Finance and risk management - international business - Practice Exam 4

MC-questions

Question 1

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?

1. purchase of a put option
2. sale of a put option
3. purchase of a call option
4. sale of a call option

Question 2

Agency costs refer to:

1. the total interest paid to creditors over the lifetime of the firm.
2. the costs that result from default and bankruptcy of a firm.
3. corporate income subject to double taxation.
4. the costs of any conflicts of interest between shareholders and management.

Question 3

Shareholders' equity:

1. decreases whenever new shares of equity are issued.
2. includes long-term debt, preferred stock, and ordinary equity.
3. represents the residual value of a firm.
4. is equal to total assets plus total liabilities.

Question 4

Which one of the following statements is the most correct?

1. Interest expense increases the amount of tax due.
2. Taxes reduce both net income and operating cash flow.
3. Interest expense is included in operating cash flow.
4. Depreciation does not affect taxes since it is a non-cash expense.

Question 5

Interest rates that include an inflation premium are referred to as:

1. effective annual rates.
2. real rates.
3. nominal rates.
4. fisher rates.

Question 6

The optimal capital structure is the one that balances

1. return and risk factors in order to maximize dividends.
2. return and risk factors in order to maximize profits.
3. return and risk factors in order to maximize earnings per share.
4. return and risk factors in order to maximize market value.

Question 7

Which one of following is the rate indicating that a stock's price is expected to appreciate?

1. capital gains yield
2. current yield
3. total return
4. dividend yield

Question 8

Which one of the following is a net working capital management decision?

1. determining the amount of equipment needed to complete a job.
2. determining the amount of long-term debt required to complete a project.
3. determining the number of shares of stock to issue to fund an acquisition.
4. determining whether to pay cash for a purchase or use the credit offered by the supplier.

Question 9

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).

1. less than
2. equal to
3. greater than
4. less than or equal to

Question 10

Which of the following measures the systematic risk for an asset held in a diversified portfolio?

1. beta
2. covariance
3. standard deviation
4. market risk premium

Question 11

Currently, the bond market requires a return of 12 percent on the 10-year semi-annual with 10 percent coupon paying bonds issued by Winston Industries. The 10 percent is referred to as which one of the following?

1. face value
2. current yield
3. coupon rate
4. yield to maturity

Question 12

In evaluating the initial investment for a capital budgeting project,

1. a decrease in net working capital is considered a cash outflow.
2. an increase in net working capital is considered a cash outflow.
3. net working capital does not have to be considered.
4. an increase in net working capital is considered a cash inflow.

Question 13

Equity financing refers to a form of ___________ while debt financing is a type of ______.

1. ownership; ownership
2. ownership; borrowed funds
3. borrowed funds; ownership
4. borrowed funds; borrowed funds

Question 14

The weighted average cost of capital (WACC) for a firm:

1. is equivalent to the after-tax cost of the firm's debt.
2. remains constant when the debt-equity ratio changes.
3. is unaffected by changes in corporate tax rates.
4. is the return investors require on the total assets of the firm.

Question 15

If the inflation rate in the United States is higher than the inflation rate in the Euro area, other things held constant, which one of the following is the most correct according to Purchasing Power Parity Theory?

1. The expected future exchange should indicate an appreciation of the U.S. dollar against €.
2. The expected future exchange rate should indicate an appreciation of € against the U.S. dollar.
3. The expected future exchange should indicate a depreciation of € against the U.S. dollar.
4. The future exchange rate won’t change.

Question 16

Suppose that you have a portfolio of two securities, which are invested equally. If each portfolio has a standard deviation of 10% and expected return of 10%, which one of the following statements is true?

1. The expected return is 10% and there is not enough information to determine the standard deviation.
2. Both the expected return and the standard deviation are unknown to the reader without additional information.
3. The expected return of the portfolio is 10% and the standard deviation is 10%.
4. The expected return of the portfolio is 20% and the standard deviation is 20%.

Question 17

Consider the capital asset pricing model (CAPM). If the systematic risk for asset A is lower than the systematic risk for asset B the expected return for asset A, holding everything else constant, is __________ the expected return for asset B.

1. less than
2. equal to
3. greater than
4. there is not sufficient information to answer this question

Answer indication MC-questions

1. C
2. D
3. C
4. B
5. B
6. D
7. C
8. D
9. A
10. A
11. C
12. B
13. B
14. D
15. B
16. B
17. A