Chapter19 GE

Principles of Managerial Finance, 13e, Global Edition (Gitman)
Chapter 19 International Managerial Finance

19.1 Understand the major factors that influence the financial operations of multinational
companies (MNCs).
1) NAFTA is a treaty estalishin! free trade and open mar"ets et#een $urope and the United
%tates.
Ans#er& FA'%$
Topic& North American Free Trade Area
(uestion %tatus& )e*ised
AAC%+ ,uidelines& -ynamics of the !loal economy
.) The /orld Trade 0r!ani1ation is a ne# international ody estalished to police #orld tradin!
practices and to mediate disputes et#een memer countries.
Ans#er& T)U$
Topic& /orld Trade 0r!ani1ation
2) 0ffshore Centers are cities or states that ha*e achie*ed prominence as major centers for
$uromar"et usiness.
Ans#er& T)U$
Topic& 0ffshore Centers
3) NAFTA is an international financial mar"et that pro*ides for orro#in! and lendin!
currencies outside their country of ori!in.
Ans#er& FA'%$
Topic& North American Free Trade Area
4) Fluctuations in forei!n e5chan!e mar"ets can affect forei!n re*enues and profits of a
multinational company6 ut they ha*e no impact on its o*erall *alue.
Ans#er& FA'%$
Topic& Forei!n $5chan!e )is"
7) The $uromar"et is the international financial mar"et that pro*ides for orro#in! and lendin!
currencies outside their country of ori!in.
Ans#er& T)U$
Topic& The $uromar"et
1
Copyri!ht 8 .91. :earson $ducation
;) 0ne reason for the recent rapid !ro# in the $uromar"et is that it pro*ides multinational
companies #ith an <e5ternal< opportunity to orro# or lend funds #ith the additional feature of
less !o*ernment re!ulation.
Ans#er& T)U$
Topic& $uromar"et
(uestion %tatus& Ne#
=) The e5istence of specific re!ulations and controls on dollar deposits in the United %tates6
includin! interest rate ceilin! imposed y the !o*ernment6 ha*e contriuted to the !ro#th of the
$uromar"et.
Ans#er& T)U$
Topic& The $uromar"et
9) A joint *enture is a partnership under #hich the participants ha*e contractually a!reed to
contriute specified amounts of money and e5pertise in e5chan!e for stated proportions of
o#nership and profit.
Ans#er& T)U$
Topic& >oint ?entures
19) The official meldin! of the national currencies of the $uropean Union into one currency6 the
$uro6 created the $uropean Monetary Union in .99..
Ans#er& T)U$
Topic& $uropean Union
11) The Mercosur ,roup is a major %outh American tradin! loc that includes countries that
account for more than half of the total of 'atin America@s ,-:.
Ans#er& T)U$
Topic& Mercosur ,roup
1.) The Mercosur ,roup is a major $uropean tradin! loc made up of former %o*iet loc
countries in $astern $urope.
Ans#er& FA'%$
.
12) -isa!reements amon! $uropean Union country memers o*er the disposition of !ara!e and
manufacturin! refuse !enerated primarily y $astern $uropean countries ha*e come to e "no#n
as the $uro Trash Assue.
Ans#er& FA'%$
13) An .992B.9936 the United %tates si!ned a re!ional trade pact #ith the -ominican )epulic6
Costa )ica6 $l %al*ador6 ,uatemala6 Conduras6 and Nicara!ua called the Central American Free
Trade A!reement or CAFTA.
Ans#er& T)U$
Topic& Central American Free Trade A!reement
14) An .992B.9936 the United %tates si!ned a re!ional trade pact #ith south pacific countries
includin! the :hilippines6 Andonesia6 Malaysia called the %outh :acific American Trade
A!reement or %:AMTA.
Ans#er& FA'%$
Topic& Free Trade A!reements
17) The /orld Trade 0r!ani1ation has in recent years admitted current and former communist
countries as memers includin! the )ussian Federation and the :eoples )epulic of China.
Ans#er& T)U$
1;) A partnership et#een a multinational company and a forei!n in*estor in #hich contractually
specified amounts of money and e5pertise are contriuted y the participants for stated
proportions of o#nership and profit is a
A) multinational corporation.
+) floatin! relationship.
