Introduction to Finance Exam Questions
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and concepts that underlie financial decision-making within organizations and personal contexts. The course covers key topics such as time value of money, risk and return, valuation of stocks and bonds, capital budgeting, financial markets, and the role of financial institutions. Through real-world examples and case studies, students will develop analytical skills to interpret financial data and make informed decisions, preparing them for further study in finance and related disciplines.
Recommended Textbook
Corporate Finance 6th Canadian Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) In the managerial structure of the corporation the two officers and their responsibilities that report directly to the Chief Financial Officer are:
A) the credit manager who handles accounts receivable and the tax manager who minimizes tax payments.
B) the personnel manager who manages salaries and compensation and the production operations manager who manages facility operations.
C) the treasurer who is responsible handling cash flow and making financial decisions and the tax manager who minimizes tax payments.
D) the controller who manages the accounting function and the treasurer who is responsible handling cash flow and making financial decisions.
Answer: D
Q2) A financial manager's most important job is to create value from capital budgeting, financing, and liquidity activities. Explain how financial managers create value. Answer: Buy assets that generate more than their cost. Sell financial securities that raise more cash than they cost. Minimize cash payouts to non-investors, ie., taxes to governments.
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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) According to GAAP, revenue is recognized as income when:
A) a contract is signed to perform a service or deliver a good.
B) the transaction is complete and the goods or services delivered.
C) payment is received.
D) income taxes are paid.
Answer: B
Q3) What is the change in the net working capital from 2009 to 2010?
Answer: ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335
Q4) Assets are listed on the balance sheet in order of:
A) decreasing liquidity.
B) decreasing size.
C) increasing size.
D) relative life.
Answer: A
4
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Chapter 3: Financial Planning and Growth
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Sample Questions
Q1) In the financial planning model, external funds needed (EFN) is equal to:
A) assets less (liabilities - equity).
B) assets less (liabilities + equity).
C) (assets + liabilities) less equity.
D) (assets + equity) less liabilities.
E) assets less equity.
Answer: B
Q2) Altering the inputs to a financial plan by changing one of the assumptions is called:
A) a redundancy check.
B) a pro forma evaluation.
C) goal seeking.
D) sensitivity analysis.
Answer: D
Q3) The addition to retained earnings for the financial planning period is equal to:
A) Net Income + Taxes - Dividends.
B) Net Income - Dividends.
C) Net income + Depreciation - Dividends.
D) Sales - Dividend.
Answer: B
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Page 5
Chapter 4: Financial Markets and Net Present Value: First Principles of Finance
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Sample Questions
Q1) 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
Q2) According to the net present value rule, an investment should be made if:
A) the net present value has no risk
B) the net present value is greater than the cost of investment
C) the net present value is greater than present value
D) the net present value is more desired than consumption
E) the net present value is positive.
Q3) The financial market rate is 5%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.) NPV = -42,000 + (46,900/1.05) = -
Q4) If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%. How much will the current shareholders earn.?
Q5) Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Your aunt, in her will, left you the sum of $5,000 a year forever with payments starting immediately. However, the news is better. She has specified that the amount should grow at 5% per year to maintain purchasing power. Given an interest rate of 12%, what is the PV of the inheritance?
Q2) The equation [Ct/(1+r)t] provides:
A) the compound value of a series of payments with a single interest rate.
B) the compound value of a series of payments with a series of interest rates.
C) the compound value of a single payment.
D) the present value of a series of payments with a single interest rate.
E) the present value of a single payment.
Q3) Aunt Clarisse has promised to leave you $60 a year starting next year and have it increase at 4% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Clarisse left you if your opportunity costs is 9%.
A) $693.33.
B) $1200.00.
C) $1248.00.
D) $666.67
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Chapter 6: How to Value Bonds and Stocks
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Sample Questions
Q1) The value of common stock today depends on:
A) the expected future holding period and the discount rate.
B) the expected future dividends and the capital gains.
C) the expected future dividends, capital gains and the discount rate.
