Chapter 14 Questions:
Topic: DIVIDENDS
1. Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
A)
Dividends.
B)
Distributions.
C)
Share repurchases.
D)
Payments-in-kind.
E)
Stock splits.
Answer: A
Topic: REGULAR CASH DIVIDENDS
2. A cash payment made by a firm to its owners in the normal course of business is called a:
A)
Share repurchase.
B)
Liquidating dividend.
C)
Regular cash dividend.
D)
Special dividend.
E)
Extra cash dividend.
Answer: C
Topic: SPECIAL DIVIDENDS
3. A cash payment made by a firm to its owners as a result of a one-time event is called a:
A)
Share repurchase.
B)
Liquidating dividend.
C)
Regular cash dividend.
D)
Special dividend.
E)
Extra cash dividend.
Answer: D
Topic: LIQUIDATING DIVIDENDS
4. A cash payment made by a firm to its owners when some of the firm's assets are sold off is called
a:
A)
Liquidating dividend.
B)
Regular cash dividend.
C)
Special dividend.
D)
Extra cash dividend.
Answer: A
Topic: DECLARATION DATE
5. The date on which the board of directors passes a resolution authorizing payment of a dividend to
the shareholders is the ____________ date.
A)
ex-rights
B)
ex-dividend
C)
record
D)
payment
E)
declaration
Answer: E
Topic: EX-DIVIDEND DATE
6. The date before which a new purchaser of stock is entitled to receive a declared dividend, but on
or after which she does not receive the dividend, is called the ____________ date.
A)
ex-rights
B)
ex-dividend
C)
record
D)
payment
E)
declaration
Answer: B
Topic: DATE OF RECORD
7. The date by which a stockholder must be registered on the firm's roll as having share ownership in
order to receive a declared dividend is called the _______________.
A)
date of ex-rights
B)
date of ex-dividend
C)
date of record
D)
date of payment
E)
date of declaration
Answer: C
Topic: DATE OF PAYMENT
8. The date on which the firm mails out its declared dividends is called the _______________.
A)
date of ex-rights
B)
date of ex-dividend
C)
date of record
D)
date of payment
E)
date of declaration
Answer: D
Topic: HOMEMADE DIVIDENDS
9. The ability of shareholders to undo the dividend policy of the firm and create an alternative
dividend payment policy via reinvesting dividends or selling shares of stock is called (a):
A)
Perfect foresight model.
B)
M&M Proposition I.
C)
Capital structure irrelevancy.
D)
Homemade leverage.
E)
Homemade dividend policy.
Answer: E
Topic: CLIENTELE EFFECT
10. The observed empirical fact that stocks attract particular investors based on the firm's dividend
policy and the resulting tax impact on investors is called the _______________.
A)
information content effect
B)
clientele effect
C)
Efficient Markets Hypothesis
D)
M&M Proposition I
E)
M&M Proposition II
Answer: B
Topic: RESIDUAL DIVIDEND APPROACH
11. A policy under which the firm pays dividends only after its capital investment needs are met, and
while maintaining a constant debt/equity ratio, is called a _______________.
A)
homemade dividend
B)
clientele effect
C)
residual dividend approach
D)
bird-in-the-hand approach
E)
constant dividend growth model
Answer: C
Topic: TARGET PAYOUT RATIO
12. The fraction of earnings a firm expects to pay out as dividends over the long-run is its:
A)
Internal rate of return.
B)
Required return on investment.
C)
Target ROA.
D)
Target payout ratio.
E)
Target capital structure.
Answer: D
Topic: SHARE REPURCHASE
13. An alternative to a cash dividend payment by the firm from its earnings to the shareholders,
achieved by the firm buying some of its outstanding stock on the open market, is a:
A)
Merger.
B)
Tender offer.
C)
Payment-in-kind.
D)
Stock split.
E)
Share repurchase.
Answer: E
Topic: STOCK DIVIDENDS
14. A payment made by the firm to its owners in the form of new shares of stock, rather than cash, is
called a _______________ dividend.
A)
stock
B)
normal
C)
special
D)
extra
E)
liquidating
Answer: A
Topic: STOCK SPLITS
15. An increase in the firm's number of shares outstanding without any change in owners' equity is
called a _______________.
