Business Finance
Final Test Solutions
Course Introduction
Business Finance introduces students to the fundamental principles of financial management within a business context. The course covers key topics such as financial analysis, planning, and control; the management of working capital; techniques for capital budgeting and investment decision-making; and the sources of business financing. Emphasis is placed on understanding financial statements, time value of money, risk and return, and the impact of financial decisions on firm value. Through case studies and practical applications, students gain the skills necessary to make informed financial decisions in a corporate setting.
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) 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
Q2) How can shareholders attempt to control managerial behavior to match shareholder interest?
Answer: Vote for directors with shareholder's interest to select management. Provide incentive contracts; performance shares or options. Outside threat of takeover, (Board should not be willing to launch poison pills.)
Managerial labor market.
Q3) A financial manager's most important job is to create value from capital budgeting, financing, and liquidity activities. Explain how financial managers create value.
Answer: Buy assets that generate more than their cost. Sell financial securities that raise more cash than they cost. Minimize cash payouts to non-investors, ie., taxes to governments.
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3
Chapter 2: Accounting Statements and Cash Flow
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Sample Questions
Q1) For any individual period the firm cashflows are a circular flow of funds, this means
A) the cashflows are always invested in fixed assets
B) that cashflows are always in a spiral away from the firm
C) that firm cashflows must be borrowed externally to be reinvested in the economy
D) that all cashflows generated by the firm must equal the cashflows paid to the creditors and shareholders.
Answer: D
Q2) 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
Q3) Pion Inc. reported current assets of $80 and fixed assets of $150 as of December 31. The company, as of December 31, also reports current liabilities of $72 and long-term liabilities of $149. Calculate Pion's shareholder's equity.
Answer: ($80 + $150) - ($72 + $149) = $9
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Page 4
Chapter 3: Financial Planning and Growth
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Sample Questions
Q1) If forecasted net income is $3,600.00 and the expected dividend is $1,098 and the tax rate is 34%, what is the retention ratio?
A) .30.
B) .198.
C) .802.
D) .70.
Answer: D
Q2) The process of combining smaller projects into a large budget for planning purposes is called:
A) aggregation.
B) consolidation.
C) accumulation.
D) capital allocation.
Answer: A
Q3) The addition to retained earnings for the financial planning period is equal to:
A) Net Income + Taxes - Dividends.
B) Net Income - Dividends.
C) Net income + Depreciation - Dividends.
D) Sales - Dividend.
Answer: B
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Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) 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
Q2) The separation theorem in financial markets is fundamental to allowing managers to maximize all shareholders wealth. Explain the separation theorem and how the financial markets provide for all different types of investors.
Q3) 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.
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Page 6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) Alan Burnie has just started work and has been wanting to buy a sleek powerboat for sometime. Rather than purchase and finance now, he plans to save every three months and increase the deposits by 3% per annum as he expects raises at least that large. How much must the first deposit be if the boat costs $25,000 today and he expects to earn 10% on the money over the next five years.
A) $1,501.56
B) $2,081.99
C) $1,561.49
D) $6,097.27
E) $2,359.82
Q2) If the compound period is greater than one:
A) the effective annual interest rate is always equal to the annual percentage rate.
B) the effective annual interest rate is always less than the annual percentage rate.
C) the effective annual interest rate is always greater than the annual percentage rate. D) the effective annual interest rate is never greater than the annual percentage rate.
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Chapter 6: How to Value Bonds and Stocks
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Sample Questions
Q1) The liquidity preference hypothesis explains that the 2<sup>nd</sup> year forward rates are set higher than the expected spot rate over year two because A) of a downward sloping yield curve.
B) of long term rates being greater than short term rates.
C) investors must be induced to buy the riskier two year bond. D) two year bonds are less risk than one years bonds when rates are higher.
Q2) The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:
A) 0.25%.
B) 0.005%.
C) 0.125%.
D) 0.50%.
