1) some of the factors (with selected explanations) used in calculating the basic “net
present value” and the “incremental” cash flows of a capital project are:
(i) – expected after-tax terminal value, including recapture of working capital
(ii) – net income, which belongs to the equity holders of the firm
(iii) – initial investment at inception
(iv) – depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed
from the calculation of net income, for tax purposes, but added back because it did not
actually flow out of the firm)
(v) – weighted-average cost of capital
(vi) – the firm’s after-tax payment of interest to debtholders
(vii) – economic life of the capital project in years
the “incremental” cash flows of a capital project is calculated by using:
a.(i), (ii), and (iii)
b.(ii), (iv), and (vi)
c.(i), (iii), (v), and (vii)
d.(iv), (v), (vi), and (vii)
2) a japanese exporter has a 1,000,000 receivable due in one year.
detail a strategy using options that will eliminate exchange rate risk.
a.buy 16 put options on euro, sell 10 call options on yen
b.buy 16 put options on euro, buy 10 call options on yen
c.sell 16 call options on euro, buy 10 put options on yen
d.none of the above
3) assume the time from acceptance to maturity on a $4,000,000 banker’s acceptance is
180 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 3.0 percent. calculate the amount the
exporter will receive if he discounts the b/a with the importer’s bank.
a.$3,993,750
b.$3,915,000
c.$3,975,000
d.$3,009,375
4) if a currency futures contract (direct quote) is priced below the price implied by
interest rate parity (irp), arbitrageurs could take advantage of the mispricing by
simultaneously
a.going short in the futures contract, borrowing in the domestic currency, and going
long in the foreign currency in the spot market
b.going short in the futures contract, lending in the domestic currency, and going long
in the foreign currency in the spot market
c.going long in the futures contract, borrowing in the domestic currency, and going
short in the foreign currency in the spot market
d.going long in the futures contract, borrowing in the foreign currency, and going long
in the domestic currency, investing the proceeds at the local rate of interest
5) the key to extracting private benefits of control that are not shared by other
shareholders on a pro rata basis is to
a.become a large shareholder and acquire control rights exceeding cash flow rights
b.buy a large block of nonvoting shares
c.sell your shares in a tender offer
d.force the firm into bankruptcy
6) which of the following is a true statement?
a.as long as exchange rates do not always move in the same direction, the firm can
stabilize its operating cash flows by diversifying its export market
b.the firm should not get into new lines of business solely to diversify exchange risk
because conglomerate expansion can bring about inefficiency and losses
c.all of the above are true
d.none of the above is true
7) the current spot exchange rate is $1.50/ and the three-month forward rate is $1.55/.
based on your analysis of the exchange rate, you are confident that the spot exchange
rate will be $1.62/ in three months. assume that you would like to buy or sell 1,000,000.
what actions do you need to take to speculate in the forward market? what is the
expected dollar profit from speculation?
a.sell 1,000,000 forward for $1.50/
b.buy 1,000,000 forward for $1.55/
c.wait three months, if your forecast is correct buy 1,000,000 at $1.62/
d.buy 1,000,000 today at $1.50/; wait three months, if your forecast is correct sell
1,000,000 at $1.62/
8) the moving average crossover rule
a.is a fundamental approach to forecasting exchange rates
b.states that a crossover of the short-term moving average above the long-term moving
average signals that the foreign currency is appreciating
c.states that a crossover of the short-term moving average above the long-term moving
average signals that the foreign currency is depreciating
d.none of the above
9) suppose that the exchange rate is 1.25 = £1.00.
options (calls and puts) are available on the london exchange in units of 10,000 with
strike prices of £0.80 = 1.00. options (calls and puts) are available on the frankfurt
exchange in units of £10,000 with strike prices of 1.25 = £1.00. for a french firm to
hedge a £100,000 receivable,
a.buy 10 call options on the pound with a strike in euro
b.buy 8 put options on the pound with a strike in euro
c.buy 10 put options on the pound with a strike in euro
d.buy 8 call options on the euro with a strike in pounds
e.both a and b
f.both c and d
10) your firm’s existing bonds trade with a yield to maturity of eight percent. the state of
missouri has offered to loan your firm $10,000,000 at zero percent for five years.
repayment will be of the form of $2,000,000 per year for five years the first payment is
due in one year. what is the value of this offer?
a.$4,729,622.75
b.$2,014,579.93
c.$0
d.$196,929.88
e.none of the above
11) in which market does a clearinghouse serve as a third party to all transactions?
a.futures
b.forwards
c.swaps
d.none of the above
12) once a mnc decides to undertake a foreign project, it can take various measures to
minimize its exposure to political risk. these include
a.the mnc can form a joint venture with a local company
b.the mnc may also consider forming a consortium of international companies to
undertake the foreign project
c.the mnc can use local debt to finance the foreign project
d.the mnc may purchase insurance against the hazard of political risk
e.all of the above
13) not all countries allow mncs the freedom to net payments,
a.the u.s., canada, and great britain allow only netting between each other
b.some countries require the mnc to ask permission, and some countries limit netting
c.but that is fine, since netting typically has costs that outweigh the benefits for a mnc
d.all of the above may be correct
14) balance of payments
a.is defined as the statistical record of a country’s international transactions over a
certain period of time presented in the form of a double-entry bookkeeping
b.provides detailed information concerning the demand and supply of a country’s
currency
c.can be used to evaluate the performance of a country in international economic
competition
d.all of the above
15) find the input d1 of the black-scholes price of a six-month call option on japanese
yen. the strike price is $1 = ¥100. the volatility is 25 percent per annum; r$ = 5.5% and
r¥ = 6%.
a.d1 = 0.074246
b.d1 = 0.005982
c.d1 = $0.006137/¥
d.none of the above