Question 1

Consider the following equation: The term r_¥ in this equation refers to

Accepted Answer

The term r_¥ refers to the risk-free rate of interest on the yen. This is indicated by the use of the yen symbol (¥), suggesting it pertains to financial metrics or rates relevant to the Japanese currency.

Question 2

The present value (PV)of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

Accepted Answer

1. Convert £5 million to dollars using the current exchange rate:
£5 million = $6.5 million (assuming an exchange rate of 1.3 dollars per pound)

2. Calculate the present value of $6.5 million using the discount rate of 8% and a time horizon of 5 years:
PV = $6.5 million / (1 + 0.08)^5
PV = $4.704 million

3. Convert the present value from dollars back to pounds using the current exchange rate:
PV = $4.704 million x 0.65 (assuming an exchange rate of 0.65 pounds per dollar)
PV = £3.056 million

4. Check the answer choices and see that the closest answer is B: $8,954,615, which is equivalent to £5,814,371 using the same exchange rate of 0.65. Therefore, the best choice is B.

Question 3

Consider the following equation: The term r_$ in this equation refers to

Accepted Answer

The term r_$ in equations related to finance typically represents the risk-free rate of interest on the dollar. The notation suggests it is related to a financial metric, and the "$" symbol indicates it is in terms of dollars, making it the risk-free rate of interest on the dollar.

Question 4

Which of the following statements is FALSE?

Accepted Answer

The answer of Which of the following statements is FALSE?
...

Question 5

Under Australian tax law, a multinational corporation may not use any excess tax credits generated in high-tax foreign countries to offset its net Australian tax liabilities on earnings in low-tax foreign countries.

Accepted Answer

This is known as the Foreign Income Tax Offset (FITO) rules and is designed to prevent profit shifting to low-tax jurisdictions. Excess tax credits can only be used to reduce tax on foreign income earned in high-tax countries.

Question 6

Suppose the domestic cost of capital for an Australian-based company is 8%. Also, the Australian interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Accepted Answer

Foreign denominated cost of capital can be calculated using the following formula:

Foreign denominated cost of capital = Domestic cost of capital + (Foreign interest rate - Domestic interest rate) x (1 - Tax rate)

Here, the domestic cost of capital is 8%, the Australian interest rate is 4% and the European interest rate is 7%.

So, the foreign denominated cost of capital = 8% + (7% - 4%) x (1 - 0) = 11.12%

Question 7

Consider the following equation: The term in this equation refers to

Accepted Answer

The answer of Consider the following equation: The term in...

Question 8

Luther Industries, an Australian firm, is considering an investment in Japan. The dollar cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r_$ = 5.5% and r_¥ = 1.5%, respectively. Luther Industries is willing to assume that capital markets are internationally integrated. Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The yen cost of equity for Luther Industries is closest to:

Accepted Answer

To find the yen cost of equity, we need to use the following formula: 
Re¥ = (Re$ - r$) + r¥

Re$ = 12% 
r$ = 5.5% 
r¥ = 1.5%

Therefore, Re¥ = (12% - 5.5%) + 1.5% = 7.8%

The closest answer choice is B) 7.8%.

Question 9

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

Accepted Answer

The amount of taxes paid by a foreign subsidiary can depend on the amount repatriated back to the home country due to tax laws that may tax repatriated earnings differently, potentially leading to additional taxation or tax credits based on the repatriated amount.

Question 10

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

Accepted Answer

Repatriation is the transfer of profits earned by a foreign subsidiary back to the home country of the multinational corporation. This can be done through dividends, royalties or other forms of payments. It is a common practice for multinationals to repatriate profits as it helps to increase the financial performance of their home country operations.

Question 11

You are an Australian investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

Accepted Answer

The correct answer is A.The present value of the £ cash inflow computed by first discounting the £ and converting them into dollars is $23,275,505. This is calculated as follows:PV = £15,000,000 x (1 / 1.45%) x $1.5682/£PV = £15,000,000 x 0.9855 x $1.5682/£PV = £14,782,500 x $1.5682/£PV = $23,275,505

Question 12

Australian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.

Accepted Answer

Australian tax policy does not allow companies to receive a refund or apply the unused part of foreign tax credits against domestic taxes owed beyond what is necessary to offset the tax on foreign income.

Question 13

Generally, Australian tax liabilities are ________ until the foreign subsidiary profits are repatriated to Australia.

