Corporate Finance- Model Questions 1) A company has just issued convertible bonds with Rs.1,000 per value and a conversion ratio of 40. Which of the following is most likely to be the market price per share of the company's common stock at present? (a) Under Rs.25. (b)rs.25. (c)between Rs.25 and Rs.30. (d) Above Rs.30. 2) A(n) is a bond that may be exchanged for common stock of the same corporation. (a) Exchangeable bond (b) Debenture (c) Convertible bond (d) Warrant 3) As the conversion value increases, the company will increase the annual rupee interest paid on the convertible security. 4) In the case of an IPO made by a company, the SEBI does not evaluate the investment value or merit of the securities it reviews. Answer- True 5) You purchased 100 shares of AAA common stock for Rs.40 per share. The initial margin is 60 per cent and the stock pays no dividend. Your rate of return would be if you sell the stock at Rs.43 per share. (a) -12.5% (b) -7.5% (c) 7.5% (d) 12.5%
Answer- (d) 6) Mutual funds perform the function of for their shareholders. (a) (b) (c) (d) tax preparation diversification return guarantee all of the above 7) Under a fixed exchange rate system: (a) a forward foreign exchange market does not exist at it would be pointless since rates do not move; (b) central bank intervention in the foreign exchange market is not necessary since rates do not move; (c) central bank intervention in the foreign exchange market is often necessary; (d) central bank intervention in the foreign exchange market is not permitted. 8) If inflation in the US is expected to be 5 per cent annually and the Euro is expected to depreciate by 3 per cent per annum relative to the Us dollar, Euro currency prices of raw materials imported by a French company from the USA and priced in dollars can be expected (ceteris paribus) to: (a) increase by about 8 per cent per annum; (b) increase by about 2 per cent per annum; (c) increase by about 5 per cent per annum; (d) increase by about 3 per cent per annum. 9) The forward market is especially well-suited to offer hedging protection against. (a) investment risk exposure. (b)transactions risk exposure. (c)political risk exposure. (d) taxation.
10) Foreign currency is on the numerator in case of direct quote. 11) Under a Documentary Collection type of transaction, the seller: (a) extends credit to the buyer on open account. (b)extends credit to the buyer subject to bank approval. (c) requires the buyer to make partial payment at fixed intervals. (d) bears the risk of the buyer's refusing the goods shipped. Answer- (d) 12) Which of the following is a legitimate reason for international investment? (a) (b) (c) (d) Dividends from a foreign subsidiary are tax exempt in the India. Most governments do not tax foreign corporations. There are possible benefits from international diversification. International investments have less political risk than domestic investments. 13) A multinational has one subsidiary in a 45 per cent tax rate country and another in a 30 per cent tax rate country. To increase its overall after-tax earnings, the head quarters should arrange to: (a) lower the price of supplies from the low tax rate subsidiary to the high tax rate subsidiary; (b) move expenses from the high tax rate subsidiary to the low tax rate subsidiary; (c) have the low tax rate subsidiary lower its prices charged for the materials transferred to the high tax rate subsidiary; (d) none of above. Answer- (d) 14) In the case of foreign banks, approval of RBI is required for establishment in India of a branch or liaison office. Answer-True 15) You purchased 400 shares of XYZ common stock on margin at Rs.20 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You would get a margin call if the
stock price is below. Assume the stock pays no dividend and ignore interest on margin. (a) Rs.15.71 (b) Rs. 11.43 (c) Rs.13.57 (d) Rs. 10.14 16) If management is primarily concerned with the long-term value of a merger, it is more likely to use the earnings-per-share approach to analyzing the merger's benefits. 17) When trying to establish whether to go ahead or not with an international capital project, which of the following factors is not relevant? (a) future inflation; (b) expenditures in the host country already made; (c) remittance provisions; (d) sales cannibalization 18) Interest-rate parity refers to the concept that: (a)the same goods must sell for the same price across countries. (b)interest rates across countries will eventually be the same. (c)there is an offsetting relationship between interest rate differentials and differentials in the forward spot exchange market. (d) there is an offsetting relationship provided by costs and revenues in similar market environments. 19) Assume that a Big Mac hamburger is selling for 1.20 in the United Kingdom, the same hamburger is selling for $2.00 in the United States, and the actual exchange rate (to buy $1.00 with British pounds) is 0.63. According to, the British pound is the US dollar. (a) purchasing-power parity; undervalued
(b)interest-rate parity; undervalued (c)purchasing-power parity; overvalued (d) interest-rate parity; overvalued 20) FDI flows from a capital-abundant to a capital-deficit country. Answer- True