B 6- Financial Decisions, Financial Risk Managment

Question 1 of 26

1

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

Select one or more of the following:

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.

Explanation

Question 2 of 26

1

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?

Select one or more of the following:

Bonds.
Short-term debt
Long-term debt
Common stock.

Explanation

Question 3 of 26

1

Which of the following types of bonds is most likely to maintain a constant market value?

Select one or more of the following:

Callable.
Floating-rate
Zero-coupon.
Convertible

Explanation

Question 4 of 26

1

Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?

Select one or more of the following:

Risk indifferent.
Risk seeking.
Cautious.
Risk averse.

Explanation

Question 5 of 26

1

If an investor's certainty equivalent is greater than the expected value of an investment alternative, the investor is said to be:

Select one or more of the following:

Cautious.
Risk seeking.
Risk averse
Risk indifferent.

Explanation

Question 6 of 26

1

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:

Select one or more of the following:

Firm-specific risks.
Unsystematic risks.
Non-market risks.
Systematic risks.

Explanation

Question 7 of 26

1

The marketable securities with the least amount of default risk are:

Select one or more of the following:

U.S. Treasury securities.
Federal government agency securities.
Bankers' acceptances.
Repurchase agreements

Explanation

Question 8 of 26

1

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?

Select one or more of the following:

Interest rate risk
Liquidity risk.
Financial risk
Purchasing power risk.

Explanation

Question 9 of 26

1

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?

Select one or more of the following:

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.

Explanation

Question 10 of 26

1

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?

Select one or more of the following:

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.

Explanation

Question 11 of 26

1

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?

Select one or more of the following:

Selling British pound call options.
Buying British pound put options
Buying British pound call options.
Selling British pound put options.

Explanation

Question 12 of 26

1

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?

Select one or more of the following:

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.

Explanation

Question 13 of 26

1

In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

Select one or more of the following:

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.

Explanation

Question 14 of 26

1

In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

Select one or more of the following:

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

Explanation

Question 15 of 26

1

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?

Select one or more of the following:

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.

Explanation

Question 16 of 26

1

Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?

Select one or more of the following:

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.

Explanation

Question 17 of 26

1

What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?

Select one or more of the following:

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.

Explanation

Question 18 of 26

1

Freely fluctuating exchange rates perform which of the following functions?

Select one or more of the following:

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.

Explanation

Question 19 of 26

1

If the dollar price of the euro rises, which of the following will occur?

Select one or more of the following:

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.

Explanation

Question 20 of 26

1

Which of the following types of risk can be reduced by diversification?

Select one or more of the following:

Recessions.
High interest rates
Labor strikes.
Inflation.

Explanation

Question 21 of 26

1

Which of the following factors is inherent in a firm's operations if it utilizes only equity financing?

Select one or more of the following:

Marginal risk.
Interest rate risk.
Business risk.
Financial risk.

Explanation

Question 22 of 26

1

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:

Select one or more of the following:

Purchasing power risk premium.
Credit risk premium
Default risk premium.
Maturity risk premium.

Explanation

Question 23 of 26

1

Each of the following financial instruments is a derivative, except:

Select one or more of the following:

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

Explanation

Question 24 of 26

1

A put is an option that gives its owner the right to do which of the following?

Select one or more of the following:

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.

Explanation

Question 25 of 26

1

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?

Select one or more of the following:

Futures contract on a stock.
Interest rate swap agreement
Structured short-term note.
Forward contract on a commodity.

Explanation

Question 26 of 26

1

Which tool would most likely be used to determine the best course of action under conditions of uncertainty?

Select one or more of the following:

Scattergraph method.
Expected value (EV).
Cost-volume-profit analysis
Program evaluation and review technique (PERT).

	Created by Harpratap Singh over 9 years ago

Financial Decisions Part 1, part 2

B 6- Financial Decisions, Financial Risk Managment

Question 1 of 26

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

Select one or more of the following:

Explanation

Question 2 of 26

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?

Select one or more of the following:

Explanation

Question 3 of 26

Which of the following types of bonds is most likely to maintain a constant market value?

Select one or more of the following:

Explanation

Question 4 of 26

Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?

Select one or more of the following:

Explanation

Question 5 of 26

If an investor's certainty equivalent is greater than the expected value of an investment alternative, the investor is said to be:

Select one or more of the following:

Explanation

Question 6 of 26

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:

Select one or more of the following:

Explanation

Question 7 of 26

The marketable securities with the least amount of default risk are:

Select one or more of the following:

Explanation

Question 8 of 26

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?

Select one or more of the following:

Explanation

Question 9 of 26

Select one or more of the following:

Explanation

Question 10 of 26

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?

Select one or more of the following:

Explanation

Question 11 of 26

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?

Select one or more of the following:

Explanation

Question 12 of 26

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?

Select one or more of the following:

Explanation

Question 13 of 26

In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

Select one or more of the following:

Explanation

Question 14 of 26

In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

Select one or more of the following:

Explanation

Question 15 of 26

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?

Select one or more of the following:

Explanation

Question 16 of 26

Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?

Select one or more of the following:

Explanation

Question 17 of 26

What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?

Select one or more of the following:

Explanation

Question 18 of 26

Freely fluctuating exchange rates perform which of the following functions?

Select one or more of the following:

Explanation

Question 19 of 26

If the dollar price of the euro rises, which of the following will occur?

Select one or more of the following:

Explanation

Question 20 of 26

Which of the following types of risk can be reduced by diversification?

Select one or more of the following: