The Effective annualized percentage cost of the financing

Question 1

3-month commercial paper FV of $1,000,000 for $980,000. Transaction costs would be $1,200. Based on 360 Day year, the effective annualized % cost of the financing is

Answer 1

The cost to issue the commercial paper is $20,000 plus transaction costs of $1,200 for a total cost of $21,200
21,200/980,000 = 2.16% ==three month
Annualized is 2.16 X 4 = 8.65%

Question 2

A factor that is inherent in a firm’s operations if it utilizes only equity financing is

Answer 2

Business Risk

Question 3

Financial Risk or Default Risk

Answer 3

is the exposure of lenders to the failure of borrowers to repay principal and interest on debt. An entity using its own cumulative earnings in capitalizing its operations is not exposed to default risk

Question 4

A derivative is

Answer 4

A financial contract which derives its value from the performance of another asset or financial contract.

Question 5

Credit Risk Premium

Answer 5

Credit Risk relates to the ability of a firm to obtain, not grant, credit. Require Rate of return adjustment do not include Credit Risk Adjustment

Question 6

A put is an option that gives its owner

Answer 6

The Right to sell a specific security at fixed condition or price and time.

Question 7

A put option

Answer 7

Specifies conditions and is not indefinite

Question 8

An option to buy is called

Answer 8

A call option. A call option gives its owner the right to purchase a specific security at fixed conditions o price and time.

Question 9

Short Term Financing

Answer 9

results in lower interest rates, but higher interest rate risk, because rates will fluctuate more dramatically for ST issues than LT issues.

Question 10

Long Term Financing

Answer 10

Credit risk will decrease because the company will seek refinancing less frequently and hereby have less credit risk or opportunity that the rates associated with debt will be changed

Question 11

As inflation associated with a foreign currency increases in relation to a domestic economy

Answer 11

demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and it reduces demand. Reduced demand for a foreign import will reduce the demand for its currency.

Question 12

To minimize risk from foreign currency fluctuations

Answer 12

Hold parables and receivables in the same amount.

Question 13

Purchasing currency futures on payable scheduled for payment

Answer 13

helps minimize currency risk pertaining to imports, but it does not mitigate currency risk pertaining to exports (receivables)

Question 14

Currency Swaps

Answer 14

minimize the risks associated with foreign exchange rate fluctuations

Question 15

what is the effect when a foreign competitor’s currency becomes weaker compared to the US dollar

Answer 15

the Foreign company will have an advantage in the US market

Question 16

As a foreign competitor’s currency becomes weaker with the US dollar

Answer 16

The product becomes less expensive in US dollars. The less expensive product will increase demand and result in an advantage in the us market

Question 17

Management has elected to hedge transactions as a means to mitigating transaction exposure to exchange rate risk. What is the most effective means to avoid over-hedging

Answer 17

Management should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions

Question 18

to fix a price in dollars to buy British pounds,

Answer 18

British pound call options should be purchased

Question 19

as inflation associated with a foreign economy increases in relation to a domestic economy

Answer 19

demand for the foreign currency falls

Question 20

Net cash outflows of a foreign currency and the foreign currency depreciates

Answer 20

economic gain

Question 21

Net cash inflows of a foreign currency and the foreign currency, depreciates

Answer 21

economic loss

Question 22

Net cash outflows of a foreign currency and the currency appreciates

Answer 22

economic loss

Question 23

if the dollar price of the euro rises,

Answer 23

then the euro is getting more expensive, that means that the dollar is getting less expensive or the dollar is depreciating against the euro