Question 1

Which of the following is not an example of political risk?
A) Government may impose taxes on a subsidiary.
B) Government may impose barriers on a subsidiary.
C) Consumers may boycott the MNC.
D) Consumers' income levels may decrease, thus decreasing consumption.

Accepted Answer

Decrease in consumers' income levels and resulting decrease in consumption is an example of economic risk, not political risk. Political risks are related to government actions or events such as expropriation, nationalization, changes in regulations, and political instability.

Question 2

​The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____.
A) ​decrease; appreciate
B) ​increase; appreciate
C) ​decrease; depreciate
D) ​increase; depreciate

Accepted Answer

When the expected cash flows from foreign subsidiaries increase, it indicates that the MNC is performing well in those markets and thus the valuation should rise. Additionally, when the foreign currencies denominating these cash flows appreciate, it leads to higher profits for the MNC when converted into the domestic currency, which also contributes to the rise in valuation.

Question 3

Which of the following is not mentioned in the text as a theory of international business?
A) theory of comparative advantage
B) imperfect markets theory
C) product cycle theory
D) All of these are mentioned in the text as theories of international business.

Accepted Answer

All three theories, namely theory of comparative advantage, imperfect markets theory, and product cycle theory are mentioned in the text as theories of international business.

Question 4

Agency costs faced by MNCs may be larger than those faced by purely domestic firms because:
A) monitoring of managers located in foreign countries is more difficult.
B) foreign subsidiary managers raised in different cultures may not follow uniform goals.
C) MNCs are relatively large.
D) All of these are correct.
E) monitoring of managers located in foreign countries is more difficult AND foreign subsidiary managers raised in different cultures may not follow uniform goals.

Accepted Answer

All of the options are valid reasons for why agency costs faced by MNCs may be larger than those faced by purely domestic firms. Monitoring managers located in foreign countries is inherently more difficult due to language barriers, time zone differences, and cultural differences. Additionally, managers of foreign subsidiaries may have different cultural backgrounds and incentives, which could create conflicts with the overall goals of the MNCs. Finally, MNCs are typically larger than domestic firms, which also creates challenges in monitoring and coordination.

Question 5

Licensing obligates a firm to provide _____, while franchising obligates a firm to provide _____.
A) a specialized sales or service strategy; its technology
B) its technology; a specialized sales or service strategy
C) its technology; its technology
D) a specialized sales or service strategy; a specialized sales or service strategy
E) its technology; an initial investment

Accepted Answer

Licensing involves granting rights to use a company's technology or intellectual property, while franchising involves granting the right to use a company's business model or brand name, along with providing support and guidance on how to operate the franchise. Therefore, licensing obligates a firm to provide its technology, while franchising obligates a firm to provide a specialized sales or service strategy.

Question 6

Which of the following is not mentioned in the text as an additional risk resulting from international business?
A) exchange rate fluctuations
B) political risk
C) interest rate risk
D) exposure to foreign economies

Accepted Answer

Interest rate risk is not mentioned in the text as an additional risk resulting from international business.

Question 7

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?
A) a weaker Mexican economy
B) lower Mexican interest rates
C) depreciation of the Mexican peso
D) appreciation of the Mexican peso

Accepted Answer

The decline in valuation of Saller Co. can be attributed to the depreciation of the Mexican peso, which reduces the value of the expected cash flows to be received in pesos from the subsidiary. The other choices are not directly related to the expected cash flows of the subsidiary and would not necessarily result in a decline in Saller Co.'s valuation.

Question 8

​With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.
A) ​shareholder wealth; short-term earnings
B) ​shareholder wealth; shareholder wealth
C) ​short-term earnings; sales volume
D) ​short-term earnings; shareholder wealth

Accepted Answer

Both MNCs (Multinational Corporations) and purely domestic firms are primarily concerned with maximizing shareholder wealth, although their strategies and operational environments might differ.

