Exercises for Chapter 7

Multiple Choice Questions

1.

A number of macroeconomic variables can adversely affect comparability of the fina
ncial performance of
subsidiaries in different countries. These include:

a.
The levels of inflation in countries.

b.
The levels of political stability in countries.

c.
The labor situation in countries.

d.
All of the above.

e.
Only (a) and (b).
2.
Research studies comparing budgeting and performance evaluation practices in Japa
n and the United States
have found that:

a.
the length of time spent in preparing budgets was higher in the U.S. than in Japan.


b.
U.S. firms tended to focus on profitability measures while Japanese firms tended to f
ocus on sales
volume and market share.

c.
the compensation and promotion of U.S. managers was more likely to be impacted b
y their budget
performance than were those of Japanese managers.

d.
All of the above.

e.
Only (b) and (c) above.
3.
Managers who refrain from active management of foreign exchange risk may do so f
or a variety of reasons,
including:

a.
they consider the use of risk management instruments such as currency options and
swaps as
speculative.

b.
they claim that foreign currency exposures cannot be measured with precision.


c.
they argue that all business is risky and the firm gets rewarded for bearing risk.

d.
they assert that the firm's balance sheet is hedged on an accounting basis.


e.
All of the above.
4.
Managers actively engaged in foreign exchange risk management cite the following b
enefits:

a.
Since there is a direct relationship between a company's risk and its cost of capital a
less volatile
earnings stream reduces its cost of capital.

b.
A less volatile earnings stream has the potential for tax savings under certain tax reg
imes.


c.
Hedging activities can help securities analysts get a more precise value of the firm's
assets.


d.
All of the above.

e.
Only (a) and (b) above.
5.
The main types of foreign exchange exposure are:

a.
translation exposure

b.
transaction exposure

c.
operating exposure

d.
currency exposure

e.
Only (a), (b), and (c) above.
6.
The main foreign currency risk hedging instruments available to companies are:

a.
forward contracts, currency options, currency futures, political risk insurance.


b.
forward contracts, currency options, money market hedges, currency futures.

c.
currency futures, commodities futures, political risk insurance, stock options.


d.
forward contracts, stock options, political risk insurance, currency futures.


e.
currency options, currency futures, commodities futures, stock options.
7.
The main internal constituents of a company that are likely to be affected by its trans
fer pricing policies
are:

a.
senior management of the company.

b.
shareholders of the company.

c.
domestic tax authorities.

d.
All of the above.

e.
Only (a) and (b) above.
8.
The main external constituents of a company that are likely to be affected by its tran
sfer pricing policies
are:

a.
domestic tax authorities

b.
foreign tax authorities

c.
joint venture partners

d.
All of the above.

e.
Only (b) and (c) above.
9.
The following is a list of the external constituents of a firm's transfer pricing policies:


a.
employees, shareholders, suppliers, and customers.

b.
domestic tax authorities, joint venture partners, competitors, and customers.

c.
foreign tax authorities, joint venture partners, customers, and shareholders.


d.
domestic tax authorities, foreign tax authorities, employees, and suppliers.


e.
competitors, suppliers, customers, and managers of foreign subsidiaries.
10.
The main transfer pricing approaches are:

a.
market based methods

b.
cost based methods

c.
negotiated transfer prices.

d.
All of the above.

e.
Only (a) and (b) above.
11.
The main transfer pricing methods for the sale and transfer of tangible items are:

a.
the comparable uncontrolled price method.

b.
the resale price method

c.
the cost plus method

d.
the comparable profits method

e.
All of the above.
12.
The main transfer pricing methods for intangible assets are:

a.
the comparable uncontrolled transaction method

b.
the comparable profit method

c.
the resale price method

d.
All of the above.

e.
Only (a) and (b) above.
13.
Which of the following is an advantage to a company of entering into an Advance Pri
cing Agreement:

a.
It removes some of the uncertainty of how transfer prices will be treated for tax pur
poses.

b.
It makes the relationship between the company and the tax authority less adversaria
l.


c.
It reduces the company's record keeping burden.

d.
All of the above.

