Deck 19: International Managerial Finance

Question 1

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

Answer 1

False

Question 2

The Mercosur Group is a major South American trading bloc that includes countries that account for more than half of the total of Latin America's GDP.

Answer 2

True

Question 3

One reason for the recent rapid grow in the Euromarket is that it provides multinational companies with an "external" opportunity to borrow or lend funds with the additional feature of less government regulation.

Answer 3

True

Question 4

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

Question 5

The World Trade Organization has in recent years admitted current and former communist countries as members including the Russian Federation and the Peoples Republic of China.

Question 6

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

Question 7

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

Question 8

The Mercosur Group is a major European trading bloc made up of former Soviet bloc countries in Eastern Europe.

Question 9

A 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 10

All of the following are considered offshore centers EXCEPT

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

Question 11

The official melding of the national currencies of the European Union into one currency, the Euro, created the European Monetary Union in 2002.

Question 12

In 2003-2004, the United States signed a regional trade pact with the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua called the Central American Free Trade Agreement or CAFTA.

Question 13

Disagreements among European Union country members over the disposition of garbage and manufacturing refuse generated primarily by Eastern European countries have come to be known as the Euro Trash Issue.

Question 14

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

Question 15

In 2003-2004, the United States signed a regional trade pact with south pacific countries including the Philippines, Indonesia, Malaysia called the South Pacific American Trade Agreement or SPAMTA.

Question 16

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 is called

A) limited partnership.
B) GmbH.
C) S.A.R.L.
D) joint venture.

Question 17

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

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

Question 18

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

Question 19

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

Question 20

The ________ is the taxation technique that increases the U.S. income of an MNC by the amount of foreign income (before foreign taxes). The U.S. tax calculation is then based on that higher level.

A) unitary tax law
B) grossing up procedure
C) GmbH
D) nationalization procedure

Question 21

The ________ is a significant economic force currently made up of 25 nations with a population of more than 295 million that permits free trade within the countries that make up this group.

A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Asian Economic Area Network (ASEAN)
D) European Union (EU)

Question 22

A U.S.-based MNC has three subsidiaries: S1 (40 percent owned by the MNC); S2 (33 percent owned by S1), and S3 (20 percent owned by S2). The taxable income for each firm is $100 million. The local taxes for each firm are $15 million, $20 million, and $10 million, respectively. The MNC's tax rate is 40 percent.
(a) Can the MNC apply all of its local taxes as a credit against its U.S. taxes?
(b) Based on the "grossing up" concept, calculate all tax credits applicable to the MNC.

Question 23

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

Question 24

FASB No. 52 is a statement issued by the Financial Accounting Standards Board requiring American MNCs to first convert the financial statement accounts of foreign subsidiaries into the country's ________ currency and then translate the accounts into the parent firm's currency using the ________ method.

A) spot; historical rate
B) functional; all-current-rate
C) principal; average rate
D) forward rate; weighted average

Question 25

________ is a treaty that has governed world trade throughout most of the post World War II era.

A) NAFTA
B) GATT
C) WTO
D) CAFTA

Question 26

Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent. What are the funds available to the parent MNC if foreign taxes can be applied as a credit against the MNC's U.S. tax liability?

A) $624,750
B) $425,250
C) $257,250
D) $735,000

Question 27

The temporal method requires specific assets and liabilities to be translated at so-called historic exchange rates, and that foreign-exchange translation gains or losses be reflected in the current year's income.

Question 28

Current U.S. tax laws require the consolidation of financial statements of subsidiaries according to the percentage of ownership by the parent company.

Question 29

The all-current-rate method dictated by the FASB No. 52 statement requires the translation of all balance sheet accounts at the ______ rate and all income statement items at the ________ rates.

A) closing; average
B) average; closing
C) historical; current
D) average; historical

Question 30

FASB No. 52 requires U.S. multinationals first to convert the financial statement accounts of foreign subsidiaries into their functional currency and then to translate the accounts into the parent firm's currency using the all-current-rate method.

Question 31

Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent. What are the funds available to the parent MNC if no tax credits are allowed?

A) $624,750
B) $425,250
C) $257,250
D) $735,000

Question 32

The all-current-rate method is the method by which the functional currency-denominated financial statements of an MNC's subsidiary are translated into the parent company's currency.

