30 – Multiple Choice Questions (calculations not required) Please simply highlight the best answer for each of the following multiple choice questions; QUESTION 1. Which of the following is/are an advantage(s) of incorporation? A) Access to capital markets B) Limited liability C) Unlimited life D) All of the above QUESTION 2. Which of the following statements is false? A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm (the debt holders) are entitled to seize the assets of the corporation in compensation for the default. C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D) If the corporation fails to satisfy debt holders’ claims, equity holders may take control of the firm. QUESTION 3 . Which of the following is NOT a financial statement that every public company is required by IFRS to produce? A) Income Statement B) Statement of Comprehensive Income C) Balance Sheet D) Statement of Changes in Equity QUESTION 4. The P/E ratio is not useful when the firm’s ________ are negative. In this case, it is common to look at the firm’s ________ relative to sales. A) operating earnings; enterprise value B) net earnings; enterprise value C) operating earnings; market value D) net earnings; market value QUESTION 5. Consider the following oil prices: ExxonMobil Oil (XOM) $71.75/Bbl Marathon Petroleum (MPC) $73.06/Bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of ExxonMobil Oil (XOM) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of Marathon Petroleum (MPC) crude. Another oil refiner is offering to trade you 10,150 Bbls of ExxonMobil Oil (XOM) crude oil for 10,000 Bbls of Marathon Petroleum (MPC) crude oil. Assuming you currently have 10,000 Bbls of MPC crude, the added benefit (cost) to you if you take the trade is closest to: A) ($1,400) B) $1,400 C) ($3,908) D) $3,908 QUESTION 6. You have an investment opportunity in France that requires an investment of $250,000 today and will produce a cash flow of 208,650 in one year with no risk. Suppose the risk-free rate of interest in France is 6% and the current competitive exchange rate is 0.78 to $1.00. What is the NPV of this project? Would you take the project? A) NPV = 0; No B) NPV = 2,358; No C) NPV = 2,358; Yes D) NPV = 13,650; Yes QUESTION 7. Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%, then the future value of this stream of cash flows is closest to: A) $1,723 B) $1,500 C) $1,626 D) $1,288 QUESTION 8 . After many years teaching finance at Georgetown University, Johnathan wants to establish a scholarship to offer 4 $1,000 awards each year to students whose performance is excellent in finance courses. If the university can negotiate a 12.75% effective interest rate, at least how much does Johnathan need to endorse over to the scholarship (closest estimate)? A) $32,000 B) $31,000 C) $31,500 D) $32,500 QUESTION 9. Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily C 6.125 Quarterly D 6.120 Monthly The highest effective rate of return you could earn on any of these investments is closest to: A) 6.250% B) 6.267% C) 6.300% D) 6.320% QUESTION 10. Which of the following statements is false? A) The yield curve changes over time. B) The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates. C) We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons. D) The yield curve tends to be inverted as the economy comes out of a recession…
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