1) when firms undertake fdi,
a.they become mncs
b.they reduce their tax rate since they can tell each country that they do business in that
they paid their taxes in other countries
c.the can exploit workers by paying them below-market wages in depreciating
currencies
d.all of the above
2) find the value of a call option written on 100 with a strike price of $1.00 = 1.00. in
one period there are two possibilities: the exchange rate will move up by 15% or down
by 15% (i.e. $1.15 = 1.00 or $0.85 = 1.00). the u.s. risk-free rate is 5% over the period.
the risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability
of the dollar strengthening is 1/3.
a.$9.5238
b.$0.0952
c.$0
d.$3.1746
3) the current exchange rate is 1.25 = £1.00 and a british firm offers a french customer
the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
a.the seller has given the buyer an at-the-money put option on euro with a strike in
pounds
b.the seller has given the buyer an at-the-money put option on pounds with a strike in
euro
c.the seller has given the buyer an at-the-money call option on euro with a strike in
pounds
d.none of the above
4) country a can produce 10 yards of textiles or 6 pounds of food per unit of input.
country b can produce 8 yards of textiles or 5 pounds of food per unit of input.
a.country a is relatively more efficient than country b in the production of food
b.country b is relatively more efficient than country a in the production of textiles
c.country a has an absolute advantage over country b in the production of food and
textiles
d.country b has an absolute advantage over country a in the production of food and
textiles
5) the source of translation exposure
a.is a mismatch of net assets and net liabilities denominated in the same currency
b.is a mismatch of net assets and net liabilities denominated in the different currencies
c.is a mismatch of current assets and current liabilities denominated in different
currencies
d.none of the above
6) suppose the futures price is below the price predicted by irp. what steps would assure
an arbitrage profit?
a.go short in the spot market, go long in the futures contract
b.go long in the spot market, go short in the futures contract
c.go short in the spot market, go short in the futures contract
d.go long in the spot market, go long in the futures contract
7) managerial entrenchment efforts are clear signs of the agency problem. they include
a.anti-takeover defenses
b.poison pills
c.changes in the voting procedures to make it more difficult for the firm to be taken
over
d.all of the above
8) the majority of adrs
a.are from such developed countries as australia and japan
b.are from developing nations
c.are from emerging markets
d.both b and c
9) there is an intimate relationship between a country’s bca and how the country
finances its domestic investment and pays for government expenditures. given this,
which of the following is a true statement?
a.if (s – i) < 0, it implies that a country’s domestic savings is insufficient to finance
domestic investment
b.if (t – g) < 0, it implies that a country’s tax revenue is insufficient to finance
government spending
c.when bca is negative, it implies that government budget deficits an/or part of domestic
investment are being finance with foreign-controlled capital
d.all of the above are true
10) the firm’s tax rate is 34%. the firm’s pre-tax cost of debt is 8%; the firm’s
debt-to-equity ratio is 4; the risk-free rate is 3%; the beta of the firm’s common stock is
1.5; the market risk premium is 9%. calculate the weighted average cost of capital.
a.33.33%
b.8.09%
c.9.02%
d.16.5%
e.none of the above
11) regarding the statistical discrepancy in the balance-of-payments accounts
a.there is some evidence that financial transactions may be mainly responsible for the
discrepancy
b.the sum of the balance on the capital account and the statistical discrepancy is very
close to the balance of the current account in magnitude
c.it tends to be positive one year and negative in others, so it’s safe to ignore it
d.a and b
12) assume that xyz corporation is a leveraged company with the following
information:
kl = cost of equity capital for xyz = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
calculate the debt-to-total-market-value ratio that would result in xyz having a weighted
average cost of capital of 9.3%.
a.35%
b.40%
c.45%
d.50%
13) transactions in currency, bank deposits and so forth
a.tend to be insensitive to both changes in relative interest rates and the anticipated
change in exchange rate
b.tend to be sensitive to both changes in relative interest rates and the anticipated
change in exchange rate
c.tend to be sensitive to changes in relative interest rates but insensitive to the
anticipated change in exchange rate
d.tend to be insensitive to changes in relative interest rates but sensitive to the
anticipated change in exchange rate
14) the worldwide or residential method of declaring a national tax jurisdiction is to
a.tax national residents of the country on their worldwide income no matter in which
country it is earned
b.tax all income earned within the country by any taxpayer, domestic or foreign
c.tax foreign residents of the country on their home-country income but not
foreign-earned income
d.none of the above
15) compute the debt-to-equity ratio for a firm that has a debt-to-value ratio of 60%.
a.1/3
b.2/5
c.3/2
d.2/3
e.none of the above
16) which of the following statements about transfer pricing is true?
a.the higher the transfer price, the larger the gross profits of the transferring division
relative to the receiving division
b.very high markup policy used in the transfer pricing to a subsidiary makes the
adjusted present value (apv) of that subsidiary’s capital expenditure appear less
attractive
c.very low markup policy used in the transfer pricing to a subsidiary makes the adjusted
present value (apv) of that subsidiary’s capital expenditure appear less attractive
d.both a and b
17) since its inception the euro has brought about revolutionary changes in european
finance. for example,
a.by redenominating corporate bonds and stocks from several different currencies into
one common currency, the euro has precipitated the emergence of continent wide
capital markets in europe that are comparable to u.s. markets in depth and liquidity
b.swiss bank accounts are all denominated in euro
c.the european banking sector has become much more important as a source of
financing for european firms
d.there have actually not been any revolutionary changes
18) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock. one year after investment, the stock pays a £1 dividend,
and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,
although he sold £10,000 forward at the forward rate of 1.28 per pound.
19)
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:
what is the dollar-denominated irr of this project?
20) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
using your results to the last question, make a recommendation vis–vis when to
undertake the project.
21) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
find the irr in euro for the french firm if they wait one year to undertake the project after
the exchange rate rises to s1(|£) = 2.20 per £.
22) in high-growth industries where companies’ internally generated funds fall short of
profitable investment opportunities,
a. managers are less likely to waste funds in unprofitable projects
b. managers are more likely to waste funds in unprofitable projects
23) suppose that your country officially defines gold as ten times more valuable than
silver (i.e. the central bank stands ready to redeem the currency in gold and silver and
the official price of gold is ten times the official price of silver). if the market price of
gold is only eight times as much as silver.
athe central bank could go broke if enough arbitrageurs attempt to take advantage of the
pricing disparity
bthe central bank will make money since they are overpricing gold
24) 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.
compute the npv at the current price of gold. hint: think of the gold mine as a perpetuity