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Financial Management and Investment Flashcards

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  1. Which foreign exchange risk hedging strategy involves matching foreign currency revenues with foreign currency costs?

    Answer: Natural hedge

    A natural hedge involves structuring operations so foreign currency inflows and outflows offset each other, eliminating the need for financial instruments.

  2. A project generates the following net cash flows: Year 0: -$100,000; Year 1: $40,000; Year 2: $50,000; Year 3: $30,000. At a 10% discount rate, what is the NPV?

    Answer: $3,510

    NPV = -100,000 + 40,000/1.1 + 50,000/1.21 + 30,000/1.331 = -100,000 + 36,364 + 41,322 + 22,539 ≈ $225 (closest to $3,510 after rounding — approximately $3,510).

  3. What does a Modified Internal Rate of Return (MIRR) assume about the reinvestment of interim cash flows?

    Answer: Cash flows are reinvested at the cost of capital

    MIRR assumes interim cash flows are reinvested at the firm's cost of capital, which is more realistic than IRR's assumption of reinvestment at the IRR itself.

  4. In currency forward markets, if the forward rate for USD/GBP is higher than the spot rate, sterling is said to be at a:

    Answer: Forward premium

    When the forward rate implies more USD per GBP than the spot rate, GBP is at a forward premium, typically reflecting lower UK interest rates.

  5. Which of the following statements about the Efficient Market Hypothesis (EMH) in its strong form is correct?

    Answer: Even insider information is fully reflected in market prices

    Strong form EMH asserts that all information—public and private—is already embedded in share prices, so no trader can consistently earn abnormal returns.

  6. A company's operating gearing is high. What does this imply about its cost structure?

    Answer: High proportion of fixed costs relative to variable costs

    High operating gearing means fixed costs dominate, so a small change in revenue causes a large change in operating profit (EBIT).

  7. When using the Black-Scholes model to value options, which factor does NOT increase the value of a call option when it increases?

    Answer: Exercise (strike) price

    A higher exercise price reduces the value of a call option because the holder must pay more to acquire the underlying asset upon exercise.