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When discussing the structure of corporate governance, the authors distinguish between
internal and external factors. ________ is an example of an internal factor, and
________ is an example of an external factor.
A) Equity markets; executive management
B) Debt markets; board of directors
C) Executive management; auditors
D) Auditors; regulators
Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation
rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative
purchasing power parity to estimate the one-year spot rate of krone per dollar.
A) 7.87 krone per dollar
B) 8.10 krone per dollar
C) 8.34 krone per dollar
D) There is not enough information to answer this question.
A ________ is the term used to describe a foreign currency agreement between two
parties to exchange a given amount of one currency for another, and after a period of
time, to give back the original amounts.
A) matched flow
B) currency swap
C) back-to-back loan
D) none of the above
________ is the risk that the host government will take specific steps that prevent the
foreign affiliate from exercising control over the firm's assets.
A) Inconvertibility
B) Expropriation
C) Business income risk
D) none of the above
A review of the evolution of the Global Monetary System shows that capital flows
dominate trade in which of the following eras EXCEPT:
A) Classical Gold Standard
B) Fixed Exchange Rates, 1945-1973
C) The Floating Era, 1973-1997
D) The Emerging Era, 1997-Present
Which of the following is generally unnecessary in measuring the cost of debt?
A) a forecast of future interest rates
B) the proportions of the various classes of debt a firm proposes to use
C) the corporate income tax rate
D) All of the above are necessary for measuring the cost of debt.
Capital market segmentation is a financial market imperfection caused mainly by:
A) government constraints.
B) institutional practices.
C) investor perceptions.
D) all of the above
For the most part, U.S. SEC disclosure requirements are ________ other, non-U.S.
equity market rules.
A) more stringent than
B) less stringent than
C) equally stringent to
D) none of the above
Bacon Signs Inc. is based in a country with a territorial approach to taxation but
generates 100% of its income in a country with a worldwide approach to taxation. The
tax rate in the country of incorporation is 25%, and the tax rate in the country where
they earn their income is 50%. In theory, and barring any special provisions in the tax
codes of either country, Bacon should pay taxes at a rate of ______ in the country of
incorporation.
A) 75%.
B) 62.5%.
C) 0%.
D) 50%.
A/An ________ letter of credit is intended to serve as a means of arranging payment,
but not as a guarantee of payment.
A) irrevocable
B) revocable
C) confirmed
D) unconfirmed
Foreign exchange ________ earn a profit by a bid-ask spread on currencies they
purchase and sell. Foreign exchange ________, on the other hand, earn a profit by
bringing together buyers and sellers of foreign currencies and earning a commission on
each sale and purchase.
A) central banks; treasuries
B) dealers; brokers
C) brokers; dealers
D) speculators; arbitrageurs
The Shareholder Wealth Maximization Model (SWM):
A) combines the interests and inputs of shareholders, creditors, management,
employees, and society.
B) is being usurped by the Stakeholder Capitalism Model as those types of MNEs
dominate their global industry segments.
C) clearly places shareholders as the primary stakeholder.
D) is the dominant form of corporate management in the European-Japanese
governance system.
Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric
motorcycles both domestically and internationally. A sudden and unexpected
appreciation of the U.S. dollar should allow sales to ________ at home and ________
abroad. (Assume other factors remain unchanged.)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
The ability of a country to profit from its ability to print money is known as:
A) profiteering.
B) dollarization.
C) seignorage.
D) inflation.
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. After the fact, under which set of circumstances would you
prefer strategy #1? (Assume your firm is borrowing money.)
A) Your credit rating stayed the same and interest rates went up.
B) Your credit rating stayed the same and interest rates went down.
C) Your credit rating improved and interest rates went down.
D) Not enough information to make a judgment.
A firm whose equity has a beta of 1.0:
A) has greater systematic risk than the market portfolio.
B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true.
Translation exposure measures:
A) changes in the value of outstanding financial obligations incurred prior to a change
in exchange rates.
B) the potential for an increase or decrease in the parent company's net worth and
reported net income caused by a change in exchange rates since the last consolidation
of international operations.
