Professional Documents
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0 - Quan Trong - Multinational - Business - Finance - 292
0 - Quan Trong - Multinational - Business - Finance - 292
1. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One
year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but
when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has
fallen to £1 = $0.75. This loss of value is an example of
b. Political Risk
c. Market imperfections
b. It may be best to conform to the local norm of the country where the subsidiary operates.
a. Creditors and potential creditors will examine the subsidiary’s financial structure
closely to assess default risk.
b. Potential creditors will still look to the parent company’s capital structure as it is
still legally and morally responsible for its subsidiary’s debts.
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5. The cost of capital
b. Is the minimum rate of return an investment project must generate in order to pay
its financing costs.
a. The company can expand its potential investor base, which will lead to a higher
stock price and a lower cost of capital.
c. Cross listing may improve the company’s corporate governance and transparency.
b. Can identify more projects that generate returns exceeding the cost of capital and
thereby increase the firm’s value.
a. Any differences in the cost of capital across countries can be diversified away.
b. Systematic differences in the cost of capital may exist across different countries.
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c. Any difference in the cost of capital that may exist across different countries is
due to differences in unsystematic risk.
11. When Nestlé announced that it would lift restrictions on foreign ownership of its registered
shares
c. The two classes of shares began a pricing to market phenomenon after the
announcement.
12. When Nestlé announced that it would lift restrictions on foreign ownership of its registered
shares
a. While the price of registered shares rose, the price of bearer shares fell. As a
result, the total market value of the company remained unchanged.
a. The value of this loan could be estimated explicitly as a component of the APV.
c. The firm would ignore the cash flow implications of this since it is a financing
decision.
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d. All of the above may be correct.
14. Suppose that domestic inflation is 3%; inflation in € is 6% and the spot exchange rate is €1 =
$2. What is your estimate of the exchange rate expected to prevail in 3 years?
a. €1 = $2.1855
b. €1 = $2.00
c. €1 = $1.8349
d. €1 = $1.9434
15. Your firm has a project that will produce cash flows of CDATA[€>500,000 per year for five
years. The foreign government will only allow repatriation of €>250,000 per year. Which cash
flow should you use in estimating the APV?
a. €>500,000
b. €>250,000
c. Both
16. Your U.S.-based firm is considering a capital budgeting project in Japan. Suppose that the
spot exchange rate for Japanese yen is ¥122/$ and that the one year forward exchange rate for
Japanese yen is ¥130/$. The discount rate is 5% in the U.S. What's the discount rate that should
be used in Japan on yen-denominated cash flows?
a. 11.89%
b. 6.56%
c. 3.28%
d. 1.67%
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c. The option could subtract value from the project in the right circumstances.
a. Each cash flow is discounted at the discount rate appropriate with the risk
associated with that cash flow.
c. The cash flow from operations is used, not the amount that is available for
remittance.
a. If it is possible to finance the project entirely with debt, the project will have a
higher APV than if all equity financed, since the return on debt is lower than the
return on equity.
b. It is never appropriate to think of the project as being financed separately from the
way the firm is financed.
20. Consider a project to invest abroad, the size and timing of the after-tax incremental cash
flows are shown in the following table:
Year 0 1 2 3
Estimate the NPV of the project to the shareholders of a U.S. firm. The inflation rate in dollars is
two percent per year, the inflation rate in euros is three percent. The spot exchange rate is $1.08
= €1.00 and the discount rate appropriate for projects of this risk (denominated in dollars) is 10
percent.
a. $38,767.63
b. €49,211.12
c. $35,895.95
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d. None of the above.
a. Different scenarios are used to estimate the value of any imbedded options that
the project carries with it.
c. APV estimated are hardened by using the expected value of the exchange rate and
inflation rate to arrive at one expected value of the APV.
22. The Schadenfreude Corporation has an optimal debt ratio of 50 percent. Its cost of equity
capital is 12 percent and its pre-tax borrowing rate is 8 percent. Given a marginal tax rate of 34
percent, calculate the weighted average cost of capital.
a. 10 percent
b. 6.6 percent
c. 8.64 percent
23. Not all countries allow MNCs the freedom to net payments,
a. The U.S., Canada, and Great Britain allow only netting between each other.
b. Some countries require the MNC to ask permission, and some countries limit
netting.
c. But that is fine, since netting typically has costs that outweigh the benefits for a
MNC.
b. The higher the gross profit of the receiving division relative to the transferring
division.
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c. The higher the gross profit of the transferring division relative to the receiving
division.
25. Your firm has a subsidiary in a foreign country which has placed restrictions on its own
currency, limiting its conversion into other currencies. What is up with that?
c. This will not affect the MNC since the accounting numbers in the consolidated
financial statements will not change.
26. Affiliate A sells 1,000 units to Affiliate B per year. The marginal income tax rate for Affiliate
A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer price
can be set at any level between $100 and $200. Which transfer price between A and B should the
parent select.
a. $200
b. $100
c. $150
27. Which will reduce the number of foreign exchange transaction the most for a MNC?
a. Multilateral netting
b. Bilateral netting
c. Fish netting
a. Each affiliate nets all its inter-affiliate receipts against all its disbursements. It
then transfers or receives the balance, respectively, if it is the net payer or
receiver.
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b. Each pair of affiliates determines the net amount due between them, and only the
net amount is transferred.
c. No inter-affiliate payments are made or even computed, since no real cash flows
are involved.
a. Is really no different for a MNC than for a purely domestic firm in a closed
economy.
b. Concerns itself with the size of cash balances, their currency denominations, and
where these cash balances are located among the MNC's affiliates.
c. Concerns itself with the size of cash balances and their currency denominations,
but not where these cash balances are located among the MNC's affiliates, since
intra-affiliate default risk is not an issue.
b. Each affiliate will have greater autonomy in managing its own cash balances.
a. Use the resale price approach, where the price at which the good is resold by the
distribution affiliate is reduced by an amount sufficient to cover overhead costs
and a reasonable profit.
c. Use the cost plus approach, where an appropriate profit is added to the cost of the
manufacturing affiliate.
