Question 1

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

B) Implied spot rate = Forward rate × (1 + foreign interest rate) / (1 + domestic interest rate)
Implied spot rate = $1.7/Pound × (1 + 0.06)/(1 + 0.05) = $1.72/Pound

Question 2

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

D) Taxes paid in dollars for the Japanese operations = ¥2,427 / ¥118.4 / $ = $20.5 million

Question 3

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

C) Earnings before interest and after taxes from the Ireland operations (in $)
= €28 million × $1.27/€ = $35.56 million

Question 4

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 5

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 6

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 7

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

Accepted Answer

A segmented capital market is one where investors do not have equal access to all financial securities. This can be due to a variety of factors such as government regulations, market structure, or differences in information access. In contrast, an integrated capital market would allow all investors equal access to all financial securities.

Question 8

Which of the following statements is FALSE?

Accepted Answer

C) In years in which the combined tax rate on all foreign income exceeds the U.S. tax rate, the repatriation of additional income does not incur an additional U.S. tax liability, so the earnings can be repatriated tax free.

Question 9

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

B) Earnings before interest and after taxes from the Japanese operations (in $)
= (¥3,493) / (¥118.4 / $) = $29.5 million

Question 10

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 11

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 12

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

C) Implied Spot rate = Forward Rate × (1 + foreign interest rate) / (1 + domestic interest rate)
Implied Spot rate = $1.8 /Pound × (1 + 0.06) / (1 + 0.045) = $1.83/Pound

Question 13

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 14

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%

Question 15

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 16

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 17

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

B) Taxes paid in dollar for the Irish operations = €4 million × $1.27/€ = $5.08 million

Question 18

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

Accepted Answer

While investors in developed countries generally have access to a wider range of financial securities in various markets, investors in developing countries may face restrictions on investing in certain markets or may not have access to the same range of securities as developed countries.

Question 19

Which of the following statements is FALSE?

Accepted Answer

D) When countries' capital markets are not integrated we call them segmented capital markets.

Question 20

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

Quiz 23: International Corporate Finance

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 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 ________.

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.

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

Which of the following statements is FALSE?

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 $1.80/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 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?

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?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?