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Chapter 01: Multinational Financial Management: An Overview
44. Assume that an American firm wants to engage in international business without making a major investment in the
foreign country. Which method is least appropriate in this situation?
a.
international trade
b.
licensing
c.
franchising
d.
direct foreign investment
45. The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows
remitted by the subsidiaries.
a.
True
b.
False
46. An MNC's value depends on all of the following, except:
a.
the MNC's required rate of return.
b.
the amount of the MNC's cash flows in a particular currency.
c.
the exchange rate at which cash flows are converted to dollars.
d.
all of the above factors
47. Which of the following is not an example of political risk?
a.
Government may impose taxes on a subsidiary.
Chapter 01: Multinational Financial Management: An Overview
b.
Government may impose barriers on a subsidiary.
c.
Consumers may boycott the MNC.
d.
Consumers' income levels may decrease, thus decreasing consumption.
48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an
MNC
a.
True
b.
False
49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of
the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.
a.
True
b.
False
50. Compared to other methods of international business, international trade generally results in ____ exposure to
international political risk and ____ exposure to international economic conditions.
a.
higher; lower
b.
higher; higher
c.
lower; higher
d.
lower; lower
51. Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan.
Which method of international business is most appropriate for Boca Co?
a.
joint venture
b.
licensing
c.
partial acquisition of an existing Japanese firm
d.
establishment of a Japanese subsidiary
52. A decentralized management style results in relatively high agency costs for an MNC.
a.
True
b.
False
53. MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows
them to avoid exchange rate risk.
a.
True
b.
False
54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from
Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and the euro's
value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of
Live Co?
a.
$200,000
b.
$559,500
c.
$582,500
d.
$393,500
55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this
subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could
have caused this decline in value?
a.
a weaker Mexican economy
b.
lower Mexican interest rates
c.
depreciation of the Mexican peso
d.
appreciation of the Mexican peso.
56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit
earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while
Jensen establishes the new subsidiary and ____ when the subsidiary starts operations.
a.
depreciates; appreciates
b.
appreciates; appreciates
c.
appreciates; depreciates
d.
depreciates; depreciates
57. A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC.
a.
True
b.
False
58. In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would
for its domestic projects.
a.
True
Chapter 01: Multinational Financial Management: An Overview
b.
False
59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits
half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is
expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are
the expected dollar cash flows of Livingston Co.?
a.
$100,000
b.
$200,000
c.
$160,000
d.
$60,000
60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its
value should increase if the value of the euro weakens over time.
a.
True
b.
False
61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they
automatically maximize the value of the entire corporation.
a.
True
b.
False
62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary,
may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's
operations.
a.
True
b.
False
63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold
stock in MNCs
a.
True
b.
False
64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial
condition of their firm.
a.
True
b.
False
65. The theory of comparative advantage begins by assuming that a given firm first becomes established in its home
country and may subsequently penetrate foreign markets via geographic or product differentiation.
a.
True
b.
False
66. Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can
Chapter 01: Multinational Financial Management: An Overview
capitalize on a foreign country's resources.
a.
True
b.
False
67. Under the product cycle theory, foreign demand can be initially satisfied by exporting.
a.
True
b.
False
68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries
a.
True
b.
False
69. International trade is the most common form of direct foreign investment (DFI).
a.
True
b.
False
70. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of
the home currency.
a.
True
b.
False
71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.
a.
True
b.
False
72. One form of exposure to political risk is terrorism
a.
True
b.
False
73. The goal of an MNC is to:
a.
minimize taxes on funds remitted from foreign subsidiaries.
b.
establish subsidiaries in any country where operations would provide a return over and above the cost of
capital, even if better projects are available domestically.
c.
maximize shareholder wealth.
d.
maximize the social benefits resulting from actions such as the employment of foreign managers.
74. Agency costs faced by MNCs may be larger than those faced by purely domestic firms because:
a.
monitoring of managers located in foreign countries is more difficult.
b.
foreign subsidiary managers raised in different cultures may not follow uniform goals.
c.
MNCs are relatively large.
d.
all of the above
e.
A and B
Chapter 01: Multinational Financial Management: An Overview
75. Which of the following is not one of the more common methods used by MNCs to improve their internal control
process?
a.
establishing a centralized database of information
b.
ensuring that all data are reported consistently among subsidiaries
c.
speeding the process by which all departments and all subsidiaries have access to the data that they need
d.
making executives more accountable for financial statements by personally verifying their accuracy
e.
All of the above are common methods used by MNCs to improve their internal control process
76. Which of the following is not mentioned in the text as a theory of international business?
a.
theory of comparative advantage
b.
imperfect markets theory
c.
product cycle theory
d.
globalization of business theory
e.
All of the above are mentioned in the text as theories of international business
77. When conducting international business, firms generally face the most risk when they:
a.
engage in franchising.
b.
make acquisitions of existing operations.
c.
establish new subsidiaries.
d.
engage of international trade.
e.
B and C
78. The least risky method by which firms conduct international business is:
a.
franchising
b.
acquisitions of existing operations.
c.
international trade.
d.
the establishment of new subsidiaries.
e.
licensing
79. Which of the following does not constitute a form of direct foreign investment?
a.
franchising
b.
international trade
c.
joint ventures
d.
acquisitions of existing operations
e.
establishment of new foreign subsidiaries
