Quan Trong_Multinational Financial Management_292

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INTERNATIONAL FINANCIAL MANAGEMENT

1. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One

year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but

when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has

fallen to £1 = $0.75. This loss of value is an example of

a. Exchange Rate Risk

b. Political Risk

c. Market imperfections

d. Weakness in the dollar

2. The fundamental goal of sound business management is

a. Shareholder wealth maximization

b. Market share maximization

c. Globalization

d. Increasing the size of the firm

3. With regard to the financial structure of foreign subsidiaries

a. It may be best to conform to the parent firm’s debt-to-equity ratio

b. It may be best to conform to the local norm of the country where the subsidiary operates.

c. It may be advantageous to vary judiciously to capitalize on opportunities to lower taxes,

reduce financing costs and risk, and take advantage fo various market imperfections

d. All of the above may be correct.

4. When a parent company is willing to let its subsidiary default,

a. Creditors and potential creditors will examine the subsidiary’s financial structure

closely to assess default risk.

b. Potential creditors will still look to the parent company’s capital structure as it is

still legally and morally responsible for its subsidiary’s debts.

c. It is incumbent upon the subsidiary to take on as much debt as possible, pay a

dividend to the parent and then default.

d. None of the above.

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5. The cost of capital

a. Is defined as K = (1 – λ)Kl + λ(1 – t)i

b. Is the minimum rate of return an investment project must generate in order to pay

its financing costs.

c. Is an accounting number reflecting historical costs.

d. Is an accounting number reflecting historical costs. None of the above

6. Companies can benefit from cross-border listing of stocks in what ways?

a. The company can expand its potential investor base, which will lead to a higher

stock price and a lower cost of capital.

b. Cross-listing can enhance the liquidity of the company’s stock.

c. Cross listing may improve the company’s corporate governance and transparency.

d. All of the above

7. A firm that can reduce its cost of capital

a. Has an arbitrage opportunity.

b. Can identify more projects that generate returns exceeding the cost of capital and

thereby increase the firm’s value.

c. Will lower its overall risk.

d. None of the above

8. If international financial markets are fully integrated rather than segmented

a. Investors would require, on average, lower expected returns on securities.

b. Investors would require, on average, higher expected returns on securities.

c. Investors would require, the same expected returns on securities.


9. If international financial markets are less than fully integrated, then

a. Any differences in the cost of capital across countries can be diversified away.

b. Systematic differences in the cost of capital may exist across different countries.

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c. Any difference in the cost of capital that may exist across different countries is

due to differences in unsystematic risk.


10. A consideration of political risk

a. Generally favors local financing over the parent’s direct financing.

b. Generally favors external debt over equity financing.

c. a) and b) are both true


11. When Nestlé announced that it would lift restrictions on foreign ownership of its registered

shares

a. The price of registered shares rose.

b. The price of registered shares fell.

c. The two classes of shares began a pricing to market phenomenon after the

announcement.

d. Both a) and c) are correct.

12. When Nestlé announced that it would lift restrictions on foreign ownership of its registered

shares

a. While the price of registered shares rose, the price of bearer shares fell. As a

result, the total market value of the company remained unchanged.

b. The total market value of the firm increased.

c. Nestlé’s cost of capital increased.


13. If a country were to offer your firm a concessionary loan

a. The value of this loan could be estimated explicitly as a component of the APV.

b. The firm would simply adjust the discount rate downward.

c. The firm would ignore the cash flow implications of this since it is a financing

decision.

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14. Suppose that domestic inflation is 3%; inflation in € is 6% and the spot exchange rate is €1 =

$2. What is your estimate of the exchange rate expected to prevail in 3 years?

a. €1 = $2.1855

b. €1 = $2.00

c. €1 = $1.8349

d. €1 = $1.9434

e. None of the above

15. Your firm has a project that will produce cash flows of CDATA[€>500,000 per year for five

years. The foreign government will only allow repatriation of €>250,000 per year. Which cash

flow should you use in estimating the APV?

a. €>500,000

b. €>250,000

c. Both


16. Your U.S.-based firm is considering a capital budgeting project in Japan. Suppose that the

spot exchange rate for Japanese yen is ¥122/$ and that the one year forward exchange rate for

Japanese yen is ¥130/$. The discount rate is 5% in the U.S. What's the discount rate that should

be used in Japan on yen-denominated cash flows?

a. 11.89%

b. 6.56%

c. 3.28%

d. 1.67%


17. If a project has a timing option associated with it

a. This should add value to the project.

b. This can add value but only if the option is exercised.

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c. The option could subtract value from the project in the right circumstances.


18. In the APV model,

a. Each cash flow is discounted at the discount rate appropriate with the risk

associated with that cash flow.

b. Cash flows are calculated with that cash flow.

c. The cash flow from operations is used, not the amount that is available for

remittance.

d. All of the above

19. When thinking about a project,

a. If it is possible to finance the project entirely with debt, the project will have a

higher APV than if all equity financed, since the return on debt is lower than the

return on equity.

b. It is never appropriate to think of the project as being financed separately from the

way the firm is financed.

c. Depreciation should always be ignored since it is a non cash item.


20. Consider a project to invest abroad, the size and timing of the after-tax incremental cash

flows are shown in the following table:

Year 0 1 2 3

Cash Flow -€500,000 €100,000 €100,000 €500,000

Estimate the NPV of the project to the shareholders of a U.S. firm. The inflation rate in dollars is

two percent per year, the inflation rate in euros is three percent. The spot exchange rate is $1.08

= €1.00 and the discount rate appropriate for projects of this risk (denominated in dollars) is 10

percent.

a. $38,767.63

b. €49,211.12

c. $35,895.95

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21. In a sensitivity analysis

a. Different scenarios are used to estimate the value of any imbedded options that

the project carries with it.

b. Different scenarios are examined by using different exchange rate estimates,

inflation rate estimates, and cost and pricing estimates in the calculation of APV.

c. APV estimated are hardened by using the expected value of the exchange rate and

inflation rate to arrive at one expected value of the APV.


22. The Schadenfreude Corporation has an optimal debt ratio of 50 percent. Its cost of equity

capital is 12 percent and its pre-tax borrowing rate is 8 percent. Given a marginal tax rate of 34

percent, calculate the weighted average cost of capital.

a. 10 percent

b. 6.6 percent

c. 8.64 percent


23. Not all countries allow MNCs the freedom to net payments,

a. The U.S., Canada, and Great Britain allow only netting between each other.

b. Some countries require the MNC to ask permission, and some countries limit

netting.

c. But that is fine, since netting typically has costs that outweigh the benefits for a

MNC.


24. The higher the transfer price

a. The higher the net profit reported by the MNC

b. The higher the gross profit of the receiving division relative to the transferring

division.

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c. The higher the gross profit of the transferring division relative to the receiving

division.


25. Your firm has a subsidiary in a foreign country which has placed restrictions on its own

currency, limiting its conversion into other currencies. What is up with that?

a. The MNC should shut down operations in protest.

b. This is known as blocked funds.

c. This will not affect the MNC since the accounting numbers in the consolidated

financial statements will not change.


26. Affiliate A sells 1,000 units to Affiliate B per year. The marginal income tax rate for Affiliate

A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer price

can be set at any level between $100 and $200. Which transfer price between A and B should the

parent select.

a. $200

b. $100

c. $150

d. It does not matter.

27. Which will reduce the number of foreign exchange transaction the most for a MNC?

a. Multilateral netting

b. Bilateral netting

c. Fish netting


28. Under multilateral netting

a. Each affiliate nets all its inter-affiliate receipts against all its disbursements. It

then transfers or receives the balance, respectively, if it is the net payer or

receiver.

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b. Each pair of affiliates determines the net amount due between them, and only the

net amount is transferred.

c. No inter-affiliate payments are made or even computed, since no real cash flows

are involved.

d. All of the above

29. Multinational cash management

a. Is really no different for a MNC than for a purely domestic firm in a closed

economy.

b. Concerns itself with the size of cash balances, their currency denominations, and

where these cash balances are located among the MNC's affiliates.

c. Concerns itself with the size of cash balances and their currency denominations,

but not where these cash balances are located among the MNC's affiliates, since

intra-affiliate default risk is not an issue.


30. One benefit of a centralized cash depository is

a. The MNC's investment in precautionary cash balances can be substantially

reduced without a reduction in its ability to cover unforeseen expenses.

b. Each affiliate will have greater autonomy in managing its own cash balances.

c. Exchange rate restrictions can be easily circumvented.


31. To establish an arms length price of a tangible good,

a. Use the resale price approach, where the price at which the good is resold by the

distribution affiliate is reduced by an amount sufficient to cover overhead costs

and a reasonable profit.

b. Use a comparable uncontrolled price between an unrelated buyer and seller.

c. Use the cost plus approach, where an appropriate profit is added to the cost of the

manufacturing affiliate.

d. All of the above.

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32. If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes Affiliate

A €2,000 when the exchange rate is $1.10 = €1.00. The net payment between A and B should be

a. €1,091 from B to A

b. €1,091 from A to B

c. $1,200 from B to A


33. The underlying principal of tax equity

a. Is that similarly situated taxpayers should participate in the cost of operating the

government according to the same rules.

b. Has been adopted worldwide, under U.N. charter.

c. Means that taxes should be fair, a consistent percentage of income regardless of

where it is earned.


34. Tax neutrality is determined by which of the following criteria?

a. National neutrality

b. Capital import neutrality

c. Capital export neutrality

d. All of the above

35. A value added tax

a. Is preferred in place of a personal income tax by many economists because

income taxes are a disincentive to work, whereas a VAT discourages unnecessary

consumption.

b. Is also known as a ad valorem tax

c. In an indirect national tax levied on the value added in the production of a good

(or service) as it moves through the various stages of production.

d. All of the above

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36. When the income tax rate in the host country is greater than the tax rate in the parent country,

a. It is beneficial to follow a high markup policy on transferred goods and services

from the parent to a foreign affiliate.

b. It is beneficial to follow a low markup policy on transferred goods and services

from the parent to a foreign affiliate.

c. Transfer pricing will not affect the total tax liability, net of foreign tax credit

offsets.


