International Corporate Finance

Corporate Finance, 3Ce (Berk, DeMarzo, Strangeland)
Chapter 31 International Corporate Finance
31.1 Internationally Integrated Capital Markets
1) Consider the following equation:
S× =
The term S in this equation is

A) the forward exchange rate.
B) the amount of foreign currency.
C) the future spot exchange rate.
D) the current spot exchange rate.
Answer: D
Diff: 1 Type: MC
Topic: 31.1 Internationally Integrated Capital Markets
S× =
The term F in this equation is

A) the future spot exchange rate.
B) the current spot exchange rate.
C) the amount of foreign currency.
D) the forward exchange rate.
Answer: D
Diff: 1 Type: MC
S× =
The term in this equation is
A) the appropriate cost of capital from the standpoint of a Canadian investor.

B) the risk-free rate for a foreign investor.
C) the risk-free rate for a Canadian investor.
D) the appropriate cost of capital from the standpoint of a foreign investor.
Answer: A
Diff: 1 Type: MC
S× =
The term in this equation is
A) the risk-free rate for a foreign investor.

B) the risk-free rate for a Canadian investor.
C) the appropriate cost of capital from the standpoint of a foreign investor.
D) the appropriate cost of capital from the standpoint of a Canadian investor.
Answer: C
Diff: 2 Type: MC
5) Under the condition of internationally integrated capital markets, the value of an

investment ________ we use in the analysis because of ________.
A) depends on the currency; the Law of One Price
B) depends on the currency; the exchange rate between two currencies
C) does not depend on the currency; the Law of One Price
D) does not depend on the currency; the exchange rate between two currencies
Answer: C
Diff: 2 Type: MC
6) Which of the following statements regarding international projects is false?
A) Interest rates and costs of capital will likely be different in the foreign country as a
result of the macroeconomic environment.
B) The project will most likely generate foreign currency cash flows, and the firm cares
about the foreign currency value of the project.
C) Under internationally integrated capital markets, the value of an investment does not
depend on the currency we use in the analysis.
D) The firm will probably face a different tax rate in the foreign country and will be subject
to both foreign and domestic tax codes.
Answer: B
Explanation: B) The project will most likely generate foreign currency cash flows, although
the firm cares about the home currency value of the project.
Diff: 2 Type: MC
Use the information for the question(s) below.
You are a Canadian Investor who is trying to calculate the present value of £5 million cash
inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and
the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash flow
is 5.32% and the appropriate £ discount rate is 5.24%.
7) The present value of the £5 million cash inflow computed by first discounting the £s and
then converting into dollars is closest to:
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
Answer: B
Explanation: B) PV£ = = £4,751,045.23
PV$ = PV£ × S = £4,751,045.23 × $1.8839/£ = $8,950,494.10

Diff: 3 Type: MC
8) The present value of the £5 million cash inflow computed by first converting into dollars
and then discounting is closest to:
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
Answer: B
Explanation: B) FV$ = £5 million × $1.8862/£ = $9,431,000
PV = = $8,954,615
Diff: 3 Type: MC
31.2 Valuation of Foreign Currency Cash Flows
1) Which of the following statements is false?

A) If the foreign project is owned by a domestic corporation, managers and shareholders
need to determine the home currency value of the foreign currency cash flows.
B) The most obvious difference between a domestic project and a foreign project is that the
foreign project will most likely generate cash flows in a foreign currency.
C) The risk of the foreign project is unlikely to be exactly the same as the risk of domestic
projects (or the firm as a whole), because the foreign project contains residual exchange
rate risk that the domestic projects often do not contain.
D) In an internationally integrated capital market, two equivalent methods are available for
calculating the NPV of a foreign project: either we can calculate the NPV in the foreign
country and convert it to the local currency at the forward rate, or we can convert the cash
flows of the foreign project into the local currency and then calculate the NPV of these cash
flows.
Answer: D
Explanation: D) In an internationally integrated capital market, two equivalent methods
are available for calculating the NPV of a foreign project: either we can calculate the NPV
in the foreign country and convert it to the local currency at the spot rate, or we can
convert the cash flows of the foreign project into the local currency and then calculate the
NPV of these cash flows.
Diff: 1 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
= (1 + )-1
The term r¥ in this equation refers to

A) the cost of capital for the firm in terms of yen.
B) the risk-free rate of interest on the dollar.
C) the cost of capital in terms of dollars.
D) the risk-free rate of interest on the yen.
Answer: D
Diff: 1 Type: MC
= (1 + )-1
The term in this equation refers to
A) the cost of capital in terms of dollars.

B) the risk-free rate of interest on the yen.
C) the risk-free rate of interest on the dollar.
D) the cost of capital for the firm in terms of yen.
Answer: A
Diff: 1 Type: MC
4) The risk of the foreign project is ________ the risk of Canadian domestic projects because
the foreign project contains ________ that the domestic projects often do not contain.
A) likely to be the same as; residual exchange rate risk
B) unlikely to be exactly the same as; residual exchange rate risk
C) likely to be the same as; residual inflation risk
D) unlikely to be exactly the same as; residual inflation risk
Answer: B
Diff: 2 Type: MC
5) Because obtaining forward rate quotes for as long as four years in the future is difficult,
managers normally use the covered ________ to compute ________.
A) interest rate parity; the forward rates
B) price parity; the forward rates
C) interest rate parity; the spot rates
D) price parity; the spot rates
Answer: A
Diff: 2 Type: MC
= (1 + )-1
The term in this equation refers to
A) the risk-free rate of interest on the dollar.

B) the risk-free rate of interest on the yen.
C) the cost of capital for the firm in terms of yen.
D) the cost of capital in terms of dollars.
Answer: C
Diff: 2 Type: MC
= (1 + )-1
The term r$ in this equation refers to

A) the cost of capital for the firm in terms of yen.
B) the cost of capital in terms of dollars.
C) the risk-free rate of interest on the dollar.
D) the risk-free rate of interest on the yen.
Answer: C
Diff: 3 Type: MC
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both
countries is flat. The risk-free rate on dollars, r$, is 5.35% and the risk-free interest rate on
pounds, r£, is 4.80%.
8) Using the covered interest parity condition, the calculated one-year forward rate F1 is
closest to:
A) $1.8568/£
B) $1.8764/£
C) $1.9161/£
D) $1.8961/£
Answer: D
Explanation: D) F1 = S × = $1.8862/£ × = $1.8961/£
Diff: 1 Type: MC
9) Using the covered interest parity condition, the calculated three-year forward rate F3 is
closest to:
A) $1.8568/£
B) $1.9161/£
C) $1.8961/£
D) $1.8764/£
Answer: B
Explanation: B) F3 = S × = $1.8862/£ × = $1.9161/£
Diff: 2 Type: MC
10) Luther Industries, a Canadian firm, is considering an investment in Japan. The dollar
cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r$ =
5.5% and r¥ = 1.5% respectively. Luther Industries is willing to assume that capital
markets are internationally integrated. Luther Industries needs to know the comparable
cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with
spot exchange rates. The yen cost of equity for Luther Industries is closest to:
A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%
Answer: C
Explanation: C) = (1 + )-1= (1.12) - 1 = .0775 or 7.75%
Diff: 2 Type: MC
Luther Industries, a Canadian Corporation, is considering a new project located in Great

