CH19 TB INTERNATIONAL MANAGERIAL FINANCE

Question 1

(T/F) NAFTA is a treaty establishing free trade and open markets among Europe and the United States.

Answer 1

FALSE

Question 2

(T/F) The World Trade Organization is an international body established to police world trading practices
and to mediate disputes among member countries.

Answer 2

TRUE

Question 3

(T/F) Offshore Centers are cities or states that have achieved prominence as major centers for Euromarket
business.

Answer 3

TRUE

Question 4

(T/F) NAFTA is an international financial market that provides for borrowing and lending currencies
outside their country of origin.

Answer 4

FALSE

Euromarket

Question 5

(T/F) Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational
company, but they have no impact on its overall value.

Answer 5

FALSE

Question 6

(T/F) The Euromarket is the international financial market that provides for borrowing and lending
currencies outside their country of origin.

Answer 6

TRUE

Question 7

(T/F) The Euromarket provides multinational companies with an external opportunity to borrow or lend
funds with the additional feature of less government regulation.

Answer 7

TRUE

Question 8

(T/F) The existence of specific regulations and controls on dollar deposits in the United States, including
interest rate ceiling imposed by the government, has contributed to the growth of the Euromarket.

Answer 8

TRUE

Question 9

(T/F) A joint venture is a partnership under which the participants have contractually agreed to contribute
specified amounts of money and expertise in exchange for stated proportions of ownership and profit.

Answer 9

TRUE

Question 10

(T/F) The official melding of the national currencies of the European Union into one currency, the euro,
created the European monetary union in 2002.

Answer 10

TRUE

Question 11

(T/F) Mercosur is a major South American trading bloc that includes countries that account for more than
half of the total of Latin America’s GDP.

Answer 11

TRUE

Question 12

(T/F) The Mercosur is a major European trading bloc that includes former Soviet bloc countries in Eastern
Europe.

Answer 12

FALSE

Mercosur is a major South American trading bloc that includes countries that account for more than
half of the total of Latin America’s GDP.

Question 13

(T/F) Multinational companies are firms that have international assets but operations in domestic markets
only and draw part of their total revenue and profits from such markets.

Answer 13

FALSE

Question 14

(T/F) In 2003-2004, the United States signed a regional trade pact with the Dominican Republic, Costa Rica,
El Salvador, Guatemala, Honduras, and Nicaragua called the Central American Free Trade Agreement or
CAFTA.

Answer 14

TRUE

Question 15

(T/F) As a result of the Maastricht Treaty of 1991, 12 EU nations adopted a single currency, the euro, as a
continent-wide medium of exchange.

Answer 15

FALSE

Question 16

(T/F) In the grossing up procedure, MNCs add the before-tax subsidiary income to their total taxable
income, calculate the U.S. tax liability on the grossed -up income, and the related taxes are paid in the
foreign country are applied as a credit against the additional U.S. tax liability.

Answer 16

TRUE

Question 17

A partnership between a multinational company and a foreign investor in which contractually specified amounts of money and expertise are contributed by the participants for stated proportions of ownership and profit is a ________.
A) multinational corporation
B) floating relationship
C) joint venture
D) consolidation

Answer 17

C

Question 18

The ________ is the taxation technique that increases the U.S. income of an MNC by the amount of
foreign income (before foreign taxes). The U.S. tax calculation is then based on that higher level.
A) unitary tax law
B) grossing up procedure
C) GmbH
D) nationalization procedure

Answer 18

B

Question 19

Which of the following is considered as a major offshore center for Euromarket business?
A) Cuba
B) North Korea
C) Iran
D) Hong Kong

Answer 19

D

Question 20

A partnership under which the participants have contractually agreed to contribute specified amounts
of money and expertise in exchange for stated proportions of ownership and profit is called a(n)
________.
A) S corporation
B) GmbH
C) S.A.R.L.
D) joint venture

Answer 20

D

Question 21

Which of the following factors can influence the operations of an MNC?
A) foreign ownership of portions of equity
B) debt and equity structures based on home country’s capital market
C) dividend payout policy
D) consolidation of financial statements based on only one currency

Answer 21

A

Question 22

Which of the following is a reason for growth of the Euromarket?
A) The sudden decline of U.S dollars after the introduction of Euro.
B) The functional-currency-denominated financial statements of the foreign subsidiary were translated
into the parent’s currency without authorization.
C) The existence of offshore centers caused massive financial losses and problems for MNCs.
D) The consistently large U.S. balance-of-payments deficits helped scatter dollars around the world.