C) joint *enture.
-) consolidation.
Ans#er& C
2
1=) The DDDDDDDD is the ta5ation techniEue that increases the U.%. income of an MNC y the
amount of forei!n income (efore forei!n ta5es). The U.%. ta5 calculation is then ased on that
hi!her le*el.
A) unitary ta5 la#
+) !rossin! up procedure
C) ,mC
-) nationali1ation procedure
Ans#er& +
Topic& ,rossin! Up :rocedure
19) All of the follo#in! are considered offshore centers $FC$:T
A) Cua.
+) %in!apore.
C) 'ondon.
-) Nassau.
Ans#er& A
Topic& 0ffshore Centers
.9) A partnership under #hich the participants ha*e contractually a!reed to contriute specified
amounts of money and e5pertise in e5chan!e for stated proportions of o#nership and profit is
called
A) limited partnership.
+) ,mC.
C) %.A.).'.
-) joint *enture.
Ans#er& -
.1) All of the follo#in! are factors that can influence the operations of an MNC $FC$:T
A) forei!n o#nership of portions of eEuity.
+) e5istence of multinational capital mar"ets.
C) forei!n currency fluctuations.
-) consolidation of financial statements ased on only one currency.
Ans#er& -
Topic& Anternational Accountin! and MNCs
3
..) The $uromar"et is dominated y the
A) French franc.
+) >apanese yen.
C) -eutsche mar".
-) U.%. dollar.
Ans#er& -
Topic& $uromar"et
.2) >oint *enture la#s and restrictions may result in any of the follo#in! ne!ati*e implications
for the operation of a forei!nBased susidiary $FC$:T
A) forei!n o#nership may result in disa!reement amon! the partners re!ardin! the distriution
of profits.
+) operatin! in forei!n countries may result in difficulties otainin! the remission of profits.
C) joint *enture a!reements may stem a certain de!ree of ris" due to political hostility.
-) forei!n mana!ement policies may e detrimental to the usual policies of the MNC.
Ans#er& C
.3) The DDDDDDDD is a si!nificant economic force currently made up of .4 nations #ith a
population of more than .94 million that permits free trade #ithin the countries that ma"e up this
!roup.
A) North American Free Trade A!reement (NAFTA)
+) Mercosur ,roup
C) Asian $conomic Area Net#or" (A%$AN)
-) $uropean Union ($U)
Ans#er& -
.4) The DDDDDDDD is a major %outh American tradin! loc that includes countries that account
for more than half of total 'atin American ,-:.
+) Mercosur ,roup
C) 'atin and %outh American Free Trade Area ('A%TA)
-) ,roup of %e*en
Ans#er& +
4
.7) The DDDDDDDD is a major trade a!reement si!ned y the United %tates and fi*e Central
American Countries.
+) Mercosur ,roup
C) 'atin and %outh American Free Trade Area ('A%TA)
-) Central American Free Trade A!reement (CAFTA)
Ans#er& -
Topic& Central American Free Trade A!reement
.;) DDDDDDDD is an international ody that polices #orld commercial tradin! practices and that
mediates disputes et#een t#o or more memer countries.
A) NAFTA
+) ,ATT
C) /T0
-) CAFTA
Ans#er& C
.=) DDDDDDDD is a treaty that has !o*erned #orld trade throu!hout most of the post /orld /ar AA
era.
A) NAFTA
+) ,ATT
C) /T0
-) CAFTA
Ans#er& +
Topic& ,eneral A!reement on Tariffs and Trade
19.. -escrie the "ey differences et#een purely domestic and international financial
statementsGconsolidation6 translation of indi*idual accounts6 and international profits.
1) FA%+ No. 4. reEuires U.%. multinationals first to con*ert the financial statement accounts of
forei!n susidiaries into their functional currency and then to translate the accounts into the
parent firm@s currency usin! the allBcurrentBrate method.
Ans#er& T)U$
Topic& FA%+ No. 4.
7
.) The allBcurrentBrate method is the method y #hich the functional currencyBdenominated
financial statements of an MNC@s susidiary are translated into the parent company@s currency.
Ans#er& T)U$
Topic& FA%+ No. 4. and the Current )ate Method
2) Current U.%. ta5 la#s reEuire the consolidation of financial statements of susidiaries
accordin! to the percenta!e of o#nership y the parent company.
