1) the firm’s tax rate is 34%. the firm’s pre-tax cost of debt is 8%; the firm’s
debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm’s common stock is
1.5; the market risk premium is 9%. what is the firm’s cost of equity capital?
a.33.33%
b.10.85%
c.13.12%
d.16.5%
e.none of the above
2) in evaluating political risk, experts focus their attention on a set of key factors such
as
a.the host country’s political/government system
b.historical records of political parties and their relative strengths
c.integration of the host country into the world political/economic system
d.all of the above
3) mislocated funds are defined as:
a.funds being found in the wrong account
b.funds being denominated in the wrong currency
c.funds being invested with the wrong maturity
d.none of the above
4) the time from acceptance to maturity on a $3,000,000 banker’s acceptance is 90 days.
if the importing bank’s acceptance commission is 1.25 percent, determine the amount
the exporter will receive if he holds the b/a until maturity.
a.$2,945,625
b.$2,990,625
c.$2,906,250
d.$3,009,375
5) with regard to clearing procedures for bond transactions
a.it is a system for transferring ownership of bonds
b.it is a system for ensuring payment from buyers to sellers
c.most eurobond trades clear through two major clearing systems
d.all of the above
6) 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
7) find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5
percent externally and pays libor + percent on a notational principal of $5 million in
exchange for fixed rate payments of 6 percent.
a.libor + percent
b.libor
c.libor – percent
d.none of the above
8) hedge fund advisors typically receive a management fee, often ________ of the fund
asset value as compensation, plus performance fee that can be 20-25 percent of capital
appreciation.
a.1 to 2 percent
b.10 to 20 basis points
c.10 percent
d.none of the above
9) the balance of payments identity is given by bca + bka + bra = 0. rearrange the
identity to solve for the statistical discrepancy.
a.the statistical discrepancy = (bca + bka) – bra
b.the statistical discrepancy = bca – bka + bra
c.the statistical discrepancy = bca – bka – bra
d.the statistical discrepancy = bca + bka + bra
10) assume that you have invested $100,000 in british equities. when purchased, the
stock’s price and the exchange rate were £50 and £0.50/$1.00 respectively. at selling
time, one year after purchase, they were £60 and £0.60/$1.00. if the investor had sold
£50,000 forward at the forward exchange rate of £0.55/$1.00. the dollar rate of return
would be:
a.10.90%
b.7.58%
c.28.00%
d.9.09%
11) the generally accepted method for consolidating the financial reports of an mnc
from the 1930s to 1975 was
a.current/noncurrent method
b.monetary/nonmonetary method
c.temporal method
d.current rate method
12) which of the following is false?
a.the competitive effect is that a depreciation may affect operating cash flow in the
foreign currency by altering the firm’s competitive position in the marketplace
b.the conversion effect is defined as a given operating cash flow in a foreign currency
will be converted into a lower dollar amount after a currency depreciation
c.the competitive effect is defined as a given operating cash flow in a foreign currency
will be converted into a lower dollar amount after a currency depreciation
d.none of the above
13) a bank bought a “three against six” fra. payment is made when?
a.at the end of 3 months
b.at the end of 6 months
c.at the end of 9 months
d.none of the above
14) when corporate governance breaks down
a.shareholders are unlikely to receive fair returns on their investments
b.managers may be tempted to enrich themselves at shareholder expense
c.the board of directors is not doing its job
d.all of the above
15) in any given year, about what percent of outstanding bonds are likely to be
international rather than domestic bonds?
a.70%
b.50%
c.30%
d.5%
16) the current spot exchange rate is $1.55/ and the three-month forward rate is $1.50/.
you enter into a short position on 1,000. at maturity, the spot exchange rate is $1.60/.
how much have you made or lost?
a.lost $100
b.made 100
c.lost $50
d.made $150
17) merchant banks are different from traditional commercial banks in what way(s)?
a.merchant banks can engage in investment banking activities
b.merchant banks can arrange for foreign exchange transactions
c.merchant banks can assist their clients in hedging exchange rate risk
d.all of the above
18) one particular type of political risk that mncs and investors may face is corruption
associated with the abuse of public office for private benefits.
a.investors may often encounter demands for bribes from politicians and government
officials for contracts and smooth bureaucratic processes
b.if companies refuse to make grease payments, they may lose business opportunities or
face difficult bureaucratic red tape
c.they may risk violating laws or being embarrassed when the payments are discovered
and reported in the media
d.all of the above
19)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed 1,000,000 for one year, how much money would you owe at maturity?
20) consider the situation of firm a and firm b. the current exchange rate is $1.50/. firm
a is a u.s. mnc and wants to borrow 40 million for 2 years. firm b is a french mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown;
both firms have aaa credit ratings.
what are the irp 1-year and 2-year forward exchange rates?
21) the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90
days.
the importing bank’s acceptance commission is 1.25 percent and that the market rate for
90-day b/as is 6 percent.
determine the bond equivalent yield the importer’s bank will earn from discounting the
b/a with the exporter.
22) the stock market of country a has an expected return of 8%, and standard deviation
of expected return of 5%. the stock market of country b has an expected return of 16%
and standard deviation of expected return of 10%.
find the global minimum variance portfolio.
23) using your results to the last question, use multilateral netting to simplify.
24) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
fill out the following figure with the initial situation shown in the table.
25) a withholding tax is
26)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
27)
consider the following international investment opportunity. it involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
find the euro-zone cost of capital to compute is the dollar-denominated npv of this
project.