Answer 22

D

Question 23

The negative implications for the operation of a foreign-based subsidiary due to joint venture laws
and restrictions can result in ________.
A) high degree of leverage
B) deficit in balance-of-payment position for the home country
C) difficulties obtaining the remission of profits
D) manipulation of tax rules

Answer 23

C

Question 24

The ________ is a significant economic force currently made up of 28 nations with a population of
more than 500 million that permits free trade within the countries that make up this group.
A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Asian Economic Area Network (ASEAN)
D) European Union (EU)

Answer 24

D

Question 25

________ is a major South American trading bloc that includes countries that account for more than half of total Latin American GDP. A) The group of five B) Mercosur C) Latin and South American Free Trade Area (LASTA) D) The group of seven

Answer 25

B

Question 26

CAFTA is ________. A) a treaty establishing free trade and open markets between Europe and five Central American Countries B) a major South American trading bloc that includes countries that account for more than half of total Latin American GDP C) a significant economic force currently made up of 28 nations with a population of more than 500 million that permits free trade within the countries that make up this group D) a trade agreement signed in 2003—2004 by the United States, the Dominican Republic, and five Central American countries

Answer 26

D

Question 27

________ is an international body that polices world commercial trading practices and mediates disputes among two or more member countries. A) NAFTA B) GATT C) WTO D) CAFTA

Answer 27

C

Question 28

________ is a treaty that has governed world trade throughout most of the post World War II era. A) NAFTA B) GATT C) WTO D) CAFTA

Answer 28

B

Question 29

(T/F) FASB No. 52 requires U.S. multinationals to first convert the financial statement accounts of foreign subsidiaries into their functional currency and then to translate the accounts into the parent firm's currency using the all-current-rate method.

Answer 29

TRUE

Question 30

(T/F) The all-current-rate method is the method by which the functional currency-denominated financial statements of an MNC's subsidiary are translated into the parent company's currency.

Answer 30

TRUE

Question 31

(T/F) Self-sustaining foreign entity operates independent of the parent multinational and the current-rate method is the primary approach for translation of individual accounts.

Answer 31

TRUE

Question 32

(T/F) The temporal method requires specific assets and liabilities to be translated at so-called historic exchange rates and that foreign-exchange translation gains or losses be reflected in the current year's income.

Answer 32

TRUE

Question 33

(T/F) Current U.S. tax laws require the separation of financial statements of subsidiaries and the operating results for some subsidiaries are excluded from the parent entirely for some countries such as China and India.

Answer 33

FALSE

Question 34

(T/F) A functional currency is the currency of the parent company's country.

Answer 34

FALSE

Question 35

A functional currency is the currency of the host country in which a subsidiary primarily generates and expends cash and in which its accounts are maintained.

Answer 35

TRUE

Question 36

FASB No. 52 is a statement issued by the Financial Accounting Standards Board requiring American MNCs to first convert the financial statement accounts of foreign subsidiaries into the country's functional currency and then translate the accounts into the parent firm's currency using the ________ method. A) historical rate B) all-current-rate C) average rate D) weighted average

Answer 36

B

Question 37

The all-current-rate method dictated by the FASB No. 52 statement requires the translation of all balance sheet accounts at the ________ rate and all income statement items at the ________ rates. A) closing; average B) average; closing C) historical; current D) average; historical

Answer 37

A

Question 38

(T/F) The spot exchange rate is the rate of exchange between two currencies at some specified future date.

Answer 38

FALSE

Question 39

(T/F) The forward exchange rate is the rate of exchange between two currencies on any given day.

