 
 
 
Corporate Finance 

This is the complete test bank for this course. All answers are listed at the end. 

Lesson 1  Overview of Corporations 

1. If a person owns his own business, what type is it? A) Partnership 2. If two or more people own their own business, what type is it? A) Partnership 3. What is limited liability for a corporation? A) Stockholders are not liable for corporation’s debt 4. Which security allows stockholders to vote for board of directors? A) Preferred stock 5. Why can corporations raise a substantial amount of capital? A) Stockholders cannot bind corporation to contracts. 6. If corporation bankrupts, who is first for a corporation’s assets? A) President of corporation7. Which person or entity appoints the president of a corporation? A) Stockholders 8. Why does a corporation issue preferred stock? A) Preferred stockholders do not have to share control with bondholders 9. What is tax avoidance? A) A corporation carefully plans activities, preventing tax liabilities from being created 10. If a stockholder is not happy the way his corporation manages its business, what can he do? A) Stockholder can vote for new board of directors at next stockholders meeting 11. What is the purpose of a corporation? A) To earn profits 12. What is a disadvantage of a corporation? A) The corporation has continuity of life 13. What is a disadvantage of a corporation? A) Government taxes corporation’s profits twice 14. What is a bond? A) Piece of ownership of a corporation 15. Which factor increases the complexity of a corporation, such as having many subsidiaries? A) Regulations 

Lesson 2  Financial Statements and Cash Flow 

16. Which financial statement would you find revenue? A) Income Statement 17. Which financial statement would you find an expense? A) Income Statement 18. Which financial statement would you find an asset? A) Income Statement 19. Which financial statement would you find a liability? A) Income Statement 20. Which financial statement would you find contributed capital from stockholders? A) Income Statement 21. Which financial statement would you find retained earnings? A) Income Statement 22. Which financial statement lists the cash inflows and outflows of a business? A) Income Statement 23. Which financial statement shows changes to the equity account? A) Income Statement 24. Which item below is an asset? A) Cash 25. Which item below is an asset? A)Cash 26. Which item below is a liability? A) Accounts Payable 27. What is accounts receivable? A) Money owed to the business from customers 28. Which item below is an asset? A) Contributed Capital 29. Which item below is a liability? A) Cash. 30. Which item below is an asset? A) Notes Payable 31. Which item below is a liability? A) Salaries owed to workers 32. What is contributed capital? A) Amount held in the retained earnings account. 33. If 30% of a corporation’s profits is paid to stockholders as dividends, where does the remainder of profits go? A) The Board of Directors 34. What is longterm debt? A) Debt longer than a year and it is usually bonds 35. Which items are current assets? A) Merchandise inventory 36. If total assets are $200 and total liabilities are $150, what is the amount of equity on the balance sheet? A) $200 37. If total assets are $500, total liabilities are $200, and contributed capital is $200, how much is recorded under retained earnings? A) $500 38. If total current assets are $800 and total current liabilities are $400, what is the current asset to current liability ratio? A) 0.5 39. Which item causes a cash inflow? A) Cash sales 40. Which item causes a cash inflow? A) Accounts receivable increases 41. Which item causes a cash inflow? A) Accounts receivable increases 42. Which item causes a cash inflow? A) Company issues new bonds 43. Which item causes a cash outflow? A) Customers pay account receivables 44. Which item causes a cash outflow? A) Customers pay account receivables 45. Which item causes a cash outflow? A) Company pays dividends 46. Which item causes a cash outflow? A) Customers pay account receivables 47. Which item causes a cash outflow? A) Cash sales 48. How does depreciation expense impact cash flow? A) Causes a cash inflow. Questions 49, 50, 51, 52, and 53 refer to the Balance sheet below:
49. How much profit did this company earn? A) $1,500 50. Please calculate the operating cash flow? A) $4,500 51. How much should retained earnings increase? A) $500 52. If the corporation debt on bonds increased by $10,000, what is the cash flow to bondholders? A) $10,000 53. If no new stock is issued, what is the cash flow to stockholders? A) $1,500 

