Financial Management
Final Test Solutions
Course Introduction
Financial Management is designed to provide students with a comprehensive understanding of the principles and practices involved in managing the finances of organizations. The course covers key topics such as financial analysis, budgeting, capital structure, investment decision-making, risk management, and the strategic planning of financial resources. Emphasis is placed on the application of financial tools and theories to real-world business scenarios, enabling students to develop the skills necessary to make informed financial decisions that support organizational objectives and value creation.
Recommended Textbook
Corporate Finance 3rd Canadian Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) What type of company trades on an organized stock exchange?
A) a limited liability company
B) a private company
C) a crown corporation
D) a public company
Answer: D
Q2) In 2011,the largest stock market by domestic capitalization in the world was
A) the London Stock Exchange.
B) the NASDAQ.
C) the American Stock Exchange.
D) the New York Stock Exchange.
Answer: D
Q3) One of the major reasons that corporations have a principal-agent problem is that A) management is less transparent.
B) they have an inefficient and incompetent management team.
C) direct control and ownership are often separate.
D) there is a lack of communication between the owners and the management team.
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) In 2002,the United States Congress passed ________ that requires,among other things,that CEO's and CFOs certify the accuracy and appropriateness of their firm's financial statements and increase the penalties against them if the financial statements later prove to be fraudulent.
A) the Sarbanes-Oxley Act
B) new American GAAP
C) the IFRS
D) revised GAAP
Answer: A
Q2) Which of the following statements regarding the balance sheet is incorrect?
A) The balance sheet provides a snapshot of the firm's financial position at a given point in time.
B) The balance sheet lists the firm's assets and liabilities.
C) The balance sheet reports stockholders' equity on the right hand side.
D) The balance sheet reports liabilities on the left hand side.
Answer: D
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4
Chapter 3: Arbitrage and Financial Decision Making
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Sample Questions
Q1) You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today.Suppose the risk-free interest rate is 6% per year.Should you take this project,and what is the closest estimate of the NPV?
A) Yes; NPV = $165
B) No; NPV = $165
C) Yes; NPV = -$165
D) No; NPV = -$165
Answer: D
Q2) If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:
A) $91.00
B) $92.50
C) $93.00
D) $100.00
Answer: C
Q3) In a normal market with transactions costs,is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?
Answer: Values can differ,but only up to the total amount of transactions costs.
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5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) Since your first birthday,your grandparents have been depositing $1,000 into a savings account on every one of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:
A) $25,645
B) $36,465
C) $12,659
D) $18,000
Q2) Which of the following statements regarding the timeline is false?
A) Date 1 is one year from now.
B) The $5,000 below date 1 is the payment you will receive at the end of the first year.
C) The $5,000 below date 2 is the payment you will receive at the beginning of the second year.
D) Date 0 represents today.
Q3) Draw a timeline detailing the cash flows from investment "A."
Q4) You have been offered the following investment opportunity: if you pay $2,500 today,you will receive $1,000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.
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Page 6
Chapter 5: Interest Rates
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Sample Questions
Q1) The Bank of Canada determines very short-term interest rates through its influence on
A) the overnight rate.
B) the nominal interest rate.
C) the real interest rate.
D) the effective annual rate.
Q2) The highest effective rate of return you could earn on any of these investments is closest to:
A) 6.250%
B) 6.267%
C) 6.300%
D) 6.320%
Q3) Should you purchase the delivery truck or lease it? Why?
Q4) The effective annual rate (EAR)for a loan with a stated APR of 10% compounded quarterly is closest to:
A) 10.52%
B) 10.25%
C) 10.38%
D) 10.00%
Q5) What is the effective after-tax rate of each instrument,expressed as an EAR?
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) Which of the following statements is false?
A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B) Credit spreads fluctuate as perceptions regarding the probability of default change.
C) Credit spreads are higher for bonds with higher ratings.
D) We refer to the difference between the yields of the corporate bonds and the treasury yields as the default spread or credit spread.
Q2) Consider a zero-coupon bond with a $1,000 face value and 10 years left until maturity.If the bond is currently trading for $459,then the yield to maturity on this bond is closest to:
A) 7.5%
B) 10.4%
C) 9.7%
D) 8.1%
Q3) Assuming that this bond trades for $1,035.44,then the YTM for this bond is equal to:
Q4) What is the relationship between a bond's price and its yield to maturity?
Q5) Compute the yield to maturity for each of the five zero-coupon bonds.
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Page 8
Chapter 7: Valuing Stocks
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Sample Questions
Q1) The firm's weighted average capital cost (WACC)is mainly used in A) the zero dividend growth model.
