Fundamentals of Corporate Finance, 4th Edition Test Bank.pdf (33)

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 1 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 35. Which of the following statements about the goal of a firm is true?

A) Stockholder value maximization is the accepted goal for firms in India.

B) Firms in Germany focus on maximizing corporate wealth.

C) The goal of a Japanese business manager is to increase the wealth and growth of the keiretsu.

All of these D) Ans: D

For exam and test prep, contact excellentessaywriters@gmail.com

Format: Multiple Choice Learning Objective: LO 1 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 36. Which of the following statements about the goal of a firm is true?

A) Corporate wealth maximization is the accepted goal for firms in India.

B) Firms in Australia focus on maximizing corporate wealth.

C) The goal of a Japanese business manager is to increase the wealth and growth of the keiretsu.

Private-sector firms in China focus on providing full employment in the economy.

D) Ans: C

.

21-13

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Analytic4 IMA: Global Business AICPA: Industry/Global Perspective 37. Economic benefits provided by the foreign exchange markets include A) a mechanism to transfer purchasing power from individuals who deal in one currency to people who deal in a different currency. a way for corporations to pass the risk associated with foreign exchange price B) fluctuations to professional risk-takers. a channel for importers and exporters to acquire credit for international business C) transactions.

All of these D) Ans: D

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 38. In 2010, the three largest foreign exchange markets based on daily volume were: A) London, New York, and Tokyo.

B) New York, Tokyo, and Zurich.

C) London, Tokyo, and Zurich.

D) London, New York, and Singapore.

Ans: A

.

21-14

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 39. The major participants in the foreign exchange markets are A) multinational commercial banks, large investment banking firms, and domestic firms.

B) multinational commercial banks, local banks and domestic firms.

C) multinational commercial banks, large investment banking firms, and small currency boutiques.

None of these D) Ans: C

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 40. Which of the following statements is true?

A) Equilibrium occurs at the price at which the quantity of the currency demanded exactly equals the quantity supplied.

When pounds become less expensive in relation to dollars, British products become less B) expensive for Americans to buy.

According to a British buyer, the lower the dollar price of pounds, the more pounds that C) have to be exchanged for dollars to buy foreign goods.

All of these D) Ans: D

.

21-15

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 41. If the foreign exchange rate is the price in foreign currency for a dollar, then the exchange rate quote is called A) an American quote.

B) an indirect quote.

C) a direct quote.

D) a cross quote.

Ans: B

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 42. A European quote is the same as A) an American quote.

B) an indirect quote.

C) a bidding quote.

D) a cross quote.

Ans: B

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 43. Which of the following is an indirect quote from an American perspective?

A) £0.5125/$ B) $0.006900/¥ C) $1.5637/€ D) ¥115.23/€ Ans: A

.

21-16

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 44. The bid quote represents the rate at which A) the dealer will buy foreign currency from you.

B) the dealer will sell foreign currency to you.

C) the dealer will buy domestic currency from you.

D) the dealer will sell domestic currency to the exchange.

Ans: A

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 45. The ask quote represents the rate at which A) the dealer will buy foreign currency from you.

B) the dealer will sell foreign currency to you.

C) the dealer will buy domestic currency from the exchange.

D) the dealer will sell domestic currency to you.

Ans: B

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Easy Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 46. The difference between the forward rate and the spot rate is called the A) cross exchange rate.

B) forward premium or forward discount.

C) indirect quote.

D) direct quote.

Ans: B

.

21-17

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 47. Venkat Ram purchased a pair of dress shoes in Italy for €131.25. If the spot exchange rate is $1.5621/€, what did the shoes cost in dollars? (Round your final answer to two decimal places.)

A) $205.03 B) $84.02 C) €131.25 D) €84.02 Ans: A Feedback: Cost of shoes in Italy = €131.25 Spot rate = $1.5621/€ Dollar cost of shoes = €131.25 × $1.5621/€ = $205.03

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 48. Starling Corp. purchased some components from a Mexican manufacturer. They have to pay 110 million Mexican Pesos for the goods today. The spot rate today is MP10.3540/$. What is the dollar cost of this payable? (Round your final answer to the nearest dollar.)

