Deck 20: Financial Management and Accounting in the Global Firm

Question 1

The first task in international financial management is to raise funds for the firm.

Answer 1

False

Question 2

When a Japanese firm sells yen-denominated bonds in the United States, it is issuing foreign bonds.

Answer 2

False

Question 3

The last task in international financial management is to manage the diversity of international accounting and tax practices.

Answer 3

True

Question 4

Countries such as Germany, Italy, and Japan view a high debt ratio as undesirable, and the leaders of these nations encourage firms to balance their capital structure with more equity financing, which is readily available.

Question 5

Gains and losses do not directly affect cash flows in the case of translation exposure, but cash flows can be significantly affected by transaction exposure.

Question 6

A centralized depository lets managers reduce the size of highly liquid accounts and invest the funds, generally at the higher interest rates offered for large deposits, to generate maximal returns.

Question 7

Firms obtain debt financing by selling stock shares to investors who then have an ownership interest in the firm.

Question 8

A project perspective approach in capital budgeting can be employed by managers interested in initially screening the appropriateness of an international capital investment project.

Question 9

Intra-corporate fund transfers enable MNEs to access cash from subsidiaries through royalty payments, transfer pricing, and multilateral netting.

Question 10

A firm in need of short-term financing will most likely turn to the global money market instead of the global capital market.

Question 11

Equity financing comes from either of two sources: (i) loans from banks and other financial intermediaries, or (ii) the sale of corporate bonds to individuals or institutions.

Question 12

The global capital market has grown rapidly due to government deregulation, which has made international movement of capital easier.

Question 13

Euro bond is a bond sold outside the issuer's country and denominated in the currency of the country where issued.

Question 14

Unlike exporters and licensors, who both face currency risk, managers of foreign investment portfolios are sheltered from the rise and fall of exchange rates.

Question 15

The purpose of capital budgeting is to defer payment for goods and services received from the parent firm.

Question 16

Capital budgeting in MNEs is protected from country risks or government intervention.

Question 17

Estimating project cash flows is complex and requires forecasting a range of variables that contribute to anticipated revenues and costs over several years.

Question 18

Transaction exposure refers to the impact of exchange rate fluctuations on long-term profitability resulting from miscalculated expenses and revenues.

Question 19

Multilateral netting is the means by which subsidiaries and affiliates charge each other as they exchange goods and services.

Question 20

The NYSE Euronext and the NASDAQ Stock Market are the largest in terms of volumes of shares traded.

Question 21

Arbitragers are currency traders who seek to minimize their risk of exchange-rate fluctuations, often by entering into forward contracts or similar financial instruments.

Question 22

Momentum trading is accomplished via computers programmed to conduct massive buying or selling when prices reach certain levels.

Question 23

A lack of transparency in emerging market economies leads to less FDI because investors are unable to make financially sound decisions due to a shortage of reliable information.

Question 24

Debt financing can add value to a firm because ________.

A) it enables investors and firms to develop long term relationship through a joint business endeavor
B) some governments allow firms to deduct interest payments from their taxes
C) it limits the risk of bankruptcy
D) it increases the cash flow toward the company compared to equity financing

Question 25

Firms that have to make debt service payments incur ________ costs.

A) variable
B) adjustable
C) fixed
D) semi-variable

Question 26

Direct quote is the number of units of foreign currency obtained for one unit of domestic currency.

Question 27

Current rate method is the translation of foreign currency balance sheet and income statements at an exchange rate that varies with the underlying method of valuation.

Question 28

Indirect taxes are typically imposed on income from profits, capital gains, intracorporate transactions, royalties, interest, and dividends.

Question 29

Which of the following financing tactics would most likely help an MNE to avoid bankruptcy?

A) integrating e-commerce opportunities with domestic sales in order to maintain a steady balance of income and expenditures
B) agreeing to forward contracts with customers and hedging purchases and sales on future currency rates
C) organizing the capital structure so that the amount of debt financing is twice the level of equity financing
D) keeping the debt proportion of their capital structure to a level that can be managed even during difficult business conditions

Question 30

In international financial management, after assessing the financial attractiveness of major investment projects, the MNE ________.

A) oversees transactions in various foreign currencies and manages risk exposure resulting from exchange-rate fluctuations
B) administers funds passing in and out of the firm's value-adding activities
C) obtains financing for funding value-adding activities and investment projects
D) learns to operate in a global environment with diverse accounting practices and international taz regimes

Question 31

In passive hedging, the firm frequently reviews total exposure and hedges only a subset of its total exposures, usually those that pose the greatest risk.

Question 32

To minimize currency risk, managers should distinguish economic exposure from transaction and translation exposures.

Question 33

Currency swap is an agreement to exchange one currency for another, according to a specified schedule.

Question 34

Speculators are currency traders who seek profits by investing in currencies with the expectation their value will change in the future.

Question 35

The sale of corporate bonds to individuals or institutions, to raise capital is called ________.

A) debt financing
B) equity financing
C) multilateral netting
D) currency hedging

Question 36

Which of the following is the final task in international financial management?

