Capital Markets
Midterm Exam
Course Introduction
This course provides a comprehensive overview of capital markets, exploring their structure, functions, and significance within the global financial system. Students will examine the various instruments traded in capital markets, such as stocks, bonds, and derivatives, as well as the institutions and participants involved. Key topics include the mechanisms of primary and secondary markets, regulatory frameworks, risk assessment, market efficiency, and the role of capital markets in economic development and corporate finance. Through case studies and practical applications, students will gain an understanding of how capital markets facilitate investment, liquidity, and resource allocation.
Recommended Textbook Principles of Corporate Finance 12th Edition by Richard
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Brealey
Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Briefly explain how individuals can adjust their current and future consumption according to their preferences.
Answer: Individuals can adjust their preferences for consumption by borrowing or lending in the financial market. The appropriate balance between present and future consumption that each individual will choose depends on personal preferences. Nevertheless, individuals with different preferences can adjust their preferences using the financial market. Individuals desiring current consumption can borrow from future income. Meanwhile, individuals favoring future consumption can refrain from current consumption and invest in the same financial market.
Q2) The line that connects the maximum that one can consume this year (now, on the horizontal axis) and the maximum one can consume next year
A)has a slope of (1 + r).
B)has a slope of - (1 + r).
C)has a slope of r.
D)has a slope of 1/r.
Answer: B
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3
Chapter 2: How to Calculate Present Values
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Q1) The present value of $100,000 expected at the end of one year, at a discount rate of 25 percent per year, is
A)$80,000.
B)$125,000.
C)$100,000.
D)$75,000.
Answer: A
Q2) If the future value annuity factor at 10 percent and five years is 6.1051, calculate the equivalent present value annuity factor.
A)6.1051
B)3.7908
C)6.7156
D)4.8127
Answer: B
Q3) The present value of a growing perpetuity, with cash flow C<sub>1</sub> occurring one year from now, is given by [C<sub>1</sub>/(r - g)], where r>g.
A)True
B)False
Answer: True
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Chapter 3: Valuing Bonds
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Q1) Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000.Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.
A)Bond A
B)Bond B
C)Both are equally sensitive.
D)Cannot be determined
Answer: A
Q2) For many years, real rates of interest tended to fluctuate more wildly than nominal rates of interest.
A)True
B)False
Answer: False
Q3) If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.
A)True
B)False
Answer: True
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Chapter 4: The Value of Common Stocks
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Sample Questions
Q1) Briefly explain the assumptions associated with the constant dividend growth formula.
Q2) The constant dividend growth formula P<sub>0</sub> = Div<sub>1</sub>/(r - g) assumes .
A)that dividends grow at a constant rate g, forever only. B)r > g only.
C)that dividends grow at a constant rate g, forever, and r > g only. D)g is never negative only.
Q3) Which of the following stocks is a growth stock?
A)Dow Chemical
B)Consolidated Edison
C)General Electric
D)Google
Q4) Briefly explain why Microsoft experienced a significant drop in price when it announced its first-ever regular dividend along with huge profits.
Q5) Which of the following formulas regarding the earnings-to-price ratio is true?
A)EPS/P<sub>0</sub> = r[1 + PVGO/P<sub>0</sub>]
B)EPS/P<sub>0</sub> = r[1 - PVGO/P<sub>0</sub>]
C)EPS/P<sub>0</sub> = [r + PVGO/P<sub>0</sub>]
D)EPS/P<sub>0</sub> = [1 + r + PVGO/P<sub>0</sub>)]/r
Page 6
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Chapter 5: Net Present Value and Other Investment Criteria
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Q1) The benefit-cost ratio is equal to the profitability index plus one.
A)True
B)False
Q2) The benefit-cost ratio is defined as the ratio of
A)net present value cash flows to initial investment.
B)present value of cash flows to initial investment.
C)net present value of cash flows to IRR.
D)present value of cash flows to IRR.
Q3) Which of the following investment rules has the value additivity property?
A)The payback period method
B)The net present value method
C)The book rate of return method
D)The internal rate of return method
Q4) The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.
A)True
B)False
Q5) Briefly explain the term hard rationing.
Q6) What are some of the disadvantages of using the IRR method?
Q7) Briefly explain the value additivity property.
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Chapter 6: Making Investment Decisions With the Net
Present Value Rule
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Q1) Two machines, A and B, which perform the same functions, have the following costs and lives. \(\begin{array} { c c c }
\text { Type } & \text { PV Costs } & \text { Life } \\
\text { Machine A } & \$ 6,000 & 5 \\
\text { Machine B } & \$ 8,000 & 7
\end{array}\) Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15 percent.
