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FINC 5310 FINAL Questions and Answers
1 Which of the following statements is most CORRECT?
A. To a large extent, the decision to dissolve a firm through
liquidation versus keeping it alive through reorganization depends
on a determination of the value of the firm if it is rehabilitated
versus the value of its assets if they are sold off individually.
b. The basic doctrine of fairness states that all debtholders must
be treated equally.
c. The primary test of feasibility in a reorganization is whether
every claimant agrees with the reorganization plan.
d. While a firm is in bankruptcy, the existing management is
always allowed to retain control, though the court will monitor its
actions closely.
e. Since the primary issue in bankruptcy is to determine the
sharing of losses between owners and creditors, the "public
interest" is not a relevant concern.
Ans: A. To a large extent, the decision to dissolve a firm through
liquidation versus keeping it alive through reorganization depends on a
determination of the value of the firm if it is rehabilitated versus the
value of its assets if they are sold off individually.
2 Neuman Corporation Convertible Bonds The following data
apply to Neuman Corporation's convertible bonds: Maturity:
10Stock price: $30.00 Par value: $1,000.00Conversion price: $35.00
Annual coupon: 5.00%Straight-debt yield: 8.00% Refer to the data
for the Neuman Corporation's convertible bonds. What is the
bond's conversion value?
a. $734.89
b. $773.57
c. $698.15
d. $814.29
e. $857.14
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Ans: Conversion value = Conversion ratio × Market price of stock =
$857.14
3 A box of chocolate candy costs 28.80 Swiss francs in
Switzerland and $20 in the United States.
Assuming that purchasing power parity (PPP) holds, what is the
current exchange rate?
a. 1 U.S. dollar equals 0.85 Swiss francs
b. 1 U.S. dollar equals 1.44 Swiss francs
c. 1 U.S. dollar equals 0.69 Swiss francs
d. 1 U.S. dollar equals 1.29 Swiss francs
e. 1 U.S. dollar equals 1.21 Swiss francs
Ans: B
If PPP holds, the chocolate should cost the same in each country, so that
28.80 Swiss francs equal 20 U.S. dollars. This relationship implies that 1
U.S. dollar equals 1.44 Swiss francs (28.80 SF/20).
4 Which of the following statements is most CORRECT?
a. Unlike bonds, preferred stock cannot have a convertible feature.
b. Whereas common stock has an indefinite life, preferred stocks
always have a specific maturity date, generally 25 years or less.
c. From the issuer's point of view, preferred stock is less risky than
bonds.
d. By law in most states, all preferred stock must be cumulative,
meaning that the compounded total of all unpaid preferred
dividends must be paid before any dividends can be paid on the
firm's common stock.
e. Preferred stock generally has a higher component cost of capital
to the firm than does common stock.
Ans: A Unlike Bonds, preferred stock cannot have a convertible feature.
5 The exercise of warrants creates new shares which:
A. increases the total number of shares which can reduce the per
share value.
B. increases share value because cash is paid into the firm at the
time of warrant exercise.
© 2025 All rights reserved
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C. increases the total number of shares but does not affect share
value.
D. increases the number of shares outstanding while maintaining
the current price per share.
E. does not change the number of shares outstanding, similar to
options
Ans: A. increases the total number of shares which can reduce the per
share value
6 A U.S. company (Johnson Inc.) arranged a 2-year, $1,000,000
loan to fund a project in Mexico.
The loan is denominated in Mexican pesos, carries a 10.0% nominal
rate, and requires equal
semiannual payments. The exchange rate at the time of the loan
was 5.75 pesos per dollar, but it
dropped to 5.10 pesos per dollar before the first payment came
due. The loan was not hedged in
the foreign exchange market. Thus, Johnson must convert U.S.
funds to Mexican pesos to make
its payments. If the exchange rate remains at 5.10 pesos per dollar
through the end of the loan
period, what effective interest rate will Johnson end up paying on
the loan?
