1)
the 5-year project requires equipment that costs $100,000. if undertaken, the
shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only
loan with a maturity of 5 years and annual interest payments. the equipment will be
depreciated straight-line to zero over the 5-year life of the project. there will be a
pre-tax salvage value of $5,000. there are no other start-up costs at year 0. during years
1 through 5, the firm will sell 25,000 units of product at $5; variable costs are $3; there
are no fixed costs.
what is the npv of the project using the wacc methodology?
a.$58,028.68
b.$49,613.03
c.$48,300.47
d.$102,727.55
e.none of the above
2) assume the time from acceptance to maturity on a $2,000,000 banker’s acceptance is
90 days. further assume that the importing bank’s acceptance commission is 1.25
percent and that the market rate for 90-day b/as is 6.0 percent. calculate the amount the
exporter will receive if he holds it to maturity.
a.$1,993,750
b.$1,999,375
c.$1,963,750
d.$1,009,375
3) a “three against nine” forward rate agreement
a.could call for a buyer to sell a six-month eurobond in three months at prices agreed
upon today
b.could call for a buyer to pay the seller the increased interest cost on a notational
amount if six-month interest rates fall below an agreed rate beginning three months
from now and ending nine months from now
c.is a forward contract on a three-month eurobond with a nine-month maturity
d.is a forward contract on a nine-month eurobond with a three-month maturity
4) a complete contract between shareholders and managers
a.would specify exactly what the manager will do under each of all possible future
contingencies
b.would be an expensive contract to write and a very expensive contract to monitor
c.would eliminate any conflicts of interest (and managerial discretion)
d.all of the above
5) for european currency options written on euro with a strike price in dollars, what of
the effect of an increase in the exchange rate s(/$)?
a.decrease the value of calls and puts ceteris paribus
b.increase the value of calls and puts ceteris paribus
c.decrease the value of calls, increase the value of puts ceteris paribus
d.increase the value of calls, decrease the value of puts ceteris paribus
6) the major components of the sarbanes-oxley act include all of the following except
a.accounting regulationthe creation of a public accounting oversight board charged with
overseeing the auditing of public companies, and restricting the consulting services that
auditors can provide to clients
b.audit committeethe company should appoint independent “financial experts” to its
audit committee
c.shareholder voting rights”one share one vote” is now the law of the land
d.executive responsibilityceos and cfos must sign off on the company’s financial
statements
7) interest rate parity (irp) is best defined as
a.when a government brings its domestic interest rate in line with other major financial
markets
b.when the central bank of a country brings its domestic interest rate in line with its
major trading partners
c.an arbitrage condition that must hold when international financial markets are in
equilibrium
d.none of the above
8) dealers in an otc market
a.stand ready to buy at the bid and sell at the ask price
b.set their own bid and ask prices
c.do not charge commissions
d.all of the above
9) prior to the argentine peso crisis
a.argentina had a “dirty float” where the government allowed the exchange rate to float
within wide bands
b.argentina had a currency board arrangement with the peso pegged to the u.s. dollar at
parity
c.the argentine government defaulted on its international debts
d.weakening of the u.s. dollar led the argentine government to abandon dollarization
10) a time draft can become a negotiable money market instrument called
a.eurodollars
b.a banker’s acceptance
c.a letter of credit
d.a bill of lading
11) what does it mean to have redenominated an asset in terms of the dollar?
a.you have undertaken a hedging strategy that gives the asset a constant dollar value
b.multiply the foreign currency value of the asset by the spot exchange rate
c.undertaken accounting changes to eliminate translation exposure
d.none of the above
12) under which accounting method are most income statement accounts are translated
at the average exchange rate for the period?
a.current/noncurrent method
b.monetary/nonmonetary method
c.temporal method
d.current rate method
13) as a general rule,
a.excess tax credits can be carried back two years
b.excess tax credits can be carried forward five years
c.excess tax credits must be used in the year recognized
d.both a and b
14) which equation is used to define the futures price?
a.
b.
c.
d.
e.
15) the bretton woods agreement resulted in the creation of
a.the bancor as an international reserve asset
b.the world bank
c.the eximbank
d.the federal reserve bank
16) a domestic bank that follows a multinational client abroad to preserve that banking
relationship
a.is playing the role of the desperate housewife in this relationship
b.is pursuing a wholesale defensive strategy
c.is pursuing a retail defensive strategy
d.none of the above
17) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock on margin with only 40% down and 60% borrowed.the
stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54
the exchange rate has changed from 1.25 per pound to 1.30 per pound. the interest on
the margin loan is 1% per year. the margin loan is denominated in pounds.
our investor’s initial endowment is £8,000. if that represents 40% of his investment,
then he borrows £12,000 and has a total investment of £20,000. at £50/share £20,000
buys 400 shares. at the end of the year he must repay a £12,000 loan.
18) 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.
19) consider an option to buy £10,000 for 12,500. in the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the
dollar by ten percent. on the other hand, the euro could depreciate against the pound by
20 percent.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
calculate the hedge ratio.
20) 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:
find the npv in euro for the french firm if they wait one year to undertake the project
after the exchange rate rises to s1(|£) = 2.20 per £.
21) the united states is considered
a. a net creditor nation
b. a net debtor nation
22)
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 dollar cash flows to compute the dollar-denominated npv of this project.
your answer is worth zero points if it does not contain currency symbols such as $, £, ,
¥!