Question 1

Income from an active business earned by a foreign affiliate in a treaty country is exempt fromCanadian taxation.

Accepted Answer

This is true under Canada's foreign affiliate rules, which provide an exemption from taxation for the active business income earned by a foreign affiliate in a country that has a tax treaty with Canada. However, there are certain conditions and limitations that must be met in order for this exemption to apply.

Question 2

With a total population estimated at more than 365 million (compared to a Canada and U.S. population of 320 million) and an overall gross national income parallelling the United States, the EU is a significant global force.

Accepted Answer

The statement is true. The EU has a population of over 365 million and a gross national income that is comparable to that of the United States, making it a significant global force.

Question 3

A foreign bond is an international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated.

Accepted Answer

A foreign bond is issued in a domestic market by a foreign entity, in the domestic market's currency. The statement describes a Eurobond, not a foreign bond.

Question 4

The existence of specific regulations and controls on dollar deposits in the United States, including interest rate ceiling imposed by the government, has contributed to the growth of the Euromarket.

Accepted Answer

The regulations and controls on dollar deposits in the United States, such as interest rate ceilings, led to the development of the Euromarket as a way for banks to bypass these restrictions and conduct dollar transactions outside of the US.

Question 5

The three basic types of risk associated with international cash flows are business and financial risks, inflation and foreign exchange risks, and political risks.

Accepted Answer

This statement is true, as these three risks are widely recognized as the main types of risk involved in international cash flows. Business and financial risks refer to the potential for changes in market conditions or financial performance to impact cash flows, while inflation and foreign exchange risks relate to changes in the value of currencies and purchasing power. Political risks involve the possibility of changes in laws, regulations, or government actions that could affect cash flows.

Question 6

Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they have no impact on its overall value.

Accepted Answer

Fluctuations in foreign exchange markets can affect the overall value of a multinational company by impacting its cash flows, competitiveness, and investment opportunities. As such, foreign exchange risk management is an important aspect of corporate finance for multinational companies.

Question 7

If a $1 Canadian costs $0.667 U.S., then $1 U.S. must cost $1.60 Canadian.

Accepted Answer

If one U.S. dollar costs $1.60 Canadian, then one Canadian dollar costs $0.625 U.S., not $0.667 U.S.

Question 8

In Canada, for integrated foreign operations, the temporal method of translation of financial statements should be used. The temporal method takes all transactions that were measured in a foreign currency and translates them into Canadian dollars using the exchanged rate in effect on the date of the original transaction.

Accepted Answer

The temporal method of translation should be used for integrated foreign operations in Canada. It involves translating foreign currency transactions into Canadian dollars using the exchange rate in effect on the date of the original transaction.

Question 9

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

Accepted Answer

This is because high inflation erodes the purchasing power of a currency, making it less attractive to foreign investors and causing a decrease in demand for the currency. As a result, its value will decline relative to currencies from countries with lower inflation rates.

Question 10

The third largest trading bloc in the world is the Mercosur Group of countries in the Middle East: Iran, Iraq, Saudi Arabia, and Turkey.

Accepted Answer

The Mercosur Group of countries is actually in South America and includes Argentina, Brazil, Paraguay, and Uruguay. The Middle Eastern countries mentioned here are not part of Mercosur or a trading bloc with them.

Question 11

Offshore Centers are cities that have achieved prominence as major centers for Euromarket business.

Accepted Answer

Offshore Centers are indeed cities that have become major centers for Euromarket business.

Question 12

Canada's biggest trading partner is the United States. In 2002, Canada's two-way trade in goods and services with the United States amounted to about $2 billion per year or about 78% of Canada's total trade in goods and services.

Accepted Answer

The answer of Canada's biggest trading partner is the United...

Question 13

In general, an international bond is one that is initially sold in the country of the borrower and,then, often distributed in several countries.

Accepted Answer

The answer of In general, an international bond is one...

Question 14

Canada is a signatory to the most recent version of the GATT treaty, which has governed world trade throughout most of the postwar era.

Accepted Answer

Canada is a founding member of the General Agreement on Tariffs and Trade (GATT) and signed the most recent version, which is now known as the World Trade Organization (WTO).

Question 15

Joint venture is a partnership under which the participants have contractually agreed to contribute specified amounts of money and expertise in exchange for stated proportions of ownership and profit.

Accepted Answer

This is the definition of a joint venture.

Question 16

Hedging strategies are techniques used to offset or protect against risk; in the international context these include borrowing or lending in different currencies, undertaking contracts in the forward, futures, and/or options markets, and also swapping assets/liabilities with other parties.

Accepted Answer

Hedging strategies are indeed used to offset or protect against risk, and the methods listed are commonly used in the international context.

Question 17

NAFTA is a treaty establishing free trade and open markets between Europe and the Canada.

Accepted Answer

NAFTA stands for the North American Free Trade Agreement, which established free trade and open markets between the United States, Canada, and Mexico. It does not involve Europe.

Question 18

The Euromarket is the international financial market that provides for borrowing and lending currencies outside their country of origin.

Accepted Answer

The statement correctly defines the Euromarket as an international financial market for borrowing and lending currencies outside their country of origin.

Question 19

NAFTA is an international financial market that provides for borrowing and lending currencies outside their country of origin.

Accepted Answer

NAFTA (North American Free Trade Agreement) is a trilateral agreement between the United States, Canada, and Mexico that eliminates tariffs on goods and services traded among the three countries. It does not pertain to borrowing and lending currencies.

Question 20

In 1998, Canada and the United States negotiated essentially unrestricted trade between their countries. The free trade zone was extended to include Chile in late 1992.

Accepted Answer

The North American Free Trade Agreement (NAFTA) was negotiated between Canada, the United States, and Mexico, not Chile. Chile was not included in NAFTA in 1992.

Quiz 19: International Corporate Finance