Principles of Finance Exam Questions
Course Introduction
Principles of Finance introduces students to the fundamental concepts and analytical tools essential for effective financial decision-making within organizations. The course covers the time value of money, risk and return, asset valuation, capital budgeting, and an overview of financial markets and institutions. Students will develop a solid understanding of how firms raise and allocate capital, evaluate investment opportunities, and manage financial resources to achieve strategic objectives. Emphasis is placed on the application of financial principles through real-world examples and problem-solving exercises to prepare students for advanced coursework and professional roles in finance.
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Fundamentals of Corporate Finance Global 3rd Edition by Jonathan Berk
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Chapter 1: The Corporation
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Q1) Which of the following statements is FALSE?
A)In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders.
B)Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default.
C)As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.
D)If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm.
Answer: D
Q2) The distinguishing feature of a corporation is that:
A)there is no legal difference between the corporation and its owners.
B)it is a legally defined, artificial being, separate from its owners.
C)it spreads liability for its corporate obligations to all shareholders.
D)provides limited liability only to small shareholders.
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The firm's asset turnover measures:
A)the value of assets held per dollar of shareholder equity.
B)the return the firm has earned on its past investments.
C)the firm's ability to sell a product for more than the cost of producing it.
D)how efficiently the firm is utilizing its assets to generate sales.
Answer: D
Q2) If in 2012 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt to equity ratio for Luther in 2012 is closest to:
A)1.47
B)1.78
C)2.31
D)4.07
Answer: B
Q3) Luther's quick ratio for 2011 is closest to:
A)0.77
B)0.87
C)1.15
D)1.30
Answer: A
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) You have an investment opportunity in Germany that requires an investment of $250,100 today and will produce a cash flow of 208,650 in one year with no risk. Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is 0.78 to $1.00. What is the NPV of this project? Would you take the project?
A)NPV = -$100; No
B)NPV = $100; Yes
C)NPV = $2,358; Yes
D)NPV = $3,650; Yes
Answer: A
Q2) If the ETF is currently trading for $1,300, what arbitrage opportunity is available? What trades would you make?
Answer: The ETF is overpriced. Therefore an arbitrage opportunity exists by longing (buying)the individual stocks and shorting (selling)the ETF. Buy or Long two shares of APPL, one share of GOOG, and ten shares of MSFT and sell or Short one share of the ETF. Price = 2 × $200.23 + 1 × $570.51 + 10 × $29.61 = $1,267.07
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Q1) Assume that you are 30 years old today, and that you are planning on retiring at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31<sup>st</sup> birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday). If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday)and if the annual rate of return is 7%, then how much money will you have to spend in each of your golden years of retirement?
Q2) Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years. To solve this problem in Microsoft Excel, you would use which of the following Excel formulas?
A)=FV(.06,10000,0,10)
B)=PV(.06,10000,0,10)
C)=FV(.06,10,0,10000)
D)=PV(.06,10,0,10000)
Q3) Draw a timeline detailing the cash flows from investment "A."
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Chapter 5: Interest Rates
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Q1) Floyd Ferris invested $3,000 into an account five years ago. Today his account has grown to have a balance of $3,927.50. Given that his account offered monthly compounding of interest, the APR on this account is was closest to:
A)5.00%
B)5.25%
C)5.40%
D)5.54%
Q2) Should you purchase the delivery truck or lease it? Why?
Q3) Which of the following statements is FALSE?
A)The plot of the relationship between the investment risk and the interest rate is call the yield curve.
B)Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.
C)The nominal interest rate does not represent the increase in purchasing power that will result from investing
D)A risk-free cash flow received in two years should be discounted at the two-year interest rate.
Q4) 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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Q1) Taggart Transcontinental has issued at par a zero-coupon bond with a ten-year maturity. Investors believe there is a 10% chance that Taggart Transcontinental will default on these bonds. If they do default, investors expect to receive only 50 cents per dollar they are owned. If investors require an 8% return on their investment in these bonds, then the yield to maturity on these bonds will be closest to (assume annual compounding):
A)6.0%
B)6.5%
C)7.0%
D)8.0%
Q2) Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades for will be closest to:
A)$946
B)$919
C)$1,086
D)$1,000
Q3) Assume that the YTM increases by 1% for each of the four bonds listed. Rank the bonds based upon the sensitivity of their prices from least to most sensitive.
Q4) Plot the zero-coupon yield curve (for the first five years).
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Chapter 7: Investment Decision Rules
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Q1) Assuming that your capital is constrained, which project should you invest in last?
A)Project A
B)Project I
C)Project D
D)Project C
Q2) Which of the following statements is FALSE?
A)The incremental IRR need not exist.
B)If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR.
C)Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly.
D)When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs.
Q3) The payback period for project B is closest to:
A)2.5 years
B)2.0 years
C)2.2 years
D)2.4 years
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year. The firm had depreciation expenses of $125 million and capital expenditures of $150 million. Although they had no interest expense, the firm did have an increase in net working capital of $20 million. What is Bubba Ho-Tep's free cash flow?
A)$170 million
B)$255 million
C)$150 million
D)$5 million
Q2) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. Considering the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to:
A)a decline of 1.5 million.
B)a decline of 0.7 million.
C)an increase of 0.7 million.
D)an increase of 1.5 million.
Q3) What is the NPV of the Epiphany's project?
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A)Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows.
B)Given accurate information about any two of these variables (a firm's future cash flows, its cost of capital, and its share price)a valuation model allows use to make inferences about the third variable.
C)A valuation model will tell us the most about the variable for which our prior information is the least reliable.
D)The idea that investors are able to identify positive NPV trading opportunities is referred to as the efficient markets hypothesis.
Q2) Based upon the enterprise value to EBITDA ratio, the value of a share of Texas Trucking is closest to:
A)$33.00
B)$82.50
C)$43.10
D)$21.25
Q3) What are some common multiples used to value stocks?
Q4) Calculate the enterprise value for DM Corporation.
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) The risk-free rate is closest to:
A)0%
B)4%
C)8%
D)16%
Q2) Which stock has the highest systematic risk?
A)Merck since it has a higher Beta
B)Exxon-Mobil since it has a lower beta
C)Exxon-Mobil since it has a higher volatility
D)Merck since it has a lower volatility
Q3) The standard deviation of the overall payoff to Bank B is closest to:
A)$751,000
B)$2,179,000
C)$2,375,000
D)$21,794,000
Q4) What is the excess return for the S&P 500?
A)5.7%
B)7.0%
C)0%
D)8.4%
Page 12
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) The variance on a portfolio that is made up of equal investments in Stock X and Stock Z stock is closest to:
A)0.62
B)0.05
C)0.12
D)0.06
Q2) The expected return on the alternative investment having the highest possible expected return while having the same volatility as Google is closest to?
A)21.6%
B)19.6%
C)23.4%
D)35.0%
Q3) The Correlation between Stock X's and Stock Y's returns is closest to:
A)0.58
B)0.29
C)0.69
D)0.10
Q4) Calculate the correlation between Stock Y's and Stock Z's returns .
Q5) 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) The equity cost of capital for "Meenie" is closest to:
A)4.50%
B)7.50%
C)9.30%
D)9.75%
Q2) Which of the following statements is FALSE?
A)Many practitioners prefer to use average industry betas rather than individual stock betas.
B)When estimating beta by using past returns it is best to use the longest time horizon of returns available.
C)The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors.
D)If we use too short a time horizon when estimating beta, our estimate of beta will be unreliable.
Q3) Your estimate of the asset beta for Rearden Metal is closest to:
A)0.42
B)0.59
C)0.66 D)0.71
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Assume that you are an investor with the disposition effect and you bought each of these stocks in January. Suppose that it is currently the end of June, which stocks are you most inclined to hold? 1. Taggart Transcontinental
2. Rearden Metal
3. Wyatt Oil
4. Nielson Motors
A)1 only
B)4 only
C)1 and 3 only
D)2 and 4 only
Q2) Which of the following statements regarding portfolio "C" is/are correct? 1. Portfolio "C" has a negative alpha.