A)Machine A, because the EAC is $1,789.89
B)Machine B, because the EAC is $1,922.88
C)Machine A, because it has lower PV costs
D)Machine B, because it has longer life
Q2) A firm owns a building with a book value of $150,000 and a market value of $250,000.If the firm uses the building for a project, then its opportunity cost, ignoring taxes, is
A)$100,000.
B)$150,000.
C)$250,000.
D)$400,000.
Q3) Define the term cash flow for a project.
Page 8
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Chapter 7: Introduction to Risk and Return
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Sample Questions
Q1) The portfolio risk that cannot be eliminated by diversification is called market risk.
A)True
B)False
Q2) Macro Corporation has had the following returns for the past three years: -10 percent, 10 percent, and 30 percent.Use the following formulas to calculate the standard deviation of the returns: Variance = expected value of \(\left( r _ { m } \right)\) \(\left( \tilde { r } _ { m } - r _ { m } \right) ^ { 2 }\) Standard deviation of . \(\tilde { r } _ { m } = \sqrt { \text { variance } \left( r _ { m } \right) }\)
A)10.00 percent
B)16.33 percent
C)18.21 percent
D)30.00 percent
Q3) For a portfolio of N-stocks, the formula for portfolio variance contains A)N covariance terms.
B)N(N - 1)/2 different covariance terms.
C)N<sup>2</sup> covariance terms.
D)N - 1 covariance terms.
Q4) What is the beta of a portfolio with a large number of randomly selected stocks?
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Chapter 8: Portfolio Theory and the Capital Asset Pricing Model
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Q1) Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent.Calculate the expected return for Microsoft.
A)12.04 percent
B)15.66 percent
C)13.94 percent
D)8.65 percent
Q2) According to the CAPM, all investments plot along the security market line.
A)True
B)False
Q3) Normal and lognormal distributions are completely specified by their A)mean only.
B)mean and standard deviation.
C)standard deviation only.
D)third moment only.
Q4) If a stock were underpriced, it would plot
A)above the security market line.
B)below the security market line.
C)on the security market line.
D)on the y-axis.
Q5) Briefly explain the term market portfolio.
10
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Chapter 9: Risk and the Cost of Capital
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Q1) Briefly discuss the risk-adjusted discount rate approach to estimating the NPV of a project.
Q2) One calculates the weighted average cost of capital (WACC), on an after-tax basis, as WACC = (r<sub>D</sub>) (1 - T<sub>C</sub> ) (D/V) + (r<sub>E</sub>) (E/V), where V = D + E.
A)True B)False
Q3) Cyclical firms tend to have high betas.
A)True
B)False
Q4) Briefly explain, when using the CAPM, which value should be used for the risk-free interest rate.
Q5) Financial slang referring to the reduction of cash flows from a project's forecasted value to its certainty equivalent is a(n)
A)deep discount.
B)haircut for risk.
C)arbitrage profit.
D)speculative gain.
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Chapter 10: Project Analysis
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Q1) Discuss the importance of conducting postaudits.
Q2) Generally, Monte Carlo models, for project analysis, use which device to generate simulations?
A)Pair of dice
B)Roulette wheel
C)Computer
D)Pack of cards
Q3) The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant that will depreciate on a straight-line basis.Fixed costs are $3 million per year.A financial calculator costs $10 per unit to manufacture and sells for $30 per unit.If the plant lasts for four years and the cost of capital is 20 percent, what is the accounting break-even level of annual sales? (Assume no taxes.)
A)300,000 units
B)150,000 units
C)381,777 units
D)750,000 units
Q4) Define the term abandonment value.
Q5) Briefly explain the term real options.
Q6) Briefly explain timing options.
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Chapter 11: Investment Strategy and Economic Rents
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Q1) To best understand a proposed positive net present value project, managers should
A)recheck all calculations.
B)assume there are no forecast errors.
C)identify sources of economic rent.
D)evaluate other similar projects the company has undertaken in the past.
Q2) The manufacture of folic acid is a competitive business.A new plant costs $100,000 and lasts for three years.The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300.(Assume no taxes.) If the discount rate is 20 percent, what is the value of the plant at the end of year 1?
A)+$76,569
B)-$23,400
C)$48,600
D)None of the options are correct.
Q3) The total NPV of a new plant is equal to the NPV of the new plant plus the change in the present value of existing plants due to the impact of the new plant.
