Finance and risk management - international business - exams
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A company has a semi-annual coupon bond outstanding. A decrease in the market required rate of return will have an effect on this bond. Which effect is meant here:
A firm is comparing two different capital structure plans, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the firm would have 178,500 shares outstanding. Under Plan II, there would be 71,400 shares outstanding and €1.79 million in debt outstanding. The interest rate on the debt is 10% and there are no taxes. What is the break-even EBIT?
Consider the the dividend growth model, an increase in which of the following will increase the current value of an equity?
I. Dividend amount
II. Number of future dividends
III. Discount rate
IV. Dividend growth rate
A company is considering a new project. The project will require €500,000 for new non-current assets, €200,000 for additional inventory, and €40,000 for additional trade receivables. Short-term debt is expected to increase by €150,000. What is the project's cash flow at time zero, which is the sum of investments in new non-current assets and net working capital?
A conflict of interest between the shareholders and the management of a firm is called:
Daphne invested €1000 seven years ago at 5 per cent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial €1000 investment. Which type of interest is Daphne earning?
Shareholders' equity is best described as:
Consider the following features for a bond:
I. It is a discounted price
II. It is a price at a premium
III. The yield-to-maturity is less than the coupon rate
IV. The yield-to-maturity exceeds the coupon rate
Which of the following features currently apply to a bond that has a market price that is lower than its face value?
M&M Proposition I with taxes is based on the concept that:
Decisions that are made by financial managers should primarily be focused on increasing which one of the following?
A proposed expansion project is expected to increase sales of the company by €35,000 and increase cash expenses by €21,000. The project will cost €24,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company store has a marginal tax rate of 30%. What is the operating cash flow of the project using the tax shield approach?
This morning a baker agreed to pay a supplier €4.40 a bushel for 5,000 bushels of wheat that the supplier will ship to the factory four months from now. What is this legally binding agreement called?
Which one of the following is a capital budgeting decision?
Assume that the total cost of a university education will be €20,000 when your child enters college in 5 years. You presently have €16,400 to invest. What annual rate of interest must you earn on your investment in an account paying semi-annual interest payment to cover the cost of your child's university education?
Consider that a firm has issued 10-year semi-annual coupon bonds with a face value of €1,000. If the annual coupon rate is 10% and the required rate of return of investors who are willing to buy this bond is 8%, what would be the current price of the bond?
You are considering two mutually exclusive projects with the following cash flows.
Project A Project B
Year 0 - € 80,000 - € 80,000
Year 1 € 32,000 0
Year 2 € 32,000 0
Year 3 € 32,000 € 103,000
Which project(s) should you accept if the discount rate is 8 per cent? What if the discount rate is 9 per cent?
Look at the following statements considering the expected return on a well-diversified portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. is independent of the unsystematic risks of the individual securities held in the portfolio.
III. is independent of the allocation of the portfolio among individual securities.
IV. must be equal to or greater than the expected return of the worst performing security in the portfolio.
Consider an asset that costs €176,000 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for €22,000. The relevant tax rate is 30%. What is the after tax cash flow from the sale of this asset?
We look at a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation?
What is the standard deviation for the following security?
State of Economy Probability of State of Economy Rate of return if state occurs
Boom 0.10 0.32
Normal 0.65 0.14
Recession 0.25 - 0.28
Which sentence is correct about futures contracts?
Which one the following is the most correct about depreciation?
Which one of the following is the best definition of the primary market?
Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by selling shares or reinvesting dividends?
Consider a firm that has net working capital of €640. It's long-term debt is €4,180, total assets are €6,230, and non-current assets are €3,910. What is the amount of the total liabilities?
A firm has annual sales of €687,400, total debt of €210,000, total equity of €365,000, and a profit margin (net Income/sales) of 5.20%. What is the ratio of return on assets (ROA)?
You purchased six €32.50 call option contracts on ABC equity when the option was quoted at €1.80 (the premium). The option expires today when the value of ABC equity is €34.60. What is the net profit or loss on this investment?
The ___________ model incorporates the time-value of money but still ignores cash flows after the cutoff date. Which word must be on the line to make this a correct sentence?
Assume that you are borrowing €10,000 to buy a car. The terms of the loan call for payments in every two months for 3 years at 12% annual interest. What is the amount of each payment?
Lucy owns an option that allows her to purchase ABC equity at €50 a share. The €50 price per share is referred to as the:
A company has a market value that is equal to its book value. Currently, the firm has excess cash of €1,332 and the market of value of the equity of €7,200. The firm has 600 shares outstanding. The firm has decided to spend one-third of its excess cash on a share repurchase program. How many shares will be outstanding after the share repurchase is completed?