A)
special dividend
B)
stock split
C)
share repurchase
D)
tender offer
E)
liquidating dividend
Answer: B
Topic: TRADING RANGE
18. The difference between the highest and lowest prices at which a stock has traded is called its:
A)
Average price.
B)
Bid-ask spread.
C)
Trading range.
D)
Opening price.
E)
Closing price.
Answer: C
Topic: REVERSE SPLITS
16. In a reverse stock split, __________________________.
A)
the number of shares outstanding increases, and owners' equity decreases
B)
the firm buys back existing shares of stock on the open market
C)
the firm sells new shares of stock on the open market
D)
the number of shares outstanding decreases, but owners' equity is unchanged
E)
shareholders make a cash payment to the firm, just the opposite of a cash dividend
Answer: D
Topic: REGULAR CASH DIVIDEND
17. All else the same, which of the following is a possible consequence of the firm making a regular
cash dividend payment?
A)
The cash account decreases.
B)
The additional paid-in capital account decreases.
C)
The common stock (par value) account decreases.
D)
The stock price declines by the amount of the dividend on the holder-of-record date.
E)
The stock price declines by the amount of the dividend on the payment date.
Answer: A
Topic: COMPROMISE DIVIDEND POLICY
18. Which of the following is a goal of a compromise dividend policy?
I. Avoid the need to sell new equity.
II. Allow for reductions in the dividend payment when convenient.
III. Avoid rejection of positive NPV projects to pay a dividend.
IV. Maintain a target debt/equity ratio.
A)
I and II only
B)
III and IV only
C)
II and III only
D)
I, II, and IV only
E)
I, III, and IV only
Answer: E
Topic: STOCK DIVIDENDS AND SPLITS
19. Compared to a cash dividend, one motivation behind the firm using a stock dividend as an
alternative would be to ______________________________ .
A)
reduce the tax liability of the firm
B)
conserve the cash of the firm
C)
decrease the owners' equity of the firm
D)
make the firm's stock more desirable to the average investor
E)
benefit shareholders since cash dividends are irrelevant
Answer: B
Topic: LOW DIVIDEND PAYOUT RATES
20. All else the same, an investor is likely to prefer firms with high dividend payouts for each of the
following reasons EXCEPT:
A)
Flotation costs are significant.
B)
The firm doesn't have any positive NPV projects in which it could invest.
C)
Marginal corporate tax rates exceed marginal personal tax rates.
D)
The investor has a need for current income.
E)
The investor is tax-exempt.
Answer: A
Topic: DIVIDEND CLIENTELES
21. Which of the following investors would likely prefer a firm with a low dividend payout rate?
I. A corporate investor
II. A tax-exempt investor
III. An investor who does not need current income
IV. An investor in a relatively high personal income tax bracket
A)
III only
B)
I and II only
C)
II and IV only
D)
III and IV only
E)
I, II, III and IV
Answer: D
Topic: CHRONOLOGY OF DIVIDEND PAYMENTS
22. Which of the following is the correct chronology of a dividend payment?
A)
Declaration date, Date of record, Ex-dividend date, Date of payment
B)
Declaration date, Date of record, Date of payment, Ex-dividend date
C)
Declaration date, Date of payment, Date of record, Ex-dividend date
D)
Declaration date, Ex-dividend date, Date of payment, Date of record
E)
Declaration date, Ex-dividend date, Date of record, Date of payment
Answer: E
Topic: DIVIDEND IRRELEVANCE
23. Consider the following two statements:
I. Dividends are irrelevant in determining share value.
II. Dividend policy is irrelevant in determining share value.
A)
B)
C)
D)
Both statements are definitely false.
Both statements are definitely true.
Statement I is definitely false; statement II is definitely true.
Statement I is definitely false; statement II is true if investors can create homemade
dividends.
E)
Statement II is definitely false; statement I is true if investors can create homemade
dividends.
Answer: D
Topic: DIVIDEND TYPES
24. If a firm has excess cash and management believes the firm's shares are currently undervalued by
market participants, the firm is a likely candidate for a _______________.
