Advanced Corporate Finance Exam Review
Course Introduction
Advanced Corporate Finance explores the complex decision-making processes that drive the financial strategies of modern corporations. The course delves into topics such as capital structure, cost of capital, mergers and acquisitions, corporate valuation, risk management, and advanced topics in financial policy. Emphasis is placed on applying financial theory to real-world scenarios, using quantitative tools and case studies to evaluate strategic alternatives and maximize firm value. Through a blend of lectures, discussions, and practical assignments, students gain a comprehensive understanding of how senior financial managers analyze and implement advanced financial strategies in a global context.
Recommended Textbook
Corporate Finance 2nd Canadian by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) One of the major reasons that corporations have a principal-agent problem is that
A) management is less transparent.
B) they have an inefficient and incompetent management team.
C) direct control and ownership are often separate.
D) there is a lack of communication between the owners and the management team.
Answer: C
Q2) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest?
Answer: 1.The threat of a hostile takeover
2.Shareholder initiatives
3.Performance-based compensation
Q3) Which of the following organization forms earns the most revenue?
A) Privately Owned Corporation
B) Limited Partnership
C) Publicly Owned Corporation
D) Limited Liability Company
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Creditors often compare a firm's ________ and ________ to assess whether the firm has sufficient working capital to meet its short-term needs.
A) total assets, total liabilities
B) current assets, current liabilities
C) total assets, current liabilities
D) current assets, total liabilities
Answer: B
Q2) A higher ________ implies less risk of the firm experiencing a cash shortfall in the near future.
A) return on asset ratio
B) market-to-book ratio
C) current ratio
D) return on equity ratio
Answer: C
Q3) Accounts payable is a
A) long-term liability.
B) current asset.
C) long-term asset.
D) current liability.
Answer: D
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Chapter 3: Arbitrage and Financial Decision Making
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Q1) Assume that the risk-free interest rate is 10%.Rank each of the four projects from most desirable to least desirable based upon NPV.Which project would you invest in first? Are there any projects that you wouldn't invest in?
Answer: Ranking
1.NPV beta = 15 - 12 / 1.1 = 4.09
2.NPV delta = -16 + 21 / 1.1 = 3.09
3.NPV alpha = -18 + 23 / 1.1 = 2.91 Would never invest in gamma.NPV gamma = 15 - 20 / 1.1 = -3.18
Q2) Which of the following statements regarding the NPV decision rule is false?
A) Reject projects with an NPV of zero, as accepting them is equivalent to losing the present value of the projects' costs.
B) When faced with a set of alternatives, choose the one with the highest NPV.
C) Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today.
D) Reject those projects with a negative NPV, as not doing them has NPV = 0.
Answer: A
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 79.50 + 3 × 40.00 + 3 × 48.50 = $424.50
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Chapter 4: The Time Value of Money
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Q1) The British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:
A) £80
B) £8
C) £1000
D) £12,500
Q2) Which of the following statements is false?
A) The process of moving a value or cash flow forward in time is known as compounding.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) A dollar in the future is worth more than a dollar today.
Q3) If the interest rate is 6%,then the NPV of investment "A" is closest to:
A) $70
B) $43
C) -$32
D) $9
Q4) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q5) Draw a timeline detailing the cash flows from investment "A."
Q6) The future value at retirement (age 65)of your savings is:
Page 6
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Chapter 5: Interest Rates
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Q1) The monthly discount rate that you should use to evaluate the truck lease is closest to:
A) 0.487%
B) 0.512%
C) 0.498%
D) 0.500%
Q2) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q3) Which of the following statements is false?
A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
B) The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C) The annual percentage rate indicates the amount of simple interest earned in one year.
D) The annual percentage rate indicates the amount of interest including the effect of compounding.
Q4) After examining the yield curve,what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
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Chapter 6: Investment Decision Rules
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Q1) You are considering an investment in an everlasting gobstopper machine.This machine will cost $10 million and will produce cash flows of $1 million at the end of every year forever.The appropriate cost of capital is 8%.Compute the economic value added (EVA)for this project.Calculate the PV of the EVAs for this project.
Q2) If the discount rate for project B is 15%,then what is the NPV for project B?
Q3) If your new strip mall will have 16,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q4) Which of the following statements is false?
A) The incremental IRR need not exist.
