FIN 6644
Global Financial Strategies
Practice Questions for Final Exam
1. Economic exposure refers to:
a) the sensitivity of realized domestic currency values of the firm’s
contractual cash flows denominated in foreign currencies to unexpected
exchange rate changes
b) the extent to which the value of the firm would be affected by
unanticipated changes in exchange rate
c) the potential that the firm’s consolidated financial statement can be
affected by changes in exchange rates
d) ex post and ex ante currency exposures
2. Operating exposure can be defined as:
a) the future home currency values of the firm’s assets and liabilities
b) the extent to which the firm’s operating cash flows would be affected
by random changes in exchange rates
c) the sensitivity of realized domestic currency values of the firm’s
contractual cash flows denominated in foreign currencies to unexpected
exchange rate changes
d) the potential that the firm’s consolidated financial statement can be
affected by changes in exchange rates
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT THREE
QUESTIONS
A U.S. firm holds an asset in Israel and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$0.30/IS
$0.20/IS
$0.15/IS
P*
IS10,000
IS12,500
IS5,000
$3,000
$2,500
$750
P
where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = dollar price of the same asset
3. The expected value of the investment in U.S. dollars is:
a) $2,083.33
b) $2,187.50
c) $6,250.00
d) $6,562.50
4. The variance of the exchange rate is:
a) 0.001968
b) 0.002968
c) 0.003968
d) 0.004968
5. The “exposure” (i.e. the regression coefficient beta) is:
Cov(P, S )
Hint: Calculate the expression
Var(S )
a) 128.98
b) 1,289.80
c) 12,898.00
d) none of the above
6. A measure of “liquidity” for a stock market is
a) the turnover ratio
b) the ratio of stock market transactions over a period of time divided by the
size, or market capitalization, of the stock market
c) the LIBOR rate
d) a) and b)
7. The more concentrated a national stock market is
a) The greater opportunity a global investor has to include shares from that
county in an internationally diversified portfolio.
b) The less opportunity a global investor has to include shares from that
county in an internationally diversified portfolio.
c) The broader the investor base across a number of different shares and
industries.
d) None of the above
8. iShares MSCI are:
a) Exchange traded funds that are subject to U.S. SEC and IRS
diversification requirements.
b) Open-end mutual funds sold OTC.
c) Exchange traded funds that are NOT subject to U.S. SEC and IRS
diversification requirements.
d) None of the above
9. American Depository Receipt (ADRs) represent foreign stocks:
a) denominated in U.S. dollars that trade on European stock exchanges
b) denominated in U.S. dollars that trade on a U.S. stock exchange
c) denominated in a foreign currency that trade on a U.S. stock exchange
d) non-registered (bearer) securities
10. Advantages of investing in U.S.-based international mutual funds include
a) Lower transactions costs relative to direct investing
b) Circumvention of many legal and institution barriers to direct portfolio
investment in many foreign markets
c) Professional management, potentially expertise in security selection,
definitely record-keeping.
d) All of the above
11. In the notation of the book, K = (1 – )Kl + (1- )i
Which of the following are correct?
a) The debt-equity ratio is 
b) The tax rate is 
c) The after-tax cost of debt capital is i
d) All of the above
12. At the optimal capital structure,
a) K = (1 – )Kl + (1- )i will be minimized
b) The debt-equity ratio will be equal to the debt-to-value ratio.
c) K = (1 – )Kl + (1- )i will be maximized
d) None of the above
13. Find the weighted average cost of capital for a firm that has a debt-to-equity
ratio of 1½ , a tax rate of 34%, a levered cost of equity of 12% and an after-tax
cost of debt of 8%
a) 9.6%
b) 7.968%
c) 14%
d) none of the above
14. The cost of equity capital is:
a) the expected return on the firm’s stock that investors require
b) frequently estimated by using the Capital Asset Pricing Model (CAPM)
c) generally considered to be a linear function of the systematic risk inherent
in the security
d) all of the above
15. The common stock of Kansas City Power and Light has a beta of 0.80. The Treasury
bill rate is 4 percent and the market risk premium is 8 percent. KCP&L is in the 34%
tax bracket. What is their cost of equity capital?
a) 12.0%
b) 10.4%
c) 7.20%
d) 6.4%
e) 8.22%
16. Assume that XYZ Corporation is a leveraged company with the following
information:
Kl = cost of equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
If XYZ’s debt-to-total-market-value ratio is 40%, then its weighted average cost
of capital, K, is:
a) 8%
b) 9%
c) 10%
d) 12%
For Question 17 and 18
i = rdebt = 10%
OCF0 = –$100,000
Ku= rasset = 15%
OCF1-4 = $39,800 = 25,000×($5 – $3)×(1 – .34) + $20,000×0.34
Kl=requity = 24.9%
OCF5 = $43,100 = $39,800 + $5,000×(1 – .34)
K = rWACC = 11.20% Tax rate = 34%
Debt-to-equity ratio = 3
Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000. If undertaken, the
shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only
loan with a maturity of 5 years and annual interest payments. The equipment will be
depreciated straight-line to zero over the 5-year life of the project. There will be a
pre-tax salvage value of $5,000. There are no other start-up costs at year 0. During
years 1 through 5, the firm will sell 25,000 units of product at $5; variable costs are
$3; there are no fixed costs.
17. When using the APV methodology, what is the NPV of the depreciation tax shield?
a) $32,051.52
b) $25,777.35
c) $22,794.65
d) $97,152.98
e) None of the above
18. When using the APV methodology, what is the NPV of the interest tax shield?
a) $9,666.51
b) $12,019.32
c) $9,377.31
d) $7,000.73
e) None of the above