Deck 19: Multinational Cash Management

Question 1

ABC Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer size quantities and sells them through sales affiliates in Hong Kong and the Unites States. For a recent month, the following payments matrix of interaffiliate cash flows, stated in Singapore dollars, was forecasted. Which of the following is an accurate chart of their current situation?

A)
B)
C)
D)

Answer 1

A

Question 2

Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions shown at left. Use MULTILATERAL netting WITH A CENTRAL DEPOSITORY to reduce the number of foreign exchange transactions.

A)
B)
C)
D)None of the above

Answer 2

B

Question 3

Precautionary cash balances

A)are necessary in case the firm has underestimated the amount of cash need to cover transactions.
B)are necessary to cover scheduled outflows of funds during a cash budgeting period.
C)both a and b
D)none of the above

Answer 3

A

Question 4

Good cash management boils down to

A)investing excess funds at the most favorable interest rate and borrowing at the lowest rate when there is a temporary cash shortage.
B)investing excess funds at the lowest rate and borrowing at the highest rate when there is a temporary cash shortage.
C)hedging currency exposure with judicious use of futures, forwards, and currency option contracts.
D)none of the above

Question 5

A multilateral netting system is beneficial in reducing the number of and the expense associated with interaffiliate foreign exchange transactions.

Question 6

Find the net exposure of the U.S. MNC with the following intra affiliate transactions shown:

A)$55
B)$65
C)$800
D)None of the above

Question 7

Precautionary cash balances

A)represent an increasingly-important source of interest income for many MNCs.
B)are necessary in case the firm has underestimated the amount needed to cover transactions.
C)are synonymous with speculative cash balances.
D)none of the above

Question 8

A central cash manager has a global view of the most favorable borrowing rates and most advantageous investment rates.

Question 9

Cash management refers to

A)the decision to grant credit to customers or to remain "cash and carry".
B)the investment the firm has in transaction balances and precautionary balances.
C)a domestic firm's investment in foreign currency.
D)none of the above

Question 10

Multinational cash management

A)is really no different for a MNC than for a purely domestic firm in a closed economy.
B)concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC's affiliates.
C)concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not an issue.
D)none of the above

Question 11

Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions shown at left. Use BILATERAL netting to reduce the number of foreign exchange transactions by half.

A)
B)
C)
D)None of the above

Question 12

A centralized cash pool assists in reducing the problem of mislocated funds and in funds mobilization.

Question 13

Many of the skills necessary for effective cash management are the same regardless of whether the firm has only domestic operations or if it operates internationally.

Question 14

Efficient cash management techniques can

A)reduce the investment in cash balances and foreign exchange transaction expenses.
B)provide for maximum return from the investment of excess cash.
C)result in borrowing at lowest rate when a temporary cash shortage exists.
D)all of the above

Question 15

A netting center necessarily implies that the MNC has a central cash manager.

Question 16

The cash manager of a domestic firm should source funds internationally to obtain the lowest borrowing cost and to place excess funds wherever the greatest return can be earned regardless of currency.
Given IRP and hedging opportunities this is true. See page 461. Likely a contentious question.

Question 17

If foreign exchange transactions cost ABC 0.45 percent, what savings results from netting?

A)S$684
B)S$765
C)S$1,449
D)S$1,823

Question 18

Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions shown at left. Use MULTILATERAL netting to reduce the number of foreign exchange transactions.

A)
B)
C)
D)None of the above

Question 19

A centralized cash management system with a cash pool can reduce the investment the MNC has in precautionary cash balances, saving the firm money.

Question 20

Calculate, in Singapore dollars, the amount that the interaffiliate foreign exchange transaction will be reduced by with multilateral netting.

A)S$152,000
B)S$170,000
C)S$322,000
D)S$405,000

Question 21

With regard to cash management systems in practice, studies suggest that the benefits of a multilateral netting system include

A)the decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.
B)the savings in administrative time.
C)the reduction in intra company float, which is frequently as high as five days, even for wire transfers.
D)all of the above

Question 22

Which of the following statements about multilateral netting system are correct? (i) - Each affiliate nets all its interaffiliate receipts against all its disbursements
(ii) - Each affiliate transfers or receives a balance, depending on whether it is a net payer or receiver
(iii) - The net funds to be received by the affiliates will equal the net disbursements to be made by the affiliates
(iv) - Only two foreign exchange transactions are necessary since the affiliates' net receipts will always be equal to zero
(v) - Only two foreign exchange transactions are necessary since the affiliates' net disbursements will always be equal to zero

A)(i) and (ii)
B)(i), (ii), and (iii)
C)(i), (ii), (iii), and (iv)
D)(i), (ii), (iii), and (v)

Question 23

Simplify the following set of intra company cash flows for this U.S. Firm. Use the following exchange rates. The fewest number of intra-affiliate cash flows is

A)Zero.
B)One.
C)Two.
D)Three.
E)Four.

