Advanced Corporate Finance
Study Guide Questions
Course Introduction
Advanced Corporate Finance delves into the strategic financial decision-making processes faced by corporations, focusing on complex topics such as capital structure optimization, valuation under uncertainty, mergers and acquisitions, corporate restructuring, risk management, and market efficiency. The course emphasizes analytical techniques, case studies, and the application of financial theories to real-world scenarios. Students will develop a deeper understanding of financial markets, instruments, and institutions, enhancing their ability to evaluate investment opportunities, manage financial risks, and create value for stakeholders.
Recommended Textbook
Corporate Finance 7th Canadian Edition by Jaffe
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) The division of profits and losses among the members of a partnership is formalized in the:
A) indemnity clause.
B) indenture contract.
C) statement of purpose.
D) partnership agreement.
Answer: D
Q2) The general partner(s)in a general partnership agree to share work,costs and profits and losses.Each partner:
A) has liability only up to the amount of their investment.
B) has liability for the debts of the partnership.
C) has liability only if it is formally documented.
D) never has any liability but the limited partners do.
Answer: B
Q3) Financial markets are composed of:
A) capital markets and equity markets.
B) capital markets and debt markets.
C) capital markets and money markets.
D) equity markets and money markets.
Answer: C
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Chapter 2: Accounting Statements and Cash Flow
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Q1) The Statement of Financial Position 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
Q2) Grady's Candies paid a total of $32 million in dividends in 2014.In addition,the company issued $22.5 million in new stock in that year.What was Grady's cash flow to stockholder's in 2014?
Answer: $32 - ($22.5)= ($9.5)
Q3) Assets are listed on the Statement of Financial Position in order of:
A) decreasing liquidity.
B) increasing liquidity.
C) increasing size.
D) relative life.
Answer: A
Q4) What is the change in the net working capital from 2013 to 2014?
Answer: ($7,310 - $2,570)- ($6,225 - $2,820)= $1,335
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Page 4
Chapter 3: Financial Planning and Growth
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Q1) A firm wishes to maintain a growth rate of 4% per year,a debt-to-equity ratio of .26,and a dividend payout of 40%.If the profit margin is 10%,and next year's sales are projected at $500,what is the total asset projection?
Answer: 11ea8884_9833_7093_a96f_ab88922ce4cb_TB5261_11 ; X = 975.00
Q2) If a firm holds the dividend payout,the debt to equity ratio and outstanding shares constant while maintaining income and assets proportional to sales,the plug variable is:
A) short term debt.
B) retained earnings.
C) sustainable growth.
D) long term debt.
E) accounts receivable.
Answer: C
Q3) Altering the inputs to a financial plan by changing one of the assumptions is called:
A) a redundancy check.
B) a pro forma evaluation.
C) goal seeking.
D) sensitivity analysis.
Answer: D
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) At what market rates of interest would make the individual indifferent between (1)all consumption in Period 0 and none in Period 1 and (2)no consumption in Period 0 and all consumption in Period 1?
Q2) An individual has income of $35,000 in period 0 and $40,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1.What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?
A) $26,000
B) $26,667
C) $44,000
D) $44,720
Q3) Financial markets develop to accommodate _________ between individuals.
A) trade and barter
B) barter and lending
C) borrowing and lending
D) lending and trade
Q4) 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.)
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Chapter 5: The Time Value of Money
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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) The present value of future cash flows minus initial cost is called:
A) the future savings of the project.
B) the net present value of the project.
C) the equivalent sum of the investment.
D) the initial investment risk equivalent value.
Q3) The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.
A) effective annual
B) annual percentage
C) periodic interest
D) compound interest
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Chapter 6: How to Value Bonds and Stocks
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Q1) The discount rate in equity valuation is composed entirely of:
A) the dividends paid and the capital gains yield.
B) the dividend yield and the growth rate.
C) the dividends paid and the growth rate.
D) the capital gains earned and the growth rate.
E) the capital gains earned and the dividends paid.
Q2) Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.
Q3) Which of the following amounts is closest to the present value of a bond with coupon payment of $80 and a face value of $1,000? Interest payments are made at the end of each of 2 years,and the bond matures in 2 years.The spot interest rate for the first year is 10%,and the spot interest rate for the second year is 12%.
A) $910
B) $934
C) $949
D) $1,000
Q4) Explain why some bond investors are subject to liquidity risk and/or default risk.How does each of these risks affect the yield of a bond?
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) The payback period rule accepts all investment projects in which the payback period for the cash flows is:
A) greater than or equal to the cut-off point.
B) greater than the cut-off point.
C) less than the cut-off point.
D) positive.
Q2) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Q3) Suppose that a project has a cash flow pattern (-$2,000,$25,000,- $25000).For its modified IRR at a discount rate of 10%,the relevant numbers are:
A) (-$2,000, $25,000)
B) (-$2,000, $2,129)
C) (-$5,000, $5,000)
D) (-$2,000, $2,273)
Q4) A $25 investment produces $27.50 at the end of the year with no risk.Which of the following is not true?
A) NPV is positive if the interest rate is less than 10%.
B) NPV is negative if the interest rate is less than 10%.
C) NPV is zero if the interest rate is equal to 10%.
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Chapter 8: Net Present Value and Capital Budgeting
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Q1) Peter's Boats has sales of $760,000 and a profit margin of 5%.The annual depreciation expense is $80,000.What is the amount of the operating cash flow if the company has no long-term debt?
A) $34,000
B) $86,400
C) $118,000
D) $120,400
E) $123,900
Q2) 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.
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Q1) 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.
Q2) Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case,best case,and worst case.I computed break-evens and degrees of operating leverage.I did sensitivity analysis and simulation analysis.I computed NPV,IRR,payback,AAR,and PI.In the end,I have over a hundred different estimates and am more confused than ever.I would have been better off just sticking with my first estimate and going by my gut reaction." Critique this statement.
Q3) Including the option to expand in your project analysis will tend to:
A) extend the duration of a project but not affect the project's net present value.
B) increase the net present value of a project.
C) decrease the net present value of a project.
D) have no effect on either a project's cash flows or its net present value.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Last year you bought some Alpha stock for $26.75 a share.It is currently selling for $32.50.You received a dividend of $2.25 during the year.What is your total rate of return?
A) 30%
B) 21%
C) 8.5%
D) 12%
Q2) Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate?
Q3) The return pattern on your favorite stock has been 5%,8%,-12%,15%,21% over the last five years.What is your average return and total change in wealth per year over the period?
A) 4.5%, 6.5%
B) 15%, 21%
C) 7.4%, 6.8%
D) 9.2%, 8.6%
Q4) List 2 shortcomings of using value at risk (VaR)as a risk management tool.
Q5) A stock has returns of 3%,18%,-24%,and 16% for the past four years.Based on this information,what is the 95% probability range for any one given year?
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) The beta of a security is calculated by:
A) dividing the covariance of the security with the market by the variance of the market.
B) dividing the correlation of the security with the market by the variance of the market.
C) dividing the variance of the market by the covariance of the security with the market.
D) dividing the variance of the market by the correlation of the security with the market.
Q2) The diversification effect of a portfolio of two stocks:
A) increases as the correlation between the stocks declines.
B) increases as the correlation between the stocks rises.
C) decreases as the correlation between the stocks rises.
D) Both increases as the correlation between the stocks declines; and decreases as the correlation between the stocks rises.
Q3) Now suppose you diversify into two securities.Given all choices,can any portfolio be eliminated? Assume equal weights.
Q4) 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) 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.
Q2) In a portfolio of risky assets the response to a factor,F<sub>i</sub>,can easily be determined by:
A) summing the weighted <sub>i</sub> s and multiplying by the innovation in F<sub>i</sub>.
B) summing the F<sub>i</sub> s.
C) adding the average weighted expected returns.
D) Summing the weighted random errors.
Q3) In normal market conditions or when the market is rising if a security has a negative beta:
A) the security always has a positive return.
B) the security has an expected return above the risk-free return.
C) the security has an expected return less than the risk-free rate.
D) the security has an expected return equal to the market portfolio.
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Chapter 13: Risk,return,and Capital Budgeting
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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 $5 million.As a result,ROA of the division changed from:
A) 50% to 44%.
