Prerp Final Exam 410, Prisi Part I (70%)
1) Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of Thither in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?
A) $19.5 million
B) $6.5 million
C) $4.75 million
D) -$6.5 million

2) Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of the combined company (Thither and Yon) in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?
A) $19.5 million
B) $6.5 million
C) $4.75 million
D) -$6.5 million

3) Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share. Bob is a new firm with much higher growth opportunities and a stock price of $40 per share. Assume Bob acquires Cat using its own stock and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?
A) 1 share of new company after takeover for each share of Cat Enterprises.
B) 0.625 shares of new company after takeover for each share of Cat Enterprises.
C) 1.6 shares of new company after takeover for each share of Cat Enterprises.
D) 0.3846 shares of new company after takeover for each share of Cat Enterprises.

4) Consider the following equation: <

The term A in this equation refers to ________.
A) the premerger, or standalone, value of the acquirer
B) new shares to pay for the target
C) the value of the synergies created by the merger
D) the premerger (standalone) value of the target

5) Consider the following equation: <

The term S in this equation refers to ________.
A) the premerger (standalone) value of the target
B) the premerger, or standalone, value of the acquirer
C) the value of the synergies created by the merger
D) new shares to pay for the target

6) Consider the following equation: <

The term x in this equation refers to ________.
A) the value of the synergies created by the merger
B) the premerger, or standalone, value of the acquirer
C) new shares to pay for the target
D) the premerger (standalone) value of the target

7) Consider the following equation: <

The term T in this equation refers to ________.
A) the premerger, or standalone, value of the acquirer
B) the value of the synergies created by the merger
C) the premerger (standalone) value of the target
D) new shares to pay for the target

8) Which of the following questions is FALSE?
A) The method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting.
B) The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value.
C) Any goodwill created in a merger deal can be amortized for tax purposes over 15 years.
D) Many transactions are carried out as acquisitive reorganizations under the tax code. These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets.

9) Which of the following questions is FALSE?
A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders.
B) In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm.
D) If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price.

10) Which of the following questions regarding risk arbitrage is FALSE?
A) Once a tender offer is announced, the uncertainty about whether the takeover will succeed reduces the volatility of the stock price. This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility.
B) Traders known as risk-arbitrageurs, who believe that they can predict the outcome of a deal, take positions based on their beliefs.
C) A potential profit arises from the difference between the target's stock price and the implied offer price, and is referred to as the merger-arbitrage spread.
D) However, it is not a true arbitrage opportunity because there is a risk that the deal will not go through. If the takeover did not ultimately succeed, the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.

11) Which of the following questions is FALSE?
A) Once the acquirer has completed the valuation process, it is in the position to make a tender offer—that is, a public announcement of its intention to purchase a large block of shares for a specified price.
B) If we view the pre-bid market capitalization as the stand-alone value of the target, then from the bidder's perspective, the takeover is a positive-NPV project only if the synergies created do not exceed the premium it pays.
C) Purchasing a corporation usually constitutes a very large capital investment decision, so it requires a more accurate estimate of value that includes careful analysis of both operational aspects of the firm and the ultimate cash flows the deal will generate.
D) A stock-swap merger is a positive-NPV investment for the acquiring shareholders if the share price of the merged firm (the acquirer's share price after the takeover) exceeds the premerger price of the acquiring firm.

12) A rights offering that gives existing target shareholders the right to buy shares in either the target or an acquirer at a deeply discounted price once certain conditions are met is called a ________.
A) golden parachute
B) poison pill
C) classified board
D) white knight

13) For a hostile takeover to succeed, the acquirer must appeal to the target shareholders; this is usually done through ________.
A) a tender offer and a proxy fight
B) a tender offer and a poison pill
C) a white knight and a proxy fight
D) a staggered board and a white knight

14) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a ________.
A) white knight
B) classified board
C) poison pill
D) golden parachute

15) When a hostile takeover appears to be inevitable, a target company will sometimes look for another, friendlier company to acquire it called a ________.
A) poison pill
B) classified board
C) golden parachute
D) white knight
16) An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a ________.
A) golden parachute
B) white knight
C) poison pill
D) classified board

17) Which of the following statements regarding poison pills is FALSE?
A) Companies with poison pills are harder to take over, and when they are taken over, the premium that existing shareholders receive for their stock is higher.
B) Because a poison pill increases the cost of a takeover, all else equal, a target company must be in better shape to justify the expense of waging a takeover battle.
C) Poison pills also increase the bargaining power of the target firm when negotiating with the acquirer because poison pills make it difficult to complete the takeover without the cooperation of the target board.
D) By adopting a poison pill, a company effectively entrenches its management by making it much more difficult for shareholders to replace bad managers, thereby potentially destroying value.