e.
Only (a) and (b) above.
14.
Which of the following is a disadvantage to a company of entering into an Advance P
ricing Agreement
(APA):

a.
The taxpayer may have to divulge proprietary information as part of the APA proces
s.


b.
It does not protect the company from subsequent scrutiny of its transfer pricing acti
vities.

c.
The monetary cost of entering into an APA can be considerable.

d.
All of the above.

e.
Only (a) and (c) above.
15.
Research evidence cited in the chapter shows that some of the main factors cited by
companie
s in their
choice of transfer pricing approach include:

a.
overall profitability of the company.

b.
differentials in income tax rates among countries.

c.
restrictions imposed by countries on repatriation of profits or dividends.

d.
competitive position of subsidiaries in foreign countries.

e.
All of the above.
16.
In the area of information technology, the main areas of differences between multina
tional companies and
domestic companies are:

a.
factors affecting system design.

b.
factors affecting system operation.

c.
factors affecting regulation.

d.
All of the above.

e.
Only (b) and (c) above.
17.
Identify the approaches that can help provide a match between a firm's global busin
ess strategy and its
global information technology system.

a.
Independent global operations system.

b.
Parent mandated system

c.
Cooperative system

d.
Integrated system

e.
All of the above.
18.
As relates to a multinational information technology strategy, which of the following
statements is true of
the independent global operations system?

a.
Under this approach the parent prescribes the information technology choices of su
bsidiaries.


b.
Under this approach the information technology system is integrated globally.


c.
An advantage is that it permits greater local responsiveness.

d.
An advantage is that it makes it easy for the multinational company to implement gl
obal initiatives and
strategies.

e.
None of the above.
19.
As relates to a multinational information technology strategy, which of the following
statements is true of
the parent mandated system?

a.
Under this approach subsidiaries are fairly autonomous.

b.
The equipment used in information systems reflects local communications standard
s and offerings as
well as local availability of trained personnel.

c.
This approach is responsive to local needs and customs.

d.
This approach facilitates global strategies and coordination.

e.
This approach offers a greater chance of local acceptance.
20.
As relates to a multinational information technology strategy, which of the following
statements is not true
about the cooperative system?

a.
Under this approach the parent influences rather than mandates the information tec
hnology choices of
its subsidiaries.

b.
Joint application development efforts are undertaken between various entities withi
n the group.

c.
Subsidiaries have latitude in modifying applications developed centrally to better fit
the local
environment.

d.
An advantage of this approach is that systems developed cooperatively are more like
ly to be used by
subsidiaries.

e.
An advantage of this approach is that the development period is short and the end pr
oduct is fully
integrated.

True/False Questions
1.

If the budget is to motivate employees and to help create goal congruence between e
mployees and the
organization then it must provide reasonable targets for the employees to attain.

2.
Additional considerations must be factored into designing budget and performance
evaluation systems for
subsidiaries in other countries.
3.
In certain situations companies may need to include non-financial criteria instead of
financial criteria based
on what they perceive to be the primary role of the foreign subsidiary in the firm's o
verall strategy.
4.
An important benefit of non-financial measures is that they can be reported on a tim
ely basis and problems
identified can be addressed promptly before they negatively affect the company's fin
ancial pe
rformance.
5.
If a multinational company has a centralized treasury operation at headquarters wit
h exclusive authority to
manage foreign currency risk then the parent's currency is the one that ought to be
used for evaluating
foreign subsidiaries.
6.
The type of transfer pricing policies within an organization have no impact on the pr
ofitability of each
subsidiary engaged in intra-firm activity.
7.
For a company that has subsidiaries in a number of countries, comparability might b
e a desired ingredient
of a transfer pricing system.
8.
If multinational companies are to suitably motivate and reward the managers of thei
r foreign subsidiaries it
is critical that they distinguish between manager performance and subsidiary perfor
mance.

9.
Research studies that have compared budgeting and performance evaluation practic
es have found that the
average length of time spent in preparing budgets is greater in Japanese companies t
han in U.S. companies.
10.
Research studies that have compared budgeting and performance evaluation practic
es have found that U.S.
companies tend to focus on profitability measures of performance while Japanese fir
ms tend to focus on
sales volume and market share.
11.
Research studies that have compared budgeting and performance evaluation practic
es have found that U.S.
firms use budget variances primarily to evaluate managers while Japanese firms use
budget variances
primarily for the timely recognition of problems and to improve next period's budge
t.

