Categories
Finance Flashcards

business finance chapter 8

The net present value of an investment represents the difference between the investment’s: cost and its market value
Net present value involves discounting an investment’s future cash flows
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to recoup its initial cost
The average net income of a project divided by the project’s average book value is referred to as the project’s: average accounting return
The internal rate of return is the discount rate that results in a zero net present value for the project.
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? discount rate
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as multiple rates of return
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? mutually exclusive
Which one of the following can be defined as a benefit-cost ratio? probability index
Which one of the following indicates that a project is expected to create value for its owners? postive net present value
The net present value Decreases as the requires rate of return increases
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? net present value
Which one of the following statements is correct? If the internal rate of return equals the required return, the net present value will equal zero.
If an investment is producing a return that is equal to the required return, the investment’s net present value will be zero
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. profitability index less than 1.0
Which one of the following indicators offers the best assurance that a project will produce value for its owners? positive NPV
Which one of the following statements is correct? The payback period ignores the time value of money
Generally speaking, payback is best used to evaluate which type of projects? low costs, short term
Which one of the following is the primary advantage of payback analysis? ease of use
The payback method of analysis ignores which one of the following? time value of money
Which one of the following methods of analysis ignores the time value of money? payback
Which one of the following methods of analysis has the greatest bias toward short-term projects? payback
Which one of the following methods of analysis ignores cash flows? average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? average accounting return
The average accounting return: measures profitability rathe than cash return
Which one of the following analytical methods is based on net income? average accounting return
Which one of the following is most closely related to the net present value profile? interest rate of return
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? The investment is mutually exclusive with another investment of a different size.
Which one of the following statements is correct? Assume cash flows are conventional. When the internal rate of return is greater than the required return, the net present value is positive.
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. Internal rate of return that exceeds the required return
The modified internal rate of return is specifically designed to address the problems associated with: unconventional cash flow
The reinvestment approach to the modified internal rate of return: compounds all the cash flows except for the initial cash flow to the end of the project
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? modified internal rate of return
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? net present value
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? The net present value of Project A equals that of Project B, but generally does not equal zero.
Which one of the following will occur when the internal rate of return equals the required return?
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The net present value is equal to zero
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? The firm should increase in value each time the firm accepts a new project.
If a project with conventional cash flows has a profitability index of 1.0, the project will: have an internal rate of return that equals the required return.
The profitability index reflects the value created per dollar invested
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Internal rate of return and net present value
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? net present value
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? profitability index
In which one of the following situations would the payback method be the preferred method of analysis? Investment funds available only for a limited period of time
Which one of the following statements is correct? The payback method is biased toward short-term projects
Which one of the following indicates that an independent project is definitely acceptable? Profitability index greater than 1.0
Categories
Finance Flashcards

Corporate Finance Ch 9

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the ____ model. Dividend Growth Model
Next year’s annual dividend divided by the current stock price is called the ___. Dividend Yield
The rate at which a stock’s price is expected to appreciate (or depreciate) is called the ____ yield. capital gains yield
A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called ____ stock. Common Stock
Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called ____. Dividends
Differential Growth refers to a firm that increases its dividend by ____. a rate which is most likely not sustainable over an extended period of time.
The total rate of return on a stock is comprised of which of the following?1. Current Yield2. Yield to Maturity3. Dividend Yield4. Capital Gains Yield 3 and 4
The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The Company ____. Must still declare each dividend before it becomes an actual company liability.
Categories
Finance Flashcards