18) Which of the following statements regarding recapitalization as a takeover defense is FALSE?
A) Another defense against a takeover is a recapitalization, in which a company changes its capital structure to make itself less attractive as a target.
B) Restructuring itself can produce efficiency gains, often removing the principal motivation for the takeover in the first place.
C) By increasing leverage on its own, the target firm can reap the benefit of the interest tax shields.
D) In many cases, a substantial portion of the synergy gains that an acquirer anticipates from a takeover are savings from a decrease in leverage as well as other cost reductions.

19) Which of the following statements is FALSE?
A) SEC rules make it difficult for investors to buy much more than about 10% of a firm in secret. After an acquirer acquires such an initial stake in the target, called a toehold, they would have to make their intentions public by informing investors of his large stake.
B) With the availability of both the freezeout merger and the leveraged buyout as acquisition strategies, most of the value added accrues to the acquiring shareholders.
C) The laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price.
D) Premiums in LBO transactions are often quite substantial—while they can avoid the free-rider problem acquirers must still get board approval to overcome other defenses such as poison pills, as well as outbid other potential acquirers.

20) Consider a case in which existing shareholders do not have to invest time and effort, but still participate in the gains from a takeover, while the bidder who puts in the time and effort is forced to give up substantial profits. This situation is called ________.
A) the free rider problem
B) a toehold
C) a leveraged buyout
D) a freezeout merger

21) Mayo Corporation is currently trading at $30 per share. There are 10 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 50% if the management were replaced. How much would you need to offer in total to acquire 50% of Mayo's shares?
A) $300 million
B) $150 million
C) $100 million
D) $10 million

22) Mayo Corporation is currently trading at $30 per share. There are 10 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 50% if the management were replaced. How much would you gain from acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and replacing the management?
A) $150 million
B) $225 million
C) $300 million
D) $10 million

23) The supply and demand for a currency is driven by ________.
A) firms trading goods
B) investors trading securities
C) actions of central banks in each country
D) all of the above

24) Suppose a firm imports goods from Europe and the import price is denominated in euros, then ________.
A) the exporter bears foreign exchange risk
B) Central Bank faces foreign exchange risk
C) the importer bears foreign exchange risk
D) none of the above

25) A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.
A) currency forward contract
B) currency options contract
C) currency call option
D) currency put option

26) A ________ exchange rate is the rate that a firm can tie in for a future transaction date.
A) fixed
B) forward
C) floating
D) none of the above

27) Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?
A) $200,000
B) $225,000
C) $400,000
D) $300,000

28) Assume IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?
A) $100,000
B) $160,000
C) $200,000
D) $300,000

29) Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?
A) $300,000
B) $325,000
C) $380,000
D) $400,000

30) A ________ strategy replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.
A) cash-and-carry
B) futures
C) forward
D) none of the above

31) ________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion, they must result in the same exchange rate.
A) Covered interest parity
B) Forward premium puzzle
C) Forward discount puzzle
D) None of the above

32) The spot exchange rate for the British pound is 0.6 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.606 pounds/dollar
B) 0.612 pounds/dollar
C) 0.617 pounds/dollar
D) 0.624 pounds/dollar

33) The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.606 pounds/dollar
B) 0.612 pounds/dollar
C) 0.617 pounds/dollar
D) 0.505 pounds/dollar

34) The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.646 pounds/dollar
B) 0.652 pounds/dollar
C) 0.662 pounds/dollar
D) 0.674 pounds/dollar

35) The one-year forward exchange rate is Rupees 50/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?
A) Rupees 47.23/$
B) Rupees 48.61/$
C) Rupees 48.99/$
D) Rupees 49.32/$

