1) countries a and b currently consume 400 units of food and 400 units of textiles each
and currently do not trade with one another. the citizens of country a have to give up
one unit of food to gain two units of textiles, while the citizens of country b have to
give up one unit of textiles to gain two units of food. their production possibilities
curves are shown.
suppose that trade is allowed and that the international exchange rate between food and
textiles is one-for-one. the increased consumption following trade will be
a.an increase of 400 units of food and 400 units of textiles
b.an increase of 1,200 units of food and 1,200 units of textiles
c.an increase of 800 units of food and 800 units of textiles
d.there are no gains from trade in this example
2) a reduced cost of equity capital increases the firm’s value
a.through revaluation of the firm’s existing cash flows from existing projects
b.through increased investment as more projects become positive npvs
c.both a and b
d.none of the above
3) the economic theory of mercantilism holds that
a.a continuing trade surplus should be a government’s major policy goal
b.the main source of wealth of a country is its productive capacity
c.free trade is the result of countries exploiting their comparative advantage
d.none of the above
4) free cash flow refers to
a.a firm’s cash reserve in excess of tax obligation
b.a firm’s funds in excess of what’s needed for undertaking all profitable projects
c.a firm’s cash reserve in excess of interest and tax payments
d.a firm’s income tax refund that is due to interest payments on borrowing
5) the underlying principle of the current/noncurrent method is that assets and liabilities
should be translated based on their maturity.
a.current assets and liabilities are converted at the current exchange rate in effect when
the cash flow associated with the asset or liability actually occurred. non-current assets
and liabilities are translated at the historical exchange rate that prevailed when the asset
was recognized
b.current assets and liabilities, which by definition have a maturity of one year or less,
are converted at the current exchange rate. non-current assets and liabilities are
translated at the historical exchange rate
c.all assets and liabilities are converted at the current exchange rate
d.none of the above
6) the firm may not be able to pass through changes in the exchange rate
a.in markets with mainly domestics (foreign to the firm) competitors
b.in markets with low price elasticities
c.both a and b
d.none of the above
7) underwriters for a domestic bond issue will commit their own capital to buy the issue
from the borrower at a discount from the issue price. the discount, or underwriting
spread, is typically
a.in the 1 to 1.5 percent range
b.in the 2 to 2.5 percent range
c.in the 3 to 3.5 percent range
d.in the 4 to 4.5 percent range
8) consider a project of the cornell haul moving company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
the firm’s tax rate is 34%; the firm’s bonds trade with a yield to maturity of 8%; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity,
the required return would be 10%
what is the levered after-tax incremental cash flow for year 4?
a.$281,704,000
b.$465,152,000
c.-$194,848,000
d.$460,796,000
e.none of the above
9) an “option” is
a.a contract giving the seller (writer) of the option the right, but not the obligation, to
buy (call) or sell (put) a given quantity of an asset at a specified price at some time in
the future
b.a contract giving the owner (buyer) of the option the right, but not the obligation, to
buy (call) or sell (put) a given quantity of an asset at a specified price at some time in
the future
c.a contract giving the owner (buyer) of the option the right, but not the obligation, to
buy (put) or sell (call) a given quantity of an asset at a specified price at some time in
the future
d.a contract giving the owner (buyer) of the option the right, but not the obligation, to
buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in
the future
10) your firm is an italian exporter of bicycles. you have sold an order to a swiss firm
for sfr. 2,000,000 worth of bicycles. payment from the customer (in swiss francs) is due
in 12 months. detail a strategy using futures contracts that will hedge your exchange
rate risk. have an estimate of how many contracts of what type and maturity.
a.go long 200 12-month swiss franc futures contracts; and long 125 12-month euro
futures contracts
b.go short 200 12-month swiss franc futures contracts; and short 125 12-month euro
futures contracts
c.go long 200 12-month swiss franc futures contracts; and short 125 12-month euro
futures contracts
d.go short 200 12-month swiss franc futures contracts; and long 125 12-month euro
futures contracts
e.none of the above
11) suppose that the british stock market is integrated with the rest of the world and
stansfield company has made its shares tradable internationally via cross-listing on the
nyse. using the capm and a risk-free rate of 5%, estimate the equity cost of capital for
stansfield.