A)True
B)False
Q4) Why are economic rents important to a manager?
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Chapter 12: Agency Problems Compensation and Performance Measurement
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Q1) Agency problems in capital budgeting include reduced effort, perks, empire building, and entrenching investments.
A)True
B)False
Q2) Define the term economic rate of return.
Q3) EVA is used for
A)measuring performance within the firm.
B)rewarding performance within the firm.
C)measuring performance and rewarding performance within the firm.
D)measuring performance within the firm, rewarding performance within the firm, and improving performance within the firm.
Q4) A firm has an average investment of $100,000 during the year.During the same period, the firm generates an after-tax income of $16,000.If the cost of capital is 15 percent, what is the EVA?
A)+$16,000
B)+$15,000
C)+$1,000
D)-$1,000
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Q5) Briefly explain how a plant manager can improve EVA (economic value added)?
Chapter 13: Efficient Markets and Behavioral Finance
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Q1) A large firm received a loan guarantee from the government.Due to the guarantee, the firm can borrow $50 million for five years at 8 percent interest rate per year instead of 10 percent per year.Calculate the value of the guarantee to the firm.(Ignore taxes.)
A)+$53.79 million
B)+$3.79 million
C)-$3.79 million
D)$3.99 million
Q2) Behavioral finance and technical analysis are basically the same theory. A)True
B)False
Q3) Informational efficiency in financial markets results in stock prices being A)higher.
B)lower.
C)fairer.
D)easier to predict.
Q4) State the important differences between investment decisions and financing decisions.
Q5) What are puzzles and anomalies?
Q6) Briefly discuss some of the important findings of behavioral finance studies.
Page 15
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Chapter 14: An Overview of Corporate Financing
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Q1) The following are characteristics of preferred stock except it
A)pays fixed dividends.
B)pays fixed dividendsand can demand payments of cumulative dividends.
C)has voting rights.
D)can demand payments of cumulative dividends.
Q2) A firm has $100 million in current liabilities, $200 million in long-term debt, $300 million in stockholders' equity, and total assets of $600 million.Calculate the firm's ratio of long-term debt to long-term debt plus equity.
A)40 percent
B)20 percent
C)50 percent
D)17 percent
Q3) Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director?
A)Majority voting
B)Cumulative voting
C)Representative voting
D)Executive voting
Q4) Indicate the major sources of finance available to corporations.
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Chapter 15: How Corporations Issue Securities
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Q1) According to the Cambridge Associates, venture capital funds earn an average annual rate of return (after expenses) of about
A)32 percent.
B)24 percent.
C)13 percent.
D)12 percent.
Q2) Image Storage Corporation has 1,000,000 shares outstanding.It wishes to issue 500,000 new shares using a (North American) rights issue.If the current stock price is $50 and the subscription price is $47/share, what is the value of a right?
A)$0.40/right
B)$5/right
C)$2.50/right
D)$1/right
Q3) The first public issue by a firm is known as a seasoned equity offering.
A)True
B)False
Q4) Briefly explain the role of underwriters in the issuance of securities.
Q5) Briefly explain the basic procedure for a new issue.
Q6) Briefly discuss SEC rule 144A.
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Chapter 16: Payout Policy
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Q1) In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased in response.
A)True
B)False
Q2) If the corporate tax rate is 35 percent, what is the maximum effective tax rate on dividends received by another corporation?
A)35 percent
B)30 percent
C)10.5 percent
D)65 percent
Q3) What information does a share repurchase convey to investors?
Q4) Generally, investors view the announcement of an open-market repurchase program as
A)bad news, and the stock price drops.
B)good news, and the stock price increases.
C)a nonevent that does not affect the stock price.
D)very bad news, and the stock price plunges.
Q5) Briefly describe an imputation tax system.
Q6) Briefly describe the leftists' point of view on dividends and taxes.
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Chapter 17: Does Debt Policy Matter
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Q1) Explain the concept of value additivity.
B.The same idea holds when assets are divided.
Q2) Health and Wealth Company is financed entirely by common stock that is priced to offer a 15 percent expected return.If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)
A)18 percent
B)21 percent
C)15 percent
D)10.5 percent
Q3) The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = T<sub>C</sub>):
A)WACC = (r<sub>D</sub>)(D/V) + (r<sub>E</sub>)(E/V)
B)WACC = (r<sub>D</sub>)(D/V) +[(r<sub>E</sub> )(E/V)/(1 - T<sub>C</sub>)]
C)WACC = [(r<sub>D</sub>)(D/V) + (r<sub>E</sub>)(E/V)]/(1 - T<sub>C</sub>)
D)WACC = (r<sub>D</sub>)(1 - T<sub>C</sub>)(D/V) + (r<sub>E</sub>)(E/V)
Q4) State the generalized version of Modigliani-Miller Proposition I.