2. Portfolio "C" is overpriced.
3. Portfolio "C" is less risky than the market portfolio.
4. Portfolio "C" should not exist if the market portfolio is efficient.
A)1 and 3
B)2 and 4
C)1, 3, and 4
D)3 only
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Prior to any borrowing and share repurchase, the equity cost of capital for RC is closest to:
A)11%
B)10%
C)12%
D)9%
Q2) What is Luther's enterprise value?
A)$16 billion
B)$10.5 billion
C)$24 billion
D)$20 billion
Q3) Consider the following equation: E + D = U = A
The E in this equation represents:
A)the value of the firm's equity.
B)the value of the firm's debt.
C)the value of the firm's unlevered equity.
D)the market value of the firm's assets.
Q4) What is a market value balance sheet and how does it differ from a book value balance sheet?
Q5) What is the conservation of value principle?
Page 16
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Chapter 15: Debt and Taxes
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Q1) The Grant Corporation is considering permanently adding $500 million of debt to its capital structure. Grant's corporate tax rate is 35% and investors pay a tax rate of 40% on their interest income and 20% on their income from capital gains and dividends.
Calculate the present value of the interest tax shield provided by this new debt.
Q2) Assume that five years have passed since Wyatt issued this debt. While tax rates have remained at 40%, interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%. Wyatt's annual interest tax shield is now closest to:
A)$2.8 million
B)$4.2 million
C)$40.0 million
D)$60.0 million
Q3) The value of Shepard Industries without leverage is closest to:
A)$114 million
B)$50 million
C)$100 million
D)$64 million
Q4) If Flagstaff currently maintains a .8 debt to equity ratio, then calculate the value of Flagstaff's interest tax shield.
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Chapter 16: Financial Distress, Managerial Incentives, and Information
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Q1) Which of the following statements is FALSE?
A)The tradeoff theory weighs the costs of debt that result from shielding cash flows from taxes against the benefits from the effects of financial distress associated with leverage.
B)Leverage has costs as well as benefits.
C)According to the tradeoff theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from debt, less the present value of financial distress costs.
D)Firms have an incentive to increase leverage to exploit the tax benefits of debt. But with too much debt, they are more likely to risk default and incur financial distress costs.
Q2) What is the expected payoff to equity holders with the speculative oil lease deal?
A)$10 million
B)$160 million
C)$275 million
D)$85 million
Q3) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Assuming Luther issues a 5:2 stock split, then the number of shares Luther will have outstanding following the split is closest to:
A)25.0 million
B)12.5 million
C)2.0 million
D)16.0 million
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 use the $200 million to repurchase shares? Which provides the higher stock price?
Q3) Anyone who purchases the stock on or after the ________ date will not receive the dividend.
A)distribution
B)record
C)ex-dividend
D)declaration
Q4) Calculate the effective tax disadvantage for retaining cash in 1999, 2001, and 2005.
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Page 19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Consider the following equation: r<sub>wacc</sub> = r<sub>U</sub><sub>c</sub>dr<sub>D</sub>
The term<sub> </sub>r<sub>U</sub> in this equation is:
A)the firm's unlevered cost of debt.
B)the firm's cost of debt.
C)the project's unlevered cost of capital.
D)the project's debt to value ratio.
Q2) Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded through issuance of new equity. Assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue and a 5% underwriting fee on the issuance of new equity, the NPV of Taggart's new rail line is closest to:
A)$195 million
B)$200 million
C)$235 million
D)$240 million
Q3) Suppose that to fund this new project, Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year. Calculate the present value of Aardvark's interest tax shield.
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Page 20
Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) What range for the market value of equity for Ideko is implied by the range of EV/EBITDA multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?
Q2) What is the purpose of the sensitivity analysis?
Q3) The amount of net working capital for Ideko in 2007 is closest to:
A)$30,510
B)$26,420
C)$22,170
D)$35,195
Q4) Based upon the average EV/Sales ratio of the comparable firms, Ideko's target economic value is closest to:
A)$191 million
B)$155 million
C)$165 million
D)$157 million
Q5) The amount of net working capital for Ideko in 2008 is closest to:
A)$35,195
B)$26,420
C)$22,170
D)$30,510
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Chapter 20: Financial Options
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Q1) Which of the following statements is FALSE?
A)Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond.