Lesson 3  Longterm Financial Planning 

Questions 54, 55, 56, and 57 refer to the Income Statement below:
54. Sales is projected to increase by 15%. How much sales should be recorded on the pro forma? A) $17,250 55. How much costs should be recorded on the pro forma, if we assume costs are 85% of sales? A) $13,500 56. If this company pays 30% of its net income as dividends, how much is expected to go to retained earnings? A) $2,070 57. Please calculate the profit margin. A) 100% 58. What is the plug? A) The financing of plant expansion from net income. Questions 59, 60, and 61 refer to the Balance sheet below:
59. Looking at the Balance Sheet, what is the current assets to current liabilities ratio? A) 1.0 60. If total assets are projected to increase by $500, what is the maximum amount of new debt the corporation borrows? Assume the corporation borrows a maximum of 50% of total assets. A) $400 61. If total current assets to total current liabilities is a maximum of 2, what is the maximum amount of new current liabilities the corporation is willing to borrow? Assume projected current assets will be $800. A) $800 62. If the plow back ratio is 0.4, growth rate of sales is 10%, the profit margin is 0.40, and total sales are $5,000, then how does retained earnings change? D RE = S(1 + g) x PM x b A) $2,000 63. If the plow back ratio is 0.9, growth rate of sales is 20%, the profit margin is 0.50, and total sales are $10,000, then how does retained earnings change? A) $5,400 64. What is the maximum growth rate in sales if the corporation cannot raise any debt? The corporation pays 35% in dividends and the Return on Assets is 1.2. max. growth rate = ROA x b / (1 – (ROA x b)) A) 72.4% 65. What is the maximum growth rate in sales if the corporation cannot raise any debt? The corporation pays 10% in dividends and the Return on Assets is 0.3. A) 100% 

Lesson 4  Time Value of Money 

66. If you deposit $1 into a savings account that earns 3% APR, how much will you have in 10 years? A) $1.00 67. If you deposit $100 into a savings account that earns 100% APR, how much will you have in one year? A) $100 68. You are expecting to receive $50 million dollars in one year, what is this amount worth to you today, if the market interest rate is 20% APR? A) $2.5 million 69. You are expecting to receive $1,000 dollars in two years, what is this amount worth to you today, if the market interest rate is 10% APR? A) $1,000 70. What is APR? A) All interest rates are defined in annual terms 71. You are expecting to receive $500 dollars in one month, what is this amount worth to you today, if the market interest rate is 12% APR? A) $446.43 72. If the interest rate is 12% APR, which interest rate would you put in the net present value, if cash flows are monthly? A) 0.01 73. If the interest rate is 10% APR, which interest rate would you put in the net present value, if cash flows are semiannually? A) 0.00833 74. Looking at the amortization table below, what is this person’s monthly payment? A) $965.02
75. Looking at the amortization table, how much interest does this person pay for Payment 8? A) $965.02 76. Looking at the amortization table, how much does this person owe the bank after he pays Payment 10? A) $98,632.62 77. How does the Net Present Value affect future cash flows? A) Future cash flows are weighted towards the present 78. When a bank grants a 30year loan for a property and the property is the collateral, what kind of loan is this? A) Mortgage 79. If you received a loan and make the exact monthly payment every month, where the payment covers the principal and interest, what kind of loan is this? A) Stock 80. If you received a mortgage for $1,000 for 1 year at 30% annual interest rate with only one payment, how much is your payment? A) $1,000 81. If you received a mortgage for $10,000 for 1 year at 10% APR interest rate with only one payment, how much is your payment? A) $1,000 

Lesson 5  Valuation of Bonds 

82. You bought a discount bond with a face value of $10,000 with a maturity of 1 year. What market price do you pay for the bond if the market interest rate is 30% APR? A) $9,708.74 83. You bought a discount bond with a face value of $2,000 with a maturity of 6 months. What market price do you pay for the bond if the market interest rate is 10% APR? A) $2,000 84. You bought a discount bond with a face value of $2,000 with a maturity of 1 year. What is your rate of return, if you bought this bond for $1,500? A) 0.33% 85. You bought a discount bond with a face value of $10,000 with a maturity of 6 months. What is your rate of return in APR, if you bought this bond for $9,500? A) 0.526% 86. You bought a bond with a face value of $1,000 with a stated interest rate of 10% with a maturity of 1 year. The interest is paid yearly. What market price do you pay for the bond if the market interest rate is 5% APR? A) $1,047.62 87. You bought a bond with a face value of $10,000 with a stated interest rate of 20% with a maturity of 1 year. The interest is paid yearly. What market price do you pay for the bond if the market interest rate is 20% APR? A) $9,090.91 88. Which bond does not have an interest rate stated on it? A) Coupon bond 89. Which bond allows the investor to convert bond into stock? A) Coupon bond 90. If a corporation keeps the names and addresses of all bondholders, what type of bond is this? A) Bearer bond 91. If a corporation is financially strong and does not pledge assets for the bonds, what type of bond is this? A) Bearer bond 92. Which bond in theory never matures? A) Perpetuity (or consul) bond 93. When the market interest rate increases, what happens to bond market prices? A) The market price of bonds will also increase, when they are discounted. 94. If you bought a perpetuity bond that pays $100 interest every year, what is the market price of the bond, if the market interest rate is 5%?
A) $100 95. If you bought a perpetuity bond that pays $10 interest every year, what is the market price of the bond, if the market interest rate is 20%? A) $10 96. If you have a oneyear bond and a tenyear bond and the bonds are exactly the same except the maturity, what happens to these bond prices, if the market interest rate falls? A) The bond price increases exactly the same amount of both bonds 97. If you bought a financial instrument and hold the instrument until it matures, what is the total rate of return? A) The rate of return equals the market interest rate. 98. You bought a financial instrument for $1,000, earned $100 interest, and resold it for $800 exactly one year later, what is your total rate of return on this investment? A) 10% 99. You bought a financial instrument for $10,000, earned $200 interest, and resold it for $11,000 exactly one year later, what is your total rate of return on this investment? A) 12% 100. If you bought a financial instrument and resold it for a lower price, what is this price difference called? A) The yield to maturity 101. What is the difference between a stock and bond? A) Stock is ownership while bond is a loan 102. Why issue bonds instead of new common stock? A) Bonds pay interest, which lowers net income and taxes 103. What is a difference between notes payable and a bond? A) A bond is ownership while investors buy notes payable from markets 104. If you bought a financial instrument and resold it for a higher price, what is this price difference called? A) The yield to maturity 105. If you bought a financial instrument and held it to maturity, what is “r” called in the present value formula? A) The yield to maturity 106. If you bought a financial instrument and resold it before maturity, what is “r” called in the present value formula? A) The yield to maturity 

Lesson 6  Valuation of Stocks 

107. Which of the following institutions help corporations issue new stocks or new bonds? A) Dow Jones Industrial Average 108. When an investment banker informs family and friends about a corporation merger and the corporate stock is expected to rise, what is this called? A) Underwriting 109. When an investment banker helps a corporation issue new securities, what is this process called? A) Underwriting 110. When a market does not have a physical location and the dealers and brokers are connected to each other by telephones and computers, what kind of market is this? A) Overthecounter market 111. When a market has a physical location and buyers and sellers meet facetoface, what kind of market is this? A) Overthecounter market 112. Why are stock market crashes so bad? A)They can cause banks to earn enormous profits 113. What is a benefit of the Dow Jones Industrial Average? A) The Dow provides fast information, as information is updated every second 114. In the area of investment banking, what is a syndicate? A) Several investment banks work together to sell new stocks and bonds 115. What is a stock market crash? A) Stock prices rapidly increase and keep increasing 116. If a corporation offers a stock split, how does this change stockholders’ power? A) Stockholders’ power increases 117. If a corporation pays a dividend of $5, the rate of return is 12%, and dividends grow at 2% per year, what is the market price of this stock per share?
A) $50.00 118. If a corporation pays a dividend of $2, the rate of return is 7%, and dividends grow at 3% per year, what is the market price of this stock per share? (The dividend growth rate is negative) A) $66.67 119. If a corporation pays a dividend of $1, the rate of return is 10%, and dividends grow at 0% per year, what is the market price of this stock per share? A) $5.00 

Lesson 7  Currency and Commodity Derivatives 

120. When a buyer and seller negotiate a price today, but the actual exchange of money for the financial security occurs at a future date, what is this called? A) Marking to mark 121. When a buyer has the obligation to pay for an asset as set forth in the futures contract, what is this called? A) Put option 122. When the market price of futures contracts changes, investors experience gains and losses each day. What is the process called, when investors have to settle their gains and losses as required by the exchange? A) Put option 123. When investors buy and sell securities in order to lower risk or use longterm investment strategies, what is this called? A) Hedging 124. When investors buy and sell securities in order to gain quick profits, what is this called? This is a form of gambling. A) Hedging 125. What kind of derivative contract gives an investor the option to buy or sell a financial security, what is this called? A) Spot market contract 126. What kind of contract gives an investor the right to sell an asset in the future? A) Call option 127. What kind of contract gives an investor the right to buy an asset in the future? A) Call option 128. Investors pay a fee in order to buy an option. What is this fee called? A) Option premium 129. Which answer below increases the size of an option premium? A) The financial institution that issues the option. More prestigious institutions charge higher option premiums. 130. Where do the price of derivatives receive (i.e. derive) their value from? A) The derivatives obtain their value from the market value of the assets that are specified in the derivatives contract 131. Which item does derivatives help prevent? A) Currency exchange rate risk 132. What is the difference between American and European options? A) They differ when investors can exercise them 133. If a futures contract states that petroleum is $90 per barrel and the spot price is $99 per barrel, who pays the broker the markingtomark requirement? A) The buyer of this contract 134. If a futures contract states that petroleum is $85 per barrel and the spot price is $75 per barrel, who pays the broker the markingtomark requirement? A) The buyer of this contract 135. A bank sells a futures contract for tenge to Proctor and Gamble for 120 tenge per $1. Who pays the markingtomark requirement, if the tenge appreciates? A) Proctor and Gamble 136. If a European call option states that the strike price of petroleum is $85 per barrel and the spot price is $90 per barrel on the expiration date, what will the investor do? A) The investor exercises the call option 137. If a European call option states that the strike price of petroleum is $80 per barrel and the spot price is $75 per barrel on the expiration date, what will the investor do? A) The investor exercises the call option 138. If a European put option states that the strike price of petroleum is $85 per barrel and the spot price is $80 per barrel on the expiration date, what will the investor do? A) The investor exercises the put option 139. If a European put option states that the strike price of petroleum is $90 per barrel and the spot price is $100 per barrel on the expiration date, what will the investor do? A) The investor exercises the put option 140. A bank sells a European call option for tenge to Proctor and Gamble for a strike price of 120 tenge per $1. Will Proctor and Gamble exercise this option on the expiration date, if the tenge appreciates? A) Proctor and Gamble exercises the call option 

Lesson 8  Rates of Return and Yield Curve 

141. What is the average rate of return if the rate of return is 10% for Year 1 and 11% for Year 2?
A) 10.5% 142. What is the average rate of return if the rate of return is 100% for Year 1 and 10% for Year 2? A) 100% 143. What is the average rate of return if the rate of return is 10% for Year 1 and 10% for Year 2? A) 0% 144. What is the annualized rate of return if you invest $100 today and receive $200 in one year? A) 1% 145. What is the annualized rate of return if you invest $1,000 today and receive $1,100 in two years? A) 10% 146. What is the present value of a project if you invest $100 today, receive $1,100 in one year, and the rate of return is 10%? A) 10% 147. What is the present value of a project if you invest $1,000 today, receive $1,100 in one year, and the rate of return is 10%? A) 10% 148. If a corporation is proceeding with a project, which of the following statements are true for the net present value of the project? A) The net present value is positive 149. What is inflation? A) Inflation is the continuous rise in prices 150. What does nominal mean? A) A number has been adjusted for inflation 151. What is the real rate of return for a corporate project, if inflation is 10% and the nominal rate of return for the project is 5%
A) 15% 152. What is the real rate of return for a corporate project, if inflation is 3% and the nominal rate of return for the project is 5%? A) 2% 153. Which U.S. government security has a maturity less than one year? A) Treasury Bills 154. Which U.S. government security has a maturity greater than 10 years? A) Treasury Bills 155. Which U.S. government security has a maturity greater than 1 year but less than 10 years? A) Treasury Bills 156. What is the yield curve? A) A graph that plots interest rates versus maturities 157. What is the normal shape of a yield curve? A) A yield curve usually has a negative slope 158. If a yield curve has a negative slope, what does this mean? A) The economy will have strong growth 159. Which answer is regarding a 5year corporate project and a 15year corporate project? A) A fiveyear project should have a higher rate of return than a 15year project 160. If a corporation has an 8year project, which financial security should this project be compared to? A) A U.S. Treasury Bill 161. Which of the following is true about a risk premium? A) Risk premium is always positive for a corporate project 162. If you determined a rate of return for a corporate project is 10% and a comparable U.S. government security is 10%, which should you do? A) You should proceed with the corporate project 163. If you determined a rate of return for a corporate project is 15% and a comparable U.S. government security is 8%, which should you do? A) You should proceed with the corporate project 

