Introduction to Corporate Finance Exam Preparation Guide
Course Introduction
Introduction to Corporate Finance explores the fundamental principles and concepts central to financial management within corporations. The course covers key topics such as the time value of money, risk and return, valuation of financial assets, capital budgeting, cost of capital, and the analysis of financial statements. Students will also examine how firms make investment and financing decisions, understand the role of financial markets, and learn about dividend policy and capital structure. Emphasis is placed on practical application through case studies and problem-solving, preparing students to assess and make informed financial decisions in a corporate environment.
Recommended Textbook
Corporate Finance 7th Canadian Edition by Jaffe
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Time preference refers to the fact that:
A) corporations match current assets with current liabilities to minimize the chance of bankruptcy.
B) corporations match both current and long-term assets with current and long-term liabilities to minimize the change of bankruptcy.
C) investors prefer current cash flows to future cash flows.
D) investors seek to time cash flows to minimize tax liabilities.
Answer: C
Q2) Do you think agency problems arise in sole proprietorships and/or partnerships?
Answer: Agency conflicts typically arise when there is a separation of ownership and management of a business.In a sole proprietorship and a small partnership,such separation is not likely to exist to the degree it does in a corporation.However,there is still potential for agency conflicts.For example,as employees are hired to represent the firm,there is once again a separation of ownership and management.
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3
Chapter 2: Accounting Statements and Cash Flow
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Q1) Which of the following is not a use of Net Working Capital?
A) Retirement of long-term debt.
B) Dividends.
C) Sale of equity.
D) Acquisition of fixed assets.
Answer: C
Q2) The primary source of the firm's cash flow is usually:
A) net income.
B) tax credits.
C) earnings before interest and depreciation minus taxes.
D) capital spending after taxes.
E) working capital requirements.
Answer: C
Q3) Pion Inc.reported current assets of $80 and fixed assets of $150 as of December 31.The company,as of December 31,also reports current liabilities of $72 and long-term liabilities of $149.Calculate Pion's shareholder's equity.
Answer: ($80 + $150)- ($72 + $149)= $9
Q4) What is the change in the net working capital from 2013 to 2014?
Answer: ($7,310 - $2,570)- ($6,225 - $2,820)= $1,335
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Chapter 3: Financial Planning and Growth
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Q1) Financial planning models frequently assume that many variables are proportional to:
A) economic growth.
B) industry growth.
C) interest rates.
D) company sales.
Answer: D
Q2) A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2.The dividend payout is .2,and the ratio of total assets to sales is constant at 1.2.What must the profit margin be?
A) 10.00%
B) 9.09%
C) 11.11%
D) 8.00%
Answer: B
Q3) A firm wishes to maintain a growth rate of 4% per year,a debt-to-equity ratio of .26,and a dividend payout of 40%.If the profit margin is 10%,and next year's sales are projected at $500,what is the total asset projection?
Answer: 11ea8884_9833_7093_a96f_ab88922ce4cb_TB5261_11 ; X = 975.00
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Q1) An individual has income of $20,000 in period 0 and $42,000 in period 1.An investment opportunity that costs $15,000 in period 0 is worth $18,000 in period 1.The market interest rate is 6%.What is the maximum possible consumption in period 1 if the individual consumes $16,000 in period 0 and follows the NPV rule?
Q2) An individual has income of $15,000 in period 0 and $20,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,500 in period 1.The market interest rate is 8%.What is the maximum possible consumption in period 0 if the individual consumes $26,000 in period 1?
Q3) At what market rates of interest would make the individual indifferent between (1)all consumption in Period 0 and none in Period 1 and (2)no consumption in Period 0 and all consumption in Period 1?
Q4) Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:
A) choosing the highest net income projects.
B) investing at the market rate of return.
C) buying shares back from investors.
D) following the NPV rule to choose investments.
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Chapter 5: The Time Value of Money
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Q1) Discounting cash flows involves:
A) reducing cash flows that occur beyond 10 years in the future.
B) discounting expected cash flows beyond a certain number of years in the future, which varies with the riskiness of the project.
C) reducing expected cash flows to achieve certainty equivalence.
