brokerage fees. Explain these concerns about market behavior and cite the evidence.
Q3) 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?
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Page 16
Chapter 15: Long-Term Financing: an Introduction
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Q1) 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.
Q2) If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.
A) proxy fight
B) stockholder derivative action
C) tender offer
D) vote of confidence
Q3) The amount of loan a person or firm borrows from a lender is the:
A) creditor.
B) indenture.
C) debenture.
D) principal
E) amortization.
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) A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900, a cost of debt of 8%, a cost of equity of 12%, and a tax rate of 34%. What is the firm's weighted average cost of capital?
A) 7.29%
B) 7.94%
C) 8.87%
D) 10.40%
E) 11.05%
Q2) A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If there are no taxes or other imperfections, what would be its cost of equity if the debt-to-equity ratio were 0?
A) 8%.
B) 10%.
C) 12%.
D) 14%.
E) 16%.
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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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Suppose a Miller equilibrium exists with corporate tax rate of 30% and personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks?
A) 10.05%.
B) 7.1%.
C) 45.5%.
D) 0.0%.
Q2) 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.
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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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) In order to value a project which is not scale enhancing you need to:
A) typically calculate the equity cost of capital using the risk adjusted beta of another firm before calculating the WACC.
B) typically increase the beta of another firm in the same line of business and then calculate the discount rate using the SML.
C) typically you can simply apply your current cost of capital.
D) discount at the market rate of return since the project will diversify the firm to the market.
Q2) The Alto Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $200,000 with total fixed and variable costs representing 70% of sales. The discount rate on the unlevered equity is 17%, but the firm plans to raise $77,820 of the initial $150,000 investment as 9% perpetual debt. The corporate tax rate is 34% and the target debt to value ratio is .3. Calculate the all equity NPV and the levered NPV using the flow-to-equity method.
Q3) 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) Two important elements of the dividend policy irrelevance proposition are:
A) all investors have homogeneous dividend needs and time horizons.
B) dividends are paid even if a positive NPV opportunity exists and investors can re-arrange their own dividend streams.
C) investors can re-arrange their own dividend streams and the investment policy is set and unaltered by the change in dividend policy.
D) all investors have homogeneous dividend needs and dividends are paid even if a positive NPV opportunity exists.
E) investors can re-arrange their own dividend streams and the source of financing must be debt.
Q2) If dividends are taxed at higher rates than are capital gains, then high dividend payout stocks should sell at lower prices, everything else equal, compared to low dividend paying stocks. One implication of this is that investors in _____ tax brackets will tend to prefer high dividend payout stocks.
A) slightly higher than average
B) average
C) slightly lower than average
D) zero
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Chapter 20: Issuing Equity Securities to the Public
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Q1) Companies use tombstone advertisements in the financial press to:
A) announce the death of the company.
B) announce the failure of a financial strategy.
C) announce the availability of a new issue of a corporate security.
D) notify the public of foreclosure.
Q2) Yoma Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price will be $40 peer share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. How many rights are needed to buy a new share?
Q3) Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing entrepreneurs give:
A) a high interest rate debt instrument and control.
B) an equity position and usually board of director positions.
C) up the right to have an initial public offering.
D) control to a court appointed trustee.
Q4) 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) Corporations typically have the right to repurchase a debt issue prior to maturity by paying the face value of the bond plus:
A) a call premium.
B) the amortized value.
C) the principal discount.
D) a balloon payment.
Q2) If the bond is priced at $1,000, what is the cost to the firm of the call provision?
Q3) Milonas Mining has $30 million in land value and $15 in mortgage bonds issued on the property. Given that the indenture does not limit the amount of additional bonds that can be issued, the company issues an additional $10 million in mortgage bonds against the property. If Milonas is forced to liquidate its property for $20 million, and the company has no other assets, how much will the original bondholders receive?
Q4) What is the bond's value today if the coupon is set at $100?
Q5) The length of time debt remains outstanding with some unpaid balance is called:
A) the funded period.
B) the sinking fund period.
C) the deferred call period.
D) the maturity.
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Chapter 22: Leasing
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Q1) The Canadian Universities sell medical equipments and used the proceeds to improve its financial position. The University then leased the equipments back in order to continue to use these facilities. This is an example of:
A) an operating lease.
B) a short-term lease.
C) a sale and leaseback.
D) a fully amortized lease.
Q2) The appropriate discount rate for valuing a financial lease is:
A) the firm's after-tax weighted average cost of capital.
B) the after-tax required return on assets of risks similar to the leased asset.
C) the after-tax cost of secured borrowing.
D) the pre-tax cost of secured borrowing
Q3) What are the cashflows in years 1 through 8?
Q4) What is the after-tax cash flow in years 1 through 5?
A) -$126.60.
B) -$198.00.
C) -$287.25.
D) -$269.40.
Q5) Should the asset be purchased or leased? Support your answer.
Q6) What is the discount rate to be used?
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) A stock has both a call and a put option outstanding. The exercise price was set equal to the stock price. If the option were to expire now what would be the minimum value of the call and the put respectively?
A) (ST- E); 0.
B) 0; (ST- E).
C) <0; >0.
D) 0; 0.
E) (E - ST); (ST- E).
Q2) Which of the following is not true concerning call option writers?
A) Writers promise to deliver shares if exercised by the buyer.
B) The writer has the option to sell shares but not an obligation.
C) The writer's liability is zero if the option expires out-of-the-money.
D) The writer receives a cash payment from the buyer at the time the option is purchased.
E) The writer has a loss if the market price rises substantially above the exercise price.
Q3) Explain how the value of a firm can be viewed as an option. How can the call and put views be resolved?
