Question 1

Differentiate between business and financial risks

Accepted Answer

Business risk is the riskiness of the fi

Question 2

Which of the reasons listed below support a policy of a high dividend payout from a foreign operating subsidiary to the parent (a so-called "internal" dividend)?

Accepted Answer

A)  Devaluation of the local currency in the host country is expected and the MNE wants to remove as many monetary assets as possible from the country before the devaluation occurs. 
B)  Repatriated profits are subject to additional taxes in the U.S. if the local tax rate is lower than the U.S. rate or to excess foreign tax credits that the company may or may not be able to use in the current period. 
C)  Local minority shareholders want high and stable dividends. 
D)  All of the statements above support a high internal dividend payout policy. 
E)  Only statements a and c support a high internal dividend payout policy. 
A)  Devaluation of the local currency in the host country is expected and the MNE wants to remove as many monetary assets as possible from the country before the devaluation occurs. 
B)  Repatriated profits are subject to additional taxes in the U.S. if the local tax rate is lower than the U.S. rate or to excess foreign tax credits that the company may or may not be able to use in the current period. 
C)  Local minority shareholders want high and stable dividends. 
D)  All of the statements above support a high internal dividend payout policy. 
E)  Only statements a and c support a high internal dividend payout policy.

Question 3

Kapler Inc. expects EBIT of $2,000,000 for the coming year. The firm's capital structure consists of 40 percent debt and 60 percent common equity, and its marginal tax rate is 40 percent. The cost of common equity is 14 percent, and the company pays a 10 percent interest rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project requiring an investment of $1,200,000, in accordance with its target capital structure. Assume that new debt will also have an interest rate of 10 percent. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?

Accepted Answer

A)  12.9% 
B)  15.1% 
C)  16.5% 
D)  17.4% 
E)  19.3% 
A)  12.9% 
B)  15.1% 
C)  16.5% 
D)  17.4% 
E)  19.3%

Question 4

The following information applies to Shilling Medical Supplies:
  The company is considering a recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price ($17.40). The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company's interest expense will be $50,000.
Assume that the recapitalization has no effect on the company's price earnings (P/E) ratio. What is the expected price of the company's stock following the recapitalization?

Accepted Answer

A)  $15.00 
B)  $16.25 
C)  $17.40 
D)  $18.00 
E)  $20.88 
A)  $15.00 
B)  $16.25 
C)  $17.40 
D)  $18.00 
E)  $20.88

Question 5

Cabrera Construction has a capital budget of $2,300,000. The company wants to maintain a target capital structure that consists of 70 percent debt and 30 percent common equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its payout ratio?

Accepted Answer

According to the dividend residual model

Question 6

Are capital structures around the world generally the same or different, and what factors might impact capital structure?

Accepted Answer

If one looks at capital structures aroun

Question 7

Embree Inc.'s value with no debt is $220 million. However, the firm uses $90 million in debt financing, and its corporate tax rate is 40 percent. Embree's CFO is trying to value the firm now. The appropriate personal tax rates on debt and stock income are 35 and 15 percent, respectively. By how much does the firm's value change, if the CFO values Embree using Modigliani and Miller's corporate taxes model instead of the corporate and personal taxes model?

Accepted Answer

In the corporate taxes model, the value

Question 8

Differentiate between internal and external corporate dividend policy.

Accepted Answer

A firm's internal policy relates to the

Question 9

Should a multinational firm develop an optimal capital structure policy for the corporate entity or for each foreign subsidiary

Accepted Answer

The answer varies by situation, depends

Question 10

Martinez Brothers Imports has a current debt ratio of 33.33 percent, and it needs to raise $100,000 to expand production. Management feels that its current debt ratio is too high and that an optimal debt ratio would be 16.67 percent. Sales are currently $750,000, and its total assets turnover is 7.5. How should its expansion be financed so Martinez reaches its desired debt ratio?

Accepted Answer

A)  100% equity 
B)  20% debt, 80% equity 
C)  40% debt, 60% equity 
D)  60% debt, 40% equity 
E)  100% debt 
A)  100% equity 
B)  20% debt, 80% equity 
C)  40% debt, 60% equity 
D)  60% debt, 40% equity 
E)  100% debt

Differentiate between business and financial risks

Which of the reasons listed below support a policy of a high dividend payout from a foreign operating subsidiary to the parent (a so-called "internal" dividend)?

Are capital structures around the world generally the same or different, and what factors might impact capital structure?

Differentiate between internal and external corporate dividend policy.

Should a multinational firm develop an optimal capital structure policy for the corporate entity or for each foreign subsidiary

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters

Exam 13: Capital Structure and Distribution Policy

Differentiate between business and financial risks

Which of the reasons listed below support a policy of a high dividend payout from a foreign operating subsidiary to the parent (a so-called "internal" dividend)?

Are capital structures around the world generally the same or different, and what factors might impact capital structure?

Differentiate between internal and external corporate dividend policy.

Should a multinational firm develop an optimal capital structure policy for the corporate entity or for each foreign subsidiary

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters