Finance and risk management - international business - Practice Exam 3

MC-questions

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)?

1. 9.09%
2. 8.74%
3. 8.41%
4. 7.79%

Question 2

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?

1. 9%
2. 10%
3. 11%
4. 12%

Question 3

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?

1. Transaction
2. Speculative
3. Compensation
4. Precautionary

Question 4

If a firm effectively manages its financial risks, what can this firm do?

1. Avoid all long-term financial risks
2. Eliminate all the risks faced by the firm
3. Reduce the price volatility it faces
4. Guarantee the firm's financial success

Question 5

Which one of the following statements concerning interest rates is the most correct?

1. The effective annual rate decreases as the number of compounding periods per year increases.
2. The effective annual rate equals the annual percentage rate when interest is compounded annually.
3. Borrowers would prefer monthly compounding over annual compounding.
4. Savers would prefer annual compounding over monthly compounding.

Question 6

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:

1. dividend-paying equities to maintain a constant price while non-dividend paying equities decrease in value.
2. dividend-paying equities to increase in price while non-dividend paying equities decrease in value.
3. an increase in all equity values.
4. a decrease in all equity values.

Question 7

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?

1. accept project A as it always has the higher NPV
2. accept A at 8 percent and B at 12 percent
3. accept B at 8 percent and A at 12 percent
4. accept A at 8 percent and neither at 12 percent

Question 8

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):

1. swap contract
2. forward contract
3. option
4. futures contract

Question 9

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?

1. £3.07
2. £2.93
3. £2.86
4. £2.69

Question 10

Consider a corporation with taxable income of €125,000. Which one of the following statements is correct?

1. An increase in depreciation will increase the operating cash flow.
2. Interest paid will be included in both net income and operating cash flow.
3. Net income minus dividends paid will equal the ending retained earnings for the year.
4. An increase in the tax rate will increase both net income and operating cash flow.

Question 11

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?

1. approximately annual 10%
2. approximately annual 8%
3. approximately annual 4%
4. approximately annual 2%

Question 12

Consider bonds issued by a government. Which of the following is the most correct concerning these bonds?

1. They are considered to be free of default risk.
2. They are considered to be free of interest rate risk.
3. They generally have higher required rate of return than those issued by companies.
4. All of above are correct.

Question 13

The principle of diversification explains that:

1. spreading an investment across many diverse assets will eliminate all of the systematic risk.
2. spreading an investment across many diverse assets will eliminate some of the total risk.
3. concentrating an investment in two or three large equities will eliminate all of the total risk.
4. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.

Question 14

The Economic Order Quantity (EOQ) model is designed to minimize:

1. the costs of replenishing inventory
2. production costs
3. the total costs of holding inventory
4. the carrying costs of inventory

Question 15

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

1. I and IV only
2. I, II, and IV only
3. I, II and III only
4. I, II, III, and IV

Question 16

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?

1. -€779,000
2. -€536,000
3. -€944,000
4. -€614,000

Question 17

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.)

1. €6.0 million
2. €5.0 million
3. €4.0 million
4. €2.5 million

Question 18

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).

1. Sale price + (Sales price - Book value) × (1 - T)
2. Sale price + (Sales price - Book value) × T
3. Sale price + (Book value - Sale price) × T
4. Sale price × (1 - T)

Question 19

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?

1. sell 12; €2,075
2. sell 16; €2,075,000
3. buy 12; €2,075
4. buy 16; €20,750

Question 20

When a corporation uses the financial markets to raise new funds, then the sale of securities is made in the:

1. online market
2. primary market
3. secondary market
4. third market

Question 21

Corporate governance regulation is intended to:

1. decrease audit costs for firms
2. protect financial managers from investors
3. double taxation on corporate income
4. protect investors from corporate abuses

Question 22

Which one of the following sets of ratios is probably most interesting for shareholders?

1. Market-to-book and times interest earned
2. Return on assets and profit margin
3. Return on equity and price-earnings
4. Price-earnings and current ratio

Question 23

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?

1. Between €1,200 and €1,249
2. Between €2,600 and €2,649
3. Between €2,650 and €2,699
4. Between €2,700 and €2,749

Question 24

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?

1. 12.47%
2. 12.22%
3. 11.40%
4. 10.92%

Question 25

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?

1. Increase of the market price
2. Decrease of the market price
3. Increase of the coupon rate
4. Decrease of the coupon rate

Question 26

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?

1. €4.69
2. €4.43
3. €3.75
4. €3.43

Question 27

Which of the following describes the lower bound of the value of a call?

1. Share price minus the exercise price or zero, whichever is greater
2. Share price minus the exercise price or zero, whichever is lower
3. Strike price or zero, whichever is lower
4. Strike price or zero, whichever is greater

Question 28

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).]

1. €1.88
2. €1.67
3. €1.50
4. €1.46

Question 29

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?

1. £2,848,315
2. £2,663,021
3. £2,515,482
4. £2,211,407

Question 30

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?

1. Share repurchase
2. Stock split
3. Reverse stock split
4. Cash dividends

Question 31

The management of the short-term assets and liabilities of a firm is called:

1. debt management
2. capital budgeting
3. capital structure
4. working capital management

Question 32

The maximization of the wealth of shareholders is a concept in which:

1. increased earnings is of primary importance.
2. virtually all earnings are paid as dividends to common stockholders.
3. optimally increasing the long-term value of the firm is emphasized.
4. profits are maximized on a quarterly basis.

Question 33

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?

1. €86,450
2. €82,550
3. €44,450
4. €42,750

Question 34

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

1. 17.00 per cent; 15.24 per cent
2. 17.00 per cent; 15.74 per cent
3. 15.49 per cent; 14.28 per cent
4. 15.49 per cent; 14.67 per cent

Question 35

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?

1. II and III
2. I and IV
3. I, III, and IV
4. II, III, and IV

Question 36

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?

1. Average rate
2. Current yield
3. Discount rate
4. Simple rate

Question 37

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?

1. I and III only
2. I and IV only
3. II and III only
4. II and IV only

Question 38

The internal rate of return is defined as the:

1. discount rate that equates the net cash inflows of a project to zero.
2. discount rate that causes the net present value of a project to equal zero.
3. discount rate that causes the present value of cash flows of a project to equal zero.
4. rate of return a project will generate if the project in financed solely with internal funds.

Question 39

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?

1. 15.29 per cent
2. 14.36 per cent
3. 13.14 per cent
4. 11.07 per cent

Question 40

Under credit terms of 1/5, net 15, customers should:

1. always pay on the 15th day.
2. either take the discount or pay on the 15th day.
3. both take the discount and pay on the 15th day.
4. take the 5 per cent discount and pay immediately.

Answer indication MC-questions

1. B

2. A

3. B

4. C

5. B

6. D

7. D

8. A

9. B

10. A

11. B

12. A

13. B

14. C

15. A

16. D

17. C

18. B

19. D

20. B

21. D

22. C

23. C

24. C

25. B

26. C

27. A

28. C

29. C

30. A

31. D

32. C

33. B

34. A

35. D

36. C

37. C

38. B

39. C

40. B