Answer 39

FALSE

Question 40

(T/F) The functional currency is the currency in which a business entity primarily generates and expends cash and in which its accounts are maintained.

Answer 40

TRUE

Question 41

(T/F) Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

Answer 41

TRUE

Question 42

(T/F) Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on a firm's value.

Answer 42

TRUE

Question 43

(T/F) The three basic types of risks associated with international cash flows are business and financial risks, inflation and exchange rate risks, and political risks.

Answer 43

TRUE

Question 44

(T/F) Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

Answer 44

TRUE

Question 45

(T/F) When more units of a foreign currency are required to buy one dollar, the currency is said to have appreciated with respect to the dollar.

Answer 45

FALSE

Question 46

(T/F) Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is a differing inflation rate between two countries.

Answer 46

TRUE

Question 47

(T/F) Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is fiscal policy that a country adopts.

Answer 47

FALSE

Question 48

(T/F) Macro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, or the adoption of new policies by the government of host country.

Answer 48

TRUE

Question 49

(T/F) Micro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies by the government of host country.

Answer 49

FALSE ## Footnote Macro

Question 50

(T/F) Recent years have seen the emergence of a third path to political risk that encompasses "global" events such as terrorism, antiglobalization movements and protests, Internet-based risks, and concerns over poverty, AIDS, and the environment all affect various MNCs' operations worldwide.

Answer 50

TRUE

Question 51

(T/F) National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct investment from MNCs and at the same time extract more benefits from their presence.

Answer 51

TRUE

Question 52

(T/F) National entry control systems are comprehensive rules, regulations, and immigration policies introduced by xenophobic host governments to regulate inflows of foreign workers.

Answer 52

FALSE

Question 53

(T/F) Both theory and empirical evidence indicate that the capital structures of MNCs differ from those of purely domestic firms.

Answer 53

TRUE

Question 54

(T/F) Both theory and empirical evidence indicate that the capital structures of MNCs are not different from those of purely domestic firms.

Answer 54

FALSE

Question 55

Which of the following is considered to be a major or hard currency? A) the Algerian dinar B) the Barbadian dollar C) the Mexican peso D) the Japanese yen

Answer 55

D

Question 56

When fewer units of a foreign currency are required to buy one dollar, the currency is said to have ________. A) appreciated with respect to the dollar B) depreciated with respect to the dollar C) appreciated with respect to the home currency D) appreciated with respect to the average rate of the home currency

Answer 56

A

Question 57

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's accounts denominated in a given foreign currency is ________. A) economic exposure B) macro political risk C) accounting exposure D) micro political risk

Answer 57

C

Question 58

The risk resulting from the effects of changes in foreign exchange rates on the firm's value is ________. A) economic exposure B) macro political risk C) accounting exposure D) micro political risk

Answer 58

A

Question 59

The potential risk of a host government's implementation of specific rules and regulations that can result in the discontinuity or seizure of the operations of a foreign company is called ________. A) exchange rate risk B) financial risk C) political risk D) business risk

Answer 59

C

Question 60

Macro political risk and micro political risk in international business refer to the risk ________. A) that will affect all foreign firms and the risk that will affect an individual firm or specific industry, respectively B) of the devaluation of the host country's currency and the risk of sudden taxes on exporting the manufactured goods of a particular industry, respectively C) that will affect an individual firm or specific industry and the risk that will affect all foreign firms, respectively D) of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the devaluation of the host country's currency, respectively

Answer 60

A

Question 61

A political risk that might affect all foreign firms in a host country is termed a ________ risk; a political risk that might affect only an individual firm or specific industry in a host country is termed a ________ risk. A) macro political; micro political B) micro political; macro political C) micro political; foreign exchange D) foreign exchange; micro political

Answer 61

A

Question 62

Which of the following is a positive approach of coping with political risk? A) control of transportation to external markets B) control of downstream processing C) license or patent restrictions under international agreement D) joint venture with government or local private sector

