Answer Options:
a. True
b. False
Answer: b. False
Question: As the text indicates, a firm’s financial risk can and should be divided into separate market and diversifiable risk components.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. Increasing its use of financial leverage is one way to increase a firm’s return on investment (ROI).
b. If a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the present level of sales saturation, this would increase its operating leverage.
c. The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price.
d. If a company were to issue debt and use the money to repurchase common stock, this would reduce its return on investors’ capital (ROIC). (Assume that the repurchase has no impact on the company’s operating income.)
e. If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations’ debt ratios.
Correct Answer: c
Answer:
Question: Which of the following statements is CORRECT, holding other things constant?
Answer Options:
a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.
b. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely lead to lower debt ratios for corporations.
d. An increase in the company’s degree of operating leverage would tend to encourage the firm to use more debt in its capital structure so as to keep its total risk unchanged.
e. An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital structure.
Correct Answer: e
Answer:
Question: Which of the following statements is most CORRECT?
Answer Options:
a. The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers.
b. During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed.
c. The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity.
d. Increased nationalization of business and a desire to scale down and focus on producing in one’s home country has virtually halted cross-border mergers today.
e. Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century.
Correct Answer: c
Answer:
Question: There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors that affect call option values? a. The price of call options will rise if XYZ’s stock price rises. b. The higher the strike price, the higher the call option price. c. Assuming the same strike price, a call option that expires in 1 month will sell for a higher price than one that expires in 3 months. d. The less volatile a stock’s price, the more valuable a call option on the stock is. e. If the risk-free rate of interest increases, the value of call options will decrease.
Answer: a. The price of call options will rise if XYZ’s stock price rises.
Question: Which of the following statements is NOT CORRECT?
Answer Options:
a. Any bond sold outside the country of the borrower is called an international bond.
b. Foreign bonds and Eurobonds are two important types of international bonds.
c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
d. The term Eurobond applies only to foreign bonds denominated in U.S. currency.
e. A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.
Answer: d. The term Eurobond applies only to foreign bonds denominated in U.S. currency.
Question: Operating leases help to shift the risk of obsolescence from the user to the lessor.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Which of the following statements about convertibles is most CORRECT?
Answer Options:
a. The coupon interest rate on a firm’s convertibles is generally set higher than the market yield on its otherwise similar straight debt.
b. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
c. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
d. At the time it is issued, a convertible’s conversion (or exercise) price is generally set equal to or below the underlying stock’s price.
e. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm’s otherwise similar straight debt and the expected return on its common stock.
Correct Answer: e
Answer:
Question: Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
Answer Options:
a. True
b. False
Answer: b. False
Question: If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
Question: A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT? a. A swap involves the exchange of cash payment obligations. b. The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds. c. Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties. d. A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market. e. Swaps can involve side payments in order to get the counterparty to agree to the swap.
Answer: d. A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
Question: A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
Question: The cash flows relevant for a foreign investment should, from the parent company’s perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
Answer Options:
a. True
b. False
Answer: b. False