B) the constant dividend growth model.
C) the discounted free cash flow model.
D) the total payout model.
Q2) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.If Defenestration's payout rate remains constant,then Defenestration's stock price is closest to:
A) $50.00
B) $22.25
C) $32.30
D) $30.75
Q3) Suppose you plan to hold Von Bora stock for one year.The price you would expect to be able to sell a share of Von Bora stock at in one year is closest to:
A) $26.50
B) $22.20
C) $23.15
D) $24.10
Q4) What are some common multiples used to value stocks?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) Which of the following statements is correct?
A) According to a 1995 study, less than 80% of Canadian firms used the rule of NPV, but about 50% of firms used some form of discounted cash flow analysis.
B) According to a 1995 study, less than 50% of Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis.
C) According to a 1995 study, every Canadian firm used the rule of NPV, and about 80% of firms used some form of discounted cash flow analysis.
D) According to a 1995 study, no Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis.
Q2) The maximum number of IRRs that could exist for project B is: A) 3
B) 1
C) 2
D) 0
Q3) If the discount rate for project B is 15%,then what is the NPV for project B?
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Page 10
Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Epiphany is worried about the reliability of the sales forecast.How sensitive is the project's NPV to a 10% change in sales.
Q2) The incremental unlevered net income for Shepard Industries in year two is closest to:
A) $355 million
B) $415 million
C) $600 million
D) $510 million
Q3) When Canadian firms need to determine the asset class and the relevant CCA rate,they can find the necessary information from
A) the Canadian Generally Accepted Accounting Principles (GAAP).
B) the Canadian Revenue Agency (CRA).
C) the respective provincial government's office.
D) the International Financial Report Standard (IFRS).
Q4) What is sensitivity analysis?
Q5) How does scenario analysis differ from sensitivity analysis?
Q6) Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of year three.What is the after-tax salvage value of this project?
Page 11
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Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) Suppose an investment is equally likely to have a 35% return or a -20% return.The standard deviation on the return for this investment is closest to:
A) 38.9%
B) 0%
C) 19.4%
D) 27.5%
Q2) Which of the following statements is correct?
A) The return indicates the percentage increase in the value of an investment per dollar initially invested in the security.
B) The return indicates the average increase in the value of an investment per dollar initially invested in the security.
C) The return indicates the weighted average increase in the value of an investment per dollar initially invested in the security.
D) The return indicates the exponential increase in the value of an investment per dollar initially invested in the security.
Q3) Which pharmaceutical company faces less risk?
Q4) What is the market portfolio?
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12
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Sample Questions
Q1) The risk of a portfolio depends on how each stock's ________ moves in relation to it.
A) dividend
B) risk
C) price
D) return
Q2) Which of the following statements is false?
A) Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1.
B) Volatility is the square root of variance.
C) The closer the correlation is to 0, the more the returns tend to move together as a result of common risk.
D) If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.
Q3) What are three main assumptions underlie the CAPM?
Q4) Calculate the covariance between Home Depot's and IBM's returns.
Q5) Calculate the correlation between Home Depot's and IBM's returns.
Page 13
Q6) Will adding the precious metals fund improve your portfolio?
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Chapter 12: Estimating the Cost of Capital
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Q1) Which of the following statements is false?
A) When an investor chooses her optimal portfolio, she will do so by finding the tangent line using the risk-free rate that corresponds to her investment horizon.
B) If the market portfolio is not efficient, savvy investors who recognize that the market portfolio is not optimal will push prices and expected returns back into balance.
C) Even though different investors may research different stocks, their information will not impact the market portfolio since there is no way to share this information with other investors.
D) In the real world borrowers pay higher interest rates than savers receive.
Q2) California Gold Mining's beta with the market is closest to:
A) 0.9
B) 1.25
C) -0.9
D) -1.25
Q3) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q4) Why does the yield to maturity of a firm's debt generally overestimate its debt cost of capital?
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Page 14
Chapter 13: Investor Behaviour and Capital Market
Efficiency
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Sample Questions
Q1) One of the reasons that it is extremely difficult in practice to identify portfolios that are efficient is because
A) we cannot measure the realized return and the standard deviation of a portfolio with great accuracy.
B) we cannot measure the expected return and the standard deviation of a portfolio with great accuracy.
C) we cannot measure the weighted average return and the standard deviation of a portfolio with great accuracy.
D) we cannot measure the required return and the standard deviation of a portfolio with great accuracy.
Q2) Investment strategy that ________ stocks that have had past ________ returns and ________ stocks that have had past ________ returns is called a momentum strategy.
