Question 1

Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources.

Accepted Answer

Under the imperfect markets theory, factors of production are not assumed to be entirely mobile, which means firms cannot easily capitalize on a foreign country's resources. This is because imperfect markets create barriers to entry and exit, such as government regulations or cultural differences, that limit the international mobility of factors of production.

Question 2

A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs.

Accepted Answer

False

Question 3

Imperfect markets reflect conditions under which factors of production are immobile.

Accepted Answer

Imperfect markets occur when there are barriers to the mobility of factors of production, meaning they cannot easily move between different uses or locations. This can lead to underutilization of resources and inefficiencies in the market.

Question 4

If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

Accepted Answer

The answer of If a U.S.-based MNC focused entirely on...

Question 5

The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

Accepted Answer

The Sarbanes-Oxley Act was passed in 2002 to increase transparency and accountability in financial reporting. It requires managers to report on the productivity and financial condition of their firm in a more detailed and accurate manner to prevent fraudulent activities. Therefore, it ensures a more transparent process for reporting.

Question 6

The theory of comparative advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.

Accepted Answer

The theory of comparative advantage applies to countries, not firms, and states that countries should specialize in producing goods or services that they have a lower opportunity cost in producing and trade with other countries to benefit from the gains of trade.

Question 7

The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources.

Accepted Answer

The imperfect markets theory suggests that factors of production are not perfectly mobile, which means that firms can take advantage of resources in foreign countries that they may not have access to in their home country.

Question 8

Franchising is the process by which national governments sell state-owned operations to corporations and other investors.

Accepted Answer

Franchising is actually a business model in which a company (franchisor) grants the right to use its trademark, products and business models to an independent entrepreneur (franchisee). It is not related to the process of national governments selling state-owned operations.

Question 9

If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).

Accepted Answer

In perfect markets, labor and other costs of production would adjust through movements across borders in search of lower costs or higher wages, leading to changes in these costs over time.

Question 10

Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.

Accepted Answer

By licensing their technology, firms can earn royalties from foreign firms without having to make significant investments in foreign markets.

Question 11

The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.

Accepted Answer

Maximizing shareholder wealth is a primary goal of MNCs, as they are accountable to their shareholders and seek to generate profits and increase the value of their investments.

Question 12

Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.

Accepted Answer

Licensing is indeed the process of providing technology in exchange for fees or other benefits.

Question 13

Institutional investors such as mutual funds or pension funds that have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC.

Accepted Answer

Institutional investors with large holdings of an MNC's stock often have significant influence over management, and can use that influence to push for changes in strategy or corporate governance. While they may not seek to take direct control of the company, their influence is still an important factor in shaping the MNC's decisions and performance.

Question 14

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

Accepted Answer

Decentralized management allows for decision making to be distributed among subsidiary managers who have a better understanding of their specific operations, leading to potentially more informed and effective decision making.

Question 15

A centralized management style for an MNC results in relatively high agency costs.

Accepted Answer

The answer of A centralized management style for an MNC...

Question 16

In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects.

Accepted Answer

The answer of In determining the valuation of foreign projects,...

Question 17

MNCs commonly consider acquiring an existing foreign operation because the cost is less expensive than establishing a new subsidiary of the same size.

Accepted Answer

The answer of MNCs commonly consider acquiring an existing foreign...

Question 18

U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.

Accepted Answer

This statement is false. Mutual funds and pension funds often hold stock in MNCs and closely monitor their performance.

Question 19

A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.

Accepted Answer

A weakening euro means that when the earnings from the European subsidiaries are converted back to dollars, they will be worth less, potentially decreasing the overall value of the MNC.

Question 20

The Sarbanes-Oxley Act (SOX), which was enacted in 2002, required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors.

Accepted Answer

This statement is true. The Sarbanes-Oxley Act (SOX) did require MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors. This was done to improve transparency and accountability in corporate reporting and reduce the risk of financial fraud.

Quiz 1: Multinational Financial Management: an Overview