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32. If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes Affiliate
A €2,000 when the exchange rate is $1.10 = €1.00. The net payment between A and B should be
a. €1,091 from B to A
b. €1,091 from A to B
c. $1,200 from B to A
a. Is that similarly situated taxpayers should participate in the cost of operating the
government according to the same rules.
a. National neutrality
c. In an indirect national tax levied on the value added in the production of a good
(or service) as it moves through the various stages of production.
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36. When the income tax rate in the host country is greater than the tax rate in the parent country,
c. Transfer pricing will not affect the total tax liability, net of foreign tax credit
offsets.
a. Is a country that has a low corporate income tax rate and low withholding tax
rates on passive income.
b. A country with no taxes and no enforcement of foreign tax laws within its
borders.
38. There are three production stages required before a bicycle produced by Masi Bicicletia S.A.
can be sold at retail for €3,500. The VAT rate is 15%. Find the total tax liability due.
a. €525
b. €150
c. €3,500
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39. If U.S. taxing authorities did not limit the amount of the foreign tax credit to the equivalent
amount of the U.S. tax
a. U.S. taxpayers would end up subsidizing part of the tax liabilities of U.S. MNC's
foreign earned income.
a. Income that results from production by the firm or individual (of goods or
services).
c. Includes dividend and interest income, since the tax court has ruled that taking
risk is a form of work.
41. The current U.S. marginal tax rate for domestic nonfinancial corporations is 35 percent.
a. This is positioned pretty well in the middle of the rates assessed by the majority of
countries, as reported in the PriceWaterhousCoopers annual Corporate Taxes:
Worldwide summaries.
c. But this is reduced on a dollar-for-dollar basis for any and all taxes paid to foreign
governments, so this is an upper limit for the tax rate faced by U.S. MNCs.
a. An indirect tax, that is, a tax that is borne by a taxpayer who did not directly
generate the income that serves as the source of the passive income.
b. A direct tax, that is, a tax that is borne by a taxpayer who generated the income
that serves as the source of the active income.
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c. Is a form of double taxation.
43. Cash flow analysis, as part of the capital budgeting process, requires:
a. A firm to conceptualize a project and forecast future cash flow from the project.
b. Areview of the firm's recent cash flow to determine if it will support projects
under consideration.
d. That foreign cash flow be converted into the home currency of the firm.
44. In the capital budgeting process in many MNCs, importance is place on making decisions on
project proposals:
a. By outside consultants who have special expertise in the particular project under
consideration.
c. At lower levels within the organization so that more costly upper level managerial
time will not be expended.
d. By involving the entire organization so that all levels of the organization will
claim ownership of a project.
45. MNCs may elect to pursue a project that uses foreign labor on the basis that the foreign labor
costs less than domestic labor, but another reason for using foreign labor is that it:
b. Is more productive.
d. Is more plentiful.
a. Foreign firms doing business in a country are sometimes subject to regulations that
do not apply to domestic firms, so foreign firms can employee government officials
in countries to see that the firm is exempted from such regulations on foreign firms.
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b. Foreign firms doing business in a country are well-advised to employ locals to lobby
the government of the country where the firm is doing business to provide local
subsidies for the foreign firm so that the foreign firm will invest in that country.
c. Since countries can impose regulations on foreign firms doing business in the
country, a firm can actually invest in a country so that it is not simply a foreign firm
selling in the country and potential avoid many of those regulations that apply to
foreign firms.
47. How does off shoring differ from a firm producing in another country?
d. Foreign production means producing something ion a foreign country for sale in
that country, while off shoring means that a product is being produced in a foreign
country and will be shipped back to the home country of the firm responsible for
the off shoring.
b. Form a joint venture with another firm in the country where it wants to sell its
products.
b. Demand for the product and the price that it will charge for the product.
c. Existing supply of the product and expanded changes in supply of the product.
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50. In a NPV calculation, the initial cash flow is:
a. The capital investment that is necessary for the project and represents a positive
cash flow.
b. The salvage value of the project and represents a negative cash flow.
c. The initial return from the project and represents a positive cash flow.
d. The capital investment that is necessary for the project and represents a negative
cash flow.
51. Since firms seek to increase shareholder wealth, which projects should firms accept?
52. What is the difference between a foreign branch of an MNC and a foreign subsidiary of an
MNC?
a. When the profits of the subsidiary are not fully paid to the parent, there is parent-
subsidiary asymmetry.
b. When the analysis of a project at the parent and at the subsidiary level yields
dissimilar estimates of NPV, there is parent-subsidiary asymmetry.
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c. When a parent and a subsidiary cannot agree on whether to pursue a specific
project, there is parent-subsidiary asymmetry.
d. When a parent wants the profits of a subsidiary repatriated to the parent but the
subsidiary resists paying its profits to the parent, there is parent-subsidiary
asymmetry.
54. MNCs may be subject to as many as three taxes on the income of their subsidiaries,
including:
a. The total cash flow of the parent will remain unchanged, but the value of that cash
flow will decrease because the receipt of the funds by the parent will be delayed.
b. The total cash flow of the parent will be reduced, and the value of that cash flow
will be further decreased because the receipt of the funds by the parent will be
delayed.
c. The parent's cash flow will not be affected because the cash flow will only be
delayed, not reduced.
d. The total cash flow of the parent will be reduced, but the delay in the receipt of
the funds by the parent will not affect the value of those funds to the parent.
56. The issues involved in parent-subsidiary asymmetry can usually be resolved by:
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b. Averaging the cash flow calculation of the subsidiary and the cash flow
calculations of the parent.
c. Being conservative and using the cash flow calculation which provides the lowest
amount of cash flow.
57. When a subsidiary is restricted from remitting its profits to the parent, the restricted cash
flow is usually:
58. If there are efficient markets and no cross-border constraints on the flow of capital, project
financing:
59. In evaluating the values associated with cash flow of the parent and the subsidiary, what are
financial "side effects"?
a. Side effects are the components of cash value that may differ between the parent
and the subsidiary such as blocked currency, additional taxes and local financing
subsidies.
b. Side effects are the additional factors, beyond cash flow, that must be considered
in determining the value of a project.
c. Side effects are the effects that are felt by a parent when its subsidiary earns more
income than the parent.
d. Side effects are effects of the non-financial issues that exist between parent and
subsidiary that must be resolved before a project can proceed.