A)
liquidating dividend
B)
stock dividend
C)
regular cash dividend
D)
stock repurchase
E)
stock split
Answer: D
Topic: DIVIDEND TYPES
25. Suppose a firm wishes to have its stock listed on an exchange but its share price is not high enough
to meet the exchange's specified minimum price level. How might the firm remedy this situation
and reduce the number of shares outstanding at the same time?
A)
Pay a liquidating dividend.
B)
Pay a stock dividend.
C)
Pay a regular cash dividend.
D)
Execute a stock split.
E)
Execute a reverse stock split.
Answer: E
Topic: STOCK SPLIT
26. A firm plans to split its stock 2-for-1. Which of the following will likely occur?
A)
Par value per share will double.
B)
Total shareholders' equity will be reduced by half.
C)
Price per share will double.
D)
The number of shares outstanding will double.
E)
The number of shares owned by each individual investor will halve.
Answer: D
Topic: STOCK DIVIDEND
27. Goodbooks Publishing, Inc. plans to issue a 15% (small) stock dividend. Which of the following
would likely NOT occur?
A)
Par value per share will remain unchanged.
B)
Price per share will fall by 15% .
C)
The number of shares outstanding will increase.
D)
Total shareholders' equity will increase by 15%.
E)
Retained earnings will decline if current market price exceeds the par value of the stock.
Answer: D
Topic: DIVIDEND YIELD
28. A firm has 80,000 shares of stock outstanding with a market price of $25 per share. If net income
for the year is $200,000 and the retention ratio is 70%, what is the dividend yield on the firm's
stock?
A)
2%
B)
3%
C)
4%
D)
5%
E)
6%
Ans: B div = $200,000 x .30 = $60,000; DPS = $60,000 / 80,000 = $0.75; DY = $0.75 / 25 = .03
Topic: DIVIDENDS PER SHARE
29. A firm has 80,000 shares of stock outstanding with a market price of $25 per share. If net income
for the year is $200,000 and the retention ratio is 70%, what is the dividend per share on the firm's
stock?
A)
$0.50
B)
$0.75
C)
$1.00
D)
$1.25
E)
$1.67
Answer: B
Response: Total div = $200,000 x .30 = $60,000; DPS = $60,000 / 80,000 = $0.75
Topic: RETENTION RATIO
30. A firm has 80,000 shares of stock outstanding with a market price of $25 per share. If net income
for the year is $200,000 and the dividend per share is $1.50, what is the retention ratio for the
firm?
A)
21.6%
B)
40.0%
C)
60.0%
D)
78.4%
E)
80.0%
Answer: B
Response:
Total div = $1.50 x 80,000 = $120,000; Payout ratio = $120,000 / 200,000 = .60; b = 1 - .60 = .40
Topic: STOCK DIVIDEND PRICE ADJUSTMENT
31. You own stock in a firm that has 3 million shares outstanding. The current stock price is $18 per
share. If the company issues a 15% stock dividend, what would you expect the stock price to be
after the dividend is paid?
A)
$15.00
B)
$15.65
C)
$17.21
D)
$18.00
E)
$20.70
Answer: B
Response: $18 / 1.15 = $15.65
Topic: STOCK SPLIT PRICE ADJUSTMENT
32. You own stock in a firm that has 3 million shares outstanding. The current stock price is $18 per
share. If the company does a 3-for-1 stock split, what would you expect the stock price to be after
the split?
A)
$18.00
B)
$12.00
C)
$ 9.33
D)
$ 6.00
E)
$ 3.00
Answer: D
Response: $18 / 3 = $6
Topic: RESIDUAL DIVIDEND POLICY
33. A firm has a target debt/equity ratio of 1.25. After-tax earnings for 2011 were $1,900,000 and the
firm needs $3,750,000 for new investments. If the company follows a residual dividend policy,
what dividend will be paid for 2011?
A)
$
0
B)
$ 66,667
C)
$233,333
D)
$466,667
E)
$900,000
Answer: C
Response:
Here, available equity is $1,900,000, but they will not need all of it. They have $3,750,000 in
investment needs, with a debt/equity ratio of 1.25 or 1.25/1. For every $1.25 in debt, there will be
$1 in equity. Investment needs will be 5/9th debt, and 4/9ths equity (take our word for it, and figure
it out!) Five fourths (1.25) of debt in the numerator, four fourths (1) of equity in the denominator.
Five fourths plus four fourths is nine fourths. Five ninths in the top, four ninths in the bottom.
Four ninths is 44.44%. 44.44% of $3.75 million or $1.667 million will be funded with equity. Five
ninths or 55.56% will be funded with debt.
Dividends =
Available equity or after-tax earnings of $1,900,000
- 1,666,667 (needed for new equity investment)
= $233,333
Your firm is financed 100% with equity. There are 50,000 shares of stock outstanding with a market price
of $8 per share. Total earnings for the most recent year are $80,000. The firm has cash of $30,000 in
excess of what is necessary to fund its positive NPV projects. The firm is considering using the cash to pay
an extra dividend of $30,000 or, alternatively, to repurchase $30,000 of stock. The firm has total assets
(including the $30,000 of excess cash) worth $400,000 (market value). For each of the questions that
follow, assume there are no transaction costs, taxes or other market imperfections.
Topic: CASH DIVIDENDS AND EPS
34. Assume the firm pays the $30,000 excess cash in the form of a cash dividend. What will be the
firm's earnings per share once the dividend is paid?
A)
$0.67
B)
$1.00
C)
$1.30
D)
$1.60
E)
$1.73
Answer: D
Response: $80,000 / 50,000 = $1.60
Topic: CASH DIVIDENDS AND P/E RATIO
35. Assume the firm pays the $30,000 excess cash in the form of a cash dividend. What will be the
firm's price/earnings ratio once the dividend is paid?
A)
3.00
B)
4.63
C)
5.00
D)
9.67
E)
13.33
Answer: B
Response: New price = $8.00 - 0.60 = $7.40; PE = $7.40 / (80,000 / 50,000) = 4.63
Chapter 18 Questions:
Topic: CROSS-RATE
1. The implicit exchange rate between currencies found from explicit exchange rates quoted in some
third currency is called a(n) ___________________.
A)
open exchange rate
B)
cross-rate
C)
backward rate
D)
forward rate
E)
interest rate
Answer: B
Topic: FOREIGN EXCHANGE MARKET
2. The foreign exchange market is where:
A)
One country's stocks are exchanged for another's.
B)
One country's bonds are exchanged for another's.
C)
One country's currency is traded for another's.
D)
International banks make loans to one another.
E)
International businesses finalize import/export relationships with one another.
Answer: C
Topic: EXCHANGE RATE
3. The price of one country's currency expressed in terms of another country's currency is (the):
A)
By definition, one unit of currency.
B)
Time value of money (expressed via the first country's short-term interest rate).
C)
Depository rate.
D)
Exchange rate.
E)
Foreign interest rate.
Answer: D
Topic: SPOT TRADE
4. An agreement to trade currencies based on today's exchange rate, with the trade being settled
within two business days, is called a ____________________.
A)
swap trade
B)
option trade
C)
futures trade
D)
forward trade
E)
spot trade
Answer: E
Topic: PURCHASING POWER PARITY
5. The notion that exchange rates adjust to keep the purchasing power of a currency constant across
countries is called:
A)
The unbiased forward rates condition.
B)
Uncovered interest rate parity.
C)
The international Fisher effect.
D)
Purchasing power parity.
E)
Interest rate parity.
Answer: D
Topic: INTEREST RATE PARITY
6. The condition that relates interest rate differentials between countries to the percentage difference
between their forward and spot exchange rates is called:
A)
The unbiased forward rates condition.
B)
Uncovered interest rate parity.
C)
The international Fisher effect.
D)
Purchasing power parity.
E)
Interest rate parity.
Answer: E
Topic: INTERNATIONAL FISHER EFFECT
7. The theory that real interest rates across countries are equal is called ______________.
A)
the unbiased forward rates condition
B)
uncovered interest rate parity
C)
the international Fisher effect
D)
purchasing power parity
E)
interest rate parity
Answer: C
Topic: EXCHANGE RATE RISK
8. The risk related to having international operations in a world where relative currency values
fluctuate is called _____________ risk.