Ans#er& T)U$
Topic& Ta5es Assues )elated to MNCs
3) The temporal method reEuires specific assets and liailities to e translated at soBcalled
historic e5chan!e rates6 and that forei!nBe5chan!e translation !ains or losses e reflected in the
current year@s income.
Ans#er& T)U$
Topic& Temporal Method
4) Current U.%. ta5 la#s reEuire the separation of financial statements of susidiaries and the
operatin! results for some susidiaries are e5cluded from the parent entirely for some countries
such as China and Andia.
Ans#er& FA'%$
Topic& Ta5es Assues )elated to MNCs
7) A functional currency is the currency of the parent company@s country.
Ans#er& FA'%$
Topic& Functional Currency
;) A functional currency is the currency of the host country in #hich a susidiary primarily
!enerates and e5pends cash and in #hich its accounts are maintained.
Ans#er& T)U$
;
=) FA%+ No. 4. is a statement issued y the Financial Accountin! %tandards +oard reEuirin!
American MNCs to first con*ert the financial statement accounts of forei!n susidiaries into the
country@s DDDDDDDD currency and then translate the accounts into the parent firm@s currency usin!
the DDDDDDDD method.
A) spotH historical rate
+) functionalH allBcurrentBrate
C) principalH a*era!e rate
-) for#ard rateH #ei!hted a*era!e
Ans#er& +
9) The allBcurrentBrate method dictated y the FA%+ No. 4. statement reEuires the translation of
all alance sheet accounts at the DDDDDD rate and all income statement items at the DDDDDDDD
rates.
A) closin!H a*era!e
+) a*era!eH closin!
C) historicalH current
-) a*era!eH historical
Ans#er& A
19) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I169496999 efore local
ta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. The
forei!n income ta5 rate is 29 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 and
the firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if forei!n
ta5es can e applied as a credit a!ainst the MNC@s U.%. ta5 liailityJ
A) I7.36;49
+) I3.46.49
C) I.4;6.49
-) I;246999
Ans#er& A
Topic& Ta5 Credits and MNCs
AAC%+ ,uidelines& Analytic s"ills
=
11) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I169496999 efore local
ta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. The
forei!n income ta5 rate is 29 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 and
the firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if no ta5
credits are allo#edJ
A) I7.36;49
+) I3.46.49
C) I.4;6.49
-) I;246999
Ans#er& C
Topic& Ta5 Credits and MNCs
1.) A U.%.Based MNC has three susidiaries& %1 (39 percent o#ned y the MNC)H %. (22
percent o#ned y %1)6 and %2 (.9 percent o#ned y %.). The ta5ale income for each firm is
I199 million. The local ta5es for each firm are I14 million6 I.9 million6 and I19 million6
respecti*ely. The MNC@s ta5 rate is 39 percent.
(a) Can the MNC apply all of its local ta5es as a credit a!ainst its U.%. ta5esJ
() +ased on the <!rossin! up< concept6 calculate all ta5 credits applicale to the MNC.
Ans#er&
(a) -etermine the de!ree of o#nership of each susidiary&
%1& 39K directly o#ned y the MNC.
%.& (39K L 22K) M 12..K o#ned y the MNC.
%2& (39K L 22K L .9K) M ..7K o#ned y the MNC.
+ased on these results6 %1 and %. can e included ut %2 cannot.
() The ma5imum credit a!ainst U.%. ta5es M 39K L (I199 million N I199 million) M I=9
million. The local ta5es paid y %1 and %.6 or I24 million6 can e used as a U.%. ta5 credit y the
MNC.
Topic& MNCs and Ta5es
9
12) A U.%Based MNC has a susidiary in China #here the local currency is the )enmini
()M+). The alance sheets and income statements of the susidiary are presented in the tale
elo#. 0n -ecemer 216 .9946 the e5chan!e rate #as =..; )M+OU%I. Assume the local
currency fi!ures in the statement elo# remain the same on -ecemer 216 .997. Calculate the
U.%. dollar translated fi!ures for the t#o endin! time periods assumin! that et#een -ecemer
216 .994 and -ecemer 216 .9976 the Chinese !o*ernment re*alues (appreciates) the )M+ y .9
percent.
