Deck 20: Financial Management in the International Business

Question 1

In practice,the biggest problem arising from economic mismanagement has been rising interest rates.

Answer 1

False

Question 2

Efficient money management involves minimizing cash balances and reducing transaction costs.

Answer 2

True

Question 3

Adjusting discount rates to reflect a location's riskiness is a rare practice.

Answer 3

False

Question 4

Empirical studies show that there is a long-run relationship between a country's relative inflation rates and changes in exchange rates.

Question 5

Transaction costs arise when cash moves from one location to another.

Question 6

When using capital budgeting techniques to evaluate a potential foreign project,cash flows to the project and cash flows to the parent must be considered as one.

Question 7

If the net present value of the discounted cash flows is slightly less than zero,the firm should go ahead with the project.

Question 8

The cost of capital is typically higher in the global capital market,by virtue of its size and liquidity,than in many domestic capital markets.

Question 9

Many nations follow the worldwide principle that they have the right to tax income earned outside their boundaries by entities based in their country.

Question 10

The problem of blocked earnings is much more serious than it was previously.

Question 11

Different tax regimes can determine the relative attractiveness of debt and equity in a country.

Question 12

In international business,money management decisions are decisions about how to manage the firm's financial resources most efficiently.

Question 13

The amount of local currency required to meet interest payments and retire principal on local debt obligations is not affected when a country's currency depreciates.

Question 14

Stockholders perceive blocked earnings as contributing to the value of the firm.

Question 15

Capital budgeting quantifies the benefits,costs,and risks of an investment.

Question 16

Political risk assessment is more art than science.

Question 17

Investment decisions,in international business,are decisions about how to finance a firm's activities.

Question 18

A firm's cash flows will be negative at first.

Question 19

Money market accounts typically offer a relatively high rate of interest.

Question 20

In recent decades,the risk of outright expropriations has increased.

Question 21

Transfer pricing is consistent with a policy of treating each subsidiary in the firm as a profit center.

Question 22

U.S.regulations tax U.S.shareholders on the firm's overseas income when it is earned,regardless of when the parent company in the United States receives it.

Question 23

A deferral principle specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.

Question 24

Dividends have certain tax advantages over royalties and fees,particularly when the corporate tax rate is higher in the host country than in the parent's home country.

Question 25

A fronting loan does not provide any tax advantage.

Question 26

Fronting loans can circumvent host country restrictions on the remittance of funds from a foreign subsidiary to the parent company.

Question 27

By pooling its cash reserves,a firm can reduce the total size of the cash pool it must hold in highly liquid accounts.

Question 28

Double taxation is mitigated to some extent by tax credits,tax treaties,and the deferral principle.

Question 29

Most governments are in favor of transfer pricing.

Question 30

Multilateral netting compounds the transaction costs that arise when many transactions occur between a firm and its subsidiaries.

Question 31

Multilateral netting is an extension of bilateral netting.

Question 32

The practice of unbundling refers solely to the use of royalty payments and fees to transfer liquid funds across borders.

Question 33

Cash balances are typically deposited in liquid accounts.

Question 34

Fees are usually levied as a percentage of a subsidiary's gross revenues.

Question 35

In a fronting loan,the parent company lends cash directly to the foreign subsidiary,and the subsidiary repays it later.

Question 36

Fronting loans is the most common method by which firms transfer funds from foreign subsidiaries to the parent company.

Question 37

The correct transfer price,according to the IRS guidelines,is an arm's-length price.

Question 38

Cash needs are assumed to be normally distributed in each country and independent of each other.

Question 39

International businesses avoid or defer income taxes by establishing a wholly owned,nonoperating subsidiary in the tax haven.

Question 40

Many firms hold at least their subsidiaries' precautionary cash reserves at a centralized depository,having each subsidiary hold its own day-to-day-needs cash balance.

Question 41

If foreign debt obligation must be served,the amount of local currency required to do this will:

A)increase as the currency depreciates,and this effectively raises the cost of capital.
B)decrease as the currency depreciates,and this effectively decreases the cost of capital.
C)increase as the currency appreciates,and this effectively raises the cost of capital.
D)increase as the currency appreciates,and this effectively decreases the cost of capital.

Question 42

Which of the following statements is true regarding cash flows that a firm must estimate to decide if it should go ahead with a project?

A)In most cases,the cash flows will be positive at first,because the firm is yet to invest heavily in production facilities.
B)After some initial period the cash flows becomes negative as investment costs increase and revenues stabilize.
C)Once the cash flows have been estimated,they must be discounted to determine their net present value using an appropriate discount rate.
D)If the net present value of the discounted cash flows is less than zero,the firm should go ahead with the project.

Question 43

In capital budgeting decisions,the discount rate must be adjusted downward:

A)in countries where liquidity is limited.
B)when the cost of capital used to finance a project is high.
C)in countries where governments offer foreign firms low-interest loans.
D)in countries where the perceived political and economic risks are greater.

Question 44

For firm's seeking external financing for a project,the cost of capital is typically lower in:

A)global capital markets.
B)domestic capital markets.
C)small markets.
D)relatively illiquid markets.