B) If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR.
C) Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly.
D) When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs.
Q5) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 7: Fundamentals of Capital Budgeting
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Q1) According to the Canadian Revenue Agency (CRA),the "half year rule" in Capital Cost Allowance is only applied in
A) the whole life of the assets after they are purchased.
B) the first year after the assets are purchased.
C) every year after the assets are purchased.
D) the last year after the assets are purchased.
Q2) Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?
Q3) In Canada,the Canadian Revenue Agency (CRA)has direct control of capital assets' depreciation which is called
A) Capital Cost Allowance
B) Straight Line Depreciation
C) Accelerated Depreciation
D) Aproportionate Depreciation
Q4) The incremental EBIT for Shepard Industries in year two is closest to:
A) $415 million
B) $875 million
C) $595 million
D) $510 million
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Chapter 8: Valuing Bonds
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Q1) Which of the following statements is false?
A) We can use the law of one price to compute the price of a coupon bond from the prices of zero-coupon bonds.
B) The plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve.
C) It is possible to replicate the cash flows of a coupon bond using zero-coupon bonds.
D) Because the coupon bond provides cash flows at different points in time, the yield to maturity of a coupon bond is the simple average of the yields of the zero-coupon bonds of equal and shorter maturities.
Q2) The yield to maturity for the two year zero-coupon bond is closest to:
A) 6.0%
B) 5.8%
C) 5.6%
D) 5.5%
Q3) Plot the zero-coupon yield curve (for the first five years).
Q4) How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%,then at what price should this bond trade for?
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Page 10
Chapter 9: Valuing Stocks
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Q1) The trailing price-earning ratio is based on
A) the earnings over the previous 12 months and current share price.
B) the estimated earnings over the next 12 months and current share price.
C) the earnings over the previous 12 months and the average share price of the past 12 months.
D) the estimated earnings over the next 12 months and the average share price of the past 12 months.
Q2) MJ LTD is expected to grow at various rates over the next five years.The company just paid a $1.00 dividend.The company expects to grow at 20% for the next two years (effecting D<sub>1</sub> and D<sub>2</sub>),then the company expects to grow at 10% for three additional years (D<sub>3</sub>,D<sub>4</sub>,D<sub>5</sub>)after which the company expects to grow at a constant rate of 5% per year indefinitely.If the required rate of return on MJ's common stock is 12%,then what is a share of MJ's stock worth?
Q3) Monsters Inc.is a utility company that recently paid a common stock dividend of $2.35 per share.Determine the current price of a share of Monsters' common stock if its divided growth rate is expected to remain at 7 percent per year indefinitely and its equity cost of capital is 12 percent.
Q4) Calculate the enterprise value for DM Corporation.
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Which of the following statements is false?
A) Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.
B) Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.
C) The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.
D) Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.
Q2) Which of the following investment opportunities provides lowest variation in average annual return?
A) S&P/TSX Composite Index
B) S&P 500 Index in Canadian Dollars
C) Long-Term Government of Canada Bonds
D) Canadian Treasury Bills
Q3) Which pharmaceutical company faces less risk?
Q4) What is the difference between common risk and independent risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) A portfolio is efficient if and only if ________ of every available security equals its
A) the required return, expected return
B) the realized return, expected return
C) the expected return, required return
D) the required return, realized return
Q2) The volatility on Home Depot's returns is closest to:
A) 35%
B) 31%
C) 42%
D) 18%
Q3) Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?
A) 13.50%
B) 14.00%
C) 13.75%
D) 14.50%
Q4) Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock.
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Chapter 12: Estimating the Cost of Capital
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Q1) The total market capitalization for all four stocks is closest to:
A) $479 billion
B) $415 billion
C) $2,100 billion
D) $200 billion
Q2) Which of the following statements is false?
A) The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate), divided by the amount of market risk present in the security's returns measured by its beta with the market.
B) We refer to the beta of a security with the market portfolio simply as the securities beta.
C) There is a linear relationship between a stock's beta and its expected return.
D) A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.
Q3) Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.
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Chapter 13: Investor Behaviour and Capital Market
Efficiency
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Q1) Explain why the market portfolio proxy may not be efficient.
Q2) According to a survey of 392 CFOs conducted by John Graham and Campbell Harvey,the most common method used in corporate America to estimate the cost of capital is
A) the CAPM.
