Question 1

The goal of a multinational corporation MNC) is

Accepted Answer

The goal of a multinational corporation is primarily to maximize shareholder wealth, which includes maximizing profits and stock prices. While minimizing taxes and establishing profitable subsidiaries are important factors in achieving this goal, they are ultimately secondary to the primary objective of creating value for shareholders. The idea of maximizing social benefits to the host country is a laudable goal but is not typically the primary objective of MNCs.

Question 2

Which of the following is NOT a step in the capital budgeting process?

Accepted Answer

The use of foreign inflation rates to discount future cash flows is not a step in the capital budgeting process. The appropriate interest rate to discount the future cash flows is identified, but it is based on the cost of capital and not foreign inflation rates.

Question 3

After considering the long-term implications of the project such as political risk and foreign tax regulations, a multinational firm called Company X decides to purchase a foreign company to merge with its foreign subsidiary. This is an example of:

Accepted Answer

This is an example of capital budgeting, which involves analyzing potential investments and determining the long-term implications and expected returns. By purchasing a foreign company to merge with its foreign subsidiary, Company X is making a significant investment decision with long-term implications for its operations and profitability. Cash management, projection analysis, and decentralized management may all be considerations in this decision, but they are not the primary focus of capital budgeting.

Question 4

Use this information to answer questions
Big Can, Inc., a U.S. firm, manufactures and sells aluminum cans worldwide. Because of a rising price of aluminum in the U.S., the company is considering to build a new plant in Europe. The plant will cost €20 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the European government zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.2
 $\begin{array}{lrrrr}
&\text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { Europe } && & & \
\text {Net cash flows in euro) } &-20.0 & 8.0 & 8.0 & 8.0 \
\text {Forecast exchange rate \$ / €)  } &1.0 & 0.96 & 0.94 & 0.92\
\text { Discount rate =10 \%  } &
\end{array}$
-Refer to Table 9.2. Based on the net present value,

Accepted Answer

The net present value of the project is negative (-€2,260,442), which means that the project is not expected to generate enough cash flows to cover the initial cost of building the plant and provide a return on investment. Therefore, the project should be rejected.

Question 5

A documentary credit is issued to importer to pay exporter for an amount of GBP 40,000 payable with drafts drawn at 30 days from the date of shipment. Document is presented with bills of lading. This is an example of:

Accepted Answer

The scenario described involves the use of a letter of credit, which is a financial instrument used in international trade to ensure payment to the exporter. The importer's bank issues a letter of credit to the exporter's bank, which guarantees payment for the specified amount and under specified conditions, such as the presentation of documents demonstrating the shipment of goods. The importer then makes payment to their own bank, who in turn pays the exporter's bank. This reduces the risk for both parties involved in the transaction.

Question 6

To reduce transfer pricing distortion, multinational firms are supposed to charge prices to their foreign subsidiaries that are __________.

Accepted Answer

Arm's-length prices are prices that would be charged by two unrelated parties in a similar transaction. By using arm's-length prices, transfer pricing distortion can be reduced because they ensure that transactions between related parties are conducted on market-based terms. This helps to prevent multinational firms from shifting profits from high tax jurisdictions to low tax jurisdictions by manipulating transfer prices. Average variable costs, total costs, and marginal costs are not relevant to determining fair market value in transfer pricing.

Question 7

Letters of credit are used because:

Accepted Answer

Letters of credit are used as a secure means of payment in international trade between buyers and sellers who do not trust each other. They provide assurance that payment will be made if the seller meets certain conditions, such as delivering the goods on time and in the expected condition. In addition, they help mitigate the risks associated with enforcing contracts across borders, such as differences in legal systems and language barriers.

Question 8

Which of the following is correct about a decentralized management style of the financial management over foreign operations?