36) The one-year forward exchange rate is Rupees 40/$. If the one-year interest rate in the United States is 4% and in India is 7%, what is the spot exchange rate so as to preclude arbitrage?
A) Rupees 38.88/$
B) Rupees 39.01/$
C) Rupees 39.23/$
D) Rupees 39.32/$

37) The one-year forward exchange rate is Rupees 45/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?
A) Rupees 43.23/$
B) Rupees 43.75/$
C) Rupees 43.99/$
D) Rupees 44.32/$

38) Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because ________.
A) of lower transaction costs
B) of inability to borrow in different currencies
C) of higher interest costs if credit quality is poor
D) all of the above

39) ________ give a firm a right, but not an obligation, to exchange currency at a given rate.
A) Currency forwards
B) Currency options
C) Currency futures
D) Currency exchanges

40) If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.
A) fixes, depreciates
B) fixes, appreciates
C) caps, depreciates
D) caps, appreciates

41) A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place. In this case it is better to hedge potential risks using ________.
A) options
B) forwards
C) futures
D) none of the above

42) A Brazilian firm owes you $2,000,000, payable in three months, however, they insist on paying in Brazilian Reals. The current spot exchange rate is $0.59305/Real. The three-month forward exchange rate is $0.61255/Real. How many Real should you demand in a forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?
A) 1,186,100 Real
B) 3,372,397 Real
C) 3,265,040 Real
D) 1,225,100 Real

43) The importer-exporter dilemma is caused by ________.
A) changing interest rates
B) increases in inflation
C) fluctuating exchange rates
D) deflation

44) Assuming Covered Interest Parity holds, a(n) ________ in the domestic interest rate will ________ the forward rate, all other things held constant.
A) increase, increase
B) increase, decrease
C) decrease, decrease
D) decrease, have no effect on

45) A(n) ________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.
A) financial
B) limit order
C) internationally integrated capital
D) over-the-counter

46) A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV) of the project cash flows?
A) $132,675
B) $145,349
C) $137,287
D) $138,889

47) A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 200,000 euros after one year. If the one-year forward exchange rate is $1.40/euro and the dollar cost of capital is 9%, what is the present value (PV) of the project cash flows?
A) $232,981
B) $245,198
C) $256,881
D) $268,880

48) A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV) of the project cash flows?
A) $122,675
B) $122,727
C) $127,150
D) $128,209

49) Which of the following statements regarding international projects is FALSE?
A) Interest rates and costs of capital will likely be different in the foreign country as a result of the macroeconomic environment.
B) The project will most likely generate foreign currency cash flows, although the managers and shareholders care about the foreign currency value of the project.
C) Under internationally integrated capital markets, the value of an investment does not depend on the currency we use in the analysis.
D) The firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes.

50) Consider the following equation:
Spot Rate × [(Foreign Cash Flow) / (1 + rFC] = (F × Foreign Cash Flow) / (1 + r$)
The term F in this equation is ________.
A) the future spot exchange rate
B) the current spot exchange rate
C) the amount of foreign currency
D) the forward exchange rate

51) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term S in this equation is ________.
A) the forward exchange rate
B) the amount of foreign currency
C) the future spot exchange rate
D) the current spot exchange rate

52) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term r$ in this equation is ________.
A) the dollar discount rate
B) the risk-free rate for a foreign investor
C) the risk-free rate for a U.S. investor
D) the foreign currency discount rate

53) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term rFC in this equation is ________.
A) the risk-free rate for a foreign investor
B) the risk-free rate for a U.S. investor
C) the foreign currency discount rate
D) the dollar discount rate

Use the information for the question(s) below.

You are a U.S. investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.