B) multifactor models.
C) characteristic models.
D) the dividend discount model.
Q3) Using the FFC four factor model and the historical average monthly returns,the expected monthly return for Wal-Mart is closest to:
A) 0.71%
B) 0.53%
C) 1.38%
D) 0.79%
Q4) The alpha for Chihuahua is closest to:
A) +2%
B) -5%
C) -3%
D) +3%
Q5) What does the existence of a positive alpha investment strategy imply?
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Considering the fact that Luther's cash is risk-free,Luther's unlevered beta is closest to:
A) 1.90
B) 2.25
C) 1.50
D) 1.45
Q2) Which of the following statements is false?
A) The money taken in by the firm as a result of the share issue exactly offsets the dilution of the shares.
B) Most analysts prefer to use performance measures and valuation multiples that are based on the firm's earnings before interest has been deducted.
C) The fact that the firm's earnings per share and price-earnings ratio are affected by leverage implies that we can always reliably compare these measures across firms with different capital structures.
D) In general, as long as the firm sells the new shares of equity at a fair price, there will be no gain or loss to shareholders associated with the equity issue itself.
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16
Chapter 15: Debt and Taxes
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Q1) If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff as an all equity firm would be closest to:
A) $80 million
B) $100 million
C) $73 million
D) $115 million
Q2) By reducing a firm's corporate tax liability,debt allows the firm to pay more of its cash flows to ________.
A) investors
B) the Canadian government
C) shareholders
D) stakeholders
Q3) To determine the benefit of leverage for the value of the firm,we must compute the ________ value of the stream of future interest tax shields the firm will receive.
A) present
B) future
C) current
D) book
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17
Chapter 16: Financial Distress, managerial Incentives, and Information
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Q1) Rose Industries has a $20 million loan due at the end of the year and its assets will have a market value of only $15 million when the loan comes due.Currently Rose has $2 million in cash.Rose is considering two possible alternative uses for this cash.One possibility is to pay the $2 million out to shareholders in the form of a special dividend.The second possibility is to invest the $2 million into a project that offers a $4 million NPV.What are the payoffs to the debt and equity holders under each of the two alternatives? Which alternative would equity holders prefer? Which alternative would debt holders prefer? What is the economic term that describes this situation?
Q2) Which of the following is NOT an indirect cost of bankruptcy?
A) Loss of Suppliers
B) Fire Sales of Assets
C) Costs of Appraisers
D) Loss of Employees
Q3) The agency costs are the costs that arise when there are conflicts of interest
A) between management and shareholders.
B) between customers and suppliers.
C) between stakeholders.
D) between the board of directors and shareholders.
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) The effective tax disadvantage for retaining cash in 2002 is closest to:
A) 15.00%
B) 14.75%
C) 30.00%
D) 35.00%
Q2) The price per share of Iota if they use the $200 million to expand is closest to:
A) $13.75
B) $16.50
C) $19.00
D) $16.80
Q3) Because buying or selling shares is a ________ transaction,such transactions have ________ on the initial share price.
A) positive-NPV; a positive effect
B) negative-NPV; a negative effect
C) zero-NPV; no effect
D) positive-NPV; a negative effect
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Calculate the NPV for Iota's new project.
Q2) The unlevered cost of capital for Anteater Enterprises is closest to:
A) 10.1%
B) 9.5%
C) 9.9%
D) 10.3%
Q3) Iota's weighted average cost of capital is closest to:
A) 8.40%
B) 9.75%
C) 10.85%
D) 11.70%
Q4) The ________ for a project will depend on the characteristics of both the project and the firm.
A) maximal leverage
B) minimal leverage
C) nominal leverage
D) optimal leverage
Q5) Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
Q6) Describe the key steps in the WACC valuation method.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Oakley is closest to:
A) 9.1%
B) 10.2%
C) 13.5%
D) 14.7%
Q2) The amount of the increase in net working capital for Ideko in 2008 is closest to:
A) $4,685
B) $3,665
C) $4,090
D) $5,230
Q3) Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2009?
A) 1,505 units
B) 1,115 units
C) 1,323 units
D) 1,702 units
E) 1,914 units
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Chapter 20: Financial Options
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Q1) Which of the following statements is false?