Accepted Answer

A decentralized management style of financial management over foreign operations allows subsidiary managers to make key decisions about their respective operations, with some monitoring by the parent's management. This approach provides autonomy to foreign subsidiaries while maintaining overall control and oversight by the parent company. Option A is incorrect because monitoring and evaluation of subsidiary managers is necessary. Option C is incorrect because subsidiary managers do not take directive from the top of the parent company's management. Option D is incorrect because financial managers at the parent company do not make all of the key decisions.

Question 9

Political instability and currency conversion are reasons why ________ is more complicated for foreign subsidiaries than domestic ones.

Accepted Answer

Political instability and currency conversion affect capital budgeting decisions differently than in a domestic subsidiary setting. The fluctuation of exchange rates and risks associated with volatile government policies present unique challenges when assessing the viability of investment projects in foreign subsidiaries.

Question 10

When the subsidiary manager is focused on meeting goals set by the parent firm, then the multinational firm is probably using an) ________ style of management.

Accepted Answer

Centralized management is when the parent firm makes all major decisions and subsidiaries focus on meeting goals set by the parent firm. This allows for better control and coordination of activities throughout the organization.

Question 11

Which of the following is NOT a reason why capital budgeting for a foreign project is more complicated than a domestic project?

Accepted Answer

While the size of the working capital may differ between domestic and foreign projects, it is not necessarily a reason why capital budgeting for a foreign project is more complicated. The other three options all involve additional complexities that arise specifically in foreign projects.

Question 12

Transfer pricing has been used by multinational corporation to:

Accepted Answer

Transfer pricing is a strategy used by multinational corporations to shift profits from high-tax countries to low-tax countries, thus minimizing their tax payments in foreign countries. By manipulating transfer prices, multinational corporations can also minimize import tariffs and foreign exchange controls. Therefore, all of the above choices are correct.

Question 13

Use this information to answer questions
Big Can, Inc., a U.S. firm, manufactures and sells aluminum cans worldwide. Because of a rising price of aluminum in the U.S., the company is considering to build a new plant in Europe. The plant will cost €20 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the European government zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.2
 $\begin{array}{lrrrr}
&\text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { Europe } && & & \
\text {Net cash flows in euro) } &-20.0 & 8.0 & 8.0 & 8.0 \
\text {Forecast exchange rate \$ / €)  } &1.0 & 0.96 & 0.94 & 0.92\
\text { Discount rate =10 \%  } &
\end{array}$
-Refer to Table 9.2. The net present value NPV) of this project in U.S. dollar is estimated at:

Accepted Answer

To calculate the NPV in U.S. dollar, we need to convert the cash flows from euro to dollar using the forecasted exchange rates. The calculation is as follows:

- Year 0: -20.0 million euro * 1.0 dollar/euro = -20.0 million dollar
- Year 1: 8.0 million euro * 0.96 dollar/euro = 7.68 million dollar
- Year 2: 8.0 million euro * 0.94 dollar/euro = 7.52 million dollar
- Year 3: 8.0 million euro * 0.92 dollar/euro = 7.36 million dollar

Using a discount rate of 10%, we can calculate the present value of these cash flows as:

- Year 0: -20.0 million dollar / (1 + 10%)^0 = -20.0 million dollar
- Year 1: 7.68 million dollar / (1 + 10%)^1 = 6.98 million dollar
- Year 2: 7.52 million dollar / (1 + 10%)^2 = 6.46 million dollar
- Year 3: 7.36 million dollar / (1 + 10%)^3 = 5.99 million dollar

Therefore, the NPV in U.S. dollar is:

NPV = -20.0 million dollar + 6.98 million dollar + 6.46 million dollar + 5.99 million dollar
= -0.57 million dollar

Since the NPV is negative, the project should not be accepted.

Question 14

Which of the following is NOT an objective of international cash management by MNCs?

Accepted Answer

Ensuring that all subsidiaries have the same pattern of cash flows is not an objective of international cash management by MNCs. The other objectives listed, such as increasing liquidity, returns on investment, and reducing foreign exchange risk, are common objectives of international cash management for MNCs.