Britain. The expected free cash flows from the project are detailed below:
Free Cash
Flow (£
Year millions)
0 -20
1 10
2 14
3 18
You know that the spot exchange rate is S = 1.8862/£. In addition, the risk-free interest
rate on dollars and pounds is 5.4% and 4.6% respectively. Assume that these markets are
internationally integrated and the uncertainty in the free cash flow is not correlated with
uncertainty in the exchange rate. You have determined that the dollar WACC for these cash
flows is 10.2%.
11) Calculate the pound denominated cost of capital for Luther's project.
Answer: = (1 + )-1= (1.102) - 1= .093636 or 9.36%
Diff: 3 Type: ES
12) What is the pound present value of the project?
Answer: = (1 + )-1= (1.102) - 1 = .093636 or 9.36%
NPV£ = -20 + + + = £14.613
Diff: 3 Type: ES
13) What is the dollar present value of the project?
Answer: = (1 + )-1= (1.102) - 1 = .093636 or 9.36%
NPV£ = -20 + + + = £14.613 million
NPV$ = NPV£ × S = £14.613 × 1.8862/£ = $27.562 million

Diff: 3 Type: ES
31.3 Valuation and International Taxation
1) Canadian tax policy requires that a ________ is given for foreign taxes paid up to the
amount of the ________.
A) 50 percent tax credit; Canadian tax liability
B) full tax credit; Canadian tax liability
C) 50 percent tax credit; foreign tax liability
D) full tax credit; foreign tax liability
Answer: B
Diff: 1 Type: MC
Topic: 31.3 Valuation and International Taxation
2) If the foreign tax rate ________ the Canadian tax rate, companies must pay ________ on
foreign earnings.
A) exceeds; this higher rate
B) exceeds; an extra rate
C) exceeds; the same as the Canadian tax rate
D) exceeds; a lower rate in Canada
Answer: A
Diff: 1 Type: MC
3) If the foreign tax rate is ________ the Canadian tax rate, the company pays total taxes
________ the Canadian tax rate on its foreign earnings.
A) greater than; equal to
B) greater than; more than
C) less than; equal to
D) less than; less than
Answer: C
Diff: 1 Type: MC
4) For Canadian companies, if the foreign project is a separately incorporated subsidiary of

the parent, the amount of taxes a company pays generally depends on the amount of profits
________.
A) received in Canada
B) earned in Canada
C) earned in the host country
D) received in the host country
Answer: A
Diff: 2 Type: MC
5) Canadian tax policy ________ companies to apply the part of the tax credit that is not
used to offset domestic taxes owed.
A) does not allow
B) allows
C) encourages
D) discourages
Answer: A
Diff: 2 Type: MC

A) Canadian tax policy requires Canadian corporations to pay taxes on their foreign income
at the same rate as profits earned in Canada.
B) The home government gets an opportunity to tax the income from a foreign project to
the domestic firm.
C) The general international arrangement prevailing with respect to taxation of corporate
profits is that the home country gets the first opportunity to tax income.
D) The home government must establish a tax policy specifying its treatment of foreign
income and foreign taxes paid on that income.
Answer: C
Explanation: C) The general international arrangement prevailing with respect to taxation
of corporate profits is that the host country gets the first opportunity to tax income
produced within its borders.
Diff: 2 Type: MC

A) If the foreign tax rate exceeds the Canadian tax rate, companies must pay this higher
rate on foreign earnings.
B) Canadian tax policy allows companies to apply the part of the tax credit that is not used
to offset domestic taxes owed, so this extra tax credit is not wasted.
C) If the foreign tax rate is less than the Canadian tax rate, the company pays total taxes
equal to the Canadian tax rate on its foreign earnings.
D) A full tax credit is given for foreign taxes paid up to the amount of the Canadian tax
liability.
Answer: B
Explanation: B) Canadian tax policy does not allow companies to apply the part of the tax
credit that is not used to offset domestic taxes owed, so this extra tax credit is wasted.
Diff: 2 Type: MC
A) If the Canadian tax rate exceeds the combined tax rate on all foreign income, it is valid
to assume that the firm pays the same tax rate on all income no matter where it is earned.
B) Firms can lower their taxes by pooling multiple foreign projects and accelerating the
repatriation of earnings.
C) Under Canadian tax law, multinational corporations may use any excess tax credits
generated in high-tax foreign countries to offset their net Canadian tax liabilities on
earnings in low-tax foreign countries.
D) If the foreign tax rate exceeds the Canadian tax rate, because the Canadian tax credit
exceeds the amount of Canadian taxes owed, no tax is owed in Canada.
Answer: B
Explanation: B) Firms can lower their taxes by pooling multiple foreign projects and
deferring the repatriation of earnings.
Diff: 3 Type: MC