An equity stock has a beta of 1.09. The risk-free rate of return is 2.75 % and the market rate of return is 9.80%. What is the risk premium on this equity according to the Capital Asset Pricing Model (CAPM)?
Which one of the following bonds is the least sensitive to interest rate risk?
Which of the following is the most correct about the weighted average cost of capital for a firm:
A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual rate of the discount if the firm purchases €4,600 worth of merchandise? (Assume that a year has 365 days)
Assume that a firm paid an annual dividend of €1.15 per share last month. Today, the firm announced that future dividends will be increasing by 2.6 per cent annually. If you require a 12 per cent rate of return, how much are you willing to pay to purchase one share of this equity today?
If a project has a net present value equal to zero, which of the following is the most correct in this case?
A company has 30,000 shares of ordinary equity outstanding at a market price of €15 a share. The company also has a bond issue outstanding with a total face value of €277,778 which is selling for 90% of face value. The cost of equity is 16% while the before-tax cost of debt is 10%. The company has a tax rate of 30% What is the weighted average cost of capital?
John is in charge of the inventory for a firm. As an inventory item gets low, he has to restock the item by a quantity that minimizes the total inventory costs for that item. What is this restocking quantity called?
A firm with unlimited funds must evaluate five projects. Projects 1, 2, and 3 are mutually exclusive and Projects 4 and 5 are independent. The projects are listed with their returns. The weighted average cost of capital (WACC) of the firm is 12 %.
Project Status Return (%)
Which projects should the firm choose?
A
C
B
C
D
D
C
B
A
D
B
D
A
C
A
D
C
B
A
A
B
B
A
C
A
D
C
B
B
D
B
B
D
C
B
B
A
A
B
B
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A company has a semi-annual coupon bond outstanding. A decrease in the market required rate of return will have an effect on this bond. Which effect is meant here:
A firm is comparing two different capital structure plans, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the firm would have 178,500 shares outstanding. Under Plan II, there would be 71,400 shares outstanding and €1.79 million in debt outstanding. The interest rate on the debt is 10% and there are no taxes. What is the break-even EBIT?
Consider the the dividend growth model, an increase in which of the following will increase the current value of an equity?
I. Dividend amount
II. Number of future dividends
III. Discount rate
IV. Dividend growth rate
A company is considering a new project. The project will require €500,000 for new non-current assets, €200,000 for additional inventory, and €40,000 for additional trade receivables. Short-term debt is expected to increase by €150,000. What is the project's cash flow at time zero, which is the sum of investments in new non-current assets and net working capital?
A conflict of interest between the shareholders and the management of a firm is called:
Daphne invested €1000 seven years ago at 5 per cent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial €1000 investment. Which type of interest is Daphne earning?
Shareholders' equity is best described as:
Consider the following features for a bond:
I. It is a discounted price
II. It is a price at a premium
III. The yield-to-maturity is less than the coupon rate
IV. The yield-to-maturity exceeds the coupon rate
Which of the following features currently apply to a bond that has a market price that is lower than its face value?
You are considering two loans and would like to select cheaper alternative. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8 percent, compounded semi-annually. Loan B offers a rate of 7.75 percent, compounded monthly. Which loan should you select and why?
You just bought a home for €250,000 and are to make payments of 11,162.71 in every two months at 12% annual interest rate. How many years will it take you to pay off your loan of €250,000?
A company has sales of €12,900, costs of €5,800, depreciation expense of €1,100, and no interest expense. What is the operating cash flow if the tax rate is 40%?
You have an annuity of equal end-of-the year cash flows of €500 that begin two years from today (the end of the second year) and last for a total of ten cash flows. Using a discount rate of 4%, what are those cash flows worth in today’s Euros?
EAR of B = {[1+(0.0775/12)]^12}-1 = 0.0803
EAR of A = {[1+(0.08/2)]^2}-1 = 0.0816 B, because the effective annual rate of B is 8.03 percent and cheaper than A.
PV = PMT * (PVIFA %r, n) 250,000 = 11,162.71 * (PVIFA%2, n*6) (PVIFA%2, n*6) = 250,000 / 11,162.71 = 22,396 (10p) for the correct answer for number of months From table with 2% the period is 30, then 30/6= 5 years. (5p)
a) Both are very important. However, a firm's profit is an accounting notion do not reflect real cash flows. Maximizing the stock price is more important because it is this that actually matters to investors. Since the financial goal of managers is shareholder wealth maximization, maximizing stock price will achieve this aim. Wealth is measured by market value and market value is obtained by stock price. Moreover, a firm can maximize value but be making a loss (this happens to many new.....read more
A company has a debt-to-equity ratio of 42%, sales of €749,000, net income of €41,300, and total debt of €198,400. What is the return on equity (ROE=Net Income/Total Equity)?