A)
international
B)
diversifiable
C)
purchasing power
D)
exchange rate
E)
political
Answer: D
Topic: POLITICAL RISK
9. The risk related to changes in the value of international assets as a result of governmental actions
is called ______________ risk.
A)
international
B)
diversifiable
C)
purchasing power
D)
exchange rate
E)
political
Answer: E
Topic: EXCHANGE RATE QUOTES
10. Which of the following is true concerning exchange rates quoted in the United States?
A)
They are usually quoted in terms of the foreign currency.
B)
C)
An exchange rate is the price of one country's currency relative to another's.
A direct exchange rate quotation in The Wall Street Journal tells you how many units of
foreign currency it takes to buy one U.S. dollar.
D)
When an exchange rate is quoted as the number of U.S. dollars needed to buy one unit of
foreign currency it is called an indirect exchange rate quote.
E)
A European exchange rate quoted in The Wall Street Journal will tell you how many U.S.
dollars you can purchase with one unit of foreign currency.
Answer: B
Topic: EXCHANGE RATE RISK
11. A U.S. electric utility has substantial power plant operations in Brazil that generate positive
current earnings in that country. However, the Brazilian government is concerned about the flow
of capital leaving the country and imposes dividend repatriation limits on foreign corporations
operating in Brazil. Hence, this U.S. electric utility faces _________________ risk.
A)
long-run exchange rate
B)
unremitted cash flow
C)
accounting
D)
translation exposure
E)
nationalization
Answer: B
Topic: POLITICAL RISK
12. The risk of nationalization of the assets of multinational corporations operating in a country can be
partially mitigated by:
A)
Expanding operations in that foreign country.
B)
Structuring operations in such a way that successful operation of the subsidiary requires
little parent company involvement.
C)
Locating only in countries that have nationalized foreign investments in the past since this
reduces the likelihood that they will do so again.
D)
Financing the assets in the foreign country directly in that nation, rather than at home.
E)
Paying bribes to foreign governments.
Answer: D
Topic: EXCHANGE RATE QUOTES
13. Suppose the direct quote for the New Zealand dollar and U.S. dollar is 0.60. Which of the
following is a correct interpretation of this quote?
I. You can buy NZ$1.00 for US$0.60
II. You can buy NZ$1.00 for US$1.67
III. You can buy NZ$1.67 for US$1.00
IV. You can buy NZ$0.60 for US$1.00
A)
I only
B)
II only
C)
III only
D)
I and III only
E)
II and IV only
Answer: D
Topic: EXCHANGE RATE QUOTES
14. Suppose the indirect quote for the Japanese Yen is 125. Based on this, you know you can buy:
A)
$1.00 U.S. for 125 Yen.
B)
$1.00 U.S. for 0.008 Yen.
C)
$125 U.S. for 1 Yen.
D)
$0.125 U.S. for 1 Yen.
E)
$1.00 U.S. for 0.125 Yen.
Answer: A
Topic: EXCHANGE RATES
15. On January 1st, you make plans to travel to Switzerland the following summer. The direct quote
for Swiss francs is $0.30. Since it will be a short trip, you believe $3,000 in spending money will
be sufficient. On June 1st, the direct quote for Swiss francs is $0.40. As a result, your $3,000 will
buy:
A)
25 percent fewer Swiss francs than you had planned.
B)
10 percent more Swiss francs than you had planned.
C)
10 percent fewer Swiss francs than you had planned.
D)
25 percent more Swiss francs than you had planned.
E)
Exactly as many Swiss francs as before, since you planned ahead.
Answer: A
Topic: EXCHANGE RATES
16. On March 1st, you make plans to travel to Sweden the following summer. The direct quote for the
Swedish krona is $0.125. Since it will be a short trip, you believe $10,000 in spending money will
be sufficient. On July 1st, the direct quote for Swedish krona is $0.100. As a result, your $10,000
will buy:
A)
20 percent fewer Swedish krona than you had planned.
B)
10 percent more Swedish krona than you had planned.