37. A tax haven is

a. Is a country that has a low corporate income tax rate and low withholding tax

rates on passive income.

b. A country with no taxes and no enforcement of foreign tax laws within its

borders.

c. Any country with a higher tax rate that available domestically.


38. There are three production stages required before a bicycle produced by Masi Bicicletia S.A.

can be sold at retail for €3,500. The VAT rate is 15%. Find the total tax liability due.

Production stage Production stage Value Added Incremental VAT

1 €1,000

2 €1,750

3 €3,500 ________________

Total VAT

a. €525

b. €150

c. €3,500


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39. If U.S. taxing authorities did not limit the amount of the foreign tax credit to the equivalent

amount of the U.S. tax

a. U.S. taxpayers would end up subsidizing part of the tax liabilities of U.S. MNC's

foreign earned income.

b. National neutrality would suffer.

c. U.S. MNCs would all depart our shores.

d. all of the above

40. Active income

a. Income that results from production by the firm or individual (of goods or

services).

b. Is income earned by athletes.

c. Includes dividend and interest income, since the tax court has ruled that taking

risk is a form of work.


41. The current U.S. marginal tax rate for domestic nonfinancial corporations is 35 percent.

a. This is positioned pretty well in the middle of the rates assessed by the majority of

countries, as reported in the PriceWaterhousCoopers annual Corporate Taxes:

Worldwide summaries.

b. This is considerably higher than that of most of our trading partners.

c. But this is reduced on a dollar-for-dollar basis for any and all taxes paid to foreign

governments, so this is an upper limit for the tax rate faced by U.S. MNCs.


42. A withholding tax is

a. An indirect tax, that is, a tax that is borne by a taxpayer who did not directly

generate the income that serves as the source of the passive income.

b. A direct tax, that is, a tax that is borne by a taxpayer who generated the income

that serves as the source of the active income.

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c. Is a form of double taxation.


43. Cash flow analysis, as part of the capital budgeting process, requires:

a. A firm to conceptualize a project and forecast future cash flow from the project.

b. Areview of the firm's recent cash flow to determine if it will support projects

under consideration.

c. Analysis of cash flow in the industry to determine if a firm is competitive.

d. That foreign cash flow be converted into the home currency of the firm.

44. In the capital budgeting process in many MNCs, importance is place on making decisions on

project proposals:

a. By outside consultants who have special expertise in the particular project under

consideration.

b. At upper levels of management since upper management is ultimately responsible

for the profitability of the firm.

c. At lower levels within the organization so that more costly upper level managerial

time will not be expended.

d. By involving the entire organization so that all levels of the organization will

claim ownership of a project.

45. MNCs may elect to pursue a project that uses foreign labor on the basis that the foreign labor

costs less than domestic labor, but another reason for using foreign labor is that it:

a. Offers technical capabilities that cannot be found domestically.

b. Is more productive.

c. Is not subject to the same restrictions as is domestic labor.

d. Is more plentiful.

46. What is a political hedge?

a. Foreign firms doing business in a country are sometimes subject to regulations that

do not apply to domestic firms, so foreign firms can employee government officials

in countries to see that the firm is exempted from such regulations on foreign firms.

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b. Foreign firms doing business in a country are well-advised to employ locals to lobby

the government of the country where the firm is doing business to provide local

subsidies for the foreign firm so that the foreign firm will invest in that country.

c. Since countries can impose regulations on foreign firms doing business in the

country, a firm can actually invest in a country so that it is not simply a foreign firm

selling in the country and potential avoid many of those regulations that apply to

foreign firms.

d. Political hedge is a politically correct way of referring to bribery of local officials.

47. How does off shoring differ from a firm producing in another country?

a. Off shoring and foreign production are essentially the same.

b. Off shoring is a more comprehensive activity than foreign production.

c. If a firm produces in another country, it owns production assets in that country to

some degree, but off shoring indicates that the firm contracts with a firm in

another country for certain production.

d. Foreign production means producing something ion a foreign country for sale in

that country, while off shoring means that a product is being produced in a foreign

country and will be shipped back to the home country of the firm responsible for

the off shoring.

48. The easiest way for a firm to sell internationally is to:

a. Produce its product in another country.

b. Form a joint venture with another firm in the country where it wants to sell its

products.

c. Export its products to another country.

d. Establish sales offices in countries where it wants to sell its products.

49. In forecasting sales revenue, a firm must determine:

a. Production capacity and the ability to expand production capacity to meet

increased demand.

b. Demand for the product and the price that it will charge for the product.

c. Existing supply of the product and expanded changes in supply of the product.

d. Impact of government regulations on the production of the product.

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50. In a NPV calculation, the initial cash flow is:

a. The capital investment that is necessary for the project and represents a positive

cash flow.

b. The salvage value of the project and represents a negative cash flow.

c. The initial return from the project and represents a positive cash flow.

d. The capital investment that is necessary for the project and represents a negative

cash flow.

51. Since firms seek to increase shareholder wealth, which projects should firms accept?

a. Firms should accept all projects without regard to their NPV.

b. Firms should accept projects with NPV>0.

c. Firms should accept projects with NPV<0.

d. Forms should accept projects with NPV>1.

52. What is the difference between a foreign branch of an MNC and a foreign subsidiary of an

MNC?

a. A foreign branch of an MNC is an office of the MNC which is not a separate

organization from the MNC, but a foreign subsidiary is a separate organization in

a foreign country that is owned by the MNC.

b. A foreign branch of an MNC is a separate entity in a foreign country which the

MNC owns, while a foreign subsidiary is an office of the MNC but not a separate

entity from the MNC.

c. A foreign branch of an MNC and a foreign subsidiary of an MNC are essentially

the same.

d. A foreign branch of an MNC is an office of the MNC which is not a separate

organization from the MNC, and a foreign subsidiary is an organization in a

foreign country in which the MNC owns only a partial interest.

53. What is parent-subsidiary asymmetry in the context of capital budgeting?

a. When the profits of the subsidiary are not fully paid to the parent, there is parent-

subsidiary asymmetry.

b. When the analysis of a project at the parent and at the subsidiary level yields

dissimilar estimates of NPV, there is parent-subsidiary asymmetry.

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c. When a parent and a subsidiary cannot agree on whether to pursue a specific

project, there is parent-subsidiary asymmetry.

d. When a parent wants the profits of a subsidiary repatriated to the parent but the

subsidiary resists paying its profits to the parent, there is parent-subsidiary

asymmetry.

54. MNCs may be subject to as many as three taxes on the income of their subsidiaries,

including:

a. Host-country income taxes on the subsidiary's income, host-country withholding

taxes on dividends paid to the MNC, and home-country taxes on the dividends

received by the MNC.

b. Host-country income sales taxes on the subsidiary's sales, host-country income

taxes on the subsidiary's income, and home-country income taxes on the MNC's

income.

c. Host-country income taxes on the subsidiary's income, host-country withholding

taxes on dividends paid to the MNC, and home-country income taxes on the

subsidiary's income.

d. Host-country sales taxes on the subsidiary's sales, host-country withholding taxes

on dividends paid to the MNC, and home-country taxes on the dividends received

by the MNC.

55. The effect of remittance restrictions on a parent's cash flow is that:

a. The total cash flow of the parent will remain unchanged, but the value of that cash

flow will decrease because the receipt of the funds by the parent will be delayed.

b. The total cash flow of the parent will be reduced, and the value of that cash flow

will be further decreased because the receipt of the funds by the parent will be

delayed.

c. The parent's cash flow will not be affected because the cash flow will only be

delayed, not reduced.

d. The total cash flow of the parent will be reduced, but the delay in the receipt of

the funds by the parent will not affect the value of those funds to the parent.

56. The issues involved in parent-subsidiary asymmetry can usually be resolved by:

a. Calculating cash flow from the perspective of the subsidiary.

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b. Averaging the cash flow calculation of the subsidiary and the cash flow

calculations of the parent.

c. Being conservative and using the cash flow calculation which provides the lowest

amount of cash flow.

d. Calculating cash flow from the perspective of the parent.

57. When a subsidiary is restricted from remitting its profits to the parent, the restricted cash

flow is usually:

a. Invested in Eurobonds to increase yields while the funds are restricted.

b. Deposited in local banks at local interest rates.

c. Spent locally by the subsidiary.

d. Lost to the parent permanently.

58. If there are efficient markets and no cross-border constraints on the flow of capital, project

financing:

a. Will be difficult because the lack of restrictions makes lending risky.

b. Will not be affected by where that financing is obtained.

c. Can only be obtained by the parent and not by the subsidiary.

d. Can only be obtained by the subsidiary and not by the parent.

59. In evaluating the values associated with cash flow of the parent and the subsidiary, what are

financial "side effects"?

a. Side effects are the components of cash value that may differ between the parent

and the subsidiary such as blocked currency, additional taxes and local financing

subsidies.

b. Side effects are the additional factors, beyond cash flow, that must be considered

in determining the value of a project.

c. Side effects are the effects that are felt by a parent when its subsidiary earns more

income than the parent.

d. Side effects are effects of the non-financial issues that exist between parent and

subsidiary that must be resolved before a project can proceed.

60. In considering the value of a project, the NPV estimate for the parent equals the:

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a. Foreign cash flow from the project discounted at the parent's discount rate.

b. Foreign cash flow from the project discounted at the appropriate foreign discount

rate.

c. Domestic cash flow discounted at the foreign discount rate.

d. Domestic cash flow discounted at the domestic discount rate.

61. Even if estimated NPV for a proposed project for the parent is different from estimated NPV

for the subsidiary, a project that shows ____________________________ should probably be

pursued.

a. NPV<0 for the parent and NPV<0 for the subsidiary

b. NPV>0 for the parent and NPV<0 for the subsidiary

c. NPV<0 for the parent and NPV>0 for the subsidiary.

d. NPV>0 for the parent and NPV>0 for the subsidiary

62. __________________ mean that a project's parameters can be changed after the decision to

pursue the project has been made.

a. Flexible parameters

b. Indefinite goals

c. Real options

d. Delayed decisions

63. Working capital management is essentially concerned with:

a. Short-and long-term financing.

b. Managing receivables.

c. Current assets and current liabilities.

d. Managing payables.

