1) Which of the following factors is not expected to generally have a favorable impact
on the firm’s cost of capital according to the text?
a. easy access to international capital markets
b. high degree of international diversification
c. high exposure to exchange rate fluctuations
d. all of the above
2) When comparing the forward hedge to the money market hedge, the MNC can easily
determine which hedge is more desirable, because the cost of each hedge can be
determined with certainty.
a. True
b. False
3) The interest rate of euronotes is based on the T-bill rate.
a. True
b. False
4) ____ refers to the purchase of financial obligations, such as bills of exchange or
promissory notes, without recourse to the original holder, usually the exporter.
a. Factoring
b. Accounts receivable financing
c. Forfaiting
d. None of the above
5) Which of the following theories suggests that the percentage difference between the
forward rate and the spot rate depends on the interest rate differential between two
countries?
a. purchasing power parity (PPP)
b. triangular arbitrage
c. international Fisher effect (IFE)
d. interest rate parity (IRP)
6) Which of the following is not a reason why the valuation of a foreign target may vary
among MNCs?
a. Differences in estimated cash flows to be generated by the foreign target
b. Differences in estimated exchange rates
c. Differences in required rates of return
d. All of the above are possible reasons why the valuation of a foreign target may vary
among MNCs
7) Which of the following is not a cost-related motive of direct foreign investment?
a. International diversification
b. Low labor costs
c. Land can be purchased at a low price
d. Manufacturing plants can be built for a low price
8) A firm’s transaction exposure in any foreign currency is based solely on the size of its
open position in that currency.
a. True
b. False
9) In what is known as dynamic hedging, banks always hedge open positions in any
foreign currencies.
a. True
b. False
10) A forecast of a currency one year in advance is typically more accurate than a
forecast one week in advance since the currency reverts to equilibrium over a longer
term period.
a. True
b. False
11) A straddle can only be achieved if the exercise prices of put and call options are the
same.
a. True
b. False
12) The European countries conforming to the euro are completely insulated from
movements in the euro’s value with respect to other currencies.
a. True
b. False
13) Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000
Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is
extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is
$.28, the dollar amount initially obtained from the loan is $____, and $____ are needed
to repay the loan.
a. 375,000; 449,400
b. 449,400; 375,000
c. 6,000,000; 5,357,143
d. 5,357,143; 6,000,000
14) If a U.S. firm’s cost of goods sold in Switzerland is much greater than its sales in
Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses
15) Privatization involves the sale of previously government-owned businesses by the
government.
a. True
b. False
16) Non-deliverable forward contracts (NDFs) are frequently used for currencies in
emerging markets.
a. True
b. False
17) Even if an existing business adds value to an MNC, it may be worthwhile to assess
whether the business would generate more value to the MNC if it was restructured.
a. True
b. False
18) If your firm expects the euro to substantially depreciate, it could speculate by ____
euro call options or ____ euros forward in the forward exchange market.
a. selling; selling
b. selling; purchasing
c. purchasing; purchasing
d. purchasing; selling
19) A currency put option provides the right, but not the obligation, to buy a specific
currency at a specific price within a specific period of time.
a. True
b. False
20) The establishment of a new subsidiary is commonly considered by MNCs because
the cost is less expensive than acquiring a foreign subsidiary of the same size.
a. True
b. False
21) A high home inflation rate relative to other countries would ____ the home
country’s current account balance, other things equal. A high growth in the home
income level relative to other countries would ____ the home country’s current account
balance, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
22) According to the text, there is evidence that the debt ratios (debt/capital) of MNCs
based in:
a. the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany
b. China tend to be generally higher than MNCs headquartered in other non-U.S.
countries
c. the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany
d. A and B
23) A common way to reduce inflation is to weaken the value of the domestic currency.
a. True
b. False
24) Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its
cost of materials attributable to the purchase of Canadian goods is C$7 million. Its
interest expense on Canadian loans is C$5 million. The dollar value of Sarakose’s
“earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the
dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected
25) The interest rate of a country with a currency board:
a. is less stable than it would be without a currency board
b. is typically below the interest rate of the currency to which it is tied
c. will move in tandem with the interest rate of the currency to which it is tied
d. is completely independent of the interest rate of the currency to which it is tied
26) Which of the following is probably not appropriate for an MNC wishing to reduce
its exposure to British pound payables?
a. Purchase pounds forward
b. Buy a pound futures contract
c. Buy a pound put option
d. Buy a pound call option
27) Which one is not a disadvantage of a freely floating exchange rate system?
a. It can adversely affect a country that has high unemployment
b. It can adversely affect a country that has high inflation
c. The government may intervene to change the value of a given currency
d. The exchange rate risk is high and may be costly to manage
28) According to your text, all of the following are factors to be considered in an
international acquisition, except
a. the target’s willingness to be acquired
b. the target’s previous acquisition history
c. the target’s previous cash flows
d. the target’s local economic conditions
29) When assessing a German project administered by a German subsidiary of a
U.S.-based MNC solely from the German subsidiary’s perspective, which variable will
most likely influence the capital budgeting analysis?
a. the withholding tax rate
b. the euro’s exchange rate
c. the U.S. tax rate on earnings remitted to the U.S
d. the German government’s tax rate
e. A and C
30) Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
decide to hedge your position by selling Japanese yen forward. The current spot rate of
the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days
to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from
now?
a. $44,500
b. $45,000
c. $526 million
d. $47,500
31) A foreign subsidiary with more susceptible expenses than revenue to exchange rate
movements will be favorably affected by an appreciation of the foreign currency.
a. True
b. False