60. In considering the value of a project, the NPV estimate for the parent equals the:
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a. Foreign cash flow from the project discounted at the parent's discount rate.
b. Foreign cash flow from the project discounted at the appropriate foreign discount
rate.
61. Even if estimated NPV for a proposed project for the parent is different from estimated NPV
for the subsidiary, a project that shows ____________________________ should probably be
pursued.
62. __________________ mean that a project's parameters can be changed after the decision to
pursue the project has been made.
a. Flexible parameters
b. Indefinite goals
c. Real options
d. Delayed decisions
b. Managing receivables.
d. Managing payables.
b. The benefit of having cash versus the opportunity cost of holding cash.
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d. The inflation rate and the opportunity cost of holding cash.
a. Increased the amount that firms pay to transfer funds between accounts because
improved communications has increased the number of transfers that mncs make.
66. How does currency risk arise with respect to cash balances that an MNC holds in foreign
funds in a bank in a developing nation?
b. When an MNC deposits funds in a foreign bank account, it transfers those funds
from a bank account in another country, and, since the funds must be converted
into the currency of the country where the bank is located, the MNC risks
incurring a loss on that conversion.
c. Withdrawal of funds in foreign banks accounts and conversion of those funds into
the home currency of the MNC may be restricted in developing nations, so that
the MNC may not have immediate access to those funds and the value of those
funds may decline before the MNC can recover the funds.
d. Typically, the interest rate paid on funds deposited in foreign bank accounts is
below the market rate, so the funds deposited in foreign bank accounts earn
below-market returns.
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68. What are the benefits of commercial paper to investors?
b. Commercial paper is issued by firms with a wide range of credit ratings, so a wide
range of interest rates are available.
d. Commercial paper is riskier than T-bills so they pay a higher interest rate, and
they offer liquidity.
69. When assets are securitized, what is done with the cash flow that results from those assets?
a. Cash flow from securitized assets is used to pay the original owner of those assets
for the sale of the assets.
c. Cash flow from securitized assets is used to pay the commissions of the financial
institution that arranged for the securitization.
d. Cash flow from securitized assets is used to pay principle and interest payments to
the investors who have invested in the securitized assets.
70. U.S. commercial paper is issued on an uncommitted basis. What potential problem does that
present to MNCs issuing U.S. commercial paper?
d. U.S. commercial paper is debt instruments issued with floating interest rates, so
the purchaser of the commercial paper does not know the interest rate at which
their investment will be repaid.
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71. What does it mean that firms should match maturities of their financing with the maturities of
the assets acquired with the funds from financing?
a. A firm should only borrow money to acquire assets that will be used by the firm
for years after the loan for the assets is repaid.
b. A firm should not borrow money to acquire assets that will be used by a
subsidiary of the firm that borrows the money.
c. A firm should arrange financing that allows the firm to repay the amount financed
at about the same time that the assets acquired through that financing are retired.
d. A firm should only borrow money to acquire assets which will produce income
that can specifically be used to repay the loan.
72. Which is more important in financial planning for an MNC, ex ante financing cost or ex post
financing cost?
a. Ex ante financing cost is more important since it is the projection of the financing
cost.
b. Ex post financing cost is more important because it is the actual cost of financing.
c. Both are important in financial planning because they measure different costs.
73. If a country taxes the income of MNCs that is derived from activities within that country's
territories, that country takes a _____________________ approach to taxation.
a. Nationalistic
b. Territorial
c. Parochial
d. Cross-border
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d. The territorial approach
a. Income taxes in any country where they receive income and income taxes in any
country. Where they purchase materials.
c. Domestic income taxes in the country where they are organized and foreign
income taxes in other countries where they conduct business operations.
d. Income taxes in countries where income is earned and income taxes in countries
from which they withdraw funds.
76. What is the effect on an MNC of withholding taxes imposed on a foreign subsidiary?
a. The withholding tax reduces the after-tax amount received by the MNC.
b. The withholding tax does not affect the MNC since it is the obligation of the
subsidiary.
c. The withholding tax always increases the overall tax burden on the combined
MNC-subsidiary enterprise.
d. The withholding tax always decreases the overall tax burden on the MNC-
subsidiary enterprise because of tax credits that are allowed for the withholding
tax paid.
77. Identification of __________________________ for each step in the value chain is key to
the VAT calculation.
78. If an MNC has foreign tax credits, how is its domestic income tax determined?
a. Foreign tax credits only affect the MNC's foreign income tax, so the MNC's
domestic income tax is not affected.
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b. Foreign tax credits are deducted from the foreign income tax owed, and then the
reduced foreign income tax is combined with the MNC's domestic income tax,
and that amount is paid by the MNC.
c. The MNC determines its tentative domestic income tax and then deducts its
allowable foreign tax credits.
79.In what situation might an MNC have an excess amount of foreign tax credits?
a. If the income tax rate in a foreign country is higher than the tax rate in the home
country of the MNC, the MNC would pay more foreign income tax than it would
domestic income tax, in which case, the foreign tax credit would exceed the
domestic tax due.
b. If the income tax rate in a foreign country is lower than the tax rate in the home
country, the MNC would pay more domestic income tax than it would foreign
income tax, so that the MNC would have domestic income tax in excess of the
foreign income tax.
c. If the foreign subsidiary of an MNC pays income taxes in more than one foreign
country, the MNC will have excess foreign tax credits because the taxes paid in
more than one foreign country cannot be used as credits against domestic income
taxes.
d. If the foreign subsidiary of an MNC pays income taxes in the country where it
operates and then remits some or all of its profits to the MNC, the withholding
taxes on that remittance will not be included in the foreign tax credit that the
MNC is entitled to claim.
80. _____________________ are the prices at which transactions between MNCs and their
subsidiaries and affiliates take place.
a. Exchange prices
c. Catalogue prices
d. Transfer prices
81. Firms can use transfer pricing to address important issue other than taxation, including:
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b. Providing money for the repayment of investments.
d. Shifting money away from countries where political or economic risk is high.
82. The royalties and fees that a subsidiary pays to its parent MNC are often:
b. Disallowed by the IRS under Section 482 of the Internal Revenue Code.
c. Deductible expenses for the subsidiary and lower the subsidiary's taxable income.
d. Minimized so that the subsidiary can earn a profit and remit more profits to the
MNC.