64. Traditional cash management analysis considers:

a. The cost of short-term financing and the interest rate on investments.

b. The benefit of having cash versus the opportunity cost of holding cash.

c. Currency risk and interest rate risk.

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d. The inflation rate and the opportunity cost of holding cash.

65. Improved financial system communications abilities have:

a. Increased the amount that firms pay to transfer funds between accounts because

improved communications has increased the number of transfers that mncs make.

b. Not affected MNC bank transactions.

c. Reduced the importance of considering transaction costs when determining the

cash balance that an MNC should have.

d. Encouraged mncs to depend more on short-term financing and less on holding

cash balances.

66. How does currency risk arise with respect to cash balances that an MNC holds in foreign

funds in a bank in a developing nation?

a. Cash balances held by an MNC in a bank in a developing nation may be subject to

expropriation by the government of that developing nation, so that the MNC is

deprived of those funds.

b. When an MNC deposits funds in a foreign bank account, it transfers those funds

from a bank account in another country, and, since the funds must be converted

into the currency of the country where the bank is located, the MNC risks

incurring a loss on that conversion.

c. Withdrawal of funds in foreign banks accounts and conversion of those funds into

the home currency of the MNC may be restricted in developing nations, so that

the MNC may not have immediate access to those funds and the value of those

funds may decline before the MNC can recover the funds.

d. Typically, the interest rate paid on funds deposited in foreign bank accounts is

below the market rate, so the funds deposited in foreign bank accounts earn

below-market returns.

67. In most short-term investments, there is a trade-off between:

a. Rate of return and liquidity.

b. Risk and opportunity cost.

c. Liquidity and flexibility.

d. Rate of return and opportunity cost.

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68. What are the benefits of commercial paper to investors?

a. Commercial paper is as safe as T-bills and offers long maturities.

b. Commercial paper is issued by firms with a wide range of credit ratings, so a wide

range of interest rates are available.

c. Commercial paper is underwritten by investment banks, so there is an active

secondary market in commercial paper.

d. Commercial paper is riskier than T-bills so they pay a higher interest rate, and

they offer liquidity.

69. When assets are securitized, what is done with the cash flow that results from those assets?

a. Cash flow from securitized assets is used to pay the original owner of those assets

for the sale of the assets.

b. There is no cash flow from securitized assets.

c. Cash flow from securitized assets is used to pay the commissions of the financial

institution that arranged for the securitization.

d. Cash flow from securitized assets is used to pay principle and interest payments to

the investors who have invested in the securitized assets.

70. U.S. commercial paper is issued on an uncommitted basis. What potential problem does that

present to MNCs issuing U.S. commercial paper?

a. U.S. commercial paper is debt instruments issued by an MNC with no guarantee

that the funds borrowed through the issue will be repaid.

b. U.S. commercial paper is debt instruments issued by an MNC without any

guarantee that all of the debt instruments will be purchased, so the issuing MNC

does not know before the issue if the full amount of the money it needs will be

raised.

c. U.S. commercial paper is debt instruments issued in a variety of currencies, so the

purchaser of the commercial paper does not know the currency risk that will be

involved in the investment.

d. U.S. commercial paper is debt instruments issued with floating interest rates, so

the purchaser of the commercial paper does not know the interest rate at which

their investment will be repaid.

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71. What does it mean that firms should match maturities of their financing with the maturities of

the assets acquired with the funds from financing?

a. A firm should only borrow money to acquire assets that will be used by the firm

for years after the loan for the assets is repaid.

b. A firm should not borrow money to acquire assets that will be used by a

subsidiary of the firm that borrows the money.

c. A firm should arrange financing that allows the firm to repay the amount financed

at about the same time that the assets acquired through that financing are retired.

d. A firm should only borrow money to acquire assets which will produce income

that can specifically be used to repay the loan.

72. Which is more important in financial planning for an MNC, ex ante financing cost or ex post

financing cost?

a. Ex ante financing cost is more important since it is the projection of the financing

cost.

b. Ex post financing cost is more important because it is the actual cost of financing.

c. Both are important in financial planning because they measure different costs.

d. Neither is important in financial planning because neither provide guidance in

determining which financing is best for an MNC.

73. If a country taxes the income of MNCs that is derived from activities within that country's

territories, that country takes a _____________________ approach to taxation.

a. Nationalistic

b. Territorial

c. Parochial

d. Cross-border

74. What approach to taxation has the United States adopted?

a. The cross-border approach

b. The modified multi-national approach

c. The world-wide approach

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d. The territorial approach

75. MNCs can expect to pay two categories of income taxes:

a. Income taxes in any country where they receive income and income taxes in any

country. Where they purchase materials.

b. Income taxes on present income and income taxes on expected income.

c. Domestic income taxes in the country where they are organized and foreign

income taxes in other countries where they conduct business operations.

d. Income taxes in countries where income is earned and income taxes in countries

from which they withdraw funds.

76. What is the effect on an MNC of withholding taxes imposed on a foreign subsidiary?

a. The withholding tax reduces the after-tax amount received by the MNC.

b. The withholding tax does not affect the MNC since it is the obligation of the

subsidiary.

c. The withholding tax always increases the overall tax burden on the combined

MNC-subsidiary enterprise.

d. The withholding tax always decreases the overall tax burden on the MNC-

subsidiary enterprise because of tax credits that are allowed for the withholding

tax paid.

77. Identification of __________________________ for each step in the value chain is key to

the VAT calculation.

a. Beginning and ending values

b. The costs incurred

c. The cost of labor incurred

d. The cost of materials incurred

78. If an MNC has foreign tax credits, how is its domestic income tax determined?

a. Foreign tax credits only affect the MNC's foreign income tax, so the MNC's

domestic income tax is not affected.

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b. Foreign tax credits are deducted from the foreign income tax owed, and then the

reduced foreign income tax is combined with the MNC's domestic income tax,

and that amount is paid by the MNC.

c. The MNC determines its tentative domestic income tax and then deducts its

allowable foreign tax credits.

d. The MNC's domestic income tax is reduced by the applicable percentage of

foreign income tax paid.

79.In what situation might an MNC have an excess amount of foreign tax credits?

a. If the income tax rate in a foreign country is higher than the tax rate in the home

country of the MNC, the MNC would pay more foreign income tax than it would

domestic income tax, in which case, the foreign tax credit would exceed the

domestic tax due.

b. If the income tax rate in a foreign country is lower than the tax rate in the home

country, the MNC would pay more domestic income tax than it would foreign

income tax, so that the MNC would have domestic income tax in excess of the

foreign income tax.

c. If the foreign subsidiary of an MNC pays income taxes in more than one foreign

country, the MNC will have excess foreign tax credits because the taxes paid in

more than one foreign country cannot be used as credits against domestic income

taxes.

d. If the foreign subsidiary of an MNC pays income taxes in the country where it

operates and then remits some or all of its profits to the MNC, the withholding

taxes on that remittance will not be included in the foreign tax credit that the

MNC is entitled to claim.

80. _____________________ are the prices at which transactions between MNCs and their

subsidiaries and affiliates take place.

a. Exchange prices

b. Intercompany trade prices

c. Catalogue prices

d. Transfer prices

81. Firms can use transfer pricing to address important issue other than taxation, including:

a. Diverting money to projects in new markets.

23

b. Providing money for the repayment of investments.

c. Allowing foreign subsidiaries to shoe false profits.

d. Shifting money away from countries where political or economic risk is high.

82. The royalties and fees that a subsidiary pays to its parent MNC are often:

a. Excluded from the parent MNC's taxable income.

b. Disallowed by the IRS under Section 482 of the Internal Revenue Code.

c. Deductible expenses for the subsidiary and lower the subsidiary's taxable income.

d. Minimized so that the subsidiary can earn a profit and remit more profits to the

MNC.

83. In the Sharpe Index, the numerator represents the ________________ and the denominator

represents the ______________________.

a. Risk; return.

b. Investment; return.

c. Return; risk.

d. Return; investment.

84. If capital in a particular market is scarce:

a. The forces of supply and demand will bring the cost of capital down.

b. High returns are possible because businesses will have to pay more for capital.

c. The risk associated with any investment increases.

d. High returns are possible only if domestic banks do not provide capital to the

market.

85. The key determinative of portfolio risk is:

a. The correlation between assets.

b. The amount invested in long-term investments.

c. The maturity date of the investments.

d. The interest rates at which investments are earning returns.

24

86. What effect should an investor's nationality have on investment decisions?

a. None.

b. Since an investor should know more about the investment climate in his or her

home country, investment decisions should favor investments in the home

country.

c. Investors should avoid investing in home-country assets to broaden their

investment opportunities.

d. Investors should weight their investments to those that can take place in their

home-country currency.

87. The total risk in an investment is composed of:

a. Currency risk, political risk, and economic risk.

b. Political risk, transaction risk, and translation risk.

c. Currency risk, asset risk, and covariance risk.

d. Covariance risk, default risk, and economic risk.

88. What reasons may lead a country to prohibit foreign ownership of local assets?

a. National pride and limiting foreign interests from acquiring domestic economic

power

b. Fear that investment losses will discourage further investment and national pride

c. Desire to protect domestic industries from competition and desire to protect

domestic technological superiority

d. Desire to protect local citizens from foreign competition for investment

opportunities and desire to protect domestic currency value from foreign

interference

89. Lack of knowledge about foreign firms in which investments might be made leads to:

a. Investments that will probably yield less return than expected.

b. A perceived lower level of risk because lack of knowledge of risks leads to the

assumption that the risks do not exist.

c. A perceived higher level of risk because lack of information creates uncertainty.

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d. Larger investments based on the presumption that returns will be higher than the

facts indicate.

90. One of the key factors in corporate governance is the:

a. Power of the board of directors of the corporation to make all decisions for the

corporation without input or review from any other group.

b. Right of stockholders in the corporation to elect directors and vote on key issues

affecting the corporation.

c. Power of government to regulate the activities of the corporation.

d. Obligation of the corporation to act ethically and to act as a good corporate

citizen.