C)
10 percent fewer Swedish krona than you had planned.
D)
20 percent more Swedish krona than you had planned.
E)
Exactly as many Swedish krona as before, since you planned ahead.
Answer: D
Topic: TRIANGLE ARBITRAGE
17. Bank A quotes you that $1.00 will buy 8 Mexican pesos or 15 Argentine dollars. At the same time,
bank B provides you a quote of 1 Mexican peso to buy 2 Argentine dollars. Thus, there exists a
potential for immediate profit via ___________________.
A)
futures arbitrage
B)
an interest rate swap
C)
a currency hedge
D)
rectangular arbitrage
E)
triangle arbitrage
Answer: E
Topic: EXCHANGE RATE RISK
18. Which of the following describe(s) an example of the political risk of international business?
I. Your firm has large oil drilling and mining interests in one of the former Soviet republics. A
new government with a distinct anti-American agenda unexpectedly wins a majority in that
country's new parliament.
II. Your firm's wholly-owned Australian subsidiary is expanding rapidly and earning increased
profits; meanwhile, the U.S. dollar has been strengthening dramatically against the Australian
dollar for some time now. Your firm reports consolidated financial statements across all its
worldwide operations and subsidiaries.
III. You import computer chips from Korea for use in your U.S.-manufactured cellphone
handsets. You agree on the terms of sale and the number of chips to be purchased 90 days in
advance, but you do not pay the Korean contractor until the chips have actually been delivered to
your U.S. plant. You invoice your transaction in the Korean currency.
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
I, II and III
Answer: A
Topic: CROSS-RATES
19. Given the following exchange rate quotes for the Irish Punt (P), the Swiss Franc (SF) and the U.S.
Dollar ($): P 4 per $1; SF 10 per $1. What is the cross-rate for Punts per Swiss Franc?
A)
P0.25 per SF1
B)
P0.40 per SF1
C)
P0.80 per SF1
D)
P2.50 per SF1
E)
P4.00 per SF1
Answer: B
Response: P/SF = (P/$) / (SF/$) = 4 / 10 = 0.40
Topic: INTERNATIONAL FISHER EFFECT
20. Suppose that the nominal risk-free rate of interest in the U.S. is 4%. The nominal risk-free rate in
Malaysia is 9% with inflation of 7%. What is the approximate inflation rate in the U.S.?
A)
2.0%
B)
3.0%
C)
4.0%
D)
5.0%
E)
6.8%
Answer: A
Response: .04 - .09 + .07 = 2.0%
Topic: ABSOLUTE PURCHASING POWER PARITY
21. Suppose absolute purchasing power parity holds. The cost of 1 pound of oranges in Hong Kong is
HK$25.00 and in the United States it is $2.75. What is the exchange rate?
A)
HK$ 0.03 per $1.00
B)
HK$ 0.11 per $1.00
C)
HK$ 7.80 per $1.00
D)
HK$ 9.09 per $1.00
E)
HK$11.26 per $1.00
Answer: D
Response: 25.00 / 2.75 = 9.09
Topic: ABSOLUTE PURCHASING POWER PARITY
22. Suppose absolute purchasing power parity holds. The exchange rate between British pounds and
U.S. dollars is £0.70 per dollar. If a stereo costs $4,995 in the United States, how much should it
cost in Britain?
A)
£2,620
B)
£3,497
C)
£3,833
D)
£4,995
E)
£7,136
Answer: B Response: .70 x 4,995 = 3,497
Topic: RELATIVE PURCHASING POWER PARITY
23. Suppose the current spot rate between Venezuela and the U.S. is V84.3 per $1.00. Expected
inflation in Venezuela is 40% and expected inflation in the U.S. is 3%. If relative PPP holds, what
is the expected percentage change in the exchange rate over the next year?
A)
21%
B)
33%
C)
37%
D)
40%
E)
109%
Answer: C
Response: E(S1) = 84.3(1 + .40 - .03) = 115.49; % = (115.49 / 84.3) - 1 = 37%
Topic: RELATIVE PURCHASING POWER PARITY
24. The current spot rate between Singapore and the U.S. is S$6.40 per $1.00. Expected inflation in
Singapore is 8% per year, and expected inflation in the U.S. is 5% per year. If relative purchasing
power parity holds, what is the expected exchange rate 2 years from now?
