Question 1

A firm would increase its investment in net working capital in order to produce ________.

Accepted Answer

Increasing investment in net working capital will increase the amount of cash available to the firm in the future. This could be used for various purposes including paying dividends, purchasing marketable securities, or increasing inventories. However, the primary reason for increasing net working capital is to ensure that the firm has enough cash to operate its business smoothly and meet its short-term obligations.

Question 2

When the IRS determines an appropriate transfer price that a multinational's affiliate may use,the guideline is known as ________.

Accepted Answer

The IRS uses the arm's length principle when determining an appropriate transfer price for a multinational's affiliate. This principle requires that the transfer price be equivalent to what two unrelated parties would agree upon in a similar transaction, in order to prevent tax avoidance through transfer pricing manipulation. The other choices - reasonable man principle, book value, and resale price - are unrelated to transfer pricing guidelines.

Question 3

When an affiliate is located in a high tax jurisdiction,the general rule is to set the transfer price that another affiliate would charge as ________ as possible.

Accepted Answer

When an affiliate is located in a high tax jurisdiction, setting the transfer price as high as possible can help minimize the overall tax burden by shifting profits to jurisdictions with lower tax rates.

Question 4

What is the name of the condition that arises when the government of a foreign country makes the nation's currency inconvertible?

Accepted Answer

The name of the condition described is blocked funds, which refers to a situation where a government restricts the conversion of its currency into another currency or limits the transfer of funds out of the country. Controlled exchange rates (A) refers to a situation where the government intervenes in currency markets to keep the value of its currency within a certain range. Managed currency (B) is a broader term that refers to any system in which a government intervenes in currency markets to influence exchange rates. Expropriation (D) is the seizure of assets by a government or other authority, typically without compensation.

Question 5

When a multinational engages in a process where it intentionally minimizes the firm's taxes when it repatriates funds,it is known as ________.

Accepted Answer

The process described in the question is known as tax planning, where a multinational intentionally minimizes the firm's taxes when it repatriates funds. Bilateral netting is a process of offsetting payables and receivables between two parties to minimize foreign exchange exposure, while lagging accounts payable and leading accounts receivable refer to tactics used to manage cash flow by delaying or accelerating payments or receipts.

Question 6

When using the cash management methods of lagging or leading payments,the basic idea is to move funds from

Accepted Answer

The basic idea of using cash management methods such as lagging or leading payments is to move funds from a high tax jurisdiction to a lower one, optimizing the overall tax burden for the company.

Question 7

The prices a multinational affiliate may charge another affiliate when selling inputs or services to them are known as ________.

Accepted Answer

The prices a multinational affiliate may charge another affiliate when selling inputs or services to them are known as transfer prices. Royalties are payments for the use of intellectual property, fees are payments for services rendered, and dividends are payments to shareholders.

Question 8

What is the name of the type of demand for money that arises because a firm realizes that is has some expenditures that will be incurred in the near future?

Accepted Answer

The demand for money that arises due to upcoming expenses and transactions is referred to as transaction demand. It includes expenditures related to day-to-day operations, such as paying salaries, buying raw materials, and paying suppliers. Therefore, option A is the correct answer. Precautionary demand refers to the demand for money as a precaution against unforeseen events, while short-term and long-term demand are based on the time period for which money is required.

Question 9

One technique a multinational may use to avoid the blocked fund strategy of a foreign nation is for the parent to lend funds to the affiliate.The loan is known as a ________ loan.

Accepted Answer

Fronting loans involve the parent company lending money to a third party, which then lends the money to the foreign affiliate. This helps bypass restrictions on direct fund transfers between the parent company and its foreign affiliate.

Question 10

What is the name of the type of demand for money that arises because a firm may need to purchase something due to an unanticipated change in its environment?