Lesson 9  Uncertainty, Default, and Risk 

164. Looking at the Table below, what is the expected outcome?
A) $30 165. Looking at the Table below, what is the variance?
A) 15 166. If the variance is 100, then what is the standard deviation? A) 100 167. Which is a problem in using variance for measuring risk? A) Variance does not reflect risk of an investment 168. What is a loan default? A) Borrower repays loan before maturity 169. What is a random variable? A) Variable has different outcomes and outcomes have probabilities associated with them 170. If a person is indifferent between a sure bet and a bet that has different outcomes but the same expected return as the sure bet, what kind of investor is this? A) Risk neutral 171. If you invested $100 and the expected payoff from a loan is $110 one year later, what is the expected rate of return of your investment? A) 10% 172. You own a house located in an earthquake zone, what is the expected value of your house if you know the following?
A) $100,000 173. If a person always chooses a bet that has different outcomes but higher payoffs as opposed to the sure bet, what kind of investor is this? A) Risk neutral 174. You have two outcomes: Hurricane destroys your house and house remains because of good weather. If you know a probability of a hurricane is 1%, what is the chance your house remains for good weather? A) 1% 175. Which of the following is true about probabilities? A) All probabilities sum to one for all outcomes 176. What is the reward for holding an investment that has uncertainty? A) Variance of an investment 177. How do financial analyst measure the risk associated with an investment? A) Standard deviation of an investment 178. If you are planning to invest in bonds of a new company and a comparable U.S. government security is 5% interest, which of the following statements are true? A) The rate of return on your investment should be 5% 179. Which classification of corporate bonds do investors consider safe investments? A) Junk bonds 180. Using the Moody’s Credit Rating System for corporate bonds, which grade indicates high risk (comparable to U.S. grades of A, B, and C)? A) C 181. Which financial security allows investors to decompose securities into risk premium and market rate of returns? A) Moody’s credit rating 182. Using the Standard & Poor’s credit ratings for corporations, which grade indicates low risk of default (Remember the ratings are similar to grades)? A) C 183. You grant a loan for $1,000 that is repaid in one year, expect a default of 10%, and expect a rate of return of 5% for the loan, what interest do you charge?
A) 5% 184. You grant a loan for $10,000 that is repaid in one year, expect a default of 50%, and expect a rate of return of 10% for the loan, what interest do you charge?
A) 10% 

Lesson 10  Capital Investment Decisions 

185. Which costs varies with the production level of a project or factory? A) Opportunity costs 186. Which costs below are an example of a fixed costs? A) A bank loan 187. Why are corporate expansions risky? A) Projects involve small sums of money 188. What is the standalone principal? A) The stockholders should subsidized the project 189. Which cost is a historical cost and not relevant for current decision? A) Sunk cost 190. Which item is important for ensuring a business has resources to operate from day to day? A) Sunk cost 191. Which cost is the cost associated with the next best alternative? A) Sunk cost The questions from 192 to 201 are based on the following information
192. What are the projected sales of this project? A) $180,000 193. What are the projected earnings before interest and taxes? A) $180,000 194. This project has a salvage value, what do you do with this? A) Salvage value is part of net working capital 195. The firm has a required rate of return of 10%, what does this reflect? A) Net working capital 196. If the firm has earnings before interest and taxes (EBIT) of $105,000, how much taxes should this company pay? A) $105,000 197. If net income is $84,000, what is the operating cash flow from this project? A) $98,000 198. At the end of the second year, how much is the project worth as net assets? A) Initial project costs of $30,000 199. How does the balance sheet change for the project? A) Only by the project’s assets 200. What are the total variable costs of the project? A) $180,000 201. What is the first term in the net present value calculation for project cash flows? A) Change in net working capital plus project costs 