D) reducing the value of future cash flows to reflect the time value of money.
E) taking the cash discount offered on trade merchandise.
Q2) Your employer contributes $25 a week to your retirement plan.Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%.Given these assumptions,what is this employee benefit worth to you today?
A) $13,144.43
B) $15,920.55
C) $16,430.54
D) $16,446.34
E) $16,519.02
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.
Q4) What is meant by "amortizing a loan"?
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Chapter 6: How to Value Bonds and Stocks
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Q1) Mortgage Instruments Inc.is expected to pay dividends of $1.03 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?
A) $20.
B) $21.
C) $34.
D) $52.
Q2) The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 years before growing at 8% indefinitely thereafter.The equity has a required return of 10% in the market.The price of the stock should be ___.
A) $9.38
B) $17.05
C) $41.67
D) $59.80
E) $62.38
Q3) Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) The IRR decision rule can be reversed because:
A) the NPV rule is not the same as the IRR.
B) the IRR is based on a mutually exclusive investment.
C) instead of an investment project it is a financing project.
D) the IRR is greater than 100%.
Q2) Payback is frequently used to analyze independent projects because:
A) it considers the time value of money.
B) all relevant cash flows are included in the analysis.
C) it is easy and quick to calculate.
D) it is the most desirable of all the available analytical methods from a financial perspective.
Q3) The internal rate of return tends to be:
A) easier for managers to comprehend than the net present value.
B) extremely accurate even when cash flow estimates are faulty.
C) ignored by most financial analysts.
D) used primarily to differentiate between mutually exclusive projects.
Q4) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
Q5) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Page 9
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Chapter 8: Net Present Value and Capital Budgeting
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Q1) The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow to $400,000 per year.The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:
A) the press cost of $250,000 and total cash flow of $400,000.
B) the change in cash flow of $67,000 versus the price cost of $250,000.
C) the current cash flow of $333,000 and the price cost of $250,000.
D) the opportunity cost of the facility of $333,000.
Q2) You are considering whether to replace an existing flow meter.The existing meter can be sold now for $50 or it can be sold in 1 year for $10.It costs $30 per year to operate and maintain.A new meter costs $400 and has a 10-year life.It could be sold for $40 at the end of its life.The new meter costs $14 per year to operate and maintain.What do you recommend if the cost of capital is 12%?
A.<sub>12,10</sub>-$40/(1.12)<sup>10</sup> = $471.87; $4 71.87/5.65 = $83.51
Because the cost of keeping the old machine is less than the cost of the new machine, the old machine should not be replaced.
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Chapter 9: Risk Analysis,real Options,and Capital Budgeting
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Q1) The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options.Explain two different options that management may have,what they are,and how they would influence market value.
Q2) Fixed production costs are:
A) directly related to labor costs.
B) measured as cost per unit of time.
C) measured as cost per unit of output.
D) dependent on the amount of goods or services produced.
Q3) All else equal,the contribution margin must increase as:
A) both the sales price and variable cost per unit increase.
B) the fixed cost per unit declines.
C) the variable cost per unit declines.
D) sales price per unit declines.
E) the sales price minus the fixed cost per unit increases.
Q4) The accounting profit break-even point occurs when:
A) the total revenue curve cuts the total cost curve.
B) the total revenue curve cuts the fixed cost curve.
C) the variable cost curve cuts the total cost curve.
D) the total revenue curve cuts the variable cost curve.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) A stock has returns of 3%,18%,-24%,and 16% for the past four years.Based on this information,what is the 95% probability range for any one given year?
Q2) List 2 shortcomings of using value at risk (VaR)as a risk management tool.
Q3) The expected return on a security in the market context is:
A) a negative function of execs security risk.
B) a positive function of the beta.
C) a negative function of the beta.
D) a positive function of the excess security risk.
E) independent of beta.
Q4) Kids Toy Co.has had total returns over the past five years of 0%,7%,-2%,10%,and 12%.What was the mean return on this stock and its variability in percent return?
A) 6.75%; 6.15%.
B) 5.40%; 6.15%.
C) 6.75%; 6.33%.
D) 5.40%; 5.50%.