Translation of Income Statement
Translation of Balance Sheet
Ans#er& This sho#s that an appreciation of the forei!n currency a!ainst the dollar for a
susidiary in that country #ill result in hi!her *alues on oth the alance sheet and income
statement once those *alues are translated into dollars e*en if the local currency *alues didn@t
chan!e at all. The opposite #ould e the case if the forei!n currency depreciates a!ainst the
dollar.
Translation of Income Statement
19
Translation of Balance Sheet
Topic& Translation of Financial %tatements
19.2 -iscuss e5chan!e rate ris" and political ris"6 and e5plain ho# MNCs mana!e them.
1) The spot e5chan!e rate is the rate of e5chan!e et#een t#o currencies at some specified
future date.
Ans#er& FA'%$
.) The for#ard e5chan!e rate is the rate of e5chan!e et#een t#o currencies on any !i*en day.
Ans#er& FA'%$
Topic& For#ard $5chan!e )ates
2) The functional currency is the currency of the economic en*ironment in #hich a usiness
entity primarily !enerates and e5pends cash6 and in #hich its accounts are maintained.
Ans#er& T)U$
3) Accountin! e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rates
on the translated *alue of a firm@s financial statement accounts denominated in a !i*en forei!n
currency.
Ans#er& T)U$
Topic& Accountin! $5posure
11
4) $conomic e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rates
on the firm@s *alue.
Ans#er& T)U$
Topic& $conomic $5posure
7) The three asic types of ris" associated #ith international cash flo#s are 1) usiness and
financial ris"s6 .) inflation and forei!n e5chan!e ris"s6 and 2) political ris"s.
Ans#er& T)U$
Topic& Types of )is" in Anternational Cash Flo#s
;) Countries that e5perience hi!h inflation rates #ill see their currencies decline in *alue relati*e
to the currencies of countries #ith lo#er inflation rates.
Ans#er& T)U$
Topic& Anflation )is" and Anternational Cash Flo#s
=) /hen more units of a forei!n currency are reEuired to uy one dollar6 the currency is said to
ha*e appreciated #ith respect to the dollar.
Ans#er& FA'%$
Topic& Forei!n $5chan!e )is" and Anternational Cash Flo#s
9) Althou!h se*eral economic and political factors can influence forei!n e5chan!e rate
mo*ements6 y far the most important e5planation for lon!Bterm chan!es in e5chan!e rates is a
differin! inflation rate et#een t#o countries.
Ans#er& T)U$
19) Althou!h se*eral economic and political factors can influence forei!n e5chan!e rate
mo*ements6 y far the most important e5planation for lon!Bterm chan!es in e5chan!e rates is
fiscal policy that a country adopts.
Ans#er& FA'%$
1.
11) Macro political ris" is the ris" faced y all forei!n firms in a host country related to political
chan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!es
in o#nership structure6 closure or e5propriation.
Ans#er& T)U$
Topic& :olitical )is"
1.) Micro political ris" is the ris" faced y all forei!n firms in a host country related to political
chan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!es
in o#nership structure6 closure or e5propriation.
Ans#er& FA'%$
12) )ecent years ha*e seen the emer!ence of a third path to political ris" that encompasses
<!loal< e*ents such as terrorism6 anti!loali1ation mo*ements and protests6 internetBased ris"s6
and concerns o*er po*erty6 AA-%6 and the en*ironment6 all of #hich affect *arious MNCs@
operations #orld#ide.
Ans#er& T)U$
13) National entry control systems are comprehensi*e rules6 re!ulations6 and incenti*es
introduced y host !o*ernments to re!ulate inflo#s of forei!n direct in*estment from MNCs and
at the same time e5tract more enefits from their presence.
Ans#er& T)U$
Topic& National $ntry Control %ystems
14) National entry control systems are comprehensi*e rules6 re!ulations6 and immi!ration
policies introduced y 5enophoic host !o*ernments to re!ulate inflo#s of forei!n #or"ers.
Ans#er& FA'%$
17) +oth theory and empirical e*idence indicate that the capital structures of MNCs differ from
those of purely domestic firms.
