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Chapter 27: Multinational Financial Management
QUESTION TYPE:
True / False
30. When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk
while lower risk might result from international diversification.
a.
True
b.
False
ANSWER:
True
31. Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The
required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6
million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors,
Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that
it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that
can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all
foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?
a.
$1.01 million
b.
$2.77 million
c.
$3.09 million
d.
$5.96 million
e.
$7.39 million
ANSWER:
b
32. Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange
rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
a.
True
b.
False
ANSWER:
True
33. Due to advanced communications technology and the standardization of general procedures, working capital
management for multinational firms is no more complex than it is for large domestic firms.
a.
True
b.
False
ANSWER:
False
34. Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the
value of inventory.
a.
True
b.
False
ANSWER:
True
35. The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain
countries and to bring in goods only as needed.
a.
True
b.
False
ANSWER:
True
36. Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a
price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to
make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6
months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar
amount would Yates actually receive after it exchanged yen for U.S. dollars?
a.
$1,075,958
b.
$1,025,000
c.
$1,000,000
d.
$975,610
e.
$929,404
ANSWER:
e
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37. Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars
to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still
valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange
rates?
a.
−$240,000
b.
−$43,200
c.
$0
d.
$43,200
e.
$47,473
ANSWER:
b
38. Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days
5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate
to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How
much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
a.
$0
b.
$1,834.86
c.
$4,517.26
d.
$5,712.31
e.
$7,547.17
ANSWER:
d
39. If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the
forward currency is said to be selling at a discount to the spot rate.
a.
True
b.
False
ANSWER:
True
40. If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward
currency is said to be selling at a premium to the spot rate.
a.
True
b.
False
ANSWER:
True
41. A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss
francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm
wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm
completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs,
how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
a.
−$396
b.
−$243
c.
$0
d.
$243
e.
$638
ANSWER:
e
42. A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the
amount by which its inflation rate exceeds that of the United States.
a.
True
b.
False
ANSWER:
True
43. Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity
value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate
is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
a.
−7.92%
b.
−4.13%
c.
6.00%
d.
8.25%
e.
12.00%
ANSWER:
a
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44. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the
United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%.
All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that
interest rate parity holds in all markets, which of the following statements is most CORRECT?
a.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
b.
The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day
forward market.
c.
The spot rate equals the 90-day forward rate.
d.
The spot rate equals the 180-day forward rate.
e.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
ANSWER:
e
45. Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S.,
90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward
Chapter 27: Multinational Financial Management
market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?
a.
1 pound = $1.8000
b.
1 pound = $1.6582
c.
1 pound = $1.0000
d.
1 pound = $0.8500
e.
1 pound = $0.6031
ANSWER:
b
46. Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an
annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of
6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in
the 180-day forward market?
a.
1 U.S. dollar = 0.6235 Canadian dollars
b.
1 U.S. dollar = 0.6265 Canadian dollars
c.
1 U.S. dollar = 1.0000 Canadian dollars
d.
1 U.S. dollar = 1.5961 Canadian dollars
e.
1 U.S. dollar = 1.6039 Canadian dollars
ANSWER:
d
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Page 25
47. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity
(PPP) holds, what is the price of the product in Switzerland?
a.
123.75 Swiss francs
b.
454.55 Swiss francs
c.
750.00 Swiss francs
d.
1,237.50 Swiss francs
e.
1,650.00 Swiss francs
ANSWER:
d
48. Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S.
Chapter 27: Multinational Financial Management
dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
a.
$14.79
b.
$63.00
c.
$74.55
d.
$85.88
e.
$147.88
ANSWER:
c
49. A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that
purchasing power parity (PPP) holds, what is the current exchange rate?
a.
1 U.S. dollar equals 0.69 Swiss francs
b.
1 U.S. dollar equals 0.85 Swiss francs
c.
1 U.S. dollar equals 1.21 Swiss francs
d.
1 U.S. dollar equals 1.29 Swiss francs
e.
1 U.S. dollar equals 1.44 Swiss francs
ANSWER:
e
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