Chapter 2 Finance

Forms of Business Organizations 1. Sole proprietorship2. Partnership3. Corporation4. Hybrids (LLP, LLC, Sub S)
Sole Proprietorship Business owned and operated by one person.
Advantages to the Sole Proprietorship 1. Easy to form. (no paperwork is involved)2. Business income is taxed once, at the individual’s personal level
Disadvantages to the Sole Proprietorship 1. Unlimited Liability2. Lack of continuity (“unbroken; consistent existence”)3. Limited access to additional funds.
Small Business Accounting Net income is added to the regular salary income and taxed at ordinary tax rates.
Partnerships is a business owned and operated by two or more people.
A partnership can be formalized by : having a lawyer create a partnership agreement
Partnership Agreement : – Establishes how decisions are made, such as how each partner can buy out the other in the event that one wants to dissolve the partnership- Stipulates how the partnership’s income is allocated among the partners.
Advantages to the Partnership Form of Business 1. Easy to Form2. Business income is taxed once, at the individual partners’ level
Disadvantages to the Partnership Form of Business 1. Unlimited liability for general partners2. Lack of continuity3. Limited access to additional funds.
Corporation Business organized as a separate legal entity under corporation law, with ownership divided into transferable shares.In tax law, such a business is generally taxed as a C corporation (C corp).
Corporate Owners have the benefit of limited liability : the maximum that owners can lose is their investment.
A corporation is usually formed by : filing articles of incorporation and receiving a certificate of incorporation from the state.
What does the articles of incorporation indicate ? * the most basic information about the company, such as its mailing address, name, line of business, number of shares issued, names and addresses of the officers of the company, and so on.
What is a critical feature of a corporation? It is a distinct legal entity.
Who are the owners in a corporation? the owners are the owners of the ownership interests—that is, the shareholders—who elect members of the board of directors, who in turn hire and monitor the company’s management.
Is the separation of management and ownership an issue for smaller companies? Or large companies? For smaller companies, the separation of management and ownership isn’t a problem, but for larger companies, it becomes a serious concern. This division is the fundamental problem of the governance structure of large companies
Advantages to the Corporation Form of Business 1. Limited Liability2. Unlimited life3. Access to capital
Disadvantages to the Corporation Form of Business 1. Income taxed at the corporate level and at the owners’ level, when distributed.2. Separation of owners and management.
Effective tax rate on corporate income Tc + [(1-Tc) DPO Ti]where, Tc – represents the corporate tax rateTi – represents the individual tax rateDPO – represents portion of dividends paid to owners
Limited Liability Company (LLC) – Hybrid Organization – a company that embodies some of the best features of both the partnership and corporate forms of business- business organized as a separate legal entity in which owners have limited liability, but the income is passed through to the owners for tax purposes
Advantages to the Limited Liability C. Form of Business 1. Limited liability for the owners2. Unlimited life3. Income taxed only at the owners’ level
Disadvantages to the Limited Liability C. Form of Business 1. Separation of owners and management.2. Access to capital.
Limited liability partnership (LLP) or Limited Partnership – Hybrid Organization – at least one general partner who manages the business (unlimited liability);- any number of limited partners (limited liability), who are passive investors.
S corporation (Sub S) A corporation that elects to be taxed as a partnership
C Corporation Business taxed as a corporation according to Subsection C of the Internal Revenue Code.
Characteristics of a Sub S Taxation: Pass – throughOwnership: Maximum of 75 ShareholdersLiability: Limited LiabilityLife: Perpetual
Characteristics of a LLC Taxation: Pass – throughOwnership: No maximumLiability: Limited LiabilityLife: Limited
Stakeholders is a party that is affected by the decisions and operations of the business entity. SH include not only the owners, but also the creditors, the employees, the suppliers, and the customers.
What is the goal of a company? To maximize the market value of the equity interest or, alternatively, maximize shareholder value.
Categories
Finance Flashcards

Personal Finance – Chapter 2

Personal Balance Sheet A statement of your financial position on a given date. It includes the assets you own, the debt or liabilities you have incurred, and your level of wealth, which is referred to as net worth.
Assets What you own.
Liabilities Something that is owed or the borrowing of money.
Net Worth of Equity A measure of the level of your wealth. It is determine by subtracting the level of your debt or borrowing from the value of your assets.
Fair Market Value What an asset could be sold for rather than what it cost or what it will be worth sometime in the future.
Tangible Asset A physical asset, such as a house or a car, as opposed to an investment.
Blue Book A listing of used-car prices, giving the average price a particular year and model sells for and what you might expect to receive for it as a trade-in.
Insolvent The condition in which you owe more money than your assets are worth.
Income Statement A statement that tells you where your money has come from and where it has gone over some period of time.
Variable Expenditure An expenditure over which you have control. That is, you are not obligated to make that expenditure, and it may very from month to month.
Fixed Expenditure An expenditure over which you have no control. You are obligated to make this expenditure, and it is generally at a constant level each month.
Budget A plan for controlling cash inflows and cash outflows. Based on your goals and financial obligations, a budget limits spending in different categories.
Current Ratio A ratio aimed at determining if you have adequate liquidity to meet emergencies, defined as monetary assets divided by current liabilities.
Month’s Living Expenses Covered Ratio A ratio aimed at determining if you have adequate liquidity to meet emergencies, defined as monetary assets divided by annual living expenditures divided by 12.
Debt Ratio A ratio aimed at determining if you have the ability to meet your debt obligations, defined as total debt or liabilities divided by total assets.
Long-Term Debt Coverage Ratio A ratio aimed at determining if you have the ability to meet your debt obligations, defined as total income available to living expenses divided by total long-term debt payments.
Savings Ratio A ratio aimed at determining how much you are saving, defined as income available for saving and investments divided by income available for living expenditure.
Ledger A book or notebook set aside to record expenditures.
Categories
Finance Flashcards

