1) consider the following spot and forward rate quotations for the swiss franc:
which of the following is true:
a.the swiss franc is definitely going to be worth more dollars in six months
b.the swiss franc is probably going to be worth less in dollars in six months
c.the swiss franc is trading at a forward discount
d.the swiss franc is trading at a forward premium
2) abc inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but
only $10 million if the dollar appreciates. assume that the dollar has an equal chance of
appreciating or depreciating. step one: calculate the expected tax of abc if it is operating
in a foreign country that has progressive corporate taxes as shown below:
corporate income tax rate = 15% for the first $7,500,000.
corporate income tax rate = 30% for earnings exceeding $7,500,000.
step two: abc is considering implementing a hedging program that will eliminate their
exchange rate risk: they will make a certain $15 million whether or not the dollar
appreciates or depreciates. how much will they save in taxes if they implement the
program?
a.$0
b.$3,375,000
c.$1,500,000
d.$4,500,000
3) swaps are said to offer market completeness
a.this means that all types of debt instruments are not regularly available for all
borrowers. thus interest rate swap markets assist in tailoring financing to the type
desired by a particular borrower
b.in that the swap market offers price discovery to the market
c.because you can trade across both currencies and fixed and floating market segments
d.none of the above
4) regarding the mechanics of international portfolio diversification, which statement is
true?
a.security returns are much less correlated across countries than within a county
b.security returns are more correlated across countries than within a county
c.security returns are about as equally correlated across countries as they are within a
county
d.none of the above
5) in reference to capital requirements,
a.bank capital adequacy refers to the amount of equity capital a bank holds as reserves
against impaired loans
b.bank capital adequacy refers to the amount of debt capital a bank holds as reserves
against risky assets to reduce the probability of bank failure
c.most bank regulators agree with the doctrine of “less is more”
d.none of the above
6) assume that xyz corporation is a leveraged company with the following information:
calculate the debt-to-total-market-value ratio that would result in xyz having a weighted
average cost of capital of 9.3%.
a.35%
b.40%
c.45%
d.50%
7) companies domiciled in countries with weak investor protection can reduce agency
costs between shareholders and management
a.by moving to a better county
b.by listing their stocks in countries with strong investor protection
c.by voluntarily complying with the provisions of the u.s. sarbanes-oxley act
d.having a press conference and promising to be nice to their investors
8) consider the no-trade input/output situation presented in the following table and
graph for countries a and b. assuming that free trade is legal; develop a scenario that
will benefit the citizens of both countries.
a.country b should make all the textiles and trade with country a for food
b.country a should make nothing but textiles and trade with country b for food
c.country b should make all the textiles and country a should make all the food
d.country b should make nothing but textiles and trade with country a for food
9) transfer risk refers to the risk which arises from the uncertainty about
a.the host’s country’s policies affecting the local operations of an mnc
b.the host’s country’s policy regarding ownership and control of local operations
c.cross-border flows of capital, payment, know-how, and the like
d.none of the above
10) a five-year floating-rate note has coupons referenced to six-month dollar libor, and
pays coupon interest semiannually. assume that the current six-month libor is 6 percent.
if the risk premium above libor that the issuer must pay is 1/8 percent, the next period’s
coupon rate on a $1,000 face value frn will be:
a.$29.375
b.$30.000
c.$30.625
d.$61.250
11) consider the dollar- and euro-based borrowing opportunities of companies a and b.
a is a u.s.-based mnc with aaa credit; b is an italian firm with aaa credit. firm a wants to
borrow 1,000,000 for one year and b wants to borrow $2,000,000 for one year. the spot
exchange rate is $2.00 = 1.00 and the one-year forward rate is given by irp as:
suppose they agree to the swap shown at right. is this
mutually beneficial swap equally fair to both parties?
a.yes, qsd = [7% – 6% $2.00/1.00 – ($8% – $9%) = $2% + $1% = $3%
b.no, company a borrows at 6% in euro but company b borrows at 8% in dollars
c.yes, a will be better off by 1% on 1m; b by 1% on $2m and $2.00 = 1.00
d.no, company a saves 1% in euro but company b saves only 1% in dollars when the
spot exchange rate is $2.00 = 1.00a is twice as better off as b
12) 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 required return on assets?
a.33.33%
b.10.85%
c.13.12%
d.16.5%
e.none of the above
13) libor
a.is a market rate, analogous to the u.s. federal funds rate
b.is a government set rate, like the discount rate
c.is the rate at which banks in london will accept interbank deposits
d.none of the above