Q5) Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50.In addition,the stock paid dividends of $0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
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Q1) A portfolio will usually contain:
A) only one riskless asset.
B) only one risky asset.
C) two or more assets.
D) no assets.
Q2) The measure of beta associates most closely with:
A) idiosyncratic risk.
B) risk-free return.
C) systematic risk.
D) unexpected risk.
E) unsystematic risk.
Q3) If the covariance of stock 1 with stock 2 is -.0065,then what is the covariance of stock 2 with stock 1?
A) -.0065.
B) less than -.0065.
C) greater than +.0065.
D) +.0065.
Q4) We routinely assume that investors are risk-averse return-seekers; i.e.,they like returns and dislike risk.If so,why do we contend that only systematic risk and not total risk is important?
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) An investor is considering the three stocks given below: A.
Stock B and C: Rp = .5(13.3%) + .5(9.2%) = 11.25%
Stock B and C: p = .5(2.1) + .5(0.75) = 1.425
Stock B and T-bills: <sub>B&TBILL</sub> = .5(2.1) + .5(0) = 1.05
Stock's B and A: <sub>B&A</sub> = .5(2.1) + .5(-0.1) = 1.00
C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stock B and
Q2) Assuming that the single factor APT model applies,the beta for the market portfolio is:
A) zero.
B) one.
C) the average of the risk free beta and the beta for the highest risk security. D) impossible to calculate without collecting sample data.
Q3) Which of the following statements is true?
A) A well-diversified portfolio has negligible systematic risk.
B) A well-diversified portfolio has negligible unsystematic risk.
C) An individual security has negligible systematic risk.
D) An individual security has negligible unsystematic risk.
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Chapter 13: Risk,return,and Capital Budgeting
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Q1) The best fit line of pairwise plot of the returns of the security against the market index returns is called :
A) the SML.
B) the CML.
C) the characteristic line.
D) the risk line.
Q2) The slope of the characteristic line is the estimated: A) intercept.
B) beta.
C) unsystematic risk.
D) market variance.
E) market risk premium.
Q3) On-line Text Co.has four new text publishing products that they must decide on publishing to expand their services.The firm's WACC has been 17%.The projects are of equal risk,ßs of 1.6.The risk-free rate is 7% and the market rate is expected to be 12%.The projects are expected to earn as follows:
Q4) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) The stock market crash of October 1987 and the Great Crash of 1929,although not fully explained,may be (partially)explained by:
A) new information coming to the market; being efficient the market was priced down.
B) technical difficulties in order processing.
C) the bubble theory that prices move wildly above equilibrium values and eventually fall back to equilibrium causing large losses.
D) the conspiracy theory that large institutions and rich investors control the market and caused the general population to suffer large wealth losses.
Q2) Explain why it is that in an efficient market,investments have an expected NPV of zero.
Q3) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
Q4) 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?
Q5) Define the three forms of market efficiency.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) A grant of authority allowing someone else to vote shares of stock that you own is called a:
A) power-of-share authorization.
B) proxy.
C) share authority grant (SAG).
D) restricted conveyance.
Q2) Retained earnings are:
A) the amount of cash that the firm has saved up.
B) the difference between the net income earned and the dividends paid in a year.
C) the difference between the market price of the stock and the book value.
D) the amount of stock repurchased.
Q3) 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?
Q4) The Knot Knit Corporation needs to elect 9 directors.There are 120,000 shares outstanding.Under cumulative voting,how many shares would you need to own to guarantee that your favorite candidate is elected?
Q5) From this information,calculate Enstat's book value per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?
Q2) A firm has a debt-to-equity ratio of 1.20.If it had no debt,its cost of equity would be 15%.Its cost of debt is 10%.What is its cost of equity if there are no taxes or other imperfections?
A) 21%.
B) 18%.
C) 15%.
D) 10%.
Q3) If a firm is unlevered and has a cost of equity capital 12% what would the cost of equity be if the firms became levered at 2:1?The expected cost of debt would be 8%.
A) 14.67%.
B) 16.0%.
C) 20.0%.
D) 14.0%.
Q4) Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 0%
A) $0.825.
