Financial Decision Making Practice
Questions
Course Introduction
Financial Decision Making equips students with the essential skills and analytical tools necessary to make informed financial choices in both personal and organizational contexts. The course covers core concepts such as time value of money, risk and return analysis, capital budgeting, cost of capital, and financial statement interpretation. Through real-world case studies and practical exercises, students will learn how to assess investment opportunities, manage resources efficiently, and evaluate the financial impact of decision alternatives. Emphasis is placed on ethical considerations and the strategic role of financial decision making in achieving long-term business success.
Recommended Textbook
Corporate Finance 9th Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The Securities Exchange Act of 1934 focuses on:
A)all stock transactions.
B)sales of existing securities.
C)issuance of new securities.
D)insider trading.
E)Federal Deposit Insurance Corporation (FDIC) insurance.
Answer: D
Q2) A proxy fight occurs when:
A)the board solicits renewal of current members.
B)a group solicits proxies to replace the board of directors.
C)a competitor offers to sell their ownership in the firm.
D)the firm files for bankruptcy.
E)the firm is declared insolvent.
Answer: B
Q3) What advantages does the corporate form of organization have over sole proprietorships or partnerships?
Answer: The advantages of the corporate form of organization over sole proprietorships and partnerships are the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise more capital, and the opportunity of an unlimited life of the business.
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities.
A)Operating cash flow
B)Capital spending
C)Net working capital
D)Cash flow from operations
E)Cash flow to creditors
Answer: D
Q2) An increase in total assets:
A)means that net working capital is also increasing.
B)requires an investment in fixed assets.
C)means that shareholders' equity must also increase.
D)must be offset by an equal increase in liabilities and shareholders' equity.
E)can only occur when a firm has positive net income.
Answer: D
Q3) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:
A)has no debt of any kind.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)also has a current ratio of 10.
E)has an equity multiplier of 2.
Answer: A
Q2) Suppose you calculated the following ratio for a firm: The sum of the compensation paid to the owners, directors, and managers, divided by total sales.Which class of financial ratios should this be included in and why? Who might be interested in such a ratio?
Answer: This doesn't fit well into any of the five categories presented in the book although it would most likely be included as a profitability ratio because it is a measure of how much of each dollar in sales is used to pay these salaries.The ratio would likely be important to all of the three groups (owners, directors, managers) included in the ratio, plus it would likely be important to lenders as a measure of how much of the firm's income these groups draw out of the business.
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) The present value of future cash flows minus initial cost is called:
A)the future value 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.
E)None of the above.
Q2) Martha receives $100 on the first of each month.Stewart receives $100 on the last day of each month.Both Martha and Stewart will receive payments for five years.At an 8% discount rate, what is the difference in the present value of these two sets of payments?
A)$32.88
B)$40.00
C)$99.01
D)$108.00
E)$112.50
Q3) There are three factors that affect the future value of an annuity.Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) No matter how many forms of investment analysis you do:
A)the actual results from a project may vary significantly from the expected results.
B)the internal rate of return will always produce the most reliable results.
C)a project will never be accepted unless the payback period is met.
D)the initial costs will generally vary considerably from the estimated costs.
E)only the first three years of a project ever affect its final outcome.
Q2) Analysis using the profitability index:
A)frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B)is useful as a decision tool when investment funds are limited.
C)cannot be used to aid capital rationing.
D)utilizes the same basic variables as those used in the average accounting return.
E)produces results which typically are difficult to comprehend or apply.
Q3) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.
Q4) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
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Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) Should financing costs be included as an incremental cash flow in capital budgeting analysis?
Q2) LiCheng's Enterprises just purchased some fixed assets that are classified as 3-year property for MACRS.The assets cost $1,900.What is the amount of the depreciation expense for year 2? \[\begin{array}{l} \text { MACRS 3-year property }\\
\begin{array} { l r }
\underline{ \text { Year }}&\underline{ \text { Rate }} \\ 1&33.33\%\\
2 & 44.44 \% \\ 3 & 14.82 \% \\ 4 & 7.41 \%
\end{array}
\end{array}\]
A)$562.93
B)$633.27
C)$719.67
D)$844.36
E)$1,477.63
Q3) Explain the half year convention used in MACRS depreciation.
