Finance and risk management - international business - exams
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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 an agreement with The Foreign Bank to exchange £500,000 for €380,000 on the first day of each of the next 3 calendar quarters. This agreement is best described as a(n):
A British firm has 450 shares of ordinary equity outstanding at a market price per share of £27. Currently, the firm has excess cash of £400, total assets of £28,900 and net income of £1,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after this dividend is paid?
Consider a corporation with taxable income of €125,000. Which one of the following statements is correct?
Assume that the total cost of a university education for your child will be €300,000 when he enters college in 3 years. You presently have €236,593 to invest. What annual rate of interest must you earn on your investment in an account paying quarterly interest payment to cover the cost of your child's university education?
Consider bonds issued by a government. Which of the following is the most correct concerning these bonds?
The principle of diversification explains that:
The Economic Order Quantity (EOQ) model is designed to minimize:
Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
I. Positive net present value
II. Positive internal rate of return
III. Profitability index greater than zero
IV. Internal rate of return greater than the required rate
H&M is considering a new project. The project will require €522,000 for new non-current assets, €218,000 for additional inventory, and €39,000 for additional trade receivables. Short-term debt is expected to increase by €165,000. 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?
Consider an all equity firm that has 80,000 shares outstanding. The company is in the process of borrowing €600,000 at 9% interest to repurchase 12,000 shares of the outstanding equity. What is the value of this firm if you ignore taxes? (Hint: The value of the company is equal to the number of outstanding shares multiplied by the share price.)
Three years ago, Carglass purchased a machine for a 5-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the after-tax salvage value of that machine? (Note that the company needs to pay tax if it makes profit from the sale of the machine. Then sale price will be cash inflows and tax payment is cash outflows. T represents the relevant tax rate).
You are the buyer for a bakery and you must buy 80,000 bushels of wheat next month. The futures contracts on wheat are based on 5,000 bushels and are currently quoted at € 4.15 per bushel for delivery next month. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract. What should be on these two lines?
When a corporation uses the financial markets to raise new funds, then the sale of securities is made in the:
Corporate governance regulation is intended to:
Which one of the following sets of ratios is probably most interesting for shareholders?
You are borrowing €17,800 to buy a motor. The terms of the loan call for annual payments for 10 years at 8% interest. What is the amount of each payment?
The risk-free rate of return is 3.9 percent, the market risk premium is 6.2 per cent and beta is 1.21. What is the expected rate of return on this equity?
A company has a semi-annual coupon bond outstanding. An increase in the required market rate of return will have an effect on this bond. Which effect is meant here?
The last dividend that the Lobster Diner paid was a dividend of €0.60 a share. The company now predicts that it will maintain a constant dividend forever. Given the lack of future growth, you will only buy this equity if you can earn at least a 16% rate of return. What is the maximum amount you are willing to pay for one share of this equity today?
Which of the following describes the lower bound of the value of a call?
Consider an all equity firm that has 5,000 shares outstanding at a market price of €15 a share. The management of the firm has decided to issue €30,000 worth of debt and to use the funds to repurchase shares of the outstanding equity. The interest rate on the debt will be 10%. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes. [Hint: You need to calculate the break-even earnings before interest and taxes (EBIT) and then earnings per share (EPS).]
A British Phone company is considering a new 6-year expansion project that requires an initial non-current asset investment of £5,994,000. The non-current asset will be depreciated using straight-line to zero over its 6-year tax life, after which it will be worthless. The project is estimated to generate £5,328,000 in annual sales, with costs of £2,131,200. The tax rate is 31%. What is the annual operating cash flow for this project?
Which one of the following involves a payment in shares by a stock issuer that increases the number of shares a shareholder owns but also decreases the value per share?
The management of the short-term assets and liabilities of a firm is called:
The maximization of the wealth of shareholders is a concept in which:
Daniel's grocery has sales of €687,000 and costs of €492,000. The interest expense is €26,000 and depreciation is €42,000. The tax rate is 35%. What is the net income of Daniel's grocery?
What is the expected return and standard deviation for the following security?
State of Economy Probability of State of Economy Rate of return if state occurs
Boom 0.30 0.35
Normal 0.60 0.14
Recession 0.10 -0.19
The interest tax shield has no value when a firm has a:
I. debt-equity ratio of 1.
II. tax rate of zero.
III. zero debt.
IV. zero leverage.
Which statements are correct?
Lisa computed the present value of a €10,000 bonus she will receive in the future. The interest rate she used in this process is referred to as which one of the following?
A bond has a market price that exceeds its face value. Consider the following features:
I. It is a discounted price
II. It is a price at a premium
III. Yield-to-maturity is less than the coupon rate
IV. Yield-to-maturity exceeds the coupon rate
Which of the features above currently apply to this bond?
The internal rate of return is defined as the:
Philips' lightening division has 30,000 shares of ordinary equity outstanding at a market price of €17.50 a share. The firm also has a bond issue outstanding with a total face value of €280,000 which is selling for 86 per cent of face value. The cost of equity is 16 per cent while the after-tax cost of debt is 6.9 per cent. The firm has a tax rate of 30 per cent. What is the weighted average cost of capital?
Under credit terms of 1/5, net 15, customers should:
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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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