International Business, 14e (Daniels et al.)
Chapter 19 The Multinational Finance Function
1) Global Positioning Solutions Inc. is a Utah-based company that ________.
A) provides location assistance for global executives who travel frequently
B) is a division of a banking syndicate in the Western part of the United States
C) assists firms that have foreign-exchange needs but that lack in-house foreign-exchange teams
D) started out by providing foreign exchange services that were not being offered by commercial banks
2) A major challenge to Global Positioning Systems in providing foreign exchange services to its clients
is that ________.
A) GPS lacks access to major foreign exchange quoting services
B) GPS has to constantly upgrade the quality of the services it offers
C) GPS cannot provide individualized attention to its customers, so it has to commoditize its product
lines
D) new regulations have stopped GPS from selling foreign exchange services that compete with the
banks
3) The long-term financing dimension of cash management ________.
A) deals with the selection, issuance, and management of long-term debt and equity
B) is unaffected by currency changes because everyone borrows in U.S. dollars
C) focuses on the analysis of investment opportunities
D) is independent of the capital structure of an MNE
4) The financial management activity that determines the proper mix of debt and equity is ________.
A) capital structure
B) long-term financing
C) capital budgeting
D) working capital management
5) The CFO’s function in a company focuses on ________.
A) improving distributor relationships
B) acquiring financial resources
C) handling accounting issues
D) creating financial statements
6) Acquiring and allocating financial resources among the company’s activities and projects is the
responsibility of the ________.
A) accounting function of the firm
B) external auditors
C) CFO
D) financial marketing manager
7) The degree to which a firm funds the growth of a business by debt is known as ________.
A) leveraging
B) equity financing
C) hedging
D) after-tax cost of debt
8) The concept of leveraging in finance refers to ________.
A) the degree to which companies rely on foreign exchange to fund operations
B) how a company hedges its foreign currency obligations
C) the degree to which a firm funds the growth of a business by debt
D) how much cash the CFO has in the bank
9) According to 2010 data, which of the following statements about the mix of debt and equity to fund
operations is true?
A) The debt/asset ratio has risen in Japan since 2007.
B) A growing number of Russian firms are relying more on debt.
C) The equity/asset ratio fell for firms in France and Germany since 2007.
D) In most emerging markets, shares of stock are broadly held like in the U.S.
10) MNEs most likely use offshore debt markets ________.
A) to hide their cash from tax authorities
B) to take advantage of their ability to access capital in different countries
C) since debt in foreign countries is always cheaper than in the home country market
D) because investors don’t like to invest in companies that only raise capital in their home markets
11) Which of the following is NOT an advantage associated with Eurocurrencies?
A) more convenience for users
B) better yield for lenders
C) tighter U.S. regulation
D) cheaper lending rates
12) Which of the following is a characteristic of the Eurocurrency market?
A) The Eurocurrency market is both short and medium term.
B) Private borrowers are the major players in the Eurocurrency market.
C) The Eurocurrency market is a retail, rather than wholesale, market.
D) The interest rates in the Eurocurrency market are about the same as in domestic markets.
13) LIBOR is best defined as the ________.
A) interest rate of the National Bank of London
B) short-term interest rate for dollars held in the Eurodollar market
C) interest rate of the European Union
D) deposit rate that applies to commercial loans in the European Union
14) A situation in which several banks pool resources in the Eurocurrency market to extend credit to a
borrower and spread the risk is known as ________.
A) credit collaboration
B) leverage equity financing
C) syndication
D) short-term Eurocurrency financing
15) A bond issue floated by a U.S. company in dollars in London, Luxembourg, and Switzerland by a
syndication of bonds is an example of a(n) ________.
A) global bond
B) domestic bond
C) Eurobond
D) foreign bond
16) Which of the following countries has the largest market for domestic bonds?
A) the U.K.
B) the U.S.
C) Japan
D) China
17) A bond issued by a Brazilian company in British pounds in London is a(n) ________.
A) Eurobond
B) global bond
C) local bond
D) foreign bond
18) Firms most likely borrow money in the international bond market to ________.