A) $110,000,000 B) $10,623,913 C) $11,110,235 D) $1,138,940,000 Ans: B Feedback: Cost of payables = MP 110,000,000 Spot rate = MP 10.3540/$ Dollar cost of payables = MP 110,000,000 / MP 10.3540/$ = $10,623,913.46 or $10,623,913

.

21-18

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 49. Tantrix, Inc. purchased its inventory from an Indian manufacturer at a cost of Rs.5,325,000.

The dollar cost of this payable is $125,634.07 at today's spot rate. What is the spot rate today?

A) $4.2385/Rs. B) $42.3850/Rs. C) Rs.42.3850/$ D) Rs.4.2385/$ Ans: C Feedback: Inventory cost to firm = Rs.5,325,000 Dollar cost of purchase = $125,634.07 Spot rate at which the foreign currency revenue was converted: Rs.5,325,000 $ 1 2 5 , 6 3 4 . 0=7 R s . 4 2 . 3 8 5 0 This is the same as $0.0236/Rs.

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Analysis AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 50. Suppose a Tata Nano car is priced at Rs.100,000 in New Delhi and $3,129 in New York. In which place is the car more expensive if the spot rate is $0.0242/Rs.?

A) In New Delhi B) In New York C) It is same in both places.

D) It cannot be determined.

Ans: B Feedback: Cost of car in New York = $3,129 Cost of car in New Delhi = Rs.100,000 Spot rate = $0.0242/Rs. Dollar cost in New Delhi = Rs.100,000 × $0.0242/Rs. = $2,420 The cost of the car is the higher in New York based on the spot rate.

.

21-19

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 51. If the spot rate is quoted as $0.009369/¥, what is the exchange rate in terms of yen per dollar?

(Round your final answer to the four decimal places.)

A) ¥0.009369/$ B) ¥0.936900/$ C) ¥106.7350/$ D) ¥16.7350/$ Ans: C Feedback: Spot rate = ¥0.009369/$ Direct quote = 1/ $0.009369/¥ = ¥106.7350/$

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 52. Given that the spot rate is $1.5136/€ and the 90-day forward quote is $1.4974/€, we can say that A) the U.S. dollar is at a forward premium against the Euro.

B) the U.S. dollar is at a forward discount against the Euro.

C) the Euro is at a forward premium against the U.S. dollar.

D) the dollar is at neither a premium nor a discount against the Euro.

Ans: A Feedback: Since the forward quote of $1.4974/€ implies that fewer dollars will be needed to purchase the Euro compared to the spot rate of $1.5136/€, we can say that the U.S. dollar is at a forward premium against the Euro.

.

21-20

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 53. Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say that A) the U.S. dollar is at a forward premium against the Yen. B) the Yen is at a forward premium against the U.S. dollar.

C) the Yen is at a forward discount against the U.S. dollar.

D) the U.S. dollar is at neither a premium nor a discount against the Yen. Ans: B Feedback: Since the forward quote of ¥100.37/$ implies that fewer yen will be needed to purchase a dollar compared to the spot rate of ¥106.74/$, we can say that the U.S. Dollar is at a forward discount against the Yen, or that the yen is at a forward premium against the U.S. dollar.

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 54. Celio, Inc. sold equipment to a French firm and will receive €1,249,425 in 30 days. If the company entered a forward contract to sell the euros at the 30-day forward rate of $1.5512/€, what is revenue received in dollars? (Round your final answer to the nearest dollar.)

A) $1,249,425 B) $805,457 C) $1,938,108 D) $1,312,224 Ans: C Feedback: Expected euro revenue = €1,249,425 30-day forward rate = $1.5512/€ Dollar revenue received = €1,249,425 × $1.5512/€= $1,938,108

.

21-21

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 55. Baljit, Inc. purchased machinery from a Japanese firm and will have to pay ¥278.45 million in 90 days. The bank quotes a forward rate of ¥105.46/$ to buy the required yen. What is the cost to Baljit in U.S. dollars? (Round your final answer to the nearest dollar.)

A) $2,640,338 B) $2,784,500 C) $2,936,534 D) $2,714,300 Ans: A Feedback: Cost of machinery = ¥278.45 million Forward rate = ¥105.46/$ Cost of equipment in dollars = ¥278,450,000 / ¥105.46/$ = $2,640,337.57 or $2,640,338

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 56. John Travers is planning a holiday to Thailand but is concerned that the U.S. dollar will depreciate before he makes his trip. His travel agent has planned a trip for him for a total cost of 41,250 Thai baht. John plans to purchase the bahts forward and is given a dollar estimate of $1,247.17 based on the 30-day forward quote. What is the forward rate?