A) When the foreign tax rate is less than the Canadian tax rate, deferral can provide
significant benefits.
B) The Canadian tax liability is not incurred until the profits are brought back home if the
foreign operation is set up as a foreign branch rather than as a separately incorporated
subsidiary.
C) If a company chooses not to repatriate £12.5 million in pre-tax earnings, for example, it
effectively reinvests those earnings abroad and defers its Canadian tax liability.
D) When the foreign tax rates exceed the Canadian tax rates, there are no benefits to
deferral because in such a case there is no additional Canadian tax liability.
Answer: B
Explanation: B) The Canadian tax liability is not incurred until the profits are brought back
home if the foreign operation is set up as a separately incorporated subsidiary rather than
as a foreign branch.
Diff: 3 Type: MC

A) Other benefits from deferral arise because the firm effectively gains a real option to
repatriate income at times when repatriation might be cheaper.
B) By pooling foreign income, the firm effectively pays the combined tax rate on all foreign
income.
C) In years in which the Canadian tax rate exceeds the combined tax rate on all foreign
income, the repatriation of additional income does not incur an additional Canadian tax
liability, so the earnings can be repatriated tax-free.
D) Deferring repatriation of earnings lowers the overall tax burden in much the same way
that deferring capital gains lowers the tax burden imposed by the capital gains tax.
Answer: C
Explanation: C) In years in which the combined tax rate on all foreign income exceeds the
Canadian tax rate, the repatriation of additional income does not incur an additional
Canadian tax liability, so the earnings can be repatriated tax-free.
Diff: 3 Type: MC
KT Enterprises, a Canadian import-export trading company, is considering its international

tax situation. Currently KT's Canadian tax rate is 35%. KT has significant operations in both
Japan and Ireland. In Japan the current exchange rate is ¥118.4/$ and earnings in Japan
are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland
are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign
taxes paid for the current year are shown here (in millions):
Japan Ireland
Earnings before interest and taxes
(EBIT) ¥5,920 €32
Host country taxes paid ¥2,427 €4
Earnings before interest after taxes ¥3,493 €28
11) After the Japanese taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Japanese operations is closest to:
A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million
Answer: B
Explanation: B) = $29.50 million
Diff: 2 Type: MC
12) After the Irish taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Ireland operations is closest to:
A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million
Answer: C
Explanation: C) €28 million × $1.27/€ = $35.56
Diff: 2 Type: MC
13) The amount of the taxes paid in dollars for the Japanese operations is closest to:
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
Answer: D
Explanation: D) = $20.5 million
Diff: 3 Type: MC
14) The amount of the taxes paid in dollars for the Irish operations is closest to:
A) $20.5 million
B) $5.1 million
C) $29.5 million
D) $50.0 million
Answer: B
Explanation: B) €4 million × $1.27/€ = $5.08 million
Diff: 3 Type: MC
15) Luther Industries, a Canadian firm, has a subsidiary in the United Kingdom. This year,
the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of £45
million. The current exchange rate is $1.86/£. The tax rate in the U.K. for this activity is
28%. Under Canadian tax codes, Luther is facing a 35% corporate tax rate on their
earnings. What is Luther's Canadian tax liability on its U.K. subsidiary?
Answer: When the foreign tax rate is below the Canadian tax rate the firm is only
responsible for the difference in the tax rates, so Luther will only be taxed at a rate of 7%
on the £45 million.
Tax Canadian = £45 × .07 = £3,150,000 × $1.86/£ = $5,859,000.