A) guarantee high yields and low rates
B) enable diversification of funding sources
C) protect against costly government regulations
D) allow emerging markets to invest in foreign exchange
19) Brooke buys shares of stock in a small bakery in a foreign country in return for an ownership
position and promised capital gains. This is an example of ________.
A) equity securities
B) debt financing
C) playing the stock market
D) investing in Euroequities
20) The market for shares sold outside the boundaries of the issuing company’s home country is the
________.
A) Eurocurrency market
B) international bond market
C) international equity market
D) Euroequity market
21) The stock market is also known as the ________.
A) capital market
B) foreign exchange market
C) bond market
D) equity-capital market
22) A negotiable certificate issued by a U.S. bank to represent the underlying shares of a foreign
corporation’s stock is called a(n) ________.
A) Euroequity
B) American Depositary Receipt
C) Global Depositary Receipt
D) European Depositary Receipt
23) The best way for a Euroequity to get a listing in the United States is to issue a(n) ________.
A) Global Depositary Receipt
B) European Depositary Receipt
C) American Depositary Receipt
D) Domestic Depositary Receipt
24) When Sistema, a Russian company, issued a U.S. dollar stock offering in London, its shares were
classified as a(n) ________.
A) Global Depositary Receipt
B) American Depositary Receipt
C) European Depositary Receipt
D) International Depositary Receipt
25) What is the main challenge companies face in listing ADRs in the United States?
A) paying costly fees and tariffs
B) complying with SEC reporting requirements
C) listing shares in U.S. dollars instead of Eurodollars
D) conducting time-consuming performance evaluations
26) A city or country that provides large amounts of funds in currencies other than its own is a(n)
________.
A) offshore financial center
B) ADR facilitator
C) interbank market
D) currency regulator
27) Which of the following is a characteristic of most offshore financial centers?
A) strict domestic regulation
B) minimal banking activities
C) large foreign currency markets
D) nominal or non-existent tax rates
28) Which of the following has extensive banking activities involving short-term financial transactions?
A) booking center
B) operational center
C) foreign exchange market
D) international regulatory market
29) What is the primary concern about offshore financial centers?
A) engaging in illegal activities
B) enabling firms to avoid taxation
C) allowing the transfer of large funds
D) existing in politically risky environments
30) Capital budgeting is best described as the ________.
A) process that determines which countries will receive capital investment funds
B) procedure for determining the proper mix of debt and equity for a country
C) proper management of a country’s current assets and liabilities
D) simplification of corporate tax procedures
31) Which of the following is unique to foreign project assessment in the capital budgeting decision?
A) Project cash flows must be determined.
B) Parent cash flows and project cash flows are the same.
C) Local tax issues affect the determination of free cash flows and the remittance of earnings.
D) Inflation is not an issue, because companies use the same inflation rate in both the domestic and
international setting in order to make the analysis more comparative.
32) Vale, the large Brazilian mining company, is trying to decide if it wants to invest in a Canadian
nickel mine. Which of the following questions is LEAST relevant to Vale’s capital budgeting decision?
A) How will differing rates of inflation in Canada and Brazil affect the parent and subsidiary?
B) How will dividends be affected by the Canadian and Brazilian tax systems?
C) What is the difference in inflation rates between Brazil and Canada?
D) Does Brazil or Canada have the absolute advantage in exporting?
33) One way to account for the challenge of the variability of future cash flows is to ________.
A) adjust the hurdle rate for the project
B) use the most likely cash flow estimate
C) ignore different rates of inflation to prevent confusion
D) leave out a consideration of the terminal value of an investment
34) Which of the following is NOT a major internal source of funds available to MNEs?
A) intercompany loans
B) equity investments by the parent company in its subsidiaries
C) equity capital raised within the country where the subsidiary is located
D) intercompany receivables and payables
35) The process of coordinating cash inflows and outflows among subsidiaries so that only the balance
in cash is transferred is known as ________.
A) dividend remissions
B) transfer pricing
C) multilateral netting
D) currency hedging
36) Multilateral netting in global cash management is best described as ________.
A) establishing a safety net so companies don’t run out of cash
B) coordinating cash inflows and outflows among subsidiaries
C) transferring currencies among subsidiaries to exhibit transparency
D) transferring funds in the absence of a good cash budget or loan arrangement
37) A foreign exchange exposure that occurs because of a change in the value of exposed assets or
liabilities of foreign currency financial statements is a(n) ________.