A) THB41.2500/$ B) THB33.0749/$ C) $0.0242/THB D) $1.2471/THB Ans: B Feedback: Cost of trip = THB 41,250 Cost of trip based on forward rate = $1,247.17 30-day forward quote = THB 41,250 / $1,247.17 = THB 33.0749/$

.

21-22

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 57. A local bank has requested foreign exchange quotes for the Swedish krona from Citibank.

Citibank quotes a bid rate of $0.1652/SK and an ask rate of $0.1667/SK. What is the percentage bid-ask spread? (Round your final percentage answer to one decimal place.)

A) 1.2% B) 2.1% C) 0.9% D) 0.65% Ans: C Feedback:

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 58. A foreign exchange dealer is willing to buy the New Zealand dollar (NZ$) at $0.7621/NZ$ and will sell it at a rate of $0.7714/NZ$. What is the percentage bid-ask spread on the Danish krone? (Round your final answer to two decimal place places.)

A) 0.26% B) 2.13% C) 0.96% D) 1.21% Ans: D Feedback:

.

21-23

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 59. Banco Herrero wants to make a bid-ask spread of 0.55 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP10.4192/$, what does the bid rate have to be? (Do not round your intermediate calculation. Round your final answer to four decimal places.)

A) MP10.3619/$ B) MP10.4192/$ C) MP10.4249/$ D) MP10.2165/$ Ans: A Feedback:

The ask rate will have to be MP10.3619/$ to provide a 0.55 percent bid-ask spread.

.

21-24

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 60. Bartman, Corp. observes that the Swiss franc (SF) is quoted at $0.6164/SF, while the Swedish krona (SK) is quoted at $0.1981/SK. What is the SK/SF cross rate? (Round your final answer to four decimal places.)

A) SK0.3214/SF B) SK3.1116/SF C) SK0.4183/SF D) SK2.1467/SF Ans: B Feedback: To find the SK/SF cross rate, divide the Swiss franc quote by the Swedish krona quote.

Cross rate = $0.6164/SF / $0.1981/SK = SK3.1116/SF

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 61. Xecor Pharma just received revenues of A$2,372,300 in Australian dollars (A$). The only quotes management received are A$2.0651/£ and $1.8538/£. What is the U.S. dollar value of the company's revenues? (Do not round your intermediate calculation. Round your final answer to the nearest dollar.)

A) $4,397,770 B) $4,899,037 C) $2,129,567 D) $9,081,834 Ans: C Feedback: Revenues received by Xecor Pharma = $2,372,300 To determine the A$ /$ cross rate, you divide the A$ to £ quote by the $/£ quote.

Cross rate = A$2.0651/£ ÷ $1.8538/£ = A$1.1139820 U.S. dollar value of its revenue

.

= A$2,372,300 / A$1.1140/$ = $2,129,567

21-25

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 62. Trident Corp. recently purchased machinery parts worth 23.5 million Mexican Pesos (MP).

Management needs to know the U.S. dollar cost of the payables. It has access to two quotes for Canadian dollars (C$): C$1.0774/$ and C$0.0981/MP. What will it cost Trident to purchase 23.5 million Mexican pesos? (Do not round your intermediate calculations. Round your final answer to the nearest dollar.)

A) $2,531,890 B) $2,305,350 C) $2,139,735 D) $1,987,325 Ans: C Feedback: Foreign currency payables = MP 23.5 million To find the MP/$ quote, divide the C$/MP quote by the C$/$ quote.

Cross rate = C$0.0981/MP / C$1.0774/$ = $0.091052534/MP Dollar cost of payables = MP23,500,000 × $0.0910525/MP = $2,139,735

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Medium Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 63. Dresdner Bank has offered the following exchange rate quotes on Indian rupees (Rs) Rs.83.7612/£ and $1.8654/£. What is the cross rate between the Indian rupees and the U.S. dollar?(Round your final answer to four decimal places) A) Rs.44.9025/$ B) Rs.49.9375/$ C) Rs.51.2134/$ D) Rs.36,7122/$ Ans: A Feedback: To find the Rs./$ cross rate, divide the Rs/£ quote by the $/£ quote.