Question 9

Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while Jensen establishes the new subsidiary and ____ when the subsidiary starts operations.​
A) ​depreciates; appreciates
B) ​appreciates; appreciates
C) ​appreciates; depreciates
D) ​depreciates; depreciates

Accepted Answer

If the value of the peso depreciates while Jensen establishes the new subsidiary, they will be able to set up the subsidiary with lower costs and will have more purchasing power in Mexico. This will favorably affect the value of the project. 
On the other hand, if the value of the peso appreciates when the subsidiary starts operations, the subsidiary will have to convert more pesos to U.S. dollars to remit earnings back to the parent. This will increase costs and unfavorably affect the value of the project. Therefore, the value of the project will be favorably affected if the peso depreciates while establishing the subsidiary and appreciates when the subsidiary starts operations.

Question 10

Which of the following theories identifies the nontransferability of resources as a reason for international business?
A) theory of comparative advantage
B) imperfect markets theory
C) product cycle theory
D) None of these are correct.

Accepted Answer

The imperfect markets theory states that international trade occurs due to the nontransferability of resources between countries, which creates market imperfections and leads to differences in prices and availability of goods and services. The other theories listed do not specifically focus on this reason for international business.

Question 11

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?​
A) ​international trade
B) ​licensing
C) ​franchising
D) ​direct foreign investment

Accepted Answer

Direct foreign investment involves a major investment in a foreign country, which is not suitable for a firm looking to engage in international business without a major investment. International trade, licensing, and franchising are all viable options for companies looking to engage in international business without a major investment in a foreign country.

Question 12

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

Accepted Answer

Establishing a foreign subsidiary involves many considerations, but avoiding exchange rate risk is not typically the primary reason; it's more about market presence, local production advantages, and circumventing trade barriers. Exchange rate risk can affect both exporting and foreign subsidiaries.

Question 13

Which of the following does not possibly represent a form of direct foreign investment?
A) franchising
B) international trade
C) joint ventures
D) acquisitions of existing operations
E) establishment of new foreign subsidiaries

Accepted Answer

International trade is not considered a form of direct foreign investment as it involves buying and selling goods and services across borders, rather than establishing a physical presence in a foreign country through the acquisition of existing operations, establishment of new subsidiaries, franchising, or joint ventures.

Question 14

​An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?
A) ​assembly line production
B) ​specialized professional services
C) ​nuclear missile programs
D) ​development of more sophisticated computer technology

Accepted Answer

Assembly line production is a manufacturing process that involves repeated production of identical products, and it is often labor-intensive. Lower labor costs in some less developed foreign countries would make it more cost-effective for companies to outsource this type of production. Specialized professional services and the development of more sophisticated computer technology are more knowledge-based industries and may rely more heavily on skilled labor and innovation, rather than simply cost savings. Nuclear missile programs are typically highly regulated and involve national security concerns, making outsourcing to foreign countries less likely.

Question 15

For an MNC, agency costs are typically:
A) nonexistent.
B) larger than agency costs of a small purely domestic firm.
C) smaller than agency costs of a small purely domestic firm.
D) the same as agency costs of a small purely domestic firm.

Accepted Answer

MNCs have a more complex organizational structure than a small purely domestic firm, which leads to higher agency costs. The agency costs of an MNC are typically larger due to the need for monitoring, controlling and coordinating the activities of different managers, employees and subsidiaries located in different countries. This is not required in a small purely domestic firm, where the owner-manager can personally supervise and control the activities of all employees.

Question 16

An MNC may be more exposed to agency problems if most of its shares are held by:
A) a few mutual funds.
B) a widely dispersed set of individual investors.
C) a few pension funds.
D) All of these would prevent agency problems.

Accepted Answer

If most of the shares of an MNC are held by a widely dispersed set of individual investors, it may lead to agency problems as it becomes difficult to monitor the actions of management and ensure that they act in the best interest of the shareholders. In contrast, if most of the shares are held by a few mutual funds or pension funds, the chances of agency problems are lower as these institutional investors may have more resources to monitor and influence management. However, none of these options completely prevent agency problems.

Question 17

​Which of the following is not a way in which agency problems can be reduced through corporate control?
A) ​executive compensation
B) ​threat of hostile takeover
C) ​acquisition of a foreign subsidiary
D) ​monitoring by large shareholders

Accepted Answer

Acquisition of a foreign subsidiary is not directly related to reducing agency problems through corporate control. The other options - executive compensation, threat of hostile takeover, and monitoring by large shareholders - are all methods of aligning the interests of management with those of shareholders, which helps to reduce agency problems.