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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8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) The Carnation Chemical Company is investing in an incinerator to dispose of PCB waste. The incinerator costs $1.5 million and will generate end of year cash of $1 million for the next 3 years. At the end of 3 years the incinerator will be worthless and must be disposed of at the cost of $500,000. The internal rate of return for this project is:
A) between 10% and 20%.
B) between 20% and 30%.
C) between 30% and 40%.
D) more than 40%.
Q2) The investment decision rule that relates average net income to average investment is the:
A) discounted cash flow rule.
B) average accounting rate of return method.
C) average payback rule.
D) average profitability index.
Q3) The IRR decision rule can be reversed because:
A) the NPV rule is not the same as the IRR.
B) the IRR iis based on a mutually exclusive investment.
C) instead of an investment project it is a financing project.
D) the IRR is greater than 100%.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Sample Questions
Q1) The Equivalent Annual Cost method allows comparison of the costs of equipment with unequal lives. If Quick-roll machine has an eleven year life, and an NPV of $2,100, while the Zip-roller machine has a seven year life and an NPV of $2,000. Which machine would you choose if the business is expected to continue and the discount rate for both is 14%?
Q2) The equivalent annual cost method is useful in determining:
A) he annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended.
B) the tax shield benefits of depreciation given the purchase of new assets for a project. C) which one of two machines to acquire given equal machine lives but unequal machine costs.
D) which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.
Q3) This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) The present value break-even point is superior to the accounting break-even point because:
A) present value break-even is more complicated to calculate.
B) present value break-even covers the economic opportunity costs of the investment.
C) present value break-even is the same as sensitivity analysis.
D) present value break-even covers the fixed costs of production, which the accounting break-even does not.
E) present value break-even covers the variable costs of production, which the accounting break-even does not.
Q2) Fixed production costs are:
A) directly related to labor costs.
B) measured as cost per unit of time.
C) measured as cost per unit of output.
D) dependent on the amount of goods or services produced.
Q3) Sensitivity analysis helps you determine the:
A) range of possible outcomes given possible ranges for every variable.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value given the best and the worst possible situations.
D) degree to which a project is reliant upon the fixed costs.
Page 11
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) When many assets are included in a portfolio or index the risk of the portfolio or index will be:
A) greater than the risk of the securities because the correlations are greater than 1.
B) equal to the risk of the securities because the correlations are equal to 1.
C) less than the risk of the securities because the correlations are usually less than 1.
D) unaffected by the risk of securities because their correlations are less than 1.
Q2) 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
Q3) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) A well-diversified portfolio has negligible: A) expected return. B) systematic risk. C) unsystematic risk. D) variance.
Q2) A portfolio exists containing stocks D, E, and F held in proportions 30%, 40%, and 30% respectively. The expected returns on the three stocks are given by 12%, 20%, and 28% respectively. Calculate the portfolio's expected return.
Q3) Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:
A) 0.89.
B) 1.60.
C) 2.40.
D) 3.00.
Q4) 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.
Page 13
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Sample Questions
Q1) In normal market conditions 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.
Q2) Three factors likely to occur in the APT model are:
A) unemployment, inflation, and current rates.
B) inflation, GNP, and interest rates.
C) current rates, inflation and change in housing prices.
D) unemployment, college tuition, and GNP.
Q3) A growth stock portfolio and a value portfolio might be characterized
A) each by their P/E relative to the index P/E; high P/E for growth and lower for value.
B) as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.
C) low unsystematic risk and high systematic risk respectively.
D) moderate systematic risk and zero systematic risk respectively.
Q4) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Page 14
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Chapter 13: Risk, Return, and Capital Budgeting
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Sample Questions
Q1) A firm with cyclical earnings is characterized by:
A) revenue patterns that vary with the business cycle.
B) high levels of debt in their capital structures.
C) high fixed costs.
D) high price per unit.
E) low contribution margins.
Q2) 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.
Q3) Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?