Question 33

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

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

Question 34

The Euromarket is dominated by the

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

Question 35

Current U.S. tax laws require the separation of financial statements of subsidiaries and the operating results for some subsidiaries are excluded from the parent entirely for some countries such as China and India.

Question 36

A functional currency is the currency of the host country in which a subsidiary primarily generates and expends cash and in which its accounts are maintained.

Question 37

A functional currency is the currency of the parent company's country.

Question 38

The ________ is a major South American trading bloc that includes countries that account for more than half of total Latin American GDP.

A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Latin and South American Free Trade Area (LASTA)
D) Group of Seven

Question 39

________ is an international body that polices world commercial trading practices and that mediates disputes between two or more member countries.

A) NAFTA
B) GATT
C) WTO
D) CAFTA

Question 40

The ________ is a major trade agreement signed by the United States and five Central American Countries.

A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Latin and South American Free Trade Area (LASTA)
D) Central American Free Trade Agreement (CAFTA)

Question 41

Both theory and empirical evidence indicate that the capital structures of MNCs differ from those of purely domestic firms.

Question 42

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

Question 43

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

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

Question 44

Both theory and empirical evidence indicate that the capital structures of MNCs are no different from those of purely domestic firms.

Question 45

Micro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies of a government that may result in changes in ownership structure, closure or expropriation.

Question 46

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

Question 47

A U.S-based MNC has a subsidiary in China where the local currency is the Renminbi (RMB). The balance sheets and income statements of the subsidiary are presented in the table below. On December 31, 2005, the exchange rate was 8.27 RMB/US$. Assume the local currency figures in the statement below remain the same on December 31, 2006. Calculate the U.S. dollar translated figures for the two ending time periods assuming that between December 31, 2005 and December 31, 2006, the Chinese government revalues (appreciates) the RMB by 20 percent.
Translation of Income Statement Translation of Balance Sheet

Question 48

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

Question 49

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.

Question 50

Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is a differing inflation rate between two countries.

Question 51

Recent years have seen the emergence of a third path to political risk that encompasses "global" events such as terrorism, antiglobalization movements and protests, internet-based risks, and concerns over poverty, AIDS, and the environment, all of which affect various MNCs' operations worldwide.

Question 52

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

Question 53

National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct investment from MNCs and at the same time extract more benefits from their presence.

Question 54

Macro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies of a government that may result in changes in ownership structure, closure or expropriation.

Question 55

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 56

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

Question 57

The 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 58

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

Question 59

Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is fiscal policy that a country adopts.

Question 60

National entry control systems are comprehensive rules, regulations, and immigration policies introduced by xenophobic host governments to regulate inflows of foreign workers.

Question 61

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

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

Question 62

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 63

Between two major currencies, the spot exchange rate is the rate ________ and the forward exchange rate is the rate ________.

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

Question 64

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?

A) 1.145
B) 0.8730
C) 1.257
D) 0.7955

Question 65

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

Question 66

For foreign bonds, interest rates are usually not directly correlated with the domestic rates prevailing in the respective countries.

Question 67

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

Question 68

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 69

For ________ currencies, changes in the value of foreign exchange rates are called ________.

A) floating; appreciation
B) floating; revaluation or devaluation
C) fixed; revaluation or devaluation
D) fixed; appreciation or depreciation

Question 70

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

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

Question 71

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) unitary tax laws.
B) foreign direct investments.
C) Eurocurrency markets.
D) national entry control systems.

Question 72

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

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

Question 73

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 74

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

A) that will affect all foreign firms and the risk that will affect an individual firm or specific industry, respectively.
B) of nationalization of the oil industry and the risk of a political revolution, respectively.
C) that will affect an individual firm or specific industry and the risk that will affect all foreign firms, respectively.
D) 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.

Question 75

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate between the U.S. dollar and the Japanese yet is 120 Yen per dollar, then what is the Euro per Yen exchange rate?

A) 0.0100
B) 144.00
C) 0.0069
D) 100.00

Question 76

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

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

Question 77

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

Question 78

Foreign exchange risk refers to the risk created by

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

Question 79

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 80

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