Question 45

Capital budgeting:

A)in practice is a very simple and perfect process.
B)techniques are not useful for quantifying the benefits,costs,and risks of an investment.
C)for a foreign project uses the same theoretical framework that domestic capital budgeting uses.
D)techniques,for evaluating potential foreign projects,do not require the firm to recognize the specific risks arising from its foreign location.

Question 46

One method of analyzing a foreign investment opportunity is to treat all risk as a single problem by adjusting the discount rate applicable.For countries with significant political and economic risks,the:

A)discount rates are revised upward.
B)discount rates are revised downward.
C)early cash flows are not adjusted.
D)distant cash flows are heavily penalized.

Question 47

Good financial management can help a firm in all of the following ways,except:

A)reduce the costs of creating value.
B)add value by improving customer service.
C)reduce the firm's cost of capital.
D)totally eliminate the firm's tax burden.

Question 48

In international business,financing decisions are:

A)decisions about what activities to finance.
B)decisions about how to finance a firms activities.
C)decisions about how to manage the firm's financial resources most efficiently.
D)decisions about the operational activities of a firm.

Question 49

_____ can help financial managers in an international business to quantify the various benefits,costs,and risks that are likely to flow from an investment in a given location.

A)Operational techniques
B)Capital budgeting techniques
C)Socio-economic techniques
D)Production techniques

Question 50

In international business,decisions about what activities to finance are best known as:

A)investment decisions.
B)financing decisions.
C)money management decisions.
D)economic decisions.

Question 51

Theses are decisions about how to manage the firm's financial resources most efficiently.

A)Investment decisions
B)Financing decisions
C)Money management decisions
D)Economic decisions

Question 52

Which of the following statements is true about government restrictions that block earnings from a foreign project?

A)The problem of blocked earnings is now much more serious than before.
B)Greater acceptance of free market economics has increased the number of countries in which governments are likely to block earnings.
C)Firms have few options for circumventing host-government attempts to block the free flow of funds from an affiliate.
D)Stockholders do not perceive blocked earnings as contributing to the value of the firm.

Question 53

Political risk assessment:

A)is without value.
B)is more science than art.
C)tries to predict a future that can only be guessed.
D)usually makes correct future predictions.

Question 54

All of the following are factors complicating the capital budgeting process for an international business except:

A)a distinction must be made between cash flows to the project and cash flows to the parent company.
B)cash flows to the project and to the parent company will be the same when a host-country government blocks the repatriation of cash flows from a foreign investment.
C)political and economic risks,including foreign exchange risk,can significantly change the value of a foreign investment.
D)the connection between cash flows to the parent and the source of financing must be recognized.

Question 55

Adjusting discount rates to reflect a location's riskiness:

A)is not widely practiced by firms.
B)treats all risk as a single problem.
C)penalizes distant cash flows too heavily.
D)does not penalize early cash flows enough.

Question 56

The relationship between a country's relative inflation rates and changes in exchange rates is:

A)much closer than what theory would predict.
B)not reliable in the short run.
C)totally reliable in the long run.
D)according to empirical studies,non existent in the long run.

Question 57

Identify the incorrect statement regarding political risk.

A)It can be defined it as the likelihood that political forces will cause drastic changes in a country's business environment that hurt the profit and other goals of a business.
B)It tends to be greater in countries where the underlying nature of the society makes the likelihood of social unrest high.
C)When political risk is high,there is a high probability that a change will occur in the country's political environment that will endanger foreign firms there.
D)In most cases,political change may result in the expropriation of foreign firms' assets.

Question 58

Historically,many governments have expanded their domestic money supply in misguided attempts to stimulate economic activity.The result has often been:

A)price inflation.
B)low interest rates.
C)a strong local currency.
D)private sector growth.

Question 59

Restrictions on a project,because of which a firm may not be able to remit all its cash flows to the parent company:

A)do not affect the net present value of the project to the parent company.
B)do not affect the net present value of the project itself.
C)do not limit the cash flows of the parent company in any manner.
D)establishes the fact that a foreign project need not be analyzed from the perspective of the parent company.

Question 60

Identify the correct statement pertaining to financial structures.

A)The financial structures of firms are remarkably similar across countries.
B)It can be described as the mix of debt and equity used to finance a business.
C)If interest income were taxed at a high rate,a preference for equity financing over debt financing would be expected.
D)According to empirical research,country differences in financial structure are systematically related to country differences in tax structure.

Question 61

Which of the following statements is true regarding transfer pricing?

A)Most governments favor the use of transfer pricing.
B)The correct transfer price,according to the IRS guidelines,is an arm's-length price-the price that would prevail between unrelated firms in a market setting.
C)Transfer pricing is consistent with a policy of treating each subsidiary in the firm as a profit center.
D)The opportunity for price manipulation is much greater with arm's-length pricing than it is for cost-based transfer pricing.

Question 62

A French subsidiary owes a Mexican subsidiary $6 million and the Mexican subsidiary simultaneously owes the French subsidiary $4 million.Through a mutual settlement a single payment of $2 million is made from the French subsidiary to the Mexican subsidiary,the remaining debt being canceled.This example best exemplifies:

A)bilateral netting.
B)a transfer loan.
C)multilateral netting.
D)a fronting loan.