Question 15

Which of the following is probably NOT an example of the use of forward contracts by a multinational corporation MNC)?

Accepted Answer

The answer of Which of the following is probably NOT...

Question 16

An advantage of netting of a multinational corporation and its subsidiaries is that it:

Accepted Answer

Netting reduces the total volume of inter-subsidiary fund flows within a multinational corporation, which can decrease the amount of foreign exchange risk the company faces. This can lead to cost savings and more efficient use of resources within the company. Option A is incorrect because netting should reduce foreign exchange risk, not increase it. Option C is incorrect because netting should decrease the total amount of currency conversion necessary, since fewer inter-subsidiary fund flows are taking place. Option D is unrelated to the advantages of netting.

Question 17

Use the following information to answer questions
General Candy, Inc., a U.S. firm, manufactures and sells candies worldwide. Because of a rising price of sugar in the U.S., the company is considering to build a new plant in the U.K. The plant will cost £15 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the British government zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.1:
 $\begin{array}{lccccc}
&\text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { U.K. } && & & \
\text { Net cash flows in pound) } &-15.0 & 7.5 & 7.5 & 7.5 \
\text { Forecast exchange rate \$ /£} &1.5 & 1.46 & 1.45 & 1.44\
\text { Discount rate =10 \% } \
\end{array}$
-Refer to Table 9.1. The net present value NPV) of this project in U.S. dollar is estimated at:

Accepted Answer

The correct answer is based on calculating the net present value (NPV) of the project using the cash flows and discount rates provided in Table 9.1. Without the specific details from Table 9.1, such as cash inflows, outflows, and the discount rate, it's not possible to perform the calculation here. However, the correct choice is determined by applying the NPV formula to the data in Table 9.1, which involves discounting the projected cash flows back to their present value and subtracting the initial investment.

Question 18

Use this information to answer questions
Big Can, Inc., a U.S. firm, manufactures and sells aluminum cans worldwide. Because of a rising price of aluminum in the U.S., the company is considering to build a new plant in Europe. The plant will cost €20 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the European government zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.2
 $\begin{array}{lrrrr}
&\text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { Europe } && & & \
\text {Net cash flows in euro) } &-20.0 & 8.0 & 8.0 & 8.0 \
\text {Forecast exchange rate \$ / €)  } &1.0 & 0.96 & 0.94 & 0.92\
\text { Discount rate =10 \%  } &
\end{array}$
-Comparing with information in Table 9.2, if the forecast exchange rate $/£) remains constant at $1.0 per pound throughout the life of the project, which of the following is true?

Accepted Answer

The answer of Use this information to answer questions
Big Can,...

Question 19

Use the following information to answer questions
General Candy, Inc., a U.S. firm, manufactures and sells candies worldwide. Because of a rising price of sugar in the U.S., the company is considering to build a new plant in the U.K. The plant will cost £15 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the British government zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.1:
 $\begin{array}{lccccc}
&\text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { U.K. } && & & \
\text { Net cash flows in pound) } &-15.0 & 7.5 & 7.5 & 7.5 \
\text { Forecast exchange rate \$ /£} &1.5 & 1.46 & 1.45 & 1.44\
\text { Discount rate =10 \% } \
\end{array}$
-Refer to Table 9.1. Based on the net present value,

Accepted Answer

The net present value (NPV) method is used to evaluate the profitability of a project. A positive NPV indicates that the project's returns exceed its costs, making it financially viable and acceptable. Therefore, if the NPV is positive, the project can be accepted.

Question 20

Comparing with information in Table 9.1, if the forecast exchange rate $/£) remains constant at $1.5 per pound throughout the life of the project, which of the following is true?

Accepted Answer

The answer of Comparing with information in Table 9.1, if...

Quiz 9: Preferential Trade Arrangements