Deck 19: International Corporate Finance

Question 1

Comprehensive rules, regulations, and incentives aimed at regulating the inflow of direct foreign investments involving MNCs and at extracting more benefits from their presence are termed

A) export taxes under GATT.
B) Eurocurrency markets.
C) national entry control systems.
D) foreign direct investments.

Answer 1

national entry control systems.

Question 2

Which of the following nations has the greatest amount of political risk?

A) United States
B) South Africa
C) Germany
D) Canada

Answer 2

South Africa

Question 3

Canada is a member of the

A) Mercosur Group.
B) North American Free Trade Agreement.
C) European Union.
D) Asian Tigers.

Answer 3

North American Free Trade Agreement.

Question 4

The__________ method takes all transactions that were measured in a foreign currency and translates them into Canadian dollars using the exchanged rate in effect on the date of the originaltransaction.

A) current rate
B) cash
C) temporal
D) foreign exchange

Question 5

Nexnew Systems Inc. is a Canada-based MNC that manufacturers satellite equipment. of $100,000 before foreign taxes. All after-tax earnings are to be paid to the parent as dividends. The foreign taxes include anincome tax rate of 35 percent and a dividend withholding tax of 15 percent. The firm's marginal tax rate in Canada is 45 percent. The taxes paid to the Canadian government would be

A) $45,000.
B) $44,750.
C) $35,000.
D) $0.

Question 6

In terms of inventory, management multinational firms

A) have only political factors to consider, since inventory is minimally affected by foreign economic factors.
B) have only economic factors to consider, since this is a current asset and is minimally affected by political factors.
C) must deal mainly with exchange rate fluctuations and tariffs.
D) must deal with a wide number of factors, including exchange rate fluctuations, tariffs, non-tariff barriers, and other rules and regulations.

Question 7

A partnership between a multinational company and a foreign investor in which contractuallyspecified amounts of money and expertise are contributed by the participants for statedproportions of ownership and profit is a

A) multinational corporation.
B) consolidation.
C) floating relationship.
D) joint venture.

Question 8

If $1 Canadian costs $0.80 U.S. and $1 U.S. costs 125 Japanese yen, than $1 Canadian costs ___________Japanese yen.

A) 75
B) 156.25
C) 100
D) 125

Question 9

The existence of__________ allows multinationals to take advantage of unregulated financial marketsto invest and raise short-term funds in a variety of countries and to protect themselves from foreign exchange exposure.

A) the International Monetary Fund
B) the European Economic Council
C) Eurocurrency markets
D) a strong Canadian dollar

Question 10

Tanks and Toilets Inc. is a Canada-based MNC that manufacturers stainless steel bathroomfixtures. of $100,000 before foreign taxes. All before-tax earnings are to be paid to the parent as interest. The foreign taxes include an income tax rate of 30 percent and an interest withholding tax of 15 percent. The firm's marginal tax rate in Canada is 45 percent. The amount of tax paid to the Canadian government would be

A) $70,000.
B) $45,000.
C) $30,000.
D) $38,250.

Question 11

As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT

A) the right to buy or sell an amount of foreign currency.
B) the ability to specify time period.
C) the ability to specify price.
D) an obligation to buy or sell.

Question 12

The Euromarket is dominated by the

A) French franc.
B) Japanese yen.
C) U.S. dollar.
D) Deutsche mark.

Question 13

Macro political risk and micro political risk in international business refer to the risk

A) of nationalization of the oil industry and the risk of a political revolution, respectively.
B) that will affect an individual firm or specific industry and the risk that will affect all foreign firms, respectively.
C) of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the devaluation of the host country's currency, respectively.
D) that will affect all foreign firms and the risk that will affect an individual firm or specific industry, respectively.

Question 14

The center of the Euro-equity market, which deals in international equity issues is

A) Geneva.
B) Tokyo.
C) London.
D) New York.

Question 15

In the international context, the__________interest rate involves only the MNC parent's currency,while the__________ interest rate includes any forecast appreciation or depreciation of a foreigncurrency relative to that of the MNC parent.

A) nominal; effective
B) macro; nominal
C) effective; nominal
D) nominal; micro

Question 16

A political risk that might affect all foreign firms in a host country is termed a risk; a political risk that might affect only an individual firm or specific industry in a host country is termed a__________ risk.

A) micro political; foreign exchange
B) foreign exchange; micro political
C) macro political; micro political
D) micro political; macro political

Question 17

Foreign bonds are sold primarily in

A) Japan.
B) Western Europe.
C) countries other than the country in which the issue is denominated.
D) the country of the currency of issue.

Question 18

In capital budgeting for a multinational, the starting discount rate to which risks stemming fromforeign exchange and political factors can be added, and from which benefits reflecting the parent'slower capital costs may be subtracted is

A) the cost of capital of the parent (multinational) company.
B) the local cost of equity capital applicable to the local business and financial environments within which a subsidiary operates.
C) the risk-free rate of the parent company, adjusted for risk relevant to the foreign subsidiary.
D) the weighted average cost of capital applicable to all foreign subsidiaries combined.