B)For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money.
C)The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher.
D)Because a put is the right to sell the stock, puts with a lower strike price are less valuable.
Q2) You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share. How much money will you receive and are these contracts in or out of the money?
Q3) A credit default swap is essentially a:
A)put option on the firm's assets.
B)call option on the firm's assets.
C)put option on the firm's debt.
D)call option on the firm's debt.
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Page 22
Chapter 21: Option Valuation
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Q1) Using risk neutral probabilities, the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)$2.00
B)$2.15
C)$1.45
D)$2.40
Q2) Using the binomial pricing model, calculate the price of a two-year put option on Kinston stock with a strike price of $9.
Q3) Using the binomial pricing model, the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)$2.00
B)$1.45
C)$2.40
D)$2..15
Q4) Luther Industries does not pay dividend and is currently trading at $25 per share. The current risk-free rate of interest is 5%. Calculate the price of a call option on Luther Industries with a strike price of $30 that expires in 75 days when N(d<sub>1</sub>)= .639 and N(d<sub>2</sub>)= .454.
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Page 23
Chapter 22: Real Options
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Q1) If you are not awarded the government contract and your sales decrease by 25%, then the value of your plant will be closest to:
A)-$1 million
B)$5 million
C)$8 million
D)$0
Q2) The NPV of project B is closest to:
A)$18.10
B)$21.70
C)$24.00
D)$16.90
Q3) Which of the following statements is FALSE?
A)If there is a lot of uncertainty, the benefit of waiting is diminished.
B)In the real option context, the dividends correspond to any value from the investment that we give up by waiting.
C)By delaying an investment, we can base our decision on additional information.
D)Given the option to wait, an investment that currently has a negative NPV can have a positive value.
Q4) Do out-of-the-money real options have value?
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Chapter 23: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A)After deciding to go public, managers of the company work with an underwriter, an investment banking firm that manages the offering and designs its structure.
B)The shares that are sold in the IPO may either be new shares that raise new capital, known as a secondary offering, or existing shares that are sold by current shareholders (as part of their exit strategy), known as a primary offering.
C)Many IPOs, especially the larger offerings, are managed by a group of underwriters.
D)At an IPO, a firm offers a large block of shares for sale to the public for the first time.
Q2) The amount of money the underwriter will earn on this transaction is closest to:
A)$4 million
B)$6 million
C)$9 million
D)$15 million
Q3) Describe the four characteristics of IPOs that puzzle financial economists.
Q4) How much money did the venture capitalists receive?
Q5) What will the proceeds from the IPO be if Luther is selling 1.1 million shares?
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Chapter 24: Debt Financing
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Q1) What is the Yield to Maturity (YTM)on this bond?
Q2) Which of the following statements is FALSE?
A)A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
B)On the maturity date of the bond, the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is, the conversion price.
C)Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
D)If the stock price is low so that the embedded warrant is deep out-of-the-money, the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.
Q3) What kind of corporate debt has a maturity of less than 10 years?
A)Asset-backed bonds
B)Debentures
C)Notes
D)Mortgage bonds
Q4) What is the Yield to Call (YTC)on this bond?
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Page 26
Chapter 25: Leasing
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Q1) Which of the following statements regarding leases and bankruptcy is FALSE?
A)Operating and true tax leases are generally viewed as true leases by the courts, whereas capital and non-tax leases are more likely to be viewed as a security interest.
B)By retaining ownership of the asset, the lessor has the right to repossess it if the lease payments are not made, even if the firm seeks bankruptcy protection.
C)If a lease contract is characterized as a true lease in bankruptcy, the lessor is in a somewhat superior position than a lender if the firm defaults.
D)If the lease is classified as a true lease in bankruptcy, then the lessee retains ownership rights over the asset.
Q2) The monthly lease payments for a four year lease of the Bulldozer are closest to:
A)$1,870
B)$1,825
C)$1,750
D)$2,115
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
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Chapter 26: Working Capital Management
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Q1) The cash conversion cycle (CCC)is defined as:
A)Inventory Days + Accounts Receivable Days - Accounts Payable Days.
B)Inventory Days - Accounts Receivable Days - Accounts Payable Days.
