Question 5:

A.

As the exchange rate between the U.S. dollar and Japanese yen fluctuates over time, Stylist Home Goods (a Japanese firm) will face ___________ if it opens a store in U.S.

Multiple Choice

• political risk

• purchasing power risk

• diversifiable risk

• exchange rate risk

• international risk

B.

From the financial pages, you have observed that the spot exchange rate on Australian dollars today is A$1.325 and the six-month forward rate is A$1.320. That means the U.S. dollar is selling at a _____ relative to the Australian dollar and the U.S. dollar is expected to _____ relative to the Australian dollar.

Multiple Choice

• premium; remain constant

• premium; appreciate

• discount; appreciate

• discount; depreciate

• premium; depreciate

C.

If a firm wants to get rid of its excess cash, one option will be to buy back some of its outstanding shares of common stock. We call this process _________________.

Multiple Choice

• stock split

• stock repeal

• stock repurchase

• stock dividend

• stock recap

D.

Burt had been asked by his manager to compute the weighted average cost of capital (WACC) of his firm. In his calculation of the WACC, Burt used the related capital structure weights based on ___________________.

I. the market value of the firm's debt

II. the book value of the firm's equity

III. the book value of the firm's preferred stock

IV. the yield to maturity of the firm's bonds

Multiple Choice

• I, III and IV only

• I, II, III and IV

• III and IV only

• I only

• I and II only

E.

When estimating the financial distress costs of a firm, we should exclude the firm's _________________.

I. direct bankruptcy costs II. indirect bankruptcy costs III. flotation costs related to bond issuance IV. direct costs related to being financially distressed, but not bankrupt V. indirect costs related to being financially distressed, but not bankrupt

Multiple Choice

• I, II, III, and IV only

• III only

• III and IV only

• I and II only

• I only