Question 24

Several international banks offer multilateral netting software packages. These packages

A)calculate the net currency positions of each affiliate.
B)can integrate the netting function with foreign exchange exposure management.
C)only work on the Mac platform.
D)both a and b

Question 25

Benefits of a multilateral netting system include:

A)The decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.
B)The reduction in the number of foreign exchange transactions and the associated cost of making fewer but larger transactions.
C)The reduction in intra-company float, which is frequently as high as five days even for wire transfers.
D)The benefits that accrue from the establishment of a formal information system, which serves as the foundation for centrally managing transaction exposure and the investment of excess funds.
E)All of the above

Question 26

Not all countries allow MNCs the freedom to net payments,

A)by limiting netting, more needless foreign exchange transactions flow through the local banking system.
B)MNCs can avoid these restrictions by using a Centralized Cash Depository.
C)MNCs can avoid these restrictions by using wire transfers.
D)both b and c

Question 27

MNCs can reduce their exchange rate expense

A)by using bilateral netting.
B)by using a centralized cash management system.
C)by using multilateral netting.
D)all of the above

Question 28

The U.S. IRS allows transfer prices to be set using the cost plus approach

A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.

Question 29

For a recent month, the following payments matrix of interaffiliate cash flows was forecasted: The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home currency. Use multilateral netting to find the net payments to and from all parties. Which of the following is an accurate chart of their current situation?

A)
B)
C)
D)None of the others.

Question 30

Assuming that the interaffiliate cash flows are uncorrelated with one another, calculate the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members:

A)$34,960.33
B)$139,841.33
C)$104,880.88
D)None of the above

Question 31

Find the net exposure of the British subsidiary of the U.S. MNC with the following intra affiliate transactions shown:

A)$40 out
B)$65 in
C)₤20 out
D)None of the above

Question 32

If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes Affiliate A €2,000 when the exchange rate is $1.10 = €1.00. The net payment between A and B should be

A) €1,091 from B to A.
B) €1,091 from A to B.
C) $1,200 from B to A.
D) None of the above

Question 33

Assuming that the interaffiliate cash flows are uncorrelated with one another, calculate the minimum cash balance to have if the firm follows a conservative policy of having three standard deviations of cash for precautionary purposes

A)$34,960.33
B)$314,642.65
C)$104,880.88
D)None of the above

Question 34

For a recent month, the following payments matrix of interaffiliate cash flows was forecasted: Use multilateral netting to find the net payment from the British affiliate to the U.S. affiliate. The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home currency.

A)$60
B)$20
C)$0
D)None of the above

Question 35

The U.S. IRS allows transfer prices to be set using Comparable uncontrolled price method. This method requires

A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.

Question 36

For a recent month, the following payments matrix of interaffiliate cash flows was forecasted: The spot exchange rates are $1.20 = €1.00 and $2.00 = £1.00; affiliates get paid in home currency. Use multilateral netting to find the net payments to and from all parties. Which of the following is an accurate chart of their current situation?

A)
B)
C)
D)None of the others.

Question 37

The U.S. IRS allows transfer prices to be set using the resale price method

A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.

Question 38

Simplify the following set of intra company cash flows for this Swiss Firm. Use the following exchange rates. The fewest number of intra-affiliate cash flows is

A)Zero.
B)One.
C)Two.
D)Three.
E)Four.

Question 39

With a CENTRALIZED CASH DEPOSITORY

A)a MNC can facilitate fund mobilization.
B)system-wide excess cash are invested at the most advantageous rates.
C)system-wide cash shortages are borrowed at the most advantageous rates.
D)all of the above

Question 40

With a CENTRALIZED CASH DEPOSITORY

A)there is less chance for an MNC's funds to be denominated in the wrong currency.
B)the central cash manager has a global view of the MNC's overall cash position.
C)there is less chance of mislocated funds.
D)All of the above

Question 41

Reasons for a country to impose exchange restrictions on its own currency, limiting conversion to other currencies include

A)enticing more foreign investment from MNCs.
B)for a variety of reasons, the country may find itself short of foreign currency reserves.
C)creating a home-grown business climate.
D)all of the above

Question 42

Which of the following statements about transfer pricing is true?