Q5) What circumstances violate M&M's Proposition I? Briefly discuss.
Q6) State the law of conservation of value.
Page 19
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Chapter 18: How Much Should a Corporation Borrow
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Q1) Financial slack includes A)cash.
B)ready access to debt markets or bank loans.
C)readily salable real assets.
D)cash, marketable securities, readily salable real assets, and ready access to debt markets or bank loans.
Q2) MM's Proposition I corrected for corporate taxes states that Value of levered firm = Value of unlevered firm + PV tax shield.
A)True
B)False
Q3) When faced with financial distress, managers of firms acting on behalf of their shareholders' interests will tend to
A)favor high-risk, high-return projects even if they have negative NPV.
B)refuse to invest in low-risk, low-return projects with positive NPVs.
C)delay the onset of bankruptcy as long as they can.
D)favor high-risk, high-return projects even if they have negative NPV, refuse to invest in low-risk, low-return projects with positive NPVs, and delay the onset of bankruptcy as long as they can.
Q4) Explain the pecking order theory of capital structure.
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Chapter 19: Financing and Valuation
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Q1) One calculates the after-tax weighted average cost of capital (WACC) as
A)WACC = r<sub>D</sub> (D/V) + r<sub>E</sub> (E/V); (where V = D + E).
B)WACC = r<sub>D</sub> (1 - T<sub>C</sub>)(D/V) + r<sub>E</sub> (E/V); (where V = D + E).
C)WACC = r<sub>D</sub> (D/V) + r<sub>E</sub> (1 - T<sub>C</sub>)(E/V); (where V = D + E).
D)WACC = (1 - T<sub>C</sub>) × ( r<sub>D</sub> (D/V) + r<sub>E</sub> (E/V)); (where V = D + E).
Q2) Which of the following is an important assumption required if using the WACC formula?
A)Companies rebalance their capital structure to maintain a constant debt ratio.
B)WACC must be used on public companies with actively traded securities.
C)Management bonuses must be added back to free cash flows.
D)The firm cannot issue any further debt without adjusting its WACC.
Q3) Generally, subsidized loans decrease the APV of a project.
A)True
B)False
Q4) "Urban renewal can be assisted by the provision of government tax and loan incentives to businesses, despite the existence of negative NPV projects." Explain why this may be true.
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Chapter 20: Understanding Options
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Q1) Briefly explain what is meant by put-call parity.
Q2) Relative to the underlying stock, a call option always has
A)a higher beta and a higher standard deviation of return.
B)a lower beta and a higher standard deviation of return.
C)a higher beta and a lower standard deviation of return.
D)a lower beta and a lower standard deviation of return.
Q3) If the stock price follows a random walk, successive price changes are statistically independent.If S1U1P12S1S1P0 is the variance of the daily price change, and there are t days until expiration, the variance of the cumulative price change is
A)"S1U1B1 S1U1B02"
B)"S1U1B0S1U1B1 S1U1B0S1U1B1( S1U1B02S1U1B1) × (t).S1U1B0"
C)"S1U1B0S1U1B1 S1U1B0S1U1B1( S1U1B02S1U1B1)/t.S1U1B0"
D)" S1U1B0S1U1B1( S1U1B02S1U1B1) × (tS1U1B02S1U1B1).S1U1B0"
Q4) For European options, the value of a call plus the present value of the exercise price is equal to
A)the value of a put minus the value of a share.
B)the value of a share minus the value of a call.
C)the value of a put plus the value of a share.
D)the value of a share minus the value of a put.
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Chapter 21: Valuing Options
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Q1) Briefly explain what is meant by risk-neutral probability.
Q2) A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent.The risk-free rate is 9.2 percent per year annually compounded.Calculate the value of d1.
A)0.3
B)0.7214
C)-0.7214
D)0.4967
Q3) Suppose Carol's stock price is currently $20.In the next six months it will either fall to $10 or rise to $40.What is the current value of a six-month call option with an exercise price of $12? The six-month risk-free interest rate is 5 percent per six-month period.(Use the risk-neutral valuation method.)
