Question 1

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

Accepted Answer

Decentralized management allows for greater autonomy and decision-making power at the subsidiary level, which can lead to better decision making as those managers are more familiar with the specific needs and operations of their subsidiary.

Question 2

Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
A) Establishing a centralized database of information
B) Ensuring that all data are reported consistently among subsidiaries
C) Speeding the process by which all departments and all subsidiaries have access to the data that they need
D) Making executives more accountable for financial statements by personally verifying their accuracy
E) All of the above are common methods used by MNCs to improve their internal control process.

Accepted Answer

All the listed methods are common strategies used by MNCs to enhance their internal control processes.

Question 3

The least risky method by which firms conduct international business is:
A) Franchising.
B) The acquisitions of existing operations.
C) International Trade.
D) The establishment of new subsidiaries.
E) Licensing

Accepted Answer

International trade is the least risky method of conducting international business as it involves buying and selling goods and services between countries without investing in setting up operations or acquiring existing ones. This allows firms to test the waters and gain experience in foreign markets before committing to further investment. Franchising, acquisitions, and the establishment of new subsidiaries all involve greater financial and operational risk, while licensing may expose firms to intellectual property risk.

Question 4

The most risky method(s) by which firms conduct international business is (are):
A) Franchising.
B) The acquisitions of existing operations.
C) The establishment of new subsidiaries.
D) All of the above
E) B and C only

Accepted Answer

Acquisitions of existing operations and the establishment of new subsidiaries involve the highest level of risk because they require a significant investment of capital and resources. Franchising, on the other hand, involves a lower level of risk because the franchisor provides support and guidance to the franchisee.

Question 5

U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.

Accepted Answer

Mutual funds and pension funds often hold stock in MNCs as part of their investment portfolios, and therefore they typically monitor these companies.

Question 6

A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.

Accepted Answer

Even if a firm operates purely within its domestic market, it may face competition from foreign firms that can offer lower prices due to favorable exchange rates. This can affect the demand for the domestic firm's products and ultimately its profitability.

Question 7

Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources.

Accepted Answer

Under the Imperfect Markets Theory, it is not assumed that factors of production are entirely mobile. In fact, one of the central assumptions of this theory is that factors of production, such as labor and capital, are not perfectly mobile between countries. This creates market inefficiencies and allows firms to capitalize on these inefficiencies by expanding into foreign markets.

Question 8

Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.

Accepted Answer

According to the Product Cycle Theory, a product begins with exporting to foreign markets until demand grows enough to justify local production. Therefore, foreign demand can initially be satisfied by exporting.

Question 9

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.

Accepted Answer

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a larger amount of the home currency, as the weak home currency means you get more of it for the same amount of foreign currency.

Question 10

Which of the following is not mentioned in the text as a theory of international business?
A) Theory of Comparative Advantage
B) Imperfect Markets Theory
C) Product Cycle Theory
D) Globalization of Business Theory
E) All of the above are mentioned in the text as theories of international business

Accepted Answer

The text mentions the Theory of Comparative Advantage, Imperfect Markets Theory, and Product Cycle Theory as theories of international business, but does not mention the "Globalization of Business Theory" as a separate theory.

Question 11

The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.

Accepted Answer

The Theory of Comparative Advantage, developed by David Ricardo, focuses on the benefits of countries specializing in the production of goods for which they have a lower opportunity cost, rather than on the establishment and expansion strategies of individual firms.

Question 12

The goal of a multinational corporation (MNC) is
A) The minimization of taxes remitted from foreign subsidiaries.
B) The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
C) The maximization of shareholder wealth.
D) The maximization of social benefits resulting from actions such as the employment of foreign managers.

Accepted Answer

The primary goal of a multinational corporation is to maximize shareholder wealth, which means increasing the value of the company's stock and providing returns to shareholders. While MNCs may pursue other objectives such as minimizing taxes and employing foreign managers, these are secondary to the primary goal of maximizing shareholder wealth. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital is a means to achieving this goal.

Question 13

If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.

Accepted Answer

This statement is false. Managers of foreign subsidiaries may make decisions that benefit their own subsidiary but could harm the overall corporation if it conflicts with the goals and strategies of the corporation as a whole. Maximizing the value of the entire corporation requires coordination and alignment of the decisions and actions of all subsidiaries towards a common goal.

Question 14

Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.

Accepted Answer

Licensing allows firms to grant their technology to foreign companies in exchange for royalties or other compensation. This allows the firms to expand their reach in foreign markets without having to invest in setting up their own operations in those countries.

Question 15

The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

Accepted Answer

The Sarbanes-Oxley Act was enacted in response to accounting scandals in the early 2000s, such as Enron and WorldCom. It requires companies to establish internal controls to ensure the accuracy and transparency of financial reporting, and imposes penalties for fraudulent behavior. Therefore, it does ensure a more transparent process for managers to report on the productivity and financial condition of their firm.

Question 16

Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because
A) Monitoring of managers located in foreign countries is more difficult.
B) Foreign subsidiary managers raised in different cultures may not follow uniform goals.
C) MNCs are relatively large.
D) All of the above
E) A and B only

Accepted Answer

All three options listed in the answer choices contribute to why multinational corporations may face larger agency costs compared to purely domestic firms. Monitoring managers located in foreign countries can be more challenging due to different time zones, languages, and cultural barriers, making it difficult for corporate headquarters to ensure that subsidiaries are following the same goals and objectives. Moreover, foreign subsidiary managers raised in different cultures may have different priorities and ways of doing business, resulting in potential conflicts with corporate headquarters. Lastly, MNCs may be relatively larger than purely domestic firms, meaning that there are more layers of management and potentially more opportunities for agency problems to arise.

Question 17

One form of an exposure to political risk is terrorism.

Accepted Answer

Terrorism involves the use of violence or intimidation in pursuit of political aims, and can create political instability and uncertainty, which can be considered a form of political risk.

Question 18

International trade is the most common form of direct foreign investment (DFI).

Accepted Answer

International trade and direct foreign investment (DFI) are two distinct forms of international business. While international trade refers to the exchange of goods and services between countries, DFI involves a company investing in and managing operations in a foreign country. While trade can be a precursor to DFI, they are not the same thing.

Question 19

Which of the following does not constitute a form of direct foreign investment?
A) Franchising
B) International trade
C) Joint ventures
D) Acquisitions of existing operations
E) Establishment of new foreign subsidiaries

Accepted Answer

International trade does not constitute a form of direct foreign investment as it involves the exchange of goods and services between countries but does not involve the establishment or ownership of operations in a foreign country. The other options - franchising, joint ventures, acquisitions of existing operations, and establishment of new foreign subsidiaries - all involve some form of investment in foreign operations.

Quiz 1: Multinational Financial Management: an Overview

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

Which of the following is not one of the more common methods used by MNCs to improve their internal control process?

The least risky method by which firms conduct international business is:

The most risky method(s) by which firms conduct international business is (are) :