Accepted Answer

Australian tax liabilities are generally not incurred until the foreign subsidiary profits are repatriated to Australia. This means that Australian tax authorities do not require taxation on foreign subsidiary profits until they are brought back to Australia. Therefore, option C is the correct answer.

Question 14

You are an Australian investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

Accepted Answer

First, we need to convert £15 million into dollars using the spot exchange rate:
£15 million * $1.5742/£ = $23,613,000

Then, we need to discount this dollar amount using the appropriate dollar discount rate of 1.05%:
PV = $23,613,000 / (1 + 1.05%) = $23,359,473.38

Therefore, the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars is $23,278,575 (rounded to the nearest dollar), which is closest to option C.

Question 15

Suppose the domestic cost of capital for an Australian-based company is 9%. Also, the Australian interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?

Accepted Answer

The foreign denominated cost of capital remains the same as the domestic cost of capital, 9%, when the interest rates in both the domestic and foreign countries are equal.

Question 16

Pooling of all foreign tax liabilities on earnings allows corporations to reduce their overall taxes.

Accepted Answer

By pooling their foreign tax liabilities, corporations can use foreign tax credits to offset their U.S. tax liabilities, ultimately reducing their overall taxes. This is a common tax minimization strategy used by multinational corporations.

Question 17

Consider the following equation: The term in this equation refers to

Accepted Answer

The term in the equation represents the cost of capital for the firm in terms of yen, which is the amount of return that the firm needs to generate in order to compensate investors for the risk associated with owning the firm's stock or debt instruments denominated in yen. It is not related to the risk-free rate of interest on the yen or dollar specifically, nor is it related to the cost of capital in terms of dollars.

Question 18

Suppose the domestic cost of capital for an Australian-based company is 10%. Also, the Australian interest rate is 6% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Accepted Answer

The answer of Suppose the domestic cost of capital for...

Question 19

Which of the following statements is FALSE?

Accepted Answer

The general international arrangement is that the host country, where the income is generated, gets the first opportunity to tax corporate profits, not the home country.

Question 20

Which of the following statements is FALSE?

Accepted Answer

In an internationally integrated capital market, only one method is available for calculating the net present value (NPV) of a foreign project, which is to convert the cash flows of the foreign project into the local currency and then calculate the net present value (NPV) of these cash flows. The option of calculating the NPV in the foreign country and converting it to the local currency at the forward rate is not equivalent, as it fails to account for the additional risk introduced by exchange rate fluctuations.

Quiz 22: International Corporate Finance

Consider the following equation: The term r_¥ in this equation refers to

The present value (PV) of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

Consider the following equation: The term r_$ in this equation refers to

Which of the following statements is FALSE?

Under Australian tax law, a multinational corporation may not use any excess tax credits generated in high-tax foreign countries to offset its net Australian tax liabilities on earnings in low-tax foreign countries.

Suppose the domestic cost of capital for an Australian-based company is 8%. Also, the Australian interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Consider the following equation: The term in this equation refers to

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

Australian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.

Generally, Australian tax liabilities are ________ until the foreign subsidiary profits are repatriated to Australia.

Suppose the domestic cost of capital for an Australian-based company is 9%. Also, the Australian interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?

Pooling of all foreign tax liabilities on earnings allows corporations to reduce their overall taxes.

Consider the following equation: The term in this equation refers to

Suppose the domestic cost of capital for an Australian-based company is 10%. Also, the Australian interest rate is 6% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Quiz 22: International Corporate Finance

Consider the following equation: The term r¥ in this equation refers to

The present value (PV) of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

Consider the following equation: The term r$ in this equation refers to

Which of the following statements is FALSE?

Under Australian tax law, a multinational corporation may not use any excess tax credits generated in high-tax foreign countries to offset its net Australian tax liabilities on earnings in low-tax foreign countries.

Suppose the domestic cost of capital for an Australian-based company is 8%. Also, the Australian interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Consider the following equation: The term in this equation refers to

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

Australian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.

Generally, Australian tax liabilities are ________ until the foreign subsidiary profits are repatriated to Australia.

Suppose the domestic cost of capital for an Australian-based company is 9%. Also, the Australian interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?

Pooling of all foreign tax liabilities on earnings allows corporations to reduce their overall taxes.

Consider the following equation: The term in this equation refers to

Suppose the domestic cost of capital for an Australian-based company is 10%. Also, the Australian interest rate is 6% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Consider the following equation: The term r_¥ in this equation refers to

Consider the following equation: The term r_$ in this equation refers to