49) A hedging instrument that allows one to establish a fixed exchange rate for future transactions where
delivery is required is a(n) ________.
A) option
B) investment contract
C) future spot contract
D) forward contract
50) Assume that a Canadian exporter sells to a French importer and denominates the sale in euros, which
opens the exporter up to foreign exchange risk. Also, assume that the exporter goes to its investment
bank and enters into a contract with the bank to gain the right but not the obligation to deliver euros for
Canadian dollars at an agreed-upon exchange rate. This is an example of a ________.
A) lead strategy
B) lag strategy
C) foreign-currency option
D) forward contract
51) A U.S. importer buys merchandise from a German manufacturer worth €100,000 when the exchange
rate is €0.6451 per dollar with payment due in 30 days. The importer decides to enter into a forward
contract to deliver dollars for euros for €0.6329. At the time the payment is due, the spot rate is €0.6711.
Based on this, which of the following is true?
A) The importer would have paid more for the merchandise at the future spot rate than at the forward
rate.
B) The importer will have to pay $67,110 for the merchandise.
C) There is no foreign exchange risk to the importer since the sale is denominated in euros.
D) The exporter will receive €100,000 for the sale.
52) Foreign branch income is ________.
A) deferred from U.S. taxation until a dividend is remitted to the parent company
B) considered passive income and therefore not subject to U.S. taxation
C) directly included in the parent’s taxable income in the year in which it is earned
D) considered active income and therefore deferred until future years
53) Foreign source income that is derived from the active conduct of a trade or business and therefore
subject to U.S. taxation is known as ________.
A) passive income
B) active income
C) uncontrollable foreign corporation income
D) tax haven income
54) Subpart F income is ________.
A) usually earned by a branch rather than a corporation
B) not taxed to the parent unless a dividend is remitted
C) not eligible for the tax credit
D) passive and usually derived from operations in a tax-haven country
55) According to U.S. tax law, if a foreign subsidiary earns income, ________.
A) its income is immediately taxable to the parent, irrespective of the type of income earned
B) that income is not taxable to the parent company as long as the subsidiary pays income taxes in the
country where it is earned
C) passive income is taxable to the parent unless the parent company is a controlled foreign corporation
D) active income is taxable to the parent when it is remitted as a dividend
56) A price on goods and services sold by one member of a corporate family to another is known as a(n)
________.
A) transfer price
B) tax credit price
C) passive price
D) active price
57) If a foreign subsidiary is located in a low tax country, the parent company would probably use a
________.
A) high transfer price on inventory shipped from the parent to the subsidiary
B) high transfer price on goods sold by the subsidiary to the parent
C) low transfer price on inventory shipped from the subsidiary to the parent
D) tax credit price to minimize local tax liabilities
58) The OECD is concerned about transfer pricing practices because ________.
A) transfer pricing can help maximize a company’s worldwide tax liability
B) transfer prices tend to be higher in industrial than developing countries
C) governments use transfer prices to manipulate companies’ investment strategies
D) companies use transfer prices to manipulate prices and therefore taxes
59) The principle by which the tax authorities allow firms to reduce their tax liability by the amount of
income taxes paid to foreign governments is known as ________.
A) transfer pricing
B) a tax credit
C) lag strategies in tax planning
D) passive income reductions
60) Assume that U.S. MNE A earns $100,000 of foreign source income, that the tax rate in the foreign
country is 40 percent, and that the tax rate in the United States is 35 percent. How much total (both
domestic and foreign) tax would the company pay on that foreign source income, assuming that the tax
credit principle applies?
A) $40,000
B) $35,000
C) $75,000
D) $5,000
61) The long-term financing dimension of cash management deals with the selection, issuance, and
management of long-term debt and equity.
62) Acquiring and allocating financial resources among the company’s activities and projects is the
responsibility of the financial marketing manager.
63) Equity financing is the degree to which a firm funds the growth of a business by debt.
64) A Eurocurrency is any currency that is banked outside its country of origin.
65) The Eurocurrency market is a retail, rather than wholesale, market.
66) A French company floating a bond issued in Swiss francs in Switzerland would be selling a foreign
bond.
67) The international bond market is much larger and more lucrative than the domestic bond market.
68) Another source of financing, in which an investor takes an ownership position in return for shares of
stock in the company and the promises of capital gains, is called debt financing.
69) Two forms of equity financing are private placement with a venture capital firm and the equity
capital market, otherwise known as the stock market.
70) An ADR is a negotiable certificate issued by a U.S. bank in the United States to represent the
underlying shares of a foreign corporation’s stock held at a custodian bank in the foreign country.
71) The best way for a Euroequity to get a listing in the United States is to issue a Global Depositary
Receipt.
72) A major problem with MNEs using offshore financial centers is that they may give unfair tax
advantages to companies.
73) Capital budgeting requires companies to determine free cash flows, which are affected by factors
such as local tax rates.
74) The process of coordinating cash inflows and outflows among subsidiaries so that only net cash is
transferred is known as multilateral netting.
75) A translation exposure arises because the dollar value of the exposed asset changes as the exchange
rate changes.
76) The combined effect of an exchange-rate change on the financial statements of a foreign subsidiary
is neither a gain nor a loss because of accounting rules.
77) A transaction exposure results in a foreign exchange gain or loss.
78) A translation exposure occurs when the dollar value of a receivable or payable from exports or
imports changes as the exchange-rate changes.
79) An economic exposure does not result in a change in future cash flows.
80) An exposure that arises from effects of exchange rate changes on the competitive position of the
company is called an economic exposure.
81) Assume that a company has a foreign subsidiary in a country with an exchange rate that is expected
to strengthen against the parent company’s currency. If the parent is planning the timing for the
subsidiary to send a dividend to the parent, it would probably choose a lag strategy.
82) An option is a hedging instrument that allows one to establish a fixed exchange rate for future
transactions where delivery is required.
83) Taxation is an important cash flow issue, but it typically does not have a strong impact on the choice
of organizational form (such as branch or subsidiary) or the location of an investment.
84) Subpart F income is passive and usually derived from operations in a tax-haven country.
85) The OECD has set transfer pricing guidelines to enhance the manipulation of prices and therefore
taxes for MNEs and the countries where they operate.
86) A transfer price is a price on goods and services sold by one member of a corporate family to
another.
87) A tax credit is a credit on goods and services paid by one member of a corporate family to another.
88) The principle by which the tax authorities allow firms to reduce their tax liability by the amount of
income taxes paid to a foreign government is known as a tax credit.
89) When using a lag strategy, a company collects foreign-currency receivables before they are due
when the foreign currency is expected to weaken.
90) Tax law variations around the world affect an MNE’s capital budgeting, financing, and method of
setting transfer prices.
91) You are the chief financial officer at an MNE. What are your main responsibilities in this position?
What taxation issues have a significant effect on the decisions you make?
92) What is an offshore financial center? What are the main characteristics of OFCs?
93) What is multilateral netting? What are the advantages of multilateral netting?
94) What is foreign currency translation exposure? How can this type of exposure affect an MNE?
95) What is capital budgeting? What types of risks are involved? How can an MNE manage these risks?
96) What is a transfer price? Why are transfer prices used?
97) What are the major sources of external funds for an MNE’s normal operations? Why do MNEs use
offshore financial centers to raise funds?
98) How do countries differ in terms of taxation? In regards to taxation, why do some MNEs turn to
offshore financial centers? Why are offshore financial centers a concern to the OECD?
99) What are the major sources of internal funds for MNEs? Why do many MNEs acquire external
funds through the Eurodollar market?
100) What is the difference between translation exposure, transaction exposure, and economic exposure?