83. In the Sharpe Index, the numerator represents the ________________ and the denominator
represents the ______________________.
a. Risk; return.
b. Investment; return.
c. Return; risk.
d. Return; investment.
a. The forces of supply and demand will bring the cost of capital down.
b. High returns are possible because businesses will have to pay more for capital.
d. High returns are possible only if domestic banks do not provide capital to the
market.
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86. What effect should an investor's nationality have on investment decisions?
a. None.
b. Since an investor should know more about the investment climate in his or her
home country, investment decisions should favor investments in the home
country.
d. Investors should weight their investments to those that can take place in their
home-country currency.
88. What reasons may lead a country to prohibit foreign ownership of local assets?
a. National pride and limiting foreign interests from acquiring domestic economic
power
b. Fear that investment losses will discourage further investment and national pride
89. Lack of knowledge about foreign firms in which investments might be made leads to:
b. A perceived lower level of risk because lack of knowledge of risks leads to the
assumption that the risks do not exist.
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d. Larger investments based on the presumption that returns will be higher than the
facts indicate.
a. Power of the board of directors of the corporation to make all decisions for the
corporation without input or review from any other group.
b. Right of stockholders in the corporation to elect directors and vote on key issues
affecting the corporation.
d. That as many investors have suffered an increase in the value of their investments
as have suffered a decline in the value of their investments.
92. A document issued by a financial institution and back by a specified shares of stock in a
foreign firm that has essentially the same value as the shares of stock it represents is called a:
a. Mutual fund.
b. Stock proxy.
c. Certificate of deposit.
d. Depository receipt.
93. The major criteria used by managers for capital budgeting decisions are
a. NPV
b. IRR
c. Payback period
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e. All of the above
a. It is not intuitive
d. Both a and c
c. Is a mediocre project.
a. Overconfident
97. Managers who do not base their decisions on NPV are prone to
a. Over-confidence.
b. Excess optimism.
e. Preference reversals.
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98. Managers who continually ask themselves whether they would support or terminate a project
if they took it over for the first time today
a. Are wasting time that could be better used in implementing the project
99. The difference between behavioral biases and agency conflicts is that
b. Behavioral biases actually arise from agency conflicts. Without agency conflicts,
there will be no behavioral biases.
d. There is no difference between the two. They are alternative names for the same
phenomenon.
c. They do not want to experience regret that they made a mistake with the project
b. They believe that they are familiar with the situation at hand
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d. The early stages of the project have been successful
102. Suppose that your firm is a U.S.-based importer of German automobile accessories. You
pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In
one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange
rate is €1.00 = $1.50; the one-year forward rate is €1.00 = $1.55. How can you fix the dollar cost
of this order?
a. Enter into long position in the one-year euro futures contract at €1.00 = $1.55.
This will fix the cost of €100,000 at $155,000.
b. Enter into short position in the one-year euro futures contract at €1.00 = $1.55.
This will fix the cost of €100,000 at $155,000.
c. Since the spot price is more than the forward price, you should trade your dollars
for euros today and pay your supplier early.
103. Suppose that your firm is a U.S.-based importer of German automobile accessories. You
pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In
one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange
rate is €1.00 = $1.50; the one-year rate of interest in the U.S. is 4 percent and in Germany it is
6%. What trades in the spot foreign exchange market and in the money market will allow you to
fix the dollar cost of this order?
a. Exchange $150,000 for €100,000 at today's spot rate. In twelve months, pay your
supplier.
b. Exchange $141,510 for €94,340 at the spot rate of €1.00 = $1.50. Invest the euros
at i€ = 6%. In one year your investment will be worth €100,000 which is enough
to pay your supplier. If you're short of cash today, borrow the $141,510 at i$ = 4
percent.
c. Sell euros forward at the exchange rate expected to prevail in one year
104. Suppose that your firm is U.S.-based importer of German automobile accessories. You pay
for them in euros and sell them in dollars. You have just ordered next year's inventory. In one
year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate
is €1.00 = $1.50; One-year call and put options are available on the euro with a variety of strike
prices. How can you place an upper limit on the dollar cost of this order?
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a. Buy one-year put options on the euro.
105. Suppose a U.S. firm has just bought an asset from a Japanese firm for ¥500 million due in
one year. Calculate today's cost (i.e. the present value) of meeting this obligation using a money
market hedge. The spot exchange rate for Japanese yen is ¥122/$ and the one year forward
exchange rate for Japanese yen is ¥130/$. The one-year interest rate is 5% in the U.S. The one-
year interest rate in Japan is 12.00%
a. $3,485,000
b. $3,659,250
c. $3,663,004
d. $3,842,213
106. Explain the process of a money market hedge for a foreign currency obligation.
a. Estimate the size of your contractual foreign currency obligation in dollars using
the forward interest rate.
b. Estimate the size of your foreign currency obligation. Buy enough call options to
meet this obligation. At maturity, exercise the calls.
c. Estimate the size of your contractual foreign currency obligation. Buy that much
foreign currency at the spot rate, pay early.
d. Estimate the size and timing of your contractual foreign currency obligation. Find
the present value of the obligation using the foreign currency discount rate. Buy
the present value of the foreign currency obligation at the spot exchange rate.
Invest the proceeds at the foreign currency interest rate.
107. Suppose a U.S. firm has sold an airplane to a British firm for £20 million payable in one
year. The spot exchange rate is $2.00 = £1.00; the one-year forward exchange rate is $2.01 =
£1.00. The one-year interest rate in the U.S. is 3 percent and the one-year interest rate in Great
Britain is 2.50 percent. Which of the following hedging strategies eliminates the exporter's
exchange rate risk?
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b. Since the forward rate is more than the spot rate, use a money market hedge
instead of a forward market hedge.
a. Swaps
b. Exposure netting
109. Today, it is not unusual for an exporter to let the importer choose the currency of payment.
110. For an exporter selling in one foreign currency, if the domestic currency is strong or
expected to become strong:
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112. Political risk
c. Refers to the potential losses to the parent firm resulting from adverse political
developments in the host country.