54) The present value (PV) of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to ________.
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695

55) The present value (PV) of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to ________.
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420

56) You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?
A) $23,275,505
B) $23,186,792
C) $23,278,575
D) $23,367,640

57) You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?
A) $23,275,505
B) $23,186,792
C) $23,367,640
D) $23,278,575

58) Suppose the domestic cost of capital for a U.S.-based company is 8%. Also, the U.S. interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?
A) 9.58%
B) 11.12%
C) 10.51%
D) 10.98%

59) Suppose the domestic cost of capital for a U.S.-based company is 9%. Also, the U.S. interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?
A) 7%
B) 8%
C) 9%
D) 10%

60) Suppose the domestic cost of capital for a U.S.-based company is 10%. Also, the U.S. interest rate is 6% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?
A) 11.04%
B) 11.26%
C) 11.51%
D) 11.98%

61) Which of the following statements is FALSE?
A) If the foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.
B) The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency.
C) The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole), because the foreign project contains residual exchange rate risk that the domestic projects often do not contain.
D) In an internationally integrated capital market, two equivalent methods are available for calculating the net present value (NPV) of a foreign project: Either we can calculate the net present value (NPV) in the foreign country and convert it to the local currency at the forward rate, or we can convert the cash flows of the foreign project into the local currency and then calculate the net present value (NPV) of these cash flows.

62) Consider the following equation: = (1 + ) - 1
The term r¥ in this equation refers to ________.
A) the cost of capital for the firm in terms of yen
B) the risk-free rate of interest on the dollar
C) the cost of capital in terms of dollars
D) the risk-free rate of interest on the yen
Answer: D

63) Consider the following equation:

= (1 + ) - 1
The term in this equation refers to ________.
A) the cost of capital in terms of dollars
B) the risk-free rate of interest on the yen
C) the risk-free rate of interest on the dollar
D) the cost of capital for the firm in terms of yen

64) Consider the following equation:

= (1 + ) - 1
The term in this equation refers to ________.
A) the risk-free rate of interest on the dollar
B) the risk-free rate of interest on the yen
C) the cost of capital for the firm in terms of yen
D) the cost of capital in terms of dollars

65) Consider the following equation:

= (1 + ) - 1
The term r$ in this equation refers to ________.
A) the cost of capital for the firm in terms of yen
B) the cost of capital in terms of dollars
C) the risk-free rate of interest on the dollar
D) the risk-free rate of interest on the yen

Use the information for the question(s) below.

The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r$, is 5.35% and the risk-free interest rate on pounds, r£, is 4.80%.

66) Using the covered interest parity condition, the calculated one-year forward rate F1 is closest to ________.
A) $1.8568/£
B) $1.8764/£
C) $1.9161/£
D) $1.8961/£

67) Using the covered interest parity condition, the calculated three-year forward rate F3 is closest to ________.
A) $1.8568/£
B) $1.9161/£
C) $1.8961/£
D) $1.8764/£

68) Luther Industries, a U.S. firm, is considering an investment in Japan. The dollar cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r$ = 5.5% and r¥ = 1.5%, respectively. Luther industries is willing to assume that capital markets are internationally integrated. Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The yen cost of equity for Luther Industries is closest to ________.
A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%

Use the information for the question(s) below.

KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions):

| Japan | Ireland | Earnings before interest and taxes (EBIT) | ¥5920 | €32 | Host country taxes paid | ¥2427 | €4 | Earnings before interest after taxes | ¥3493 | €28 |

69) After the Japanese taxes are paid, the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to ________.
A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million

70) After the Irish taxes are paid, the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to ________.
A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million

71) The amount of the taxes paid in dollars for the Japanese operations is closest to ________.
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million

72) The amount of the taxes paid in dollars for the Irish operations is closest to ________.
A) $20.5 million
B) $5.1 million
C) $29.5 million
D) $50.0 million

73) The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?
A) 8.56%
B) 9.24%
C) 9.77%
D) 10.24%

74) The spot exchange rate for Indian Rupees is Rs 42/$. The one-year forward exchange rate is Rs 43/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?
A) 5.56%
B) 6.48%
C) 7.25%
D) 8.91%

75) The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?
A) 6.54%
B) 6.24%
C) 6.77%
D) 6.75%

76) The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.
A) $1.89/pound
B) $1.90/pound
C) $1.92/pound
D) $1.94/pound

77) The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year U.S. interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.
A) $1.75/pound
B) $1.79/pound
C) $1.83/pound
D) $1.88/pound

78) The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.
A) $1.69/pound
B) $1.72/pound
C) $1.75/pound
D) $1.78/pound

79) The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high ________.
A) default risk
B) inflation risk
C) depreciation risk
D) none of the above

80) Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.