91. A financial crisis that is global is scope suggests:

a. A positive correlation between national stock markets world-wide.

b. That government regulation has failed on a broad basis.

c. That stock markets around the world are not coordinated.

d. That as many investors have suffered an increase in the value of their investments

as have suffered a decline in the value of their investments.

92. A document issued by a financial institution and back by a specified shares of stock in a

foreign firm that has essentially the same value as the shares of stock it represents is called a:

a. Mutual fund.

b. Stock proxy.

c. Certificate of deposit.

d. Depository receipt.

93. The major criteria used by managers for capital budgeting decisions are

a. NPV

b. IRR

c. Payback period

d. Return measures such as ROIC, ROOPA or RONABIT

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e. All of the above

94. NPV is not always used by managers because

a. It is not intuitive

b. Alternative measures such as the payback period are equally accurate

c. Managers rarely think of NPV as incremental value for investors

d. Both a and c

e. All of the above

95. A project with a zero NPV

a. Earns a competitive rate of return

b. Is not worth undertaking

c. Is a mediocre project.

d. Is just breaking even profit-wise

e. None of the above.

96. Managers who avoid discounted cash flow analysis tend to be

a. Overconfident

b. Less sophisticated, older and longer-tenure managers

c. Managers of highly-levered firms

d. Managers of firms with agency conflicts

e. None of the above.

97. Managers who do not base their decisions on NPV are prone to

a. Over-confidence.

b. Excess optimism.

c. The representativeness bias.

d. Being averse to a sure loss.

e. Preference reversals.

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98. Managers who continually ask themselves whether they would support or terminate a project

if they took it over for the first time today

a. Are wasting time that could be better used in implementing the project

b. Are undermining the decisions of their predecessors

c. Are avoiding excessive reluctance to terminate failing projects

d. Are second-guessing themselves


99. The difference between behavioral biases and agency conflicts is that

a. Dealing with agency conflicts involves the alignment of incentives while

behavioral biases need to be addressed by debiasing.

b. Behavioral biases actually arise from agency conflicts. Without agency conflicts,

there will be no behavioral biases.

c. Agency conflicts actually arise from behavioral biases. By addressing behavioral

biases, agency conflicts will automatically be eliminated.

d. There is no difference between the two. They are alternative names for the same

phenomenon.


100. Managers are often reluctant to terminate losing projects because

a. They are averse to sure losses

b. The losing projects are highly visible

c. They do not want to experience regret that they made a mistake with the project

d. All of the above


101. Managers are excessively optimistic in projects where

a. They believe they have a high degree of perceived control

b. They believe that they are familiar with the situation at hand

c. The outcome is much more desirable

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d. The early stages of the project have been successful

e. All of the above

102. Suppose that your firm is a U.S.-based importer of German automobile accessories. You

pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In

one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange

rate is €1.00 = $1.50; the one-year forward rate is €1.00 = $1.55. How can you fix the dollar cost

of this order?

a. Enter into long position in the one-year euro futures contract at €1.00 = $1.55.

This will fix the cost of €100,000 at $155,000.

b. Enter into short position in the one-year euro futures contract at €1.00 = $1.55.

This will fix the cost of €100,000 at $155,000.

c. Since the spot price is more than the forward price, you should trade your dollars

for euros today and pay your supplier early.

d. Sell a call option on the euro with a one-year maturity.

103. Suppose that your firm is a U.S.-based importer of German automobile accessories. You

pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In

one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange

rate is €1.00 = $1.50; the one-year rate of interest in the U.S. is 4 percent and in Germany it is

6%. What trades in the spot foreign exchange market and in the money market will allow you to

fix the dollar cost of this order?

a. Exchange $150,000 for €100,000 at today's spot rate. In twelve months, pay your

supplier.

b. Exchange $141,510 for €94,340 at the spot rate of €1.00 = $1.50. Invest the euros

at i€ = 6%. In one year your investment will be worth €100,000 which is enough

to pay your supplier. If you're short of cash today, borrow the $141,510 at i$ = 4

percent.

c. Sell euros forward at the exchange rate expected to prevail in one year

d. None of the above are correct.

104. Suppose that your firm is U.S.-based importer of German automobile accessories. You pay

for them in euros and sell them in dollars. You have just ordered next year's inventory. In one

year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate

is €1.00 = $1.50; One-year call and put options are available on the euro with a variety of strike

prices. How can you place an upper limit on the dollar cost of this order?

29

a. Buy one-year put options on the euro.

b. Sell one-year put options on the euro.

c. Sell one-year call options on the euro.

d. Buy one-year call options on the euro.

105. Suppose a U.S. firm has just bought an asset from a Japanese firm for ¥500 million due in

one year. Calculate today's cost (i.e. the present value) of meeting this obligation using a money

market hedge. The spot exchange rate for Japanese yen is ¥122/$ and the one year forward

exchange rate for Japanese yen is ¥130/$. The one-year interest rate is 5% in the U.S. The one-

year interest rate in Japan is 12.00%

a. $3,485,000

b. $3,659,250

c. $3,663,004

d. $3,842,213

106. Explain the process of a money market hedge for a foreign currency obligation.

a. Estimate the size of your contractual foreign currency obligation in dollars using

the forward interest rate.

b. Estimate the size of your foreign currency obligation. Buy enough call options to

meet this obligation. At maturity, exercise the calls.

c. Estimate the size of your contractual foreign currency obligation. Buy that much

foreign currency at the spot rate, pay early.

d. Estimate the size and timing of your contractual foreign currency obligation. Find

the present value of the obligation using the foreign currency discount rate. Buy

the present value of the foreign currency obligation at the spot exchange rate.

Invest the proceeds at the foreign currency interest rate.

107. Suppose a U.S. firm has sold an airplane to a British firm for £20 million payable in one

year. The spot exchange rate is $2.00 = £1.00; the one-year forward exchange rate is $2.01 =

£1.00. The one-year interest rate in the U.S. is 3 percent and the one-year interest rate in Great

Britain is 2.50 percent. Which of the following hedging strategies eliminates the exporter's

exchange rate risk?

a. Sell £20 million forward at $2.01 = £1.00

30

b. Since the forward rate is more than the spot rate, use a money market hedge

instead of a forward market hedge.

c. Borrow £19,512,195.12 from a British lender. Exchange for $39,024,390.24 at the

spot exchange rate. In one year, the £20 million receivable will service the loan.


108. A recurring exposure could be best be hedged with

a. Swaps

b. Exposure netting

c. Selling call options

d. Buying call options

109. Today, it is not unusual for an exporter to let the importer choose the currency of payment.

a. This amounts to the exporter giving the importer a currency option.

b. The importer is essentially selling an option to the exporter.

c. This is an example of exposure netting.

d. This only works when neither party wishes to hedge.

110. For an exporter selling in one foreign currency, if the domestic currency is strong or

expected to become strong:

a. The firm can hedge by selling their home currency forward.

b. The firm could hedge by buying foreign currency forward.

c. a) and b) are both correct

d. The firm could hedge by buying their home currency forward.

111. A firm that has an exposure to a minor currency,

a. Can hedge to the exposure to an extent using cross-hedging techniques.

b. Can directly hedge at no more expense than with a major currency.

c. Should never hedge since this could cost too much.

d. b) and c) are both correct.

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112. Political risk

a. Is an example of a macro risk.

b. Arises from uncertainty regarding exchange rates.

c. Refers to the potential losses to the parent firm resulting from adverse political

developments in the host country.

d. a) and c) are both correct.

113. Other things equal, a country will be perceived to have more political risk

a. The less integrated it is into the world system.

b. The more stable a country's government is.

c. The more stable its neighboring countries are.

d. With lessening income inequality.

114. Country risk

a. Is a narrower measure of risk than political risk.

b. Is a broader measure of risk than political risk.

c. Is unrelated to political risk.


116. Consider a country where the bribery of officials is a normal part of doing business.

a. U.S. MNC should adjust capital budgeting projects in that country by including

the cost of the bribes.

b. U.S. firms are legally able to bribe foreign officials, but are not able to deduct the

costs.

c. U.S. firms are legally prohibited from bribing foreign official by the Foreign

Corrupt Practices Act.


117. When a MNC builds brand-new production facilities overseas, this is an example of

a. A cross-border M&A.

b. A greenfield investment.

32

c. Foreign direct investment.

d. Both answers b) and c) are correct.

118. Imperfect factor markets drive much FDI. Which of the following markets has the most

imperfections?

a. Product market.

b. Labor market.

c. Capital market.

d. Market for raw materials.

119. Other things equal, a firm with a greater investment in intangible assets

a. Is more likely to establish foreign subsidiaries than to use licensing.

b. Is less likely to consider foreign direct investment.

c. Is less likely to establish foreign subsidiaries than licensing.

d. Is less profitable.

120. When U.S. car makers began to build their own network of dealerships in Japan, this was an

example of:

a. Forward vertical FDI.

b. Backward vertical FDI.

c. Horizontal FDI.


121. Insurance for political risk exists. How would you incorporate the cost of the insurance

premium into the capital budgeting process?

a. Subtract the insurance premium from the expected cash flows for the project

when computing its NPV

b. Raise the cost of capital (discount rate).

c. Adjust the NPV downward by a subjective amount.