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Chapter 7: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) Quirk and Company has been busy analyzing a new product.It has determined that an operating cash flow of $18,500 will result in a zero net present value, which is a company requirement for project acceptance.The fixed costs are $14,000 and the contribution margin is $8.00.The company feels that it can realistically capture 10% of the 40,000 unit market for this product.Should the company develop the new product? Why or why not?
A)No; because 4,000 units of sales is less than the quantity required for a zero net present value
B)No; because the internal break-even point is greater than 4,000 units
C)Yes; because the firm can generate sufficient sales to obtain at least a zero net present value
D)Yes; because the project has an expected internal rate of return of 100%
E)Yes; because the project will pay back on a discounted basis
Q2) Which of the following are types of break-even analysis?
A)present value break-even
B)accounting profit break-even
C)mrket value break-even
D)Both A and B
E)Both A and C
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) The bonds of Frank's Welding, Inc.pay an 8% coupon, have a 7.98% yield to maturity and have a face value of $1,000.The current rate of inflation is 2.5%.What is the real rate of return on these bonds?
A)5.32%
B)5.35%
C)5.37%
D)5.42%
E)5.48%
Q2) Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon.The bond is currently priced at $894.60 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?
A)8.67%
B)10.13%
C)10.16%
D)10.40%
E)10.45%
Q3) Interest rate risk is often explained by using the concept of a teeter-totter.Explain interest rate risk and how it is related to the movements of a teeter-totter.
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Chapter 9: Stock Valuation
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Sample Questions
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) The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.
A)current
B)total
C)dividend
D)capital gains
E)earnings
Q3) What are the components of the required rate of return on a share of stock? Briefly explain each component.
Q4) Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why.
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11
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) A stock had returns of 8%, -2%, 4%, and 16% over the past four years.What is the standard deviation of this stock for the past four years?
A)6.3%
B)6.6%
C)7.1%
D)7.5%
E)7.9%
Q2) A stock had returns of 8%, 14%, and 2% for the past three years.Based on these returns, what is the probability that this stock will earn at least 20% in any one given year?
A)0.5%
B)1.0%
C)2.5%
D)5.0%
E)16.0%
Q3) You earned a total return of -5% on NoDotCom this year, earned -40% last year, and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) The Capital Market Line is the pricing relationship between:
A)efficient portfolios and beta.
B)the risk-free asset and standard deviation of the portfolio return.
C)the optimal portfolio and the standard deviation of portfolio return.
D)beta and the standard deviation of portfolio return.
E)None of the above.
Q2) A portfolio will usually contain:
A)one riskless asset.
B)one risky asset.
C)two or more assets.
D)no assets.
E)None of the above.
Q3) The total number of variance and covariance terms in a portfolio is N<sup>2</sup>.How many of these would be (including non-unique) covariances?
A)N
B)N<sup>2</sup>
C)N<sup>2</sup>- N
D)N<sup>2</sup>- N/2
E)None of the above.
Q4) Explain in words what beta is and why it is important.
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) The most realistic APT model would likely include:
A)multiple factors.
B)only one factor.
C)a factor to measure inflation.
D)Both A and C.
E)Both B and C.
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.
E)This cannot be determined or even estimated.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Q4) A value company is defined as one that:
A)tends to have a lower average return than a growth company.
B)tends to have higher average return than a growth company.
C)has a high ratio of book equity to market equity.
D)a and b.
E)a and c.
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Chapter 13: Risk, Cost of Capital, and Capital Budgeting
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Sample Questions
Q1) An industry is likely to have a low beta if the:
A)stream of revenues is stable and less volatile than the market.
B)economy is in a recession.
C)market for its goods is unaffected by the market cycle.
D)Both A and B.
E)Both A and C.
Q2) Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index, calculate Top Black's correlation.What can be said about the relationship of Top Black and the market return behavior?
Q3) The problem of using the overall firm's beta in discounting projects of different risk is the:
A)firm would accept too many high-risk projects.
B)firm would reject too many low risk projects.
C)firm would reject too many high-risk projects.
D)firm would accept too many low risk projects.
E)Both A and B.
Q4) Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index, calculate Top Black's covariance and beta.
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Page 15
Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15%.Is your cousin's performance a violation of market efficiency?
Q2) Which one of the following statements is correct concerning market efficiency?
A)Real asset markets are more efficient than financial markets.
B)If a market is efficient, arbitrage opportunities should be common.
