Quiz 2 - Chapter 31 SB

Which of the following are differences between interest payments and dividend payments by the corporation?

- Dividend payments are not an obligation but interest payments are an obligation. - Dividends are paid to stockholders while interest is paid to bondholders. - Dividend income is not fixed while interest income is generally fixed.

What are the advantages of using internal financing?

- It may be cheaper than debt or equity issues. - It prevents the adverse market reaction that tends to accompany a stock issue.

Which of the following are correct when describing purchasing power parity?

- Purchasing power parity is a major factor in the rate of change in exchange rates. - Parity is expressed as both absolute and relative. - Exchange rates adjust to keep purchasing power level between currencies.

When compared to the home currency approach, which of the following are true for the foreign currency approach to capital budgeting?

- The foreign currency approach requires forecasting the foreign discount rate. - The foreign currency approach is computationally easier. - The foreign currency approach computes NPV in both foreign and domestic currencies.

The foreign currency approach to capital budgeting analysis ______.

- is computationally easier than the home currency approach - computes the NPV of a project in both the foreign and domestic currency - produces the same results as the home currency approach

The different types of exchange rate risk include which of the following?

- short-term exposure - translation exposure - long-term exposure

A project costs Can$700,000 and has expected annual cash inflows of Can$300,000 for Years 1 through 3. The Canadian discount rate is 10 percent. The current spot rate is $1 = Can$1.07. What is the NPV of this project in U.S. dollars using the foreign currency approach?

43,043

Which firm has a higher debt capacity?

A profitable firm

From a tax shield perspective, why would a firm with low profits not borrow much?

Because the firm needs only a small interest deduction to offset pretax profits.

When is a rational firm likely to increase the level of debt so as to capture the tax shield benefit of debt?

If profits are expected to be high.

What is generally the most important component of direct costs of financial distress?

Legal costs

Which of the following is the successor to LIBOR in the United States?

SOFR

The _______ Overnight Financing Rate is the successor to LIBOR in the United States.

Secured

What is the difference in results between the home currency approach and the foreign currency approach?

The two procedures produce the same answer.

Almost all currency trading takes place in terms of the ______.

U.S. dollar

If a manager has more information than an investor about the firm, that information is referred to as ______ information.

asymmetric

Corporations with significant foreign operations are often called ______.

multinationals

The foreign exchange market is where ______.

one country's currency is traded for another country's currency

Which method employs uncovered interest parity to project future exchange rates?

the home currency approach

Translation exposure results from ______.

the need to translate financial statements into home currency

The home currency approach appears to be inferior to the foreign currency approach to capital budgeting. In truth, ______.

the two approaches are the same

When a U.S. company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to ______ exposure to exchange rate risk.

translation