Seminar 2 MCQs

Question 1

Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency.

A) deficit, devaluing; surplus, devaluing B) surplus, revaluing; deficit, devaluing C) surplus, devaluing; deficit, revaluing D) deficit, revaluing; surplus, revaluing

Answer 1

Surplus, revaluing; deficit, devaluing.

Question 2

Imports have the potential to lower a country’s inflation rate because of each of the following EXCEPT:

A) the import of lower priced goods limits what domestic competitors can charge for goods.
B) the higher prices of foreign goods spurs domestic competitors to cut prices.
C) the import of lower priced services limits what domestic competitors can charge for services.
D) all of the above

Answer 2

The higher prices of foreign goods spurs domestic competitors to cut prices.

Question 3

Use the following terms for this question:

(X-M) = Current Account Balance
(CI-CO) = Capital Account Balance
(FI-FO) = Financial Account Balance
(I-S) = Investment-Saving Balance FXB = Reserve Balance
BOP = balance of payments
GDP = gross domestic product
C = consumption
I = capital investment spending G = government spending

The static equation for the BOP is:
A) BOP=GDP-[C+I+G]+(FI-FO)
B) BOP = (X-M) + (I-S) + (FI-FO) + FXB
C) BOP = (X-M) + (CI-CO) + (FI-FO) + FXB D) BOP = (X-M) - (CI-CO) - (FI-FO) + FXB

Answer 3

C
BOP = (X-M) + (CI-CO) + (FI-FO) + FXB

Question 4

________ is the cross-border purchase of assets that are then managed in a way that hides the movement of money and its ownership.

A) Irrational exuberance
B) Capital flight
C) Capital mobility
D) Money laundering

Answer 4

Money laundering.

Question 5

This was an era dominated by industrialised nation economies that were dependent on gold convertibility to maintain confidence in the system.

A) The Gold Standard, 1870-1914
B) The Interwar Years, 1914-1939
C) The Bretton Woods Era, 1944-1973
D) The Floating Era, 1973-1997

Answer 5

The Gold Standard, 1870 - 1914.

Question 6

A ________ is any restriction that limits or alters the rate or direction of capital movement into or out of a country.

A) balance of trade surplus
B) balance of trade deficit
C) capital budget
D) capital control

Answer 6

Capital control.

Question 7

Long-term capital flows reflect the following factors EXCEPT:

A) growth prospects.
B) short-term interest rate differentials.
C) perceptions of political stability.
D) fundamental economic expectations.

Answer 7

Short-term interest rate differentials.

Question 8

Foreign stock markets are frequently characterised by controlling shareholders for the individual publicly traded firms. Which of the following is NOT identified by the authors as
typical controlling shareholders?

A) family (such as in France)
B) institutions (such as banks in Germany)
C) the government (for example, privatized utilities)
D) All of the above were identified by the authors as controlling shareholders.

Answer 8

All of the above.

Question 9

Which of the following is NOT typically associated with the public ownership of business organisations?

A) the government
B) families
C) the state
D) civil society

Answer 9

Families.

Question 10

State Owned Enterprises (SOEs):

A) are created for commercial activities rather than civil or social activities.
B) are a form of public ownership.
C) are the dominant form of business organization in some countries.
D) are all of the above.

Answer 10

All of the above.

Question 11

The problems that may arise due to the separation of ownership and management in large business organisations are known as:

A) separation anxiety.
B) corporate disconnect theory.
C) the agency problem.
D) none of the above

Answer 11

The agency problem.

Question 12

Which of the following are NOT implications of an initial sale of shares to the public ?

A) The firm must disclose a sizeable degree of financial and operational details.
B) Comply with rules and regulations of the SEC.
C) Publish financial information quarterly.
D) All of the above are implications of an initial sales of shares to the public.

Answer 12

All of the above.

Question 13

“Maximise corporate wealth”:

A) as a management objective treats shareholders on a par with other corporate stakeholders
such as creditors, labor, and local community.
B) is the primary objective of the non-Anglo-American model of management.
C) has a broader definition than just financial wealth.
D) all of the above

Answer 13

All of the above.

Question 14

The Stakeholder Capitalism Model (SCM):

A) combines the interests and inputs of shareholders, creditors, management, employees, and society.
B) clearly places shareholders as the primary stakeholder.
C) is the Anglo-American model of corporate governance.
D) has financial profit as its goal and is often termed impatient capital.

