Question 1

The Sarbanes-Oxley Act improves corporate governance of MNCs because it:

Accepted Answer

The Sarbanes-Oxley Act makes executives more accountable for verifying financial statements by requiring them to certify the accuracy of financial information in annual reports submitted to the SEC. This helps improve corporate governance by increasing transparency and accountability, ultimately leading to greater investor confidence in MNCs. Eliminating stock options or placing limits on funds that managers can spend do not necessarily improve corporate governance, and tying executive compensation to firm performance is only one aspect of improving overall governance practices.

Question 2

Which of the following theories suggests that firms seek to penetrate new markets over time?

Accepted Answer

The product cycle theory suggests that firms seek to penetrate new markets over time. This theory argues that firms begin by introducing a product in their domestic market, where it goes through a product life cycle (introduction, growth, maturity, and decline). As the product reaches maturity and becomes saturated in the domestic market, firms look to expand their market by introducing the product in foreign markets. Thus, firms seek to penetrate new markets over time according to the product cycle theory. The theory of comparative advantage and imperfect markets theory do not specifically address the issue of firms seeking to penetrate new markets.

Question 3

Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries?

Accepted Answer

Assembly line production relies heavily on low labor costs, making it more feasible to manufacture products in less developed countries. Specialized professional services, such as legal and financial consulting, may require a higher level of education and expertise, which may not be available in some less developed countries. Nuclear missile planning and more sophisticated computer technology require high levels of security and technology, which may not be available in some less developed countries.

Question 4

Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.

Accepted Answer

This is an accurate definition of licensing.

Question 5

Franchising is the process by which national governments sell state owned operations to corporations and other investors.

Accepted Answer

Franchising is actually a business model in which a corporation allows independent entrepreneurs to use its trademark, products, and processes in exchange for a fee and ongoing royalties. It is not related to national governments selling state owned operations.

Question 6

Which of the following theories identifies specialization as a reason for international business?

Accepted Answer

The theory of comparative advantage argues that nations should specialize in producing the goods and services that they can produce more efficiently than other countries. This specialization can lead to increased international trade and business activities.

Question 7

The valuation of an MNC should rise when an event causes the expected cash flows from foreign to ____ and when foreign currencies denominating these cash flows are expected to ____.

Accepted Answer

When an event causes the expected cash flows from foreign to increase, it means the MNC's foreign subsidiaries are expected to bring in more cash, increasing the overall cash flows of the company. This will lead to an increase in the MNC's valuation. 
If foreign currencies denominating these cash flows are expected to appreciate, it means that when the cash flows are converted into the MNC's reporting currency, they will be worth more, leading to higher cash flows and an increase in the company's valuation.

Question 8

The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC.

Accepted Answer

Yes, the parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. This is a common practice in many MNCs as it aligns the interests of the subsidiary managers with those of the parent company and encourages them to act in the best interests of the overall organization.

Question 9

Due to the risks involved in international business, firms should:

Accepted Answer

None of the options provided are appropriate or necessary for all firms engaging in international business. The level of risk and the appropriate amount of international business will vary depending on the industry, market conditions, and individual company considerations. Each firm should assess the risks and benefits of international business and make decisions accordingly.

Question 10

For the MNC, agency costs are typically:

Accepted Answer

MNCs have more complex organizational structures and diverse stakeholder interests, leading to larger agency costs compared to a small purely domestic firm. MNCs need to have mechanisms in place to monitor and control their subsidiaries, which involves additional costs. Additionally, MNCs may face issues with cultural differences and legal restrictions in different countries, which adds to their agency costs.

Question 11

Institutional investors such as mutual funds or pension funds which have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC.

Accepted Answer

Institutional investors with large holdings of an MNC's stock often have the power to influence management and may engage in shareholder activism to push for changes in the company's strategy or governance.

Question 12

The agency costs of an MNC are likely to be lower if it:

Accepted Answer

Using a centralized management style allows for more control over the operations of the subsidiaries, reducing the likelihood of agency costs. Scattering subsidiaries across many foreign countries may make it difficult to monitor them effectively and increase the likelihood of agency costs. Increasing the volume of international business may lead to more complex and decentralized operations, which can increase agency costs. Therefore, option D is incorrect.

Question 13

An MNC may be more exposed to agency problems if most of its shares are held by:

Accepted Answer

When a widely dispersed set of individual investors hold majority shares, it becomes harder for any one group to exercise control over management, thus reducing the risk of agency problems. In contrast, if a few mutual or pension funds hold majority shares, they may have more power to influence and control management, leading to potential conflicts of interest and agency problems.

Question 14

Which of the following theories identifies the non-transferability of resources as a reason for international business?

Accepted Answer

The imperfect markets theory suggests that the non-transferability of resources, such as specialized knowledge and technology, creates a need for international business. This is because firms may need to access resources located in other countries in order to remain competitive. The theory of comparative advantage focuses on the differences in relative cost of production as the reason for international trade, while the product cycle theory argues that a product moves through different stages of production and marketing, requiring different locations at each stage.

Question 15

Which of the following could reduce agency problems for an MNC?

Accepted Answer

All of the options listed (stock options as managerial compensation, hostile takeover threat, and investor monitoring) are forms of corporate control that could reduce agency problems for an MNC. Using stock options as managerial compensation can align the interests of managers with those of shareholders. A hostile takeover threat can serve as a disciplinary mechanism to keep managers in line with shareholder interests. Investor monitoring can help identify and correct agency problems. Therefore, all of these options can help reduce agency problems for an MNC.

Question 16

With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.

Accepted Answer

Both MNCs (Multinational Corporations) and purely domestic firms are primarily concerned with maximizing shareholder wealth, although their strategies and operational environments might differ.

Question 17

MNCs can improve their internal control process by all of the following, except:

Accepted Answer

The choice of borrowing from countries where interest rates are lowest is a financial decision and does not specifically relate to improving internal control processes. The other choices, establishing a centralized data base of information, ensuring consistent reporting of data, and using a system to check for unusual discrepancies, all relate to improving internal control processes.

Question 18

If a publicly-traded MNC's managers make poor decisions that reduce its value, it may encourage other firms to acquire it.

Accepted Answer

If the managers of a publicly-traded MNC make poor decisions that reduce its value, other firms may see an opportunity to acquire it at a lower price and attempt a takeover of the company. This is a common occurrence in the corporate world, especially when a company's stock price has been declining for an extended period of time. The potential for a takeover can put pressure on a company's management to make changes that will increase its value and improve its market position.

Question 19

The commonly accepted goal of the MNC is to:

Accepted Answer

The commonly accepted goal of the MNC is to maximize shareholder wealth. This is because the MNC is owned by shareholders who have invested their money in the company, and they expect a return on their investment. Therefore, the MNC's primary goal is to operate in a manner that maximizes the value of the shareholders' investment, which in turn means maximizing shareholder wealth.

Question 20

A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.

Accepted Answer

The definition provided describes a franchise system, not a product cycle. A product cycle refers to the stages that a product goes through from development to decline, including introduction, growth, maturity, and decline.

Quiz 1: Multinational Financial Management: an Overview