Advanced Corporate Finance [Fn2] Examination

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1. Questions 1 and 2 are multiple choice. For these questions, select the best answer for each of the unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Except for multiple-choice questions, answers should include all supporting calculations where appropriate. If you provide alternative answers to Questions 3, 4, 5, or 6, only the first answer will be marked. If you wish to change your answer, you must cross out the answer you do not wish to submit for marking.

Time: 4 Hours

2. 3.


Question 1 Note:
2 marks each


Which of the following is least likely to increase market efficiency? 1) Governments relax restrictions on foreign investment. 2) Corporations disseminate more information to investors. 3) More new investors choose to invest in individual stocks on their own rather than invest in mutual funds. 4) More stock transactions are conducted online than on the floor of an exchange.

b. Which of the following is the best example of ethical behaviour? 1) 2) 3) 4) c. ABC Corp. cut employees’ hours and pay without laying off anyone. Instead of depleting its retained earnings, DEF Inc. borrowed heavily to expand. JKL Ltd. used government bailout money to pay wages owed to its employees. Executives at MBI Corp. shared their performance bonus with new employees.

Which of the following represents one of the classes for cash inflows and outflows relevant to a capital budgeting decision? 1) 2) 3) 4) Terminal cash flows Sunk cost Undepreciated capital allowance Investment credit

d. Which of the following statements is true about the weighted average cost of capital (WACC) method? 1) WACC can be used to evaluate projects in which the capital structure is significantly different from the firm’s overall structure. 2) WACC is very efficient in evaluating the impact of special financing arrangements on projects because it determines the cash flows that can be distributed to shareholders after paying operating costs, financing costs, and debt repayments. 3) WACC explicitly calculates interest tax shields that are generated by debt securities for the financing of a project. 4) WACC adjusts for the deductibility of interest costs.

EFN2J11 ©CGA-Canada, 2011 Page 1 of 7


Which of the following statements is true about lease financing? 1) 2) 3) 4) The term of a typical operating lease is almost equal to the useful life of the asset. Leasing always provides the same tax breaks to the lessor and the lessee. Operating leases can avoid the risk of obsolescence. In a typical sale and leaseback arrangement, the asset is sold for its book value and is leased using a capital lease.


Which of the following is the best alternative for a Canadian exporter that is expected to receive US dollar payments? 1) 2) 3) 4) Buy calls on US dollars Buy puts on US dollars Buy puts on Canadian dollars Sell puts on US dollars


Question 2 Note:
3 marks each


BMINE Inc. has sales of $500,000 with a degree of operating leverage of 1.5. To increase earnings before interest and taxes (EBIT) by 10% for this year, how much sales would it require? 1) 2) 3) 4) $533,333 $550,000 $575,000 $750,000

b. What is the effective annual interest rate on a bank loan that charges 13% interest compounded semi-annually with a 9% compensating balance, with loan payments made semi-annually? 1) 2) 3) 4) c. 10.34% 14.29% 14.80% 16.67%

To make a Canadian investor indifferent between investing in 1-year Canadian dollar term deposits and investing in 1-year British pound term deposits, what should the 1-year forward exchange...
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