Answer 14

Combines the interest and inputs of shareholders, creditors, management, employees and society.

Question 15

In finance, an efficient market is one in which:
A) prices are assumed to be correct.
B) prices are the best allocators of capital in the macro economy.
C) prices adjust quickly and accurately to new information.
D) all of the above

Answer 15

All of the above.

Question 16

Systematic risk can be defined as:
A) the risk of the individual security.
B) the total risk to the firm.
C) the risk of the market in general.
D) the risk that can be systematically diversified away.

Answer 16

The risk of the market in general.

Question 17

The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximisation model is called:

A) the SCM model.
B) market efficiency.
C) the SWM model.
D) agency theory.

Answer 17

Agency theory.

Question 18

Which of the following is NOT true regarding the stakeholder capitalism model?
A) Labor unions are more powerful than in the Anglo-American markets.
B) Governments interfere more in the marketplace to protect important stakeholder groups.
C) Banks and other financial institutions are less important creditors than securities markets.
D) All of the above are TRUE.

Answer 18

Banks and other financial institutions are less important creditors than securities markets.

Question 19

The primary operational goal for the firm is to:
A) maximise after-tax profits in each country where the firm is operating.
B) maximise the total risk to the firm.
C) minimise the total financial risk to the firm.
D) maximise the consolidated after-tax profits of the firm.

Answer 19

Maximise the consolidated after-tax profits of the firm.

Question 20

Which of the following is NOT an important concept when distinguishing between international and domestic financial management?

A) political risk
B) corporate governance
C) culture, history, and institutions
D) All of the above are important distinguishing concepts.

Answer 20

All of the above.

Question 21

Corporate governance regimes are a function of the following factors EXCEPT:

A) financial market development.
B) exchange rate regimes.
C) disclosure and transparency.
D) development of the legal system.

Answer 21

Exchange rate regimes.

Question 22

An acquiring firm crossing the disclosure threshold is required to publicly disclose that it has gained a specific level of voting right in the target firm. The most common threshold across countries is:
A) 33%.
B) 15%.
C) 5%.
D) 51%.

Answer 22

5%

Question 23

Nearly two decades ago a number of large corporations began to refine their publicly acknowledged corporate objective as “pursuit of the triple bottom line”. This triple bottom line
is:

A) profitability, neutrality, and social responsibility.
B) market share, social responsibility, and environmental sustainability.
C) profitability, social responsibility, and environmental sustainability.
D) maximisation of share price, social responsibility, and environmental neutrality.

Answer 23

Profitability, social responsibility, and environmental sustainability.

Question 24

Anti-takeover provisions (ATPs) are intended to make acquiring the target firm more costly and more difficult. The following are ATPs EXCEPT:

A) poison pills.
B) Pac-Man defence.
C) white knights.
D) government fines.

Answer 24

Government fines.

Question 25

If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

A) illiquid; segmented
B) liquid; segmented
C) liquid; large
D) large; illiquid

Answer 25

Illiquid; segmented.

Question 26

Relatively high costs of capital are more likely to occur in:
A) unsegmented domestic securities markets.
B) highly illiquid domestic securities markets.
C) highly liquid domestic securities markets.
D) none of the above

Answer 26

Highly illiquid domestic securities markets.

Question 27

Which of the following is NOT a contributing factor to the segmentation of capital markets?
A) asymmetric availability of information
B) insider trading
C) lack of transparency
D) All of the above are contributing factors.

Answer 27

All of the above.

Question 28

The weighted average cost of capital (WACC) is:
A) the required rate of return for a firm’s average risk projects.
B) not applicable for use by MNE.
C) the required rate of return for all of a firm’s capital investment projects.
D) equal to 13%.

Answer 28

The required rate of return for a firm’s average risk projects.

Question 29

Which of the following is generally unnecessary in measuring the net cost of debt?

A) the corporate income tax rate
B) a forecast of future interest rates
C) the proportions of the various classes of debt a firm proposes to use
D) All of the above are necessary for measuring the cost of debt.

Answer 29

All of the above.

Question 30

Which of the following statements is NOT true regarding beta?

A) Beta will have a value of greater than 1.0 if the firm’s returns are more volatile than the
market.
B) Beta will have a value of equal to 1.0 if the firm’s returns are of equal volatility to the
market.
C) Beta will have a value of less than 1.0 if the firm’s returns are less volatile than the market.
D) All of the statements above are true.