C)In an efficient market, some market participants will have an advantage over others.
D)A firm will generally receive a fair price when it sells shares of stock.
E)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.
Q3) Which of the following is true?
A)Most empirical evidence is consistent with strong form efficiency.
B)Most empirical evidence is inconsistent with weak form efficiency.
C)Strong form market efficiency is not supported by the empirical evidence.
D)Both A and C.
E)Both B and C.
Q4) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Preferred stock may be desirable to issue for which of the following reason(s)?
A)If there is no taxable income, preferred stock does not impose a tax penalty.
B)The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.
C)Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.
D)Both B and C.
E)Both A and B.
Q2) Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:
A)a debenture.
B)a bond.
C)a long-term liability.
D)a preferred liability.
E)None of the above.
Q3) From this information, calculate Eaton's book value per share.
Q4) Preferred Stock, as a hybrid security, presents somewhat of a puzzle as to why they are issued.What elements give rise to the puzzle and how is it explained?
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Page 17
Chapter 16: Capital Structure: Basic Concepts
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Q1) MM Proposition I with taxes supports the theory that:
A)there is a positive linear relationship between the amount of debt in a levered firm and its value.
B)the value of a firm is inversely related to the amount of leverage used by the firm.
C)the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
E)a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.
Q2) The reason that MM Proposition I does not hold in the presence of corporate taxation is because:
A)levered firms pay less taxes compared with identical unlevered firms.
B)bondholders require higher rates of return compared with stockholders.
C)earnings per share are no longer relevant with taxes.
D)dividends are no longer relevant with taxes.
E)All of the above.
Q3) Explain homemade leverage and why it matters.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) An exchange may offer:
A)allow customers a 30 day money-back guarantee on the firm's product.
B)allow customers a 90 day warranty on the firm's product from defects.
C)allow bondholders to exchange some debt for stock.
D)allow stockholders to exchange some of their stock for debt.
E)Both C and D.
Q2) In Miller's model, when the quantity [(1 - Tc)(1 - Ts) = (1 - Tb)], then:
A)the firm should hold no debt.
B)the value of the levered firm is greater than the value of the unlevered firm.
C)the tax shield on debt is exactly offset by higher personal taxes paid on interest income.
D)the tax shield on debt is exactly offset by higher levels of dividends.
E)the tax shield on debt is exactly offset by higher capital gains.
Q3) Conflicts of interest between stockholders and bondholders are known as:
A)trustee costs.
B)financial distress costs.
C)dealer costs.
D)agency costs.
E)underwriting costs.
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The all equity cost of capital for flat Rock Grinding is 15% and the company has set a target debt to value ratio of 50%.The current cost of debt for a firm of this risk is 10% and the corporate tax rate is 34%.Calculate the WACC for the Flat Rock Grinding Corporation.
Q2) What are the three standard approaches to valuation under leverage?
A)CAPM, SML, and CML
B)APR, FTE, and CAPM
C)APT, WACC, and CAPM
D)APV, FTE, and WACC
E)NPV, IRR, Payback
Q3) If the WACC is used in valuing a leveraged buyout, the:
A)WACC remains constant because of the final target debt ratio desired.
B)flotation costs must be added to the total UCF.
C)WACC must be recalculated as the debt is repaid and the cost of capital changes.
D)tax shields of debt are not available because the corporation is no longer publicly traded.
E)None of the above.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) The Tinslow Co.has 125,000 shares of stock outstanding at a market price of $93 a share.The company has just announced a 5-for-3 stock split.How many shares of stock will be outstanding after the split?
A)62,500 shares
B)75,000 shares
C)83,333 shares
D)175,000 shares
E)208,333 shares
Q2) A one-for-four reverse stock split will:
A)increase the par value by 25%.
B)increase the number of shares outstanding by 400%.
C)increase the market value but not affect the par value per share.
D)increase a $1 par value to $4.
E)increase a $1 par value by $4.
Q3) The information content of a dividend increase generally signals that:
A)the firm has a one-time surplus of cash.
B)the firm has few, if any, net present value projects to pursue.
C)management believes that the future earnings of the firm will be strong.
D)the firm has more cash than it needs due to sales declines.
E)future dividends will be lower.
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Chapter 20: Issuing Securities to the Public
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Q1) In comparison to debt issuance expenses, the total direct costs of equity issues are:
A)considerably less.
B)about the same.
C)meaningless.
D)considerably greater.
E)None of the above.
Q2) Types of dilution include:
A)dilution of percentage ownership
B)dilution of market share
C)dilution of book value and earnings per share
D)A and C
E)All of the above
Q3) Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?
Q4) Lamar Inc.is attempting to raise $5,000,000 in new equity with a rights offering.The subscription price will be $40 per share.The stock currently sells for $50 per share and there are 250,000 shares outstanding.How many rights are needed to buy a new share?
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Chapter 21: Leasing
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Q1) Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes.This off-balance-sheet-financing made firms with:
A)capital leases appear financially stronger than firms that used debt to purchase the asset.
B)operating leases appear financially stronger than firms that used debt to purchase the asset.
C)leases of any type appear financially stronger than firms that used debt to purchase the asset.
D)All of the above.
E)None of the above.
Q2) The Plastic Iron Company has decided to acquire a new electronic milling machine.Plastic Iron can purchase the machine for $87,000 which has an expected life of 8 years and will be depreciated using 7 class MACRS rates of .1428, .2449, .1749, .125, .0892, .0892, .0892 and any remainder in year 8.Miller Leasing has offered to lease the machine to Plastic Iron for $14,000 a year for 8 years.Plastic Iron has an 18.64% cost of equity, 12% cost of debt, a 1:1 D/E ratio and faces a 34% marginal tax rate.Should they lease or buy? Show all work.
Q3) What are some of the advantages and disadvantages of leasing?
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Chapter 22: Options and Corporate Finance
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Q1) An option that may be exercised at any time up to its expiration date is called a(n) _____ option.
A)futures
B)Asian
C)Bermudan
D)European
E)American
Q2) You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10.Today, the option expires and the underlying stock is selling for $34.30 a share.Ignoring trading costs and taxes, what is your total profit or loss on this investment?
A)-$2,900
B)-$1,100
C)$700
D)$1,100
E)$2,900
Q3) How do options apply to capital budgeting? Explain and give an example.
Q4) What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value.This value can be primarily attributed to:
A)the potential sale of the company.
B)the low exercise price held by the shareholders.
C)the option to open the facility when prices rise dramatically.
D)All of the above.
E)None of the above.
Q2) On the notion of embedded options, which of the following is/are true?
A)If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.
B)There are at least two possible outcomes for virtually every business idea.
C)Virtually every business has both the option to abandon and the option to expand.
D)All of the above.
E)Both B and C.
Q3) If Mr.Maxim earned $500,000 in regular annual salary why might he prefer to have $1,500,000 in straight salary versus salary and options?
Q4) Why would the company pay the executive in options as opposed to salary?
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) A firm has 2,000 shares of stock and 200 warrants outstanding.The warrants are about to expire, and all of them will be exercised.The market value of the firm's assets is $14,000, and the firm has no debt.Each warrant gives the owner the right to buy 1 share at $5.What is the warrant's effective exercise price?
Q2) The gain from exercising a warrant is similar to the gain from exercising a call option except:
A)the gain on a warrant is greater by the fraction of warrant shares divided by total shares.
B)the gain on a warrant is limited by the firm's value after being reduced by the debt of the firm.
C)the gain on a warrant is decreased by the fraction of original shares divided by total post exercise shares.
D)Both A and B.
E)Both B and C.
Q3) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
Q4) Illustrate and explain how a convertible bond value is based on both debt and equity value.What is the option value?
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Chapter 25: Derivatives and Hedging Risk
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Q1) If a firm purchases a cap at 10% this will:
A)limit the amount of borrowing to 10% of assets.
B)pay the firm 10% on their purchase.
C)pay the holder the LIBOR interest above 10%.
D)pay the holder the LIBOR interest below the 10%.
E)None of the above.
Q2) On March 1, you contract to take delivery of 1 ounce of gold for $495.The agreement is good for any day up to April 1.Throughout March, the price of gold hit a low of $425 and hit a high of $535.The price settled on March 31 at $505, and on April 1<sup>st</sup> you settle your futures agreement at that price.Your net cash flow is:
A)$-30.
B)$-20.
C)$-15.
D)$10.
E)$20.
Q3) What new asset duration will immunize the balance sheet?
Q4) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?
