Question

True or False.
(1) According to Relative Purchasing Power Parity, if expected inflation rate is 2.5% in the US and 3% in Canada, US dollar will appreciate in the future, relative to Canadian Dollar.

(2) Stock repurchases will typically decrease stock prices and give investors less control over their tax liabilities.

(3) If a company’s expected EBIT in the coming year is more than the break-even EBIT, then the increase in Debt/Equity ratio may be beneficial to its stockholders. (

(4) If the underwriters are concerned with the possibility of oversubscription of IPO shares, they can have a best efforts contract with the IPO company.

Answer 1

Q1: True; Relative PPP states that the exchange rate appreciates or depreciates in proportion to the changing inflation rates in 2 countries. ie if inflation is more in one country, value of that currency with respect to the second country reduces.

Q2: False; It is not always true that stock repurchases reduced stock price. Based on the companys performance at that point of time, stock price can increase or reduce

Q3:True; If EBIT is greater than breakeven EBIT, additional income will be recieved by the shareholders and will bring positive sentiment for the stock

Q4:: False; Best effort contracts are given if there is chance of undersubscription of an IPO.