Diff: 3 Type: ES
31.4 Internationally Segmented Capital Markets

A) In some countries, especially in the developing world, all investors do not have equal
access to financial securities.
B) Firms may face differential access to markets if there is any kind of asymmetry with
respect to information about them.
C) In some cases, a country's risk-free securities are internationally integrated but markets
for a specific firm's securities are not.
D) When countries' capital markets are not integrated we call them disintegrated capital
markets.
Answer: D
Explanation: D) When countries' capital markets are not integrated we call them
segmented capital markets.
Diff: 1 Type: MC
Topic: 31.4 Internationally Segmented Capital Markets
A) Differential access to national capital markets is common enough that it provides the
best explanation for the existence of currency swaps, which are like the interest rate swap
contracts, but with the holder receiving coupons in one currency and paying coupons
denominated in a different currency.
B) Currency swaps generally also have final face value payments, also in different
currencies.
C) Using a currency swap, a firm can borrow in the market where it has the best access to
capital, and then "swap" the coupon and principal payments to whichever currency it would
prefer to make payments in.
D) With differential access to national markets, to maximize shareholder value, the firm
should raise capital in the foreign market; the method of valuing the foreign project as if it
were a domestic project would then provide the correct NPV.
Answer: D
Explanation: D) With differential access to national markets, to maximize shareholder
value, the firm should raise capital at home; the method of valuing the foreign project as if
it were a domestic project would then provide the correct NPV.
Diff: 2 Type: MC
3) Currency swaps allow firms to mitigate their exchange rate risk exposure between
________, while still making investments and raising funds in the most attractive locales.
A) assets and liabilities
B) long-term liabilities and equity
C) assets and equity
D) equity and liabilities
Answer: A
Diff: 1 Type: MC

A) Many countries regulate or limit capital inflows or outflows, and many do not allow their
currencies to be freely converted into dollars, thereby creating capital market
segmentation.
B) The existence of internationally integrated capital markets makes many decisions in
international corporate finance more complicated but potentially more lucrative for a firm
that is well positioned to exploit the market segmentation.
C) Political, legal, social, and cultural characteristics that differ across countries may
require compensation in the form of a country risk premium.
D) Swaps allow firms to mitigate their exchange rate risk exposure between assets and
liabilities, while still making investments and raising funds in the most attractive locales.
Answer: B
Explanation: B) The existence of segmented capital markets makes many decisions in
international corporate finance more complicated but potentially more lucrative for a firm
that is well positioned to exploit the market segmentation.
Diff: 2 Type: MC
A) The rate of interest paid on government bonds or other securities in a country with a
tradition of weak enforcement of property rights is likely not really a risk-free rate. Instead,
interest rates in the country will reflect a risk premium for the possibility of default, so
relations such as covered interest rate parity will likely not hold exactly.
B) If the return difference in a segmented financial market results from a market friction
such as capital controls, corporations can exploit this friction by setting up projects and
raising capital in the high-return country/currency.
C) Important macroeconomic reasons for segmented capital markets include capital
controls and foreign exchange controls that create barriers to international capital flows
and thus segment national markets.
D) A segmented financial market has an important implication for international corporate
finance: one country or currency has a higher rate of return than another country or
currency, when the two rates are compared in the same currency.
Answer: B
Explanation: B) If the return difference in a segmented financial market results from a
market friction such as capital controls, corporations can exploit this friction by setting up
projects in the high-return country/currency and raising capital in the low-return
country/currency.
Diff: 3 Type: MC
6) Suppose the interest rate on Russian government bonds is 7.8%, and the current
exchange rate is 26.8 rubles per dollar. If the forward exchange rate is 27.2 rubles per
dollar, and the current Canadian risk-free interest rate is 4.6%, what is the implied credit
spread for the Russian government bonds?
Answer: × 1.046 × R27.2/$ = R106,161
So, true ruble risk-free rate = - 1 = 6.161%
The risk premium = 7.8% - 6.161% = 1.639%