A) buys; low; sells high
B) sells; high; buys; low
C) buys; high; sells; low
D) none of the above
Q3) What does the existence of a positive alpha investment strategy imply?
Q4) Explain why the market portfolio proxy may not be efficient.
Page 15
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Chapter 14: Financial Options
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Sample Questions
Q1) Using options to place a bet on the direction in which you believe the market is likely to move is called
A) speculation.
B) hedging.
C) a covered position.
D) a naked position.
Q2) The Law of One Price requires that ________ must have the same price.
A) the stock and a put or a bond and a call
B) the stock and a call or a bond and a put
C) the bond and a put or a stock and a put
D) the bond and a call or a stock and a call
Q3) In Canada,the Montreal Exchange's only broad index option is ________.
A) on the S&P TSX Composite
B) on the S&P TSX 60
C) on the TSX Ventures
D) on the TSX Derivatives
Q4) You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in- or out-of-the-money?
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Chapter 15: Option Valuation
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Sample Questions
Q1) The risk-neutral probability of an up state for KD industries is closest to:
A) 37.5%
B) 60.0%
C) 40.0%
D) 62.5%
Q2) Which of the following statements is false?
A) Out-of-the-money calls have the highest expected returns and out-of-the-money puts have the lowest expected returns.
B) The expression S /(S + B) is the ratio of the amount of money in the stock position in the replicating portfolio to the value of the replicating portfolio (or the option price); it is known as the leverage ratio.
C) The beta of a portfolio is just the weighted average beta of the constituent securities that make up the portfolio.
D) The magnitude of the leverage ratio for options is usually very small, especially for out-of-the-money options.
Q3) Using risk-neutral probabilities,calculate the price of a two-year put option on Kinston stock with a strike price of $9.
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Page 17
Chapter 16: Real Options
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Q1) One of the major differences between a real option and a financial option is that
A) a real option is not traded in competitive markets.
B) a real option is traded in competitive markets.
C) a real option is less risky than a financial option.
D) a real option has more risk than a financial option.
Q2) Which of the following statements is false?
A) When the investment cannot be delayed, the optimal rule is to invest whenever the profitability index is greater than zero.
B) It is often better to wait too long (use a profitability index criterion that is too high) than to invest too soon (use a profitability index criterion that is too low).
C) When the source of uncertainty that creates a motive to wait is interest rate uncertainty, the hurdle rate is relatively easy to calculate.
D) When there is an option to delay, a good rule of thumb is to invest only when the profitability index is at least 1.
Q3) Describe the two factors that affect the value of an investment timing option?
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18
Chapter 17: Capital Structure in a Perfect Market
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Q1) With perfect capital markets,leverage has ________ effect on firm value or the firm's overall cost of capital.
A) zero
B) a positive
C) a negative
D) an unpredictable
Q2) The example of Canadian Jet Set Airline's expansion by issuing new equity proves that
A) any gain or loss associated with the transaction will result from the expected return of the investments the firm makes with the funds raised.
B) any gain or loss associated with the transaction will result from the realized return of the investments the firm makes with the funds raised.
C) any gain or loss associated with the transaction will result from the required return of the investments the firm makes with the funds raised.
D) any gain or loss associated with the transaction will result from the NPV of the investments the firm makes with the funds raised.
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19
Chapter 18: Debt and Taxes
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Q1) Which of the following statements is false?
A) To determine the benefit of leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive.
B) Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield, by the Law of One Price the same must be true for the present values of these cash flows.
C) By increasing the amount paid to debt holders through interest payments, the amount of the pretax cash flows that must be paid as taxes increases.
D) When a firm uses debt, the interest tax shield provides a corporate tax benefit each year.
Q2) The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:
A) $290 million
B) $745 million
C) $847 million
D) $550 million
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Chapter 19: Financial Distress, managerial Incentives, and Information
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Q1) Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The total value of MI with leverage is closest to:
A) $140 million
B) $100 million
C) $125 million
D) $134 million
Q2) Two key qualitative factors determine ________ of financial distress costs: (1)the probability of financial distress and (2)the magnitude of the costs after a firm is in distress.
A) the market value
B) the book value
C) the future value
D) the present value
Q3) The agency costs are the costs that arise when there are conflicts of interest
A) between management and shareholders.
B) between customers and suppliers.
C) between stakeholders.
D) between the board of directors and shareholders.
Page 21
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Chapter 20: Payout Policy
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Q1) In Bell Canada Enterprises' spin-off,shareholders who received Nortel shares ________ for capital gains tax at the time they ________ the Nortel shares.