a.12%
b.10.60%
c.6.60%
d.none of the above
12) the sensitivity of the firm’s consolidated financial statements to unexpected changes
in the exchange rate is
a.transaction exposure
b.translation exposure
c.economic exposure
d.none of the above
13) prior to the 1870s, both gold and silver were used as international means of
payment and the exchange rates among currencies were determined by either their gold
or silver contents. suppose that the dollar was pegged to gold at $30 per ounce, the
french franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce
of silver, and the german mark pegged to silver at 1 mark per ounce of silver. what
would the exchange rate between the u.s. dollar and german mark be under this system?
a.1 german mark = $2
b.1 german mark = $0.50
c.1 german mark = $3
d.1 german mark = $1
14) call markets and crowd trading offer advantages for __________ because they
mitigate the possibility of sparse order flow over short time periods.
a.thinly traded issues
b.actively traded issues
c.stocks but not bonds
d.none of the above
15) if a foreign county experiences a hyperinflation,
a.its currency will depreciate against stable currencies
b.its currency may appreciate against stable currencies
c.its currency may be unaffectedit’s difficult to say
d.none of the above
16) when managerial self-dealings are excessive and left unchecked,
a.they can have serious negative effects on share values
b.they can impede the proper functions of capital markets
c.they can impede such measures as gdp growth
d.all of the above
17) assume that you have invested $100,000 in japanese equities. when purchased the
stock’s price and the exchange rate were ¥100 and ¥100/$1.00 respectively. at selling
time, one year after purchase, they were ¥110 and ¥110/$1.00. the dollar rate of return
would be:
a.0%
b.4.32%
c.28.00%
d.-9.09%
18) multinational cash management
a.is really no different for a mnc than for a purely domestic firm in a closed economy
b.concerns itself with the size of cash balances, their currency denominations, and
where these cash balances are located among the mnc’s affiliates
c.concerns itself with the size of cash balances and their currency denominations, but
not where these cash balances are located among the mnc’s affiliates, since
intra-affiliate default risk is not an issue
d.none of the above
19) xyz corporation, located in the united states, has an accounts payable obligation of
¥750 million payable in one year to a bank in tokyo. the current spot rate is ¥116/$1.00
and the one year forward rate is ¥109/$1.00. the annual interest rate is 3 percent in
japan and 6 percent in the united states. xyz can also buy a one-year call option on yen
at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. the future
dollar cost of meeting this obligation using the forward hedge is
a.$6,450,000
b.$6,545,400
c.$6,653,833
d.$6,880,734
20) the united states adopted the gold standard in
a.1776
b.1879
c.1864
d.1973
21) the time from acceptance to maturity on a $1,000,000 banker’s acceptance is 60
days.
the importing bank’s acceptance commission is 1.00 percent and that the market rate for
60-day b/as is 5 percent.
if the exporter’s opportunity cost of capital is 11 percent, should he discount the b/a or
hold it to maturity?
22)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
23) calculate the euro-based return an italian investor would have realized by investing
10,000 into a $50 american stock. one year after investment, the stock pays a $1
dividend, and sells for $54 the exchange rate has changed from .625 per dollar to .6875
per dollar.
24)
using the table, what is 3-month forward premium or discount (expressed as an annual
percentage rate) for the british pound in terms of u.s. dollars?
25)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
26) calculate the euro-based return an italian investor would have realized by investing
10,000 into a $50 american stock. the stock pays a $0.30 quarterly dividend, and after
one year the investment sells for $54 the exchange has changed from .625 per dollar to .
6875 per dollar.
27)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed $1,000,000 for one year, how much money would you owe at
maturity?