A) A call option gives the owner the right to buy the asset.
B) A put option gives the owner the right to sell the asset.
C) A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.
Q2) The holder of a put option has
A) the obligation to sell a security for a given price.
B) the right to buy a security for a given price.
C) the right to sell a security for a given price.
D) the obligation to buy a security for a given price.
Q3) You are long both a put option and a call option on Rockwood stock with the same expiration date.The exercise price of the call option is $40 and the exercise price of the put option is $30.Graph the payoff of the combination of options at expiration.
Q4) You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in- or out-of-the-money?
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Chapter 21: Option Valuation
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Q1) Which of the following statements is false?
A) After we have constructed the tree and calculated the probabilities in the risk-neutral world, we can use them to price the derivative by simply discounting its expected payoff (using the risk-neutral probabilities) at the risk-free rate.
B) By using the probabilities in the risk-neutral world we can price any derivative security - that is, any security whose payoff depends solely on the prices of other marketed assets.
C) To ensure that all assets in the risk-neutral world have an expected return equal to the risk-free rate, relative to the true probabilities, the risk-neutral probabilities underweigh the bad states and overweigh the good states.
D) In Monte Carlo simulation, the expected payoff of the derivative security is estimated by calculating its average payoff after simulating many random paths for the underlying stock price.
Q2) Luther Industries does not pay dividend and is currently trading at $25 per share.The current risk-free rate of interest is 5%.Calculate the price of a call option on Luther Industries with a strike price of $30 that expires in 75 days when N(d<sub>1</sub>)= .639 and N(d<sub>2</sub>)= .454.
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Chapter 22: Real Options
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Q1) Assuming that Kinston does not have the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:
A) -$45,000
B) $455,000
C) $590,000
D) $90,000
Q2) An abandonment option is the option to walk away.Abandonment options can ________ a project because a firm can drop a project if it turns out to be unsuccessful. A) add value to B) subtract value from C) keep the value of D) none of the above
Q3) List three kinds of real options that are most frequently encountered in practice.
Q4) Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?
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Chapter 23: The Mechanics of Raising Equity Capital
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Q1) How much money did the venture capitalists receive?
Q2) Which of the following statements is false?
A) More often than not, firms return to the equity markets and offer new shares for sale, a type of offering called a seasoned equity offering (SEO).
B) Usually, profitable growth opportunities occur throughout the life of the firm, and in some cases it is not feasible to finance these opportunities out of retained earnings.
C) When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. The main difference is that a market price for the stock already exists, so the price-setting process is not necessary.
D) A firm's need for outside capital usually ends at the IPO.
Q3) When referring to IPOs,what is book building?
Q4) Prior to an IPO,in Canada,the first step is the preparation of ________.
A) the audited financial statements and the registration statement
B) the registration statement only
C) the preliminary prospectus and the registration statement
D) the preliminary prospectus only
Q5) Describe the four characteristics of IPOs that puzzle financial economists.
Q6) Based upon the price/earnings ratio,what would be a reasonable value for KD?
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Chapter 24: Debt Financing
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Q1) The Government of Canada also issues ________ with maturities of up to ________ years.
A) discounted bonds; 30
B) strip bonds; 30
C) real return bonds; 30
D) real return bonds; 20
Q2) Which of the following statements is false?
A) With registered bonds, on each coupon payment date, the bond issuer consults its list of registered owners and mails each owner a check (or directly deposits the coupon payment into the owner's brokerage account).
B) If a coupon bond is issued at a discount, it is called an original issue discount bond.
C) The face value or principal amount of the bond is denominated in standard increments, most often $10,000.
D) In a public offering, the indenture lays out the terms of the bond issue.
Q3) What is the Yield to Maturity (YTM)on this bond?
Q4) What is the Yield to Call (YTC)on this bond?
Q5) What is the Yield to Call (YTC)on this bond?
Q6) What is the Yield to Maturity (YTM)on this bond?
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Chapter 25: Leasing
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Q1) Which of the following statements is false?
A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting, tax, and legal treatment.
B) When publicly traded firms disclose leasing transactions in their financial statements, they must follow the recommendations of the Financial Accounting Standards Board (FASB).
C) In its Statement of Financial Accounting Standards No. 13 (FAS13), the FASB provides specific criteria that distinguish a true tax lease from a non-tax lease.
