Question 1

Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.

Accepted Answer

Political risk can be addressed in multinational corporate financial analysis through various techniques such as diversification of operations across different political jurisdictions, political risk insurance, and conducting thorough political risk assessments. However, it cannot be completely eliminated or fully negotiable.

Question 2

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

Accepted Answer

The interest rate paid on Eurodollar deposits is determined by the particular bank's lending rate plus the rates available on U.S. money market instruments.

Question 3

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

Exchange rates directly affect the value of inventory in a multinational firm's financial statements. When the currency of the country where the inventory is held changes in value relative to the reporting currency of the company, the value of the inventory also changes. Therefore, exchange rate fluctuations can influence a multinational company's inventory policy, including decisions about where to hold inventory and how much to produce.

Question 4

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return,what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

Accepted Answer

To maintain a 9% after-tax return in the face of a 28% withholding tax, the before-tax interest rate needs to be calculated using the formula: required return = before-tax return * (1 - tax rate). Rearranging to solve for the before-tax return gives: before-tax return = required return / (1 - tax rate) = 9% / (1 - 0.28) = 9% / 0.72 = 12.5%.

Question 5

A U.S.-based company,Stewart,Inc. ,arranged a 2-year,$1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos,carries a 10.0% nominal rate,and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar,but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,what effective interest rate will Stewart end up paying on the loan?

Accepted Answer

1. Calculate the amount of the loan in pesos: 1,000,000 x 5.75 = 5,750,000 pesos
2. Calculate the semiannual payment in pesos: 5,750,000 / 4 = 1,437,500 pesos
3. Calculate the semiannual payment in dollars at the original exchange rate: 1,437,500 / 5.75 = $250,000
4. Calculate the semiannual payment in dollars at the current exchange rate: 1,437,500 / 5.10 = $282,353. This is the amount that Stewart needs to pay each period in dollars.
5. Calculate the effective interest rate based on the actual payments made: 
PV = $1,000,000
PMT = -$282,353
n = 4
FV = 0
Solve for I/Y = 10.895%
The effective interest rate is therefore 10.895% or 21.79% per annum. The correct answer is E.

Question 6

Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Accepted Answer

The answer of Suppose a U.S.firm buys $200,000 worth of...

Question 7

Due to advanced communications technology and the standardization of general procedures,working capital management for multinational firms is no more complex than it is for large domestic firms.

Accepted Answer

Working capital management for multinational firms is more complex than it is for large domestic firms due to the additional factors such as foreign exchange risk, cross-border regulations, and cultural differences. Advanced communications technology and standardization of general procedures may help to some extent, but they do not eliminate the complexities completely.

Question 8

Suppose Yates Inc. ,a U.S.exporter,sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen,when the exchange rate was 140 yen per dollar.In order to close the sale,Yates agreed to make the bill payable in yen,thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid,what dollar amount would Yates actually receive after it exchanged yen for U.S.dollars?

Accepted Answer

The answer of Suppose Yates Inc. ,a U.S.exporter,sold a consignment...

Question 9

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Accepted Answer

The risk associated with a foreign project may be different from that of an equivalent domestic project, which affects the cost of capital. Factors such as political instability, currency risks, and different legal systems can increase the perceived risk of a foreign project, and consequently increase the cost of capital. On the other hand, foreign projects may offer higher growth opportunities, leading to a lower cost of capital. Ultimately, the cost of capital for a foreign project depends on the specific circumstances of the project and the perceived risks involved.

Question 10

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.

Accepted Answer

A foreign currency selling at a discount in the forward market means that it is cheaper to buy it in the future compared to buying it in the spot market. This could be due to factors such as market expectations or interest rate differentials.

Question 11

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

Accepted Answer

The threat of expropriation, or the government seizing a company's assets, can make a multinational firm hesitant to leave large amounts of inventory in a country. This can lead to a strategy of minimizing inventory and only importing goods as they are needed to reduce the risk of losing assets in case of expropriation.

Question 12

Which of the following statements is NOT CORRECT?

Accepted Answer

The statement that "The term Eurobond applies only to foreign bonds denominated in U.S. currency" is incorrect. Eurobonds are actually foreign bonds that are denominated in a currency other than that of the country in which they are issued. They are called Eurobonds because they are typically issued in the European capital markets, but they can be denominated in any currency.

Question 13

LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to smaller U.S.corporations.

Accepted Answer

LIBOR is an average of interest rates offered by London banks to other large, internationally recognized banks, not specifically smaller U.S. corporations.

Question 14

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

Multinational firms have to deal with multiple currencies and fluctuations in exchange rates, which adds to the risk of their credit policy. Additionally, the creditworthiness of foreign customers may not always be easy to assess, posing further risks to credit policies.

Question 15

Suppose Stackpool Inc.had inventory in Britain valued at 240,000 pounds one year ago.The exchange rate for dollars to pounds was 1£ = 2 U.S.dollars.This year the exchange rate is 1£ = 1.82 U.S.dollars.The inventory in Britain is still valued at 240,000 pounds.What is the gain or loss in inventory value in U.S.dollars as a result of the change in exchange rates?

Accepted Answer

First, we need to convert the initial inventory value in pounds to U.S. dollars:
240,000 pounds × 2 dollars/pound = $480,000
Using the new exchange rate, the inventory value in U.S. dollars would be:
240,000 pounds × 1.82 dollars/pound = $436,800
The loss in inventory value in U.S. dollars is the difference between the initial value and the new value:
$480,000 - $436,800 = $43,200.
Therefore, the correct answer is (B).

Question 16

Which of the following is NOT a reason why companies move into international operations?

Accepted Answer

Moving into international operations is typically done to expand and grow the company by accessing new markets, serving primary customers better, obtaining important raw materials, or reducing production costs. Increasing inventory levels is not a typical reason for international expansion.

Question 17

The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Accepted Answer

The answer of The cash flows relevant for a foreign...

Question 18

Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.In addition,due to political risk factors,Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?

Accepted Answer

First, calculate the net cash inflows after the 20% blockage: Years 1-2: $4 million * 80% = $3.2 million per year. Years 3-4: $6 million * 80% = $4.8 million per year. The expected terminal value is calculated as the average of the two possible outcomes, weighted by their probabilities: (0.5 * $2 million + 0.5 * $8 million) * 80% = $4 million. The adjusted cost of capital is 15% + 1% = 16%. Using these figures, the NPV can be calculated as follows: NPV = -$10 million + ($3.2 million / (1+0.16)^1) + ($3.2 million / (1+0.16)^2) + ($4.8 million / (1+0.16)^3) + ($4.8 million / (1+0.16)^4) + ($4 million / (1+0.16)^4) = $2.77 million.

Question 19

When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

Accepted Answer

Exchange rate risk and political risk can increase the overall risk of a foreign investment, while diversification can help lower the risk by spreading investments across different countries and markets.

Question 20

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market,then the forward currency is said to be selling at a premium to the spot rate.

Accepted Answer

This is the definition of a forward premium.

Quiz 17: Multinational Financial Management