Question 1

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.

Accepted Answer

This statement is true. A centralized depository allows managers to pool funds from various accounts in one place, reducing the need for multiple highly liquid accounts. This can lead to higher returns on investment by allowing the funds to be invested in larger deposits that offer higher interest rates.

Question 2

Net working capital is ________.

Accepted Answer

Net working capital is the difference between a firm's current assets (such as cash, inventory, and accounts receivable) and current liabilities (such as accounts payable and short-term debt). It represents the amount of money a company has available to meet its short-term financial obligations and fund its day-to-day operations. Options A, C, and D do not accurately represent net working capital.

Question 3

What are four advantages to large firms lending funds to their foreign subsidiaries?

Accepted Answer

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Question 4

Explain the difference between working capital and net working capital, and discuss why managers employ net present value (NPV)analysis to evaluate domestic and international capital investment projects.

Accepted Answer

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Question 5

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

Accepted Answer

Royalty payment is the compensation paid to the owner of intellectual property such as patents, copyrights, or trademarks for the use of their property by another person or entity. Commission fee is a payment made to a salesperson for a sale, trade credit is the credit extended by a supplier to a customer to delay payment, and dividend remittance is a payment made to shareholders of a company.

Question 6

________ estimates future cash flows from the project in the functional currency of the parent firm.

Accepted Answer

When estimating future cash flows from a project, the perspective of the parent firm is more relevant as it needs to assess the potential returns and risks of the investment. Therefore, the estimation should be done in the functional currency of the parent firm to reflect its economic reality. The project's perspective would focus on the cash flows generated within the project, which may not align with the parent's objectives. Passive and active hedging are strategies used to manage currency risk but are not directly related to estimating future cash flows.

Question 7

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

Accepted Answer

Intra-corporate fund transfers can be accomplished through various methods, such as royalty payments, transfer pricing, and multilateral netting, allowing MNEs to access cash from their subsidiaries.

Question 8

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

Accepted Answer

Fronting loans are a type of loan used by multinational enterprises (MNEs) to minimize taxes. Essentially, a fronting loan is a loan that is extended by a bank or other financial institution in a low-tax country to an MNE subsidiary in a high-tax country. By doing this, the MNE can shift profits to the low-tax country and reduce their overall tax burden. This practice has come under increased scrutiny in recent years as governments seek to crack down on tax avoidance.

Question 9

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

Accepted Answer

Multilateral netting refers to a process used by multinational corporations to consolidate and net out payments between their subsidiaries and affiliates, reducing the number and volume of cross-border transactions and thus minimizing transaction costs and foreign exchange exposure. It is more about managing inter-company payments efficiently rather than how they charge each other for goods and services.

Question 10

Capital budgeting is intended to ________.

Accepted Answer

Capital budgeting is the process of evaluating and selecting long-term investment projects that are expected to generate profits over an extended period. It helps managers decide which projects offer the best financial return, including international projects. The other options (A, C, and D) are not related to the purpose of capital budgeting.

Question 11

Why have global capital markets grown so rapidly in the past decade? Why has the growth of international business pressured multinational firms and international organizations to harmonize world accounting systems?

Accepted Answer

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Question 12

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

Accepted Answer

Multilateral netting allows for the elimination of offsetting cash flows within the MNE family, strategically reducing cash transfers. Herding refers to the behavior of investors following each other's actions, hedging is a risk management strategy, and currency swap involves exchanging one currency for another.

Question 13

Transfer pricing is defined as ________.

Accepted Answer

Transfer pricing refers to the pricing strategies and methods used by subsidiaries and affiliates to charge each other for the exchange of goods and services within a multinational corporation. It is a mechanism for allocating income and expenses within the organization and can have an impact on the tax liabilities of individual entities within the group. Choices A and D are inaccurate definitions of transfer pricing, while choice B refers to compensation for intellectual property and is not directly related to transfer pricing.

Question 14

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

Accepted Answer

The parent's perspective in capital budgeting typically involves estimating future cash flows from the project in the functional currency, which is often the parent company's home currency. This approach helps in assessing the project's impact on the parent company's financials directly.

Question 15

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

Accepted Answer

Multilateral netting allows an MNE to consolidate intracorporate cash transfers and netting out the balances, which reduces transaction fees, enhances liquidity management and boosts efficiency in intercompany dealings. It enables the firm to process multiple payments as a single transaction to reduce transaction costs while retaining individual accounts receivable/payable in subsidiaries currencies. Contrarily, options B to D do not relate to the advantages of multilateral netting.

Question 16

Describe three methods used to transfer funds within an MNE.

Accepted Answer

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Question 17

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

Accepted Answer

Trade credits allow a subsidiary to defer payment for goods and services received from its parent firm. This is a common method used for intra-firm transactions.

Question 18

Net present value is defined as the ________.

Accepted Answer

Net present value (NPV) is the present value of a project's cash inflows less the present value of its cash outflows. In other words, it is the difference between the present value of a project's incremental cash flow and the initial investment. Option A is incorrect because NPV only accounts for cash inflows and outflows, not the value of capital assets. Option B is incorrect because it compares two different things (assets and liabilities) and not specific to a project. Option D is incorrect because it combines the initial investment and cash flows, but does not take into account their present value.

Question 19

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

Accepted Answer

The volume and complexity of a firm's intracorporate transfers depend on the number of subsidiaries and alliances the firm maintains worldwide. The more subsidiaries and alliances a firm has, the more complicated its internal transfer processes may become. Factors such as the amount of cash available and the value of shareholders' stock may have some impact on intracorporate transfers but are not the primary drivers of volume and complexity. The country of origin may also have some influence but is not as significant as the number of subsidiaries and alliances.

Question 20

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

Accepted Answer

The parent's perspective approach uses the functional currency of the parent, estimates future cash flows from the project, and forecasts forward rates. However, it does not necessarily use the subsidiary's local currency, as this would not reflect the parent company's overall financial position.

Quiz 10: Financial Management and Accounting in the Global Firm