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet, but they have no direct effect on the cash flows that result from a leasing transaction.
Q2) The CICA distinguishes two types of leases based on the lease terms,and this classification determines the lease's accounting treatment.The two types of leases are
A) fixed leases and variable leases.
B) long-term leases and short-term leases.
C) operating leases and capital leases.
D) temporary leases and permanent leases.
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Chapter 26: Working Capital Management
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Q1) Luther's cash conversion cycle is closest to:
A) 51 days
B) 66 days
C) 71 days
D) 129 days
Q2) Which of the following is NOT a direct cost associated with inventory?
A) Acquisition costs
B) Order costs
C) Carrying costs
D) Stock-out costs
Q3) Luther's inventory days is closest to:
A) 32 days
B) 59 days
C) 39 days
D) 42 days
Q4) Your firm purchases goods from its supplier on terms of 2/10,net 45.Calculate the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered.
Q5) What is a compensating balance?
Q6) Describe "just-in-time" inventory management.
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Chapter 27: Short-Term Financial Planning
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Q1) Occasionally,a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason.We refer to such a situation as
A) a liquidity shock.
B) a negative cash flow shock.
C) a negative liquidity shock.
D) a cash crunch.
Q2) The permanent working capital needs for Hasbeen Toys is closest to:
A) $1,100 million
B) $2,435 million
C) $1,275 million
D) $770 million
Q3) In which quarter are Hasbeen's seasonal working capital needs the greatest?
A) 4
B) 2
C) 3
D) 1
Q4) Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.
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Chapter 28: Mergers and Acquisitions
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Q1) Which of the following statements is false?
A) Merger activity is greater during economic expansions than during contractions and correlates with bull markets.
B) Merger activity is greater during economic contractions than during expansions and correlates with bear markets.
C) According to Thomson Reuters, 2007 saw the value of merger and acquisition activity hit an all-time high, with over $4.5 trillion worth of deals announced globally.
D) The latest merger wave came to a crashing end as the credit crisis of late 2007 and 2008 curtailed the ability to finance mergers.
Q2) This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:
A) 1960s
B) 1970s
C) 1980s
D) 1990s
Q3) What is a white knight?
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is false?
A) In addition to the evidence that board independence matters for major activities such as firing CEOs and making corporate acquisitions, researchers have found a strong connection between board structure and firm performance.
B) Theoretical and empirical research support the notion that the longer a CEO has served, especially when that person is also chairman of the board, the more likely the board is to become captured.
C) Most firms that have just gone public either as young companies or as older firms returning to public status after a leveraged buyout (LBO) choose to start with smaller boards.
D) Boards tend to grow over time as members are added for various reasons. For example, boards are often expanded by one or two seats after an acquisition to accommodate the target CEO and perhaps one other target director.
Q2) How does a pyramid structure work?
Q3) Describe the "stakeholder" model of corporate governance.
Q4) What is the difference between inside,gray,and outside directors?
Q5) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
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Chapter 30: Risk Management
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Q1) Which of the following statements is false?
A) The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security.
B) An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loans.
C) In a standard interest rate swap, one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period.
D) If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration.
Q2) If your firm is fully insured,the NPV of implementing the new safety policies is closest to:
A) $2.15 million
B) $2.5 million
C) $2.25 million
D) -$.25 million
Q3) What is the actuarially fair cost of full insurance?
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Chapter 31: International Corporate Finance
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Q1) Canadian tax policy requires that a ________ is given for foreign taxes paid up to the amount of the ________.
A) 50 percent tax credit; Canadian tax liability
B) full tax credit; Canadian tax liability
C) 50 percent tax credit; foreign tax liability
D) full tax credit; foreign tax liability
Q2) Which of the following statements is false?
A) If the foreign tax rate exceeds the Canadian tax rate, companies must pay this higher rate on foreign earnings.
B) Canadian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.
C) If the foreign tax rate is less than the Canadian tax rate, the company pays total taxes equal to the Canadian tax rate on its foreign earnings.
D) A full tax credit is given for foreign taxes paid up to the amount of the Canadian tax liability.
Q3) What is the pound present value of the project?
Q4) Calculate the pound denominated cost of capital for Luther's project.
Q5) What is the dollar present value of the project?
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