A)$9.78
B)$10.28
C)$16.88
D)$13.33
Q4) Briefly explain why the discounted cash flow method (DCF) does not work for valuing options.
Q5) Briefly explain the term option delta.
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Chapter 22: Real Options
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Q1) How does an option to wait or postpone a project add value to the project?
Q2) Explain the main difference between the Black-Scholes formula and the binomial method.How does this relate to real options analysis?
Q3) A rational manager may be reluctant to commit to a positive net present value project when
A)the value of the option to abandon is high.
B)the exercise price is high.
C)the opportunity cost of capital is high.
D)the value of the option to wait is high.
Q4) How does a large firm like Intel hold a natural real option on a new technology, whereas a smaller firm would not have the same option if they owned the same technology?
Q5) The first step in a real options analysis is to value the underlying asset using the discounted cash flow (DCF) method.
A)True
B)False
Q6) How can managers take advantage of real options? Briefly explain.
Q7) Briefly discuss three practical problems associated with real options analysis.
Q8) How does an abandonment option increase the value of a project?
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Chapter 23: Credit Risk and the Value of Corporate Debt
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Q1) The interest rate on a one-year risk-free bond is 5 percent.BAC Company issued a 5 percent coupon bond with a face value of $1,000, maturing in one year.If the bond is considered risk-free, what is the price of the bond?
A)$1,050
B)$1,000
C)$985
D)$950
Q2) Investors can insure corporate bonds through an arrangement called a credit default swap.
A)True
B)False
Q3) If the discount rate on a bond is 8 percent and the expected payment in year 1 is $952.50, calculate the price of the bond.
A)$1,050
B)$985
C)$907.14
D)$881.94
Q4) Briefly explain the model developed by Beaver, McNichols, and Rhie to predict the chance of failure of a firm.
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Chapter 24: The Many Different Kinds of Debt
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Q1) LYONs are bonds that are
A)callable and puttable.
B)callable, puttable, and convertible.
C)callable, puttable, convertible, and zero-coupon.
D)puttable, convertible, and zero-coupon.
Q2) Privately placed loans are advantageous because
A)there are usually fewer restrictive covenants.
B)there is direct contact with the lender and renegotiations can be handled more easily. C)SEC registration is necessary.
D)there are usually fewer restrictive covenants and SEC registration is necessary.
Q3) The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock.The stock is selling for $25.What is the conversion price?
A)$35
B)$7.70
C)$28.57
D)$975
Q4) What are reverse floaters?
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Chapter 25: Leasing
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Q1) Your firm is considering leasing a magic box.The lease lasts for three years.The lease calls for three payments of $1,350 per year with the first payment occurring at lease inception.The magic box would cost $3,600 to buy and would be straight-line depreciated to zero salvage value over three years.The firm can borrow at 6 percent, and the marginal corporate tax rate is 30 percent.What is the NPV of the lease?
A)$30.50
B)-$30.50
C)-$65.75
D)-$117.52
Q2) In a leveraged lease structure, which party is entitled to the leased asset in the event of a default on lease payments?
A)The SPE (special-purpose entity)
B)The lessee
C)The lessor
D)The lenders to the SPE (special-purpose entity)
Q3) The IRS can modify the tax code to alter the attractiveness of leases.
A)True
B)False
Q4) What advantage does a sale-lease-back to a SPE have?
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Chapter 26: Managing Risk
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Q1) The price for immediate delivery of a commodity is called the A)forward price.
B)exercise price.
C)spot price.
D)impact price.
Q2) The spot price for home heating oil is $0.55 per gallon.The futures price for one year from now is $0.57.If the risk-free rate is 6 percent per year, what is the net convenience yield?
A)0.0411
B)0.0364
C)0.0236
D)0.0440
Q3) As a commodity futures contract nears expiration, the futures price converges to the spot market price for that commodity.
A)True
B)False
Q4) For commodity futures, Net convenience yield = (convenience yield - storage costs).
A)True
B)False
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Chapter 27: Managing Risk
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Q1) XJ Company from the United States is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14 percent and the discount rate in $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV of the project in BP.
A)+28.69
B)+25.86
C)+42.67
D)+22.68
Q2) If the price of a Big Mac in the United States is $2.56, and in Japan it is yen 300, then the implied exchange rate is yen 117.19/$US. Yen 300/$2.56 = Yen 117.19/$1.
A)True
B)False
Q3) For a project's cost of capital measured in Swiss francs, one should use Swiss interest rates and beta with respect to Swiss market.
A)True
B)False
Q4) Briefly explain the concept of purchasing power parity.
