Questions and Answers of Introduction To Corporate Finance

Trials and tribulations of Argentina’s currency board. Using data from the International Monetary Fund and the Bank for International Settlements, chart the current (balance of both visible and
International debt forgiveness. Assume that France decides to write off €10 billion of debt to Morocco. What would be the impact of debt forgiveness on(1) France’s balance of payments and (2)
Bank of China’s international reserves management. How would China’s balance of payments be affected should its central bank decide to sell one billion of dollar-denominated U.S. Treasury bonds
Accounting for natural disasters. The earthquake-cum-tsunami that devastated part of Japan on March 11, 2011, is estimated to be a loss of US$250 billion.What is its likely impact on the Japanese
The world’s largest creditor nation. How is Japan’s annual balance of payments impacted by the country’s dominant international creditor position? Which accounts are directly affected? Is Japan
Grexit. Referring to IMF balance of payments statistics for Greece in 2010, what was its current account situation? How does it compare to its budget deficit?How would Greece’s exit from the euro
Taiwan’s official reserve account. Assume that in 2012 Taiwan ran a surplus on its current account of US$125 billion and a capital account deficit of US$25 billion.What would be the net impact on
Tequila Crisis (A) (web exercise). Log in to www.pacific.commerce.ubc.ca/xr to graph the Mexican price of one U.S. dollar over the period 1992–1996. Can you characterize the exchange rate regime(s)
Tequila Crisis (C) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s capital account over the period 1992–1996. How can you reconcile your findings
Tequila Crisis (D) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s official reserve account over the period 1992–1996. What can you infer about
Foreign remittances and the subprime crisis (A). Log in to the IMF International Financial Statistics and track the flows of expatriates’ remittances to Mexico before, during, and after the
Foreign remittances and the subprime crisis (B). Track the flows of expatriates’remittances to the Philippines before, during, and after the subprime crisis. What is your interpretation? How do
What is the basic function performed by the foreign exchange market?
What are the differences between an FX trader/dealer and an FX broker?
Contrast a voice broker with electronic broking systems.
What are the activities performed by the front office and back office of a trading room?
What is algorithmic trading?
Do you believe that currency traders are a dying species?
Why is foreign exchange trading directly linked to trade in goods and services accounting for only 15 percent of the foreign exchange market turnover?
Why is the foreign exchange market often referred to as “the market that never sleeps”?
Why is foreign exchange considered an asset class?
Why is the price of Swiss franc for U.S. dollar in Zurich and New York City almost—but not quite—the same? What do you think explains the small difference in rates?
What is meant by bilateral arbitrage in the foreign exchange market?
What is meant by trilateral arbitrage in the foreign exchange market?
What is the bid-ask spread in foreign exchange?
State the Law of One Price. Why does it hold in the foreign exchange market?
Would you expect the bid-ask percentage spread to be different for the Indonesian rupiah versus the U.S. dollar than for the Japanese yen?
What is the meaning of a forward premium or discount?
What is the difference between a forward and a nondeliverable forward contract?For which currencies are nondeliverable forward contracts usually traded?
What is the implicit interest rate for a given currency?
Ford Motor Company has successfully negotiated the sale of Volvo Car Corporation for the cash amount of SEK 10 billion. Svenska Handelbank quotes the Swedish krona at SEK 6. 7100-37 = US$1. What is
A currency trader at UBS in New York City quotes to a customer the dollar-Swissie as CHF 1. 1975-85 = US$1. What is the bid price for the U.S. dollar?What is the bid price for the Swiss franc? At
Weyerhaeuser Inc.—the U.S. lumber multinational—is importing a shipment of pine trees from Canada. The invoice is for CAD 250 million. Wells Fargo’s currency trader quotes the Canadian dollar
If the dollar price of one Russian ruble (RUB) is US$0.03282 = RUB 1 in New York City and at the same time the Russian ruble price of one dollar is 30. 469 in Moscow, show how arbitrageurs could take
Siam Commercial Bank in Bangkok (Thailand) quotes the U.S. dollar at THB 31. 25/US$ whereas Standard Chartered Bank of Singapore quotes the U.S. dollar at SGD1.31/US$. What is the cross-rate THB/SGD?
Referring to exchange rate quotations provided in the Wall Street Journal (Exhibit 5. 5) for the Brazilian real and the Thai baht, compute the crossrate price of one Brazilian real in Thai baht
Referring to the forward quotes in the Wall Street Journal (Exhibit 5. 5) for the Japanese yen, determine whether the yen is at a premium or discount against the U.S. dollar. What is the percentage
Referring to the following spot and forward bid-ask rates for the US$/€ exchange rate, answer the questions that follow:a. Is the euro at a premium or discount vis-à-vis the U.S. dollar?b. What is
The chief currency strategist at the Copenhagen-based Viking hedge fund was reviewing the forecast that the fund chief economist had just released. Within six to nine months Greece would exit the
Assuming that transaction costs represent 1/16 of 1 percent of the amount transacted, what is the maximum/minimum dollar price of one Japanese yen that you would expect to prevail in New York, given
Geneviève received as a graduation present a oneweek cruise on the Baltic Sea that will take her from Kiel (Germany) to Copenhagen(Denmark), Stockholm (Sweden), and Saint Petersburg (Russia) before
Assume that the Thai baht (THB) is quoted as THB 30. 2511-3987 per US$1 and that the Japanese yen (¥) is quoted as 76. 2518-7985 per US$1. What is the cross ¥/THB bid-ask price that the bank would
Assuming that the pound is worth 1. 1567 euros in Paris and 1. 4393 Swiss francs in Zurich, can Britain-based arbitrageurs make profits, given that the Swiss franc is worth 0. 8102 euros in Paris?a.
Show that if two currencies i and j independently maintain their exchange rate within a band of fluctuations defined as +/−1 percent around a par value S$,i(t)PAR or S$,j(t)PAR vis-à-vis the U.S.
Shares of Telefonos Mexicanos (Telmex) listed on the New York Stock Exchange fell from US$60 to US$48 when the Mexican peso (MXN)was devalued on December 19, 1994, from MXN3.44 to MXN 6. 05 = $1.a.
What is interest rate arbitrage?
What are the risks involved in covered interest arbitrage? Can they be eliminated?
Why do currencies yielding low interest rates tend to sell at a forward premium?
What are the main reasons accounting for the fact that covered interest rate parity may not hold as perfect equality?
Why were large deviations from covered interest rate parity observed during the subprime crisis?
What are the risks involved in the carry trade?
Is the carry trade consistent with covered interest rate parity?
What is the difference between the carry trade and speculation through forward contracts?
What is finance?
Discuss how the four most important types of financial intermediaries operate.
What difficulties do analysts face when trying to compare the financial statements of firms that are based in different countries?
Why should people be aware of the precise definition of a financial ratio employed by those who calculate the ratio?
What three areas of a firm’s operations does the DuPont system provide information about?
All else being equal, list three factors that will lead to higher ROE ratios.
What can we use as a basis for comparison when looking at financial ratios? What kind of information can we gain from this comparison?
Why is it so important to look at stock and flow leverage ratios to assess a firm’s debt situation?
Briefly explain what type of information is provided about a firm’s leverage position by the debt ratio, the D/E ratio, the TIE ratio, and the cash flow to debt ratio.
What useful information is provided by the contribution margin, the degree of total leverage, and the break-even point?
Why is it uncommon to see these three ratios reported by companies for external users of their financial statements?
What useful information is provided by the net profit margin, the gross profit margin, and the operating margin?
What information can be gained by examining a firm’s receivables turnover, inventory turnover, and fixed asset turnover ratios?
Why is it common to estimate the ACP by using total revenues rather than credit sales, and to estimate inventory turnover by using revenues rather than cost of sales?
What type of financial statement user will be most interested in a firm’s liquidity ratios?
What useful information do we obtain from a firm’s working capital, current, and quick ratios?
Why might bankers focus more on the quick ratio than on the current ratio?
What useful information do we obtain from the dividend yield, P/E ratio, M/B ratio, and EBITDA multiple?
Why are P/E ratios and dividend yields often not useful indicators of value?
Why is it so difficult to assess whether a firm is properly valued?
Why is the sales forecast the most critical component of financial forecasting?
Describe the basic percentage of sales approach to financial forecasting. What is the main underlying premise of this forecasting approach?
What are some of the major limitations of the percentage of sales approach, and how may they be overcome?
What four variables have a direct impact on a firm’s need for external financing?
What is the nature of the relationship between EFR and the four variables described in this section?
What is the relationship between the sustainable growth rate, the actual sales growth rate, external financing requirements, and dividend payments?
What is the difference between a positive and a negative covenant provision?
When would the coefficient of variation be a useful measure of risk and what are its limitations?
Why is the efficient frontier bowed?
Define market efficiency in terms of information.
Discuss the reasonableness of the assumptions underlying market efficiency.
Distinguish from among operational efficiency, informational efficiency, and allocation efficiency.
Explain the efficient market hypothesis (EMH).
Explain how to estimate the intrinsic value and time value for a call option.
Explain how to estimate the intrinsic value and time value for a put option.
Where are options traded?
What are risk-neutral probabilities?
What is a tender?
What is the difference between value and price?
What is free cash flow?
What is the difference between an operating and a financial lease?
Which type of lease, operating or financial, gives a higher net income margin in the early years of a lease agreement?
Explain how to calculate comparisons in the lease-versus-buy decision for leases in Canada under current IFRS and CRA standards.
Why are leases often more flexible than a borrow-purchase option?
Why do you think that the major market for leasing is often SMEs, rather than large corporations?
If you were opening a copy centre, do you think you would lease or borrow to buy the equipment and why?
Why is the weighted average cost of capital (WACC) so important?

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