Ans#er& T)U$
Topic& MNC Capital %tructure
12
1;) +oth theory and empirical e*idence indicate that the capital structures of MNCs are no
different from those of purely domestic firms.
Ans#er& FA'%$
Topic& MNC Capital %tructure
1=) All of the follo#in! are considered to e major or <hard< currencies $FC$:T
A) the >apanese yen.
+) the +ritish pound.
C) the Me5ican peso.
-) the U.%. dollar.
Ans#er& C
Topic& Forei!n $5chan!e
19) /hen fe#er units of a forei!n currency are reEuired to uy one dollar6 the currency is said to
ha*e DDDDDDDD #ith respect to the dollar.
A) appreciated
+) depreciated
C) consolidated
-) remained fi5ed
Ans#er& A
Topic& Forei!n $5chan!e
.9) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the translated
*alue of a firm@s accounts denominated in a !i*en forei!n currency is
A) economic e5posure.
+) macro political ris".
C) accountin! e5posure.
-) micro political ris".
Ans#er& C
Topic& Accountin! $5posure
.1) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the firm@s *alue is
A) economic e5posure.
+) macro political ris".
C) accountin! e5posure.
-) micro political ris".
Ans#er& A
Topic& $conomic $5posure
13
..) The ris" attached to international cash flo#s are all of the follo#in! $FC$:T
A) usiness and financial ris"s.
+) inflation and forei!n e5chan!e ris"s.
C) political ris"s.
-) ris" of local mana!ement.
Ans#er& -
Topic& Types of )is" in Anternational Cash Flo#s
.2) Macro political ris" and micro political ris" in international usiness refer to the ris"
A) that #ill affect all forei!n firms and the ris" that #ill affect an indi*idual firm or specific
industry6 respecti*ely.
+) of nationali1ation of the oil industry and the ris" of a political re*olution6 respecti*ely.
C) that #ill affect an indi*idual firm or specific industry and the ris" that #ill affect all forei!n
firms6 respecti*ely.
-) of sudden ta5es on e5portin! the manufactured !oods of a particular industry and the ris" of
the de*aluation of the host country@s currency6 respecti*ely.
Ans#er& A
.3) A political ris" that mi!ht affect all forei!n firms in a host country is termed a DDDDDDDD ris"H
a political ris" that mi!ht affect only an indi*idual firm or specific industry in a host country is
termed a DDDDDDDD ris".
A) macro politicalH micro political
+) micro politicalH macro political
C) micro politicalH forei!n e5chan!e
-) forei!n e5chan!eH micro political
Ans#er& A
.4) All of the follo#in! are positi*e approaches of copin! #ith political ris" $FC$:T
A) use of locals in mana!ement.
+) joint *enture #ith local an"s.
C) license or patent restrictions under international a!reement.
-) local sourcin!.
Ans#er& C
14
.7) For DDDDDDDD currencies6 chan!es in the *alue of forei!n e5chan!e rates are called
DDDDDDDD.
A) floatin!H appreciation
+) floatin!H re*aluation or de*aluation
C) fi5edH re*aluation or de*aluation
-) fi5edH appreciation or depreciation
Ans#er& C
Topic& Fi5ed *ersus Floatin! )ate Currencies
.;) +et#een t#o major currencies6 the spot e5chan!e rate is the rate DDDDDDDD and the for#ard
e5chan!e rate is the rate DDDDDDDD.
A) on that dateH today
+) at some specified future dateH today
C) todayH on that date
-) on that dateH at some specified future date
Ans#er& -
Topic& %pot and For#ard $5chan!e )ates
.=) Forei!n e5chan!e ris" refers to the ris" created y
A) the potential sei1ure of an MNC@s operations in a host country
+) the *aryin! e5chan!e rate et#een t#o currencies
C) the fi5ed e5chan!e rate et#een t#o currencies
-) the potential nationali1ation of the MNC@s operations y a host !o*ernment
Ans#er& +
Topic& Forei!n $5chan!e )is"
.9) Af the e5chan!e rate et#een the U.%. dollar and the $uro is I1..9 per $uro and the e5chan!e
rate et#een the U.%. dollar and the >apanese yet is 1.9 Pen per dollar6 then #hat is the $uro per
Pen e5chan!e rateJ
A) 9.9199
+) 133.99
C) 9.9979
-) 199.99
Ans#er& C
Topic& $5chan!e )ates
17
29) Af the e5chan!e rate et#een the U.%. dollar and the $uro is I1..9 per $uro and the annual
rate of inflation is 4 percent in the United %tates and 19 percent in $urope6 #hat #ill e U.%.