A) 10.8%.
B) 12.8%.
C) 10.4%.
D) 14.4%.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Sample Questions
Q1) Which form of the efficient market hypothesis implies that security prices reflect all information contained in past prices?
A) The weak form.
B) The semi-strong form.
C) The strong form.
D) The hard form.
E) The past form.
Q2) Which of the following is not true about serial correlation?
A) It measures the correlation between the current return on a security and the current return on another security.
B) It involves only one security.
C) Positive serial correlation indicates a tendency for continuation.
D) Negative serial correlation indicates a tendency toward reversal.
E) Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.
Q3) Explain why it is that in an efficient market, investments have an expected NPV of zero.
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Page 16
Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) If cumulative voting is permitted:
A) the total number of votes a shareholder has is equal to the number of shares owned.
B) the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.
C) the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.
D) the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.
Q2) The book value of the shareholders ownership is represented by:
A) the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.
B) the total assets minus the net worth.
C) the sum of the preferred stock, debt and the capital surplus.
D) the sum of the total assets minus the current liabilities.
Q3) 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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Sample Questions
Q1) In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:
A) the conservation of energy principle.
B) MM Proposition I that leverage is invariant to market value.
C) MM Proposition II that the cost of equity is always constant.
D) MM Proposition I that the market value of the firm is invariant to the capital structure.
E) MM Proposition III that there is no risk associated with leverage in a no tax world.
Q2) The change in firm value in the presence of corporate taxes is:
A) positive as equityholders face a lower effective tax rate.
B) positive as equityholders gain the tax shield on the debt interest.
C) negative because of the increased risk of default and fewer shares outstanding.
D) negative because of a reduction of equity outstanding.
Q3) The weighted average cost of capital is invariant to the use of leverage under MM conditions of no taxes. Graph the relationship of the weighted average cost of capital and leverage; be sure to include the cost of equity and debt. Explain why this relationship holds.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) 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: 30%
Personal tax rate on income from stocks: 30%
A) $0.246.
B) $0.340.
C) $0.006.
D) -$0.050.
Q2) The TrunkLine Company will earn $60 if it does well. The debtholders are promised payments of $35 if the firm does well. If the firm does poorly the repayment will be $20 because of the dead weight cost of bankruptcy, expected earnings will be $30. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
A) $32.50.
B) $27.50.
C) $25.00.
D) $29.55.
E) $35.00.
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Sample Questions
Q1) The Telescoping Tube Company is planning to put a manufacturing facility in place to build observatory quality but recreational scale telescopes. The systematic risk of this project alone is 25% greater than they currently manage. The company has a target debt to value ratio of 35%. The of the assets currently managed is .8 and they face a 36% tax rate. The initial investment cost is $4,200,000 and the expected cashflows after tax are $1,200,000 per year for 6 years. The risk-free rate is 5% and you believe the historical market risk premium of 8.5% is a reasonable estimate.
A. What is the all equity value of the investment?
B. What is the added value if the company finances this project with $682,044 worth of 16% debt which requires an interest payment until maturity when the full principle is due.
C. If the Albanic County Board of Commissioners approaches the Telescoping Tube Company with an offer to raise the needed $682,044 debt capital as 15% perpetual debt, should the company accept the offer?
Q2) A loan of $10,000 is issued at 15% interest. Interest on the loan is to be repaid annually for 5 years, and the non-amortized principal is due at the end of the fifth year. Calculate the NPV of the loan if the company's tax rate is 34%.
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Page 20
Chapter 19: Dividends and Other Payouts
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Sample Questions
Q1) Which of the following is true?
A) A 10% stock dividend would increase stockholder wealth by $5 if the current price of stock is $50 (ignoring transaction costs).
B) Stock dividends are not true dividends.
C) Stock splits involve a small increase (splintering) in total stock outstanding.
D) The most common dividend policy involves regular cash payments with year-end bonuses.