A) manage currency risk
B) manage the diversity of international accounting and tax practices
C) raise funds for the firm
D) manage working capital and cash flow

Question 37

Debt financing comes from ________.

A) personal savings of founders
B) loans from financial intermediaries
C) capital contributed by founders
D) selling shares of stock to investors

Question 38

In international financial management, after raising funds for the firms, the MNE immediately ________.

A) assesses the financial attractiveness of major investment projects, such as foreign expansion
B) determines the ideal long-term mix of financing for the firm's international operations
C) learns to operate in a global environment with diverse accounting practices and international tax regimes
D) administer funds passing in and out of the firm's value-adding activities

Question 39

Which of the following is the first task in international financial management?

A) manage working capital and cash flow
B) manage currency risk
C) decide on capital structure
D) manage the diversity of international accounting and tax practices

Question 40

The mix of long-term equity financing and debt financing that firms use to support their international activities is known as ________.

A) multilateral netting
B) controlling interest
C) capital structure
D) transaction exposure

Question 41

Capital budgeting is intended to ________.

A) assist in the means by which subsidiaries and affiliates charge each other as they exchange goods and services
B) help managers decide which international projects provide the best financial return
C) defer payment for goods and services received from the parent firm
D) eliminate the need for international accounting experts

Question 42

________ is a debt instrument that enables the issuer (borrower) to raise capital by promising to repay the principal along with interest on a specified date (maturity).

A) Fronting loan
B) Stock
C) Bond
D) Forward contract

Question 43

A fronting loan would most likely be utilized by an MNE attempting to ________.

A) increase transfer pricing
B) reduce dividend payments
C) minimize taxes
D) conceal corporate debt

Question 44

The global capital market has grown rapidly due to widespread ________ of financial instruments, which results in the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds.

A) debt consolidation
B) factoring
C) securitization
D) multilateral netting

Question 45

Which of the following statements is true of the Export Import Bank?

A) It is an international agency run by the WTO that provides capital to firms from emerging and developing economies.
B) It is a U.S. federal agency that provides direct loans to SMEs unable to raise money from other sources.
C) It is a branch of the EU that provides working capital loans to SMEs that are based in the economic bloc.
D) It is a privately owned bank that offers high interest loans to international firms with poor credit ratings.

Question 46

Equity financing comes from ________.

A) foreign bonds
B) domestic bonds
C) capital by selling stocks
D) Eurocurrency market

Question 47

When using equity financing, firms run the risk of ________.

A) diluting the firm's ownership
B) regular monthly payments of principal and interest
C) incurring a high debt ratio
D) severe penalties for late or missed payments of interest

Question 48

Which of the following firms can sustain a higher debt ratio?

A) an automobile firm in a developing economy
B) a software firm that sells software in an emerging economy
C) an insurance firm with stable sales in an advanced economy
D) a small supplier of construction material in a poor country

Question 49

Transfer pricing is defined as ________.

A) methods for transferring funds exclusively from foreign subsidiaries to parent corporations
B) compensation paid to owners of intellectual property
C) the means by which subsidiaries and affiliates charge each other as they exchange goods and services
D) the process through which a parent deposits a large sum in a foreign bank, which transfers it to a subsidiary as a loan

Question 50

Which of the following terms is used to refer to compensation paid to the owner of intellectual property?

A) commission fee
B) trade credit
C) royalty payment
D) dividend remittance

Question 51

________ is the strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.

A) Herding
B) Multilateral netting
C) Hedging
D) Currency swap

Question 52

Net working capital is ________.

A) the combined total of a firm's equity capital and net losses
B) the difference between a firm's current assets and current liabilities
C) the difference between a firm's expected profits and current debts
D) any currency deposited in a bank outside its country of origin

Question 53

Through ________, a subsidiary can defer payment for goods and services received from its parent firm.

A) trade credit
B) royalty payments
C) fronting loan
D) dividend remittances

Question 54

Global equity market refers to ________.

A) the international marketplace in which bonds are bought and sold, primarily through bond brokers
B) collective financial markets where firms can borrow money from banks or other financial intermediaries, or sell corporate bonds to individuals or institutions, to raise capital
C) the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds
D) stock exchanges worldwide where investors and firms meet to buy and sell shares of stock

Question 55

Which of the following best explains the emergence of a large Eurocurrency market?

A) lower interest rates on Eurocurrency loans
B) regulations of home-country banking systems
C) loans repaid interest-free at face value
D) low interest rates on Eurocurrency deposits

Question 56

Multilateral netting would enable an MNE with numerous subsidiaries to ________.

A) consolidate intracorporate cash transfers and reduce transaction fees
B) charge its subsidiaries as they exchange goods and services with the parent company
C) transfer goods and services within the firm without paying host-country taxes
D) channel funds from small subsidiaries to large ones without paying interest

Question 57

Which of the following statements is true of global money market?

A) A great advantage for investors in the global money market is the ability to access a wide range of investment opportunities.
B) It refers to the collective financial markets where firms and governments raise long-term financing.
C) The maturity period for the funding obtained from the global money market is over ten years.
D) It refers to the collective financial markets worldwide where firms and governments raise short-term financing.

