Corporate Finance Final!

15. Which of the following statements are correct? I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk. II. Accounting translation gains are recorded on the income statement as other income. III. The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

A. I and III only

9. Which of the following statements concerning acquisitions are correct? I. Being acquired by another firm is an effective method of replacing senior management. II. The net present value of an acquisition should have no bearing on whether or not the acquisition occurs. III. Acquisitions are often relatively complex from an accounting and tax point of view. IV. The value of a strategic fit is easy to estimate using discounted cash flow analysis.

A. I and III only

10. Interest rate parity: A. eliminates covered interest arbitrage opportunities. B. exists when spot rates are equal for multiple countries. C. means that the nominal risk-free rate of return must be the same across countries. D. exists when the spot rate is equal to the futures rate. E. eliminates exchange rate fluctuations.

A. eliminates covered interest arbitrage opportunities.

. Generous compensation packages paid to a firm's top management in the event of a takeover are referred to as: A. golden parachutes. B. poison puts. C. white knights. D. shark repellents. E. bear hugs.

A. golden parachutes.

The home currency approach: A. discounts all of a project's foreign cash flows using the current spot rate. B. employs uncovered interest parity to project future exchange rates. C. computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S. dollars. D. utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. E. utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S. dollars.

B. employs uncovered interest parity to project future exchange rates.

1. An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace the current board of directors is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. leveraged buyout. E. consolidation.

B. proxy contest.

4. A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment. E. white knight provision.

B. standstill agreement.

9. Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions. II. helps keep the currency market in equilibrium. III. opportunities can exist in either the spot or the forward market. IV. only involves currencies other than the U.S. dollar.

C. I, II, and III only

13. The foreign currency approach to capital budgeting analysis: I. is computationally easier to use than the home currency approach. II. produces the same results as the home currency approach. III. utilizes the uncovered interest parity relationship. IV. computes the net present value of a project in both the foreign and in the domestic currency.

C. I, II, and IV only

14. Which of the following represent potential gains from an acquisition? I. the replacement of ineffective managers II. lower costs per unit produced III. an increase in production size so that diseconomies of scale are realized IV. spreading of overhead costs

C. I, II, and IV only

Which one of the following statements is correct? A. If an acquisition is made with cash, then the cost of that acquisition is dependent upon the acquisition gains. B. Acquisitions made by exchanging shares of stock are normally taxable transactions. C. The management of an acquiring firm may put itself at risk of losing control of the firm if they make acquisitions using shares of stock. D. The stockholders of the acquiring firm will be better off when an acquisition results in losses if the acquisition was made with cash rather than with stock. E. Acquisitions based on legitimate business purposes are not taxable transactions regardless of the means of financing used.

C. The management of an acquiring firm may put itself at risk of losing control of the firm if they make acquisitions using shares of stock.

13. When evaluating an acquisition, you should: A. concentrate on book values and ignore market values. B. focus on the total cash flows of the merged firm. C. apply the rate of return that is relevant to the incremental cash flows. D. ignore any one-time acquisition fees or transaction costs. E. ignore any potential changes in management.

C. apply the rate of return that is relevant to the incremental cash flows.

1. In a tax-free acquisition, the shareholders of the target firm: A. receive income that is considered to be tax-exempt. B. gift their shares to a tax-exempt organization and therefore have no taxable gain. C. are viewed as having exchanged their shares. D. sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. E. sell their shares at cost thereby avoiding the capital gains tax.

C. are viewed as having exchanged their shares.

5. The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potential unfriendly takeover attempt are referred to as: A. a golden parachute. B. standstill payments. C. greenmail. D. a poison pill. E. a white knight

C. greenmail.

14. An international firm which imports raw materials can reduce its _____ exposure to _____ rate risk by entering into a forward contract. A. long-term; inflation B. short-term; inflation C. short-run; exchange D. long-run; exchange E. total; interest

C. short-run; exchange

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a: A. golden suitor. B. poison put. C. white knight. D. shark repellent. E. crown jewel.

C. white knight.

2. The idea that commodities have the same value no matter where they are purchased or what currency is used is known as _____ parity. A. forward exchange rates B. absolute purchasing power C. interest rate D. relative purchasing power E. uncovered interest rate

absolute purchasing power

A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called: A. a golden parachute. B. a standstill agreement. C. greenmail. D. a poison pill. E. a white knight

D. a poison pill.

1. The idea that the exchange rate adjusts to keep buying power constant among currencies is called: A. the unbiased forward rates condition. B. uncovered interest rate parity. C. the international Fisher effect. D. purchasing power parity. E. interest rate parity.

D. purchasing power parity.

12. The purchase accounting method for mergers requires that: A. the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm. B. goodwill be amortized on a yearly basis. C. the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm. D. the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.

D. the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.

10. When a building supply store acquires a lumber mill it is making a ______ acquisition. A. horizontal B. Longitudinal C. conglomerate D. vertical E. complementary resources

D. vertical

16. A firm engaging in international investments: A. could provide indirect diversification. B. could lower the risk premium on international projects. C. could lead to lower risk adjusted discount rates. D. could provide indirect diversification and could lower the risk premium on international projects. E. could provide indirect diversification; could lower the risk premium on international projects; and could lead to lower risk adjusted discount rates.

E. could provide indirect diversification; could lower the risk premium on international projects; and could lead to lower risk adjusted discount rates.

2. The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy.

E. synergy.

Which of the following statements are correct concerning the foreign exchange market? I. The trading floor of the foreign exchange market is located in London, England. II. The foreign exchange market is the world's largest financial market. III. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the Canadian dollar, and the euro. IV. Importers and exporters are key players in the foreign exchange market.

II and IV only

3. _____ holds because of the possibility of covered interest arbitrage. A. Uncovered interest parity B. Interest rate parity C. The international Fisher effect

Interest rate parity

7. The theory that real interest rates are equal across countries is called: A. the unbiased forward rates condition. B. uncovered interest rate parity. C. the international Fisher effect. D. purchasing power parity. E. interest rate parity.

the international Fisher effect.

The forward rate market is dependent upon: A. current forward rates exceeding current spot rates. B. current spot rates exceeding current forward rates over time. C. current spot rates equaling current forward rates on average over time. D. forward rates equaling the actual future spot rates on average over time. E. current spot rates equaling the actual future spot rates on average over time.

forward rates equaling the actual future spot rates on average over time.

4. The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called: A. the unbiased forward rates condition. B. uncovered interest rate parity. C. the international Fisher effect. D. purchasing power parity. E. interest rate parity.

interest rate parity.

3. A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment. E. white knight provision.

supermajority amendment.

5. The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called: A. the unbiased forward rates condition. B. uncovered interest rate parity. C. the international Fisher effect. D. purchasing power parity. E. interest rate parity.

the unbiased forward rates condition.

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called: A. the unbiased forward rates condition. B. uncovered interest parity. C. the international Fisher effect. D. purchasing power parity. E. interest rate parity.

uncovered interest parity.