Lesson 11  Investment Portfolios 

Questions 202, 203, 204, and 205 refer to this Table
202. Refer to the Table, which investment has the lowest rate of return? A) Investment A 203. Refer to the Table, which investment has the highest rate of return? A) Investment A 204. Refer to the Table, which investment has the lowest risk? A) Investment A 205. Refer to the Table, which investment has the highest risk? A) Investment A 206. If you are going to invest in a financial security that is in the table below, what is the expected rate of return if both outcomes are equally likely?
A)2% 207. If you are going to invest in a financial security that is in the table below, what is the expected rate of return if both outcomes are equally likely?
A) 5% 208. If you are going to invest in a financial security that is in the table below, what is the variance, if both outcomes are equally likely?
A) 0% 209. What is diversification of your investments mean? A) An investor invests all his funds into a financial security with a low standard deviation 210. What is the purpose of diversification of investments? A) Increases investment risk 211. What is imperfect correlation? A) Returns from projects do not move closely together 212. Which case does diversification lower risk? A) Financial securities move closely together with the market 213. What is the tradeoff between rates of return and risk? A) Higher rates of return entail higher risk 214. What is a market beta? A) An intercept in a linear regression equation 215. What is the rule for choosing a beta? A) Choose the smallest beta to include in a portfolio Questions 216 and 218 refer to the Table below
216. Refer to the Table, which stock should you include in your portfolio? A) AMD 217. Refer to the Table, which stock represents the highest risk? A) AMD 218. What is value weight returns for an investment portfolio? A) Investors invests in a portfolio with different mixes and proportions of investments 219. Which of the following can be averaged or weighted? A) Standard deviation of rates of return 220. Refer to the Table below, what is the weighted average of your portfolio?
A) 10% 221. How should you estimate the beta in the linear regression? A) Use only recent data like data of the last 3 years 

Lesson 12  Capital Asset Pricing Model (CAPM) 

222. Using the Capital Asset Pricing Model, what is a project’s rate of return, if b = 2.0, average market return is 5%, and a comparable U.S. government security is 3%?
A) 2% 223. Using the Capital Asset Pricing Model, what is a project’s rate of return, if b = 0.5, average market return is 10%, and a comparable U.S. government security is 4%? A) 4% 224. Using the Capital Asset Pricing Model, what is a project’s rate of return, if b = 1.5, average market return is 8%, and a comparable U.S. government security is 3%? A) 3% 225. What is the equity premium? A) Average market return minus a comparable risk free financial instrument 226. Using Rule 70, if you want to double you money in 10 years, what interest rate should you money earn? A) 7% 227. Using Rule 70, how many years does your investment need to double in size, if your investment is earning 5%? A) 7 years 228. If a return on a risk free security is 4% and your rate of return for a project is 10% using capital asset pricing model, what is the risk premium associated with this project? A) 4% 229. If your risk premium is 5%, risk free return is 3%, and inflation is 3%, what should be the minimal rate of return for this project? A) 5% 230. Which statement is true about the Capital Asset Pricing Model? A) Very popular method with executives 231. Which statement is true about the Capital Asset Pricing Model? A) Experts are always correct 232. Which statement is true about the Capital Asset Pricing Model? A) This model tends to be very accurate 233. How do you use the Capital Asset Pricing Model to evaluate a cash flow for a possible corporate project? A) The rate of return from the model is the future payments of the cash flow 234. If your risk premium is 10% and a return from a risk free investment is 5%, what is the minimum rate of return for your investment or project? A) 0% 

Lesson 13  Theory of the Firm (No lecture notes are available) 

235. What should managers of a corporation do? A) Maximize share value 236. Which of the following statements are true? A) If the firm takes on more debt, the debt becomes riskier and the cost of capital for the debt increases. 237. The formula for the Weight Average Costs of Capital (WACC) is below. If a corporation issues 50% bonds with a return of 5%, and 50% stocks with a return of 10%, what is the average rate of return for the corporation’s capital?
A) 5% 238. If a corporation issues 75% bonds with a return of 10%, and 25% stocks with a return of 16%, what is the average rate of return for the corporation’s capital? A) 0% 239. If a corporation issues 75% bonds with a beta of 0.5, and 25% stocks with a beta of 2.0, what is the average beta for this firm’s capital?
A) 0.0 240. If a corporation issues 0% bonds with a beta of 1.0, and 100% stocks with a beta of 0.2, what is the average beta for this firm’s capital? A) 0.2 

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