D) the expected future holding period and capital gains.
Q2) Gugenheim, Inc. offers a 7% coupon bond with annual payments. The yield to maturity is 5.85% and the maturity date is 9 years. What is the market price of a $1,000 face value bond?
A) $742.66
B) $868.67
C) $869.67
D) $1,078.73
E) $1,079.59
Q3) The No-zip Snap Company had net earnings of $127,000 this past year. Dividends were paid of $38,100 on the company's equity of $1,587,500. The estimated growth for Unzip is:
A) 2.4%
B) 5.6%
C) 7.2%
D) 16.8%
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) Suppose that a project has a cash flow pattern (-$2,000, $25,000, -$25000) Its IRR is given by
A) 12%
B) 9% or 1040%
C) 25%or 250%
D) 4100%
Q2) Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
Q3) An investment project has the cashflow stream of -250, 75, 125, 100, and 50. The cost of capital is 12%. What is the discount payback period?
A) 2.5 years.
B) 2.7 years.
C) 3.38 years.
D) 1.40 years.
E) 1.25 years.
Q4) The NPV rule and PI give the same results when there is no conflict. In the case of a mutually exclusive set of investments, explain the potential conflict and the way it should be solved with supporting examples.
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Page 9
Chapter 8: Net Present Value and Capital Budgeting
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Sample Questions
Q1) A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n):
A) sunk cost.
B) opportunity cost.
C) erosion cost.
D) fixed cost.
Q2) One of the key differences between corporate finance and financial accounting courses is:
A) the focus on cashflows instead of earnings.
B) the focus on marginal tax rates versus average tax rates.
C) the role of total income flow versus incremental flows.
D) the focus on corporate avarice versus stewardship.
Q3) The bottom-up approach to computing the operating cash flow applies only when:
A) both the depreciation expense and the interest expense are equal to zero.
B) the interest expense is equal to zero.
C) the project is a cost-cutting project.
D) no fixed assets are required for the project.
E) taxes are ignored and the interest expense is equal to zero.
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is $225 million. If the test is successful, which has a 65% chance, the company will spend another $800 million to put the productive capabilities in place. The expected cashflows after tax for a successful project are $225 million each year for the next six years with a probability of .8; there is a 20% chance of a zero NPV. If the test fails the cashflows associated with continuing through the sixth year is $125 million per year after tax. The company uses a 12% discount rate for these types of projects. Draw and label the decision tree. Explain what decisions management would make at each node upon their realization.
Q2) 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.
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11
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q2) When stocks with the same expected return are combined into a portfolio:
A) the expected return of the portfolio is less than the average expected return of the stocks.
B) the expected return of the portfolio is greater than the average expected return of the stocks.
C) the expected return of the portfolio is equal to the average expected return of the stocks.
D) there is no relationship between the expected return of the portfolio and the expected return of the stocks.
Q3) The means of IS and DS are:
A) 4.4; 4.6
B) 5.5; 5.75
C) 10; 6
D) 4; 6
Q4) Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?
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Chapter 11: Risk and Return: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) Systematic risk is measured by:
A) the mean.
B) beta.
C) the geometric average.
D) the standard deviation.
Q2) Total risk can be divided into:
A) standard deviation and variance.
B) standard deviation and covariance.
C) portfolio risk and beta.
D) portfolio risk and unsystematic risk.
E) portfolio risk and covariance.
Q3) The expected return on GenLabs is:
A) 20.5
B) 12.5
C) 8.5
D) 3.3
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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Q5) Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?
Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) The term Corr(å <sub>R</sub>, <sub>T</sub>) = 0 tells us that:
A) the error terms of company R and T are 0.
B) the unsystematic risk of companies R and T is unrelated or uncorrelated.
C) the correlation between the returns of companies R and T is zero.
D) the systematic risk companies R and T is unrelated.
Q2) A growth stock portfolio and a value portfolio might be characterized
A) each by their P/E relative to the index P/E; high P/E for growth and lower for value.