Diff: 3 Type: ES
31.5 Capital Budgeting with Exchange Risk
1) Whenever a project has cash flows that depend on the values of ________, the most
convenient approach is to ________ the cash flows according to the currency they depend
on.
A) multiple currencies; separate
B) multiple currencies; consolidate
C) single currency; separate
D) single currency; combine
Answer: A
Diff: 1 Type: MC
Topic: 31.5 Capital Budgeting with Exchange Risk
2) What conditions cause the cash flows of a foreign project to be affected by exchange rate
risk?
Answer: The working assumptions made thus far are that the project's free cash flows are
uncorrelated with the spot exchange rates. Such an assumption often makes sense if the
firm operates as a local firm in the foreign market—it purchases its inputs and sells its
outputs in that market, and price changes of the inputs and outputs are uncorrelated with
exchange rates. However, many firms use imported inputs in their production processes or
export some of their output to foreign countries. These scenarios alter the nature of a
project's foreign exchange risk and, in turn, change the valuation of the foreign currency
cash flows.
Diff: 2 Type: ES
3) How do we make adjustments when a project has inputs and outputs in different
currencies?
Answer: Whenever a project has cash flows that depend on the values of multiple
currencies, the most convenient approach is to separate the cash flows according to the
currency they depend on.
Diff: 3 Type: ES

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Corporate Finance, 3Ce (Berk, DeMarzo, Strangeland)

Chapter 31 International Corporate Finance

31.1 Internationally Integrated Capital Markets

1) Consider the following equation:

The term S in this equation is

2) Consider the following equation:

The term F in this equation is

The term in this equation is

A) the appropriate cost of capital from the standpoint of a Canadian investor.

4) Consider the following equation:

The term in this equation is

A) the risk-free rate for a foreign investor.

5) Under the condition of internationally integrated capital markets, the value of an

Use the information for the question(s) below.

PV$ = PV£ × S = £4,751,045.23 × $1.8839/£ = $8,950,494.10

31.2 Valuation of Foreign Currency Cash Flows

1) Which of the following statements is false?

2) Consider the following equation:

The term r¥ in this equation refers to

The term in this equation refers to

A) the cost of capital in terms of dollars.

The term in this equation refers to

A) the risk-free rate of interest on the dollar.

7) Consider the following equation:

The term r$ in this equation refers to

Use the information for the question(s) below.

Explanation: D) F1 = S × = $1.8862/£ × = $1.8961/£

Explanation: B) F3 = S × = $1.8862/£ × = $1.9161/£

Explanation: C) = (1 + )-1= (1.12) - 1 = .0775 or 7.75%

Luther Industries, a Canadian Corporation, is considering a new project located in Great

Answer: = (1 + )-1= (1.102) - 1= .093636 or 9.36%

12) What is the pound present value of the project?

Answer: = (1 + )-1= (1.102) - 1 = .093636 or 9.36%

NPV£ = -20 + + + = £14.613

13) What is the dollar present value of the project?

Answer: = (1 + )-1= (1.102) - 1 = .093636 or 9.36%

NPV£ = -20 + + + = £14.613 million

NPV$ = NPV£ × S = £14.613 × 1.8862/£ = $27.562 million

4) For Canadian companies, if the foreign project is a separately incorporated subsidiary of

6) Which of the following statements is false?

7) Which of the following statements is false?

9) Which of the following statements is false?

10) Which of the following statements is false?

KT Enterprises, a Canadian import-export trading company, is considering its international

Tax Canadian = £45 × .07 = £3,150,000 × $1.86/£ = $5,859,000.

31.4 Internationally Segmented Capital Markets

1) Which of the following statements is false?

4) Which of the following statements is false?

Answer: × 1.046 × R27.2/$ = R106,161

So, true ruble risk-free rate = - 1 = 6.161%

The risk premium = 7.8% - 6.161% = 1.639%

31.5 Capital Budgeting with Exchange Risk

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