mba_680_solutions 2 revision-for-final

1. Suppose you borrow $95.24 for one year at 5% and invest $95.24 for two years at 7%. For the time period beginning one year from today, you have: (approximately) 
a. Borrowed at 7%
b. Invested at 7%
c. Borrowed at 9%
d. Invested at 9%

2. Firm A is paying a fixed $700,000 in interest payments, while Firm B is paying LIBOR plus 50 basis points on $10,000,000 loans. The current LIBOR rate is 6.25%. Firm A and B have agreed to swap interest payments, how much will be paid to which Firm this year? 
a. A pays $750,000 to Firm B
b. B pays 25,000 to Firm A
c. B pays $50,000 to Firm A
d. A pays $25,000 to Firm B

3. First National Bank has made a 5-year, $100 million fixed-rate loan at 10%. Annual interest payments are $10 million, and all principal will be repaid in year 5. The bank wants to swap the fixed interest payment into floating-rate payments. If the bank could borrow at a fixed rate of 8% for 5 years, what is the notional principal of the swap? 
a. $80 million
b. $100 million
c. $125 million
d. $180 million

4. Third National Bank has made 10-year, $25 million fixed-rate loan at 12%. Annual interest payments are $3 million, and all principal will be repaid in year 10. The bank wants to swap the fixed interest payments into floating-rate payments. If the bank could borrow at a fixed rate of 10% for 10 years, what is the notional principal of the swap? 
a. $40 million
b. $20 million
c. $25 million
d. $30 million

1. If a Big Mac costs C$3.00in Canada and $2.31 in the USA, according to purchasing power parity, what is the implied exchange rate in C$/US$? 
a. 1.2987
b. 0.725
c. 1.3276
d. None of the above

2. The Mexican economy is predicted to average double digit inflation over the next two years of 10% per annum. The inflation forecast for the US is 4% per annum. If the current exchange rate is $0.091/peso, what will be the exchange rate two years from now? 
a. $0.0831
b. $0.08134
c. $0.1018
d. None of the above

3. Currency risk exposure can be categorized as: 
a. Transactions exposure
b. Economic exposure
c. Translation exposure
d. All of the above

4. XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV of the project in BP: 
a. +28.69
b. +25.86
c. +42.67

5. XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV in US$: 
a. +25.86
b. +28.69
c. +51.46

6. Assume that international capital markets are competitive and that the real interest rates are the same. The one-year interest rate is approximately 9% in the USA and 5% in Switzerland. If the expected inflation rate is 6% in the USA, what is the expected inflation rate in Switzerland? (Approximately) 
a. 16%
b. 10%
c. 2.1%

1. Which of the following statement(s) is(are) true about company financing in the U.S.A.? I) The U.S.A. has a large amount of bank loans outstanding II) The U.S.A. has a large stock market III) The U.S.A. has a large bond market 
a. I only
b. II only
c. I,II and III
d. II and III only

2. Individual investors in the U.S.A. can play an important part in corporate governance because: I) A large fraction of households' portfolio is held directly in equity securities II) A large fraction of households' portfolio is held in pension funds III) A large fraction of households' portfolio is held directly in bank deposits 
a. I only
b. II only
c. III only
d. II and III only

3. Large firms in Germany have: I) The board of directors II) The supervisory board III) The management board 
a. I only
b. II only
c. III only
d. II and III only

4. The banking system in Germany is: 
a. Nationally chartered banking system
b. Dual banking system
c. Universal banking system
d. State chartered system

5. A firm whose only asset is controlling blocks of shares in other firms is called: 
a. A conglomerate
b. A holding company
c. A pyramid
d. Dual-class company

6. Large business combinations in Japan are normally carried out through reciprocal ownership of common stock. These networks, or keiretsu, involve a large number of diversified companies centered around a large bank, industrial firm, or trading firm. One of the main benefits of this structure is argued to be: 
a. The monopolistic control of economic segments
b. The reduction of financial distress costs
c. Large scale diversification that cannot be done by individual shareholders
d. Greater efficiency in management because the management skills are homogeneous even for

7. The idea that a corporation's financial goal is to "maximize stockholder value" is more prevalent in: I) the U.S.A II) the U.K. III) France IV) Japan 
a. I and II only
b. II and III only
c. III and IV only
d. II and IV only

8. The following are sources of financing for corporations: I) Households II) Financial institutions III) Other corporations 
a. I only
b. II only
c. III only
d. I, II, and III