B) 55% to 40%.
C) 44% to 50%.
D) 50% to 70%.
Q2) What is the firm's market value of debt and equity respectively?
A) 22,500,000; 6,750,000
B) 2,020,000; 22,500,000
C) 4,750,000; 15,750,000
D) 9,642,857; 15,750,000
E) E)9,642,857; 22,500,000
Q3) The beta of a security provides:
A) an estimate of the market risk premium.
B) an estimate of the slope of the CML.
C) an estimate of the slope of the SML.
D) an estimate of the systematic risk of the security.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) If the securities market is efficient an investor need only throw darts at the stock pages to pick securities and be just as well off.
A) This is true because there are no differences in risk and return.
B) This is true because in an efficient stock market prices do not fluctuate.
C) This is false because professional portfolio managers prefer to generate commissions.
D) This is false because investors may not hold a desirable risk-return combination in their portfolio.
E) This is false because the markets are controlled by the institutional investors.
Q2) In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV the price of the stock will:
A) rise gradually over the next few days.
B) decline gradually over the next few days.
C) rise on the same day to the new price.
D) stay at the same price, with no net effect.
E) drop on the same day to the new price.
Q3) Define the three forms of market efficiency.
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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) There are 3 directors seats up for election.If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director,this is illustrative of:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
Q3) Retained earnings are:
A) the amount of cash that the firm has saved up.
B) the difference between the net income earned and the dividends paid in a year.
C) the difference between the market price of the stock and the book value.
D) the amount of stock repurchased.
Q4) From this information,calculate Enstat's book value per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) A 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%.
Q2) Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding.The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock.What is the value of this firm if you ignore taxes?
A) $20.0 million.
B) $20.8 million.
C) $21.0 million.
D) $21.2 million.
E) $21.3 million
Q3) Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) The Zercon Company has EBIT of $50,000 and market value debt of $100,000 outstanding with a 9% coupon rate.The cost of equity for an all equity firm would be 14%.Zercon has a 35% corporate tax rate.Investors face a 20% tax rate on debt receipts and a 15% rate on equity.Determine the value of Zercon.
A) $263,080.
B) $332,143.
C) $258,537.
D) $162,948.
E) $120,000.
Q2) The main difference between a positive and negative covenants is(are):
A) a positive covenant is one you must not do while a negative covenant must be carried out.
B) actions that you must do regularly versus periodically.
C) a positive covenant is one you must do while a negative covenant is to limit actions the firm can take.
D) no difference as they are both restrictive.
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 Delta Dam Company has a capital structure of 80% risky debt with a of .9 and 20% equity with a of 1.6.Their current tax rate is 34%.What is the if Delta Dam was an unlevered firm?
A) 1.09
B) 1.04
C) 0.80
D) 0.56
E) 0.44
Q2) The Webster Corp.is planning construction of a new shipping depot for its single manufacturing plant.The initial cost of the investment is $1 million.Efficiencies from the new depot are expected to reduce costs by $100,000 forever.The corporation has a total value of $60 million and has outstanding debt of $40 million.What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?
A) $428,571
B) $444,459
C) $565,547
D) $1,000,000
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Chapter 19: Dividends and Other Payouts
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Q1) The date before which a new purchaser of stock is entitled to receive a declared dividend,but on or after which he/she does not receive the dividend,is called the _____ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
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) What are venture capitalists and what is their role in raising capital for firms?
Q2) Regional Power wants to raise $10 million in new equity.The subscription price is $20.There are currently 3 million shares outstanding,each with 1 right.How many rights are needed to purchase 1 share?
A) 1.
B) 3.
C) 5.
D) 6.
Q3) To determine the value of a rights the stockholder needs to know what two pieces of information in addition to the current stock price:
A) the subscription price and the number of rights needed to acquire a new share.
B) the amount of new equity to be raised and the detachment date.
C) the amount of new equity to be raised and standby fee.
D) the detachment date and the subscription price.
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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Chapter 21: Long-Term Debt
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Q1) The main difference between an open-end and closed-end mortgage trust indenture is:
A) the mutual fund carries a no load fee.
B) security can be diminished as an open-end trust indenture allows for unlimited bond issuance.
