1) shareholders of u.s. bidders (acquiring firms in m&a) experience significant positive
abnormal returns when firms expand into new industries and geographic markets.
2) a dealer in british pounds who thinks that the pound is about to appreciate
a.may want to widen his bid-ask spread by raising his ask price
b.may want to lower his bid price
c.may want to lower his ask price
d.none of the above
3) act as a swap bank and quote bid and ask prices to a and b that are attractive to a and
b and promise to make at least 20bp for your firm.
4) with regard to the past price performance of closed end mutual funds
a.most funds have traded at both a premium and a discount to nav
b.most funds trade on a stock exchange just like a publicly traded corporation
c.suggests the risk-return characteristics can be quite different from those of the
securities underlying the fund
d.all of the above
5) the worldwide method of declaring a national tax jurisdiction
a.is also known as the residential method
b.is to tax national residents of the country on their worldwide income no matter in
which country it is earned
c.is different from the territorial method of declaring a national tax jurisdiction
d.all of the above
6) with regard to the oip,
a.the composition of the optimal international portfolio is identical for all investors,
regardless of home country
b.the oip has more return and less risk for all investors, regardless of home country
c.the composition of the optimal international portfolio is identical for all investors,
regardless of home country, if they hedge their risk with currency futures contracts
d.none of the above
7) a value-maximizing firm’s would
a.undertake an investment project as long as the irr exceeds the npv
b.undertake an investment project as long as the irr is less than the cost of capital
c.undertake an investment project as long as the irr exceeds the cost of capital
d.none of the above
8) synergistic gains refers to:
a.gains from hedging
b.gains obtained when the value of the acquiring and target firms, combined together, is
greater than the stand-alone valuations of the individual firms
c.gains arising if the combined companies can save on the costs of production,
marketing, distribution, and r&d
d.both b and c
9) a firm that is committed to keeping manufacturing facilities in only the home country
(and not developing multiple production sites in a variety of countries) can
a.lessen the effect of exchange rate changes by pursuing a strategy of diversifying the
markets in which the firm’s products are sold
b.not mitigate the effects of exchange rate changes
c.lessen the effect of exchange rate changes by pursuing a strategy of selling
commodity products without product differentiation
d.pursue a strategy of increasing its products price elasticity of demand
10) following the adoption of the cadbury code of best practice,
a.joint ceo/cob (chief executive officer and chairman of the board) positions declined
b.there has been a significant impact on the internal governance mechanisms of u.k.
companies
c.ceos have become more sensitive to company performance, strengthening managerial
accountability and weakening managerial entrenchment
d.all of the above
11) solve for the weighted average cost of capital:
a.7.00%
b.6.89%
c.6.73%
d.6.67%
e.6.57%
12) a recent study of mncs suggests that when a foreign subsidiary’s obligations cannot
be met with locally generated revenues,
a.parent firms bail out their subsidiaries regardless of circumstances
b.that parent firms routinely allow subsidiaries to default
c.most subsidiaries are financed almost entirely with banker’s acceptances
d.none of the above
13) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
explain how firm b could use the forward exchange markets to redenominate a 2-year
£30m 4% pound sterling loan into a 2-year usd-denominated loan.
14) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward bid exchange
rate in $ per that that satisfies irp from the perspective of a customer.
15) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
your banker quotes the euro-zone risk-free rate at i = 6% and the british risk free rate at
i£ = 6%. find the value of the option and thereby the project.
16) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
17) assume that the balance sheet and income statement of a french subsidiary, which
keeps its books in euro, is translated into u.s. dollars, the reporting currency of the u.s.
mnc.
the table presents the balance sheet and income statement in euro.
the subsidiary is at the end of its first year of operation.
the historical exchange rate is $1.60/1.00 and the most recent exchange rate is $2.00/
fill out the 20 missing entries that translate the balance sheet and income statement for
this french subsidiary using the current/noncurrent method, the monetary/nonmonetary
method, the temporal method, and the current rate method
18) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
the irp 1-year and 2-year forward exchange rates are
explain how firm b could use two of the swaps offered above to hedge its exchange rate
risk.
19) come up with a swap (principal + interest) for two parties a and b who have the
following borrowing opportunities.
the current exchange rate is $1.60 = 1.00. company “a” wishes to borrow $1,000,000 for
5 years and “b” wants to borrow 625,000 for 5 years. you are a swap dealer. quote a and
b a swap that makes money for all parties and eliminates exchange rate risk for both a
and b. firms a and b are more concerned with what currency that they borrow in than
whether the debt is fixed or floating.