113. Other things equal, a country will be perceived to have more political risk
116. Consider a country where the bribery of officials is a normal part of doing business.
a. U.S. MNC should adjust capital budgeting projects in that country by including
the cost of the bribes.
b. U.S. firms are legally able to bribe foreign officials, but are not able to deduct the
costs.
c. U.S. firms are legally prohibited from bribing foreign official by the Foreign
Corrupt Practices Act.
117. When a MNC builds brand-new production facilities overseas, this is an example of
a. A cross-border M&A.
b. A greenfield investment.
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c. Foreign direct investment.
118. Imperfect factor markets drive much FDI. Which of the following markets has the most
imperfections?
a. Product market.
b. Labor market.
c. Capital market.
119. Other things equal, a firm with a greater investment in intangible assets
d. Is less profitable.
120. When U.S. car makers began to build their own network of dealerships in Japan, this was an
example of:
c. Horizontal FDI.
121. Insurance for political risk exists. How would you incorporate the cost of the insurance
premium into the capital budgeting process?
a. Subtract the insurance premium from the expected cash flows for the project
when computing its NPV
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a. ANPV analysis
a. Benefits or costs associated with how the project is financed must be considered
c. It is crucial to consider the effect of the project on the firm’s eventual capital
structure
d. The debt-equity ratio that will be in place after the project is up and running must
be forecast
124. When calculating the NPV of a project’s cash flows, how must the revenues and costs be
measured?
125. All of the following are true regarding financial slack, EXCEPT
a. It can reduce managers’ incentives to find ways to make the company operate
more cost-effectively
b. It develops when a company chooses not to pay out dividends from its free cash
flow
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b. A tax benefit that allows current business losses to be used to reduce tax liability
in future years
c. The value created by the ability of a firm to borrow at an interest rate below the
firm’s market-determined interest rate
a. The ability of a company to shut down a mine until operating conditions improve
b. The ability to sell a successful domestic product in the international market place
c. The ability to transfer goods from a party in one country directly to a party in
another country in exchange for some other goods of equal value
d. The ability to delay an important operating decision until more information can be
gathered
128. When developing the adjusted net present value of a project, which of the following would
be considered in the second step?
c. The possibility that the current project could lead to another project
129. The possible loss of export revenue when a foreign market is served by direct foreign
investment and the former exports to that market are unable to be sold elsewhere is known as
a. Export factor
b. Cannibalization of exports
c. Cannibalization of imports
130. The weighted average cost of capital (WACC) is the capital budgeting approach that
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a. Finds the value of the unlevered project and then factors in the additional value of
financial side effects and from the value of growth options
b. Discounts the after-tax free cash flows to stockholders at the required rate of
return on the equity
c. Is a one-step process that works well for projects that have stable debt-equity
ratios
132. The flow-to-equity (FTE) method of capital budgeting finds the value of the equity by
discounting the forecasts of the flows to equity holders _____
b. At the appropriate risk-adjusted required rate of return on the assets of the firm
133. Assuming an upward-sloping term structure of spot interest rates, if the expected profits
from a foreign project are discounted by a higher discount rate found in later years, the present
value of the project is _____.
a. Inaccurately inflated
b. Impossible to determine
c. Substantially increased
d. Needlessly penalized
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a. The ratio of investment to gross cash flows
136. The fraction of operating profits that management chooses to reinvest in the firm is
137. _____ is a situation in which managers, acting in the interests of shareholders, accept a
high-variance project that may lower overall firm value but that increases shareholder value.
a. Underinvestment
b. Asset substitution
c. Financial distress
138. When doing international capital budgeting, differences in _____ across countries must be
taken into account.
a. Accounting conventions
b. Political risk
c. Costs of capital
d. Business risk
139. _____ is the collection of cash, marketable securities, accounts receivable, and inventories
held by a firm at any point in time.
b. Working capital
c. Capital account
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d. Future profitability
a. Short-term debt
141. If a firm takes out a short-term bank loan to purchase inventory the firm’s net working
capital
a. Will increase
b. Will decrease
c. Taxes are imposed on the repatriation of funds from a foreign affiliate to its parent
d. Transaction costs are incurred to convert funds from one currency to another
143. What is a way for a multinational corporation with many affiliates around the world to
realize significant savings?
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a. Generating cash to be paid to the parent by the affiliate as a dividend
145. In the U.S. the IRS specifies that an appropriate transfer price is one that reflects _____, that
is, one that would be observed in a sale of the good or the service to an unrelated customer.
a. Ad valorem duties
d. An incentive price
146. Leading and lagging the payments made between its affiliates allows an MNC to _____ of
the affiliates.
147. Generally, risk management is the use of _____ to take positions in financial markets that
offset the underlying sources of risks that arise in a company’s normal course of business.
a. Asset securitization
b. Derivative securities
c. Margin calls
d. Tax shields
148. Modigliani and Miller argued that a corporation’s financial policies, such as hedging
foreign exchange risk, do not change the value of the firm’s assets unless they
c. Could be done more cheaply than individual investors’ transactions could be done
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d. All of the above
a. Hedging is costly
c. Hedging can reduce the future taxes that a firm expects to pay
a. Larger in the spot market than in the forward market for currency
b. Smaller in the spot market than in the forward market for currency
c. Smaller in the forward market than in the swap market for currency
a. Difficult, because the equity value of a firm is affected by nominal exchange rate
risk
b. Impossible, because the equity value of a firm must be discounted a finite period
of times
c. Difficult, because the equity value of a firm depends on the indefinite future
d. Impossible, because the equity value of a firm is derived from current and past
cash flows only
152. Which of the following does NOT increase the tax benefits of hedging?
d. When more of the firm’s income occurs in the convex region of the tax code
153. According to some research, firms with _____ dividend payouts are more likely to hedge.
a. Higher
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b. Lower
c. No
d. Asymmetric
154. If the value of a firm increases when the pound strengthens relative to the dollar, _____
would be an appropriate hedge.
155. Which of the following is NOT a basic step in the capital budgeting process?
a. Estimate the cash flows to be derived from the project over time.
b. Identify the initial capital invested.
c. Identify the IRR.
d. All of the above are steps in the capital budgeting process.