A)The higher the transfer price, the larger the gross profits of the transferring division relative to the receiving division.
B)Very high markup policy used in the transfer pricing to a subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure appear less attractive.
C)Very low markup policy used in the transfer pricing to a subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure appear less attractive.
D)Both a and b

Question 43

The lower the transfer price

A)the higher the net profit reported by the MNC.
B)the lower the gross profit of the transferring division relative to the receiving division.
C)the higher the gross profit of the receiving division relative to the transferring division.
D)none of the above

Question 44

In reference to establishing "transfer prices" between the affiliates of an MNC, which of the following relates to the "resale" price approach?

A)Comparable uncontrolled price between unrelated firms.
B)The price at which the good is resold by the distribution affiliate is reduced by an amount to cover overhead costs and a reasonable profit.
C)Assumes that the manufacturing cost is readily available.
D)Is based on financial and economic models and econometric techniques.

Question 45

The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method. This method is difficult to apply in practice because many factors enter into the pricing of goods and services. Examples include

A)differences in the terms of sale.
B)differences in quantity and or quality sold.
C)differences in location or date of sale.
D)all of the above

Question 46

Under multilateral netting

A)each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is the net payer or receiver.
B)each pair of affiliates determines the net amount due between them, and only the net amount is transferred.
C)no inter-affiliate payments are made or even computed, since no real cash flows are involved.
D)all of the above

Question 47

According to a recent survey by Ernst and Young, the most important tax issue that multinational enterprises now face is

A)transfer pricing.
B)choice of accounting method to use in preparing consolidated income statements when firms have subsidiaries in countries with different tax treatments of expense items.
C)choice of accounting method to use in preparing consolidated income statements when firms have subsidiaries in countries with different tax treatments of income recognition.
D)none of the above

Question 48

Ad valorem duties are best described as

A)an ad valorem duty is a percentage tax levied at customs on the assessed value of the imported good.
B)a value-added tax on domestic production.
C)a percentage tax levied at customs on the value added by shipping the good.
D)none of the above

Question 49

When engaged in bilateral netting

A)total interaffiliate receipts will always equal total interaffiliate disbursements.
B)we can reduce the number of foreign exchange transactions among a MNC with N affiliates to or less
C)each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver.
D)all of the above

Question 50

Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency, limiting conversion to other currencies, a MNC's frustrated remittance of profits from a subsidiary would be

A)blocked funds.
B)stopped funds.
C)constipated funds.
D)money down the toilet.

Question 51

On blocked funds strategy is

A)transferring personnel from corporate headquarters to the subsidiary offices.
B)using the national airlines of the host country when possible for the international travel of all MNC executives.
C)holding business conferences of the MNC in the host country, where all expenses are paid by the local subsidiary.
D)all of the above

Question 52

Why can blocked funds can be detrimental to all concerned?

A)Host countries want to attract foreign industries that benefit their economic development; blocked funds make MNCs less willing to invest.
B)MNCs should not be expected to make beneficial investment where they may not be able to receive an appropriate return.
C)Local competitors may be able to reap monopoly profits.
D)Both a and b

Question 53

Which will reduce the number of foreign exchange transaction the most for a MNC?

A)Multilateral netting
B)Bilateral netting
C)Fish netting
D)None of the above

Question 54

One benefit of a centralized cash depository is

A)the MNC's investment in precautionary cash balances can be substantially reduced without a reduction in its ability to cover unforeseen expenses.
B)each affiliate will have greater autonomy in managing its own cash balances.
C)exchange rate restrictions can be easily circumvented.
D)none of the above

Question 55

For the U.S. affiliate shown below, net all its inter-affiliate receipts against all its disbursements. Use the following exchange rates. The net inter-affiliate cash flow for the U.S. affiliate is

A)$0.
B)-$135.
C)$135.
D)$405.
E)$90.

Question 56

Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

A)$50,000
B)$100,000
C)$125,000
D)$250,000

Question 57

If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes Affiliate A €2,000 when the exchange rate is $1.50 = €1.00. The net payment between A and B should be closest to

A) $2,000 from B to A.
B) €2,000 from A to B.
C) $1,000 from B to A.
D) none of the above

Question 58

Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

A)$250,000
B)$500,000
C)$1,000,000
D)$1,250,000

Question 59

Multinational cash management

A)is really no different for a MNC than for a purely domestic firm in a closed economy.
B)concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC's affiliates.
C)concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not an issue.
D)none of the above

Question 60

"Unbundling fund transfers" from an MNC and to its affiliates refers to the following activity:

