12) After the Irish taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Ireland operations is closest to ________.
A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
13) The amount of the taxes paid in dollars for the Japanese operations is closest to
________.
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
14) The amount of the taxes paid in dollars for the Irish operations is closest to ________.
A) $20.5 million
B) $5.1 million
C) $29.5 million
D) $50.0 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
30
23.6 Internationally Segmented Capital Markets
1) All investors in the developed and developing world have access to the inancial
securities in all markets.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) A(n) ________ capital market is one where all investors do not have access to all the
inancial securities in the various markets.
A) integrated
B) divested
C) managed
D) segmented
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange
rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year
interest rate in India?
A) 8.56%
B) 9.24%
C) 9.77%
D) 10.24%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
31
4) The spot exchange rate for Indian Rupees is Rs 42/$. The one-year forward exchange
rate is Rs 43/$ and the one-year U.S. interest rate is 4%. What is the implied one year
interest rate in India?
A) 5.56%
B) 6.48%
C) 7.25%
D) 8.91%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange
rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year
interest rate in India?
A) 6.54%
B) 6.24%
C) 6.77%
D) 6.75%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year
U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied
spot exchange rate in $/Pound.
A) $1.89/pound
B) $1.90/pound
C) $1.92/pound
D) $1.94/pound
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
32
7) The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year
U.S. interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied
spot exchange rate in $/Pound.
A) $1.75/pound
B) $1.79/pound
C) $1.83/pound
D) $1.88/pound
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8) The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year
U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied
spot exchange rate in $/Pound.
A) $1.69/pound
B) $1.72/pound
C) $1.75/pound
D) $1.78/pound
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) The implied foreign interest rate computed using spot and forward exchange rates may
be lower than the actual foreign interest rate if the foreign country has a high ________.
A) default risk
B) inlation risk
C) depreciation risk
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
33
10) A U.S. irm acquires a British irm that will generate cash lows of 10,000 pounds next
year and these cash lows will grow at 6% a year. If the British WACC is 9% and the spot
exchange rate is $1.9/pound, what is the present value (PV) of the cash lows from this
acquisition to domestic shareholders?
A) $633,333
B) $654,876
C) $691,543
D) $716,289
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11) A U.S. irm acquires a British irm that will generate cash lows of 20,000 pounds next
year and these cash lows will grow at 4% a year. If the British WACC is 9% and the spot
exchange rate is $1.8/pound, what is the present value (PV) of the cash lows from this
acquisition to domestic shareholders?
A) $633,333
B) $654,876
C) $691,543
D) $720,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) A U.S. irm acquires a British irm that will generate cash lows of 30,000 pounds next
year and these cash lows will grow at 3% a year. If the British WACC is 9% and the spot
exchange rate is $1.7/pound, what is the present value (PV) of the cash lows from this
acquisition to domestic shareholders?
A) $820,000
B) $850,000
C) $870,000
D) $890,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13) Which of the following statements is FALSE?
A) In some countries, especially in the developing world, all investors do not have equal
34
access to inancial securities.
B) Firms may face diferential access to markets if there is any kind of asymmetry with
respect to information about them.
C) In some cases, a country’s risk-free securities are internationally integrated but markets
for a speciic irm’s securities are not.
D) When countries’ capital markets are not integrated we call them disintegrated capital
markets.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14) Which of the following statements is FALSE?
A) Diferential access to national capital markets is common enough that it provides the
best explanation for the existence of currency swaps, which are like the interest rate swap
contracts, but with the holder receiving coupons in one currency and paying coupons
denominated in a diferent currency.
B) Currency swaps generally also have inal face value payments, also in diferent
currencies.
C) Using a currency swap, a irm can borrow in the market where it has the best access to
capital, and then “swap” the coupon and principal payments to whichever currency it would
prefer to make payments in.
D) With diferential access to national markets, to maximize shareholder value, the irm
should raise capital in the foreign market; the method of valuing the foreign project as if it
were a domestic project would then provide the correct net present value (NPV).
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
35
15) Which of the following statements is FALSE?
A) Many countries regulate or limit capital inlows or outlows, and many do not allow their
currencies to be freely converted into dollars, thereby creating capital market
segmentation.
B) The existence of internationally integrated capital markets makes many decisions in
international corporate inance more complicated but potentially more lucrative for a irm
that is well positioned to exploit the market segmentation.
C) Political, legal, social, and cultural characteristics that difer across countries may
require compensation in the form of a country risk premium.
D) Swaps allow irms to mitigate their exchange rate risk exposure between assets and
liabilities, while still making investments and raising funds in the most attractive locales.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16) Which of the following statements is FALSE?
A) The rate of interest paid on government bonds or other securities in a country with a
tradition of weak enforcement of property rights is likely not really a risk-free rate. Instead,
interest rates in the country will relect a risk premium for the possibility of default, so
relations such as covered interest rate parity will likely not hold exactly.
B) If the return diference in a segmented inancial market results from a market friction
such as capital controls, corporations can exploit this friction by setting up projects and
raising capital in the high-return country/currency.
C) Important macroeconomic reasons for segmented capital markets include capital
controls and foreign exchange controls that create barriers to international capital lows
and thus segment national markets.
D) A segmented inancial market has an important implication for international corporate
inance: One country or currency has a higher rate of return than another country or
currency, when the two rates are compared in the same currency.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
36
17) What are internationally segmented capital markets?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
23.7 Capital Budgeting with Exchange Rate Risk
1) Exchange rate risk exists if the irm’s free cash lows are correlated with the spot
exchange rate.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
2) Firms must consider the impact of exchange rate risk if ________ of the project are
afected by exchange rate changes
A) cash lows
B) revenues
C) costs
D) capital costs
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) If the cash lows generated by a foreign investment are ________ with ________, we do not
need to consider the impact of exchange rate risk.
A) uncorrelated, costs
B) negatively correlated, revenues
C) uncorrelated, cash lows
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
37
4) If a irm purchases its inputs and sells its goods in the same foreign market, evaluation
of the project ________.
A) requires us to consider the exchange rate risk of output only
B) requires us to consider exchange rate risk of inputs only
C) does not require consideration of exchange rate risk
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
38