156. Project evaluation from the _________ viewpoint serves some useful purposes and/but
should _______________ the ____________ viewpoint.
157. Given a current spot rate of ¥124.50/$, expected inflation rates of 2% in Japan and 4% per
annum in the U.S., use the formula for relative purchasing power parity estimate the one-year
spot rate of yen per dollar.
a. ¥122.11/$
b. ¥124.50/$
c. There is not enough information to answer this question
d. ¥126.94/$
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158. When determining a firm's weighted average cost of capital (WACC) which of the
following terms is necessary?
159. McCody Manufacturing has an after-tax cost of debt of 8% and a cost of equity of 14%. If
McCody is in a 40% tax bracket, and finances 25% of assets with debt, what is the firm's
WACC?
a. 11.70%
b. 12.50%
c. 11.30%
d. 11.00%
160. Calculate the cost of equity for InLine Systems using the following information: The cost of
debt is 6%, the corporate tax rate is 30%, the rate on Treasury Bills is 2%, the firm has a beta of
1.1, and the expected return on the market is 11%.
a. 12.20%
b. 5.67%
c. 13.70%
d. 11.90%
161. Generally speaking, a firm wants to receive cash flows from a currency that is __________
relative to their own, and pay out in currencies that are _________ relative to their home
currency.
a. Appreciating; depreciating
b. Depreciating; appreciating
c. Appreciating; appreciating
d. Depreciating; depreciating
162. When a foreign project is analyzed from the parent's point of view, the additional risk that
stems from it "foreign" location is typically measured by ________________ or
____________________.
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163. Your company just received a $1,000,000 cash remittance from your German subsidiary. If
the risk-free one-year T-bill rate is 3.5% and the current exchange rate is $1.01/€, and the one-
year forward rate is $0.98/€, then the present value of the remittance is _________________
a. $1,00,000
b. $1,003,500
c. $1,001,000
d. $980,000
164. Which is NOT considered a shortcoming of the parent simply adjusting discount rates to
account for the additional risk that stems from a project's foreign location?
165. A foreign subsidiary has $1,000,000 of taxable income, a (foreign) corporate tax rate of
30%, and a foreign dividend withholding rate of 20%. The U.S. (domestic) parent has a
corporate tax rate of 35%. What are the total taxes paid by the foreign subsidiary? Assume that
the foreign subsidiary is 100% owned by the U.S. parent and that all after-tax income is paid to
the U.S. parent.
a. $50,000
b. $30,000.
c. $85,000
d. $44,000
166. McDonalds Corporation operates in many different countries and pays taxes at many
different rates. However, they always pay the same rate as their local competitors. McDonalds is
operating in an environment of _________ tax policy.
a. Territorial approach
b. Domestic neutrality
c. Foreign neutrality
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167. Prescott International Inc. is based in a country with a worldwide approach to taxation but
generates 100% of its income in a country with a territorial approach to taxation. The tax rate in
the country of incorporation is 20%, and the tax rate in the country where they earn their income
is 30%. In theory, and barring any special provisions in the tax codes of either country, Jensen
should pay taxes at a rate of __________.
a. 44%
b. 80%
c. 56%
d. 30%
168. Tax treaties generally have the effect of increasing the withholding taxes between the
countries that are negotiating the treaties.
a. True
b. False
a. Equitable
b. Flat
c. Value-added
170. What is the total value of taxes paid in the following example if the value added tax is 15%?
A farmer raises wheat that he sells for $2.00 to the grain company. The grain company sells to
the processor for $3.00 per bushel. The processor turns the wheat into a breakfast cereal and
wholesales it for $4.00 per bushel. The retailer sells the cereal for $5.00 per bushel.
a. $.45
b. $.60
c. $.75
d. $.90
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a. A dollar earned anywhere in the world by a U.S. corporation is taxed the same as
if earned in the U.S.
172. A foreign subsidiary has $4,000,000 of taxable income, a (foreign) corporate tax rate of
35%, and a foreign dividend withholding rate of 15%. The U.S. (domestic) parent has a
corporate tax rate of 40%. What are the additional taxes paid by the U.S. domestic parent after
the foreign subsidiary pays corporate and withholding taxes? Assume that the foreign subsidiary
is 100% owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.
a. $19,000
b. $12,000
c. $42,000
d. $0
173. Tax credits or deficits from foreign-source income may be applied to net tax positions in
domestic-source income and vice versa.
a. True
b. False
b. It is a progressive tax
Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection
molding manufacturing process. Their supplier, BioTech Chemical, Inc. offers financing terms
of a 3% discount if the accounts payable are paid in 15 days or less with the full balance due in
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60 days. Short-term financing available to Sunny is available at an annual rate of 7.9%. Sunny
has just purchased $500,000 of plastic chips from BioTech Chemical.
What is the amount of money Sunny will save on accounts payable if they accept the discount?
a. $15,000
b. $20,000
c. $500,000
d. $39,500
176. What is the effective annual interest cost of supplier financing offered by BioTech
Chemical?
a. 105.3%
b. 19.4%
c. 27.1%
d. 22.9%
a. Yes, SureDrip will get to use their raw materials 35 days earlier than if they
waited to pay at the end of the 45 days.
b. No, it costs SureDrip 27.1% to accept the discount and they are better off paying
the full amount in 45 days.
c. Yes, SureDrip's short term borrowing rate of 7.9% is less than Sun's offered cost
of carry of 27.1%.
d. No, SureDrip will not have to pay any interest if they just pay in 45 days.
178. Other things equal, a firm would rather have _________ in a depreciating currency, and
____________ in an appreciating currency.
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b. Accounts payable; accounts receivable
179. Firms might be tempted to order _________ inventory from foreign sources if they thought
their currency was about to be ____________.
a. Less; devalued
b. Extra; devalued
c. Less; revalued
180. Decreases to cash flows can be anticipated if which of the following occurs?
181. The advantages to unbundling of cash flows from a subsidiary to a parent include all of the
following EXCEPT:
b. All of the above are legitimate reasons for unbundling cash flows between a
parent and subsidiary.
c. Items that my have been classified as residual profits are viewed as tax-deductible
expenses.