Finance Chapter 11

B Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.A) necessary cash flowsB) relevant cash flowsC) perpetual cash flowsD) ordinary cash flows
B Relevant cash flows for a project are best described as ________.A) incidental cash flowsB) incremental cash flowsC) sunk cash flowsD) contingent cash flows
C When making replacement decisions, the development of relevant cash flows is complicatedwhen compared to expansion decisions, due to the need to calculate ________ cash inflows.A) conventionalB) opportunityC) incrementalD) sunk
C In developing the cash flows for an expansion project, the analysis is the same as the analysis for replacement projects where ________.A) all cash flows from the old assets are equalB) prior cash flows are irrelevantC) all cash flows from the old asset are zeroD) cash inflows equal cash outflows
D Cash outlays that had been previously made and have no effect on the cash flows relevant to acurrent decision are called ________.A) incremental historical costsB) incremental past expensesC) opportunity costs foregoneD) sunk costs
C Cash flows that could be realized from the best alternative use of an owned asset are called ________.A) incremental costsB) lost resale opportunitiesC) opportunity costsD) sunk costs
B Benefits expected from proposed capital expenditures ________.A) must be on a pre-tax basis because it provides the true position of profits by the firmB) must be on an after-tax basis because no benefits may be used until tax claims are satisfiedC) may be valued either on pre-tax or after-tax basis based on the size of the firmD) are independent of interest and taxes
A One basic technique used to evaluate after-tax operating cash flows is to ________.A) add noncash charges to net incomeB) subtract depreciation from operating revenuesC) add cash expenses to net incomeD) subtract cash expenses from noncash charges
C The book value of an asset is equal to the ________.A) fair market value minus the accounting valueB) original purchase price plus annual depreciation expenseC) original purchase price minus accumulated depreciationD) depreciated value plus recaptured depreciation
D The tax treatment regarding the sale of existing assets that are sold for more than the originalpurchase price results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) a recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability
C The tax treatment regarding the sale of existing assets that are sold for more than the bookvalue but less than the original purchase price results in a(n) ________.A) ordinary tax benefitB) capital gain tax liabilityC) recaptured depreciation taxed as ordinary incomeD) capital gain tax liability and recaptured depreciation taxed as ordinary income
B The tax treatment regarding the sale of existing assets that are sold for their book value results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income
B The portion of an asset’s sale price that is above its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value
C The portion of an asset’s sale price that is below its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value
B The tax treatment regarding the sale of existing assets that are sold for less than the book value results in ________.A) an ordinary tax benefitB) a capital loss tax benefitC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income
D A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $7,560 tax liabilityC) $4,400 tax liabilityD) $7,720 tax liability
A A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $840 tax liabilityC) $3,160 tax liabilityD) $3,160 tax benefit
D A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $1,100 tax liabilityC) $3,600 tax liabilityD) $280 tax benefit
B A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, wasbeing depreciated under MACRS using a five-year recovery period and has been depreciated forfour full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the taxeffect of this transaction is ________.A) $0 tax liabilityB) $1,320 tax liabilityC) $1,160 tax liabilityD) $2,000 tax benefit
B A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.A) deductible from capital gains income; deductible from ordinary incomeB) deductible from ordinary income; deductible only against capital gainsC) a credit against the tax liability; not deductibleD) not deductible; deductible only against capital gains
C A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $42,000B) $52,440C) $54,240D) $50,000
A A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $48,560B) $44,360C) $49,240D) $27,600
B Which of the following would be used in the computation of an initial investment?A) the annual after-tax inflow expected from the investmentB) the initial purchase price of the investmentC) the historic cost of the existing investmentD) the profits from the new investment
C Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?A) incremental annual savings produced by the new assetB) cash flows generated by the new investmentC) proceeds from the sale of an existing assetD) profits on the sale of an existing asset
D An important cash inflow in the analysis of initial cash flows for a replacement project is ________.A) taxesB) the cost of the new assetC) installation costD) the sale value of the old asset
B When evaluating a capital budgeting project, installation costs of a new machine must beconsidered as part of ________.A) the operating cash inflowsB) the initial investmentC) the incremental operating cash inflowsD) the operating cash outflows
D The change in net working capital when evaluating a capital budgeting decision is ________.A) the change in fixed liabilities minus the change in fixed assetsB) the increase in current assetsC) the increase in current liabilitiesD) the change in current assets minus the change in current liabilities
C In evaluating the initial investment for a capital budgeting project, ________.A) an increase in net working capital is considered a cash inflowB) a decrease in net working capital is considered a cash outflowC) an increase in net working capital is considered a cash outflowD) net working capital does not have to be considered
D A corporation is considering expanding operations to meet growing demand. With the capitalexpansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________.A) an increase of $120,000B) a decrease of $60,000C) a decrease of $120,000D) an increase of $60,000