B) $0.528.
C) $0.175.
D) $0.472.
Q2) The basic lesson of MM theory is that the value of a firm is dependent upon the:
A) capital structure of the firm.
B) total cash flows of the firm.
C) percentage of a firm to which the bondholders have a claim.
D) tax claim placed on the firm by the government.
E) size of the stockholders claims on the firm.
Q3) Indirect costs of bankruptcy are born principally by:
A) bondholders.
B) stockholders.
C) managers.
D) the Federal government.
E) the firm's suppliers.
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The Free-Float Company,a company in the 36% tax bracket,has riskless debt in its capital structure which makes up 40% of the total capital structure,and equity is the other 60%.The beta of the assets for this business is 0.8 and the equity beta is:
A) 0.80.
B) 0.73.
C) 0.53.
D) 1.33.
E) 1.47.
Q2) The Delta Dam Company has a capital structure of 80% risky debt with a of .9 and 20% equity with a of 1.6.Their current tax rate is 34%.What is the if Delta Dam was an unlevered firm?
A) 1.09
B) 1.04
C) 0.80
D) 0.56
E) 0.44
Q3) Discuss the adjusted present value,the flow to equity and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.
Page 20
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Chapter 19: Dividends and Other Payouts
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Q1) A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices.This process is called a:
A) dividend creation model.
B) secondary market transaction.
C) free market sale.
D) Dutch auction.
Q2) The date before which a new purchaser of stock is entitled to receive a declared dividend,but on or after which he/she does not receive the dividend,is called the _____ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
Q3) Which one of the following is an argument in favor of a low dividend policy?
A) the tax on capital gains is deferred until the gain is realized.
B) few, if any, positive net present value projects are available to the firm.
C) a preponderance of stockholders have minimal taxable income.
D) corporate tax rates exceed personal tax rates.
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Chapter 20: Issuing Equity Securities to the Public
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Q1) The winner's curse is used to describe:
A) the payoff you receive on lottery tickets.
B) getting a full allocation of undesirable IPO shares.
C) acquiring all underpriced IPO issues.
D) a fully underwritten issue.
Q2) Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3.Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
Q3) The ZYX Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities.The current share price is $40 and there are 500,000 shares outstanding.The number of rights needed to buy a share of stock should be:
A) 0.10
B) 40.00.
C) 0.40.
D) 10.00.
Q4) What are venture capitalists and what is their role in raising capital for firms?
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Chapter 21: Long-Term Debt
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Q1) If the bond sells for par today,what is the coupon?
Q2) An Income bond is unique in at least one characteristic.Explain what is different about income bonds and why they exist.Why are they not more popular?
Q3) A sinking fund is useful to bondholders because:
A) it stops the company from going under or into default.
B) the funds are usable at the option of the bondholders.
C) when a firm has difficulty making payments this sends a signal of potential default. D) a balloon payment is necessary to fully pay off the bonds at maturity.
Q4) Owers Divestiture Corporation,a firm speculating in corporate reorganizations,has bonds outstanding that were originally issued at par but are now selling,on September 19,2012,for $1,050 per $1,000 face value.The bonds have a stated interest rate of 8% and mature on January 1,2022.The bonds pay interest semi-annually on July 1 and January 1 each year.Suppose that an investor buys a $1,000 face value bond on September 1,2012.What dollar amount will the investor pay to the seller on September 1? How much interest will the investor receive on January 1,2013?
Q5) If the bond sells for par today,what is the coupon?
Q6) What is the bond's value today if the coupon is set at $100?
Q7) What is the bond's value today if the coupon is set at $70?
Page 23
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Chapter 22: Leasing
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Q1) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
A) -$100,000
B) $15,000
C) -$15,000
D) -$125,000
Q2) What is the NPV of the lease relative to the purchase?
A) -$125,000
B) -$36,970
C) $75,000
D) $125,000
Q3) The city of Oakville sold some buildings and used the proceeds to improve its financial position.The city then leased the buildings back in order to continue to use these facilities.This is an example of:
A) an operating lease.
B) a short-term lease.
C) a sale and leaseback.
D) a fully amortized lease.