182. The fund which cannot be repatriated to their parent company by foreign subsidiaries is
called.
b. A government fund
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c. A special fund
d. A mutual fund
e. A blocked fund
183. The ability to relocate working cash balances and profits on a global basis provides
multinational firms with several types of arbitrage opportunities. These types of arbitrage
opportunities do not include arbitrage.
a. Tax
b. Financial market
c. Regulatory system
d. Commodity market
e. Both a and b
185. Which of the following is not a major component of fund flows from subsidiary to parent?
186. An advantage of multilateral netting by a multinational corporation and its foreign affiliates
is that it
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b. Increases the total volume of interaffiliate fund flows
188. According to the transfer pricing regulations, multinational firms are supposed to charge
prices to its foreign affiliates based on the following:
a. Total cost
b. Arm's-length prices
c. Average cost
d. Internal prices
a. Invoices in the same currency for the buyer and seller of goods and services
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a. Direct loans
b. Credit swaps
d. Both b and c
e. Currency swaps
c. A bank
d. A foreign government
e. Both a and b
192. Multinational firms may be able to repatriate funds from foreign affiliates through the
following method(s).
a. Royalty payments
b. Management fees
c. Dividend payments
193. Which of the following is not related to the traditional objectives of multinational firms'
cash management?
b. To improve liquidity
d. To reduce risks
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a. Do whatever it wants with its excess cash
195. The most important factor affecting the location of international cash centers is probably .
a. The local government's political stability and its attitude toward foreign-based
companies
a. Invoicing float
b. Credit float
c. Mail float
d. Processing float
e. Transit float
b. Germany
c. Japan
e. Korea
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198. A 1996 study by Ricci and Morrison found that 80 percent of Fortune 200 companies use
wire transfers , 50 percent poor their cash , and almost half net payments and transfer
funds electronically .
199. Transfer pricing has been used by multinational firms to achieve the following objectives:
200. Re-invoicing centers are set up in tax haven countries to do the following .
d. A and b
e. A, b, and c
a. Avoid taxes
d. A and b
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e. A, b, and c
a. Luxembourg
b. The Netherlands
c. Bermuda
d. Chile
e. The Bahamas
a. Direct loans
b. Credit swaps
204. In international cash management, which of the following items is most important?
c. Interest rate and foreign exchange rate comparisons between two countries
d. A and b
e. A, b, and c
205. Which of the following is not one of the ways that a multinational company can delay its
payments?
a. Mail
d. Floats
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e. None of the above
206. The difference between European and American companies regarding working capital is:
a. European companies have a considerably higher level of net working capital than
US companies due to support the same level of sales.
b. European companies have a considerably lower level of net working capital than
US companies due to support the same level of sales.
d. US companies have higher levels of net working capital but this is used to support
a higher level of sales.
e. European companies have higher levels of net working capital but this is used to
c. Working capital management requires cash flow projections and these cannot be
be forecasted by the financial manager alone
d. a and b
e. a, b and c
208. A U.S. company has $10,000 in cash available for 45 days. It can earn 1 percent on 45-day
investment in the United States. Alternatively, if it converts the dollars to German marks, it can
earn 1.5 percent on a German deposit for 45 days. The spot rate of the German mark is $0.50.
The spot rate 45 days from now is expected to be $0.40. Should this company invest its cash in
the United States or in Germany?
b. In the Germany
53
209. A German investor has DM100,000 to invest for one year. U.S. Treasury bills offer a yield
of 11 percent. The current exchange rate of the mark is $0.50. What is the yield on the
investment if the exchange rate of the mark is $0.46 at the end of the year?
a. 10.25%
b. 12.55%
c. 15.00%
d. 20.65%
e. 25.00%
a. Physical communication
c. Spiritual values
d. Entertainment
e. A, b, and d
212. Some scholars worried that the terrorist attacks of September 11th, 2001 would have a
negative effect on the worldwide increase in globalization. In fact, the effect of the bombings
can be best described as:
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c. The global recession reduced the desire of multinational firms to globalize
a. Employees' benefits
b. Satisfaction of customers
c. Satisfaction of suppliers
d. A and b
e. A, b, and c
d. Increased globalization
e. A, B, and D
216. Those companies listed below do business in more than 150 countries around the world
except the following company:
a. IBM
b. General Motors
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c. Sony
e. BP Amoco
b. Strategic planning
d. Manage others
a. Market homogeneity
e. Market interdependency
219. Which of the following is not one of seven principles of global finance?
a. Market imperfection
b. Risk-return tradeoff
c. Portfolio effect
d. Comparative advantage
e. Company advantage
a. Stockholders
b. Agents
c. Creditors
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d. Suppliers
e. Customers
221. Incentives for multinational company managers does not include the following:
a. Stock options
b. Bonuses
c. Perquisites
d. Salary increases
e. Vacation
222. Which changes in corporate governance have made US managers more responsive to the
interests of stakeholders:
a. Foreign customs
e. International distance
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d. Accounting, management and information
b. Asset dispositions
227. The conflict between owners, employees, suppliers, and customers of a company is
known as:
a. Regulatory risk
b. Problem of agency
d. Conflict of interests
228. The main differences between domestic and international companies from a financial
manager's point of view are largely due to differences in:
a. Risks
b. National laws
c. Economic factors
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d. Political factors
d. A and b
e. A, b, and c
230. Corporate governance is often narrowly defined as the prudent exercise of ownership
rights toward the goal of increased:
a. Shareholder value
b. Profit
d. Asset turnover
e. Sales volume
d. A, b, and c
e. A and c only
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d. Disclosure and transparency
e. All of above
233. The U.S. Department of Commerce defines foreign direct investment as investment in either
_____.
d. Nominal capital assets or financial assets with a minimum of ten percent equity
ownership in a foreign firm
e. Real capital assets or financial assets with a minimum of ten percent equity
ownership in a foreign firm
236. Host countries can benefit from foreign direct investment because it _____.
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c. Induces the transfer of technology and skills which are frequently in short supply
237. Construction of new plants abroad requires demand forecast. Such a demand forecast
does not depend on the following ___.
a. Political system
b. Competition
c. Income
d. Population
e. Economic conditions
238. Total private flows to developing countries grew more than ___ fold between 1992 and
1999.
a. Eight
b. Nine
c. Ten
d. Eleven
e. Twelve
239. Local companies often control the channels of distribution, the financial resources, and
the marketing know-how, but they _____.
c. Do not have the products for marketing to capitalize on their unique market
position
240. Like all aspects of good business, successful licensing requires _____.
a. Good luck
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b. Management and planning
d. A bureaucratic hierarchy
241. Since the mid-1990s, ___ has become the largest component of external financing to
developing countries.
a. Bank financing
b. Official flows
c. Bond financing
e. Equity financing
a. A merger is a transaction that combines two companies into one new company.
d. Keiretsu is a japanese word that stands for financially linked groups of firms.
