Finance and risk management - international business - Practice Exam 6

MC-questions

Question 1

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?

1. around 2%
2. around 4%
3. around 6%
4. around 8%

Question 2

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?

1. 8.71%
2. 8.90%
3. 9.09%
4. There is not enough information to answer the question

Question 3

Which of the following statements is FALSE?

1. shareholders are paid before debt holders if a company fails
2. stock is a major finance source for public companies
3. for common stock, there is no maturity date and the promised cash flow is not stated on the asset, but us determined at a later date by the company
4. common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim

Question 4

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?

1. €22,000
2. €38,000
3. €44,000
4. €56,000

Question 5

In which market does the sale of new securities, where the financial asset is being traded for the very first time, take place?

1. primary market
2. secondary market
3. money market
4. capital market

Question 6

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?

1. total asset turnover
2. asset management ratios
3. financial leverage ratios
4. days' sales in inventory

Question 7

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?

1. about 5 years
2. about 12 years
3. about 20 years
4. about 30 years

Question 8

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?

1. 11.24%
2. 10.00%
3. 9.84%
4. 8.56%

Question 9

A company pays a €1.37 dividend every quarter and says it will keep this policy forever. If you want an annual return of 12.5% on your investment, what price should you pay for one share of common stock?

1. €43.84
2. €43.94
3. €44.84
4. €44.94

Question 10

Fully depreciated assets __________, and thus any proceeds from sale at disposal are taxable gains.

1. have a positive book value
2. have a negative market value
3. always have a market value of zero
4. have a book value of zero

Question 11

Which of the following means that managers or owners of a company know more about the future performance of the company than potential outside lenders?

1. asymmetric information
2. external financing
3. symmetric information
4. two-sided information

Question 12

Toyota has €1,000 par value bonds with a coupon rate of 9% per year with monthly coupon payments. Assume that there are 12 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?

1. 0.75%
2. 4.5%
3. 9%
4. cannot be determined

Question 13

Which of the following is NOT a definition of beta?

1. a measure of risk that can be avoided
2. a measure of nondiversifiable risk
3. a measure of systematic risk
4. a statistical measure of an individual asset's or portfolio's co-movement with the returns of the market

Question 14

At the end of a project's life, any initial increases in ________ from the beginning of the project will be recovered.

1. taxes
2. net working capital
3. depreciation
4. start-up costs

Question 15

The contribution of M&M comes from the constant trade-off ratio. Which statement describes this constant trade-off ratio?

1. When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital increases.
2. When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital decreases.
3. When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital remains constant.
4. None of the above

Question 16

Daniel just finished university and is now new CFO of a company and wants to shake things up. Currently the firm s an all equity firm. Due to pressure of stockholders Daniel is considering acquiring some debt to boost earnings per share. The company currently has 600 shares and Daniel is thinking about borrowing €6,000 at 10% per year and buying back 200 of those shares. What level of EBIT would make this strategy attractive?

1. €1,400
2. €1,600
3. €1,800
4. €2,000

Question 17

Which of the following addresses where we raise money to finance our business activities?

1. working capital management
2. capital budgeting
3. capital structure
4. accounts receivable management

Question 18

In what kind of markets do current prices already reflect the price history and volume of the stock as well as all available public information?

1. operational efficient markets
2. strong-form efficient markets
3. semi-strong -form efficient markets
4. weak-form efficient markets

Question 19

Which of the following is the return an individual would earn if he purchased a bond today and held the bond to the end of his life?

1. prime rate
2. coupon rate
3. current yield
4. yield to maturity

Question 20

Which of the following statements concerning the relationship between the yield-to-maturity and bond prices is FALSE?

1. a bond selling at a discount means that the coupon rate is less than the yield-to-maturity
2. when interest rates go up, bond prices go up
3. a bond selling at a premium means that the coupon rate is greater than the yield-to-maturity
4. when the yield-to-maturity and coupon rate are the same, the bond is called a par value bond

Question 21

Which of the following statements regarding the fact that the pricing of stocks is more difficult than the pricing of bonds is FALSE?

1. Cash dividends, unlike coupons for bonds, typically change from year to year.
2. Because a stock has no maturity date, the number of its payments are unknown.
3. The ending price of the stock at any point in time is not fixed like the par value of the principal.
4. A stock's final sale is fixed in time on its maturity date.

Question 22

For a ten year project the initial outlay costs are €1,000,000. The respective annual future cash inflows are €170,000. If the discount rate is 10%, what is the discounted payback period?

1. the project doesn't pay back
2. 9 years
3. 9.32 years
4. 9.75 years

Question 23

Suppose you made an investment of €80,000 at the beginning of the project and it generates a positive cash flow of €30,000 for 4 years. The cost of capital is 12%, the IRR of the project is 18.45% and the NPV is €11,120. According to the IRR model, at the end of the first year you can invest the €30,000 at:

1. 12.00%
2. a rate less than the cost of capital
3. 18.45%
4. a rate greater than the IRR

Question 24

The optimal debt-to-equity ratio shows the point that reflects the maximum benefit of leverage. At this point the WACC is:

1. irrelevant
2. the lowest
3. the midpoint
4. the highest

Question 25

Assume you have signed a put option contract for an asset. The premium of this option is €1.10 and expires in 2 months. The asset is currently sold on the market at €26 (current spot price). The strike price of the option is €25. What are the intrinsic and time value components of the premium for this call option?