A)
S$5.53 per $1.00
B)
S$6.40 per $1.00
C)
S$6.79 per $1.00
D)
S$6.92 per $1.00
E)
S$7.11 per $1.00
Answer: C
Response: E(S2) = 6.40(1 + .08 - .05)2 = 6.79
Topic: INTERNATIONAL FISHER EFFECT
25. The U.S. risk-free rate is 5.5%. The Canadian risk-free rate is 4.5%. Expected inflation in the U.S.
is 3%. What is the expected inflation rate in Canada?
A)
0.5%
B)
2.0%
C)
3.0%
D)
4.5%
E)
7.5%
Answer: B
Response: .045 - .055 + .03 = 2%
Topic: ABSOLUTE PURCHASING POWER PARITY
26. Suppose absolute purchasing power parity holds. The cost of 1 pound of apples in Japan is ¥300,
and the cost is $2.50 in the United States. What is the exchange rate?
A)
¥100 per $1.00
B)
¥110 per $1.00
C)
¥120 per $1.00
D)
¥130 per $1.00
E)
¥140 per $1.00
Answer: C
Topic: ABSOLUTE PURCHASING POWER PARITY
27. Suppose absolute purchasing power parity holds. The exchange rate between Indian rupees and
U.S. dollars is Rs 0.155 per $1.00. If an automobile costs $28,000 in the United States, how much
should the same car cost in India?
A)
Rs 2,935
B)
Rs 4,340
C)
Rs 5,275
D)
Rs 8,610
E)
Rs 9,935
Answer: B
Response: .155 x 28,000 = 4,340
Response: 300 / 2.5 = 120
Use the following to answer questions 28-30:
Euro
Swiss franc
Australian dollar
U.S. $-Equivalent
0.9152
0.1155
0.4225
Currency per $
1.0927
8.6570
2.3669
Topic: EXCHANGE RATES
28. How many Swiss francs can you buy with $500?
A)
SF
58
B)
SF 1,984
C)
SF 3,752
D)
SF 4,328
E)
SF 5,224
Answer: D
Response: 8.657 x 500 = 4,328
Topic: EXCHANGE RATES
29. A Saab convertible costs A$90,000. How expensive is the car in U.S. dollars?
A)
$38,025
B)
$39,750
C)
$42,400
D)
$45,875
E)
$48,125
Answer: A
Response: 90,000 x .4225 = $38,025
Topic: CROSS-RATE
30. How many Euros are needed to buy one Australian dollar?
A)
0.353
B)
0.419
C)
0.462
D)
0.559
E)
2.166
Answer: C
Response: 1.0927 / 2.3669 = .4617
Use the following to answer questions 31-34:
Canada dollar
Hong Kong dollar
Denmark krone
U.S. $-Equivalent
0.6125
0.0815
0.1461
Currency per $
1.6327
12.2699
6.8440
Topic: EXCHANGE RATES
31. How many Canadian dollars can you buy with 5,000 U.S. dollars?
A)
720
B)
3,062
C)
8,163
D)
9,425
E)
12,008
Answer: C
Response: 5,000 x 1.6327 = $8,163
Topic: EXCHANGE RATES
32. How many U.S. dollars can you buy with 5,000 Hong Kong dollars?
A)
$ 408
B)
$ 564
C)
$ 701
D)
$ 2,392
E)
$61,350
Answer: A
Response: 5,000 x .0815 = $407.50
Topic: CROSS-RATE
33. How many Canadian dollars are needed to buy one Danish krone?
A)
0.2386
B)
0.3612
C)
0.4800
D)
0.5985
E)
0.7044
Answer: A
Response: 1.6327 / 6.8440 = .2386
Topic: CROSS-RATE
34. How many Hong Kong dollars are needed to buy one Danish krone?
A)
1.4481
B)
1.7928
C)
2.3256
D)
2.5649
E)
3.4981
Answer: B
Response: 12.2699 / 6.8440 = 1.7928