C) security can be diminished as a closed-end trust indenture allows for unlimited bond issuance.
D) the mortgage trust company does not have any security.
Q2) The growth of junk bond markets can be traced to:
A) the issuance of callable debt.
B) the small difference between the return on high yield versus the return on low yield bonds.
C) the large difference between the return on high yield versus the return on low yield bonds.
D) the fact that there is virtually no difference between the return on high vs low yield bonds.
Q3) If the bond sells for par today,what is the coupon?
Q4) An Income bond is unique in at least one characteristic.Explain what is different about income bonds and why they exist.Why are they not more popular?
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Chapter 22: Leasing
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Q1) Sardinas Sardines has assets valued at $10 million and equity of $10 million.The firm recently leased new equipment worth $1 million.Present the balance sheet under two conditions; the lease is judged to be an operating lease,and the lease is judged to be a capital lease.
Q2) What is the after-tax cash flow in years 1 through 5?
A) $126,600
B) $198,000
C) $269,400
D) $287,250
Q3) The price or lease payment that the lessee sets as their bound is known as:
A) the present value of the tax shields.
B) the reservation payment, L<sub>MIN</sub>.
C) the present value of operating savings.
D) the reservation payment, L<sub>MAX</sub>.
Q4) What is the after-tax cash flow from leasing in year 0?
A) -$300
B) -$852
C) -$948
D) -$495
Q5) Calculate the NPV of the lease versus the purchase decision.
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) In terms of relating options to firm value,if the stockholders have a call option on the firm,what do the bondholders have?
A) In addition to owning the firm, they have written a call option against the firm whose exercise price equals the promised payment.
B) In addition to owning the firm, they have bought a call option against the firm whose exercise price equals the promised payment.
C) In addition to owning the firm, they have written a put option against the firm whose exercise price equals the promised payment.
D) In addition to owning the firm, they have bought a put option against the firm whose exercise price equals the promised payment.
Q2) The Black-Scholes OPM is dependent on which five parameters?
A) Stock price, exercise price, risk free rate, probability, and time to maturity.
B) Stock price, risk free rate, probability, time to maturity, and variance.
C) Stock price, risk free rate, probability, variance and exercise price.
D) Stock price, exercise price, risk free rate, variance and time to maturity.
E) Exercise price, probability, stock price, variance and time to maturity.
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) The Nu-Tech Company has a new project available to it at a cost of $6 million.The project that they can sell 13,000 personal organizers at $172 in net cash flow for each of the next five years.Nu-Tech's discount rate is 15%.What is the NPV of the investment? The executives of Nu-Tech are concerned about the potential of future competition and a subsequent drop in sales and price.If after two year you can dispose of the asset for 1.0 million at what price would it make sense to abandon the project?
Q2) Which of the following is not part of the Black Scholes option pricing model?
A) Standard deviation
B) Time to maturity
C) Exercise price
D) Par value of the company's stock
Q3) The volatility of interest rates affect the value of the project by:
A) increasing the value as volatility increase.
B) increasing the value as volatility decrease.
C) decreasing the value as volatility increase.
D) Interest rate volatility does not affect value.
Q4) 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?
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Chapter 25: Warrants and Convertibles
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Q1) Kida Consultants has 100,000 shares of stock outstanding.The firm's value net of debt is $2 million.Kida has 1,000 warrants outstanding with an exercise price of $18,where each warrant entitles the holder to purchase one share of stock.Calculate the gain from exercising a single warrant.
Q2) Which of the following would not describe the difference between warrants and call options?
A) Warrants are issued by firms whereas call options are issued by individuals.
B) Call options have an exercise price whereas warrants do not.
C) Exercising of warrants creates dilution whereas exercising all options does not.
D) When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.
Q3) Kida Consultants currently has 300,000 shares of common outstanding.Firm value net of debt is $3,900,000.Kida has warrants outstanding with an exercise price of $10.How many warrants must the firm have issued if the gain from exercising a single warrant is $8.25?
Q4) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
Q5) Why are warrants and convertibles issued?
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Chapter 26: Derivatives and Hedging Risk
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Q1) If the producer of a product has entered into a fixed price sale agreement for that output,the producer faces:
A) a nice steady profit because the output price is fixed.