Q5) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 26: Short-Term Finance and Planning
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Q1) The Babco Co.has a $200,000 line of credit with an 8% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed.What is the effective interest rate if the firm uses this source of funding to purchase a $117,000 piece of equipment? The company plans on repaying the loan in a lump sum at the end of one year.
A)7.20%
B)7.27%
C)8.08%
D)8.80%
E)8.89%
Q2) Your firm factors its accounts receivable immediately at a 3% discount.The average collection period is 41.95 days.Assume that all accounts are collected in full.What is the effective annual interest rate on this arrangement?
A)27.9%
B)30.3%
C)31.7%
D)32.9%
E)34.3%
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Chapter 27: Cash Management
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Q1) A firm with low cash balances will need to borrow to cover an unexpected cash outflow:
A)if it has high cash flow variability.
B)if COGS decrease.
C)if the firm maintains a zero lower control limit.
D)Both A and B.
E)Both A and C.
Q2) Your firm receives 10 checks per month.Of these, 6 are for $1,000 and 4 are for $500.The delay for the $1,000 checks is 5 days, and the $500 checks are delayed 8 days.Calculate the average daily float.
A)$1,533.33
B)$1,486.87
C)$1,500.00
D)$1,530.35
E)$1,590.04
Q3) Refer to the above scenario.If Mesa will charge your firm an annual fee of $35,000 and $.20 per check handled will you accept Mesa's services?
Q4) Refer to the above scenario.What is the savings float and what can you earn if the firm takes Mesa's lockbox service?
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Chapter 28: Credit and Inventory Management
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Q1) Quattro Incorporated has an investment in accounts receivable of $3,500,000.Daily credit sales are $120,000.If 20% of Quattro's credit customers receive a discount by paying within 10 days, what is the net period that Quattro maintains?
A)10 days
B)23 days
C)38 days
D)45 days
E)There is not enough information to tell.
Q2) Aggie Corporation has been asked by its customers to grant them a 2% discount if they pay their bill within 15 days.The purchase size of the average order is $75,000.Normally, the customer pays within 30 days with no discount.Aggie's cost of debt capital is 12%.Should the request be granted?
Q3) When analyzing the NPV of a decision to change cash discounts, the firm would probably not consider:
A)the size of the discount.
B)the expected change in the order size.
C)the firm's cost of debt.
D)the expected change in sales due to the cash discount policy change.
E)All of the above would probably be considered.
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Chapter 29: Mergers and Acquisitions
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Q1) Firm A is planning on merging with Firm B.Firm A will pay Firm B's stockholders the current value of their stock in shares of Firm A.Firm A currently has 3,000 shares of stock outstanding at a market price of $15 a share.Firm B has 1,000 shares outstanding at a price of $10 a share.What is the value per share of the merged firm?
A)$10.00
B)$15.00
C)$16.25
D)$20.00
E)$20.50
Q2) If Microsoft were to acquire U.S.Airways, the acquisition would be classified as a _____ acquisition.
A)horizontal
B)longitudinal
C)conglomerate
D)vertical
E)complementary resources
Q3) Discuss why Bank of America purchased Merrill Lynch in 2009.
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Chapter 30: Financial Distress
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Q1) Altman's Z-score predicts the:
A)percentage of payout to equityholders in liquidations.
B)percentage of payout to equityholders in reorganization.
C)likelihood of a private workout.
D)likelihood of bankruptcy of a firm within one year.
E)None of the above.
Q2) The difference between liquidation and reorganization is:
A)reorganization terminates all operations of the firm and liquidation only terminates non-profitable operations.
B)liquidation terminates only profitable operations and reorganization terminates only non-profitable operations.
C)liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.
D)liquidation only deals with current assets and reorganization only consolidates debt.
E)None of the above.
Q3) When choosing between liquidation and reorganization, what are some of the empirical factors that lead a firm toward one choice or the other?
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Chapter 31: International Corporate Finance
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Q1) The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:
A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.
Q2) Assume that $1 can buy you either ¥107 or £.55.If a TV in London costs £500, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?
A)¥95,255
B)¥96,667
C)¥97,273
D)¥98,008
E)¥118,889
Q3) Are exchange rate changes between the U.S.dollar and the Japanese yen necessarily good or bad for Japanese automakers? Explain your reasoning.
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