Answer 62

D

Question 63

Fixed relationship among currencies refers to ________. A) the relationship in which the value of any one currency with respect to all other currencies is allowed to fluctuate on a yearly basis B) the relationship in which the value of any two currencies with respect to each other is allowed to fluctuate on a monthly basis C) the constant relationship of a currency to one of the major currencies, a combination of major currencies, or some type of international foreign exchange standard D) the constant relationship of a currency to one of the major foreign exchange market or a combination of markets

Answer 63

C

Question 64

Between two major currencies, the spot exchange rate is the rate ________ and the forward exchange rate is the rate ________. A) on that date; today B) at some specified future date; on that date C) today; on that date D) on that date; at some specified future date

Answer 64

D

Question 65

Foreign exchange risk refers to the risk created by ________. A) the potential seizure of an MNC's operations in a host country B) the varying exchange rate between two currencies C) the fixed exchange rate between two currencies D) the potential nationalization of the MNC's operations by a host government

Answer 65

B

Question 66

(T/F) A foreign bond is an international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated.

Answer 66

FALSE

Question 67

(T/F) In general, an international bond is one that is initially sold in the country of the borrower and, then, often distributed in home country.

Answer 67

FALSE

Question 68

(T/F) Because of their access to the international bond and equity markets, MNCs may have lower long-term financing costs, thus resulting in differences between the capital structures of these firms and those of purely domestic companies.

Answer 68

TRUE

Question 69

(T/F) The foreign direct investment (FDI) is a multi-national corporation's transfer of capital, managerial, and technical assets from a foreign country to its home country.

Answer 69

FALSE

Question 70

(T/F) A multi-national corporation (MNC) can give some protection to international cash flows by reducing its liabilities if the currency is appreciating, or by reducing its financial assets if the currency is depreciating.

Answer 70

TRUE

Question 71

(T/F) For foreign bonds, interest rates are usually not directly correlated with the domestic rates prevailing in the respective countries.

Answer 71

FALSE

Question 72

(T/F) For a Eurodollar bond, the interest rate will reflect several different rates, most notably the U.S. long term rate, the Eurodollar rate, and long-term rates in other countries.

Answer 72

TRUE

Question 73

Comprehensive rules, regulations, and incentives aimed at regulating the inflow of direct foreign investments involving MNCs and at extracting more benefits from their presence are termed as ________. A) unitary tax laws B) foreign direct investments C) Eurocurrency markets D) national entry control systems

Answer 73

D

Question 74

The transfer of capital, managerial, and technical assets by a multinational firm from its home country to a foreign country is termed ________. A) an MNC B) an SDI C) an FDI D) a CAPM

Answer 74

C

Question 75

An international bond that is sold primarily in countries other than the country of the currency in which the issue is denominated is called ________. A) sovereign bond B) foreign bond C) Eurobond D) global bond

Answer 75

C

Question 76

In capital budgeting for a multinational company, the starting discount rate to which risks stemming from foreign exchange and political factors can be added, and from which benefits reflecting the parent's lower capital costs may be subtracted is ________. A) the cost of capital of the parent (multinational) company B) the risk-free rate of the parent company, adjusted for risk relevant to the foreign subsidiary C) the local cost of equity capital applicable to the local business and financial environments within which a subsidiary operates D) the weighted average cost of capital applicable to all foreign subsidiaries combined

Answer 76

C

Question 77

Theory and empirical evidence indicate that the capital structures of multinational companies ________. A) are basically the same as those of domestic firms B) differ, but all multinationals are similar no matter the domicile country C) not only differ from domestic firms, but also differ based upon the country in which they are domiciled D) differ only because of their operating structure and the country in which they are domiciled has no impact on capital structure

Answer 77

C

Question 78

Relative to cash flows of domestic firms, by diversifying internationally, multinationals ________. A) will have higher cash flows B) can achieve further risk reduction C) are unable to change the risk D) pay higher dividends

Answer 78

B

Question 79

The capital structures of MNCs are influenced by ________. A) domestic futures markets B) international diversification C) the overall relationship between the public and private sectors in home country D) dividends paid by corporations

Answer 79

B

Question 80

MNCs have lower long-term financing costs in international capital markets than in domestic markets because ________. A) the cost of equity is less than the cost of debt in international capital markets B) they have access to the international bond and equity markets C) the cost of equity is more than the cost of debt in international capital markets D) the international capital markets have less volatility and hence low risk

Answer 80

B

Question 81

(T/F) In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.

