Question 1

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

Accepted Answer

Theory suggests that MNCs have access to multiple sources of financing, including global capital markets, and thus have greater flexibility in choosing their capital structure. Empirical evidence supports this, showing that MNCs tend to have lower levels of debt and a greater reliance on internal financing compared to purely domestic firms.

Question 2

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

Accepted Answer

The spot exchange rate is the rate of exchange between two currencies at the present moment or the current date. The rate for a specified future date is called a forward exchange rate.

Question 3

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

Accepted Answer

The Japanese yen, the British pound, and the U.S. dollar are all major or "hard" currencies due to their stability and widespread use in international trade and finance. The Mexican peso is not considered to be a major currency, as it is more volatile and has a smaller share of the global currency market.

Question 4

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

Accepted Answer

While theory suggests that MNCs may benefit from greater access to international capital markets and have more options for financing, empirical studies have generally found little difference in capital structures between MNCs and domestic firms. However, there are some exceptions and nuances to this general finding, such as differences in the use of internal financing and the impact of currency risk.

Question 5

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.

Accepted Answer

Micro political risk affects specific sectors or companies within a host country, not all foreign firms. It involves localized political actions or policies that impact particular industries or businesses.

Question 6

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

Accepted Answer

This is because high inflation erodes the purchasing power of a currency, making it less attractive to investors compared to currencies that experience lower inflation rates. As a result, the demand for the currency decreases, leading to a decline in its value relative to other currencies.

Question 7

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

Accepted Answer

The answer of A U.S-based MNC has a subsidiary in...

Question 8

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

Accepted Answer

The forward exchange rate refers to the exchange rate agreed upon today for a currency transaction that will take place at a future date, not the current day's exchange rate.

Question 9

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.

Accepted Answer

When more units of a foreign currency are required to buy one dollar, the currency has actually depreciated with respect to the dollar. The opposite is true when fewer units of a foreign currency are required to buy one dollar - the currency has appreciated with respect to the dollar.

Question 10

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.

Accepted Answer

According to the purchasing power parity theory, exchange rates should adjust to equalize the prices of identical goods and services in different countries. If one country has a higher inflation rate than another, its goods and services will become relatively more expensive, thus reducing its competitiveness and demand for its currency, and leading to a depreciation of its exchange rate. The opposite will happen in the country with lower inflation, which will see an appreciation of its currency. Therefore, inflation differentials are a primary driver of exchange rate movements in the long run. However, in the short run, other factors such as interest rates, geopolitical events, economic indicators, and market sentiment may also influence exchange rate fluctuations.

Question 11

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.

Accepted Answer

The statement is true, as it describes the emergence of a new type of political risk that is related to global events and issues affecting multinational corporations.

Question 12

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.

Accepted Answer

The statement correctly identifies the three basic types of risk associated with international cash flows as business and financial risks, inflation and foreign exchange risks, and political risks.

Question 13

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.

Accepted Answer

This statement is true as national entry control systems aim to regulate and manage the inflow of foreign direct investment while maximizing the benefits for the host country.

Question 14

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.

Accepted Answer

Macro political risk is indeed the risk faced by 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. This type of risk is different from micro political risk, which refers to risks faced by individual firms due to political actions such as corruption, bribery, and regulatory changes.

Question 15

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.

Accepted Answer

Accounting exposure is indeed the risk related to the impact of foreign exchange rate changes on a company's financial statement accounts denominated in a particular foreign currency. This risk arises due to the difference in the exchange rates at the time when the financial statements were prepared and the time when they are translated.

Question 16

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

Accepted Answer

Economic exposure is a real risk faced by firms engaged in international trade or investment, and it refers to the impact of exchange rate fluctuations on their financial performance and value. It can affect their revenue, costs, profits, cash flows, competitiveness, and overall market position. Economic exposure is different from transaction exposure (the risk of loss or gain on specific foreign exchange transactions) and translation exposure (the risk of accounting changes due to the translation of foreign currency financial statements into the reporting currency).

Question 17

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.

Accepted Answer

This statement correctly defines the concept of functional currency.

Question 18

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

Accepted Answer

Appreciation means the value of a currency increases with respect to another currency. So, when fewer units of a foreign currency are required to buy one dollar, it means the foreign currency has become more valuable compared to the dollar, and therefore, it has appreciated with respect to the dollar.

Question 19

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.

Accepted Answer

While fiscal policy can influence exchange rates in the short-term, long-term changes in exchange rates are more strongly influenced by factors such as inflation, interest rates, and overall economic growth. Additionally, other factors such as global market trends, geopolitical events, and changes in commodity prices can also contribute to exchange rate fluctuations. Therefore, while fiscal policy can be a contributing factor, it is not the most important explanation for long-term changes in exchange rates.

Question 20

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

Accepted Answer

National entry control systems are designed to regulate the entry and stay of foreigners in a country, focusing on immigration control and national security, rather than being inherently xenophobic.

Quiz 19: International Managerial Finance