1. Ana Smith does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 12 percent, while one-year interest rates in the U.S. are 5 percent. Ana converts $100,000 to euros and invests them in France. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.28.

If the spot rate of the euro in one year is $1.08, what is Ana’s percentage return from her strategy? (Points : 3.5)

a. 8.15%

b. -5.50%

c. -94.50%

d. 108.15%

e. None of the above

2. According to the trade-off theory of capital structure, _____.

A. Optimal capital structure is reached when the present value of tax savings on account of additional borrowing is just offset by increases in the present value of costs of distress

B. Optimal capital structure is reached when stockholders' right to default is balanced by the bondholders' right to get interest and principal payments

C. Optimal capital structure is reached when the benefits of limited liability is just offset by the value of the lawyers' claim

D. More than one of the above

E.   None of the above