122. Capital budgeting is done with

33

a. ANPV analysis

b. the WACC method

c. the FTE method

d. all of the above

123. In the first step of deriving the ANPV of a project

a. Benefits or costs associated with how the project is financed must be considered

b. The amount of debt issued to finance the project is not a concern

c. It is crucial to consider the effect of the project on the firm’s eventual capital

structure

d. The debt-equity ratio that will be in place after the project is up and running must

be forecast

124. When calculating the NPV of a project’s cash flows, how must the revenues and costs be

measured?

a. On an incremental, pre-tax, cash flow basis

b. On an annual, pre-tax, cash flow basis

c. On an incremental, after-tax, cash flow basis

d. On an annual, after-tax, cash flow basis

125. All of the following are true regarding financial slack, EXCEPT

a. It can reduce managers’ incentives to find ways to make the company operate

more cost-effectively

b. It develops when a company chooses not to pay out dividends from its free cash

flow

c. It will lead to lower agency costs

d. Management might be tempted to indulge in perks for themselves

126. An interest tax shield is

a. The value created by the tax deductibility of interest on debts

34

b. A tax benefit that allows current business losses to be used to reduce tax liability

in future years

c. The value created by the ability of a firm to borrow at an interest rate below the

firm’s market-determined interest rate

d. A form of payment to investment banks that issue securities equaling the

difference between the value that investors pay for the securities and the value

that the firm receives

127. Which of the following is NOT an example of a real option?

a. The ability of a company to shut down a mine until operating conditions improve

b. The ability to sell a successful domestic product in the international market place

c. The ability to transfer goods from a party in one country directly to a party in

another country in exchange for some other goods of equal value

d. The ability to delay an important operating decision until more information can be

gathered

128. When developing the adjusted net present value of a project, which of the following would

be considered in the second step?

a. The costs of financial distress

b. The amount of debt issued to finance the project

c. The possibility that the current project could lead to another project

d. All of the above

129. The possible loss of export revenue when a foreign market is served by direct foreign

investment and the former exports to that market are unable to be sold elsewhere is known as

a. Export factor

b. Cannibalization of exports

c. Cannibalization of imports

d. Overhead management fees

130. The weighted average cost of capital (WACC) is the capital budgeting approach that

35

a. Finds the value of the unlevered project and then factors in the additional value of

financial side effects and from the value of growth options

b. Discounts the after-tax free cash flows to stockholders at the required rate of

return on the equity

c. Is a one-step process that works well for projects that have stable debt-equity

ratios

d. Cannot be used for international projects

131. What is one of the first decisions in an international valuation?

a. Whether to do the valuation using forecasts denominated in a foreign currency or

in the domestic currency

b. Whether to source raw materials and intermediate goods locally

c. Whether to arrange financing in the foreign or domestic currency


132. The flow-to-equity (FTE) method of capital budgeting finds the value of the equity by

discounting the forecasts of the flows to equity holders _____

a. At the appropriate risk-adjusted required rate of return on the assets associated

with the project

b. At the appropriate risk-adjusted required rate of return on the assets of the firm

c. At the appropriate risk-adjusted required rate of return on the equity

d. At the appropriate risk-adjusted required rate of return on the debt

133. Assuming an upward-sloping term structure of spot interest rates, if the expected profits

from a foreign project are discounted by a higher discount rate found in later years, the present

value of the project is _____.

a. Inaccurately inflated

b. Impossible to determine

c. Substantially increased

d. Needlessly penalized

135. The return on investment is

36

a. The ratio of investment to gross cash flows

b. Another name for the plowback ratio

c. The change in a firm’s future operating profit divided by its investment

d. A firm’s investment divided by its increase in gross cash flow

136. The fraction of operating profits that management chooses to reinvest in the firm is

a. The plowback ratio

b. The return on investment

c. Gross cash flow

d. The retention ratio

137. _____ is a situation in which managers, acting in the interests of shareholders, accept a

high-variance project that may lower overall firm value but that increases shareholder value.

a. Underinvestment

b. Asset substitution

c. Financial distress

d. Low variance avoidance

138. When doing international capital budgeting, differences in _____ across countries must be

taken into account.

a. Accounting conventions

b. Political risk

c. Costs of capital

d. Business risk

139. _____ is the collection of cash, marketable securities, accounts receivable, and inventories

held by a firm at any point in time.

a. Net working capital

b. Working capital

c. Capital account

37

d. Future profitability

140. Net working capital = working capital – _____

a. Short-term debt

b. Short-term debt and accounts receivable

c. Accounts receivable and accounts payable

d. Accounts payable and short-term debt

141. If a firm takes out a short-term bank loan to purchase inventory the firm’s net working

capital

a. Will increase

b. Will decrease

c. Will not change

d. It cannot be determined from the information given

142. Blocked funds arise when

a. The government of a foreign country makes the nation’s currency completely

inconvertible

b. Foreign exchange controls impose unattractive foreign exchange rates

c. Taxes are imposed on the repatriation of funds from a foreign affiliate to its parent

d. Transaction costs are incurred to convert funds from one currency to another

143. What is a way for a multinational corporation with many affiliates around the world to

realize significant savings?

a. Centralizing the management of the short-term cash balances of its affiliates

b. Outsourcing offshore the management of the short-term cash balances of its

affiliates

c. Dispersing the management of the short-term cash balances of its affiliates

d. Regionally arranging the management of the short-term cash balances of its

affiliates

144. Tax planning is the process of

38

a. Generating cash to be paid to the parent by the affiliate as a dividend

b. Minimizing the firm’s taxes by choosing when to repatriate funds

c. Using current business losses to reduce tax liability in future years

d. Withholding taxes on royalties and fees

145. In the U.S. the IRS specifies that an appropriate transfer price is one that reflects _____, that

is, one that would be observed in a sale of the good or the service to an unrelated customer.

a. Ad valorem duties

b. An arm’s length price

c. The book value

d. An incentive price

146. Leading and lagging the payments made between its affiliates allows an MNC to _____ of

the affiliates.

a. Affect the liquidity

b. Lower the taxes

c. Block the funds

d. Repatriate the funds

147. Generally, risk management is the use of _____ to take positions in financial markets that

offset the underlying sources of risks that arise in a company’s normal course of business.

a. Asset securitization

b. Derivative securities

c. Margin calls

d. Tax shields

148. Modigliani and Miller argued that a corporation’s financial policies, such as hedging

foreign exchange risk, do not change the value of the firm’s assets unless they

a. Lowered the firm’s taxes

b. Affected its investment decisions

c. Could be done more cheaply than individual investors’ transactions could be done

39

d. All of the above

149. All of the following are arguments against hedging EXCEPT

a. Hedging is costly

b. Hedging equity risk is difficult if not impossible

c. Hedging can reduce the future taxes that a firm expects to pay

d. Hedging can create bad incentives

150. Bid-ask spreads are typically _____.

a. Larger in the spot market than in the forward market for currency

b. Smaller in the spot market than in the forward market for currency

c. Smaller in the forward market than in the swap market for currency

d. Irrelevant for evaluating the cost of hedging

151. Hedging foreign exchange risk is _____.

a. Difficult, because the equity value of a firm is affected by nominal exchange rate

risk

b. Impossible, because the equity value of a firm must be discounted a finite period

of times

c. Difficult, because the equity value of a firm depends on the indefinite future

d. Impossible, because the equity value of a firm is derived from current and past

cash flows only

152. Which of the following does NOT increase the tax benefits of hedging?

a. When more of the firm’s income is subject to a flat rate tax

b. When the tax code is more progressive

c. When a firm’s pretax income is more volatile

d. When more of the firm’s income occurs in the convex region of the tax code

153. According to some research, firms with _____ dividend payouts are more likely to hedge.

a. Higher

40

b. Lower

c. No

d. Asymmetric

154. If the value of a firm increases when the pound strengthens relative to the dollar, _____

would be an appropriate hedge.

a. Buying pounds forward

b. Converting some of the firm’s debt into pounds

c. Liquidating pound liabilities

d. Finding another currency that is highly correlated to sell forward

155. Which of the following is NOT a basic step in the capital budgeting process?

a. Estimate the cash flows to be derived from the project over time.

b. Identify the initial capital invested.

c. Identify the IRR.

d. All of the above are steps in the capital budgeting process.

156. Project evaluation from the _________ viewpoint serves some useful purposes and/but

should _______________ the ____________ viewpoint.

a. Parent's; be subordinated to; local

b. Local; not be subordinated to; parent's

c. Local's; not dominate; parent's


157. Given a current spot rate of ¥124.50/$, expected inflation rates of 2% in Japan and 4% per

annum in the U.S., use the formula for relative purchasing power parity estimate the one-year

spot rate of yen per dollar.

a. ¥122.11/$

b. ¥124.50/$

c. There is not enough information to answer this question

d. ¥126.94/$

41

158. When determining a firm's weighted average cost of capital (WACC) which of the

following terms is necessary?

a. The firm's tax rate

b. The firm's cost of equity

c. The weight of debt financing

d. All of the above are necessary

159. McCody Manufacturing has an after-tax cost of debt of 8% and a cost of equity of 14%. If

McCody is in a 40% tax bracket, and finances 25% of assets with debt, what is the firm's

WACC?

a. 11.70%

b. 12.50%

c. 11.30%

d. 11.00%

160. Calculate the cost of equity for InLine Systems using the following information: The cost of

debt is 6%, the corporate tax rate is 30%, the rate on Treasury Bills is 2%, the firm has a beta of

1.1, and the expected return on the market is 11%.

a. 12.20%

b. 5.67%

c. 13.70%

d. 11.90%

161. Generally speaking, a firm wants to receive cash flows from a currency that is __________

relative to their own, and pay out in currencies that are _________ relative to their home

currency.

a. Appreciating; depreciating

b. Depreciating; appreciating

c. Appreciating; appreciating

d. Depreciating; depreciating

162. When a foreign project is analyzed from the parent's point of view, the additional risk that

stems from it "foreign" location is typically measured by ________________ or

____________________.

a. Adjusting the discount rates; adjusting the timing

b. Adjusting the discount rates; adjusting the cash flows

c. Adjusting the timing; adjusting the cash flows


42

163. Your company just received a $1,000,000 cash remittance from your German subsidiary. If

the risk-free one-year T-bill rate is 3.5% and the current exchange rate is $1.01/€, and the one-

year forward rate is $0.98/€, then the present value of the remittance is _________________

a. $1,00,000

b. $1,003,500

c. $1,001,000

d. $980,000

164. Which is NOT considered a shortcoming of the parent simply adjusting discount rates to

account for the additional risk that stems from a project's foreign location?

a. These are all shortcomings associated with discount rate adjustment.

b. Increased sales volume might offset the lower value of a local currency.

c. Cash flows are already highly subjective.

d. Two-sided risk in that foreign currency may appreciate or depreciate.