B A corporation is considering expanding operations to meet growing demand. With the capitalexpansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is ________.A) an increase of $10,000B) a decrease of $10,000C) a decrease of $90,000D) an increase of $80,000
D If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________.A) decrease by $500,000B) increase by $1,500,000C) increase by $2,000,000D) experience no change
B A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $15,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $24,000B) $16,000C) $14,000D) $26,000
C A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $2,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $5,800B) $7,800C) $8,200D) $6,200
B Which of the following must be considered in computing the terminal value of a replacementproject?A) operating cash flow for the final yearB) after-tax proceeds from the sale of a new assetC) before-tax proceeds from the sale of an old assetD) before-tax proceeds from the sale of a new asset
B Behavioral approaches ________.A) are used to explicitly recognize project riskB) are used to get a feel for project riskC) are not used by rational financial managersD) are used to quantify the risk
A Breakeven cash inflow refers to ________.A) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPVgreater than zeroB) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV lessthan zeroC) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR lessthan zero cost of capitalD) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR equalszero
D In capital budgeting, risk refers to ________.A) the chance that a project will prove acceptableB) the conflicting IRR and NPV in a projectC) the degree of variability of initial outlayD) the uncertainty of cash inflows
A In capital budgeting, risk refers to ________.A) the degree of variability of the cash inflowsB) the degree of variability of the initial investmentC) the chance that the net present value will be greater than zeroD) the chance that the internal rate of return will exceed the cost of capital
B Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is ________.A) $1,000,000B) $131,474C) $100,000D) $66,667
B A behavioral approach that evaluates the impact on a firm’s return through simultaneouschanges in a number variables of a project is called ________.A) sensitivity analysisB) scenario analysisC) simulation analysisD) Monte Carlo simulation
B The advantage of using simulation in the capital budgeting process is the ________.A) ease of calculation over scenario analysisB) continuum of risk-return trade-offs for decision makingC) single point estimate that helps the decision maker to choose the most accurate alternativeD) use of several possible outcomes to asses risk
D One type of simulation program made popular by the widespread use of personal computers is called ________.A) Monaco SimulationB) Lemans SimulationC) Cannes SimulationD) Monte Carlo Simulation
C ________ reflects the return that must be earned on the given project to compensate the firm’s owners adequately.A) Internal rate of returnB) Cost of capitalC) Risk-adjusted discount rateD) Average rate of return
B The difference by which the required discount rate exceeds the risk-free rate is called the________.A) excess returnB) risk premiumC) inflation premiumD) maturity premium
D A preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is ________.A) sensitivity analysisB) simulation analysisC) scenario analysisD) risk-adjusted discount rates
B The theoretical basis from which the concept of risk-adjusted discount rates is derived is ________.A) the Gordon modelB) the capital asset pricing modelC) simulation theoryD) the basic cost of money
C The shares traded publicly in an efficient market are ________.A) generally positively affected by diversification, because of the reduction in riskB) generally negatively affected by diversification, because of the increase in riskC) generally not affected by diversification, unless greater returns are expectedD) generally negatively affected by diversification, because of the increase in the required rate ofreturn
C Firms do not usually get rewarded by diversifying investments in different lines of business because ________.A) the capital markets are efficient and they quickly respond to change in economic conditionsB) cash flows from such projects tend to respond less to changing economic conditionsC) investors themselves can diversify by holding securities in a variety of firms; they do not needthe firm to do it for themD) it is not possible for a firm to diversify its risk as the inflation premium is different fordifferent projects
D The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).A) internal rate of returnB) investment opportunities scheduleC) risk-adjusted discount rateD) annualized net present value
A The option to develop follow-on projects, expand markets, expand or retool plants, and so on that would not be possible without implementation of the project that is being evaluated is called ________.A) growth optionB) timing optionC) flexibility optionD) abandonment option
A A(n) ________ allows management to avoid or minimize losses on projects that turn bad.A) abandonment optionB) growth optionC) timing optionD) put option
A The objective of ________ is to select the group of projects that provides the highest overallnet present value and does not require more dollars than are budgeted.A) capital rationingB) scenario analysisC) real optionsD) sensitivity analysis
D An IRR approach to capital rationing involves graphically plotting project IRRs indescending order against total dollar investment on an ________ graph.A) ANPVB) NPVC) RADRD) IOS
C If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.A) constrained capitalB) wealth optimizationC) capital rationingD) profitability
B An approach to capital rationing that involves graphing project returns in descending orderagainst the total dollar investment to determine the group of acceptable projects is called the________.A) net present value approachB) internal rate of return approachC) payback approachD) profitability index approach
Categories
Finance Flashcards

