1) since security returns tend to have low correlations among countries,
a.investors can reduce risk more effectively if they diversify their portfolio holdings
internationally rather than purely domestically
b.investors who have a domestically diversified portfolio, with exposures across
industry types will not gain much from diversifying abroad
c.investors who diversify internationally will likely underperform investors who keep
all their investments in one country
d.none of the above
2) the market risk premium
a.can be defined by the difference between the expected market return and the risk-free
rate
b.is the reward for bearing nondiversifiable risk
c.is the slope of the security market line
d.
e.all of the above are correct
3) a typical foreign trade transaction requires three basic documents:
a.letter of credit, time draft, and bill of lading
b.letter of credit, banker’s acceptance, and bill of lading
c.letter of credit, time draft, and a banker’s acceptance
d.none of the above
4) ad valorem duties are best described as
a.an ad valorem duty is 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 above
5) nondollar currency transactions
a.are priced by looking at the price that must exist to eliminate arbitrage
b.allow for triangular arbitrage opportunities to keep the currency dealers employed
c.are only for poor people who don’t have dollars
d.none of the above
6) an uncontrolled foreign corporation is
a.an extension of the parent and is not an independently incorporated firm separate from
the parent
b.an affiliate organization of the mnc that is independently incorporated in the foreign
country, and one in which the u.s. mnc owns at least 51 percent of the voting equity
stock
c.an affiliate organization of the mnc that is independently incorporated in the foreign
country, and one in which the u.s. mnc owns at least 10 percent but less than 50 percent
of the voting equity stock
d.b and c
7) today is january 1, 2009. the state of iowa has offered your firm a subsidized loan. it
will be in the amount of $10,000,000 at an interest rate of 5% and have annual
(amortizing) payments over 3 years. the first payment is due today and your taxes are
due january 1 of each year on the previous year’s income. the yield to maturity on your
firm’s existing debt is 8%. what is the apv of this subsidized loan?
notethatididnotroundmyintermediatesteps.ifyoudid,youranswermaybeoffbyabit.selectthe
answerclosesttoyours.
a.$406,023.10
b.$840,797
c.$64,157.38
d.$20,659.77
e.none of the other answers are within $100 of my answer
8) solve for the weighted average cost of capital:
a.8.67%
b.8.00%
c.7.60%
d.7.33%
e.7.14%
9) through its medium and long-term guaranteeprogram, eximbank helps u.s. exporters
develop and expand their overseas sales by
a.protecting them against loss should a foreign buyer default
b.guaranteeing the loans made by private financial institutions to foreign importers
c.providing liquidity via the purchase of notes issued by eximbank to finance the loans
d.none of the above
10) 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.
what is the dollar-denominated irr of this project?
11) edge act banks are so-called because
a.the are federally chartered subsidiaries of u.s. banks that are physically located in the
united states and are allowed to engage in a full range of international banking activities
b.senator walter e. edge of new jersey sponsored the 1919 amendment to section 25 of
the federal reserve act to allow u.s. banks to be competitive with the services foreign
banks could supply their customers
c.they can only be chartered in states that are on the borders of the united stateson the
“edge” of the map
d.none of the above
12) in the real world, does the cost of capital differ among countries?
a.yes
b.no
c.none of the above
13) company x wants to borrow $10,000,000 floating for 5 years; company y wants to
borrow $10,000,000 fixed for 5 years. their external borrowing opportunities are shown
below:
a swap bank proposes the following interest only swap:
x will pay the swap bank annual payments on $10,000,000 with the coupon rate of
libor; in exchange the swap bank will pay to company x interest payments on
$10,000,000 at a fixed rate of 10.05%. y will pay the swap bank interest payments on
$10,000,000 at a fixed rate of 10.30% and the swap bank will pay y annual payments on
$10,000,000 with the coupon rate of libor – 0.15%.
what is the value of this swap to the swap bank?
a.the swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year
b.the swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year
c.the swap bank will lose money
d.none of the above
14) the strik-it-rich gold mining company is contemplating expanding its operations. to
do so it will need to purchase land that its geologists believe is rich in gold.
strik-it-rich’s management believes that the expansion will allow it to mine and sell an
additional 2,000 troy ounces of gold per year. the expansion, including the cost of the
land, will cost $500,000. the current price of gold bullion is $425 per ounce and
one-year gold futures are trading at $450.50 = $425 (1.06). extraction costs are $375 per
ounce. the firm’s cost of capital is 10 percent.
strik-it-rich’s management is, however, concerned with the possibility that large sales of
gold reserves by russia and the united kingdom will drive the price of gold down to
$390 for the foreseeable future. on the other hand, management believes there is some
possibility that the world will soon return to a gold reserve international monetary
system. in the latter event, the price of gold would increase to at least $460 per ounce.
the course of the future price of gold bullion should become clear within a year.
strik-it-rich can postpone the expansion for a year by buying a purchase option on the
land for $25,000.
what should strik-it-rich’s management do?
15) what is the euro-denominated irr of this project?
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:
16) consider an option to buy £10,000 for 12,500. in the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the
dollar by ten percent. on the other hand, the euro could depreciate against the pound by
20 percent.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
use your results from the last three questions to verify your earlier result for the value of
the call.
17) using your results from parts a and b find the value of this put option (in ).
your answer is worth zero points if it does not include currency symbols ()!
18) simplify the following set of intra company cash flows for this swiss firm.
consider the following exchange rates.
19) your firm is based in southern ireland (and thereby operates in euro, not pounds)
and is considering an investment in the united states.
the project involves selling widgets: you project a sales volume of 50,000 widgets per
year, sales price of $20 per widget with a contribution margin of $15 per widget.
the project will last for 5 years, require an investment of $1,000,000 at time zero (which
will be depreciated straight-line to $10,000 over the 5 years). salvage value for the
equipment is projected to be $10,000. the project will operate in rented quarters:
$300,000 rent is due at the start of each year.
the corporate tax rate is 12% in ireland and 40% in the u.s.
for simplicity, assume that taxes are paid like sales taxes: immediately.
the spot exchange rate is $1.50 = 1.00. the cost of capital to the irish firm for a domestic
project of this risk is 8%. the u.s. risk-free rate is 3%; the irish risk-free rate is 2%.
repeat the above project analysis assuming that the irish firm could replicate the project
in ireland. (i.e. cash flow out the project in ireland and find break-even price (in ),
quantity, npv, irr (in euro not dollars).
20) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
21) the time from acceptance to maturity on a $50,000 banker’s acceptance is 180 days.
the importing bank’s acceptance commission is 2.50 percent and that the market rate for
180-day b/as is 2 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer’s bank.