B) an uncertain profit if the input prices are volatile. This risk can be reduced by a short hedge.
C) an uncertain profit if the input prices are volatile. This risk can be reduced by a long hedge.
D) a modest profit if the input prices are stable. This risk can be reduced by a long hedge.
E) a modest profit if the input prices are stable. This risk can be reduced by a short hedge.
Q2) The buyer of a forward contract:
A) will be taking delivery of the good(s) today at today's price.
B) will be making delivery of the good(s) at a later date at that date's price.
C) will be making delivery of the good(s) today at today's price.
D) will be taking delivery of the good(s) at a later date at pre-specified price.
Q3) 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) Firms hold cash,in part,to satisfy compensating balances. Compensating balances are:
A) cash balances held at the firm in excess of its transactions needs.
B) cash balances held at the firm that are below that of its transactions needs.
C) cash balances held at the firm in excess of its cash inflows.
D) cash balances held at commercial banks to pay implicitly for bank services.
Q2) Cash flow from operations equals:
A) net income minus change in net working capital.
B) net income minus depreciation.
C) net income minus taxes.
D) net income plus change in net working capital.
E) net income plus depreciation.
Q3) The inventory turnover for the Sneeky Company is 8 times and its day's sales outstanding is 55.The average payables deferral period (or turnover)is 7.5.What is the cash cycle for Sneeky given a 365-day year.
A) 149.29 days.
B) 51.96 days.
C) 58.04 days.
D) 115.00 days.
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Page 29
Chapter 28: Cash Management
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Q1) 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.
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) What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
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?
Q5) What is the firm's net float?
A) $300
B) -$3,300
C) $3,300
D) -$300
Q6) 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)?
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Chapter 29: Credit Management
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Q1) Lengthening the credit period _____ the price paid by the customer.Generally,this acts to _____ sales.
A) increases; increase
B) increases; decrease
C) decreases; decrease
D) decreases; increase
E) increases; have no effect on
Q2) Which of the following is not one of the "five Cs of Credit" for credit scoring?
A) Capability
B) Capacity
C) Capital
D) Character
E) Conditions
Q3) The three components of credit policy are:
A) collection policy, credit analysis, and interest rate determination.
B) collection policy, credit analysis, and terms of the sale.
C) collection policy, interest rate determination, and repayment analysis.
D) credit analysis, repayment analysis, and terms of the sale.
E) interest rate determination, repayment analysis and terms of sale.
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Chapter 30: Mergers and Acquisitions
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Q1) Compensation paid to top management in the event of a takeover is called a:
A) poison pill.
B) golden parachute.
C) self-tender.
D) buyout.
Q2) A merger that improves the use of one company's design team and the other company's testing group is evidence of:
A) replacement of inefficient management.
B) one company exercising monopoly power.
C) complementary resources.
D) minimizing the net operating losses.
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.
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) 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) Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?
A) Cash payments are delayed to creditors.
B) The market value of the stock declines by 50%.
C) The firm's operating cash flows are insufficient to pay current obligations.
D) Cash distributions are eliminated because the board of directors considers the surplus account to be low.
Q3) What will the equity holders receive if they had 5 million shares with a par value of $0.50 each?
A) $0
B) $35,714
C) $583,333
D) $1,000,000
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Chapter 32: International Corporate Finance
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Q1) Newsat Telco is planning on investing $40 billion in Europe this year for a satellite communications systems.The expected cashflow over the next three years is 20.6 billion Euros per year growing at the rate of inflation.After three year they will abandon the system as worthless.The European current and expected inflation rate is 5.2% per annum over this period and the U.S.inflation rate is expected to be 2.8% per annum.The current exchange rate is $.9/Euro.Newsat has a U.S.cost of capital of 15%.Should Newsat invest?
Q2) A Eurobond investor prefers this market to the Yankee bond market because:
A) these bonds are registered.
B) the bonds are in bearer form.
C) an agent is used to transfer ownership.
D) income is taxed directly.
Q3) When the German mark is quoted as $.52 this quote is a(n): A) triangular rate.
B) indirect rate.
C) direct rate.
D) cross rate.
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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