Assume that Omicron uses the entire $60 million to repurchase shares. The amount of the regular yearly dividends in the future is closest to ________.
A) $3.56
B) $5.34
C) $4.45
D) $8.90

81) Omicron Technologies has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 8% and there are 8 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $40 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $40 million to repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to ________ shares.
A) 227.27
B) 272.73
C) 454.55
D) 181.82

82) Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 9% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to ________ shares.
A) 225.00
B) 337.50
C) 562.50
D) 281.25

83) A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?
A) $2.40
B) $1.50
C) $3.00
D) $6.00

84) Which of the following is NOT a method for a firm to payout excess cash to its shareholders?
A) issue new shares
B) issue new shares and pay a high dividend
C) pay a dividend with the excess cash
D) repurchase shares

85) Share repurchases have a tax advantage over dividends because ________.
A) dividend payments are tax deductible
B) share repurchases increase the value of debt
C) capital gains can be deferred by long-term investors
D) repurchases are associated with increased customer loyalty

86) Historical evidence shows that over the last few decades a larger proportion of firms have used ________ for payouts.
A) repurchases
B) dividends
C) stock reverse splits
D) stock splits

87) The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the ________.
A) issuance puzzle
B) dividend puzzle
C) payback puzzle
D) policy puzzle

88) When a firm pays out a dividend, the share price ________, and when it conducts a share repurchase at the market price, the share price ________.
A) increases, increases
B) is unchanged, decreases
C) decreases, decreases
D) decreases, is unchanged

89) Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________.
A) income
B) investment horizon
C) tax jurisdiction
D) all of the above

90) Corporations enjoy a tax advantage associated with dividends due to ________.
A) personal tax exemptions
B) the 70% exclusion rule
C) laddered tax rates
D) concave tax structure

91) Which of the following statements is FALSE?
A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.
B) If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends.
C) Shareholders typically must pay taxes on the dividends they receive. They must also pay capital gains taxes when they sell their shares.
D) Because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

92) Which of the following statements is FALSE?
A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases rather than dividends for all payouts.
C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

93) Which of the following statements is FALSE?
A) While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage.
B) The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle.
C) At the end of the 1990s, dividend payments exceeded the value of repurchases for U.S. industrial firms.
D) While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders.

94) The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity. Assume that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 14%.

The price of a share of JRN's stock is closest to ________.
A) $16.07
B) $12.86
C) $19.29
D) $32.14

95) The JRN Corporation will pay a constant dividend of $5 per share per year in perpetuity. Assume that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 10%.

Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead. The price of a share of JRN's stock is now closest to ________.
A) $40.00
B) $50.00
C) $60.00
D) $100.00

96) The WTC Corporation will pay a constant dividend of $4.20 per share, per year, in perpetuity. If all investors pay a 20% tax on dividends, there is no capital gains tax, and the cost of capital for investing in WTC stock is 14%, what is the price for a share of WTC stock?
A) $24.00
B) $19.20
C) $28.80
D) $48.00

97) The largest proportion of investors in common stock are ________.
A) mutual funds
B) pension funds
C) corporations
D) individual investors

98) Palo Alto Enterprises has $200,000 in cash. They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options

99) Palo Alto Enterprises has $200,000 in cash. They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. If corporate tax rates are 30%, which option will shareholders prefer in perfect capital markets?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options

100) Palo Alto Enterprises has $300,000 in cash. They wish to invest the money in Treasury bills at 8% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options

101 Palo Alto Enterprises has $100,000 in cash. They wish to invest the money in Treasury bills at 6% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options

Part II
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Apple Inc.’s share decline Wednesday wiped almost $43 billion off the iPhone-maker’s market value in just one hour. That’s more than the entire market capitalization of multinationals such as Deutsche Bank AG and Glencore Plc, as well as technology companies Netflix Inc., eBay Inc. and Electronic Arts Inc. The difference between Apple’s market value of about $540 billion and the next biggest company, Google parent Alphabet Inc., is still about $55 billion -- or approximately the capitalization of BMW AG.

a. Which prices did they use to get that amount? b. Calculate the discount rate for App, assuming rm11%, and Rf 4% c. Calculate the “g” d. The expected price of Apple is 133.87, calculate g for this price. e. Is This stock over or under valuated?

III. Marriott Cost of Capital Case.