1) for a parent that sells goods to a subsidiary, transfer pricing can have an effect on
international capital expenditure analysis. a very low markup policy makes the apv of a
subsidiary’s capital expenditure appear
a.more attractive
b.less attractive
c.no impact
2)
the 5-year project requires equipment that costs $100,000. if undertaken, the
shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only
loan with a maturity of 5 years and annual interest payments. the equipment will be
depreciated straight-line to zero over the 5-year life of the project. there will be a
pre-tax salvage value of $5,000. there are no other start-up costs at year 0. during years
1 through 5, the firm will sell 25,000 units of product at $5; variable costs are $3; there
are no fixed costs.
what is the npv of the project using the wacc methodology?
a.$58,028.68
b.$49,613.03
c.$48,300.47
d.$102,727.55
e.none of the above
3) reasons for a country to impose exchange restrictions on its own currency, limiting
conversion to other currencies include
a.enticing more foreign investment from mncs
b.for a variety of reasons, the country may find itself short of foreign currency reserves
c.creating a home-grown business climate
d.all of the above
4) the floor value of a convertible bond
a.is the ‘straight bond” value
b.is the conversion value
c.is the minimum of a and b
d.is the maximum of a and b
5) during the five-year period 2007-2011, total annual worldwide fdi outflows
amounted to
a.about $1,698 million on average
b.about $1,698 billion on average
c.about $1,698 trillion on average
d.none of the above
6) in countries like france and germany,
a.managers have often made business decisions with regard maximizing market share to
the exclusion of other goals
b.managers have often viewed shareholders as one of the ‘stakeholders” of the firm,
others being employees, customers, suppliers, banks and so forth
c.managers have often regarded the prosperity and growth of their combines, or
families of related firms, as their critical goal
d.managers have traditionally embraced the maximization of shareholder wealth as the
only worthy goal
7) the current exchange rate is £1.00 = $2.00. compute the correct balances in bank a’s
correspondent account(s) with bank b if a currency trader employed at bank a buys
£45,000 from a currency trader at bank b for $90,000 using its correspondent
relationship with bank b.
a.bank a’s dollar-denominated account at b will rise by $90,000
b.bank b’s dollar-denominated account at a will fall by $90,000
c.bank a’s pound-denominated account at b will rise by £45,000
d.bank b’s pound-denominated account at a will rise by £45,000
8) assume that a product has the following three stages of production:
if the value-added tax (vat) rate is 20%, what would be the vat over all stages of
production?
a.90
b.120
c.300
d.225
9) consider a project of the cornell haul moving company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
the firm’s tax rate is 34%; the firm’s bonds trade with a yield to maturity of 8%; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity,
the required return would be 10%
what is the levered after-tax incremental cash flow for year 2?
a.$185,796,000
b.$215,152,000
c.$267,952,000
d.$284,848,000
e.none of the above
10) find the weighted average cost of capital for a firm that has a debt-to-equity ratio of
2, a tax rate of 40%, a levered cost of equity of 12% and an after-tax cost of debt of 9%.
a.7.6%
b.7.968%
c.10%
d.none of the above
11) if you owe a foreign currency denominated debt, you can hedge with
a.a long position in a currency forward contract
b.a long position in an exchange-traded futures option
c.buying the foreign currency today and investing it in the foreign county
d.both a and c
12) 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
13) american depository receipt (adrs) represent foreign stocks
a.denominated in u.s. dollars that trade on european stock exchanges
b.denominated in u.s. dollars that trade on a u.s. stock exchange
c.denominated in a foreign currency that trade on a u.s. stock exchange
d.non-registered (bearer) securities
14) under a purely flexible exchange rate system
a.supply and demand set the exchange rates
b.governments can set the exchange rate by buying or selling reserves
c.governments can set exchange rates with fiscal policy
d.answers b and c are correct
15) imperfections in the market for intangible assets can also play a major role in
motivating firms to undertake cross-border acquisitions. according to the internalization
theory,
a.cross-border acquisitions may also be motivated by the acquirer’s desire to acquire
and internalize the target firm’s intangible assets
b.a firm with intangible assets that have a public good property such as technical and
managerial know-how may acquire foreign firms as a platform for using its special
assets on a larger scale and, at the same time, avoid the misappropriation that may occur
while transacting in foreign markets through a market mechanism
c.the internalization thus may proceed forward to internalize the acquirer’s assets, or
backward to internalize the target’s assets
d.all of the above
16) some commodities never enter into international trade. examples include
a.nontradables
b.haircuts
c.housing
d.all of the above
17) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
the irp 1-year and 2-year forward exchange rates are
explain how firm b could use two of the swaps offered above to hedge its exchange rate
risk.
18) the stock market of country a has an expected return of 5%, and a standard
deviation of expected return of 8%. the stock market of country b has an expected
return of 15% and a standard deviation of expected return of 10%.
calculate the expected return of a portfolio that is half invested in a and half in b.
19) 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.
calculate the hedge ratio.
20) 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%.
what is cf5 in dollars?
21) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
if the call finishes in-the-money what is your portfolio cash flow?
22) the time from acceptance to maturity on a $300,000 banker’s acceptance is 30 days.
the importing bank’s acceptance commission is 3 percent and that the market rate for
30-day b/as is 4 percent.
determine the bond equivalent yield the importer’s bank will earn from discounting the
b/a with the exporter.
23) the time from acceptance to maturity on a $6,000,000 banker’s acceptance is 360
days.
the importing bank’s acceptance commission is 2 percent and that the market rate for
360-day b/as is 3 percent.
determine the amount the exporter will receive if he holds the b/a until maturity.
24) the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90
days.
the importing bank’s acceptance commission is 1.25 percent and that the market rate for
90-day b/as is 6 percent.
if the exporter’s opportunity cost of capital is 11 percent, should he discount the b/a or
hold it to maturity?
25) the time from acceptance to maturity on a $500,000 banker’s acceptance is 270
days.
the importing bank’s acceptance commission is 0.75 percent and that the market rate for
270-day b/as is 4 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer’s bank.
26) the stock market of country a has an expected return of 5%, and a standard
deviation of expected return of 8%. the stock market of country b has an expected
return of 15% and a standard deviation of expected return of 10%.
is it reasonable to conclude that your portfolio is on the efficient frontier? if not, then
prove your point by finding just one portfolio weighting between a and b that offers
more return with less risk. if you think it is on the efficient frontier, why do you think
this? either way, your answer should include verification.