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Page 25
Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) What is the value of Mr. Maxim's options?
Q2) Calculate N(d<sub>2</sub>).
A) .5130
B) .5578
C) .6085
D) .7085
E) .7142
Q3) What is d<sub>1</sub>?
A) .1842
B) .4102
C) .4583
D) .4909
E) .5412
Q4) What is d<sub>2</sub>?
A) .0121
B) .0252
C) .0326
D) .0452
E) .0525
Q5) Why would the company pay the executive in options as opposed to salary?
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Chapter 25: Warrants and Convertibles
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Q1) A firm has experienced a significant increase in share value. In retrospect, which of the following securities would have been best to have issued prior to the change in share value?
A) Common stock.
B) Bond/warrant package.
C) Convertible preferred stock.
D) Straight bonds.
E) Convertible bonds.
Q2) 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.
Q3) A bond/warrant package is priced to sell at face value ($1,000). Each bond comes with 50 detachable warrants. A warrant gives the owner the right to buy 1 share of stock at $20 per share. The value of a warrant has been estimated at $2. The bonds mature in 20 years. Similar bonds without warrants yield 10%. What is the bond's annual coupon?
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Chapter 26: Derivatives and Hedging Risk
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Q1) The futures markets are labeled as pure speculation and even gambling. Why is this an inaccurate portrayal of the markets function.
Q2) In the practical use of credit default swaps there:
A) is not an organized exchange or template for the agreement. B) is an organized exchange or template for the agreement. C) are laws making them illegal in Canada.
D) are limits to the amount of borrowing of both parties.
Q3) You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. Before you can reverse your position in the futures market on the fifth day you are notified to accept delivery. What will you receive on delivery and what is the net amount you receive in total?
A) $2.60; $2.70
B) $2.70; -$0.10
C) $2.70; $2.60
D) $2.60; $0.10
E) $2.60; -$0.10
Q4) Calculate the duration of a 4-year $1,000 face value bond, which pays 8% coupons annually throughout maturity and has a yield to maturity of 9%.
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Chapter 27: Short-Term Finance and Planning
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Q1) The three basic forms of inventory loans include:
A) blanket inventory lien, field warehouse financing, and line of credit.
B) blanket inventory lien, line of credit, and trust receipt.
C) blanket inventory lien, field warehouse financing, and trust receipt.
D) field warehouse financing, line of credit, and trust receipt.
Q2) 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.
Q3) The days in payable for 2010 is (use average payables):
A) 47.10 days.
B) 40.46 days.
C) 45.85 days.
D) 40.82 days.
E) 35.13 days.
Q4) . 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.
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Chapter 28: Cash Management
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Q1) Checks written by the firm are said to generate:
A) collection float.
B) ledger float.
C) disbursement float.
D) book float.
Q2) The net float of a firm is made up of disbursement float and collection float. Discuss the three components of collection float and how they would work against the firm.
Q3) During the month you receive 4 checks, one for $100, two for $200, and one for $500. They are delayed for 2 days, 4 days, and 8 days respectively. What is your average daily collection float (a month has 30 days)?
Q4) Your firm has average daily receipts of $2,500. These receipts are available after 6 days on average. The interest rate that could be earned is .02% (.0002) per day. What is the approximate cost of the float per day?
A) $50.
B) $30.
C) $2.5.
D) $3.0.
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Chapter 29: Credit Management
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Q1) The carrying value of its account receivable is $700,000 and the average collection period is 45 days. The firm's credit sales per day are:
A) $15,555.56.
B) $23,333.33.
C) $4,666,666.67.
D) $700,000.
Q2) Which of the following is not true concerning considerations in setting a credit policy?
A) A firm that supplies a perishable product will tend to offer restrictive credit terms.
B) A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C) Lengthening the credit period effectively reduces the price paid by the customer.
D) Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to receive longer credit periods.
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Chapter 30: Mergers and Acquisitions
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Q1) Firm A and Firm B merge to form firm AB. This is an example of:
A) a tender offer.
B) an acquisition of assets.
C) an acquisition of stock.
D) a consolidation.
Q2) 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.
Q3) A merger should not take place simply for the purpose of:
A) diversification if shareholders can accomplish the same result on there own portfolios. B) increasing the debt capacity for the tax shield gain.
C) acquiring free cash flow to be put to use by the acquirer.
D) reducing the cost of production.
Q4) Bondholders can be made better off in a merger, this is known as the co-insurance effect. Explain how this can happen using an example.
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Chapter 31: Financial Distress
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Q1) Stock-based insolvency is a:
A) income statement measurement.
B) balance sheet measurement.
C) only a book value measurement.
D) income statement and balance sheet measurement.
Q2) How much and what percentage of their claim will the secured creditors receive, in total?
A) $1,200,000; 100%.
B) $1,009,091; 84.1%.
C) $900,000.00; 75%.
D) $981,818; 81.82%.
Q3) A firm that has a series of negative earnings, sales declines and workforce reductions is likely head to:
A) a change in management.
B) a merger.
C) financial distress.
D) new financing.
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Chapter 32: International Corporate Finance
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Q1) 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).
Q2) The Brazilian inflation rate is expected to be 30% per year for the next 4 years. The U.S. inflation rate is expected to be 3% per year over the same period. A Brazilian real currently costs 87.36 cents. Assuming RPPP holds, how many reals will you need to buy a dollar in four years?
A) 11.447.
B) 2.905.
C) 2.862.
D) 1.676.
Q3) The European Currency Unit (ECU) is (a):
A) measure of how well the European Community keeps up with the times.
B) basket of 10 European currencies.
C) money on deposit in financial centers outside the country whose currency is involved.
D) the nickname for NATO troops from Europe.
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