1. the intrinsic value is €1.10 and the time value is €0
2. the intrinsic value is €1.0 and the time value is €0.10
3. the intrinsic value is €0 and the time value is €1.10
4. the intrinsic value is €0.10 and the time value is €1.0

Question 26

What is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principles?

1. principal theory
2. interested party theory
3. compensation process theory
4. agency theory

Question 27

Which of the following securities cannot have any benefits for diversification with your investment portfolio?

1. Beta company stock has a correlation coefficient of 0.50 with your portfolio
2. treasury bills with a correlation coefficient of 0.0 with your portfolio.
3. Alpha company stock has a correlation coefficient of -0.25 with your portfolio
4. all of the above would reduce risk for your portfolio and show some benefit to diversification

Question 28

A residual dividend policy is one in which:

1. no dividends are paid to stockholders because they will reap their benefits when the firm ceases operations.
2. a conservative dividend payment is made each period to stockholders
3. leftover funds are paid out to stockholders as dividends after all other capital requirements are met.
4. bondholders receive extra cash flows when available after paying dividends to shareholders

Question 29

A firm is forecasting sales and uses the percentage of sales method to forecast additional capital needed for the operations next year. Which of the following factors are likely to decrease the additional outside funding needed?

1. the company expects a decrease in its profit margin next year
2. the company has a high dividend payout ratio and plans to keep the same policy for the next year.
3. the company currently operates at full capacity
4. the company plans to increase the amount of accounts payable by increasing the payment cycle.

Question 30

A company with unlimited funds has to evaluate six projects. Project 1, 2 and 3 are independent and projects 4,5 and 6 are mutually exclusive. The WACC of the firm is 12%.

Project Status Return(%)

• 1 Independent 15
• 2 Independent 16
• 3 Independent 10
• 4 Mutually exclusive 14
• 5 Mutually exclusive 11
• 6 Mutually exclusive 13

Which projects should the firm choose?

1. 1 and 4
2. 1, 2 and 4
3. 2, 4 and 6
4. 1, 2, 4 and 6

Question 31

What is a good description of the IRR decision criterion?

1. accept a project if the NPV is positive
2. accept the project if the IRR exceeds the desired or required return rate
3. accept a project if the IRR falls below the desired or required return rate
4. reject a project if the IRR exceeds the desired or required return rate

Question 32

Consider the Big Max index and the concept of purchasing power parity. If the price of a Big Mac burger in the US is 4.26andthecurrentexchangerateis

1.3322/€, what is the implied price of a Big Mac in the Netherlands?

1. €3.19
2. $3.19
3. €4.25
4. €5.66

Question 33

Jamie currently owns 600 shares of Bol.com. Bol.com has a high-dividend-payout policy and will this year pay €2.50 cash dividend on its shares that are currently selling at €23. Jamie wants a low dividend-payout policy of 3.5% of the stock price. What needs Jamie to do to convert this high policy to a low payout policy for himself?

1. sell 49.61 shares
2. sell 44.22 shares
3. purchase 49.61 more shares
4. purchase 44.22 more shares

Question 34

BeverSport store will have cash receipts of €47,000 and cash disbursements of €41,000 in November. If the beginning cash is €7,000 and its minimum required level of cash is €4,000, what will be the excess for Novemer?

1. There is no excess but a shortfall
2. €13,000
3. €9,000
4. €6,000

Question 35

Suppose that a Dutch company recently has sold 210,000 worth of computers to 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?

1. A forward contract on selling US dollars
2. a call option on US dollars
3. a put option on US dollars
4. Since the Euro is expected to appreciate against the US dollar, the change in exchange rate will not create a problem.

Question 36

According to the DuPont analysis the ROE = profitability ratio x asset turnover ratio x total asset to total equity ratio. Mediamarkt has a profitability ratio of 0.14, an asset turnover ratio of 1.7 and a total debt to total equity ratio of 0.6. What s the firm's ROE?

1. 14.28%
2. 22.85%
3. 38.08%
4. 41.76%

Question 37

Consider a firm that has issued 10-year semi-annual coupon bonds which have a face value of €1,000. The current yield-to-maturity is 8% and the annual coupon rate is 10%. What is the firm's current price per bond?

1. between €1,101 and €1,150
2. between €1,051 and €1,100
3. between €851 and €900
4. between €801 and €850

Question 38

Consider the following information of several states in the world:

State of the economy Probability of state Return on state

• Recession 0.15 -5%
• Steady 0.55 10%
• Boom 0.30 18%

What is the expected return for a company?

1. -0.75%
2. 5.40%
3. 5.50%
4. 10.15%

Question 39

A company is considering a nine year project that has an initial after-tax outlay/cost of €190,000. the future after ax inflow for the years 1-9 are €35,000 each year. The net present value method is used by the company and the discount rate is 12%. Will the company accept the project?

1. reject because the NPV is over -€4,000
2. reject because the NPV is about -€3,520
3. accept because the NPV is over €4,000
4. accept because the NPV is about €3,500

Question 40

A company has credit terms of 1/10 net 30. Customers should take the discount and pay in 10 days if they cannot earn more than ________ (APR) on their investment.

1. 12.29%
2. 13.01 %
3. 18.43%
4. 20.13%

Answer indication MC-questions

1. B

2. B

3. A

4. C

5. A

6. C

7. A

8. B

9. A

10. D

11. A

12. C

13. A

14. B

15. C

16. C

17. C

18. C

19. D

20. B

21. D

22. C

23. C

24. B

25. C

26. D

27. D

28. C

29. D

30. B

31. B

32. A

33. C

34. C

35. A

36. C

37. A

38. D

39. B

40. C