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B 6- Financial Decisions, Financial Risk Managment

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Financial Decisions Part 1, part 2
Harpratap Singh
Quiz by Harpratap Singh, updated more than 1 year ago
Harpratap Singh
Created by Harpratap Singh over 9 years ago
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Resource summary

Question 1

Question
What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
Answer
  • To reduce the coupon rate on the bonds being sold.
  • To cause the price of the company's stock to rise.
  • To reduce the risk for existing bondholders.
  • To lower the company's bond rating.

Question 2

Question
Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date and an increase in the credit-worthiness of the company. Which of the following would best meet Bander's financing requirements?
Answer
  • Bonds.
  • Short-term debt
  • Long-term debt
  • Common stock.

Question 3

Question
Which of the following types of bonds is most likely to maintain a constant market value?
Answer
  • Callable.
  • Floating-rate
  • Zero-coupon.
  • Convertible

Question 4

Question
Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?
Answer
  • Risk indifferent.
  • Risk seeking.
  • Cautious.
  • Risk averse.

Question 5

Question
If an investor's certainty equivalent is greater than the expected value of an investment alternative, the investor is said to be:
Answer
  • Cautious.
  • Risk seeking.
  • Risk averse
  • Risk indifferent.

Question 6

Question
Investment managers develop portfolios of different investments to combine, offset, and thereby reduce overall risk. Not all risks can be eliminated by development of a portfolio. Risks that cannot be eliminated through a portfolio are called:
Answer
  • Firm-specific risks.
  • Unsystematic risks.
  • Non-market risks.
  • Systematic risks.

Question 7

Question
The marketable securities with the least amount of default risk are:
Answer
  • U.S. Treasury securities.
  • Federal government agency securities.
  • Bankers' acceptances.
  • Repurchase agreements

Question 8

Question
When purchasing temporary investments, which one of the following best describes the risk associated with the ability to sell the investment in a short period of time without significant price concessions?
Answer
  • Interest rate risk
  • Liquidity risk.
  • Financial risk
  • Purchasing power risk.

Question 9

Question
Hedgehog International has a receivable valued at 500,000 local currency units from its foreign customer due in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a put option to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the receivable's settlement date?
Answer
  • Hedgehog will not exercise the option and sell local currency units collected from its receivable at the spot rate.
  • Hedgehog will be indifferent as to whether it exercises the option or not.
  • Hedgehog will sell the option at the settlement date and combine its proceeds along with local currency units purchased at the spot rate to maximize its revenue.
  • Hedgehog will exercise its option and sell the proceeds of its accounts receivable collection under the provisions of the option contract at a gain.

Question 10

Question
Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?
Answer
  • Hedgehog should acquire parallel loans to provide a means for liquidating unneeded hedge securities
  • Hedgehog should acquire the maximum amount required to hedge known and projected transactions
  • Hedgehog should acquire the minimum amount required to hedge known transactions.
  • Hedgehog should enter into a cross hedging agreement.

Question 11

Question
An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars?
Answer
  • Selling British pound call options.
  • Buying British pound put options
  • Buying British pound call options.
  • Selling British pound put options.

Question 12

Question
Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce this risk?
Answer
  • Enter into a forward contract to sell 30,000 euros in 30 days
  • Buy 30,000 euros now.
  • Platinum cannot effectively reduce this risk
  • Enter into an interest rate swap contract for 30 days.

Question 13

Question
In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?
Answer
  • As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency falls.
  • As inflation associated with a foreign economy decreases in relation to a domestic economy, demand for the foreign currency falls.
  • As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency increases.
  • Inflation is irrelevant to currency demand.

Question 14

Question
In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?
Answer
  • As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency falls.
  • As inflation associated with a foreign economy decreases in relation to a domestic economy, demand for the foreign currency falls.
  • As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency increases
  • Inflation is irrelevant to currency demand

Question 15

Question
Atlas Worldwide Industries conducts business in a number of different countries and is trying to evaluate its economic exposure to exchange rate risk. Which of the following statements is not correct?
Answer
  • Atlas will suffer an economic loss in the event it has net cash outflows of a foreign currency and the foreign currency appreciates
  • Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency appreciates.
  • Atlas will enjoy an economic gain in the event it has net cash outflows of a foreign currency and the foreign currency depreciates
  • Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency depreciates.

Question 16

Question
Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?
Answer
  • Universal is subject to transaction and translation exposures to exchange rate risk.
  • Universal is subject to economic and translation exposures to exchange rate risk.
  • Universal is subject to potential transaction, economic and translation exposures to exchange rate risk.
  • Universal is subject to potential transaction and economic exposures to exchange rate risk.

Question 17

Question
What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?
Answer
  • The fluctuation in the foreign currency's exchange rate has no effect on the U.S. company's sales or cost of goods sold.
  • The foreign company will be disadvantaged in the U.S. market.
  • It is better for the U.S. company when the value of the U.S. dollar strengthens.
  • The foreign company will have an advantage in the U.S. market.

Question 18

Question
Freely fluctuating exchange rates perform which of the following functions?
Answer
  • They make imports cheaper and exports more expensive.
  • They automatically correct a lack of equilibrium in the balance of payments.
  • They impose constraints on the domestic economy.
  • They eliminate the need for foreign currency hedging.

Question 19

Question
If the dollar price of the euro rises, which of the following will occur?
Answer
  • The dollar depreciates against the euro.
  • The euro will buy fewer U.S. goods
  • The euro depreciates against the dollar
  • The euro will buy fewer European goods.

Question 20

Question
Which of the following types of risk can be reduced by diversification?
Answer
  • Recessions.
  • High interest rates
  • Labor strikes.
  • Inflation.

Question 21

Question
Which of the following factors is inherent in a firm's operations if it utilizes only equity financing?
Answer
  • Marginal risk.
  • Interest rate risk.
  • Business risk.
  • Financial risk.

Question 22

Question
The required rate of return is generally computed as the risk-free rate of return plus a number of risk premium adjustments. All of the following risk adjustments are used to compute the required rate of return, except:
Answer
  • Purchasing power risk premium.
  • Credit risk premium
  • Default risk premium.
  • Maturity risk premium.

Question 23

Question
Each of the following financial instruments is a derivative, except:
Answer
  • Interest rate futures.
  • A fixed interest, five-year note payable
  • A contract to purchase a commodity in six months at a price determined today
  • An agreement to buy a piece of equipment in six months at a price determined today

Question 24

Question
A put is an option that gives its owner the right to do which of the following?
Answer
  • Sell a specific security at fixed conditions of price and time.
  • Buy a specific security at a fixed price for an indefinite time period.
  • Buy a specific security at fixed conditions of price and time.
  • Sell a specific security at a fixed price for an indefinite time period.

Question 25

Question
A company has several long-term floating-rate bonds outstanding. The company's cash flows have stabilized, and the company is considering hedging interest rate risk. Which of the following derivative instruments is recommended for this purpose?
Answer
  • Futures contract on a stock.
  • Interest rate swap agreement
  • Structured short-term note.
  • Forward contract on a commodity.

Question 26

Question
Which tool would most likely be used to determine the best course of action under conditions of uncertainty?
Answer
  • Scattergraph method.
  • Expected value (EV).
  • Cost-volume-profit analysis
  • Program evaluation and review technique (PERT).
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