1) ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s
after-tax cash flows.
a. The number of units sold by the subsidiary
b. The subsidiary’s earnings before income and taxes (EBIT)
c. The tax rate the subsidiary is subject to in the host country
d. Withholding taxes imposed by the host government
2) If the net inflow of one currency is about the same amount as a net outflow in
another currency, the firm will benefit if these two currencies are negatively correlated
because the transaction exposure is offset.
a. True
b. False
3) Regarding the valuation of privatized businesses in less developed countries, ____
can normally be estimated with a high degree of accuracy.
a. future cash flows
b. future exchange rate movements
c. the proper discount rate
d. none of the above
4) Treck Co. expects to pay 200,000 in one month for its imports from Greece. It also
expects to receive 250,000 for its exports to Italy in one month. Treck Co. estimates the
standard deviation of monthly percentage changes of the euro to be 3 percent over the
last 40 months. Assume that these percentage changes are normally distributed. Using
the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum
one-month loss in dollars if the expected percentage change of the euro during next
month is -2%? Assume that the current spot rate of the euro (before considering the
maximum one-month loss) is $1.23.
a. -$38,468
b. -$21,371
c. -$17,097
d. -$4,274
5) The term “global” target capital structure for an MNC represents the MNC’s capital
structure:
a. in the U.S.
b. relative to competitors across all countries
c. where it has its largest subsidiary
d. when consolidating all of its subsidiaries
6) A European option can only be exercised at the expiration date, while an American
option can be exercised any time prior to the expiration date.
a. True
b. False
7) It is always advantageous to use foreign debt to finance a foreign project, particularly
in developing countries.
a. True
b. False
8) Futures, forward, and money market hedges all lock into a certain price to be
received from hedging a receivable. For a currency option hedge with a put option,
however, the exact amount received is not known until the option is (or is not)
exercised.
a. True
b. False
9) ____ are most commonly classified as a direct foreign investment.
a. Foreign acquisitions
b. Purchases of international stocks
c. Licensing agreements
d. Exporting transactions
10) A European option can be exercised at any time prior to maturity, while an
American option can only be exercised at maturity.
a. True
b. False
11) Capital asset pricing theory would most likely suggest that the cost of capital is
generally ____ for ____.
a. higher; MNCs
b. lower; domestic firms
c. lower; MNCs
d. none of the above
12) A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S.
balance of payments account.
a. True
b. False
13) MNCs can probably achieve more desirable risk-return characteristics from their
project portfolios if they sufficiently diversify among products and geographical
markets.
a. True
b. False
14) The Working Capital Guarantee Program is administered by the:
a. Private Export Funding Corporation (PEFCO)
b. Overseas Private Investment Corporation (OPIC)
c. Ex-Imbank
d. Foreign Credit Insurance Association (FCIA)
15) In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many
non-U.S. firms that issued new shares of stock decided to place their stock in the United
States.
a. True
b. False
16) An effective way for an MNC to assess its economic exposure is to review the
firm’s:
a. income statement
b. liquidity
c. retained earnings
d. level of stockholders’ equity
17) Which of the following theories suggests that firms seek to penetrate new markets
over time?
a. theory of comparative advantage
b. imperfect markets theory
c. product cycle theory
d. none of the above
18) When the current exchange rate is less than the strike price, a call option with that
strike price will be in the money and a put option with that strike price will be out of the
money.
a. True
b. False
19) Country risk analysis is important because it:
a. can be used by MNCs as a screening device to avoid countries with excessive risk
b. can be used by MNCs to monitor countries where the MNC is presently engaged in
international business
c. can be used to improve the analysis used to make long-term investing or financing
decisions
d. all of the above
20) Which of the following is not a characteristic of a country to be considered within
an MNC’s international tax assessment?
a. corporate income taxes
b. withholding taxes
c. provisions for carrybacks and carryforwards
d. tax treaties
e. all of the above are characteristics to be considered
21) To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract
for that currency.
a. receivable; purchase
b. payable; sell
c. payable; purchase
d. none of the above
22) Without the international capital flows, there would be ____ funding available in
the U.S. across all risk levels, and the cost of funding would be ____ regardless of the
firm’s risk level.
a. more; lower
b. more; higher
c. less; lower
d. less; higher
23) An MNC is attempting to reduce its economic exposure by financing a portion of its
business with loans in the foreign currency. If the foreign currency weakens, the MNC
will need ____ of the foreign currency to cover the loan payment, while the MNC’s
foreign currency revenues will convert to ____ dollars.
a. more; fewer
b. more; more
c. less; fewer
d. less; more
24) Which of the following is not a reason for devaluation of a currency?
a. high inflation
b. to reduce balance-of-trade deficit
c. to decrease the amount of imports
d. high unemployment
25) Inflation and interest rate differentials between the U.S. and foreign countries are
examples of variables that could be used in fundamental forecasting.
a. True
b. False
26) Which of the following factors is least likely to cause the required rate of return to
vary among MNCs assessing the same foreign target?
a. differences in the timing of remittances from the target to the parent
b. differences in the desired use of the target
c. differences in the local risk-free interest rate
d. differences in the ability to use financial leverage
27) If the international Fisher effect (IFE) holds, the local investors are expected to earn
the same return from investing internationally as they would from investing in their
local markets.
a. True
b. False
28) One form of an exposure to political risk is terrorism.
a. True
b. False
29) An argument for MNCs to have a debt-intensive capital structure is:
a. they are well diversified
b. they can reduce the chance of bankruptcy
c. it spreads the shareholder base
d. it forces subsidiaries to pay dividends to shareholders
30) Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the
Netherlands. Cerra estimates the standard deviation of daily percentage changes of the
euro to be 1 percent over the last 100 days. Assume that these percentage changes are
normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence
level for the following question(s).
Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage
change of the euro tomorrow is 0.5%?
a. -0.5%
b. -2.2%
c. -1.5%
d. -1.2%
31) To fully benefit from economies of scale, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere
b. establish a subsidiary in a market that has relatively low costs of labor or land
c. establish a subsidiary in a market where raw materials are cheap and accessible
d. participate in a joint venture in order to learn about a production process or other
operations
32) Research indicates that currency forecasting services almost always outperform
forecasts based on the forward rate.
a. True
b. False
33) ____ are free of default risk.
a. Euronotes
b. Eurobonds
c. Euro-commercial paper
d. None of the above
34) An MNC issuing pound-denominated bonds may be completely insulated from
exchange rate risk associated with the bond if its foreign subsidiary makes the coupon
and principal payments of the bond with its pound receivables.
a. True
b. False
35) Countries that have adopted the euro tend to have very similar ____.
a. interest rates
b. inflation rates
c. income tax rates
d. budget deficits
36) Which of the following statement is false?
a. If interest rate parity holds, foreign financing a simultaneous hedge of that position in
the forward market will result in financing costs similar to those in domestic financing
b. If interest rate parity holds, and the forward rate is an accurate forecast of the future
spot rate, uncovered foreign financing will result in financing costs similar to those in
domestic financing
c. If interest rate parity holds, and the forward rate is expected to overestimate the
future spot rate, uncovered foreign financing is expected to result in lower financing
costs than those in domestic financing
d. If interest rate parity holds, and the forward rate is expected to underestimate the
future spot rate, uncovered foreign financing is expected to result in lower financing
costs than those in domestic financing
37) Two highly negatively correlated currencies move in tandem almost as if they are
the same currency.
a. True
b. False