Question 1

Which of the following are advantages of netting?
I.Avoiding transaction costs
II.Shifting profits to different subsidiaries
III.Avoiding taxes for the parent firm
IV.Increasing flexibility in the parent firm

Accepted Answer

Netting can help avoid transaction costs by consolidating multiple financial transactions into a single transaction, which reduces the number of fees and commissions that need to be paid. Netting can also increase flexibility for the parent firm by allowing it to more easily manage cash flows and liquidity. However, netting does not typically involve shifting profits to different subsidiaries or avoiding taxes for the parent firm.

Question 2

Capital budgeting refers to the evaluation of prospective investment alternatives and the commitment of funds to preferred projects.

Accepted Answer

Capital budgeting involves assessing and selecting investment opportunities and allocating available funds to chosen projects.

Question 3

For a multinational firm using a decentralized management style,the subsidiary would be expected to meet goals for key variables such as sales and labor costs.

Accepted Answer

The answer of For a multinational firm using a decentralized...

Question 4

When a multinational firm calculates a project for a foreign subsidiary with ________ net value,then the project should probably be ________.

Accepted Answer

When a multinational firm calculates a project for a foreign subsidiary with a positive net value, then the project should probably be accepted. This means that the project will add value to the subsidiary and ultimately benefit the parent company.

Question 5

If multinational businesses want managers of foreign subsidiaries to be involved in international financing issues,then subsidiary profits should be measured in:

Accepted Answer

The answer of If multinational businesses want managers of foreign...

Question 6

Assume a letter of contract is in place.If the importer does not pay the bank,then under the letter of contract the _______ is still obligated to pay the exporter.

Accepted Answer

Under a letter of credit, if the importer does not pay the bank, the bank is still obligated to pay the exporter. This is because the letter of credit is a financial instrument issued by the bank that guarantees the exporter will be paid, provided that the terms and conditions of the letter of credit are met.

Question 7

A detailed list of the content that is shipped,and can be used to identify missing or damaged items is called an:

Accepted Answer

A bill of lading is a detailed list of the contents of a shipment, including the quantity and description of each item. It is used as a receipt of goods by the carrier and can be used to identify missing or damaged items.

Question 8

The U.S.Internal revenue service requires subsidiaries set transfer prices by charging prices that an unrelated buyer and seller would willingly pay or using:

Accepted Answer

The U.S. Internal Revenue Service requires subsidiaries to use arm's-length pricing when setting transfer prices. This means that they must charge prices that an unrelated buyer and seller would willingly pay, ensuring fairness and avoiding tax evasion through inflated or deflated prices. Minimal cost pricing and marginal cost pricing are not relevant to transfer pricing, and deposit pricing is not a commonly used pricing method in this context.

Question 9

For a multinational firm using a decentralized management style,the subsidiary would be expected:

Accepted Answer

A decentralized management style means that decision-making is distributed among different levels of the organization, with each level responsible for its own decisions. In this case, the subsidiary would be expected to make most of the financing and production decisions, rather than relying on directives from the parent firm. However, the subsidiary would still be expected to operate efficiently and in line with the overall goals of the parent firm.

Question 10

Centralization of cash management allows the parent to offset subsidiary payables and receivables in a process called:

Accepted Answer

The process described in the question is called netting. Netting is a cash management technique where a central company offsets subsidiaries' payables and receivables against each other, reducing the overall amount of cash that needs to be transferred between companies. This simplifies cash management and reduces transaction costs. Therefore, the correct answer is D.

Question 11

The sum of the project's initial investment cost,the present values of cash flows,and all financial effects related to the investment is called:

Accepted Answer

The sum of the project's initial investment cost, present values of cash flows, and all financial effects related to the investment is referred to as Adjusted Present Value (APV). APV is a method used to assess the value of an investment by adding up the present value of the expected cash flows and deducting the initial investment cost.

Question 12

A contract written by a bank to guarantee that the bank will pay the exporter the amount of money owed by the importer is called a:

Accepted Answer

A letter of credit is a written commitment issued by a bank to a seller (exporter) that guarantees payment for goods or services provided to a buyer (importer). The bank guarantees the payment on behalf of the buyer, so if the buyer fails to pay, the bank will cover the cost. Therefore, option A is the correct answer. Options B, C, and D do not accurately describe this type of contract.

Question 13

The sum of the project's initial investment cost,the present values of cash flows,and all financial effects related to the investment is called the adjusted present value.

Accepted Answer

The statement is true. The adjusted present value takes into account the initial investment cost and all future cash flows, adjusted for the time value of money and any financial effects such as taxes and financing costs.

Question 14

A transfer price is the price that one subsidiary charges another subsidiary of internal good transfers.

Accepted Answer

A transfer price is indeed the price that one subsidiary charges another subsidiary for internal transfers of goods or services within a multinational corporation.

Question 15

Because cash earns no interest,firms engage in multinational cash management to use this liquid resource as efficiently as possible.

Accepted Answer

This statement is true. Cash earns no interest, which is why firms engage in multinational cash management to find ways to use this liquid resource efficiently. This can involve techniques such as centralizing cash management, using notional pooling, or investing excess cash in high-yielding instruments.

Question 16

By using netting,firms are able to minimize:

Accepted Answer

Netting is a process of consolidating multiple financial transactions into one net amount, which helps firms minimize transaction costs. It is not directly related to labor costs, penalty payments, or transfer prices.

Question 17

Suppose Banana Computers has a foreign subsidiary with a 3 million pound payable due on October 1,as well as 2 million pound receivable due on September 1.One way the firm could avoid transaction costs is:

Accepted Answer

Lagging currency flows involves delaying or accelerating payments or receipts to benefit from expected changes in exchange rates, which can help a firm like Banana Computers manage its foreign currency payables and receivables without incurring transaction costs.

Question 18

An ________ letter of credit where the agreement cannot be modified without the express permission of all parties is considered:

Accepted Answer

An irrevocable letter of credit cannot be modified or canceled by the issuing bank without the consent of all parties involved. This provides assurance to the beneficiary that they will be paid as long as they comply with the terms and conditions of the letter of credit.

Question 19

The evaluation of prospective investment alternatives and the commitment of funds to preferred projects is referred to as:

Accepted Answer

Capital budgeting involves evaluating potential investment options and allocating funds to the most promising projects. This process is vital for business decision-making, as it helps ensure that company resources are being used effectively to generate returns and achieve strategic goals. Cash management refers to the management of a company's cash flows and liquidity, while flow budgeting is a budgeting process that focuses on tracking cash inflows and outflows. Decentralized management is a management structure where decision making is distributed across various levels of an organization. While all of these may be important aspects of business management, only capital budgeting relates directly to the evaluation and selection of investment opportunities.

Question 20

The price that one subsidiary charges another subsidiary of internal good transfers is called an:

Accepted Answer

The price charged by one subsidiary to another subsidiary for internal good transfers is known as a transfer price. This price is important for determining the profitability of each subsidiary and for evaluating the performance of the entire company.

Quiz 9: Financial Management of the Multinational Firm

Which of the following are advantages of netting? I.Avoiding transaction costs II.Shifting profits to different subsidiaries III.Avoiding taxes for the parent firm IV.Increasing flexibility in the parent firm