Question 63

The commission fee a firm pays to foreign exchange dealers for changing cash from one currency into another currency is known as:

A)foreign exchange tax.
B)transfer fee.
C)transaction cost.
D)conversion tax.

Question 64

A tax haven:

A)allows an entity to reduce the taxes paid to the home government and those paid to foreign governments.
B)directs both the host-country government and the parent company's home government not to tax the income of a foreign subsidiary.
C)specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.
D)is a country with an exceptionally low,or even no,income tax.

Question 65

A tax treaty:

A)allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.
B)directs both the host-country government and the parent company's home government to tax the income of a foreign subsidiary.
C)is an agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned.
D)specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.

Question 66

A fronting loan:

A)helps a multinational to make a direct intrafirm loan,where the parent company lends cash directly to the foreign subsidiary,and the subsidiary repays it later.
B)can circumvent host-country restrictions on the remittance of funds from a foreign subsidiary to the parent company.
C)is suitable for lending funds to subsidiaries based in countries which are politically stable.
D)offers insignificant tax advantages.

Question 67

It is best recommended that an international business adopt a financial structure:

A)that is consistent with host-country norms.
B)that is insensitive to the local monetary policy.
C)that minimizes the cost of capital.
D)that allows it to easily evaluate its return on equity relative to local competitors in the same industry.

Question 68

Which of the following allows a multinational firm to reduce the transaction costs that arise when many transactions occur between its subsidiaries?

A)Unbundling
B)Deferral principle
C)Fronting loan
D)Multilateral netting

Question 69

The price at which goods and services are transferred between entities within the firm is referred to as:

A)transfer tax.
B)service tax.
C)service charges.
D)transfer price.

Question 70

By using a mix of techniques to transfer liquid funds from a foreign subsidiary to the parent company,_____ allow(s)an international business to recover funds from its foreign subsidiaries without piquing host-country sensitivities with large "dividend drains."

A)unbundling
B)tax treaties
C)the deferral principle
D)tax havens

Question 71

This is a loan between a parent and its subsidiary channeled through a financial intermediary,usually a large international bank.

A)International loan
B)Fronting loan
C)Transfer loan
D)Unbundling loan

Question 72

If a firm invests its cash balances in money market accounts:

A)it will have unlimited liquidity and earn a high rate of interest.
B)it will have unlimited liquidity but will earn a relatively low rate of interest.
C)it will have limited liquidity but will earn a high rate of interest.
D)it will have limited liquidity but will earn a low rate of interest.

Question 73

The payment of dividends is an attractive option:

A)when the rate of tax levied on dividends by the host-country government is high.
B)for subsidiaries based in "high-risk" countries.
C)for newly established subsidiaries.
D)when local equity participation is limited.

Question 74

In general,firms prefer to hold cash balances at a centralized depository for all of the following reasons except:

A)by pooling cash reserves centrally,the firm can deposit larger amounts.
B)it enables the firm to invest a larger amount of cash reserves in short-term,highly liquid financial instruments that earn a lower interest rate.
C)if the centralized depository is located in a major financial center,it has access to information about good short-term investment opportunities that the typical foreign subsidiary would lack.
D)the firm can reduce the total size of the cash pool it must hold in highly liquid accounts.

Question 75

A _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

A)tax treaty
B)tax credit
C)deferral principle
D)tax benefit

Question 76

Which of the following represents the remuneration paid to the owners of technology,patents,or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names?

A)Trademarks
B)Royalties
C)Copyrights
D)Transfer fees

Question 77

All of the following are gains that can be derived by manipulating transfer prices,except:

A)a firm can reduce its tax liabilities by shifting earnings from a high-tax country to a low-tax one.
B)a firm can move funds out of a country where a significant currency devaluation is expected,thereby reducing its exposure to foreign exchange risk.
C)funds can be moved by a firm from a subsidiary to the parent company when financial transfers in the form of dividends are blocked by host-country government policies.
D)if there are high transfer prices on goods or services being imported into the country,a firm can reduce the import duties it must pay when an ad valorem tariff is in force.

Question 78

Which of the following statements is true regarding royalties and fees?

A)Royalties may be levied as fixed charges for the particular services provided.
B)A fee may be levied as a fixed monetary amount per unit of the product the subsidiary sells or as a percentage of a subsidiary's gross revenues.
C)Royalties may be differentiated into "management royalties" for general expertise and advice and "technical assistance royalties" for guidance in technical matters.
D)Royalties and fees are often tax-deductible locally,so arranging for payment in royalties and fees will reduce a foreign subsidiary's tax liability.

Question 79

This occurs when both the host-country government and the parent company's home government tax the income of a foreign subsidiary.

A)Double taxation
B)Tax duplication
C)Tax discrepancy
D)Indirect taxation

Question 80

These are the charges that most banks take for moving cash from one location to another.

A)Currency taxes
B)Location fee
C)Exchange charges
D)Transfer fee