Question 58

Funding obtained from sources inside a firm is known as ________.

A) structural financing
B) grid loan financing
C) internal network financing
D) intracorporate financing

Question 59

Which of the following is a benefit for firms that participate in the global capital market?

A) availability of short-term financing
B) availability of a large pool of financing sources at a lower, competitive rate
C) access to larger funds exclusively in the domestic market
D) access to unregulated and secured returns on investment

Question 60

The volume and complexity of a firm's intracorporate transfers depends on ________.

A) the amount of cash available from loans
B) the value of the shareholders' stock
C) the country from which the firm originates
D) the number of firm subsidiaries and alliances around the world

Question 61

Net present value is defined as the ________.

A) combined value of the capital assets of a project and the sales projections
B) difference between the present value of a firm's assets and the future project liabilities
C) difference between the present value of a project's incremental cash flow and the initial investment
D) combined value of a project's initial investment and its incremental cash flow

Question 62

________ is the process of combining and integrating the financial results of foreign subsidiaries into the financial statements of the parent firm.

A) Hedging
B) Dumping
C) Consolidation
D) Trade credit

Question 63

Which of the following is applied when an American tourist exchanges dollars for Japanese yen at a Tokyo bank?

A) the forward rate
B) the spot rate
C) the discount rate
D) the prime rate

Question 64

Economic exposure results from exchange-rate fluctuations that affect ________.

A) marketing strategies
B) tariffs and duties
C) brand personality
D) product pricing

Question 65

Transaction exposure occurs when ________ are denominated in foreign currencies.

A) accounts receivables
B) financial reports
C) bank loans
D) wages and salaries

Question 66

With a futures contract, the purchaser agrees to buy or sell a currency ________.

A) within a certain amount of time, at the rate applicable on that day
B) when the exchange rate reaches a set amount
C) at any rate after a specified period of time has elapsed
D) at a pre-determined price on a specific date

Question 67

Which of the following is a factor that complicates capital budgeting in the MNE?

A) project cash flows in the reporting currency of the parent firm
B) government intervention in the project
C) similar tax rules in the project location and the parent's country
D) government permit to exclusively transfer funds from the project to the parent firm

Question 68

Tax havens are characterized by all of the following EXCEPT that they are ________.

A) legal means to reduce corporate income taxes
B) regions where certain taxes are absent
C) supported by the World Bank and the EU
D) used to establish operations or funnel transactions

Question 69

Which of the following is characteristic of the parent's perspective in capital budgeting?

A) It estimates future cash flows from the project in the functional currency.
B) It adds the subsidiary's after-tax operating cash flows with the project's cost of capital.
C) It seldom uses the currency of the primary economic environment in which it operates.
D) It estimates the incremental after-tax operating cash flows in the subsidiary's local currency.

Question 70

________ is the currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

A) Translation exposure
B) Transaction exposure
C) Spot exchange rate
D) Multilateral netting

Question 71

The current rate method is typically employed when translating records of ________.

A) foreign subsidiaries that are part of the parent firm's operations
B) domestic affiliates that conduct business abroad occasionally
C) foreign subsidiaries that are considered stand-alone legal entities
D) joint venture partnerships that participate in global operations

Question 72

Which of the following is the purpose of a forward contract?

A) reduce corporate exposure to tax audits
B) maximize intracorporate finance
C) minimize the risk of exchange rate fluctuations
D) earn profits from outsourcing activities

Question 73

________ is the number of units of foreign currency obtained for one unit of domestic currency.

A) Indirect quote
B) Prime rate
C) Direct quote
D) Repo rate

Question 74

All of the following are characteristic of the parent's perspective approach in capital budgeting EXCEPT that it ________.

A) estimates future cash flows from the project
B) uses the subsidiary's local currency
C) forecasts forward rates
D) uses the functional currency of the parent

Question 75

________ forecasts spot exchange rates, or forward rates, and calculates their present value using a discount rate in line with the required return on projects of similar risk.

A) Transaction exposure
B) Total return swap
C) Currency hedging
D) Functional currency conversion

Question 76

If one U.S. dollar equaled one euro last year, and then the exchange rate shifted so that today one dollar equals two euros, which of the following will most likely occur?

A) Europeans will purchase more U.S. products.
B) Americans will have a lower standard of living.
C) Americans will cancel vacations to Europe.
D) Europeans will purchase fewer U.S. products.

Question 77

Which of the following is a direct tax?

A) customs tax
B) corporate income tax
C) VAT
D) sales tax

Question 78

________ are currency traders who seek to minimize their risk of exchange-rate fluctuations, often by entering into forward contracts or similar financial instruments.

A) Venture capitalists
B) Arbitragers
C) Hedgers
D) Speculators

Question 79

Firms that operate within the European Union are less concerned about currency risk mainly because of the ________.

A) tax haven privileges in the bloc
B) consistently favorable exchange rates for the bloc
C) use of a single currency within the bloc
D) economic bloc restrictions that are applicable to all the firms

Question 80

________ is the currency risk that results from exchange-rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

A) Translation exposure
B) Operating exposure
C) Transaction exposure
D) Interoceptive exposure