Finance Test 1

the person responsible for overseeing the cash and credit functions financial planning and captial expenditures is the treasurer
the mixture of debt and equity used by a firm to finance its operations is called capital structure
the management of a firms short term assets and liabilties is called working capital management
a business created a distinct legal entity composed of one or more individuals or entities is called corporation
a business entity operated and taxed like a partnership but with limited liability for the owners is called a limited liability company
the primary goal of financial management is to maximize the current value per share of the existing stock
a conflict of interest between the stockholders and management of a firm is called the agency problem
the sarbanes oxeley act of 2002 is intended to protect investors from corporate abuses
which of the following is a capital budgeting decision deciding whether or not to open a new store
which of the following statements concerning a sole proprietorship is correct? may be forced to sell his/her personal assets to pay company debts
a general partner has more management responsibility than a limited partner
which one of the following statements is correct concerning corporations the largest firms are usually corporations
which one of the following business types is best suited to raising large amounts of capital corporations
the decisions made by financial managers should all be ones which increase the market value of the existing owner’s equity
which form of business structure faces the greatest agency problems corporations
financial markets are composed of capital markets and money markets
the primary market is defined as the market for new issues
the NYSE and NASDAQ are both secondary markets
in a limited partnership each limited partners liability is limited to the amount he put into the partnership
accounting profits and cash flows are generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows
Categories
Finance Flashcards

