Question 1

Reasons for a country to impose exchange restrictions on its own currency, limiting conversion to other currencies include

Accepted Answer

Exchange restrictions may be imposed by a country when it is short of foreign currency reserves. This is because there may be an imbalance in the country's balance of payments, where the amount of foreign currency flowing out of the country is higher than the amount flowing in. In such a situation, limiting the conversion of the domestic currency to other currencies can help to conserve foreign reserves. However, restrictions on currency conversion may not necessarily be effective in enticing foreign investment or creating a home-grown business climate.

Question 2

Which of the following statements about transfer pricing is true?

Accepted Answer

A higher transfer price increases the transferring division's profits at the expense of the receiving division, and a high markup can make a subsidiary's APV less attractive by inflating costs.

Question 3

The lower the transfer price

Accepted Answer

The answer of The lower the transfer price
...

Question 4

In reference to establishing "transfer prices" between the affiliates of an MNC, which of the following relates to the "resale" price approach?

Accepted Answer

The resale price approach is based on the price at which the good is resold by the distribution affiliate, which is reduced by an amount to cover overhead costs and a reasonable profit. This approach is commonly used when the manufacturing process is completed by a different affiliate within the same MNC.

Question 5

The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method. This method is difficult to apply in practice because many factors enter into the pricing of goods and services. Examples include

Accepted Answer

All of the above factors can affect the pricing of goods and services, making it difficult to apply the comparable uncontrolled price method in practice. Differences in the terms of sale, quantity and quality sold, location or date of sale, and other factors must all be carefully considered to arrive at an accurate comparability analysis for transfer pricing purposes.

Question 6

Under multilateral netting

Accepted Answer

Under multilateral netting, each affiliate nets all its inter-affiliate receipts against all its disbursements and then transfers or receives the balance, making option A correct.

Question 7

According to a recent survey by Ernst and Young, the most important tax issue that multinational enterprises now face is

Accepted Answer

The survey specifically states that transfer pricing is the most important tax issue that multinational enterprises currently face. Therefore, option A is the correct answer. Option B and C may be important accounting issues, but they are not the most important tax issues according to the survey. Option D is not correct as the survey clearly identifies transfer pricing as a significant tax issue.

Question 8

Ad valorem duties are best described as

Accepted Answer

Ad valorem duties are a type of tax levied at customs based on the assessed or declared value of the imported good. It is usually a percentage of the value of the imported item.

Question 9

When engaged in bilateral netting

Accepted Answer

All three statements are true when engaged in bilateral netting:
A) Total interaffiliate receipts will always equal total interaffiliate disbursements as all transactions are netted off against each other. 
B) Bilateral netting reduces the number of foreign exchange transactions as each affiliate only has to transfer or receive a balance, resulting in fewer transactions. 
C) Each affiliate nets all its interaffiliate receipts against all its disbursements, and the balance is transferred or received if it is a net payer or receiver.

Question 10

Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency, limiting conversion to other currencies, a MNC's frustrated remittance of profits from a subsidiary would be

Accepted Answer

When a country imposes exchange restrictions on its own currency, the conversion of the currency to other currencies is limited. This can lead to blocked or trapped funds, where multinational corporations are unable to transfer their profits or other funds from their subsidiaries in that country to their home country. Hence, option A is the best choice as it accurately describes the situation. Options B, C, and D do not adequately describe the situation.

Question 11

On blocked funds strategy is

Accepted Answer

All of the given options are examples of blocked funds strategies, which involve using local resources and minimizing the transfer of funds out of the host country.

Question 12

Why can blocked funds can be detrimental to all concerned?

Accepted Answer

Blocked funds can have negative effects on both the host country and the MNCs. Host countries aim to attract foreign industries that can contribute to their economic development, so if MNCs are dissuaded from investing due to blocked funds, it can hinder the growth of the host country. Additionally, MNCs have a responsibility to their shareholders to invest in ventures that will provide an appropriate return on investment, so blocked funds that prevent repatriation of profits can make investing in a particular country less attractive. Therefore, both options A and B are correct. Finally, option C could also be true in some cases where local competitors are able to gain an advantage in the absence of the MNCs.

Question 13

Which will reduce the number of foreign exchange transaction the most for a MNC?

Accepted Answer

Multilateral netting involves combining payments and receipts across multiple subsidiaries and currencies, which reduces the need for individual foreign exchange transactions. This results in a significant reduction in foreign exchange transaction costs for the MNC. Bilateral netting involves combining payments and receipts between two parties, while fish netting is not a valid term in the context of foreign exchange transactions.

Question 14

One benefit of a centralized cash depository is

Accepted Answer

Centralizing cash depository allows MNCs to pool their cash in one location thereby reducing the need for each affiliate to hold large precautionary cash balances. This reduces the overall cost of holding cash for the MNC without compromising its ability to cover unforeseen expenses. This makes option A the correct answer. Option B is incorrect because centralization of cash creates efficiency by giving central management of cash balances while option C is incorrect because a centralized cash depository does not help MNCs to evade exchange rate restrictions.

Question 15

For the U.S. affiliate shown below, net all its inter-affiliate receipts against all its disbursements. Use the following exchange rates.  The net inter-affiliate cash flow for the U.S. affiliate is

Accepted Answer

The answer of For the U.S. affiliate shown below, net...

Question 16

Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

Accepted Answer

If Y uses the higher transfer price of $1,250 per unit, there will be an additional cost of $250 per unit ($1,250 - $1,000). If Y sells 500 units, the total additional cost would be $125,000 ($250 x 500).

As the tariff is tax deductible, Y can reduce the taxable income by $87.50 ($1,250 x 7%) for each unit. Thus, the total tax savings would be $43,750 ($87.50 x 500).

The increase in after-tax profits would be the difference between the additional cost and the tax savings, which is $81,250 ($125,000 - $43,750).

Therefore, the best choice is C, $125,000.

Question 17

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 $1.50 = €1.00. The net payment between A and B should be closest to

Accepted Answer

Affiliate A owes Affiliate B $1,000, and Affiliate B owes Affiliate A €2,000. When the exchange rate is $1.50 = €1.00, €2,000 is equal to $3,000. Therefore, Affiliate B owes Affiliate A $3,000 - $1,000 = $2,000.

Question 18

Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

Accepted Answer

The increase in annual after-tax profits is $250,000. This is because the higher transfer price of $1,250 per unit will increase the profit margin on each unit sold. The company will sell 1,000 units per year, so the total increase in annual after-tax profits will be $250,000.

Question 19

Multinational cash management

Accepted Answer

Multinational cash management concerns itself with various factors beyond just the size of cash balances and their currency denominations, including where these cash balances are located among the MNC's affiliates. This is important because it helps to mitigate risks such as foreign exchange rate fluctuations and intra-affiliate default risk, and also allows for efficient cash management strategies to be implemented. Therefore, option B is the most accurate choice.

Question 20

"Unbundling fund transfers" from an MNC and to its affiliates refers to the following activity:

Accepted Answer

The answer of "Unbundling fund transfers" from an MNC and...

Quiz 19: Multinational Cash Management