a. 17.44%
b. 21.79%
c. 10.36%
d. 11.50%
e. 20.00%
© 2025 All rights reserved
FINC 5310 FINAL Questions and Answers
1 Which of the following statements is most CORRECT?
A. To a large extent, the decision to dissolve a firm through
liquidation versus keeping it alive through reorganization depends
on a determination of the value of the firm if it is rehabilitated
versus the value of its assets if they are sold off individually.
b. The basic doctrine of fairness states that all debtholders must
be treated equally.
c. The primary test of feasibility in a reorganization is whether
every claimant agrees with the reorganization plan.
d. While a firm is in bankruptcy, the existing management is
always allowed to retain control, though the court will monitor its
actions closely.
e. Since the primary issue in bankruptcy is to determine the
sharing of losses between owners and creditors, the "public
interest" is not a relevant concern.
Ans: A. To a large extent, the decision to dissolve a firm through
liquidation versus keeping it alive through reorganization depends on a
determination of the value of the firm if it is rehabilitated versus the
value of its assets if they are sold off individually.
2 Neuman Corporation Convertible Bonds The following data
apply to Neuman Corporation's convertible bonds: Maturity:
10Stock price: $30.00 Par value: $1,000.00Conversion price: $35.00
Annual coupon: 5.00%Straight-debt yield: 8.00% Refer to the data
for the Neuman Corporation's convertible bonds. What is the
bond's conversion value?
a. $734.89
b. $773.57
c. $698.15
d. $814.29
e. $857.14
© 2025 All rights reserved
, 2 | Page
Ans: Conversion value = Conversion ratio × Market price of stock =
$857.14
3 A box of chocolate candy costs 28.80 Swiss francs in
Switzerland and $20 in the United States.
Assuming that purchasing power parity (PPP) holds, what is the
current exchange rate?
a. 1 U.S. dollar equals 0.85 Swiss francs
b. 1 U.S. dollar equals 1.44 Swiss francs
c. 1 U.S. dollar equals 0.69 Swiss francs
d. 1 U.S. dollar equals 1.29 Swiss francs
e. 1 U.S. dollar equals 1.21 Swiss francs
Ans: B
If PPP holds, the chocolate should cost the same in each country, so that
28.80 Swiss francs equal 20 U.S. dollars. This relationship implies that 1
U.S. dollar equals 1.44 Swiss francs (28.80 SF/20).
4 Which of the following statements is most CORRECT?
a. Unlike bonds, preferred stock cannot have a convertible feature.
b. Whereas common stock has an indefinite life, preferred stocks
always have a specific maturity date, generally 25 years or less.
c. From the issuer's point of view, preferred stock is less risky than
bonds.
d. By law in most states, all preferred stock must be cumulative,
meaning that the compounded total of all unpaid preferred
dividends must be paid before any dividends can be paid on the
firm's common stock.
e. Preferred stock generally has a higher component cost of capital
to the firm than does common stock.
Ans: A Unlike Bonds, preferred stock cannot have a convertible feature.
5 The exercise of warrants creates new shares which:
A. increases the total number of shares which can reduce the per
share value.
B. increases share value because cash is paid into the firm at the
time of warrant exercise.
© 2025 All rights reserved
, 3 | Page
C. increases the total number of shares but does not affect share
value.
D. increases the number of shares outstanding while maintaining
the current price per share.
E. does not change the number of shares outstanding, similar to
options
Ans: A. increases the total number of shares which can reduce the per
share value
6 A U.S. company (Johnson Inc.) arranged a 2-year, $1,000,000
loan to fund a project in Mexico.
The loan is denominated in Mexican pesos, carries a 10.0% nominal
rate, and requires equal
semiannual payments. The exchange rate at the time of the loan
was 5.75 pesos per dollar, but it
dropped to 5.10 pesos per dollar before the first payment came
due. The loan was not hedged in
the foreign exchange market. Thus, Johnson must convert U.S.
funds to Mexican pesos to make
its payments. If the exchange rate remains at 5.10 pesos per dollar
through the end of the loan
period, what effective interest rate will Johnson end up paying on
the loan?
a. 17.44%
b. 21.79%
c. 10.36%
d. 11.50%
e. 20.00%
© 2025 All rights reserved