Q4) Should the asset be purchased or leased? Support your answer.
Q5) Calculate the NPV of the lease versus the purchase decision.
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) Suppose a stock can be purchased for $8,a put option on the stock can be purchased for $1.50,and a call option on the stock can be written (i.e.,sold)for $1.00.If holding these positions in combination can guarantee a payoff of $10 at the end of the year,then what must be the risk-free rate if no arbitrage opportunities exist?
A) 12.50%.
B) 5.50%.
C) 17.65%.
D) 33.33%.
E) 18.75%.
Q2) If the time to expiration of the underlying stock decreases,then the:
A) value of the put option will increase, but the value of the call option will decrease.
B) value of the put option will decrease, but the value of the call option will increase.
C) value of both the put and call option will increase.
D) value of both the put and call option will decrease.
E) value of both the put and call option will remain the same.
Q3) Explain how the value of a firm can be viewed as an option.How can the call and put views be resolved?
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) What is the value of a call option?
A) $3.14
B) $5.86
C) C)$4.26
D) $5.62
E) $6.16
Q2) The NPV approach must be:
A) augmented by added analysis if there are a few embedded options.
B) augmented by added analysis if a decision has significant embedded options.
C) jettisoned if there are any embedded options.
D) computed carefully to identify the options.
Q3) Executives cannot exercise their options for a fixed period of time,this is the:
A) investing period.
B) freeze-out period.
C) valuation period.
D) guaranteed growth period.
E) strike period.
Q4) Why would the company pay the executive in options as opposed to salary?
Page 26
Q5) If Mr.Maxim earned $500,000 in regular annual salary why might why might he prefer to have $1,500,000 in straight salary versus salary and options?
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Chapter 25: Warrants and Convertibles
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Q1) Concerning convertible bonds,which of the following statements is not correct?
A) A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.
B) Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.
C) If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.
D) Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.
Q2) Kida Consultants currently has 300,000 shares of common outstanding.Firm value net of debt is $3,900,000.Kida has warrants outstanding with an exercise price of $10.How many warrants must the firm have issued if the gain from exercising a single warrant is $8.25?
Q3) Kida Consultants has 100,000 shares of stock outstanding.The firm's value net of debt is $2 million.Kida has 1,000 warrants outstanding with an exercise price of $18,where each warrant entitles the holder to purchase one share of stock.Calculate the gain from exercising a single warrant.
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Chapter 26: Derivatives and Hedging Risk
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Q1) On March 1,you contract to take delivery of 1 ounce of gold for $415.The agreement is good for any day up to April 1.Throughout March,the price of gold hit a low of $385 and hit a high of $435.The price settled on March 31 at $420,and on April 1<sup>st</sup> you settle your futures agreement at that price.Your net cash flow is:
A) -$30.00.
B) $20.00.
C) $5.00.
D) -$15.00.
E) -$20.00.
Q2) Credit default swaps:
A) will pay the holder the LIBOR interest rate.
B) pay the borrower the LIBOR interest rate.
C) are like insurance against a loss of value if the firm defaults on a bond.
D) limit the amount of borrowing of all parties in the credit default swap.
Q3) Duration of a pure discount bond:
A) is equal to its half-life.
B) is less than a zero coupon bond.
C) is equal to the liabilities hedged.
D) equal to its maturity.
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Page 28
Chapter 27: Short-Term Finance and Planning
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Q1) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
Q2) Which of the following statements is not true?
A) A flexible policy toward total asset requirement involves cash surplus.
B) A flexible policy toward total asset requirement involves a permanent need for short-term borrowing.
C) A restrictive policy toward total asset requirement involves a large investment in net working capital.
D) Maturity hedging seeks to avoid financing long-term assets with short-term borrowing.
E) Usually, long-term borrowing costs are lower than short-term borrowing costs.
Q3) The cash cycle for 2014 is:
A) 140.27 days.
B) 50.71 days.
C) 94.55 days.
D) 81.65 days.
E) 98.74 days.
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Chapter 28: Cash Management
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Q1) Most large firms hold a cash balance greater than most models imply because:
A) it is too difficult to estimate the costs of security transactions.