Cross rate = Rs.83.7612/£/ $1.8654/£= Rs.44.9025/$

.

21-26

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 64. The spot rate on the London market was £0.5434/$, while the 90-day forward rate was £0.5519/$. What is the annualized forward premium or discount on the U.S. dollar for the period? (Round your final answer to one decimal place.)

A) 1.6% premium B) 6.3% premium C) 6.3% discount D) 1.6% discount Ans: B Feedback:

or 6.30% The British pound is at a forward discount of 6.3 percent against the U.S. dollar as it takes more pounds to buy a dollar at the forward rate. Or we can say that the U.S dollar is at a 90-day forward premium of 6.3 percent against the British pound.

.

21-27

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 65. Bank of America quoted the 180-day forward rate on the Japanese yen at $0.009702/¥. The spot rate was quoted at $0.009466/¥. What is the forward premium or discount on the Japanese yen? (Round your final answer to the nearest percentage.)

A) 7% premium B) 7% discount C) 5% premium D) 5% discount Ans: C Feedback:

or 5.00% The Japanese yen is at a 5 percent forward premium against the dollar.

.

21-28

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 66. State Bank of India has offered a spot rate quote on Indian rupees (Rs.) of Rs. 42.47/$. The Indian rupee is quoted at a 30-day forward discount of 7.65 percent against the dollar. What is the 30-day forward quote?

Rs.43.5622/$ A) Rs.41.5687/$ B) Rs.45.1226/$ C) Rs.42.7407/$ D) Ans: D Feedback: Spot rate = Rs.42.47/$ 30-day forward premium on the dollar = 7.65%

The 30-day forward rate is Rs.42.7407/$.

.

21-29

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 67. Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of $0.6123/BR. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? (Round your final answer to the nearest dollar.)

A) $24,687 B) $803,838 C) $779,152 D) $31,278 Ans: A Feedback: Foreign currency payables = BR1,272,500 Spot rate on payment date = $0.6317/BR Dollar cost of payables = BR1,272,500 × $0.6317/BR = $803,838.25 30-day forward rate = $0.6123/BR Cost if hedged at forward rate = BR 1,272,500 × $0.6123/BR = $779,151.75 Cost savings = $803,838.25 − $779,151.75 = $24,686.50 or $24,687.00

.

21-30

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 68. Kapona Industries has purchased equipment from a Korean firm for a total cost of 11,500,000 Korean won. The firm has to pay in 90 days. J. P. Morgan has given the firm a 90-day forward quote of $0.0009791/won. Assume that on the day the payment is due, the spot rate is at $0.001004/ won. How much would Kapona save by hedging with a forward contract? (Round your final answer to the nearest dollar.)

A) $687 B) $338 C) $152 D) $286 Ans: D Feedback: Foreign currency payables = 11,500,000 Korean won Spot rate on payment date = $0.001004/ won Dollar cost of payables = 11,500,000 won × $0.001004/ won= $11,546 30-day forward rate = $0.0009791/won Cost if hedged at forward rate = 11,500,000 won × $0.0009791/won= $11,259.65 Cost savings = $11,546.00 – $11,259.65 = $286.35 or $286.00

.

21-31

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 69. Carrington Industries sold equipment to a Mexican firm. Payment of 41,275,000 pesos will be due in 30 days. Carrington has the option of selling the pesos at a 30-day forward rate of $0.09739/peso. If it waits 30 days to sell the pesos, the expected spot rate is $0.09596/peso.

How much additional dollar revenue will Carrington gain by selling forward the pesos? (Round your final answer to the nearest dollar.)

A) $24,687 B) $83,838 C) $59,023 D) $31,278 Ans: C Feedback: Foreign currency receivables = MP 41,275,000 Spot rate on payment date = $0.09596/peso Dollar revenues from receivables = MP 41,275,000 × $0.09596/peso = $3,960,749 30-day forward rate = $0.09739/peso Revenues if hedged at forward rate = MP 41,275,000 × $0.09739/peso = $ 4,019,772.25 Additional revenues received = $4,019,772.25 – $3,960,749 = $59,023.25 or $59,023

.

21-32

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 2 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 70. Palermo, Corp. sold equipment to a French firm. Payment of €4,275,000 will be due in 90 days.

Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling the euros forward? (Round your final answer to the nearest dollar.)

A) $124,687 B) $118,418 C) $159,023 D) $131,278 Ans: B Feedback: Foreign currency receivables = €4,275,000 Spot rate on payment date = $1.5645/€ Dollar revenues from receivables = €4,275,000 × $1.5645/€ = $6,688,237.50 90-day forward rate = $1.5922/€ Revenues if hedged at forward rate = €4,275,000 × $1.5922/€ = $ 6,806,655 Additional revenues lost by not hedging = $6,688,237.50 − $ 6,806,655 = $118,417.50 or $118,418.00

Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 71. When performing capital budgeting analysis on international projects, managers A) find it more difficult to estimate the incremental cash flows for foreign projects.

B) have to deal with foreign exchange rate risk on international capital investments.

C) must incorporate a country risk premium when evaluating foreign business activities.

D) All of these Ans: D

.

21-33

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 72. The ways that a foreign government can affect the risk of a foreign project include A) change tax laws in a way that adversely impacts the firm.

B) impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms. disallow any remittance of funds from the subsidiary to the parent firm for either a C) limited period of time or the duration of the project.

All of these D) Ans: D

Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 73. The ways that a foreign government can adversely affect the risk of a foreign project include all of the following EXCEPT A) change tax laws in a way that adversely impacts the firm.

B) impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms. remove tariffs and quotas on any imports.

C) disallow any remittance of funds from the subsidiary to the parent firm for either a D) limited period of time or the duration of the project.

Ans: C

.

21-34

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 3 Level of Difficulty: Easy Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 74. Country risk should be incorporated into an international capital budgeting analysis by A) adjusting the firm's discount rate for the additional risk.

B) increasing cash flow estimates from the project.

C) including the country risk premium to sunk costs.

D) None of these Ans: A

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 75. The Euromarkets are A) vast, largely unregulated money and capital markets existing in Tokyo, Hong Kong, and Singapore. vast, regulated money and capital markets with major financial centers in the United B) Kingdom. vast, regulated money and capital markets with major financial centers in the euro zone.

C) None of these D) Ans: A

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 76. The Eurocurrency market is the A) medium-term portion of the Euromarket.

B) short-term portion of the Euromarket.

C) long-term portion of the Euromarket.

D) None of these Ans: B

.

21-35

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 77. Which of the following statements about Eurocredits is true?

A) The international banking system gathers funds from businesses and governments in the Eurocurrency market and then allocates funds to banks that have the most profitable lending opportunities.

Eurocredits are denominated in all major Eurocurrencies, although the dollar is the B) overwhelming favorite.

Eurocredits are short- to medium-term loans made to multinational corporations and C) governments of medium to high credit quality.

All of these D) Ans: D

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 78. Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that country's currency is called a _____ .

A) Eurobond B) municipal bond C) foreign bond D) currency bond Ans: C

.

21-36

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Knowledge AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 79. Long-term debt instruments sold by firms to investors in countries other than the country in whose currency the bonds are denominated are called _____.

A) Samurai bonds B) Eurobonds C) foreign bonds D) currency bonds Ans: B

Format: Multiple Choice Learning Objective: LO 4 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 80. Which of the following statements about Eurobonds is NOT true?

A) Multinational firms can use Eurobonds to finance international or domestic projects.

B) Eurobonds are bearer bonds.

C) Eurobonds have to be registered.

D) Eurobonds also pay interest annually.

Ans: C

.

21-37

Fundamentals of Corporate Finance 4e

Test Bank

Format: Multiple Choice Learning Objective: LO 5 Level of Difficulty: Hard Bloomcode: Application AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 81. Zylex Corporation's German unit is looking to borrow €4.5 million from Deutsche Bank.

Deutsche Bank quotes a rate of three-month LIBOR plus 0.5 percent for the 90-day loan.

Currently, the three-month LIBOR is 4.175 percent. If the exchange rate on the payoff date is €0.8334/$, what is the dollar cost of the loan? (Round your final answer to two decimal places.)