A project that provides annual cash flows of €9,377.18 for 12 years costs €67,150 today. At what rate would you be indifferent between accepting the project and rejecting it?
Yesterday, the president of HB Enterprises received a phone call from a competitor. The competitor is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family. Thus, the assets of the competitor are being offered to HB Enterprises at a bargain basement price. While HB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up. This illustrates which of the following needs to hold cash?
If a firm effectively manages its financial risks, what can this firm do?
Which one of the following statements concerning interest rates is the most correct?
This question is based on the dividend growth model. If you expect the market required rate of return to increase across all equity securities, then you should also expect:
You are considering two mutually exclusive projects with the following cash flows.
Year Project A Project B
0 - € 80,000 - € 80,000
1 0 €32,000
2 0 €32,000
3 € 105,000 € 32,000
Which project(s) should you accept if the discount rate is 8 per cent? What if the discount rate is 12 per cent?
The National Bank has.....read more
Which one of the following actions will provide you with the right, but not the obligation, to buy the underlying asset at a specified price during a specified period of time?
Agency costs refer to:
Shareholders' equity:
Which one of the following statements is the most correct?
Interest rates that include an inflation premium are referred to as:
The optimal capital structure is the one that balances
Which one of following is the rate indicating that a stock's price is expected to appreciate?
Which one of the following is a net working capital management decision?
When the Net Present Value (NPV) is negative, the Internal Rate of Return (IRR) is __________ the required rate of return (or the weighted average cost of capital).
Which of the following measures the systematic risk for an asset held in a diversified portfolio?
Currently, the bond market requires a return of.....read more
The four stocks A, B, C, and D have standard deviations, respectively, of 5%, 10%, 15% and 20%. Which one is the riskiest?
According to the Pecking Order Hypothesis: less probable companies in an asymmetric world will need more ________; they will first seek ________ and will avoid ________.
Consider the following sales:
For any month the following percentages are received over time in cash: 40% in cash from that same month of sales, 50% in cash from the previous month's sales and 10% in cash from the sales from two months ago. What amount of cash will be received during July?
Which model shows how soon one will recover from an initial investment?
Consider the following information from a balance sheet: the value of common stock is €60,000, preferred stock has a value of €10,000, retained earnings are €40,000, long-term debt is €120,000. For the purpose of estimating the WACC of the firm,what are the weights of long-term debt, preferred stock and equity? (Note: D = debt, PS= preferred stock, E = equity and V = total value).
Which of the following types of securities cannot be issued by a large public firm?
A company that offers a credit discount to its customers is trying to ________, and a company that pays a credit in time rather than take a discount and paying it early is attempting to ________.
Assume you have signed a call option contract for an asset. The premium of this option is €0.90 and expires in 2 months. The asset is currently sold on the market at €25 (current spot price). The strike price of the option is €26. What are the intrinsic and time value components of the.....read more
The annual salary of Sam fifteen years ago was €52,500. Today he earns an annual salary of €94,552.50. What is the average annual rate of growth of John's salary?
For this question use the dividend growth model. Suppose a firm has just paid a dividend of €1.50 per share and that the recent price is €31.82 per share. The growth rate in dividends is 4% per year for the future. What is the required rate of return for equity?
Which of the following statements is FALSE?
Suppose that the EBIT before depreciation is €50,000, depreciation is €10,000 and the tax rat is 15%. What is the operating cash flow?
In which market does the sale of new securities, where the financial asset is being traded for the very first time, take place?
Which of the following helps us analyze whether a company is moving toward financial stress or is using debt to benefit the company and ultimately the owners of the company?
Assume that you just bought a home for €250,000 ad that you make payments of €11,162.71 per two months at 12% annual percentage rate. How long will it take you to pay of your loan of €250,000?
Gazelle has an adjusted WACC of 8.56%. Its capital structure consists of 60% equity and 40% debt. The cost of equity is 11%, before-tax cost of debt is7% and the tax rate is 30%. Gazelle is considering expanding by building a new shop and considers the project to be riskier than the current operation. Gazelle has an existing beta of 1, the required return on the market portfolio is 11%, the risk-free rate is 3% and the beta for the new project is 1.3. What adjusted WACC should be used in making.....read more
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