China Threat

BA 789

CORPORATE FINANCIAL MANAGEMENT

QUIZ 4 - CHAPTERS 11 AND 13 and extra credit CHAPTER 14

P. A. BEISER

NOTE: THERE ARE EXTRA CREDIT POINTS (10 POINTS IN TOTAL EXTRA CREDIT)

True False: (5 points each).

Please answer the following questions as True (T) or False (F):

1. The cost of each type of capital depends on the risk-free cost of that type of funds, the business risk of the firm, and the financial risk of the firm.

2. Business risk is the risk to the firm of being unable to cover required financial obligations.

3. The weighted average cost of capital (WACC) reflects the expected average future cost of funds over the long run.

4. Since retained earnings is a more expensive source of financing than debt and preferred stock, the weighted average cost of capital will fall once retained earnings have been exhausted.

5. As the volume of financing increases, the costs of the various types of financing will decrease, reducing the firm's weighted average cost of capital.

6. Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they have no impact on its overall value.

7. FASB No. 52 requires U.S. multinationals first to convert the financial statement accounts of foreign subsidiaries into their functional currency and then to translate the accounts into the parent firm's currency using the all-current-rate method.

8. The forward exchange rate is the rate of exchange between two currencies on any given day.

9. Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

10. Hedging strategies are techniques used to offset or protect against risk; in the international context these include borrowing or lending in different currencies, undertaking contracts in the forward, futures, and/or options markets, and also swapping assets/liabilities with other parties.

Multiple Choice: (5 points each).

Please select the best answer from each the following:

1. The ______ is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock.

A. net present value

B. cost of capital

C. internal rate of return

D. gross profit margin

2. ______ is the risk to the firm of being unable to cover financial obligations.

A. Total risk

B. Business risk

C. Financial risk

D. Diversifiable risk

3. The cost of capital reflects the cost of funds

A. over a short run time period.

B. at a given point in time.

C. over a long run time period.

D. at current book values.

4. The firm's optimal mix of debt and equity is called its

A. optimal ratio.

B. target capital structure.

C. maximum wealth.

D. maximum book value.

5. A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

Target market

Source of capital proportions After tax cost

______________________________________________________

Long term debt 40% 6%

Preferred stock 10 11

Common stock equity 50 15

The weighted average cost of capital is

A. 6 percent.

B. 10.7 percent.

C. 11 percent.

D. 15 percent.

6. A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

Target market After tax

Source of capital proportions cost

_________________________________________________

Long term debt 45% 5%

Preferred stock 10 14

Common stock equity 45 22

If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt in the capital structure), the weighted average cost of capital would

A. increase.

B. remain