A) are not liable; sell
B) are liable; sell
C) are not liable; receive
D) are liable; receive
Q2) Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend: investing the $200 million in an expansion project that will raise future free cash flows by 30% or using the $200 million to repurchase shares? Which provides the higher stock price?
Q3) If Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value,then the number of shares outstanding following the repurchase is closest to:
A) 92 million
B) 10 million
C) 75 million
D) 90 million
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Chapter 21: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following is NOT a step in the WACC valuation method?
A) Compute the value of the investment, including the tax benefit of leverage, by discounting the free cash flow of the investment using the WACC.
B) Compute the weighted average cost of capital.
C) Determine the free cash flow of the investment.
D) Adjust the WACC for the firm's current debt/equity ratio.
Q2) The three main methods of capital budgeting are
A) the weighted average cost of capital (WACC) method, the net present value (NPV) method, and the flow-to-equity (FTE) method.
B) the weighted average cost of capital (WACC) method, the adjusted present value (APV) method, and the debt-to-equity (DTE) method.
C) the weighted average cost of capital (WACC) method, the adjusted present value (APV) method, and the flow-to-equity (FTE) method.
D) the weighted average cost of capital (WACC) method, the adjusted future value (AFV) method, and the flow-to-equity (FTE) method.
Q3) Describe the key steps in the WACC valuation method.
Q4) Calculate the NPV for Iota's new project.
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23
Chapter 22: Valuation and Financial Modelling: a Case Study
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Q1) The unlevered beta for Oakley is closest to:
A) 0.70
B) 1.50
C) 1.00
D) 0.60
Q2) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A) 25.9
B) 16.4
C) 14.5
D) 19.0
Q3) Describe the major approach in estimating the cost of capital when attempting to evaluate an acquisition of a private firm.
Q4) The amortization expense may be used for ________ but for ________,the Canada Revenue Agency (CRA)requires companies to use Capital Cost Allowance (CCA).
A) asset valuation; financial reporting purposes
B) tax purposes; financial reporting purposes
C) financial reporting purposes; tax purposes
D) the income statement; the balance sheet
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Chapter 23: The Mechanics of Raising Equity Capital
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Q1) What will the offer price of these shares be if Luther is selling 800,000 shares?
Q2) Luther Industries currently has 100 million shares of stock outstanding at a price of $25 per share.The company would like to raise money and has announced a rights issue.Every existing shareholder will be sent one right per share of stock that he or she owns.The company plans to require twenty rights to purchase one share at a price of $20 per share.The amount of money that Luther will raise through its rights offering is closest to:
A) $500 million
B) $125 million
C) $100 million
D) $400 million
Q3) What will the proceeds from the IPO be if Luther is selling 1.1 million shares ?
Q4) ________ can provide substantial capital for young companies.In return,________ often demand a great deal of control.
A) Institutional investors; institutional investors
B) Corporate investors; corporate investors
C) Venture capital firms; venture capitalists
D) Sovereign wealth funds; sovereign wealth funds
Q5) Based upon the price/revenue ratio,what would be a reasonable value for KD?
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Chapter 24: Debt Financing
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Q1) Which of the following statements is false regarding a call provision?
A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue.
B) A call provision allows the issuer to repurchase the bonds at a predetermined price.
C) The call price is generally set at or below, and is expressed as a percentage of, the bond's face value.
D) A call feature allows the issuer of the bonds the right (but not the obligation) to retire all outstanding bonds on (or after) a specific date (the call date), for the call price.
Q2) In addition to the tradable securities,the Canadian government also borrows directly from ________ through ________ and Canada Premium Bonds.
A) corporate investors; Canada Savings Bonds
B) venture capital investors; Government of Canada Bonds
C) institutional investors; Government of Canada Bonds
D) individuals; Canada Savings Bonds
Q3) What is the Yield to Call (YTC)on this bond?
Q4) What is the Yield to Maturity (YTM)on this bond?
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Page 26
Chapter 25: Leasing
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Q1) In order to further understand Capital Cost Allowance (CCA),________ of exempt assets are referred to as ________ and other leases are referred to as non-tax leases.
A) operating leases and financial leases; true tax leases
B) temporary leases and capital leases; true tax leases
C) long-term leases and financial leases; true tax leases
D) capital leases and financial leases; true tax leases
Q2) If Luther acquires the new fleet of delivery trucks using an operating lease,Luther's Debt to Equity ratio will be closest to:
A) 2.0
B) 1.5
C) 0.80
D) 0.66
Q3) In a perfect market,where lessors compete with one another in initiating leases,the cost of leasing is equivalent to
A) the cost of purchasing and future reselling price of the asset.