Question 19

Foreign exchange risk refers to the risk created by

A) the varying exchange rate between two currencies.
B) the fixed exchange rate between two currencies.
C) the potential seizure of an MNC's operations in a host country.
D) the potential nationalization of the MNC's operations by a host government.

Question 20

When fewer units of a foreign currency are required to buy one dollar, the currency is said to have__________with respect to the dollar.

A) depreciated
B) consolidated
C) appreciated
D) remained fixed

Question 21

Joint venture laws and restrictions may result in any of the following negative implications for the operation of a foreign-based subsidiary EXCEPT

A) foreign management policies may be detrimental to the usual policies of the MNC.
B) joint venture agreements may stem a certain degree of risk due to political hostility.
C) operating in foreign countries may result in difficulties obtaining the remission of profits.
D) foreign ownership may result in disagreement among the partners regarding the distribution of profits.

Question 22

The Euromarket is dominated by the

A) U.S. dollar.
B) Japanese Yen.
C) Canadian dollar.
D) British Pound.

Question 23

Relative to cash flows of domestic firms, by diversifying internationally, multinationals

A) are unable to change the risk.
B) can achieve further risk reduction.
C) are not attempting to change risk.
D) can increase cash flows.

Question 24

All of the following are factors that can influence the operations of an MNC, EXCEPT

A) consolidation of financial statements based on only one currency.
B) foreign currency fluctuations.
C) foreign ownership of portions of equity.
D) existence of multinational capital markets.

Question 25

The transfer by a multinational firm of capital, managerial, and technical assets from its homecountry to a host country is termed

A) an MNC.
B) a CAPM.
C) an SDI.
D) an FDI.

Question 26

An international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated is called

A) a Eurobond.
B) a foreign bond.
C) an international bond.
D) none of the above.

Question 27

The usual capital markets used by U.S.-based MNCs that desire international ownership of theirequity are

A) Liechtenstein and Panama.
B) Saudi Arabia and South Africa.
C) Western Europe and Japan.
D) Mexico and Canada.

Question 28

All of the following are considered to be major or "hard" currencies EXCEPT

A) the Mexican peso.
B) the British pound.
C) the Japanese yen.
D) the U.S. dollar.

Question 29

Delta Systems Inc. is a Canada-based MNC that manufacturers satellite equipment. of $100,000 before foreign taxes. All after-tax earnings are to be paid to the parent as dividends. The foreign taxes include an income tax rate of35 percent and a dividend withholding tax of 10 percent. The firm's marginal tax rate in Canada is34 percent. What will be the firm's after-tax dividend income?

A) $71,000
B) $34,000
C) $41,500
D) $58,500

Question 30

The risks attached to international cash flows are all of the following EXCEPT

A) the risk of local management.
B) political risks.
C) inflation and foreign exchange risks.
D) business and financial risks.

Question 31

All of the following are considered offshore centers EXCEPT

A) Nassau.
B) London.
C) Cuba.
D) Singapore.

Question 32

T&T Inc. is a Canada-based MNC that manufacturers stainless steel bathroom fixtures. of $100,000 before foreign taxes. All before-tax earnings are to be paid to the parent as interest. The foreign taxes include an income tax rate of 30 percent and an interest withholding tax of 15 percent. The firm's marginal tax rate in Canada is 40 percent. What wouldbe the firm's after-tax interest income?

A) $85,000
B) $75,000
C) $45,000
D) $60,000

Question 33

A short-term financial decision based on an MNC management's expectation that the local foreigncurrency will appreciate may be

A) decreasing local notes receivable and decreasing accruals.
B) increasing local customers' accounts receivable and increasing local notes payable.
C) increasing local inventories and increasing local notes payable.
D) increasing local accounts receivable and decreasing local accounts payable.

Question 34

As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT

A) each party pays the other's interest payment.
B) principal amounts are reversed at the spot rate at maturity.
C) an initial exchange by two parties of two principal amounts in two different currencies.
D) principal amounts are reversed at a pre-agreed rate at maturity.

Question 35

A partnership under which the participants have contractually agreed to contribute specifiedamounts of money and expertise in exchange for stated proportions of ownership and profit iscalled

A) a joint venture.
B) general agreement of tariffs and trade.
C) a foreign subsidiary.
D) a limited partnership.

Question 36

The risk resulting from the effects of changes in foreign exchange rates on the firm's value is

A) micro political risk.
B) accounting exposure.
C) economic exposure.
D) macro political risk.

Question 37

Theory and empirical evidence indicate that the capital structures of multinational companies

A) not only differ from domestic firms, but differ also based upon the country in which they are domiciled.
B) are basically the same as those of domestic firms.
C) differ, but all multinationals are similar no matter the domicile country.
D) differ only because of their operating structure.