12.
There is research evidence that British firms tend to focus on control systems to imp
rove short term profits
while Japanese firms focused more on long term strategic planning and emphasized
growth in market
share.
13.
A recent study found that while management accounting practices of Australian com
panies emphasize cost
control tools at the manufacturing stage, Japanese companies pay much greater atte
ntion to cost planning
and cost reduction tools at the production design stage.
14.
In conducting multinational capital budgeting analysis, one way to handle the additi
onal risk from projects
based abroad is to add a foreign risk premium to the discount rate that would be use
d for a domestic
project.
15.
In conducting multinational capital budgeting analysis, one way to handle the additi
onal risk from pro
jects
based abroad is to adjust the cash flows for the foreign project to reflect the addition
al uncertainty.

16.
The additional complexities resulting from doing business abroad must be incorpora
ted in the capital
budgeting analysis by adjusting either the discount rate or the expected life of the in
vestment.
17.
Some managers refrain from actively managing foreign currency risk because they c
onsider risk
management instruments such as currency options and futures to be speculative.

18.
Management should only devote resources to managing foreign exchange risk if the
benefits to the
company exceed the cost of implementing such a program.
19.
Managers actively engaged in foreign exchange risk management argue that since th
ere is a direct relation
between risk and the required rate of return a less volatile earnings stream reduces t
he firm's cost of capital.

20.
A forward contract is the right and the obligation to buy or sell a currency at a set ex
change rate on a set
date in the future.
21.
In a foreign currency option, the right to buy currency is
a put
and the right to sell currency is
a call.
22.
The only objective under a multinational transfer pricing policy is to minimize the fir
m's global tax
liability.
23.
Joint venture partners in other countries are never impacted by a multinational com
pany's transfer pricing
policies.
24.
In international business, dumping is generally said to occur when a firm sells produ
cts at much higher
prices in foreign markets than it does in its domestic market.
25.
With the improvement in information technology and the growing cooperation betw
een tax authorities in
various countries, the level of monitoring of multinational companies is likely to dec
rease.

Exercises for Chapter 7 Multiple Choice Questions
1. A number of macroeconomic variables can adversely affect comparability of the fi
nancial performance of
subsidiaries in different countries. These include: a. The levels of inflation in countri
es. b. The levels of political stability in countries. c. The labor situation in countries.
d. All of the above. e. Only (a) and (b). 2. Research studies comparing budgeting and
performance evaluation practices in Japan and the United States
have found that: a. the length of time spent in preparing budgets was higher in the U
.S. than in Japan. b. U.S. firms tended to focus on profitability measures while Japane
se firms tended to focus on sales
volume and market share.
c. the compensation and promotion of U.S. managers was more likely to be impacted
by their budget
performance than were those of Japanese managers.
d. All of the above. e. Only (b) and (c) above. 3. Managers who refrain from active m
anagement of foreign exchange risk may do so for a variety of reasons,
including: a. they consider the use of risk management instruments such as currenc
y options and swaps as
speculative.
b. they claim that foreign currency exposures cannot be measured with precision. c.
they argue that all business is risky and the firm gets rewarded for bearing risk. d. t
hey assert that the firm's balance sheet is hedged on an accounting basis. e. All of th
e above. 4. Managers actively engaged in foreign exchange risk management cite the
following benefits: a. Since there is a direct relationship between a company's risk a
nd its cost of capital a less volatile
earnings stream reduces its cost of capital.
b. A less volatile earnings stream has the potential for tax savings under certain tax
regimes. c. Hedging activities can help securities analysts get a more precise value of
the firm's assets. d. All of the above. e. Only (a) and (b) above. 5. The main types of f
oreign exchange exposure are: a. translation exposure b. transaction exposure c. op
erating exposure d. currency exposure

e. Only (a), (b), and (c) above.






