MBA Toolkit: Corporate Finance Quiz #1

Team Latte
January 29, 2010

Company XYZ has the following on its financial statements: huge fixed assets, very large depreciation, a big top line (revenue), but big losses, stable cash flows, but when depreciation is added back it generates very large cash flows. This company is in the following industry:


a) Banking
b) Airlines
c) Textiles and synthetic yarn manufacturing
d) Shipping



Company ABC has a large holding of short term securities and money market instruments on its asset side, very large liabilities, including large current liabilities, small equity base with its net worth significantly impacted by short term interest rate movements. Company ABC is in the following industry:


a) Banking
b) Petrochemicals
c) Shipping
d) Telecommunications



The "Equity approach", as opposed to the "Entity approach" is most suitable for valuing:


a) Internet start ups
b) Automobile companies
c) Banks
d) Technology growth companies



A private equity firm has invested in a coal mining company which is starting a new project. The investment will be done in three stages with the final stage completing in three years time. However, there is clause in the investment agreement which states that the private equity firm can abandon the project or sell the stake in the project at on the second and the third stage (second and third year). This is equivalent to:


a) a European style put option
b) an American style put option
c) a Bermudan style put option
d) a European style call option



A callable bond is a


a) a straight bond
b) a straight bond plus a call option
c) a straight bond plus a put option
d) a straight bond less (minus) a call option



The Miller-Modigliani (MM) formula values a company:


a) as the value of the cash flows of its assets;
b) as the value of the book value of debt plus book value of equity;
c) as the value of the cash flows of its assets plus the value of its growth
         opportunities;
d) as the value of the shareholder’s equity (equity plus reserves)



A common error in discounted equity valuations (in the “equity approach” for valuation of companies) is:


a) the inconsistency between a company’s dividend policy and the discount
          rate used:
b) the inconsistency between a company’s weighted average cost of capital
          and the discount rate used;
c) the inconsistency between a company’s cost of debt and the discount rate
          used;
d) None of the above;



In the Accounting approach to valuation the value of the business is:


a) simply the discounted future expected cash flow discounted at the rate that
         captures,the risk of cash flows;
b) simply earnings times some multiple (such as the P/E ratio);
c) simply the book value of common equity adjusted for accumulated profits
          and losses;
d) book value of the assets of the company adjusted for depreciation;



If, NOLAT is Net Operating Profits less Adjusted Taxes, FCF is free cash flows,  is the growth rate in NOPLAT, WACC is the Weighted Average Cost of Capital, then the Continuing Value (CV) of a company can be estimated as:


a)
b)
c)
d)




The interest rate parity theory is predicated on the notion that the exchange rate (FX) between two countries is:


a) based on the ratio of expected inflation rates of the two countries;
b) based on the ratio of the GDP of the two countries;
c) based on the ratio of the current account deficit of the two countries;
d) None of the above;

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