B) as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.
C) low unsystematic risk and high systematic risk respectively.
D) moderate systematic risk and zero systematic risk respectively.
Q3) Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common is:
A) 3.2%.
B) 4.0%.
C) 7.2%.
D) 8.0%.
E) 9.0%.
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Chapter 13: Risk, Return, and Capital Budgeting
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Sample Questions
Q1) Beta measures depend highly on the:
A) direction of the market variance.
B) the overall cycle of the market.
C) the variance of the market and asset, but not their co-movement.
D) the standard deviation of the security and the market and how they are correlated.
Q2) XYZ INC has several divisions and the one managed by Dr. Donaldson has asset base of $4 million and earnings after taxes is $2 million. A new project would earn $2 million per year on an investment of $3 million. If the new project is on, Mr. Donaldson's bonus should not be based on
A) EVA
B) ROA
C) Sales
D) Accounting profits
E) Cash flows
Q3) What is the required rate of return on equity?
A) 9.6%
B) 14.4%
C) 15.2%
D) 18.56%
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Page 15
Chapter 14: Corporate Financing Decisions and Efficient
Capital Markets
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Sample Questions
Q1) Technical analysts believe that the:
A) future stock prices are unpredictable and therefore plot past prices.
B) stock prices are in equilibrium and advise not to follow price patterns.
C) future stock prices are a reflection of the past and plot prices to find reoccurring price patterns.
D) stock prices are only predictable based on the outlook for corporations earnings. E) SML is the most reliable predictor.
Q2) The Nu-Tux Seat Company has an expansion opportunity and is considering selling their 100,000 share investment in Slip-Cover currently worth $2 million or raising other external funding. The share price has been holding in a narrow range day to day. If Nu-Tux decides to unload their holding is there any concern about getting the full $2 million, aside from investment banker/brokerage fees. Explain these concerns about market behavior and cite the evidence.
Q3) Explain why it is that in an efficient market, investments have an expected NPV of zero.
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?
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) If a firm retires or extinguish a debt issue before maturity the specific amount they pay is:
A) the amortization amount.
B) the call price.
C) the sinking fund amount.
D) the spread premium.
Q2) Preferred stock has both a tax advantage and a tax disadvantage. These two are:
A) in default there are no taxes and dividends are taxed in corporate hands at 70%.
B) corporate dividend receipts are taxed on 30% of the total dividends and a liability is created for arrears.
C) dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.
D) dividends are fully tax deductible but are not equity capital.
Q3) Firms follow the "pecking order" in their long-term financing because:
A) internally generated funds are the cheapest source of financing.
B) outsiders will know less about the company and reduce the threat of any takeover.
C) other financial strategies create more agency problems.
D) firms prefer to issue safe securities with less valuation risk first.
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17
Chapter 16: Capital Structure: Basic Concepts
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Q1) A key assumption of MMs Proposition I (no taxes) is:
A) that financial leverage increases risk.
B) that individuals can borrow on their own account at rates less than the firm.
C) that individuals must be able to borrow on their own account at rates equal to the firm.
D) managers are acting to maximize the value of the firm.
Q2) A manager should attempt to maximize the value of the firm by:
A) changing the capital structure if and only if the value of the firm increases.
B) changing the capital structure if and only if the value of the firm increases to the benefit of the stockholders.
C) changing the capital structure if and only if the value of the firm increases only to the benefits the debtholders.
D) changing the capital structure if and only if the value of the firm increases although it decreases the stockholders' value.
E) changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) When small companies issue large stock offerings, we can expect owner managers to:
A) increase both leisure time and work related amenities.
B) decrease both leisure time and work related amenities.
C) increase leisure time but decrease work related amenities.
D) decrease leisure time and increase work related amenities.
E) decrease leisure time but keep work related amenities the same.
Q2) Indirect costs of financial distress:
A) effectively limit the amount of equity a firm issues.
B) serve as an incentive to increase the financial leverage of a firm.
C) include direct costs such as legal and accounting fees.
D) include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
Q3) The optimal capital structure will tend to include more debt for firms with:
A) the highest depreciation deductions.
B) the lowest marginal tax rate.
C) substantial tax shields from other sources.
D) lower probability of financial distress.
E) less taxable income.
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The flow-to-equity approach to capital budgeting is a three step process of:
A) calculating the levered cash flow, the cost of equity capital for a levered firm, then adding the interest expense when the cashflows are discounted.
B) calculating the unlevered cash flow, the cost of equity capital for a levered firm, and then discounting the unlevered cash flows.
C) calculating the levered cash flow after interest expense, the cost of equity capital for a levered firm, and then discounting the levered cash flows by the cost of equity capital.
D) calculating the levered cash flow after interest expense, the cost of equity capital for a levered firm, and then discounting the levered cash flows at the risk free rate.
Q2) A loan of $10,000 is issued at 15% interest. Interest on the loan is to be repaid annually for 5 years, and the non-amortized principal is due at the end of the fifth year. Calculate the NPV of the loan if the company's tax rate is 34%.
Q3) The appropriate cost of debt to the firm is:
A) the weighted cost of debt after tax. D) the coupon rate pre-tax.
B) the levered equity rate.
C) the market borrowing rate after tax.
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) On the date of record the stock price drop is:
A) a full adjustment for the dividend payment.
B) a partial adjustment for the dividend payment because of the tax effect.
C) zero because it happened on ex-dividend date.
D) zero because it happens on payment date.
Q2) You purchased 200 shares of ABC stock on July 15<sup>th</sup>. On July 20<sup>th</sup>, you purchased another 100 shares and then on July 22<sup>st</sup> you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5<sup>th</sup> to holders of record on Friday, July 23<sup>rd</sup>. The dividend is payable on July 31<sup>st</sup>. How much dividend income will you receive on July 31<sup>st</sup> from ABC?
A) $0
B) $220
C) $330
D) $440
E) $550
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21
Chapter 20: Issuing Equity Securities to the Public
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Q1) If a shareholder or investor wants to acquire new stock under a rights plant they must:
A) acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.
B) simply pay a registration fee and turn in the subscription price.
C) acquire the correct rights per share desired, turn the rights and the total subscription price into the subscription agent.
D) acquire the correct rights and wait for the company to send you the stock.
Q2) 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.
Q3) An equity issue sold directly to the public is called:
A) a rights offer.
B) a general cash offer.
C) a restricted placement.
D) a fully funded sales.
E) a standard call issue.
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Page 22
Chapter 21: Long-Term Debt
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Q1) A sinking fund is useful to a corporation because:
A) the corporation does not have to worry about paying the bondholders.
B) it provides the corporation with the option to buy the bonds back at the lower of face value or market price.
C) the payments to the sinking fund are not necessary when the firm is in financial difficulty.
D) they are simple and easy to monitor.
Q2) What is the cost of the call provision to the firm if the bond sells for $1,000 today?
A) -$71.43.
B) $0.00.
C) $77.43.
D) $178.57.
Q3) What is the bond's value today if the coupon is set at $100?
Q4) Zeros are bonds that:
A) have zero maturity.
B) have zero call dates.
C) have zero sinking funds.
D) have zero coupon rates.
Q5) What is the bond's value today if the coupon is set at $70?
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Chapter 22: Leasing
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Q1) In a lease arrangement, the user of the asset is:
A) the lesser.
B) the lessee.
C) the lessor.
D) the leaser.
Q2) The WACC is not used in the lease versus purchase decision because:
A) the WACC was used in the decision to acquire the asset, this is only a financing decision.
B) the WACC is used only when a lease alone is considered and not a lease versus purchase.
C) the WACC does not include the lease cost of capital and therefore should not be used.
D) tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.
Q3) What is the NPV of the lease?
A) -$1039.78.
B) $6,610.22.
