Finance and risk management - international business - exams
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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 premium for this call option?
The sale of used securities is the sale where the financial asset is being traded from one individual to another and proceeds do not go to the original issuer of the security. In what kind of market does such a sale take place?
The annual salary of John fifteen years ago was €52,500. Today he earns an annual salary of €191,205. What is the average annual rate of growth of John's salary?
Toyota has €1,000 par value bonds with a coupon rate of 8% per year with semi-annual coupon payments. Assume that there are ten years remaining prior to maturity and that these bonds are selling for €1,000. What would be the annual yield to maturity of these bonds?
Janette works for a firm that is expanding into a new line of business. She has been asked to determine tan appropriate WACC for an average risk project in the expansion division. There are two publicly traded standalone firms that produce the same products as the new division. The average beta of these is 1.25. The expected return on the market portfolio is 13% and the risk-free rate of return is 4%. The firm where Janette works finances 50% of its project with equity and 50% with debt. The firm has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?
Managing the relationship between current liabilities and current assets of the firm in order to improve the flow of funds is called:
The current exchange rate is $1.2963/€. The anticipated annual inflation rate is 5% in the Euro zone and 3% in the United States. What is the forward exchange rate?
Consider the fact that the pricing of stocks is more than difficult than the pricing of bonds. Which of the below statements is FALSE?
A water company is considered a liquid company because of its generous dividend policy. The ex-dividend date is May 15th. Prior to this date the firm's stock is selling for a price of €23.18 per share. If you purchase the stock prior to May 15th, you will receive a dividend of €1.15. If you would wait until May 16th to buy the stock, and there was no other event that would change the price of the stock what would be the expected stock price be?
Suppose that a Dutch company recently has bought 210,000 worth of computers from a U.S.Supplier with payment to be made in 90 days.The current spot exchange rate at the time of the sale is 1.20/€. The current market developments led to an appreciation of the Euro against the US dollar. If this company wants to minimize foreign exchange risk, which of the followings will the company need to sign?
What kind of discount rates should be used to evaluate higher risk projects?
Which statement below is FALSE?
List financial management decisions that a business might make in the following statement: When a company chooses a new product to introduce into the market this is a ___________ decision, to sell a bond to finance the new product is a ___________ decision, and to set production and inventory levels on the new product is a __________ decision.
Assume that revenues are €40,000, the costs of goods sols is €26,000, the selling, general and administrative expenses are €7,000, depreciation is €3,000 and interest expense is €2,000. What is the EBIT?
Which of the following factors has little or no impact on the initial coupon rate tassigned to a new bond?
A company is considering a project that has an initial after-tax outlay/cost of €250,000. The respective cash inflows from the ten year project for years 1-10 are €39,000 each year. The firm uses the IRR method and has a WACC of 10%. Will the company accept this project?
To compute the total cash outflow that is needed to start a project we must include:
A residual dividend policy is a policy in which:
The primary goal of a financial manager is to:
Which of the following statements is FALSE?
At year 0 a company paid a dividend of €1.80. The growth rate is 6% and the required rate of return is 12%. What is the stock price according to the constant dividend model?
What is the primary benefit of diversification?
When a depreciable asset is sold, a tax gain or loss on disposal is calculated based on the book value of the asset at the time of disposal. If a ________ has occurred, ________ are incurred.
The optimal debt-to-equity ratio reflects the maximum benefit of leverage. At this optimal ration the firm value is:
When markets react instantaneously to the release of new information it is a sign of:
If the current ratio (current assets / current liabilities) of a company is greater than one this tells us that the company:
A company has issues 10-year annual coupon bonds with a face value of €1,000. If the current yield to maturity is 12% and the annual coupon rate is 10%, what is the current price per bond?
You want to invest in a stock that will pay for the next six years an annual cash dividend of €3.50. At the end of these six years you will sell the stock for €22.50. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?
Beta is:
Consider the M&M proposition with corporate taxes. An unlevered, all equity, firm value is €500 million. By adding debt, the annual interest expense is €100 million. The discount rate on the tax shield is 8% and the corporate tax rate is 30%. If the gain to leverage or the value added from issuing debt is the present value of the annual tax debt shield, what is levered firm value?
Which model incorporates the time-value of money but still ignores cash flows after the cutoff date?
The degree to which a firm or individual utilizes borrowed money to make money is called:
A company is considering a project that has an initial after-tax outlay/cost of €250,000. The respective future cash inflow from the ten year project for years 1-10 are €37,500 each year. The company expects an additional cash flow of €45,000 in year 10. The net present value method is used by the firm and the firm's discount rate is 10%. Will this company accept the project?
D
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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.....read more
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 companies).
b) Secondary market is important to obtain fair market value.....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 an agreement with The Foreign Bank to exchange £500,000 for.....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 12 percent on the 10-year semi-annual with 10 percent coupon.....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 premium for this call option?
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 a decision whether to undertake the new project?
In this bundle summaries, exam questions and lecture notes will be shared for the course Global Supply Chain management, International Business, Year 2 University Groningen.
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