165. A foreign subsidiary has $1,000,000 of taxable income, a (foreign) corporate tax rate of

30%, and a foreign dividend withholding rate of 20%. The U.S. (domestic) parent has a

corporate tax rate of 35%. What are the total taxes paid by the foreign subsidiary? Assume that

the foreign subsidiary is 100% owned by the U.S. parent and that all after-tax income is paid to

the U.S. parent.

a. $50,000

b. $30,000.

c. $85,000

d. $44,000

166. McDonalds Corporation operates in many different countries and pays taxes at many

different rates. However, they always pay the same rate as their local competitors. McDonalds is

operating in an environment of _________ tax policy.

a. Territorial approach

b. Domestic neutrality

c. Foreign neutrality


43

167. Prescott International Inc. is based in a country with a worldwide approach to taxation but

generates 100% of its income in a country with a territorial approach to taxation. The tax rate in

the country of incorporation is 20%, and the tax rate in the country where they earn their income

is 30%. In theory, and barring any special provisions in the tax codes of either country, Jensen

should pay taxes at a rate of __________.

a. 44%

b. 80%

c. 56%

d. 30%

168. Tax treaties generally have the effect of increasing the withholding taxes between the

countries that are negotiating the treaties.

a. True

b. False

169. A ___________ tax is effectively a sales tax at each stage of production.

a. Equitable

b. Flat

c. Value-added


170. What is the total value of taxes paid in the following example if the value added tax is 15%?

A farmer raises wheat that he sells for $2.00 to the grain company. The grain company sells to

the processor for $3.00 per bushel. The processor turns the wheat into a breakfast cereal and

wholesales it for $4.00 per bushel. The retailer sells the cereal for $5.00 per bushel.

a. $.45

b. $.60

c. $.75

d. $.90

171. Domestic tax neutrality means that

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a. A dollar earned anywhere in the world by a U.S. corporation is taxed the same as

if earned in the U.S.

b. Tax rates are neither regressive nor progressive.

c. Foreign affiliates must neutralize their income by subtraction of foreign

investment credits.


172. A foreign subsidiary has $4,000,000 of taxable income, a (foreign) corporate tax rate of

35%, and a foreign dividend withholding rate of 15%. The U.S. (domestic) parent has a

corporate tax rate of 40%. What are the additional taxes paid by the U.S. domestic parent after

the foreign subsidiary pays corporate and withholding taxes? Assume that the foreign subsidiary

is 100% owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.

a. $19,000

b. $12,000

c. $42,000

d. $0

173. Tax credits or deficits from foreign-source income may be applied to net tax positions in

domestic-source income and vice versa.

a. True

b. False

174. Which of the following is NOT true of the value-added tax?

a. It increases the total tax burden

b. It is a progressive tax

c. The tax may have an inflationary impact

d. All are true

175. Use the following information to answer questions 175 - 177:

Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection

molding manufacturing process. Their supplier, BioTech Chemical, Inc. offers financing terms

of a 3% discount if the accounts payable are paid in 15 days or less with the full balance due in

45

60 days. Short-term financing available to Sunny is available at an annual rate of 7.9%. Sunny

has just purchased $500,000 of plastic chips from BioTech Chemical.

What is the amount of money Sunny will save on accounts payable if they accept the discount?

a. $15,000

b. $20,000

c. $500,000

d. $39,500

176. What is the effective annual interest cost of supplier financing offered by BioTech

Chemical?

a. 105.3%

b. 19.4%

c. 27.1%

d. 22.9%

177. Should Sunny take the discount offered by BioTech Chemical?

a. Yes, SureDrip will get to use their raw materials 35 days earlier than if they

waited to pay at the end of the 45 days.

b. No, it costs SureDrip 27.1% to accept the discount and they are better off paying

the full amount in 45 days.

c. Yes, SureDrip's short term borrowing rate of 7.9% is less than Sun's offered cost

of carry of 27.1%.

d. No, SureDrip will not have to pay any interest if they just pay in 45 days.

178. Other things equal, a firm would rather have _________ in a depreciating currency, and

____________ in an appreciating currency.

a. Accounts receivable; accounts payable

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b. Accounts payable; accounts receivable

c. Accounts receivable; accounts receivable


179. Firms might be tempted to order _________ inventory from foreign sources if they thought

their currency was about to be ____________.

a. Less; devalued

b. Extra; devalued

c. Less; revalued


180. Decreases to cash flows can be anticipated if which of the following occurs?

a. Days in accounts payable increase by 10 days.

b. A receivables contract is denominated in a depreciating foreign currency.

c. Sales are more than anticipated.


181. The advantages to unbundling of cash flows from a subsidiary to a parent include all of the

following EXCEPT:

a. The facilitation of local capital into joint-venture projects.

b. All of the above are legitimate reasons for unbundling cash flows between a

parent and subsidiary.

c. Items that my have been classified as residual profits are viewed as tax-deductible

expenses.

d. The facilitation of allocating shared-services (i.e., overhead).

182. The fund which cannot be repatriated to their parent company by foreign subsidiaries is

called.

a. A black market fund

b. A government fund

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c. A special fund

d. A mutual fund

e. A blocked fund

183. The ability to relocate working cash balances and profits on a global basis provides

multinational firms with several types of arbitrage opportunities. These types of arbitrage

opportunities do not include arbitrage.

a. Tax

b. Financial market

c. Regulatory system

d. Commodity market

e. Both a and b

184. Fund flows from parent to subsidiary do not include :

a. The initial investment from the parent

b. Intracompany loans from the parent

c. The credit purchase of goods from the parent

d. The purchase of management services from the parent

e. The transfer of employees from the parent

185. Which of the following is not a major component of fund flows from subsidiary to parent?

a. Dividend payments from subsidiary

b. Interest payments from subsidiary

c. Royalty payments from subsidiary

d. Payments for goods received from the parent

e. Tax payments from subsidiary

186. An advantage of multilateral netting by a multinational corporation and its foreign affiliates

is that it

a. Reduces the total volume of interaffiliate fund flows

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b. Increases the total volume of interaffiliate fund flows

c. Increases foreign exchange risk

d. Increases political risk

e. Reduces the number of employees

187. Leads and lags are a form of working capital management by .

a. Accelerating hard-currency payables payments and delaying soft-currency

payables payments

b. Delaying accounts receivable payments and speeding up accounts payable

payments

c. Accelerating both receivables and payables payments

d. Accelerating soft-currency payables payments and accelerating hard-currency

payables payments

e. All of the above

188. According to the transfer pricing regulations, multinational firms are supposed to charge

prices to its foreign affiliates based on the following:

a. Total cost

b. Arm's-length prices

c. Average cost

d. Internal prices


189. Some multinational companies set up a re-invoicing center which normally .

a. Invoices in the same currency for the buyer and seller of goods and services

b. Buys in one currency and pays in another currency

c. Buys in the parent currency and pays in the parent currency

d. Buys in gold and pays in the u.s. dollar

e. All of the above

190. Intracompany loans do not include the following transaction(s) .

49

a. Direct loans

b. Credit swaps

c. Back to back loans

d. Both b and c

e. Currency swaps

191. Credit swaps do not include the following party .

a. The parent company

b. The foreign company

c. A bank

d. A foreign government

e. Both a and b

192. Multinational firms may be able to repatriate funds from foreign affiliates through the

following method(s).

a. Royalty payments

b. Management fees

c. Dividend payments

d. Adjustment of transfer prices

e. All of the above

193. Which of the following is not related to the traditional objectives of multinational firms'

cash management?

a. To minimize the cost of funds

b. To improve liquidity

c. To improve the return on investment

d. To reduce risks

e. To pay the same amount of dividend year after year

194. Centralized international cash management requires each local subsidiary to .

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a. Do whatever it wants with its excess cash

b. Hold the minimum cash balance

c. Invest in foreign exchange markets

d. Invest in local capital markets

e. Invest in long-term securities

195. The most important factor affecting the location of international cash centers is probably .

a. The local government's political stability and its attitude toward foreign-based

companies

b. Having enough cash balances at the local subsidiary

c. Exchange rate volatility

d. The local government's ability to export oil

e. All of the above

196. Major categories of a float do not include the following ___ .

a. Invoicing float

b. Credit float

c. Mail float

d. Processing float

e. Transit float

197. The "just-in-time" inventory management was initiated by .

a. The United States

b. Germany

c. Japan

d. The United Kingdom

e. Korea

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198. A 1996 study by Ricci and Morrison found that 80 percent of Fortune 200 companies use

wire transfers , 50 percent poor their cash , and almost half net payments and transfer

funds electronically .

a. Sometimes; sometimes; sometimes

b. Often; often; often.

c. Often; sometimes; rarely.

d. Rarely; rarely; rarely.

e. Often; often; rarely.

199. Transfer pricing has been used by multinational firms to achieve the following objectives:

a. Minimize income taxes

b. Minimize tariff payments

c. Minimize foreign exchange controls

d. Operate working capital effectively

e. All of the above

200. Re-invoicing centers are set up in tax haven countries to do the following .

a. Charge higher prices

b. Meet different accounting standards

c. Bypass government restrictions and/or avoid taxes

d. A and b

e. A, b, and c

201.Multinational companies frequently unbundle remittances into separate flow categories in

order to

a. Avoid taxes

b. Minimize the size of profit repatriation

c. Meet the accounting standards

d. A and b

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e. A, b, and c

202.Which of the following is not a popular cash center location.

a. Luxembourg

b. The Netherlands

c. Bermuda

d. Chile

e. The Bahamas

203. Intracompany loans do not include

a. Direct loans

b. Credit swaps

c. Back to back loans

d. Loans under parent guarantees

e. Loans from the world bank

204. In international cash management, which of the following items is most important?

a. Interest rate differential between two countries

b. Inflation differential between two countries

c. Interest rate and foreign exchange rate comparisons between two countries

d. A and b

e. A, b, and c

205. Which of the following is not one of the ways that a multinational company can delay its

payments?

a. Mail

b. Electronic fund transfers

c. More frequent requisitions

d. Floats

53


206. The difference between European and American companies regarding working capital is:

a. European companies have a considerably higher level of net working capital than

US companies due to support the same level of sales.

b. European companies have a considerably lower level of net working capital than

US companies due to support the same level of sales.

c. there are no noticeable differences regarding working capital.

d. US companies have higher levels of net working capital but this is used to support

a higher level of sales.

e. European companies have higher levels of net working capital but this is used to

support a higher level of sales.