A)instead of lumping all costs into a single transfer price, for the MNC (parent firm) to recognize the cost of the physical good and each service separately that it provides to its affiliates.
B)in addition to charging for the cost of the physical good, for the parent firm to charge for technical training of the affiliates' staff, cost of worldwide advertising, royalty, licensing fee, and technology, whenever applicable, to facilitate for the MNC to present and support to the taxing authority of a host country that each charge is legitimate and can be well substantiated.
C)used for removing blocked funds from a host country that is enforcing foreign exchange restrictions.
D)all of the above

Question 61

Not all countries allow MNCs the freedom to net payments,

A)the U.S., Canada, and Great Britain allow only netting between each other.
B)some countries require the MNC to ask permission, and some countries limit netting.
C)but that is fine, since netting typically has costs that outweigh the benefits for a MNC.
D)all of the above may be correct

Question 62

Bilateral netting can reduce the number of foreign exchange transactions among a MNC with N affiliates to

A) .
B) .
C) .
D)None of the above.

Question 63

Mislocated funds are defined as:

A)Funds being found in the wrong account.
B)Funds being denominated in the wrong currency.
C)Funds being invested with the wrong maturity.
D)None of the above

Question 64

Find the net cash flow in (out of) the Canadian affiliate.

A)$5,000 in
B)$5,000 out
C)$30,000 in
D)$30,000 out
E)None of the above

Question 65

Find the net cash flow in (out of) the U.K. affiliate.

A)$5,000 in
B)$5,000 out
C)$30,000 out
D)$30,000 in
E)None of the above

Question 66

Find the net cash flow in (out of) the German affiliate.

A)$0 in or out
B)$5,000 out
C)$30,000 in
D)$30,000 out
E)None of the above

Question 67

Find the net cash flow in (out of) the U.K. affiliate.

A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above

Question 68

Find the net cash flow in (out of) the Canadian affiliate.

A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above

Question 69

Which one of the following is a false statement when engaged in bilateral netting?

A)Total interaffiliate receipts will always equal total interaffiliate disbursements.
B)We can reduce the number of foreign exchange transactions among a MNC with N affiliates to or less
C)Each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net receiver or payer respectively.
D)All of the above

Question 70

Find the net cash flow in (out of) the German affiliate.

A)$5,000 in
B)$5,000 out
C)$30,000 out
D)$30,000 in
E)None of the above

Question 71

The formula for the standard deviation of cash held by the centralized depository for N affiliates is

A)The formula assumes that interaffiliate cash flows have a correlation coefficient of -1.
B)The formula assumes that interaffiliate cash flows have a correlation coefficient of +1.
C)The formula assumes that interaffiliate cash flows have a correlation coefficient of 0.
D)None of the above

Question 72

Find the net cash flow in (out of) the U.S. affiliate.

A)$5,000 in
B)$5,000 out
C)$30,000 in
D)$30,000 out
E)None of the above

Question 73

A firm keeps a precautionary cash balance to cover unexpected transactions during the budget period. The size of this balance depends on how safe the firm desires to be in its ability to meet unexpected transactions.

A)The larger the precautionary cash balance, the greater is the firm's ability to meet unexpected expenses.
B)The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing.
C)The larger the precautionary cash balance, the greater the potential opportunity cost.
D)All of the above

Question 74

Which one of the following is a false statement when engaged in bilateral netting?

A)Total interaffiliate receipts will always equal total interaffiliate disbursements.
B)We can reduce the number of foreign exchange transactions among a MNC with N affiliates to or less
C)Each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver.
D)All of the above

Question 75

Find the net cash flow in (out of) the Canadian affiliate.

A)$0 in or out
B)$20,000 out
C)$15,000 in
D)$30,000 out
E)None of the above

Question 76

Find the net cash flow in (out of) the U.S. affiliate.

A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above

Question 77

Some countries allow interaffiliate transactions to be settled only on a gross basis. That is,

A)all receipts for a settlement period must be grouped into a single large receipt and all disbursements must be grouped into a single large payment.
B)all receipts and disbursements for a settlement period must be handled individually.
C)all receipts and disbursements for a settlement period must be netted against each other and then a single large payment is made.
D)each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver.

Question 78

Find the net cash flow in (out of) the German affiliate.

A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above

Question 79

Which one of the following is a false statement when engaged in bilateral netting?

A)Total interaffiliate receipts need not always equal total interaffiliate disbursements.
B)We can reduce the number of foreign exchange transactions among a MNC with N affiliates to or less
C)Each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver.
D)All of the above

Question 80

Find the net cash flow in (out of) the U.S. affiliate.

A)$0 in or out
B)$5,000 out
C)$10,000 in
D)$15,000 out
E)None of the above