International Finance Chapter 7

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage C
Due to ____, market forces should realign the spot rate of a currency among banks.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage D
Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage B
If interest rate parity exists, then ____ is not feasible.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage C
In which case will locational arbitrage most likely be feasible?a. One bank’s ask price for a currency is greater than another bank’s bid price for the currencyb. One bank’s bid price for a currency is greater than another bank’s ask price for the currencyc. One bank’s ask price for a currency is less than another bank’s ask price for the currency. d. One bank’s bid price for a currency is less than another bank’s bid price for the currency. B
When using ____, funds are not tied up for any length of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and C D
When using ____, funds are typically tied up for a significant period of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and C A
Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:a. should exhibit a discount.b. should exhibit a premium.c. should be zero (i.e., it should equal its spot rate). A
If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound’s spot rate, then:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage. d. A and B B
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage.d. A and B A
Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?a. downward pressure on the euro’s spot rate.b. downward pressure on the euro’s forward rate.c. downward pressure on the U.S. interest rate.d. upward pressure on the euro’s interest rate. B
Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?a. upward pressure on the Swiss franc’s spot rate.b. upward pressure on the U.S. interest rate.c. downward pressure on the Swiss interest rate.d. upward pressure on the Swiss franc’s forward rate. D
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attemptto use covered interest arbitrage, what forces should occur?a. spot rate of peso increases; forward rate of peso decreases.b. spot rate of peso decreases; forward rate of peso increases.c. spot rate of peso decreases; forward rate of peso decreases.d. spot rate of peso increases; forward rate of peso increases. A
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $15,385. b. $15,625.c. $22,136. d. $31,250. A
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency. A
Assume the following information:You have $1,000,000 to invest: Current spot rate of pound= $1.3090-day forward rate of pound= $1.28 3-month deposit rate in U.S.= 3% 3-month deposit rate in Great Britain= 4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?a. $1,024,000.b. $1,030,000.c. $1,040,000.d. $1,034,000.e. none of the above A
Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.c. U.S. investors will earn 15% whether they use covered U.S. interest arbitrage or invest in the U.S.d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S. D
Assume the following information:U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars= 12%1-year deposit rate offered on Singapore dollars= 10%1-year forward rate of Singapore dollars= $.412Spot rate of Singapore dollar= $.400Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domesticallyb. Interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domesticallyc. interest rate parity exists and covered interest arbitrage above what is possible domestically.d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in ayield above what is possible dome B
Assume the following information:Current spot rate of New Zealand dollar= $.41Forecasted spot rate of New Zealand dollar 1 year from now= $.43One-year forward rate of the New Zealand dollar= $.42Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9%Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.a. about 11.97b. about 9.63c. about 11.12d. about 11.64e. about 10.63 E
20. Assume the following bid and ask rates of the pound for two banks as shown below:BidBank A $1.41 Bank B $1.39Ask$1.42 $1.40As locational arbitrage occurs:a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willincrease.b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willdecrease.c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willdecrease.d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase. D
21. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willincrease.a. $11,764. b. $11,964. c. $36,585. d. $24,390. e. $18,219. D
Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency. B
23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.a. appreciate; depreciateb. depreciate; appreciatec. depreciate; depreciated. appreciate; appreciatee. remain stable; appreciate A
24. Assume the following information:Spot rate today of Swiss franc = $.601-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64Rate on 1-year deposits denominated in Swiss francs = 7%Rate on 1-year deposits denominated in U.S. dollars = 9%From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.a. 5.00b. 12.35c. 15.50 d. 14.13 e. 11.22 B
Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.32 Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$4.50Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should appreciate.d.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate. D
26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?a. 2.0.b. 2.40.c. .80.d. .50.e. none of the above D
27. Assume that the euro’s interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?a. Americans using covered interest arbitrage earn the same rate of return as Germans whoattempt covered interest arbitrage.b. Americans who invest in the U.S. earn the same rate of return as Germans who attemptThe Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate.covered interest arbitrage.c. Americans who invest in the U.S. earn the same rate of return as Germans who invest inGermanyd. AandBe. None of the above E
28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as ifthey invested in Switzerland. b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.c. A and Bd. none of the above B
Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound’s spot rate, and ____ pressure on the pound’s forward rate.a. downward; downwardb. downward; upwardc. upward; downwardd. upward; upward C
Assume that interest rate parity holds, and the euro’s interest rate is 9% while the U.S. interest rate is 12%. Then the euro’s interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro’s forward ____ will ____ in order to maintain interest rate parity.a. discount; increaseb. discount; decreasec. premium; increased. premium; decrease D
Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $7,067. b. $8,556. c. $10,114. d. $12,238. A
Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.60 90-day forward rate of pound = $1.57 3-month deposit rate in U.S. = 3% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,020,500. b. $1,045,600. c. $1,073,330. d. $1,094,230. e. $1,116,250. A
33. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $.62 Spot rate of Swiss franc = $.60 Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. B
34. Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the U.S. = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59 E
35. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63Bank D $1.58 $1.60As locational arbitrage occurs:a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willincrease.b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willdecrease.c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willdecrease.d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willincrease. D
36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $10,003.b. $12,063.c. $14,441.d. $16,393.e. $18,219. D
37. Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.60Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$2.6Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate. B
38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?a. $2,041,667.b. $9,804.c. $500.d. $1,639. D
39. Which of the following is an example of triangular arbitrage initiation?a. buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20.c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.d. converting funds to a foreign currency and investing the funds overseas. C
40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?a. A$39.93.b. A$25,043.48.c. A$553.00.d. none of the above A
National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price / Quoted Ask PriceValue of a British pound (£) in $ $1.61 $1.62Value of a New Zealand dollar (NZ$) in $ $.55 $.56Value of a British pound in New Zealand dollars NZ $2.95 NZ$2.96Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?a. $77.64.b. $197.53.c. $15.43.d. $111.80.Quoted Bid Price Quoted Ask Price C
42. Assume the following information:You have $900,000 to invest:Current spot rate of Australian dollar (A$) = $.62180-day forward rate of the Australian dollar = $.64180-day interest rate in the U.S. = 3.5%180-day interest rate in Australia = 3.0%If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?a. $56,903.b. $61,548.c. $27,000.d. $31,500. A
Assume the following information:You have $400,000 to invest:Current spot rate of Sudanese dinar (SDD) = $.0057090-day forward rate of the dinar = $.0056990-day interest rate in the U.S. = 4.0%90-day interest rate in Sudan = 4.2%If you conduct covered interest arbitrage, what amount will you have after 90 days?a. $416,000.00.b. $416,800.00.c. $424,242.86.d. $416,068.77.e. none of the above D
Exhibit 7-1Assume the following information:You have $300,000 to invest:The spot bid rate for the euro (€) is $1.08The spot ask quote for the euro is $1.10The 180-day forward rate (bid) of the euro is $1.08The 180-day forward rate (ask) of the euro is $1.10The 180-day interest rate in the U.S. is 6%The 180-day interest rate in Europe is 8%44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?a. $318,109.10.b. $330,000.00.c. $312,218.20.d. $323,888.90.e. none of the above A
45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180days? Is covered interest arbitrage feasible in this situation?a. 7.96%; feasibleb. 6.04%; feasiblec. 6.04%; not feasibled. 4.07%; not feasiblee. 10.00%; feasible B
46. According to interest rate parity (IRP):a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. D
47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso’s forward ____ will ____.a. premium; increaseb. discount; decreasec. discount; increased. premium; decrease C
62. Assume the following information:U.S. investors have $1,000,000 to invest:1-year deposit rate offered by U.S. banks = 10%1-year deposit rate offered on British pounds = 13.5%1-year forward rate of Swiss francs = $1.26Spot rate of Swiss franc = $1.30Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. A
63. If quoted exchange rates are the same across different locations, then ____ is not feasible.a. triangular arbitrageb. covered interest arbitragec. locational arbitraged. A and C D
64. Points above the IRP line represent situations where:a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.d. covered interest arbitrage is not feasible for neither domestic nor foreign investors. C
65. Points below the IRP line represent situations where:a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.d. covered interest arbitrage is not feasible for neither domestic nor foreign investors. B
66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?a. transaction costs.b. political risk.c. differential tax laws.d. all of the above. D
67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.a. discount; 2.73b. premium; 2.73c. discount; 3.65d. premium; 3.65 B
68. Assume the following information:Exchange rate of Japanese yen in U.S. $ = $.011Exchange rate of euro in U.S. $ = $1.40Exchange rate of euro in Japanese yen = 140 yenWhat will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?a. $100,000b. -$90,909c. 10%d. -9.09% C
69. Assume the following information:Value of an Australian dollar (A$) in $ $0.67 $0.69Value of Mexican peso in $ $.074 $.077Value of an Australian dollar in Mexican pesos 8.2 8.5Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?a. $6,133b. $2,368c. $6,518d. $13,711 B
88. Which of the following is not mentioned in the text as a form of international arbitrage?a. Locational arbitrageb. Triangular arbitragec. Transactional arbitraged. Covered interest arbitragee. All of the above are mentioned in the text as forms of international arbitrage. C
89. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?a. $2,041,667b. $9,804c. $500d. $1,639 D
90. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:a. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.d. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.e. Locational arbitrage is not possible in this case. B
91. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs’ actions, the following adjustments must take place.a. One bank’s ask price will rise and the other bank’s bid price will fall.b. One bank’s ask price will fall and the other bank’s bid price will rise.c. One bank’s bid/ask spread will widen and the other bank’s bid/ask spread will fall.d. A and C D
92. Which of the following is an example of triangular arbitrage initiation?a. Buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.b. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.c. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.d. Converting funds to a foreign currency and investing the funds overseas. C
93. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?a. $6,053.27b. $5,030.45c. $6,090.13d. Triangular arbitrage is not possible in this case. B
94. National Bank quotes the following for the British pound and the New Zealand dollar:Quoted Bid Price/ Quoted Ask PriceValue of a British pound (£) in $ $1.61 $1.62Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?a. $77.64b. $197.53c. $15.43d. $111.80 C
95. Which of the following is not true regarding covered interest arbitrage?a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. C
96. Which of the following is not true regarding covered interest arbitrage?a. Covered interest arbitrage is a reason for observing interest rate parity (IRP).b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.c. When interest rate parity holds, covered interest arbitrage is not possible.d. When interest rate disparity exists, covered interest arbitrage may not be profitable.e. All of the above are true. E
97. Which of the following is not true regarding interest rate parity (IRP)?a. When interest rate parity holds, covered interest arbitrage is not possible.b. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country’s currency should exhibit a discount.c. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country’s currency should exhibit a premium.d. When covered interest arbitrage is not feasible, interest rate parity must hold.e. All of the above are true. D
Categories
Finance Flashcards