C) +$339.78.
D) $360.22.
Q4) Should the asset be purchased or leased? Support your answer.
Page 24
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Chapter 23: Options and Corporate Finance: Basic Concepts
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Q1) The special contractual nature giving the owner the right to buy or sell an asset at a fixed price on or before a given date is the basis of:
A) a common stock.
B) a capital investment.
C) a futures.
D) an option.
Q2) You have entered into a call option contract for 1 period. The stock is selling for $28, you borrowed 412 at 8% and the delta is .6. What is the cost of the call?
A) $8.89.
B) $16.00.
C) $5.69.
D) $9.60.
Q3) Explain the rationale behind the statement that equity is a call option on the firm's assets. When would a shareholder allow the call to expire?
Q4) Options can be used to explain how the choice of a project can determine investor value. Options are also useful in evaluating alternatives open within a project choice, such as investing now or delaying. Give an example of how options can be used in investment timing.
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Chapter 24: Options and Corporate Finance: Extensions and Applications
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Q1) What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?
A) 1.1159; .8961
B) .0317; 31.5789
C) .0317; .9683
D) .2193; .7807
Q2) Rejecting an investment today forever may not be a good choice because:
A) the size of the firm will decline.
B) there are always errors in the estimation of NPVs.
C) the option value is negative.
D) the company's foregoing the future rights or option to the investment.
Q3) The volatility of interest rates affect the value of the project by:
A) increasing the value as volatility increase.
B) increasing the value as volatility decrease.
C) decreasing the value as volatility increase.
D) interest rate volatility does not affect value.
Q4) What is the value of Mr. Maxim's options?
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) Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:
A) subordinated straight debt is issued because there are other senior bondholders to protect them.
B) convertible debt is issued because the equity component will reduce these agency costs when value is shared.
C) convertible debt is issued because the holders can more readily sue when a high-risk project is under taken.
D) subordinated debt because monitoring is much easier with subordinated straight debt is issued.
Q2) A convertible bond is selling for $800. It has 10 years to maturity, a $1000 face value, and a 10% coupon. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $31.375 per share. The conversion premium is:
A) 37.25%.
B) 43.33%.
C) 59.36%.
D) 66.67%.
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Chapter 26: Derivatives and Hedging Risk
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Q1) In the practical use of credit default swaps there:
A) is not an organized exchange or template for the agreement.
B) is an organized exchange or template for the agreement.
C) are laws making them illegal in Canada.
D) are limits to the amount of borrowing of both parties.
Q2) The duration of a 2 year annual 10% bond that is selling for par is:
A) 2.00
B) 1.00
C) 1.91
D) 2.09
Q3) Derivatives can be used to either hedge or speculate. These actions:
A) increase risk in both cases.
B) decrease risk in both cases.
C) spread or minimize risk in both cases.
D) offsets risk by hedging and increase risk by speculating.
E) offset risks by speculating and increase risk by hedging.
Q4) The futures markets are labeled as pure speculation and even gambling. Why is this an inaccurate portrayal of the markets function.
Q5) What new asset duration will immunize the balance sheet if the duration of the liabilities are 1.111?
Page 28
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Chapter 27: Short-Term Finance and Planning
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Q1) The most common way to finance a temporary cash deficit is the use of:
A) banker's acceptances.
B) call options.
C) commercial paper.
D) unsecured bank loans.
Q2) A. What is the cash cycle for White Bluffs, Inc. if all sales are credit sales.
B. If you knew that Accounts Payables were $4884 last year, what effect would this have on your estimate of the cash cycle. Show and explain why.
Q3) . What is the operating cycle for White Bluffs, Inc. if all sales are on credit?
B. If you knew that Accounts Receivables were $3,250 the prior year, what effect would this have on your estimate of the operating cycle. Show and explain why.
Q4) Which of the following is not included in current assets?
A) Accounts receivable.
B) Accrued wages.
C) Cash.
D) Inventories.