Accepted Answer

The demand for money that arises due to unanticipated changes in a firm's environment is called precautionary demand for money. This type of demand arises when a firm wants to ensure that it has sufficient cash reserves to deal with any unforeseen circumstances or opportunities. Transactions demand for money is related to the need for cash to carry out day-to-day transactions, while short-term and long-term refer to the duration of loans or investments, not to the type of demand for money.

Question 11

Which one of the following methods would the U.S.Internal Revenue Service accept to establish an arm's length price?

Accepted Answer

The answer of Which one of the following methods would...

Question 12

To avoid paying the higher corporate tax to a foreign government,the rule states that a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible to lower tariff payments.

Accepted Answer

By setting a lower transfer price, the multinational can show lower profits in that country, thus reducing the amount of taxes it would have to pay. This is known as transfer pricing and is a common practice among multinational corporations.

Question 13

If the cash a firm invests in net working capital does not earn the weighted average cost of capital,it should be ________.

Accepted Answer

If the cash a firm invests in net working capital does not earn the weighted average cost of capital, it indicates that the investment is not generating a sufficient return. Therefore, it would be more beneficial for the firm to return this cash to the investors, as they could potentially find better uses for it, ensuring a higher return on investment.

Question 14

Cash management can be enhanced using a process where payments and receipts between affiliates are recorded but the actual transfer of funds involves net amounts only for amounts owed between affiliates.The system is known as

Accepted Answer

The system being described is multilateral netting, where payments and receipts between affiliates are recorded but the actual transfer of funds involves net amounts only for amounts owed between affiliates. This helps to streamline and simplify the cash management process. Centralized cash management refers to consolidating cash management activities within a single entity or department. Lagging accounts payables and leading accounts receivables refer to strategies for managing cash flows by delaying payments to suppliers or accelerating collections from customers, respectively.

Question 15

Using a centralized cash management system results in a decreased ________ cash demand.

Accepted Answer

The centralized cash management system allows for more efficient cash management and reduces the need for precautionary cash reserves. This leads to a decreased demand for precautionary cash.

Question 16

For a multinational corporation with many affiliates throughout the world,________ the management of the short-term cash balances of the affiliates provides significant savings to the firm.

Accepted Answer

Centralizing the management of short-term cash balances of affiliates means consolidating all the cash balances into one central treasury function. This provides better visibility and control over cash management, allows for better cash forecasting, and helps avoid excess liquidity or shortfalls. As a result, the firm can achieve significant savings in terms of reduced borrowing costs, improved investment returns, and lower transaction costs.

Question 17

When the value of a firm's current liabilities are subtracted from its stock of working capital,the resulting value is known as

Accepted Answer

Net working capital is the difference between current assets and current liabilities. It represents the amount of resources that a firm can utilize to meet its short-term obligations. Subtracting current liabilities from stock of working capital gives net working capital.

Question 18

________ refers to the stock of current assets held by a firm at any point in time.

Accepted Answer

Working capital refers to the current assets of a firm, which includes cash, marketable securities, accounts receivable, and inventory, among others. Working capital is used to cover short-term expenses and to ensure that a business can continue to operate smoothly.

Question 19

What is the term that refers to a firm's stock of cash,marketable securities,accounts receivable,and inventories?

Accepted Answer

Working capital is the term that refers to a firm's stock of cash, marketable securities, accounts receivable, and inventories. It represents the funds that a company has available to finance its daily operations and to meet its short-term liabilities. Therefore, working capital is a crucial financial metric that measures a company's liquidity and ability to pay its bills on time.

Question 20

One goal of management is to operate the corporation efficiently in order to ________ the need for net working capital.

Accepted Answer

The goal of management is to minimize the need for net working capital, which refers to the difference between current assets and current liabilities. By operating the corporation efficiently, management can reduce the amount of working capital needed to run the business. This, in turn, can help increase profitability and cash flow, as excess working capital ties up cash that could be used for other purposes, such as investing in growth opportunities or paying dividends.

Quiz 19: Managing Net Working Capital