B) the future cost of purchasing and reselling the asset.
C) the cost of purchasing and reselling the asset.
D) the future cost of purchasing and future reselling price of the asset.
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Chapter 26: Working Capital Management
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Q1) Luther's Accounts Receivable days is closest to:
A) 42 days
B) 39 days
C) 32 days
D) 59 days
Q2) What does the term 2/10 net 30 mean?
A) If the invoice is paid within 10 days a 2% discount can be taken. If the invoice is paid between 11 and 29 days a 1% discount can be taken. After 30 days the full invoice is due.
B) If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is due in 30 days.
C) If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can be taken if the invoice is paid in 30 days.
D) If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is due in 30 days.
Q3) Calculate the number of days in Luther's Operating Cycle.
Q4) What is a compensating balance?
Q5) Describe "just-in-time" inventory management.
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Chapter 27: Short-Term Financial Planning
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Sample Questions
Q1) Which of the following statements is false?
A) In a pledging of accounts receivable agreement, the lender reviews the invoices that represent the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan, based on its own credit standards.
B) With a trust receipts loan or floor planning, all inventory items are held in a trust as security for the loan.
C) If the factoring agreement is without recourse, the borrowing firm must receive credit approval for a customer from the factor prior to shipping the goods. If the factor gives its approval, the firm ships the goods and the customer is directed to make payment directly to the lender.
D) In a warehouse arrangement, the inventory that serves as collateral for the loan is stored in a warehouse.
Q2) Luther Industries wants to borrow $1 million for two months.Using its inventory as collateral,it can obtain a 10% (APR)loan (compounded monthly).The lender requires that a warehouse arrangement be used.The warehouse fee is $10,000,payable at the end of the two months.Calculate the effective annual rate of this loan for Luther Industries.
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Chapter 28: Mergers and Acquisitions
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Q1) ________ are/is by far the most common justification that bidders give for the premium they pay for a target.
A) Small risks
B) Value Added
C) Diversification
D) Large synergies
Q2) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
Q3) The price paid for a target is equal to the target's ________ plus the ________ paid in the acquisition.
A) after-bid market capitalization; premium
B) pre-bid market capitalization; administrative cost
C) pre-bid market capitalization; premium
D) pre-bid market capitalization; opportunity cost
Q4) What is a white knight?
Q5) Canada's Competition Bureau was rated in the "good" category by ________.
A) the World Bank
B) the Global Competition Review
C) the International Monetary Fund
D) the Organization for Economic Co-operation and Development
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Chapter 29: Corporate Governance
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Q1) What is corporate governance?
Q2) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q3) Which of the following statements is false?
A) The relationship between managerial ownership and firm value is unlikely to be the same for every firm, or even for different executives of the same firm.
B) Even with the risk benefits of separating ownership and control, there are still examples of corporations in which the top managers have substantial ownership interests.
C) Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers.
D) While increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal.
Q4) A variety of pyramid structures are quite common in Canada and ________.
A) other countries including the United States
B) other countries except the United States
C) the United States and not the European countries
D) other Asian countries except Japan
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Page 31
Chapter 30: Risk Management
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Q1) Insurance allows the firm to exchange a(n)________ future loss for a certain ________ expense.
A) uncertain; upfront
B) certain; upfront
C) uncertain; afterward
D) certain; afterward
Q2) Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called
A) key personnel insurance.
B) business liability insurance.
C) property insurance.
D) business interruption insurance.
Q3) Hedging involves contracts or transactions that provide the firm with ________ that offset its losses from price changes.
A) profits
B) incomes
C) cash flows
D) net earnings
Q4) What is the actuarially fair cost of full insurance?
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Chapter 31: International Corporate Finance
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Q1) Which of the following statements is false?
A) Canadian tax policy requires Canadian corporations to pay taxes on their foreign income at the same rate as profits earned in Canada.
B) The home government gets an opportunity to tax the income from a foreign project to the domestic firm.
C) The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income.
D) The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income.
Q2) The risk of the foreign project is ________ the risk of Canadian domestic projects because the foreign project contains ________ that the domestic projects often do not contain.
A) likely to be the same as; residual exchange rate risk
B) unlikely to be exactly the same as; residual exchange rate risk
C) likely to be the same as; residual inflation risk
D) unlikely to be exactly the same as; residual inflation risk
Q3) What is the dollar present value of the project?
Q4) Calculate the pound denominated cost of capital for Luther's project.
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