dollar per $uro e5chan!e rate in one yearJ
A) 1.134
+) 9.=;29
C) 1..4;
-) 9.;944
Ans#er& A
Topic& $5chan!e )ates and Anflation
19.3 -escrie forei!n direct in*estment6 in*estment cash flo#s and decisions6 the MNCs@
capital structure6 and the international det and eEuity instruments a*ailale to MNCs.
1) Forei!n ond is an international ond that is sold primarily in countries other than the country
of the currency in #hich the issue is denominated.
Ans#er& FA'%$
Topic& Forei!n +onds
.) An !eneral6 an international ond is one that is initially sold in the country of the orro#er and6
then6 often distriuted in se*eral countries.
Ans#er& FA'%$
Topic& Anternational +onds
2) +ecause of their access to the international ond and eEuity mar"ets6 MNCs may ha*e lo#er
costs of *arious sources of lon!Bterm financin!6 thus resultin! in differences et#een the capital
structures of these firms and those of purely domestic companies.
Ans#er& T)U$
Topic& Cost of Capital for MNCs
3) The forei!n direct in*estment (F-A) is a multiBnational corporation@s transfer of capital6
mana!erial6 and technical assets from a host country to its home country.
Ans#er& FA'%$
Topic& Forei!n -irect An*estment
1;
4) A multiBnational corporation (MNC) can !i*e some protection to international cash flo#s y
reducin! its liailities if the currency is appreciatin!6 or y reducin! its financial assets if the
currency is depreciatin!.
Ans#er& T)U$
Topic& MNCs and Anternational Cash Flo#s
7) Comprehensi*e rules6 re!ulations6 and incenti*es aimed at re!ulatin! the inflo# of direct
forei!n in*estments in*ol*in! MNCs and at e5tractin! more enefits from their presence are
termed
A) unitary ta5 la#s.
+) forei!n direct in*estments.
C) $urocurrency mar"ets.
-) national entry control systems.
Ans#er& -
;) The transfer y a multinational firm of capital6 mana!erial6 and technical assets from its home
country to a host country is termed
A) an MNC.
+) an %-A.
C) an F-A.
-) a CA:M.
Ans#er& C
=) An international ond that is sold primarily in countries other than the country of the currency
in #hich the issue is denominated is called
A) international ond.
+) forei!n ond.
C) $uroond.
-) none of the ao*e.
Ans#er& C
Topic& $uroonds
9) For forei!n onds6 interest rates are usually not directly correlated #ith the domestic rates
pre*ailin! in the respecti*e countries.
Ans#er& FA'%$
1=
19) For a $urodollar ond6 the interest rate #ill reflect se*eral different rates6 most notaly the
U.%. lon!Bterm rate6 the $urodollar rate6 and lon!Bterm rates in other countries.
Ans#er& T)U$
Topic& $uroonds
11) An capital ud!etin! for a multinational6 the startin! discount rate to #hich ris"s stemmin!
from forei!n e5chan!e and political factors can e added6 and from #hich enefits reflectin! the
parent@s lo#er capital costs may e sutracted is
A) the cost of capital of the parent (multinational) company.
+) the ris"Bfree rate of the parent company6 adjusted for ris" rele*ant to the forei!n susidiary.
C) the local cost of eEuity capital applicale to the local usiness and financial en*ironments
#ithin #hich a susidiary operates.
-) the #ei!hted a*era!e cost of capital applicale to all forei!n susidiaries comined.
Ans#er& C
Topic& Multinational Capital +ud!etin!
1.) Theory and empirical e*idence indicate that the capital structures of multinational companies
A) are asically the same as those of domestic firms.
+) differ6 ut all multinationals are similar no matter the domicile country.
C) not only differ from domestic firms6 ut differ also ased upon the country in #hich they are
domiciled.
-) differ only ecause of their operatin! structure.
Ans#er& C
Topic& Multinational Capital %tructures
12) )elati*e to cash flo#s of domestic firms6 y di*ersifyin! internationally6 multinationals
A) can increase cash flo#s.