207. There is little literature on working capital management because:

a. Decisions on working capital are relatively routine and frequent.

b. Working capital decisions are easily reversible

c. Working capital management requires cash flow projections and these cannot be

be forecasted by the financial manager alone

d. a and b

e. a, b and c

208. A U.S. company has $10,000 in cash available for 45 days. It can earn 1 percent on 45-day

investment in the United States. Alternatively, if it converts the dollars to German marks, it can

earn 1.5 percent on a German deposit for 45 days. The spot rate of the German mark is $0.50.

The spot rate 45 days from now is expected to be $0.40. Should this company invest its cash in

the United States or in Germany?

a. In the United States

b. In the Germany

c. It does not make any difference

d. All of the above


54

209. A German investor has DM100,000 to invest for one year. U.S. Treasury bills offer a yield

of 11 percent. The current exchange rate of the mark is $0.50. What is the yield on the

investment if the exchange rate of the mark is $0.46 at the end of the year?

a. 10.25%

b. 12.55%

c. 15.00%

d. 20.65%

e. 25.00%

210. Globalization, or the movement to a “borderless world” is happening to which of the

following:

a. Physical communication

b. Economic and business exchange

c. Spiritual values

d. Entertainment

e. All of the above

211. Three major reasons to study international finance include:

a. To understand a global economy

b. To understand the impact of global finance on businesses

c. To understand the european union

d. To make intelligent personal decisions

e. A, b, and d

212. Some scholars worried that the terrorist attacks of September 11th, 2001 would have a

negative effect on the worldwide increase in globalization. In fact, the effect of the bombings

can be best described as:

a. Resentment in foreign countries rose to such a high degree that it neutralized

America’s movement abroad

b. The commitment of U.S. multinational companies to international trade actually

grew after September 11th.

55

c. The global recession reduced the desire of multinational firms to globalize

d. Technological advances slowed to the almost zero growth

e. Policy makers moved away from free trade

213. Which of the following is the primary objective of a firm?

a. Employees' benefits

b. Satisfaction of customers

c. Satisfaction of suppliers

d. Prompt payment to creditors

e. Maximize stockholder wealth

214. Financial risk involves:

a. Fluctuation in exchange rates

b. Different interest and inflation rates

c. Balance of payments position

d. A and b

e. A, b, and c

215. Three sweeping changes include:

a. The end of Cold War

b. Industrialization and growth of the developing world

c. The creation of the North American Trade Agreement

d. Increased globalization

e. A, B, and D

216. Those companies listed below do business in more than 150 countries around the world

except the following company:

a. IBM

b. General Motors

56

c. Sony

d. Union Pacific Railroad

e. BP Amoco

217. The main role of financial managers is changing to:

a. Efficient allocation of funds

b. Strategic planning

c. Acquisition of funds on favorable terms

d. Manage others

e. Focus on international activities

218. The major determinant of globalization is:

a. Market homogeneity

b. Amount of trade between countries

c. Degree of product standardization

d. Amount of communication between countries

e. Market interdependency

219. Which of the following is not one of seven principles of global finance?

a. Market imperfection

b. Risk-return tradeoff

c. Portfolio effect

d. Comparative advantage

e. Company advantage

220. Managers are generally defined as:

a. Stockholders

b. Agents

c. Creditors

57

d. Suppliers

e. Customers

221. Incentives for multinational company managers does not include the following:

a. Stock options

b. Bonuses

c. Perquisites

d. Salary increases

e. Vacation

222. Which changes in corporate governance have made US managers more responsive to the

interests of stakeholders:

a. An active takeover market

b. An increased usage of executive incentive plans

c. More active institutional shareholder

d. New laws and regulations

e. All of the above

223. Environmental factors affecting international operations are as follows except:

a. Foreign customs

b. Foreign economic factors

c. Foreign political situations

d. Foreign legal aspect

e. International distance

224. Three major risks in international business are:

a. Political, financial and weather

b. Economic, political and people

c. Political, financial and regulatory

58

d. Accounting, management and information

e. Marketing, ethics and political

225. Conflicts of interest for multinational corporations do not include:

a. The interests of sovereign governments may be different

b. The goals of multinationals are divergent from host countries

c. Some conflicts may exist within multinational subsidiaries

d. Multinational companies may conflict with local laws

e. Multinational managers live in different time zones

226. To maximize shareholder value, US companies have increased:

a. Profit margin on sales and asset turnover

b. Asset dispositions

c. Dividends and share purchases

d. The utilization rate of assets

e. Mergers and acquisitions

227. The conflict between owners, employees, suppliers, and customers of a company is

known as:

a. Regulatory risk

b. Problem of agency

c. Conflict of multiple environments

d. Conflict of interests


228. The main differences between domestic and international companies from a financial

manager's point of view are largely due to differences in:

a. Risks

b. National laws

c. Economic factors

59

d. Political factors

e. All of the above

229. A global company is an organization that attempt to :

a. Has a worldwide presence in its market

b. Integrate its operations worldwide

c. Standardize operations in one or more of the company's functional areas.

d. A and b

e. A, b, and c

230. Corporate governance is often narrowly defined as the prudent exercise of ownership

rights toward the goal of increased:

a. Shareholder value

b. Profit

c. Profit margin on sales

d. Asset turnover

e. Sales volume

231. The most common form of shareholder activism includes:

a. A shareholder proposal for proxy fight

b. Direct negotiation with management

c. Public targeting of a corporation

d. A, b, and c

e. A and c only

232. The OECD Principles of Corporate Governance covers:

a. The rights of shareholders

b. The equitable treatment of shareholders

c. The responsibilities of the board

60

d. Disclosure and transparency

e. All of above

233. The U.S. Department of Commerce defines foreign direct investment as investment in either

_____.

a. Equity or leveraged investments

b. Equity investments alone or investments in a multinational company

c. A multinational company or in a subsidiary of that multinational company

d. Nominal capital assets or financial assets with a minimum of ten percent equity

ownership in a foreign firm

e. Real capital assets or financial assets with a minimum of ten percent equity

ownership in a foreign firm

234. Modes of foreign direct investments do not include the following .

a. Construction of new plants abroad

b. Sales of airplanes to foreign customers

c. Mergers and acquisitions of foreign firms

d. International joint ventures

e. International equity alliances

235. Many multinational companies invest their capital abroad _____.

a. Because their subsidiaries desperately need those funds

b. To utilize their oligopoly-created advantages

c. To under-utilize their oligopoly-created advantages

d. Because of almost no competition in foreign countries

e. As a reminder of their international outlook

236. Host countries can benefit from foreign direct investment because it _____.

a. Contributes to tax revenues and helps balance their international balance of

payments

b. Provides local workers with an opportunity to learn managerial skills

61

c. Induces the transfer of technology and skills which are frequently in short supply

d. Increases both national employment and domestic wages

e. All of the above

237. Construction of new plants abroad requires demand forecast. Such a demand forecast

does not depend on the following ___.

a. Political system

b. Competition

c. Income

d. Population

e. Economic conditions

238. Total private flows to developing countries grew more than ___ fold between 1992 and

1999.

a. Eight

b. Nine

c. Ten

d. Eleven

e. Twelve

239. Local companies often control the channels of distribution, the financial resources, and

the marketing know-how, but they _____.

a. Do not have competent managers to efficiently run daily operations

b. Do not have access to raw materials

c. Do not have the products for marketing to capitalize on their unique market

position

d. Need the support and experience of multinational companies

e. Are overwhelmed by the strength of multinational companies

240. Like all aspects of good business, successful licensing requires _____.

a. Good luck

62

b. Management and planning

c. Heavy investment in capital markets

d. A bureaucratic hierarchy

e. Support from a multinational company

241. Since the mid-1990s, ___ has become the largest component of external financing to

developing countries.

a. Bank financing

b. Official flows

c. Bond financing

d. Foreign direct investments

e. Equity financing

242. Which of the following statements is false?

a. A merger is a transaction that combines two companies into one new company.

b. An acquisition is the purchase of one firm by another firm.

c. A tender offer is an offer to sell a certain number of shares.

d. Keiretsu is a japanese word that stands for financially linked groups of firms.

e. Cross-holdings in japan have recently weakened.

243. The use of the purchase-of-assets method in case of a merger creates ___.

a. Goodwill

b. Actual profits

c. Additional expenses

d. Additional sales

e. Additional market share

244. Newman said that a growth-oriented company can globally close several types of growth

gaps between its sales potential and its current actual performance. These gaps do not include

___.

63

a. A product-line gap

b. A distribution gap

c. A local gap

d. A usage gap

e. A competitive gap

245. Implications of increased private-investment flows include _____.

a. Broader choices and higher returns for investors

b. Higher world-wide interest rates

c. Hindering some capital flows to industrial countries

d. All of the above


246. Which of the following is not an oligopoly-created advantage of foreign investment for

investing firms?

a. Proprietary technology

b. Management know-how

c. Access to scarce raw materials

d. All of the above

e. Political advantage

247. A merger can affect the following except ___.

a. Earnings before taxes

b. Employee health care

c. Taxes

d. Capitalization rate

e. Debt capacity

248. A company's acquisition of another firm is economically justified only if _____.

64

a. The bought out firm is undervalued

b. It improves cash flow

c. The market of the new company is increased

d. It increases the total value of the firm

e. It is bought on an all cash basis

249. The appropriate mix of debt and equity ___ the overall cost of capital.

a. Increase

b. Reduce

c. Does not change

d. Unknown

e. A and b

250. The economic cycles of different countries _____.

a. Are tied to the correlation of multinational companies working in those countries

b. Are required to be unsynchronized

c. Tend to be the mostly synchronized

d. Tend to be totally synchronized

e. Do not tend to be totally synchronized

251. The tax benefit for mergers comes from the fact that the tax loss carryforward _____

unless the firm makes sufficient profits to offset it completely.

a. Does not expire at any moment

b. Expires at the end of ten years in the united states

c. Expires at the end of a specified number of years

d. Cannot expire during the first five years in japan


252. When a profitable company acquires companies with a large tax loss carryforward, the

merger _____.