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Chapter 28: Cash Management
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Q1) If interest rates were to rise to 12.00% per annum, what would be the firm's optimum cash balance using the Baumol model?
A) $1024.70.
B) $853.91.
C) $295.81.
D) $2958.04.
Q2) If the total long term financing of the firm is greater than the total financing needs for part of the year and less than the needs for some of the year due to seasonal fluctuations the company will most likely:
A) hold excess cash.
B) borrow short term and hold excess cash.
C) hold excess cash and reduce business activities.
D) invest in marketable securities and borrow short term.
Q3) Collection float increase book cash and:
A) decreases disbursement float.
B) decreases bank cash.
C) increases bank cash.
D) offsets net float.
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Chapter 29: Credit Management
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Q1) Robinson Rollingpin Corporation has been asked by its customers to please grant them a 2% discount if they pay their bill within 15 days. The purchase size of each order is $75,000. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Should the request be granted?
Q2) Risk is incorporated into the decision to grant credit by:
A) decreasing the discount rate.
B) altering the credit period.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.
Q3) If a firm refuses to offer credit the NPV of the transaction is:
A) the cash revenues received minus the cost paid in time period 0.
B) the discounted value of the revenues from time period 0.
C) the net cash flow from the future payments to be received.
D) determined by all of the above.
E) always equal to zero.
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Chapter 30: Mergers and Acquisitions
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Q1) A modification to the corporate charter that requires 80% shareholder approval for a takeover is called a(n):
A) repurchase standstill provision.
B) exclusionary self-tender.
C) super majority amendment.
D) tender offer.
Q2) The value of synergy is estimated by the equation:
A) VA+ VB- Revenue.
B) VAB- VA- VB.
C) VAB- VB- Taxes.
D) VA- VB- Costs.
Q3) Dexter Department Stores has a market value of $400 million and 20 million shares outstanding. Walnut Stores has a market value of $134 million and 13.4 million shares outstanding. Dexter is deciding to acquire Walnut Stores. The top management of Dexter's have determined that due to the synergies between the firms the combination will worth $667 million. Dexter expect to pay a $67 million premium for Walnut Stores. If Dexter were to make an offer of $201 million in stock for Walnut what would the exchange ratio be?
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32
Chapter 31: Financial Distress
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Q1) Insolvency can be defined as:
A) not having cash.
B) being illiquid.
C) an inability to pay one's debts.
D) an inability to increase one's debts.
E) the present value of payments being less than assets.
Q2) How much should the secured creditors receive?
A) $1,000,000.
B) $1,500,000.
C) $1,250,000.
D) $1,333,333.
Q3) A firm that has a series of negative earnings, sales declines and workforce reductions is likely head to:
A) a change in management.
B) a merger.
C) financial distress.
D) new financing.
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Chapter 32: International Corporate Finance
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Q1) Remitting cash flows is a term used to describe:
A) cash flows earned in a foreign country.
B) moving cash flows from the foreign subsidiary to the parent firm.
C) forecasting the value of foreign currency one-year hence.
D) forecasting the value of U.S. currency one-year hence.
Q2) Suppose that the Greer Company knows that it must pay 7 million for goods that it will receive in England. The current exchange rate is $1.75 . The risk that the corporate Treasurer faces is that:
A) the pound exchange rate falls in a months time to $1.50 .
B) the pound exchange rate rises in a months time to $2.00 .
C) the pound exchange rate does not change from its current position.
D) the pound exchange rate falls in a months time to $1.25 .
Q3) The inflation rates in the U.S. and Canada are predicted to be 3 and 5%, respectively, in the coming year. The exchange rate is currently 1.44 Canadian dollars for 1 U.S. dollars. Assuming RPPP holds, how many U.S. dollars will it take to buy 1 Canadian dollar at the end of the year? What will it cost to buy a U.S. dollar?
Q4) Describe the foreign currency and home currency approaches to capital budgeting. Which is better? Which approach would you recommend a U.S. firm use? Justify your answer.
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