A) translation exposure
B) transaction exposure
C) economic exposure
D) hedge exposure
38) The effect of an exchange-rate change on the financial statements of a foreign subsidiary ________.
A) generally results in a foreign exchange gain
B) generally results in a foreign exchange loss
C) is neither a gain nor a loss because of accounting rules
D) is either a net gain or a net loss
39) FTX, a U.S. electronics firm, has operations in Japan. Currently, the yen is rising against the dollar.
Which of the following will most likely occur?
A) Translated earnings will be higher than before the strengthening of the exchange rate.
B) Translated earnings will be lower than before the strengthening of the exchange rate.
C) There will be no gain or loss on translating the financial statements into dollars.
D) The gains or losses will not affect earnings per share and stock prices.
40) Diego is a Brazilian mining company that has operations in Canada. Currently, the Canadian dollar
is falling against the Brazilian real. Which of the following will most likely occur?
A) Translated earnings will be lower after the fall in the dollar.
B) Translated earnings will be lower than before the strengthening of the dollar.
C) Translated earnings will be higher than when the Brazilian real was worth more.
D) The gains or losses on translated earnings will not affect earnings per share and stock prices.
41) A transaction exposure for a U.S. company ________.
A) occurs when the dollar value of a payable from exports changes as the exchange-rate changes
B) generally takes place when foreign currencies weaken against the dollar
C) occurs when reporting systems are inadequate
D) does not result in a gain or loss in cash flows
42) If a U.S. company exports to Canada and the sale is denominated in Canadian dollars, which of the
following is true?
A) The U.S. company would report a gain if the U.S. dollar rises against the Canadian dollar.
B) The Canadian company would report a gain if the Canadian dollar falls against the U.S. dollar.
C) The U.S. company would report a loss if the Canadian dollar falls against the U.S. dollar.
D) Exports do not result in a gain or loss.
43) If a British company exports to a German company and the export is denominated in euros, which of
the following is true?
A) The German company would experience a loss if the euro strengthens against the pound.
B) The British company would experience a gain if the euro strengthens against the pound.
C) The British company would not experience a gain or a loss because the sale is denominated in euros,
not pounds.
D) Exports result in translation exposures but not transaction exposures.
44) A Japanese company exports merchandise to a U.S. importer for ¥1,000,000 when the exchange rate
is ¥107 per dollar. Payment is not due until the end of the month. At the end of the month, the exchange
rate has moved to ¥105 per dollar, and the U.S. importer pays the Japanese exporter for the merchandise.
From the standpoint of the U.S. importer, ________.
A) there is no transaction exposure since they will sell the merchandise in the United States for dollars
B) the merchandise will be carried on the books at $93,468 (rounded)
C) the Japanese exporter will be paid $9,524
D) the exposure is considered to be a translation exposure, not a transaction exposure
45) Which term refers to the potential for change in expected cash flows that arises from the pricing of
products and the location of investments?
A) translation exposure
B) transaction exposure
C) economic exposure
D) hedge exposure
46) An economic exposure ________.
A) occurs when reporting systems are inadequate
B) generally takes place when foreign currencies weaken against the dollar
C) occurs when the sourcing and costs of components change as exchange rates change
D) is the same as a translation exposure
47) Assume a U.S. exporter sells to a British importer and denominates the sale in dollars. If the dollar
rises over time against the British pound, what types of economic exposure and/or possible strategies
could the exporter or importer face?
A) The U.S. exporter has no economic risk because the sale is denominated in dollars.
B) The British importer has only economic risk if the dollar falls against the pound.
C) The U.S. exporter could lower prices in order to reduce the cost to the importer and thereby keep up
sales volume.
D) The U.S. exporter does not face an economic exposure, but the British importer does because it must
pay in dollars.
48) An example of an operational hedging strategy against foreign exchange risk is ________.
A) using a forward contract to establish a fixed exchange rate for future transactions
B) using local debt to balance local assets
C) using a foreign currency option to ensure access to foreign currency at a fixed exchange rate for a
specific period of time
D) not using leads and lags for intercompany payments