65

a. Increases its net operating income after taxes

b. Decreases its net operating income after taxes

c. Increases its net operating income before taxes

d. Decreases its net operating income before taxes

e. Neither decreases nor increases it nets operating income before taxes

253. Foreign companies with more favorable accounting and tax laws _____ bid higher prices

for target companies.

a. Always

b. Cannot

c. May be able to

d. May not be able to


254. An important advantage of mergers is the fact that _____.

a. Increased productivity is guaranteed in larger companies

b. Larger companies acquire a greater tax advantage

c. Smaller companies acquire a greater tax advantage

d. Earnings of smaller companies are capitalized at lower rates

e. Earnings of larger companies are capitalized at lower rates

255. The potential benefit of international acquisition is the _____.

a. Greater tax base of the newly acquired company

b. Guaranteed larger rate of return for the acquiring company

c. Lower required rate of return for the acquiring company

d. Guaranteed lower required rate of return for the bought-out company

e. Guaranteed larger rate of return for the bought-out company

256. The appropriate mix of debt and equity reduces the overall cost of capital and therefore

______.

66

a. Raises the book value of the firm

b. Raises the market value of the firm

c. Lowers the market value of the firm

d. Lowers the book value of the firm

e. Raises the market and book value of the firm

258. Factors affecting international acquisitions exclude _____.

a. Smaller taxes

b. Greater taxes

c. Higher earnings after taxes

d. Lower capitalization rate

e. Higher earnings before taxes

259. The market-based system of corporate governance is primarily used in ___.

a. South Africa

b. the United States

c. Japan

d. Mexico

e. China

260. The bank-based system of corporate governance is primarily used in ___.

a. Japan

b. the United States

c. the United Kingdom

d. Canada

e. North America

261. Two major reasons for the continuous growth of foreign direct investment in developing

countries are___.

67

a. High wages and highly skilled workers

b. Various incentive programs and high wages

c. Market-based capitalism and low wages

d. Productivity and tax concessions

e. Various incentive programs and emerging market-based capitalism

262. Which of the following is not a step for determining the value of a firm:

a. Determine the earnings after taxes the company expects to produce

b. Determine the capitalization rate for the company’s earnings

c. Determine the extent to which the company may be leveraged or the adequate

amount of debt

d. Determine the likelihood of increased or decreased debt

e. Determine earnings before taxes multiplied by (1 – tax rate)

263. Which of the following is not true of foreign direct investment in developing countries:

a. China receives more FDI than the United States

b. Latin American and the Caribbean have seen a decrease in investment

c. South America receives the greatest amount of FDI

d. the process of privatization has moved to completion in many developing

countries

e. there has been decline in investment in developing countries

264. In a foreign investment analysis, the most important variable a company must forecast is.

a. Net cash flow

b. Net earnings

c. Market price of the company stock

d. Book value of the company stock

e. Labor cost

68

265. Which of the following is not directly related to the cash flow analysis of a foreign

investment project?

a. Foreign royalty payments

b. Foreign taxes

c. Foreign exchange rate changes

d. Management changes

e. Demand forecast

266. In a foreign investment analysis, which of the following objectives is most important and

relevant?

a. To maximize the project cash flows

b. To maximize the parent cash flows

c. To maximize the project earnings

d. To maximize the overall parent earnings

e. To maximize the subsidiary cash flows

267. If a foreign project is financed entirely by local financing sources, which of the following

is most important and relevant in the project analysis?

a. Analysis of the overall weighted average cost of capital

b. Comparison of the internal rate of return with the incremental cost of capital in a

foreign subsidiary

c. Analysis of the stock price

d. Analysis of the exchange risk

e. Analysis of the political environment

268. The variables needed to calculate the cost of equity using the dividend valuation model

do not include .

a. Expected dividend payments

b. The current market price of stock

c. Annual dividend growth rate

69

d. Earnings growth rate

e. A, b, and c

269. In an international capital project analysis, is not a major cause of the systematic

risk?

a. Worldwide recessions

b. Worldwide wars

c. Worldwide energy supply

d. Both a and c

e. Host-country's exchange controls

270. Which of the following capital budgeting techniques is considered to be superior to other

methods?

a. The average rate of return

b. The payback method

c. The net present value method

d. The rule-of-thumb methods

e. Both a and d

271. Many multinational companies use the risk-adjusted discounted rate and increase the

discount rate if a country's risk is .

a. Lower than normal risk

b. The same as normal risk

c. Greater than normal risk

d. Cannot tell

e. All of the above

272. In a foreign investment analysis, the certainty-equivalent approach adjusts for risk in the

following variable .

a. The cost of capital

b. Net cash flow

70

c. Inflation rate

d. Interest rate

e. Unemployment rate

273. The last three phases of a foreign investment analysis are:

a. Implementation, control, and post audit

b. Implementation, control, and the publication of annual financial reports

c. Implementation, post audit, and planning

d. Control, post audit, and planning

e. Control, search for projects, and planning

274. The portfolio theory relies on the following variable(s) .

a. Risk

b. Project maturity

c. Project return

d. Both a and c

e. Both b and c

275. When net present value and internal rate of return produce different answers, net present

value is better because:

a. The net present value is easier to compute than the internal rate of return

b. The primary goal of a firm is to maximize the value of the firm, which coincides

with the net present value approach

c. The internal rate of return assumes a constant reinvestment rate

d. A single project may have more than one internal rate of return

e. All of the above

276. A review of the literature on foreign direct investment reveals the following:

a. Multinational firms should value only those cash flows which can be repatriated

b. Multinational firms should use discounted cash flow methods

71

c. Multinational firms should use their weighted average cost of capital

d. A and b

e. A, b, and c

277. Portfolio theory deals with the selection of investment projects that would.

a. Maximize profit

b. Minimize risk

c. Maximize the rate of return for a given level of risk

d. Minimize risk for a given level of return

e. C and d

278. Use the following information to answer the next three questions:

A foreign investment project with an initial cost of $15,000 is expected to produce net cash flows

of $8,000, $9,000, $10,000, and $11,000 for each of the next four years. The firm's cost of

capital is 12 percent, but the international financial manager perceives the risk of this particular

project is much higher than 12 percent. The international financial manager feels that a 20

percent discount rate would be appropriate for the project.

What is the payback period of the project?

a. 1.8 years.

b. 2.5 years.

c. 2.7 years.

d. 3.0 years.

e. 4.0 years.

279. What is the net present value of the project at the firm's cost of capital?

a. About $15,033.

b. About $13,433.

c. About $11,533

d. About $10,433

e. $12,000.

72

280. What is the risk-adjusted net present value of the project?

a. about $9,002

b. about $8,502

c. about $7,900

d. about $7,400

e. $8,000.

281. A multinational company is considering the establishment of a two-year project in

Germany with a $8 million initial investment. The company's cost of capital is 12 percent. The

required rate of return on this project is 18 percent. The project with no salvage value after two

years is expected to generate net cash flows of DM12 million in year 1 and DM30 million in year

2. Assume no taxes and a stable exchange rate of $0.60 per mark. What is the net present value

of the project in dollar terms?

a. About $30 million

b. About $12 million

c. About $11 million

d. About $10 million

e. About $ 8 million

282. A foreign project has an initial investment of $1,400. Its net cash flows are expected to be

$900, $1,000, and $1,400 for each of the next three years. The certainty equivalent coefficients

of the project are 0.75, 0.55, and 0.35 for each of the next three years. With a 6-percent riskless

rate of return, determine the certain net present value of the project.

a. About $138

b. About $458

c. About $1,508

d. About $2,508

e. About $2,408

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283. Which of the following is not a major political risk listed in a study by Goddard?

a. Expropriation

b. Restrictions on remittances of dividends

c. Tax law changes

d. Exchange controls

e. High inflation rates

284. Which of the following is not a major reason for the nationalization of both foreign and

domestic companies by many governments?

a. The government believes that it could run the business more efficiently

b. The government believes that companies are concealing their profits

c. Politicians wish to win popular support as they save jobs by nationalizing

d. The government wants to operate business firms

e. The government can control a company or industry

285. According to a study by Kennedy, the largest number of expropriations took place

between .

a. 1970 and 1979

b. 1980 and 1989

c. 1960 and 1969

d. 1950 and 1959

e. 1990 and 1999

286. A significant upsurge in expropriation will not return in the future because ___.

a. The International demonstration effect discourages expropriation

b. The economic consequences of mass expropriation have been negative

c. The loss of sovereignty over some sectors may be politically accepted

d. Foreign aids from socialist countries have almost disappeared

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e. All of the above

287. Some popular techniques of political-risk assessment include the following .

a. The delphi technique

b. The grand tour

c. Old hand

d. Quantitative analysis

e. All of the above

289. The grand tour relies on the visiting the countries where investment is considered.

a. Opinions of company executives

b. Gut feeling of independent advisors

c. Opinions of bankers

d. Opinions of government officials


290. The Delphi technique of political risk analysis involves .

a. Compiling the opinions of independent experts

b. Using an outside consultant

c. Executive visits to a country

d. All of the above

e. Both b and c

291. Defensive measures before investment to avoid political risk of a foreign project include.

a. Planned divestment

b. Joint venture with local partner

c. Adapting to host-country goals

d. Concession agreements

e. All of the above

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292. To become a good citizen of a host country, the multinational company should take the

following actions except ___.

a. Use a large amount of locally-supplied raw materials

b. Hire local people for managerial positions

c. Maintain a competitive edge

d. Deflate the subsidiary's profits

e. Make the equity of the subsidiary available to local investors

Quan Trong_Multinational Financial Management_292

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