243. The use of the purchase-of-assets method in case of a merger creates ___.
a. Goodwill
b. Actual profits
c. Additional expenses
d. Additional sales
244. Newman said that a growth-oriented company can globally close several types of growth
gaps between its sales potential and its current actual performance. These gaps do not include
___.
62
a. A product-line gap
b. A distribution gap
c. A local gap
d. A usage gap
e. A competitive gap
246. Which of the following is not an oligopoly-created advantage of foreign investment for
investing firms?
a. Proprietary technology
b. Management know-how
e. Political advantage
c. Taxes
d. Capitalization rate
e. Debt capacity
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a. The bought out firm is undervalued
249. The appropriate mix of debt and equity ___ the overall cost of capital.
a. Increase
b. Reduce
d. Unknown
e. A and b
251. The tax benefit for mergers comes from the fact that the tax loss carryforward _____
unless the firm makes sufficient profits to offset it completely.
252. When a profitable company acquires companies with a large tax loss carryforward, the
merger _____.
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a. Increases its net operating income after taxes
253. Foreign companies with more favorable accounting and tax laws _____ bid higher prices
for target companies.
a. Always
b. Cannot
c. May be able to
256. The appropriate mix of debt and equity reduces the overall cost of capital and therefore
______.
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a. Raises the book value of the firm
a. Smaller taxes
b. Greater taxes
a. South Africa
c. Japan
d. Mexico
e. China
a. Japan
d. Canada
e. North America
261. Two major reasons for the continuous growth of foreign direct investment in developing
countries are___.
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a. High wages and highly skilled workers
262. Which of the following is not a step for determining the value of a firm:
c. Determine the extent to which the company may be leveraged or the adequate
amount of debt
263. Which of the following is not true of foreign direct investment in developing countries:
264. In a foreign investment analysis, the most important variable a company must forecast is.
b. Net earnings
e. Labor cost
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265. Which of the following is not directly related to the cash flow analysis of a foreign
investment project?
b. Foreign taxes
d. Management changes
e. Demand forecast
266. In a foreign investment analysis, which of the following objectives is most important and
relevant?
267. If a foreign project is financed entirely by local financing sources, which of the following
is most important and relevant in the project analysis?
b. Comparison of the internal rate of return with the incremental cost of capital in a
foreign subsidiary
268. The variables needed to calculate the cost of equity using the dividend valuation model
do not include .
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d. Earnings growth rate
e. A, b, and c
269. In an international capital project analysis, is not a major cause of the systematic
risk?
a. Worldwide recessions
b. Worldwide wars
d. Both a and c
270. Which of the following capital budgeting techniques is considered to be superior to other
methods?
e. Both a and d
271. Many multinational companies use the risk-adjusted discounted rate and increase the
discount rate if a country's risk is .
d. Cannot tell
272. In a foreign investment analysis, the certainty-equivalent approach adjusts for risk in the
following variable .
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c. Inflation rate
d. Interest rate
e. Unemployment rate
a. Risk
b. Project maturity
c. Project return
d. Both a and c
e. Both b and c
275. When net present value and internal rate of return produce different answers, net present
value is better because:
a. The net present value is easier to compute than the internal rate of return
b. The primary goal of a firm is to maximize the value of the firm, which coincides
with the net present value approach
d. A single project may have more than one internal rate of return
276. A review of the literature on foreign direct investment reveals the following:
a. Multinational firms should value only those cash flows which can be repatriated
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c. Multinational firms should use their weighted average cost of capital
d. A and b
e. A, b, and c
277. Portfolio theory deals with the selection of investment projects that would.
a. Maximize profit
b. Minimize risk
e. C and d
278. Use the following information to answer the next three questions:
A foreign investment project with an initial cost of $15,000 is expected to produce net cash flows
of $8,000, $9,000, $10,000, and $11,000 for each of the next four years. The firm's cost of
capital is 12 percent, but the international financial manager perceives the risk of this particular
project is much higher than 12 percent. The international financial manager feels that a 20
percent discount rate would be appropriate for the project.
a. 1.8 years.
b. 2.5 years.
c. 2.7 years.
d. 3.0 years.
e. 4.0 years.
279. What is the net present value of the project at the firm's cost of capital?
a. About $15,033.
b. About $13,433.
c. About $11,533
d. About $10,433
e. $12,000.
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280. What is the risk-adjusted net present value of the project?
a. about $9,002
b. about $8,502
c. about $7,900
d. about $7,400
e. $8,000.
e. About $ 8 million
282. A foreign project has an initial investment of $1,400. Its net cash flows are expected to be
$900, $1,000, and $1,400 for each of the next three years. The certainty equivalent coefficients
of the project are 0.75, 0.55, and 0.35 for each of the next three years. With a 6-percent riskless
rate of return, determine the certain net present value of the project.
a. About $138
b. About $458
c. About $1,508
d. About $2,508
e. About $2,408
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283. Which of the following is not a major political risk listed in a study by Goddard?
a. Expropriation
d. Exchange controls
284. Which of the following is not a major reason for the nationalization of both foreign and
domestic companies by many governments?
a. The government believes that it could run the business more efficiently
285. According to a study by Kennedy, the largest number of expropriations took place
between .
286. A significant upsurge in expropriation will not return in the future because ___.
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e. All of the above
c. Old hand
d. Quantitative analysis
289. The grand tour relies on the visiting the countries where investment is considered.
c. Opinions of bankers
e. Both b and c
291. Defensive measures before investment to avoid political risk of a foreign project include.
a. Planned divestment
d. Concession agreements
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292. To become a good citizen of a host country, the multinational company should take the
following actions except ___.
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