FINC 5310 FINAL EXAM Questions with Correct Answers| Latest Update Guaranteed Success
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. 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 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 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. 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.
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 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, $1,000,000 loan to fund a project in Mexico.
The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal
semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but
it
, dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged
in
the foreign exchange market. Thus, Johnson must convert U.S. funds to Mexican pesos to make
its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan
period, what effective interest rate will Johnson end up paying on the loan?
a. 17.44%
b. 21.79%
c. 10.36%
d. 11.50%
e. 20.00% Financial calculator solution: Calculate the required payments in Mexican pesos:
Inputs: N = 4; I/YR = 5; PV = −5,750,000; FV = 0. Output: PMT =1,621,568 MP. 1,621,568
Mexican pesos are needed on each payment date. At the initial exchange rate of 5.75
pesos/US$, the payments are
approximately US $282,012. Payment in U.S. dollars after conversion =1,621,568 pesos/(5.75
FF/US$) = $282,011.83. However, at an exchange rate of 5.10 pesos/US$, the cost to the firm in
US$ increases to
1,621,568/5.10 = $317,954.51 ≈ $317,955. Calculate nominal annual interest rate on loan:
Inputs: N = 4; PV = −1,000,000; PMT = 317,955; FV = 0.
Output: I/YR = 10.36% semiannual rate. Annual nominal rate = 10.36(2) =20.72%. Calculate
effective annual rate: Inputs: P/YR = 2; NOM% = 20.72.
Output: EFF% = 21.79%.
7 An international firm which imports raw materials can reduce its _____ exposure to_____
rate risk by entering into a forward contract.
A. short-term; inflation
B. long-term; inflation
C. total; interest
D. short-run; exchange
E. long-run; exchange D. short run; exchange
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. 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 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 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. 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.
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 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, $1,000,000 loan to fund a project in Mexico.
The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal
semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but
it
, dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged
in
the foreign exchange market. Thus, Johnson must convert U.S. funds to Mexican pesos to make
its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan
period, what effective interest rate will Johnson end up paying on the loan?
a. 17.44%
b. 21.79%
c. 10.36%
d. 11.50%
e. 20.00% Financial calculator solution: Calculate the required payments in Mexican pesos:
Inputs: N = 4; I/YR = 5; PV = −5,750,000; FV = 0. Output: PMT =1,621,568 MP. 1,621,568
Mexican pesos are needed on each payment date. At the initial exchange rate of 5.75
pesos/US$, the payments are
approximately US $282,012. Payment in U.S. dollars after conversion =1,621,568 pesos/(5.75
FF/US$) = $282,011.83. However, at an exchange rate of 5.10 pesos/US$, the cost to the firm in
US$ increases to
1,621,568/5.10 = $317,954.51 ≈ $317,955. Calculate nominal annual interest rate on loan:
Inputs: N = 4; PV = −1,000,000; PMT = 317,955; FV = 0.
Output: I/YR = 10.36% semiannual rate. Annual nominal rate = 10.36(2) =20.72%. Calculate
effective annual rate: Inputs: P/YR = 2; NOM% = 20.72.
Output: EFF% = 21.79%.
7 An international firm which imports raw materials can reduce its _____ exposure to_____
rate risk by entering into a forward contract.
A. short-term; inflation
B. long-term; inflation
C. total; interest
D. short-run; exchange
E. long-run; exchange D. short run; exchange