Question 38

All of the following are positive approaches of coping with political risk EXCEPT

A) license or patent restrictions under international agreement.
B) use of locals in management.
C) local sourcing.
D) joint venture with local banks.

Question 39

Between two major currencies, the spot exchange rate is the rate__________ and the forwardexchange rate is the rate__________ .

A) at some specified future date; today
B) today; on that date
C) on that date; at some specified future date
D) on that date; today

Question 40

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's accounts denominated in a given foreign currency is

A) accounting exposure.
B) micro political risk.
C) economic exposure.
D) macro political risk.

Question 41

Income from an active business earned by a foreign affiliate in a treaty country is exempt fromCanadian taxation.

Question 42

With a total population estimated at more than 365 million (compared to a Canada and U.S. population of 320 million) and an overall gross national income parallelling the United States, the EU is a significant global force.

Question 43

A foreign bond is an international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated.

Question 44

The existence of specific regulations and controls on dollar deposits in the United States, including interest rate ceiling imposed by the government, has contributed to the growth of the Euromarket.

Question 45

The three basic types of risk associated with international cash flows are business and financial risks, inflation and foreign exchange risks, and political risks.

Question 46

Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they have no impact on its overall value.

Question 47

If a $1 Canadian costs $0.667 U.S., then $1 U.S. must cost $1.60 Canadian.

Question 48

In Canada, for integrated foreign operations, the temporal method of translation of financial statements should be used. The temporal method takes all transactions that were measured in a foreign currency and translates them into Canadian dollars using the exchanged rate in effect on the date of the original transaction.

Question 49

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

Question 50

The third largest trading bloc in the world is the Mercosur Group of countries in the Middle East: Iran, Iraq, Saudi Arabia, and Turkey.

Question 51

Offshore Centers are cities that have achieved prominence as major centers for Euromarket business.

Question 52

Canada's biggest trading partner is the United States. In 2002, Canada's two-way trade in goods and services with the United States amounted to about $2 billion per year or about 78% of Canada's total trade in goods and services.

Question 53

In general, an international bond is one that is initially sold in the country of the borrower and,then, often distributed in several countries.

Question 54

Canada is a signatory to the most recent version of the GATT treaty, which has governed world trade throughout most of the postwar era.

Question 55

Joint venture is a partnership under which the participants have contractually agreed to contribute specified amounts of money and expertise in exchange for stated proportions of ownership and profit.

Question 56

Hedging strategies are techniques used to offset or protect against risk; in the international context these include borrowing or lending in different currencies, undertaking contracts in the forward, futures, and/or options markets, and also swapping assets/liabilities with other parties.

Question 57

NAFTA is a treaty establishing free trade and open markets between Europe and the Canada.

Question 58

The Euromarket is the international financial market that provides for borrowing and lending currencies outside their country of origin.

Question 59

NAFTA is an international financial market that provides for borrowing and lending currencies outside their country of origin.

Question 60

In 1998, Canada and the United States negotiated essentially unrestricted trade between their countries. The free trade zone was extended to include Chile in late 1992.

Question 61

The current rate method is the method by which the is used to translate the foreign subsidiary's financial statements into Canadian dollars.

Question 62

The interest rates offered in the Euromarket on the Canadian dollar are greatly affected by the prime rate inside Canada.

Question 63

In the international context, the effective interest rate is equal to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.

Question 64

The spot exchange rate is the rate of exchange between two currencies at some specified futuredate.

Question 65

Functional currency is the currency of the economic environment in which a business entity primarily generates and expends cash, and in which its accounts are maintained.

Question 66

A multi-national corporation (MNC) can give some protection to international cash flows by reducing its liabilities if the currency is appreciating, or by reducing its financial assets if the currency is depreciating.

Question 67

In the case of short-term financing, the forces of supply and demand are among the main factors determining exchange rates in Eurocurrency markets.

Question 68

The foreign direct investment (FDI) is a multinational corporation's transfer of capital, managerial, and technical assets from a host country to its home country.

Question 69

If a $1 Canadian costs $0.80 U.S., then $1 U.S. must cost $1.25 Canadian.

Question 70

Because of their access to the international bond and equity markets, MNCs may have lower costs of various sources of long-term financing, thus resulting in differences between the capital structures of these firms and those of purely domestic companies.

Question 71

The forward exchange rate is the rate of exchange between two currencies on any given day.

Question 72

Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the firm's value.

Question 73

The World Trade Organization is a new international body established to police world trading practices and to mediate disputes between member countries.

Question 74

A self-sustaining foreign subsidiary is one that is financially and operationally independent of the parent company.

Question 75

Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

Question 76

In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.

Question 77

If a Canadian-based MNC with a subsidiary in Mexico expects the Mexican currency to appreciate in value relative to the Canadian dollar, local customers' accounts receivable would be increased and accounts payable would be reduced if at all possible.

Question 78

When more units of a foreign currency are required to buy one dollar, the currency is said to have appreciated with respect to the dollar.