Q2) You purchased 200 shares of ABC stock on July 15<sup>th</sup>. On July 20<sup>th</sup>, you purchased another 100 shares and then on July 22<sup>st</sup> you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5<sup>th</sup> to holders of record on Friday, July 23<sup>rd</sup>. The dividend is payable on July 31<sup>st</sup>. How much dividend income will you receive on July 31<sup>st</sup> from ABC?
A) $0
B) $220
C) $330
D) $440
E) $550
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Page 21
Chapter 20: Issuing Equity Securities to the Public
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Q1) The order of listing of investment bankers on tombstone advertisements reflects their:
A) prestige.
B) ability to manage selling syndicates.
C) role as a firm commitment buyer.
D) role as a best efforts seller.
Q2) Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:
A) $-6.
B) $6.
C) impossible to determine without the subscription price.
D) impossible to determine without the number of rights needed to buy one share.
Q3) The winner's curse is used to describe:
A) the payoff you receive on lottery tickets.
B) getting a full allocation of undesirable IPO shares.
C) acquiring all underpriced IPO issues.
D) a fully underwritten issue.
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Chapter 21: Long-Term Debt
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Q1) Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:
A) not being in default if a coupon payment is omitted due to a lack of corporate income.
B) lacking the smell of death from financial distress.
C) being easier to sell in the marketplace given the lower risk of default.
D) not having any agency costs between bondholders and stockholders.
Q2) If the coupon were set to $70 what would the bond sell for?
A) $824.61.
B) $898.82.
C) $964.25.
D) $1000.00.
E) $1031.74.
Q3) A description of the property in security and the details of the protective covenants are:
A) key terms in a rights agreement.
B) the basic terms of a bond.
C) key parts of a typical bond indenture.
D) key parts of a typical bond debenture.
Q4) If the bond sells for par today, what is the coupon?
Page 23
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Chapter 22: Leasing
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Q1) What are the cashflows in years 1 through 8?
Q2) The risk of cashflow associated with the lease payment and the depreciation shield are:
A) different for taxable firms and the depreciation shield should be discounted at a higher riskier rate.
B) different for taxable firms and the depreciation shield should be discounted at a lower riskless rate.
C) the same and should be discounted at the same rate.
D) dependent on the amount of debt displaced, therefore the discount rate may vary for both.
Q3) 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.
Q4) What is the discount rate to be used?
Q5) Calculate the NPV of the lease versus the purchase decision.
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Options can be used to explain how the choice of a project can determine investor value. Options are also useful in evaluating alternatives open within a project choice, such as investing now or delaying. Give an example of how options can be used in investment timing.
Q2) 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).
Q3) You own a call option with time to expiration. The common stock is selling for $15 and your exercise price is $12, this option:
A) must be sold to the writer.
B) is in-the-money.
C) is out-of-the-money.
D) must be offset by a put.
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) The call option on a dividend paying stock compared to a non-dividend paying stock is:
A) more valuable because of the extra dividend payment.
B) equal in value because cash dividends are paid on stock only.
C) less valuable because cash dividends are paid on stock only.
D) less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.
Q2) Calculate N(d<sub>2</sub>).
A) .5130
B) .5578
C) .6085
D) .7085
E) .7142
Q3) Corporations by rewarding executives with large option positions:
A) cause the executives to hold highly undiversified portfolios.
B) put the firm in a risky position to pay off the options.
C) cause the value of the stock to fall because the options are theft.
D) are really valueless because most options are never exercised.
Q4) Why would the company pay the executive in options as opposed to salary?
Q5) What is the value of Mr. Maxim's options?
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Chapter 25: Warrants and Convertibles
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Questions
Q1) A firm has experienced a significant decrease 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) Convertible bonds.
B) Convertible preferred stock.
C) Common stock.
D) Straight debt.
Q2) If all warrants are exercised, what will your fraction of ownership be if you owned 2,000 shares originally.
