Chapter 17: Multinational Financial Management
1. Multinational financial management requires that financial analysts consider the effects of changing currency values.
a. True
b. False
2. Legal and economic differences among countries, although important, do NOT pose significant problems for most
multinational corporations when they coordinate and control worldwide operations of subsidiaries.
a. True
b. False
3. Exchange rate quotations consist solely of direct quotations.
a. True
b. False
Chapter 17: Multinational Financial Management
4. Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as
a base.
a. True
b. False
5. When the value of the U.S. dollar appreciates against another country’s currency, we may purchase more of the foreign
currency with a dollar.
a. True
b. False
6. If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?
a. 0.50
b. 0.71
c. 1.00
d. 1.41
e. 2.81
Chapter 17: Multinational Financial Management
7. If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian
dollar?
a. 0.37
b. 0.61
c. 1.00
d. 1.64
e. 3.28
8. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the
U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros?
a. 0.43
b. 0.86
c. 1.41
d. 1.64
e. 2.27
Chapter 17: Multinational Financial Management
9. Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the
cross exchange rate between the pound and the franc?
a. 1 British pound equals 3.2400 Swiss francs
b. 1 British pound equals 2.6244 Swiss francs
c. 1 British pound equals 1.8588 Swiss francs
d. 1 British pound equals 1.0000 Swiss francs
e. 1 British pound equals 0.3810 Swiss francs
10. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar,
then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
a. premium of 8%
b. premium of 18%
c. discount of 18%
d. discount of 8%
e. premium of 16%
Chapter 17: Multinational Financial Management
11. In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same
amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S.
dollars?
a. $5.964
b. $8,200
c. $10,250
d. $12,628
e. $13,525
12. If the United States is running a deficit trade balance with China, then in a free market we would expect the value of
the Chinese yuan to depreciate against the U.S. dollar.
a. True
b. False
Chapter 17: Multinational Financial Management
13. Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0%
tomorrow, how many yen could one U.S. dollar buy tomorrow?
a. 155.5 yen
b. 144.0 yen
c. 133.5 yen
d. 78.0 yen
e. 72.0 yen
14. The United States and most other major industrialized nations currently operate under a system of floating exchange
rates.
a. True
b. False
15. Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company’s
currency, will be worth less than was originally projected because of exchange rate changes.
a. True
b. False
Chapter 17: Multinational Financial Management
16. Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the
process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to
depreciate.
a. True
b. False
17. If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the
British pound will
a. Depreciate against the U.S. dollar.
b. Remain unchanged against the U.S. dollar.
c. Appreciate against other major currencies.
d. Appreciate against the dollar and other major currencies.
e. Appreciate against the U.S. dollar.
Chapter 17: Multinational Financial Management
18. Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency
forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many
dollars will a pound buy in 30 days?
a. 1.12
b. 1.63
c. 1.82
d. 2.04
e. 3.64
19. A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
a. True
b. False
20. The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer
than one year.
a. True
b. False
Chapter 17: Multinational Financial Management
21. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks
to smaller U.S. corporations.
a. True
b. False
22. The interest rate paid on Eurodollar deposits depends on the particular bank’s lending rate and on rates available on
U.S. money market instruments.
a. True
b. False
Chapter 17: Multinational Financial Management
23. Which of the following is NOT a reason why companies move into international operations?
a. To develop new markets for the firm’s products.
b. To better serve their primary customers.
c. Because important raw materials are located abroad.
d. To increase their inventory levels.
e. To take advantage of lower production costs in regions where labor costs are relatively low.
24. Which of the following statements is NOT CORRECT?
a. Foreign bonds and Eurobonds are two important types of international bonds.
b. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the
issue is sold.
c. The term Eurobond applies only to foreign bonds denominated in U.S. currency.
d. A foreign bond might pay a higher nominal interest rate than a U.S. bond.
e. Any bond sold outside the country of the borrower is called an international bond.
25. Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk
domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor’s
required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
a. 9.00%
b. 10.20%
c. 11.28%
Chapter 17: Multinational Financial Management
d. 12.50%
e. 13.57%
26. A U.S.-based company, Stewart, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is
denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate
at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.
The loan was not hedged in the foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to
make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective
interest rate will Stewart end up paying on the loan?
a. 10.36%
b. 11.50%
c. 17.44%
d. 20.00%
e. 21.79%
management
Chapter 17: Multinational Financial Management
27. Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial
analysis.
a. True
b. False
28. The cash flows relevant for a foreign investment should, from the parent company’s perspective, include the financial
cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the
foreign country.
a. True
b. False
29. The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign
projects may be more or less risky.
a. True
b. False