C) an unexpected change in exchange rates impact on short run expected cash flows.
D) none of the above
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or
that your credit rating might improve. The risk of strategy #2 is: (Assume your firm is
borrowing money.)
A) that interest rates might go down or that your credit rating might improve.
B) that interest rates might go up or that your credit rating might improve.
C) that interest rates might go up or that your credit rating might get worse.
D) none of the above
Financial globalization has not resulted in:
A) continuing imbalances of balance of payments.
B) an increase in quantity and speed in the flow of capital across the world.
C) capital markets less open and a decrease in the availability of capital for many
organizations.
D) uniform ways of ownership, control, and governance across the world.
Instruction 18.1:
Use the information to answer the following question(s).
The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers,
scooters and other wheeled non-motorized recreational equipment is considering an
expansion of their product line to Europe. The expansion would require a purchase of
equipment with a price of euro 1,200,000 and additional installation of euro 300,000
(assume that the installation costs cannot be expensed, but rather, must be depreciated
over the life of the asset). Because this would be a new product, they will not be
replacing existing equipment. The new product line is expected to increase revenues by
euro 600,000 per year over current levels for the next 5 years, however; expenses will
also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash
flows in years 1-5 are equal, and that the terminal value of the project in year 5 may
change total after-tax cash flows for that year.) The equipment is multipurpose and the
firm anticipates that they will sell it at the end of the five years for euro 500,000. The
firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is
straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial
investment (at year 0) also requires an increase in NWC of euro 100,000 (to be
recovered at the sale of the equipment at the end of five years). The current spot rate is
$0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year
in Europe.
Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid
Revolutions project?
A) €400,000
B) €240,000
C) €120,000
D) €360,000
Under the U.S. method of translation procedures, if the financial statements of the
foreign subsidiary of a U.S. company are maintained in the local currency, and the U.S.
dollar is the functional currency, then:
A) translation is not required.
B) translation is accomplished through the current rate method.
C) translation is accomplished through the temporal method.
D) none of the above
Individual borrowers — whether they be governments or companies — possess their
own individual credit rating, the market's assessment of their ability to repay debt in a
timely manner. These credit assessments influence all the following EXCEPT:
A) cost of capital
B) access to capital
C) credit risk premium
D) risk-free rate
The United Kingdom and United States together make up nearly ________ of daily
currency trading.
A) 30%
B) 40%
C) 50%
D) 60%
Which of the following is NOT an example of a form of political risk that might be
avoided or reduced by foreign exchange risk management?
A) expropriation of assets
B) destruction of raw materials through natural disaster
C) war
D) unfavorable legal changes
Which of the following is NOT true regarding the stakeholder capitalism model?
A) Banks and other financial institutions are less important creditors than securities
markets.
B) Labor unions are more powerful than in the Anglo-American markets.
C) Governments interfere more in the marketplace to protect important stakeholder
groups.
D) All of the above are TRUE.
The two major concerns about foreign direct investment are:
A) national defense and taxes.
B) who controls the assets and who receives the profits.
C) who receives the profits and taxes.
D) who pays the taxes and who receives the taxes.
Relatively high costs of capital are more likely to occur in:
A) highly illiquid domestic securities markets.
B) highly liquid domestic securities markets.
C) unsegmented domestic securities markets.
D) none of the above
Which of the following led to the eventual demise of the fixed currency exchange rate
regime worked out at Bretton Woods?
A) widely divergent national monetary and fiscal policies among member nations
B) differential rates of inflation across member nations
C) several unexpected economic shocks to member nations
D) all of the above
Among IMF member countries since 2010 the dominating exchange rate regime has
been:
A) hard peg.
B) soft peg.
C) floating arrangements.
D) residual agreement.
In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$,
thus, the Argentine Peso ________ against the U.S. dollar.
A) strengthened
B) weakened
C) remained neutral
D) all of the above
Of the following, which is NOT cited by the authors as an example of tax haven:
A) Ireland
B) Bermuda
C) Cayman Islands
D) Bahamas
The following is an example of an American term foreign exchange quote:
A) $20/£
B) €0.85/$
C) ¥100/€
D) none of the above