B) banks are compensated by account balances for payment of services.
C) corporations have few bank accounts and it is difficult to manage their cash.
D) cash is costless and need not be managed closely.
Q2) Which of the following money-market securities has no active secondary market?
A) Certificates of deposit (CD's)
B) Commercial paper
C) Banker's acceptances
D) Treasury bills
Q3) Efficient funds management attempts to reduce mailing and clearing time.Two methods do this by:
A) moving collections and deposits closer together in concentration banks; and moving surplus funds quickly by wire transfers.
B) moving mailing points to cross country locations and using depository drafts to transfer funds.
C) drawing checks against zero balance accounts and using cross country mailing.
D) wiring funds to zero balance accounts and using lockboxes in many cities.
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Chapter 29: Credit Management
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Q1) When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:
A) invoice account.
B) open account.
C) unsecured account.
D) unsecured note.
Q2) Robinson Rollingpin Corporation has variable cost per unit of $.35 per $1 of sales.The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%.A customer normally orders $75,000,and is considering the discount.Normally,the customer pays within 30 days with no discount.Robinson's cost of debt capital is 12%.Would Robinson be wise to offer the discount? Calculate the NPV of the decision.
Q3) The carrying value of its account receivable is $700,000 and the average collection period is 45 days.The firm's credit sales per day are:
A) $15,555.56.
B) $23,333.33.
C) $4,666,666.67.
D) $700,000.00.
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31
Chapter 30: Mergers and Acquisitions
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Q1) Firm A and Firm B merge to form firm AB.This is an example of:
A) a tender offer.
B) an acquisition of assets.
C) an acquisition of stock.
D) a consolidation.
Q2) Compensation paid to top management in the event of a takeover is called a:
A) poison pill.
B) golden parachute.
C) self-tender.
D) buyout.
Q3) Cowboy Curtiss' Cowboy Hat Company recently completed a merger.When valuing the combined firm after the merger,which of the following is an example of the type of common mistake that can occur?
A) The use of market values in valuing either of the new firm.
B) The inclusion of cash flows that are incremental to the decision.
C) The use of its own correct discount rate when valuing the cash flows of the entire company.
D) The inclusion of all relevant transactions cost associated with the acquisition.
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Chapter 31: Financial Distress
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Q1) Which of the following statements about private workouts of financial distress is NOT true?
A) Senior debt is replaced with junior debt.
B) Debt may be replaced by equity.
C) Private workouts account for about three quarters of all reorganizations.
D) Top management is dismissed or take pay reduction many times.
Q2) How much and what percentage of their claim will the unsecured creditors receive,in total?
A) $290,909; 36.36%
B) $300,000; 37.50%
C) $600,000; 75.00%
D) $100,000; 12.50%
Q3) Steel Pony decides to reorganize and assumes the "going concern" value of the firm is a strong and reliable estimate.Management feels that for the firm to have a stable financial structure and for any plan to be acceptable to the current senior debtholders the new debt cannot represent more than twice equity and be made up of 40% senior debt.Determine the distribution of new securities under the reorganization.Assuming all creditors are treated according to APR.
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Chapter 32: International Corporate Finance
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Q1) Newsat Telco is planning on investing $40 billion in Europe this year for a satellite communications systems.The expected cashflow over the next three years is 20.6 billion Euros per year growing at the rate of inflation.After three year they will abandon the system as worthless.The European current and expected inflation rate is 5.2% per annum over this period and the U.S.inflation rate is expected to be 2.8% per annum.The current exchange rate is $.9/Euro.Newsat has a U.S.cost of capital of 15%.Should Newsat invest?
Q2) You want to invest in a riskless project in Sweden.The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years.The project will be worthless after the first 3 years.The expected inflation rate in Sweden is 2 percent while it is 5 percent in the U.S.A risk-free security is paying 6 percent in the U.S.The current spot rate is $1 = SKr7.55.What is the net present value of this project in Swedish krona using the foreign currency approach? Assume that the international Fisher effect applies.
A) SKr185,607
B) SKr192,434
C) SKr196,910
D) SKr197,867
E) SKr202,818
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