1) the agency problem tends
a.to be more serious in firms with free cash flows
b.to be more serious in firms with excessive amounts of excess cash
c.to be less serious in firms with few numbers of shareholders
d.all of the above
2) fdi stocks
a.are the common shares of multinational companies that invest abroad
b.are mutual funds that invest in fdi
c.represent the accumulation of previous years’ fdi flows
d.at the sum total of current year fdi flows
3) the current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is
$1.60 = 1.00. consider a three-month american call option on 62,500 with a strike price
of $1.50 = 1.00. immediate exercise of this option will generate a profit of
a.$6,125
b.$6,125/(1 + i$)3/12
c.negative profit, so exercise would not occur
d.$3,125
4) the /$ spot exchange rate is $1.50/ and the 120 day forward exchange rate is 1.45/.
the forward premium (discount) is
a.the dollar is trading at an 8% premium to the euro for delivery in 120 days
b.the dollar is trading at a 5% premium to the swiss franc for delivery in 120 days
c.the dollar is trading at a 10% discount to the euro for delivery in 120 days
d.the dollar is trading at a 5% discount to the euro for delivery in 120 days
5) the vast majority of the foreign-exchange reserves held by central banks are
denominated in
a.local currencies
b.u.s. dollars
c.yen
d.euro
6) suppose you observe the following exchange rates: 1 = $1.25; £1 = $2.00. calculate
the euro-pound exchange rate.
a.1 = £1.60
b.1 = £0.625
c.2.50 = £1
d.1 = £2.50
7) a zero-coupon japanese bond promises to pay ¥1,200,000 in five years. the current
exchange rate is $1.00 = ¥100 and inflation is forecast at 3% in the u.s. and 2% in japan
per year for the next five years. the appropriate discount rate for a bond of this risk
would be 10% if it paid in dollars. what is the appropriate price of the bond?
a.¥782,353.60 = $7,823.54
b.¥745,105.60 = $7,451.06
c.none of the above
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 3; 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) international trade is
a.a “zero-sum” game in which one country benefits at the expense of another country
b.an “increasing-sum” game at which all players become winners
c.none of the above
10) gold was officially abandoned as an international reserve asset
a.in the january 1976 jamaica agreement
b.in the 1971 smithsonian agreement
c.in the 1944 bretton woods agreement
d.none of the above
11) if one country is twice the size of another country and is better at making almost
everything than the benighted citizens of the smaller county,
a.the bigger county enjoys an absolute advantage
b.the bigger county enjoys an relative advantage
c.the bigger county enjoys an comparative advantage
d.there is not enough information to make a determination
12) country a can produce 10 yards of textiles or 6 pounds of food per unit of input.
country b can produce 8 yards of textiles or 5 pounds of food per unit of input.
a.country a is relatively more efficient than country b in the production of food
b.country b is relatively more efficient than country a in the production of textiles
c.country a has an absolute advantage over country b in the production of food and
textiles
d.answers b and c are both correct
13) the over-the-counter (otc) market is a dealer market. almost all otc stocks trade on
the national association of security dealers automated quotation system (nasdaq), which
is a computer-linked system that shows
a.the limit orders of all available counterparties
b.the last price at which a security was sold
c.the bid (buy) and ask (sell) prices of all dealers in a security
d.the bid (sell) and ask (buy) prices of all dealers in a security
14) for a firm that has both debt and equity in its capital structure, its financing cost can
be represented by the weighted average cost of capital that is computed by
a.weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using
the debt as the weight
b.weighing the after-tax borrowing cost of the firm and the cost of equity capital, using
the debt as the weight
c.k = (1 – )kl + (1 – )i
where:
k = weighted average cost of capital
kl = cost of equity capital for a leveraged firm
i = before-tax borrowing cost
= marginal corporate income tax rate
= debt-to-total-market-value ratio
d.b and c
15) why do governments regulate international trade?
a.to raise revenue
b.protect domestic industries
c.pursue other economic objectives
d.all of the above
16) the firm may not be able to pass through changes in the exchange rate
a.in markets with low product differentiation
b.in markets with high price elasticities
c.both a and b
d.none of the above
17) company x wants to borrow $10,000,000 floating for 1 year; company y wants to
borrow £5,000,000 fixed for 1 year. the spot exchange rate is $2 = £1 and irp calculates
the one-year forward rate as $2.00 (1.08)/£1.00 (1.06) = $2.0377/£1. their external
borrowing opportunities are:
a swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. in
order for x and y to be interested, they can face no exchange rate risk
what must the values of a and b in the graph shown above be in order for the swap to be
of interest to firms x and y?
a.a = £7%; b = $9%
b.a = $8%; b = £6%
c.a = $7%; b = £7%
d.a = $8%; b = £8%
18) a fully diversified u.s. portfolio is about
a.75 percent as risky as a typical individual stock
b.27 percent as risky as a typical individual stock
c.12 percent as risky as a typical individual stock
d.half as risky as a fully diversified international portfolio
19) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
find the net cash flow in (out of) the u.s. affiliate.
a.$5,000 in
b.$5,000 out
c.$30,000 in
d.$30,000 out
e.none of the above
20) the eurobond segment of the international bond market
a.is roughly four times the size of the foreign bond segment
b.has considerably less regulatory hurdles than the foreign bond segment
c.typically has a lower rate of interest that borrowers pay in comparison to yankee bond
financing
d.all of the above
21) come up with a swap (principal + interest) for two parties a and b who have the
following borrowing opportunities.
the current exchange rate is $1.60 = 1.00. company “a” wishes to borrow $1,000,000 for
5 years and “b” wants to borrow 625,000 for 5 years. you are a swap dealer. quote a and
b a swap that makes money for all parties and eliminates exchange rate risk for both a
and b. firms a and b are more concerned with what currency that they borrow in than
whether the debt is fixed or floating.
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.
23) the time from acceptance to maturity on a $300,000 banker’s acceptance is 30 days.
the importing bank’s acceptance commission is 3 percent and that the market rate for
30-day b/as is 4 percent.
determine the amount the exporter will receive if he holds the b/a until maturity.
24) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
the irp 1-year and 2-year forward exchange rates are
explain how firm b could use the forward exchange markets to redenominate a 2-year
£30m 4% pound sterling loan into a 2-year usd-denominated loan.
25) the time from acceptance to maturity on a $50,000 banker’s acceptance is 180 days.
the importing bank’s acceptance commission is 2.50 percent and that the market rate for
180-day b/as is 2 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer’s bank.
26) verify that the dollar value of your put option equals the dollar value of your call.
your answer is worth zero points if it does not include currency symbols ($,)!
27) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
using your results to the last question, use multilateral netting to simplify.
28) 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:
the cfo who has a cfa notices the optionality in starting this project today. he asks you to
comment and outline your valuation strategy.
