Question 1

Use the information for the question(s)below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. 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): 
-The amount of the taxes paid in dollars for the Irish operations is closest to ________.

Accepted Answer

To calculate the taxes paid in dollars for the Irish operations, we need to first find the earnings in Euros for Ireland. 
Earnings in Ireland = €400 million = €400 million x $1.27/€ = $508 million

Taxes paid in Ireland = 12.5% x €400 million = €50 million = €50 million x $1.27/€ = $63.5 million

Finally, we need to convert the taxes paid in Ireland to dollars:

Taxes paid in Ireland = $63.5 million

Therefore, the closest answer is $5.1 million (B). None of the other choices are close to $5.1 million.

Question 2

A U.S. firm acquires a British firm that will generate cash flows of 20,000 pounds next year and these cash flows will grow at 4% a year. If the British WACC is 9% and the spot exchange rate is $1.8/pound, what is the present value (PV)of the cash flows from this acquisition to domestic shareholders?

Accepted Answer

D) PV of project = Spot exchange rate × (Time 1 cash flows / (WACC - growth rate))
PV of project = $1.8/Pound × (£20,000 / (0.09 - 0.04)) = $720,000

Question 3

A U.S. firm acquires a British firm that will generate cash flows of 10,000 pounds next year and these cash flows will grow at 6% a year. If the British WACC is 9% and the spot exchange rate is $1.9/pound, what is the present value (PV)of the cash flows from this acquisition to domestic shareholders?

Accepted Answer

A) PV of project = Spot exchange rate × (Time 1 cash flows / (WACC - growth rate))
PV of project = $1.9/Pound × (£10,000 / (0.09 - 0.06)) = $633,333

Question 4

Use the information for the question(s)below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. 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): 
-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 ________.

Accepted Answer

The answer of Use the information for the question(s)below.
KT Enterprises,...

Question 5

A U.S. firm acquires a British firm that will generate cash flows of 30,000 pounds next year and these cash flows will grow at 3% a year. If the British WACC is 9% and the spot exchange rate is $1.7/pound, what is the present value (PV)of the cash flows from this acquisition to domestic shareholders?

Accepted Answer

B) PV of project = Spot exchange rate × (Time 1 cash flows / (WACC - growth rate))
PV of project = $1.7/Pound × (£30,000 / (0.09 - 0.03)) = $850,000

Question 6

Use the information for the question(s)below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. 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): 
-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 ________.

Accepted Answer

First, we need to calculate the earnings before taxes in Japan:
Earnings before taxes in Japan = ¥4,350 million / ¥118.4 = $36.71 million
Next, we need to calculate the amount of taxes paid in Japan:
Taxes paid in Japan = ¥4,350 million x 41% / ¥118.4 = $15.07 million
Finally, we can calculate the earnings after taxes in Japan:
Earnings after taxes in Japan = $36.71 million - $15.07 million = $21.64 million
Therefore, the closest answer choice is B) $29.5 million, which is the earnings after taxes in Japan plus the earnings in Ireland: $21.64 million + $7.86 million = $29.5 million.

Question 7

All investors in the developed and developing world have access to the financial securities in all markets.

Accepted Answer

Not all investors have equal access to financial securities in all markets. Factors such as regulatory barriers, trading restrictions, and market limitations can prevent investors from certain regions or countries from accessing certain securities in other markets.

Question 8

The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

Accepted Answer

A) Implied interest rate = (Forward rate / Spot rate) × (1 + U.S. interest rate) - 1
Implied interest rate = [(Rs. 42 / $) / (Rs. 41 / $)] × (1 + 0.04) - 1 = 6.54%

Question 9

Which of the following statements is FALSE?

Accepted Answer

The statement "When countries' capital markets are not integrated we call them disintegrated capital markets" is false. The correct term for non-integrated capital markets is segmented capital markets.

Question 10

Use the information for the question(s)below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. 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): 
-The amount of the taxes paid in dollars for the Japanese operations is closest to ________.

Accepted Answer

Japanese earnings are taxed at 41%, therefore the taxes paid in Japan are (370 x 41%) = ¥151.7 million. To convert to dollars, we use the exchange rate of ¥118.4/$: 
¥151.7 million ÷ 118.4 = $1.28 million
Therefore, the amount of taxes paid in dollars for the Japanese operations is closest to $20.5 million. (Option D)

Question 11

The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high ________.

Accepted Answer

The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high default risk. This is because high default risk can lead to a higher actual interest rate as lenders demand a risk premium, but this risk may not be fully reflected in the spot and forward exchange rates.

Question 12

A(n)________ capital market is one where all investors do not have access to all the financial securities in the various markets.

Accepted Answer

In a segmented capital market, some investors may not have access to all the financial securities offered in other markets due to factors such as geography, regulation, or information barriers. This can create disparities in pricing and availability of investment opportunities. In an integrated capital market, all investors have access to all financial securities, leading to greater efficiency and fairness in pricing. The terms "divested" and "managed" do not accurately describe the concept of a segmented capital market.

Question 13

The spot exchange rate for Indian Rupees is Rs 42/$. The one-year forward exchange rate is Rs 43/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

Accepted Answer

B) Implied interest rate = (Forward rate / Spot rate) × (1 + U.S. interest rate) - 1
Implied interest rate = [(Rs. 43 / $) / (Rs. 42 / $)] × (1 + 0.04) - 1 = 6.48%

Question 14

The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Accepted Answer

According to interest rate parity, the difference in the interest rate between two countries should be equal to the forward premium or discount of the exchange rate. Thus, we can calculate the implied spot exchange rate as follows:

$1.70/Pound = (1 + 0.05)/(1 + 0.06) * Spot Exchange Rate

Spot Exchange Rate = $1.72/Pound

Therefore, the best choice is B.

Question 15

The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Accepted Answer

D) Implied Spot rate = Forward Rate × (1+ foreign interest rate) / (1+ domestic interest rate)
Implied Spot rate = $1.9/Pound × (1+ 0.06) / (1+ 0.04) = $1.94/Pound

Question 16

Which of the following statements is FALSE?

Accepted Answer

In fact, in years in which the U.S. tax rate exceeds the combined tax rate on all foreign income, the repatriation of additional income incurs an additional U.S. tax liability. Therefore, statement C is false.

Question 17

Which of the following statements is FALSE?

Accepted Answer

B)Firms can lower their taxes by pooling multiple foreign projects and deferring the repatriation of earnings.

Question 18

Which of the following statements is FALSE?

Accepted Answer

B)The U.S.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.

Question 19

The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year U.S. interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Accepted Answer

Let S be the spot exchange rate in $/Pound.

Using Interest Rate Parity, we have:

S * (1+0.06) = (1.045) * (1.80)

S = (1.045) * (1.80) / (1.06) = 1.83

Therefore, the implied spot exchange rate is $1.83/Pound.

Question 20

The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?

Accepted Answer

C) Implied interest rate = (Forward rate / Spot rate) × (1 + U.S. interest rate) - 1
Implied interest rate = [(Rs. 46 / $) / (Rs. 44 / $)] × (1 + 0.05) - 1 = 9.77%

Quiz 23: International Corporate Finance

All investors in the developed and developing world have access to the financial securities in all markets.

The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

Which of the following statements is FALSE?

The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high ________.

A(n) ________ capital market is one where all investors do not have access to all the financial securities in the various markets.

The spot exchange rate for Indian Rupees is Rs 42/$. The one-year forward exchange rate is Rs 43/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year U.S. interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?