Answer 81

TRUE

Question 82

(T/F) In the case of short-term financing, the forces of supply and demand are among the main factors determining exchange rates in Eurocurrency markets.

Answer 82

TRUE

Question 83

(T/F) Hedging strategies are techniques used to offset or protect against risk and include borrowing or lending in different currencies.

Answer 83

TRUE

Question 84

(T/F) The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate inside the United States.

Answer 84

TRUE

Question 85

(T/F) In the international context, the effective interest rate equals to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.

Answer 85

TRUE

Question 86

(T/F) Exchange rate risk hedging tools include forward contracts, options, interest rate swaps, currency swaps, and hybrid securities.

Answer 86

TRUE

Question 87

(T/F) Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and inventory swaps.

Answer 87

FALSE

Question 88

International short-term financing opportunities are available in ________. A) future markets B) bond markets C) forward markets D) Eurocurrency markets

Answer 88

D

Question 89

The usual capital markets used by U.S.-based MNCs that desire international ownership of their equity are ________. A) Western Europe and Japan B) Mexico and Canada C) Saudi Arabia and South Africa D) Liechtenstein and Panama

Answer 89

A

Question 90

A Eurobond is ________. A) a bond sold primarily to Europeans B) a bond sold primarily in countries other than the country of the currency in which the issue is denominated C) a debt instrument sold exclusively in Europe D) a bond issued by European Union

Answer 90

B

Question 91

The existence of ________ allows multinationals to take advantage of unregulated financial markets to invest and raise short-term funds in a variety of countries and to protect themselves from foreign exchange exposure. A) a strong U.S. dollar B) the International Monetary Fund C) Eurocurrency markets D) European Economic Council

Answer 91

C

Question 92

In the international context, the ________ interest rate involves only the MNC parent's currency, while the ________ interest rate includes any forecast appreciation or depreciation of a foreign currency relative to that of the MNC parent. A) effective; nominal B) macro; nominal C) nominal; effective D) nominal; micro

Answer 92

C

Question 93

A short-term financial decision based on an MNC management's expectation that the local foreign currency will appreciate may be ________. A) increasing local customers' accounts receivable and increasing local notes payable B) decreasing local notes receivable and decreasing accruals C) increasing local inventories and increasing local notes payable D) increasing local accounts receivable and decreasing local accounts payable

Answer 93

D

Question 94

As a foreign exchange hedging tool, options ________. A) provide the right to buy or sell an amount of foreign currency B) allow the trading of one interest rate stream for another C) permit firms to change the interest rate structure of their assets/liabilities D) represent an obligation to buy or sell an amount of foreign currency

Answer 94

A

Question 95

As a foreign exchange hedging tool, currency swaps ________. A) provide the right to buy or sell an amount of foreign currency B) allow each party to pay the other's interest payments C) represent an obligation to buy or sell D) are a variety of combinations of the other hedging tools

Answer 95

D

Question 96

In terms of inventory management, multinational firms ________. A) have only economic factors to consider, since this is a fixed asset and is minimally affected by political factors B) must deal with a wide number of factors, including exchange rate fluctuations, tariffs, nontariff barriers, integration schemes such as the EU, and other rules and regulations C) have only economic factors to consider, since this is a current asset and is minimally affected by political factors D) have only political factors to consider, since inventory is minimally affected by foreign economic factors

Answer 96

B

Question 97

(T/F) The creation of international joint ventures has increased significantly beginning in the 1980s.

Answer 97

TRUE

Question 98

(T/F) In the U.S. over the past 30 years, foreign direct investment (FDI) came overwhelmingly in the form of mergers and acquisitions rather than through establishments.

Answer 98

TRUE

Question 99

(T/F) In the most emerging/developing countries (including China) over the past 30 years, foreign direct investment (FDI) came overwhelmingly in the form or mergers and acquisitions rather than through establishments.

Answer 99

FALSE