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Chapter 28: Financial Analysis
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Q1) Assume a book value per share of $10 and a price per share of $24.What is the market capitalization of a firm with 2,000,000 outstanding shares?
A)$2,000,000
B)$20,000,000
C)$28,000,000
D)$48,000,000
Q2) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the current ratio.
A)2
B)1.5
C)1
D)2.5
Q3) What are the common ratios used to measure the liquidity of a firm?
Q4) Assets are listed on the balance sheet in order of
A)decreasing liquidity.
B)increasing size and relative life.
C)decreasing size.
D)relative life.
Q5) Why is liquidity relevant?
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Chapter 29: Financial Planning
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Q1) The cash cycle occurs in the following sequence:
A)cash, raw materials, finished goods, receivables, and cash.
B)cash, receivables, finished goods, raw materials, and cash.
C)cash, raw materials, receivables, finished goods, and cash.
D)cash, finished goods, receivables, raw materials, and cash.
Q2) A company has forecast sales in the first three months of the year as follows (figures in millions): January, $200; February, $140; March, $100.Fifty percent of sales are usually paid for in the month that they take place, 30 percent in the following month, and the final 20 percent in the month after that.Receivables at the end of December were $100 million.What are the forecasted collections on accounts receivable in March?
A)$132 million
B)$100 million
C)$240 million
D)$92 million
Q3) A problem with the percentage of sales method is that some variables are relatively insensitive to sales.The percentage of sales method will, therefore, in a growing company, overstate such values.
A)True
B)False
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Chapter 30: Working Capital Management
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Q1) What are eurodollars (international dollars)?
Q2) If a commercial draft is an order to pay immediately, it is called a time draft.
A)True
B)False
Q3) The following are money market instruments except A)T-bills.
B)federal agency discount notes.
C)commercial paper.
D)preferred stocks.
Q4) Briefly explain how firms can protect against bad debt.
Q5) The main advantage of using a netting system to settle foreign currency payments is that it
A)drastically reduces the number of payments.
B)increases the number of payments.
C)reduces the number of foreign currencies.
D)None of these options are correct.
Q6) Fedwire is a system that transfers money between banks. A)True B)False
Q7) Briefly explain different terms of sale used in practice.
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Chapter 31: Mergers
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Q1) A modification of the corporate charter that requires 80 percent shareholder approval for a takeover is called a(n)
A)repurchase standstill provision.
B)exclusionary self-tender.
C)supermajority amendment.
D)tender offer.
Q2) Assume the following data: \(\begin{array}{lccl}
& \text { Firm A } & \text { Firm B } & \text { Firm } \mathrm{AB} \text { (after merger of } \mathrm{A} \text { and } \mathrm{B} \text { ) } \\
\text { Market Price per share } & \$ 20 & \$ 10 & \\
\text { Number of shares } & 1,000,000 & \$ 200,000 & \\
\text { Market value of the firm }&\$ 20 \text { million } & \$ 5 \text { million } &\$ 30
\text { milion }
\end{array}\) If Firm A intends to pay $7 million cash for Firm B, then calculate the cost of this merger.
A)$2 million
B)$3 million
C)$1 million
D)zero
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Chapter 32: Corporate Restructuring
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Q1) Which of the following is not a motive for privatization?
A)Increased efficiency
B)Share ownership
C)Expansion of government
D)Revenue for the government
Q2) There are two common types of bankruptcy procedures in the United States, which are set out in Chapter 7 and Chapter 11 of the 1978 Bankruptcy Reform Act.
A)True
B)False
Q3) A "privatization" is the same type of transaction as taking a company private in an LBO.
A)True
B)False
Q4) The following are examples of LBOs except
A)3G and Burger King.
B)KKR and First Data.
C)Fiat and Chrysler.
D)All of these options are LBOs.
Q5) What is a leveraged buyout?
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Chapter 33: Governance and Corporate Control Around the World
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Q1) One should expect that the countries having a common law tradition would do a better job protecting
A)shareholders.
B)creditors.
C)shareholders and creditors.
D)shareholders, creditors, and managers.
Q2) German governance seeks to include labor unions as a partner in making long-term decisions.
A)True
B)False
Q3) In which area do households allocate the highest percentage of their portfolio to direct equity ownership?
A)The United States
B)Japan
C)The UK
D)The euro area
Q4) Briefly explain the two important legal traditions in Europe and the United States.
Q5) What is corporate governance?
Q6) Briefly explain the term keiretsu.
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