Answer 30

All are true.

Question 31

An internationally diversified portfolio:

A) has the same overall risk shape as a purely domestic portfolio.
B) is only about 12% as risky as the typical individual stock.
C) should result in a portfolio with a lower beta than a purely domestic portfolio.
D) all of the above

Answer 31

All of the above.

Question 32

In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because:

A) investors are trying to reduce systematic risk.
B) investors are trying to reduce the total risk of the portfolio.
C) the investor is attempting to combine assets that are perfectly correlated.
D) all of the above

Answer 32

Investors are trying to reduce the total risk of the portfolio.

Question 33

Which of the following is NOT a portfolio diversification technique used by portfolio managers?

A) diversify by country
B) diversify by the size of capitalisation of the securities held
C) diversify by type of security
D) All of the above are diversification techniques.

Answer 33

All of the above.

Question 34

Capital market segmentation is a financial market imperfection caused mainly by:
A) institutional practices.
B) investor perceptions.
C) government constraints.
D) all of the above

Answer 34

All of the above.

Question 35

The authors refer to companies that have access to a ________ as MNEs, and firms without such access are identified as ________.

A) large domestic capital market; geographically challenged
B) global cost and availability of capital; domestic firms
C) world financial markets; antiquated D) none of the above

Answer 35

Global cost and availability of capital; domestic firms.

Question 36

Portfolio theory assumes that investors are risk-averse. This means that investors:
A) cannot be induced to make risky investments.
B) will accept some risk, but not unnecessary risk.
C) prefer more risk to less for a given return.
D) All of the above are true.

Answer 36

Will accept some risk, but not unnecessary risk.

Question 37

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

A) debt ratios
B) equity ratios
C) temperatures
D) none of the above

Answer 37

Debt ratios.

Question 38

Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts. This could be due to:

A) the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm.
B) the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like.
C) the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm.
D) None of the above; systematic risk is less for MNEs than for their domestic counterparts.

Answer 38

The reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like.

Question 39

Which of the following is the typical order of sourcing capital abroad?

A) an international bond issue in less prestigious markets, then an international bond issue in
the target market, and ultimately a eurobond issue
B) cross-listing the outstanding issues on other exchanges, then an international bond issue,
then an international bond issue in the target market
C) an international bond issue, then cross-listing the outstanding issues on other exchanges,
then an international bond issue in the target market
D) an international bond issue in the target market, then cross-listing the outstanding issues
on other exchanges, then an international bond issue

Answer 39

A) an international bond issue in less prestigious markets, then an international bond issue in
the target market, and ultimately a eurobond issue

Question 40

For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt
________.

A) decreases; decreases
B) increases; increases
C) increases; decreases
D) decreases; increases

Answer 40

Increases; increases.

Question 41

Which of the following is a characteristic of a euro-equity issue?
A) The investors are located in Europe.
B) Is an offering on multiple exchanges in multiple countries at the same time. C) The issuers are located in Europe.
D) An initial public offering of euro-denominated securities

Answer 41

Is an offering on multiple exchanges in multiple countries at the same time.

Question 42

________ are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank.

A) Negotiable CDs
B) Euro-deposits
C) International mutual funds
D) Depositary receipts

Answer 42

Depositary receipts.

Question 43

Private equity funds (PEF) differ from traditional venture capital (VC) funds in that:
A) VC typically invests in family business whereas PEF do not.
B) VC operates mainly in lesser-developed countries while PEF do not.
C) VC is almost unavailable to emerging markets while PEF capital is available.
D) All of the above are true.

Answer 43

VC is almost unavailable to emerging markets while PEF capital is available.

Question 44

By cross-listing shares on a foreign exchange, you can expect:
A) a positive share price effect for foreign firms that cross-list on major U.S. exchanges.
B) no share price effect for foreign firms that cross-list on major U.S. exchanges.
C) a negative share price effect for foreign firms that cross-list on major U.S. exchanges.
D) none of the above

Answer 44

A positive share price effect for foreign firms that cross-list on major US exchanges.

Question 45

Of the following, which was NOT cited by the authors as a valuable function provided by the Eurocurrency market?

A) The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs.
B) Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the U.S. dollar.
C) Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity.
D) All of the above were cited by the authors.

Answer 45

Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the US dollar.