C)Inventory Days + Accounts Receivable Days + Accounts Payable Days.
D)Inventory Days + Accounts Payable Days - Accounts Receivable Days.
Q2) Which of the following statements is FALSE?
A)After a firm decides on its credit standards, it must next establish its credit terms.
B)The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its payables.
C)Knowledge of the payments pattern is also useful for forecasting the firm's working capital requirements.
D)An aging schedule categorizes accounts by the number of days they have been on the firm's books.
Q3) 1. The average number of inventory days outstanding for Rearden is closest to:
A)6 days
B)8 days
C)37 days
D)64 days
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28
Chapter 27: Short-Term Financial Planning
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Q1) Which of the following statements is FALSE?
A)Regardless of the loan structure, the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds.
B)Another common type of fee is a loan origination fee, which a bank charges to cover credit checks and legal fees.
C)Firms frequently use lines of credit to finance seasonal needs.
D)The commitment fee associated with a committed line of credit is designed to decreases the effective cost of the loan to the firm.
Q2) Occasionally, a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason. We refer to such a situation as:
A)a liquidity shock.
B)a negative cash flow shock.
C)a negative liquidity shock.
D)a cash crunch.
Q3) Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000. Calculate the effective annual rate that Kinston is paying.
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Chapter 28: Mergers and Acquisitions
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Q1) Assuming you get 50% control of Associated Steel, then your gain from this transaction will be closest to:
A)$50.0 million
B)$65 million
C)$75 million
D)$125 million
Q2) If Ford Motor Company bought The Goodyear Tire & Rubber Company, this would be an example of a ________ merger.
A)conglomerate
B)vertical
C)horizontal
D)diagonal
Q3) Savings that come from combining the marketing and distribution of different types of related products. are called:
A)horizontal integration.
B)vertical integration.
C)economies of scale.
D)economies of scope.
Q4) What is a white knight?
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Chapter 29: Corporate Governance
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Q1) Agency costs are best defined as:
A)the costs imposed on a corporation through the laws and regulations that control corporations.
B)the costs a corporation incurs as the result of fraud.
C)the costs that arise when there are conflicts of interest between a firm's stakeholders.
D)the costs associated with compensating managers when ownership and control are separated in a firm.
Q2) What is corporate governance?
Q3) What is the role of takeovers in corporate governance?
Q4) Insider trading is best described as:
A)when a member of the management team makes a trade based upon privileged information.
B)when a member of the management team makes a trade based upon public information.
C)when any investor makes a trade based upon public information.
D)when any investor makes a trade based upon privileged information.
Q5) How does a pyramid structure work?
Q6) What is the difference between Inside, gray, and outside directors?
Q7) Describe the "stakeholder" model of corporate governance.
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Chapter 30: Risk Management
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Q1) If your firm is fully insured, the NPV of implementing the new safety policies is closest to:
A)$2.15 million
B)$2.5 million
C)$2.25 million
D)-$.25 million
Q2) Which of the following statements is FALSE?
A)Not all insurable risks have a beta of zero. Some risks, such as hurricanes and earthquakes, create losses of tens of billions of dollars and may be difficult to diversify completely.
B)When a firm buys insurance, it transfers the risk of the loss to an insurance company. The insurance company charges an upfront premium to take on that risk.
C)By its very nature, insurance for non-diversifiable hazards is generally a positive beta asset; the insurance payment to the firm tends to be larger when total losses are low and the market portfolio is high.
D)Because insurance provides cash to the firm to offset losses, it can reduce the firm's need for external capital and thus reduce issuance costs.
Q3) What are some of the disadvantages of long-term supply contracts?
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32
Chapter 31: International Corporate Finance
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Q1) What is the dollar present value of the project?
Q2) Hammond's Euro WACC is closest to:
A)7.9%
B)8.7%
C)10.2%
D)12.1%
Q3) Which of the following statements is FALSE?
A)If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on foreign earnings.
B)U.S. tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.
C)If the foreign tax rate is less than the U.S. tax rate, the company pays total taxes equal to the U.S. tax rate on its foreign earnings.
D)A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability.
Q4) What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?
Q5) What is the pound present value of the project?
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