6. The main foreign currency risk hedging instruments available to companies are: a
. forward contracts, currency options, currency futures, political risk insurance. b. fo
rward contracts, currency options, money market hedges, currency futures. c. curre
ncy futures, commodities futures, political risk insurance, stock options. d. forward
contracts, stock options, political risk insurance, currency futures. e. currency optio
ns, currency futures, commodities futures, stock options.
7. The main internal constituents of a company that are likely to be affected by its tra
nsfer pricing policies
are: a. senior management of the company. b. shareholders of the company. c. dome
stic tax authorities. d. All of the above. e. Only (a) and (b) above. 8. The main extern
al constituents of a company that are likely to be affected by its transfer pricing polic
ies
are: a. domestic tax authorities b. foreign tax authorities c. joint venture partners d
. All of the above. e. Only (b) and (c) above. 9. The following is a list of the external c
onstituents of a firm's transfer pricing policies: a. employees, shareholders, supplier
s, and customers.
b. domestic tax authorities, joint venture partners, competitors, and customers. c. fo
reign tax authorities, joint venture partners, customers, and shareholders. d. domest
ic tax authorities, foreign tax authorities, employees, and suppliers. e. competitors, s
uppliers, customers, and managers of foreign subsidiaries. 10. The main transfer pri
cing approaches are: a. market based methods b. cost based methods
c. negotiated transfer prices. d. All of the above.
e. Only (a) and (b) above.
11. The main transfer pricing methods for the sale and transfer of tangible items are:
a. the comparable uncontrolled price method. b. the resale price method c. the cost
plus method
d. the comparable profits method e. All of the above.
12. The main transfer pricing methods for intangible assets are: a. the comparable u
ncontrolled transaction method b. the comparable profit method c. the resale price
method d. All of the above.

e. Only (a) and (b) above.






13. Which of the following is an advantage to a company of entering into an Advance
Pricing Agreement: a. It removes some of the uncertainty of how transfer prices will
be treated for tax purposes. b. It makes the relationship between the company and t
he tax authority less adversarial. c. It reduces the company's record keeping burden.
d. All of the above.
e. Only (a) and (b) above.
14. Which of the following is a disadvantage to a company of entering into an Advanc
e Pricing Agreement
(APA): a. The taxpayer may have to divulge proprietary information as part of the A
PA process. b. It does not protect the company from subsequent scrutiny of its transf
er pricing activities. c. The monetary cost of entering into an APA can be considerabl
e. d. All of the above. e. Only (a) and (c) above. 15. Research evidence cited in the ch
apter shows that some of the main factors cited by companies in their
choice of transfer pricing approach include: a. overall profitability of the company. b
. differentials in income tax rates among countries. c. restrictions imposed by countr
ies on repatriation of profits or dividends. d. competitive position of subsidiaries in f
oreign countries. e. All of the above. 16. In the area of information technology, the m
ain areas of differences between multinational companies and
domestic companies are: a. factors affecting system design. b. factors affecting syste
m operation. c. factors affecting regulation. d. All of the above. e. Only (b) and (c) ab
ove. 17. Identify the approaches that can help provide a match between a firm's glob
al business strategy and its
global information technology system. a. Independent global operations system. b.
Parent mandated system c. Cooperative system d. Integrated system e. All of the ab
ove. 18. As relates to a multinational information technology strategy, which of the fo
llowing statements is true of
the independent global operations system? a. Under this approach the parent prescr
ibes the information technology choices of subsidiaries. b. Under this approach the i
nformation technology system is integrated globally. c. An advantage is that it permi
ts greater local responsiveness. d. An advantage is that it makes it easy for the multi
national company to implement global initiatives and
strategies.
e. None of the above.






