1) the price of a mcdonald’s big mac sandwich
a.is about the same in the 120 countries that mcdonalds does business in
b.varies considerably across the world in dollar terms
c.supports ppp
d.none of the above
2) consider the following international investment opportunity. it involves a gold mine
that can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
the current exchange rate is $1.60 = 1.00. the inflation rate in the u.s. is 6 percent and in
the euro zone 2 percent. the appropriate cost of capital to a u.s.-based firm for a
domestic project of this risk is 8 percent.
find the dollar cash flows to compute the dollar-denominated npv of this project.
please note that your answer is worth zero points if it does not contain currency
symbols.
3) what is the objective of managing operating exposure?
a.stabilize accounting results in the face of fluctuating exchange rates
b.selecting low cost production sites
c.increase the variability of cash flows in the face of fluctuating exchange rates
d.none of the above
4) you will get more diversification
a.across industries than across countries
b.across countries than across industries
c.across stocks and bonds than across countries
d.none of the above
5) international trade is more difficult and risky from the exporter’s perspective than is
domestic trade because
a.the exporter may not be familiar with the buyer, and thus not know if the importer is a
good credit risk
b.if the merchandise is exported abroad and the buyer does not pay, it may prove
difficult, if not impossible, for the exporter to have any legal recourse
c.political instability makes it risky to ship merchandise abroad certain to parts of the
world
d.all of the above
6) ecuador does not have its own national currency, circulating the u.s. dollar instead.
about how many countries do not have their own national currency?
a.10
b.20
c.30
d.40
7) an american hedge fund is considering a one-year investment in an italian
government bond with a one-year maturity and a euro-denominated rate of return of i =
5%. the bond costs 1,000 today and will return 1,050 at the end of one year without
risk. the current exchange rate is 1.00 = $1.50. u.s. dollar-denominated government
bonds currently have a yield to maturity of 4%. suppose that the european central bank
is considering either tightening or loosening its monetary policy. it is widely believed
that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
find the npv in euro for the american firm if they wait one year to undertake the project
after the exchange rate falls to s1($|) = $1.40 per . assume that i doesn’t change.
8) under the pure flexible exchange rate regime
a.the combined balance on the current and capital accounts will be equal in size, but
opposite in sign, to the change in the official reserves
b.the balance on the current and capital accounts will be equal in size, but opposite in
sign
c.a current account surplus or deficit must be matched by an official reserves deficit or
surplus
d.a capital account surplus or deficit must be matched by an official reserves deficit or
surplus
9) the otc market
a.does not accept creditthe dealers “only take cash”
b.is a dealer market
c.includes the nasdaq in the u.s
d.both b and c
10) the required return on equity for a levered firm is 10.60%. the debt to equity ratio is
the tax rate is 40%, the pre-tax cost of debt is 8%. find the cost of capital if this firm
were financed entirely with equity.
a.10%
b.12%
c.8.67%
d.none of the above
11) nestl, a well-known swiss corporation,
a.has been a paragon of virtue in its opposition to all forms of political risk
b.at one time placed restrictions on foreign ownership of its stock. when it relaxed these
restrictions, the total market value of the firm fell
c.at one time placed restrictions on foreign ownership of its stock. when it relaxed these
restrictions, there was a major transfer of wealth from foreign shareholders to swiss
shareholders
d.none of the above
12) which of the following statements is false?
a.most income statement items under the current/noncurrent method are translated at
the average exchange rate for the accounting period
b.under the current/noncurrent method, revenue and expense items that are associated
with current assets or liabilities, such as depreciation expense, are translated at the
historical rate that applies to the applicable balance sheet item
c.under the current/noncurrent method, revenue and expense items that are associated
with noncurrent assets or liabilities, such as depreciation expense, are translated at the
historical rate that applies to the applicable balance sheet item
d.depreciation expense is translated at the historical rate that applies to the applicable
depreciable asset items
13) suppose that country a is twice as good at producing widgets as country b. if the
currency of b is twice as valuable as the currency of a,
a.the comparative advantage will be canceled out
b.trade will be an improved outcome for both a and b
c.the comparative advantage could possible be canceled out depending on how much it
costs to produce the widget in country b
d.none of the above
14) many companies issue shares with differential voting rights, deviating from the
one-share one-vote principle.
a.by accumulating superior voting shares, investors can acquire cash flow rights
exceeding control rights
b.the price of the voting shares is usually twice the price of the voting shares
c.by accumulating superior voting shares, investors can acquire control rights exceeding
cash flow rights
d.none of the above
15) which will reduce the number of foreign exchange transaction the most for a mnc?
a.multilateral netting
b.bilateral netting
c.fish netting
d.none of the above
16) assume that a product has the following three stages of production:
if the value-added tax (vat) rate is 15%, what would be the vat over all stages of
production?
a.90
b.120
c.465
d.225
17) the official reserve account includes
a.the export and import of goods and services
b.all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses
c.all purchases and sales of international reserve assets such as dollars, foreign
exchanges, gold, and special drawing rights (sdrs)
d.none of the above
18) the boomerang effect
a.the possibility that if the secret formula of coca-cola were leaked, that other firms
would come up with similar products and hurt coca-cola’s sales
b.the possibility that fdi in an undeveloped nation will lead to a group of workers who
have enough money to afford the firm’s products, leading to an increase of sales and
increase of workers and so on
c.the possibility that fdi in an undeveloped nation will lead to a group of domestic
workers no longer have enough money to afford the firm’s products, leading to an
decrease of sales
d.none of the above
19) suppose you observe the following exchange rates: 1 = $1.25; £1 = $2.00. calculate
the euro-pound exchange rate.
a.1 = £1.60
b.1 = £0.625
c.2.50 = £1
d.1 = £2.50