+) can achie*e further ris" reduction.
C) are unale to chan!e the ris".
-) are not attemptin! to chan!e ris".
Ans#er& +
Topic& Multinationals and -i*ersification
19
13) The capital structures of MNCs are influenced y all of the factors elo# $FC$:T
A) international capital mar"ets.
+) international di*ersification.
C) country factors.
-) all of the ao*e.
Ans#er& -
Topic& Capital %tructure and MNCs
14) The first international capital mar"et6 a mar"et #ith uniform rules and re!ulations !o*ernin!
major stoc" e5chan!es6 #as finally estalished and e!an operations in .99.
A) at The Ca!ue.
+) in Ne# Por".
C) in 'ondon.
-) none of the ao*e.
Ans#er& -
Topic& Anternational Capital Mar"et
17) A multinational company has t#o susidiaries6 one in Areland (local currency6 Arish pound)
and the other in /est ,ermany (local currency6 -eutsche mar"). :ro forma statements of
operations indicate the follo#in! shortBterm financial needs for each susidiary (in eEui*alent
U.%. dollars)& Areland& I.4 million e5cess cash to e in*ested (lent)H /est ,ermany& I19 million
funds to e raised (orro#ed)
The follo#in! financial data is also a*ailale&
(a) -etermine the effecti*e rates of interest for Arish pound and -eutsche mar" in oth the
$uromar"et and the domestic mar"et.
() /here should the funds e in*estedJ
(c) /here should the funds e raisedJ
.9
Ans#er&
(a)
() I.4 million should e in*ested in U.%. dollars in the $uromar"et.
(c) I19 million should e raised in -eutsche mar"s in the
Topic& MNCs and Financin! -ecisions
19.4 -iscuss the role of the $urocurrency mar"et in shortBterm orro#in! and in*estin!
(lendin!) and the asics of international cash6 credit6 and in*entory mana!ement.
1) An the international conte5t6 the nominal interest rate is the stated interest rate char!ed on
financin! #hen only the MNC parent@s currency is in*ol*ed.
Ans#er& T)U$
Topic& MNCs and Anterest )ates
.) An the case of shortBterm financin!6 the forces of supply and demand are amon! the main
factors determinin! e5chan!e rates in $urocurrency mar"ets.
Ans#er& T)U$
Topic& $urocurrency Mar"ets
2) Ced!in! strate!ies are techniEues used to offset or protect a!ainst ris"H in the international
conte5t these include orro#in! or lendin! in different currencies6 underta"in! contracts in the
for#ard6 futures6 andOor options mar"ets6 and also s#appin! assetsOliailities #ith other parties.
Ans#er& T)U$
Topic& Ced!in! Forei!n $5chan!e )is"
3) The interest rates offered in the $uromar"et on the U.%. dollar are !reatly affected y the
prime rate inside the United %tates.
Ans#er& T)U$
Topic& $uromar"et Anterest )ates
.1
4) An the international conte5t6 the effecti*e interest rate eEuals to the nominal rate plus (or
minus) any forecast appreciation (or depreciation) of a forei!n currency relati*e to the currency
of the MNC parent.
Ans#er& T)U$
7) $5chan!e rate ris" hed!in! tools include for#ard contracts6 options6 interest rate s#aps6
currency s#aps6 and hyrid securities.
Ans#er& T)U$
Topic& Ced!in! $5chan!e )ate )is"
;) $5chan!e rate ris" hed!in! tools include Monte Carlo s#aps6 synthetic insurance contracts6
and in*entory s#aps.
Ans#er& FA'%$
Topic& Ced!in! $5chan!e )ate )is"
=) The center of the $uroBeEuity mar"et6 #hich deals in international eEuity issues is
A) Ne# Por".
+) ,ene*a.
C) To"yo.
-) 'ondon.
Ans#er& -
Topic& $uroB$Euity Mar"et
9) The usual capital mar"ets used y U.%.Based MNCs that desire international o#nership of
their eEuity are
A) /estern $urope and >apan.
+) Me5ico and Canada.
C) %audi Araia and %outh Africa.
-) 'iechtenstein and :anama.
Ans#er& A
Topic& MNCs and Capital Mar"ets
..