A) 13.33%
B) 12.12%
C) 13.07%
D) 14.04%
Q3) What would your gain be from exercising the warrants, assuming all are exercised?
A) $2.00 per share
B) $1.96 per share
C) $0.00 per share
D) $25.00 per share
E) $27.00 per share
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Chapter 26: Derivatives and Hedging Risk
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Q1) If a financial institution has equated the dollar effects of interest rate risk on the assets with the dollar effects on the liabilities, it has engaged in:
A) a long hedge.
B) a short hedge.
C) a protected swap.
D) immunizing interest rate risk.
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 7-year $1,000 zero-coupon bond with a current price of $399.63 and a yield to maturity of 14%.
Q4) 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.
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Page 28
Chapter 27: Short-Term Finance and Planning
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Q1) The average inventory in 2010 is:
A) $12,567.50.
B) $12, 883.50.
C) $23,837.50.
D) $24,702.50.
E) $25, 567.50.
Q2) The most common way to finance a temporary cash deficit is the use of:
A) banker's acceptances.
B) call options.
C) commercial paper.
D) unsecured bank loans.
Q3) In an "ideal" economy:
A) cash is zero.
B) long-term debt is zero.
C) net working capital is zero.
D) short-term debt is zero.
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) 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.
Q2) The difference between bank cash and book cash is called:
A) float.
B) disbursement float.
C) net float.
D) collection float.
Q3) The most common cash management technique used to speed up collections is:
A) concentration banking.
B) wire transfers.
C) lockboxes.
D) in-house processing.
Q4) 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.
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Chapter 29: Credit Management
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Q1) Robinson Rollingpin Corporation has variable cost per unit of $.35 per $1 of sales. The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%. A customer normally orders $75,000, and is considering the discount. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Would Robinson be wise to offer the discount? Calculate the NPV of the decision.
Q2) Delta PDA Distributors has an investment in accounts receivable of $2,750,000. Daily credit sales are $118,280. If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days, what is the net period that Delta maintains?
A) 31 days.
B) 40 days.
C) 37 days.
D) 19 days.
Q3) Robinson Rollingpin Corporation has been asked by its customers to please grant them a 2% discount if they pay their bill within 15 days. The purchase size of each order is $75,000. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Should the request be granted?
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Chapter 30: Mergers and Acquisitions
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Q1) 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.
Q2) If the All-Star Fuel Filling Company, a chain of gasoline stations acquire the Mid-States Refining Company, a refiner of oil products, this would be an example of a: A) conglomerate acquisition.
B) white knight.
C) vertical acquisition.
D) going-private transaction.
E) horizontal acquisition.
Q3) Bondholders can be made better off in a merger, this is known as the co-insurance effect. Explain how this can happen using an example.
Q4) Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 31: Financial Distress
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Q1) 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.
Q2) What is the correct priority of the following claims once a corporation is determined to be bankrupt?
A) administrative expenses, wages claims not exceeding $2,000, government tax claims, debtholder and then equityholder claims.
B) administrative expenses, wages claims not exceeding $2,000, government tax claims, equityholder and then debtholder claims.
C) all wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claims.
D) all wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claims.
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33
Chapter 32: International Corporate Finance
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Q1) What kind of trade involves agreeing today on an exchange rate for settlement in future?
A) Spot trade.
B) Futures trade.
C) Forward trade.
D) Triangle trade.
Q2) "A commodity costs the same regardless of what currency is used to purchase it." This is a statement of:
A) The Law of One Price (LOP).
B) Relative Purchasing Power Parity (RPPP).
C) The First Principle of International Finance.
D) The Conservation of Currency Value.
Q3) Suppose the spot exchange rate is 2 U.S. dollars per British pound. The forward exchange rate is 1.9 dollars per pound. Which of the following is true?
A) The U.S. inflation rate is lower. D) U.S. interest rates are lower.
B) The pound is selling at a premium.
C) The pound is selling at a discount.
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