A) $63,107.45 B) $126,214.90 C) $39,143.76 D) $56,357.99 Ans: A Feedback: Amount Zylex plans to borrow = €4.5 million Term of loan = 90 days Interest cost = LIBOR + 0.5% = 4.175 % + 0.5% = 4.675% Interest cost in euros = €4,500,000 × 0.04675 × (90/360) = €52,593.75 Spot rate on payoff date = €0.8334/$ Dollar interest cost = €52,593.75 / €0.8334/$ = $63,107.45

.

21-38

Fundamentals of Corporate Finance 4e

Test Bank

Format: Essay Learning Objective: LO 1 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Analytic IMA: Global Business AICPA: Industry/Global Perspective 82. What are the six factors that can cause international business transactions to differ from domestic deals?

Ans: The six factors are foreign exchange risk, differences in legal systems and tax codes, the divergence of the language for communication purposes in business and socialization, cultural differences, differences in economic systems, and country risk. These six factors can cause international business transactions to differ from domestic deals.

The uncertainty of future exchange rate movements is called foreign exchange rate risk, or just exchange rate risk. Differences in legal systems and tax codes can also impact the way firms operate in foreign countries. There are two important levels of communication in international business deals: business communication and social communication.

Although English is the official business language, it is not the world's social language.

Cultural views also shape business practices and people's attitudes toward business. An economic system determines how a country mobilizes its resources to produce goods and services needed by society, as well as how the production is distributed. Country risk refers to political uncertainty associated with a particular country and hence, its impact on a firm's cash flows.

.

21-39

Fundamentals of Corporate Finance 4e

Test Bank

Format: Essay Learning Objective: LO 1 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 83. How does the goal of a firm vary across countries?

Ans: Stockholder wealth maximization is the accepted goal for firms in the United States, as well as in some other countries that share a similar heritage, such as the United Kingdom, Australia, India, and Canada.

In Continental Europe, for example, countries such as France and Germany focus on maximizing corporate wealth. The European manager's goal is to earn as much wealth as possible for a firm while considering the overall welfare of all stakeholders.

In Japan, companies form tightly knit, interlocking business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, and the goal of a Japanese business manager is to increase the wealth and growth of the keiretsu. As a result, he might focus on maximizing market share rather than stockholder wealth.

In China, which is making a transition from a command economy to a market-based economy, there are sharp differences between state-owned companies and emerging private-sector firms. The large state-owned companies have an overall goal that can best be described as maintaining full employment in the economy while the new privatesector firms fully embrace the Western standard of stockholder wealth maximization.

.

21-40

Fundamentals of Corporate Finance 4e

Test Bank

Format: Essay Learning Objective: LO 5 Level of Difficulty: Medium Bloomcode: Comprehension AASCB: Diversity IMA: Global Business AICPA: Industry/Global Perspective 84. Describe the global debt markets.

Ans: The international debt markets can be classified into the Eurocurrency market, the Eurocredit market, and the long-term bond market. The Eurocurrency market is the short-term portion of the Euromarket. The most widely quoted Eurocurrency interest rate is the London Interbank Offer Rate, or LIBOR, which is the short-term interest rate that major banks in London charge one another. The international banking system gathers funds from businesses and governments in the Eurocurrency market and then allocates funds to banks that have the most profitable lending opportunities. These loans, which are short- to medium-term loans of a Eurocurrency to multinational corporations and governments of medium to high credit quality, are called Eurocredits. Eurocredits are denominated in all major Eurocurrencies, although the dollar is the overwhelming favorite.

International bonds fall into two generic categories: foreign bonds and Eurobonds.

Foreign bonds are long-term debt sold by a foreign firm to investors in another country and denominated in that country's currency. Foreign bonds may have colorful nicknames: foreign bonds sold in the United States are called Yankee bonds, and yendenominated bonds sold in Japanese financial markets by non-Japanese firms are called Samurai bonds. Firms sell foreign bonds when they need to finance projects in a particular foreign country.

Eurobonds are long-term debt instruments sold by firms to investors in countries other than the country in whose currency the bonds are denominated. Multinational firms can use Eurobonds to finance international or domestic projects. Eurodollar and other Eurocurrency bonds have a number of characteristics that differ from similar U.S corporate bonds. Eurobonds are bearer bonds and do not have to be registered.

Eurobonds also pay interest annually. While historically almost all Eurocurrency bonds were sold without credit ratings, today, more than half of the Eurodollar bonds sold in Europe have credit ratings.

.

21-41