19) A $uroond is
A) a ond sold primarily to $uropeans.
+) a ond sold primarily in countries other than the country of the currency in #hich the issue is
denominated.
C) a det instrument sold e5clusi*ely in $urope.
-) a ond issued in 'iechtenstein.
Ans#er& +
Topic& $uroonds
11) The e5istence of DDDDDDDD allo#s multinationals to ta"e ad*anta!e of unre!ulated financial
mar"ets to in*est and raise shortBterm funds in a *ariety of countries and to protect themsel*es
from forei!n e5chan!e e5posure.
A) a stron! U.%. dollar
+) the Anternational Monetary Fund
C) $urocurrency mar"ets
-) $uropean $conomic Council
Ans#er& C
Topic& $urocurrency Mar"ets
1.) An the international conte5t6 the DDDDDDDD interest rate in*ol*es only the MNC parent@s
currency6 #hile the DDDDDDDD interest rate includes any forecast appreciation or depreciation of a
forei!n currency relati*e to that of the MNC parent.
A) effecti*eH nominal
+) macroH nominal
C) nominalH effecti*e
-) nominalH micro
Ans#er& C
12) A shortBterm financial decision ased on an MNC mana!ement@s e5pectation that the local
forei!n currency #ill appreciate may e
A) increasin! local customers@ accounts recei*ale and increasin! local notes payale.
+) decreasin! local notes recei*ale and decreasin! accruals.
C) increasin! local in*entories and increasin! local notes payale.
-) increasin! local accounts recei*ale and decreasin! local accounts payale.
Ans#er& -
Topic& MNCs and %hortBterm Finance
.2
13) As a forei!n e5chan!e hed!in! tool6 options ha*e all of the follo#in! characteristics
$FC$:T
A) the ri!ht to uy or sell an amount of forei!n currency.
+) specifies price.
C) specifies time period.
-) represents an oli!ation to uy or sell.
Ans#er& -
14) As a forei!n e5chan!e hed!e6 currency s#aps ha*e all of the follo#in! characteristics
$FC$:T
A) an initial e5chan!e y t#o parties of t#o principal amounts in t#o different currencies.
+) principal amounts are re*ersed at the spot rate at maturity.
C) each party pays the other@s interest payment.
-) principal amounts are re*ersed at a preBa!reed rate at maturity.
Ans#er& +
17) An terms of in*entory mana!ement multinational firms
A) must deal mainly #ith e5chan!e rate fluctuations and tariffs.
+) must deal #ith a #ide numer of factors6 includin! e5chan!e rate fluctuations6 tariffs6 nonB
tariff arriers6 inte!ration schemes such as the $$C6 and other rules and re!ulations.
C) ha*e only economic factors to consider6 since this is a current asset and is minimally affected
y political factors.
-) ha*e only political factors to consider6 since in*entory is minimally affected y forei!n
economic factors.
Ans#er& +
Topic& MNCs and An*entory Mana!ement
1;) Forei!n onds are sold primarily in
A) countries other than the country in #hich the issue is denominated.
+) /estern $urope.
C) >apan.
-) the country of the currency of issue.
Ans#er& -
.3
1=) A ond that is initially sold primarily in countries other than the country of the currency in
#hich the issue is denominated is called
A) an international ond.
+) a forei!n ond.
C) a $uroond.
-) a doule -utch ond.
Ans#er& C
Topic& $uroonds
19.7 )e*ie# recent trends in international mer!ers and joint *entures.
1) The creation of international joint *entures has increased sustantially durin! the past t#o
decades.
Ans#er& T)U$
Topic& Anternational >oint ?entures
.) An the U.%. o*er the past 29 years6 forei!n direct in*estment (F-A) came o*er#helmin!ly in
the form of mer!ers and acEuisitions rather than throu!h estalishments.
Ans#er& T)U$
2) An the most emer!in!Ode*elopin! countries (includin! China) o*er the past 29 years6 forei!n
direct in*estment (F-A) came o*er#helmin!ly in the form or mer!ers and acEuisitions rather
than throu!h estalishments.
Ans#er& FA'%$
.4

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Principles of Managerial Finance, 13e, Global Edition (Gitman)

Chapter 19 International Managerial Finance

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