finance review

What would be the anticipated effect of a corporate dividend poliies if dividends were taxed as ordinary income? Cash dividends would likely decrease and stock repurchases would likely increase
WOTF would tend to lower a firms use of debt a decrease in corporate tax rates
The reason maximizing expected profits should not be your financial objective is that it ignores the amount of risk taken
WOTF terms of credit has the highest effective interest cost 2/10 net 30
Firms generally choose to finance temporary assets with short term debt because matching the maturities of assets and liabilities reduces risk
Ranking conflicts between the NPV and IRR methods are caused by differing all of the above
WOTF sources of funds is generally considered to be most expensive to the firm new common stock
Character refers to the willingness of the applicant to meet its financial obligations
The importance of a letter of credit in international trade is that the bank issuing the credit all of the above
The primary goal of accounts receivable management should be maximizing shareholder wealth
WOTF is false Changes in firms collection policy can affect sales and working capital
WOTF statements concerning commercial paper is false commercial paper can be issued by any firm so long as it is willing to pay rate of interest
According to residual theory of dividends dividends are a residual after financing needs have been met
Most investment banking firms do business in the all of the above
WOTF would not be expected to result in a dilution of stock price stock repurchase
WOTF is not a typical attribute of an operating lease lease period equals the economic life of an asset
The objective of offering a cash discount is to reduce the firms level of receivables investment
The transactions that george has just participated in is a margin purchase
WOTF factors does not influence a firms financial structure lifo versus fifo
WOTF would not be acceptable as collateral for a loan by most lenders all of the above are accepted as collateral
The largest single category of short term credit is trade credit
The stock of most companies is traded in the over the counter market
A portion of a firms current assets fluctuate over time the cyclical and seasonal nature of the firms business
If the inflation rate in england is higher than US, the british pound should depreciate against the US dollar
WOTF is not a function served by investment bankers assume the risk of dividend payments by guaranteeing them to investors
Leases can be operating leases or financial leases lessee is allowed to deduct depreciation of the asset
WOTF statements about the valuation of the company as a whole uses WACC is not true all of the above are true
A firm needs to generate cash establish a lockbox system
If the inflation rate in switzerland is higher than US, the swiss franc would depreciate against the dollar
WOTF terms of credit has the lowest effective interest cost 2/10 net 30
WOTF does not influence the average size of the inventory that a firm holds all of the above influence the average size of a firms inventory
WOTF is not true about a stock split it causes a dilution of control
As a consequence of using debt financing the percentage change in net income is greater than the percentage in sales
WOTF is true An increase in the corporate tax rate would lower the weighted average cost
WOTF is not true about NPV of a project It assumes cash flows are reinvested at the IRR
If a large corporation wants to issue new common stock investment banker
Modigliani and miller all of the above
a portion of a firms current assets fluctuate over time. the volatilit is attributable to the cyclical and seasonal nature of the business
Categories
Finance Flashcards

corporate finance chapter 7

dividend growth model a model that determines the current price of a stock as its dividend next period divided by the discounted rate less the dividend growth rate
dividend yield a stock’s expected cash dividend divided by its current price
capital gains yield the dividend growth rate, or the rate at which the value of an investment grows
cumulative voting a procedure in which a shareholder may cast all votes for one member of the board of directors
common stock equity without priority for dividends or in bankruptcy
straight voting a procedure in which a shareholder may cast all votes for each member of the board of directors
proxy a grant of authority by a shareholder allowing another individual to vote that shareholder’s shares.
dividends payments by a corporation to shareholders, made in either cash or stock.
preferred stock stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.
primary market the market in which new securities are originally sold to investors.
secondary market the market in which previously issued securities are traded among investors.
dealer an agent who buys and sells securities from inventory
broker an agent who arranges security transactions among investors
member as of 2006, a member is the owner of a trading license on the NYSE
commission brokers NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor
specialist an NYSE member acting as a dealer in a small number of securities on the exchange floor; often called a market maker
floor brokers NYSE members who execute orders for commission brokers on a fee basis; sometimes called $2 brokers.
SuperDOT system an electronic NYSE system allowing orders to be transmitted directly to the specialist
floor traders NYSE members who trade for their own accounts, trying to anticipate temporary price fluctuations
order flow the flow of customer orders to buy and sell securities
specialist’s post the fixed place on the exchange floor where the specialist operates
inside quotes the highest bid quotes and the lowest ask quotes for a security
electronic communications networks (ECNs) web sites that allow investors to trade directly with one another
stock price the dividend growth model makes the implicit assumption that the _________ ________ will grow at the same constant rate as the dividend. if cash flows on an investment grow at a constant rate through time, the value of that investment grows at the same rate as the cash flows.
No. Investors who don’t like the voting features of a particular class of stock are under no obligation to buy it. is it unfair or unethical for corporations to create classes of stock with unequal voting rights?
stock value the current_________ ________ reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term.
Categories
Finance Flashcards

Business Finance

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as one of the firm’s:a) capital structureb) capital budgetc) asset allocationd) working capitale) risk structure Capital structure
Margie opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Margie own if she is personally liable for all the store’s debts?a) general partnershipb) limited partnershipc) corporationd) sole proprietorship Sole proprietorship
Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which once of the following areas of finance?a) capital managementb) corporate financec) international financed) financial institutionse) personal finance international finance
Capital budgeting includes the evaluation of which of the following?a) risk and size of future cash flows onlyb) size, timing, and risk of future cash flowsc) size and timing of future cash flows onlyd) size of future cash flows only size, timing, and risk of future cash flows
The goal of financial management is to increase the:a) number of shares outstandingb) current market value per sharec) dividends paid per shared) book value of equity current market value per share
The Serbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?a) increased use of tax loopholesb) increased foreign investment in US stock marketsc) corporate accounting and financial fraud d) increased stock market volatility corporate accounting and financial fraud
Which one of the following parties can sell shares of ABC stock in the primary market?a) only officers and directors of ABC companyb) ABC companyc) any corporation, other than ABC companyd) any institutional shareholder ABC company