21
37) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:
Disbursement From:
Receipts by:
France
Britain
U.S.
France
€
500
€
800
Britain
£
300
£
400
U.S.
$
1,000
$
500
The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home currency.
Use multilateral netting to find the net payments to and from all parties.
Which of the following is an accurate chart of their current situation?
A)
B)
C)
D) none of the options
23
38) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:
Disbursement From:
Receipts by:
France
Britain
U.S.
France
€
500
€
800
Britain
£
480
£
300
U.S.
$
600
$
960
The spot exchange rates are $1.20 = €1.00 and $2.00 = £1.00; affiliates get paid in home currency.
Use multilateral netting to find the net payments to and from all parties.
Which of the following is an accurate chart of their current situation?
A)
B)
C)
D) none of the options
39) Simplify the following set of intra company cash flows for this U.S. firm.
Use the following exchange rates:
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
The fewest number of intra-affiliate cash flows is
A) zero.
B) one.
C) two.
D) three.
40) Simplify the following set of intra-company cash flows for this Swiss firm.
Use the following exchange rates:
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
The fewest number of intra-affiliate cash flows is
A) zero.
B) one.
C) two.
D) three.
41) Which will reduce the number of foreign exchange transactions the most for an MNC?
A) Multilateral netting
B) Bilateral netting
C) Fish netting
D) none of the options
42) 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.
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 options
43) 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.
D) none of the options
44) 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 $1.50 = €1.00. The net payment between A and B should be
closest to
A) $2,000 from B to A.
B) €2,000 from A to B.
C) $1,000 from B to A.
D) none of the options
45) For the U.S. affiliate shown below, net all its inter-affiliate receipts against all its
disbursements.
Use the following exchange rates.
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
The net inter-affiliate cash flow for the U.S. affiliate is
A) $0.
B) −$135.
C) $135.
D) $405.
46) The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method.
This method is difficult to apply in practice because many factors enter into the pricing of goods
and services. Examples include
A) differences in the terms of sale.
B) differences in quantity and or quality sold.
C) differences in location or date of sale.
D) all of the options
47) Ad valorem duties are best described as
A) a percentage tax levied at customs on the assessed value of the imported good.
B) a value-added tax on domestic production.
C) a percentage tax levied at customs on the value added by shipping the good.
D) none of the options
48) According to a recent survey by Ernst and Young, the most important tax issue that
multinational enterprises now face is
A) transfer pricing.
B) choice of accounting method to use in preparing consolidated income statements when firms
have subsidiaries in countries with different tax treatments of expense items.
C) choice of accounting method to use in preparing consolidated income statements when firms
have subsidiaries in countries with different tax treatments of income recognition.
D) none of the options
49) Which of the following statements about transfer pricing is true?
A) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division.
B) Very high markup policy used in the transfer pricing to a subsidiary makes the adjusted present
value (APV) of that subsidiary’s capital expenditure appear less attractive.
C) Very low markup policy used in the transfer pricing to a subsidiary makes the adjusted present
value (APV) of that subsidiary’s capital expenditure appear less attractive.
D) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division. In addition, very high markup policy used in the transfer pricing to a
subsidiary makes the adjusted present value (APV) of that subsidiary’s capital expenditure appear
less attractive.
50) The lower the transfer price
A) the higher the net profit reported by the MNC.
B) the lower the gross profit of the transferring division relative to the receiving division.
C) the higher the gross profit of the receiving division relative to the transferring division.
D) none of the options
51) Multinational cash management
A) is really no different for an 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.
D) none of the options
52) In reference to establishing “transfer prices” between the affiliates of an MNC, which of the
following relates to the “resale” price approach?
A) Comparable uncontrolled price between unrelated firms.
B) The price at which the good is resold by the distribution affiliate is reduced by an amount to
cover overhead costs and a reasonable profit.
C) Assumes that the manufacturing cost is readily available.
D) Is based on financial and economic models and econometric techniques.
53) “Unbundling fund transfers” from an MNC and to its affiliates refers to the following activity:
A) instead of lumping all costs into a single transfer price, for the MNC (parent firm) to recognize
the cost of the physical good and each service separately that it provides to its affiliates.
B) in addition to charging for the cost of the physical good, for the parent firm to charge for
technical training of the affiliates’ staff, cost of worldwide advertising, royalty, licensing fee, and
technology, whenever applicable, to facilitate for the MNC to present and support to the taxing
authority of a host country that each charge is legitimate and can be well substantiated.
C) used for removing blocked funds from a host country that is enforcing foreign exchange
restrictions.
D) all of the options
54) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at $1,000,
but it can go as high as $1,250.
Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is
used.
A) $250,000
B) $500,000
C) $1,000,000
D) $1,250,000
55) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at $1,000,
but it can go as high as $1,250.
Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate the
increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A) $50,000
B) $100,000
C) $125,000
D) $250,000
56) Which term correctly describes the following situation? When a country imposes exchange
restrictions on its own currency, limiting conversion to other currencies, an MNC’s frustrated
remittance of profits from a subsidiary would be
A) blocked funds.
B) stopped funds.
C) constipated funds.
D) money down the toilet.
57) On blocked funds strategy is
A) transferring personnel from corporate headquarters to the subsidiary offices.
B) using the national airlines of the host country when possible for the international travel of all
MNC executives.
C) holding business conferences of the MNC in the host country, where all expenses are paid by
the local subsidiary.
D) all of the options
58) Reasons for a country to impose exchange restrictions on its own currency, limiting conversion
to other currencies include
A) enticing more foreign investment from MNCs.
B) for a variety of reasons, the country may find itself short of foreign currency reserves.
C) creating a home-grown business climate.
D) all of the options
59) Why can blocked funds be detrimental to all concerned?
A) Host countries want to attract foreign industries that benefit their economic development;
blocked funds make MNCs less willing to invest.
B) MNCs should not be expected to make beneficial investment where they may not be able to
receive an appropriate return.
C) Local competitors may be able to reap monopoly profits.
D) Host countries want to attract foreign industries that benefit their economic development;
blocked funds make MNCs less willing to invest. Additionally, MNCs should not be expected to
make beneficial investment where they may not be able to receive an appropriate return.