19. As relates to a multinational information technology strategy, which of the follow
ing statements is true of
the parent mandated system? a. Under this approach subsidiaries are fairly autono
mous. b. The equipment used in information systems reflects local communications
standards and offerings as
well as local availability of trained personnel.
c. This approach is responsive to local needs and customs. d. This approach facilitat
es global strategies and coordination. e. This approach offers a greater chance of loc
al acceptance. 20. As relates to a multinational information technology strategy, whic
h of the following statements is not true
about the cooperative system? a. Under this approach the parent influences rather t
han mandates the information technology choices of
its subsidiaries.
b. Joint application development efforts are undertaken between various entities wi
thin the group. c. Subsidiaries have latitude in modifying applications developed cen
trally to better fit the local
environment.
d. An advantage of this approach is that systems developed cooperatively are more l
ikely to be used by
subsidiaries.
e. An advantage of this approach is that the development period is short and the end
product is fully
integrated. True/False Questions
1. If the budget is to motivate employees and to help create goal congruence betwee
n employees and the
organization then it must provide reasonable targets for the employees to attain. 2.
Additional considerations must be factored into designing budget and performance
evaluation systems for
subsidiaries in other countries. 3. In certain situations companies may need to inclu
de non-financial criteria instead of financial criteria based
on what they perceive to be the primary role of the foreign subsidiary in the firm's o
verall strategy. 4. An important benefit of non-financial measures is that they can be
reported on a timely basis and problems
identified can be addressed promptly before they negatively affect the company's fin
ancial performance. 5. If a multinational company has a centralized treasury operati
on at headquarters with exclusive authority to
manage foreign currency risk then the parent's currency is the one that ought to be
used for evaluating foreign subsidiaries. 6. The type of transfer pricing policies withi
n an organization have no impact on the profitability of each
subsidiary engaged in intra-firm activity. 7. For a company that has subsidiaries in a
number of countries, comparability might be a desired ingredient
of a transfer pricing system. 8. If multinational companies are to suitably motivate an
d reward the managers of their foreign subsidiaries it
is critical that they distinguish between manager performance and subsidiary perfor
mance. 9. Research studies that have compared budgeting and performance evaluati
on practices have found that the
average length of time spent in preparing budgets is greater in Japanese companies t
han in U.S. companies.






10. Research studies that have compared budgeting and performance evaluation pra
ctices have found that U.S.
companies tend to focus on profitability measures of performance while Japanese fir
ms tend to focus on sales volume and market share. 11. Research studies that have c
ompared budgeting and performance evaluation practices have found that U.S.
firms use budget variances primarily to evaluate managers while Japanese firms use
budget variances primarily for the timely recognition of problems and to improve ne
xt period's budget. 12. There is research evidence that British firms tend to focus on
control systems to improve short term profits
while Japanese firms focused more on long term strategic planning and emphasized
growth in market share. 13. A recent study found that while management accounting
practices of Australian companies emphasize cost
control tools at the manufacturing stage, Japanese companies pay much greater atte
ntion to cost planning and cost reduction tools at the production design stage. 14. In
conducting multinational capital budgeting analysis, one way to handle the addition
al risk from projects
based abroad is to add a foreign risk premium to the discount rate that would be use
d for a domestic project. 15. In conducting multinational capital budgeting analysis,
one way to handle the additional risk from projects
based abroad is to adjust the cash flows for the foreign project to reflect the addition
al uncertainty. 16. The additional complexities resulting from doing business abroad
must be incorporated in the capital
budgeting analysis by adjusting either the discount rate or the expected life of the in
vestment. 17. Some managers refrain from actively managing foreign currency risk b
ecause they consider risk
management instruments such as currency options and futures to be speculative. 18.
Management should only devote resources to managing foreign exchange risk if the
benefits to the
company exceed the cost of implementing such a program. 19. Managers actively en
gaged in foreign exchange risk management argue that since there is a direct relatio
n
between risk and the required rate of return a less volatile earnings stream reduces t
he firm's cost of capital. 20. A forward contract is the right and the obligation to buy
or sell a currency at a set exchange rate on a set
date in the future. 21. In a foreign currency option, the right to buy currency is a put
and the right to sell currency is a call. 22. The only objective under a multinational tr
ansfer pricing policy is to minimize the firm's global tax
liability. 23. Joint venture partners in other countries are never impacted by a multin
ational company's transfer pricing
policies. 24. In international business, dumping is generally said to occur when a fir
m sells products at much higher
prices in foreign markets than it does in its domestic market. 25. With the improvem
ent in information technology and the growing cooperation between tax authorities
in
various countries, the level of monitoring of multinational companies is likely to dec
rease.