Question 18

Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and the euro's value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of Live Co?​
A) ​$200,000
B) ​$559,500
C) ​$582,500
D) ​$393,500

Accepted Answer

To calculate the expected dollar cash flows of Live Co., convert the foreign currencies to USD using the given exchange rates and add them to the domestic cash flows. For Swiss francs: 200,000 * $0.83 = $166,000. For euros: 150,000 * $1.29 = $193,500. Adding these to the domestic cash flows: $200,000 + $166,000 + $193,500 = $559,500.

Question 19

MNCs can improve their internal control process by all of the following, except:
A) establishing a centralized database of information.
B) ensuring that all data are reported consistently among subsidiaries.
C) ensuring that the MNC always borrows from countries where interest rates are lowest.
D) using a system that checks internal data for unusual discrepancies.

Accepted Answer

The option "ensuring that the MNC always borrows from countries where interest rates are lowest" has nothing to do with improving internal control processes. The other options (A, B, and D) are all valid ways for MNCs to improve their internal control processes.

Question 20

​The Sarbanes-Oxley Act improved corporate governance of MNCs because it:
A) ​made executives more accountable for verifying financial statements.
B) ​eliminated stock options as a form of compensation.
C) ​tied executive compensation to firm performance.
D) ​placed a limit on the amount of funds that managers can spend.

Accepted Answer

The Sarbanes-Oxley Act strengthened corporate governance of MNCs by making executives personally responsible for ensuring the accuracy of financial statements. This accountability helped to prevent fraudulent activities and increased transparency in financial reporting. The Act did not eliminate stock options, tie executive compensation to firm performance or limit the amount of funds managers can spend.

Quiz 1: Multinational Financial Management: an Overview

Which of the following is not an example of political risk?

The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to and when the foreign currencies denominating these cash flows are expected to .

Which of the following is not mentioned in the text as a theory of international business?

Agency costs faced by MNCs may be larger than those faced by purely domestic firms because:

Licensing obligates a firm to provide _, while franchising obligates a firm to provide _.

Which of the following is not mentioned in the text as an additional risk resulting from international business?

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?

With regard to corporate goals, an MNC is mostly concerned with maximizing , and a purely domestic firm is mostly concerned with maximizing .

Which of the following theories identifies the nontransferability of resources as a reason for international business?

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

Which of the following does not possibly represent a form of direct foreign investment?

An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?

For an MNC, agency costs are typically:

An MNC may be more exposed to agency problems if most of its shares are held by:

Which of the following is not a way in which agency problems can be reduced through corporate control?

MNCs can improve their internal control process by all of the following, except:

The Sarbanes-Oxley Act improved corporate governance of MNCs because it:

Quiz 1: Multinational Financial Management: an Overview

Which of the following is not an example of political risk?

​The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____.

Which of the following is not mentioned in the text as a theory of international business?

Agency costs faced by MNCs may be larger than those faced by purely domestic firms because:

Licensing obligates a firm to provide _____, while franchising obligates a firm to provide _____.

Which of the following is not mentioned in the text as an additional risk resulting from international business?

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?

​With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.

Which of the following theories identifies the nontransferability of resources as a reason for international business?

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?​

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

Which of the following does not possibly represent a form of direct foreign investment?

​An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?

For an MNC, agency costs are typically:

An MNC may be more exposed to agency problems if most of its shares are held by:

​Which of the following is not a way in which agency problems can be reduced through corporate control?

MNCs can improve their internal control process by all of the following, except:

​The Sarbanes-Oxley Act improved corporate governance of MNCs because it:

The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to and when the foreign currencies denominating these cash flows are expected to .

Licensing obligates a firm to provide _, while franchising obligates a firm to provide _.

With regard to corporate goals, an MNC is mostly concerned with maximizing , and a purely domestic firm is mostly concerned with maximizing .

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?

An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?

Which of the following is not a way in which agency problems can be reduced through corporate control?

The Sarbanes-Oxley Act improved corporate governance of MNCs because it: