Finance for Multinational Corporations
Final Exam Questions
Course Introduction
Finance for Multinational Corporations explores the unique financial challenges and opportunities that arise when organizations operate on a global scale. The course covers topics such as international financial markets, currency exchange risk management, international capital budgeting, global financing strategies, and cross-border mergers and acquisitions. Students will learn how to analyze and make decisions regarding foreign investments, assess political and economic risks, and understand the roles of multinational banking and taxation in shaping corporate policy. Practical case studies and real-world examples are used to enhance understanding of how multinational corporations optimize financial performance in a complex, dynamic international environment.
Recommended Textbook
International Financial Management 8th Edition by Cheol Eun
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Page 2
Chapter 1: International Monetary System
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Q1) During the period between World War I and World War II,many central banks followed a policy of sterilization of gold
A)by restricting the rate of growth in the supply of gold.
B)by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit.
C)by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit.
D)none of the options
Answer: B
Q2) Under a gold standard,if Britain exports more to France than France exports to Great Britain,
A)such international imbalances of payment will be corrected automatically.
B)this type of imbalance will not be able to persist indefinitely.
C)net export from Britain will be accompanied by a net flow of gold in the opposite direction.
D)all of the options
Answer: D
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Chapter 2: Globalization and the Multinational Firm
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Q1) The goal of shareholder wealth maximization
A)is not appropriate for non-U.S.business firms.
B)means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially.
C)is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
D)is in conflict with the privatization process taking place in third-world countries.
Answer: B
Q2) A firm with concentrated ownership
A)may give rise to conflicts of interest between dominant shareholders and small outside shareholders.
B)may enjoy more accounting transparency than firms with diffuse ownership structures.
C)is a partnership,never a corporation.
D)none of the options
Answer: A
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Chapter 3: Balance of Payments
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Q1) The factors of production are
A)land,labor,capital,and entrepreneurial ability.
B)interest,wages and dividends.
C)payments and receipts of interest,dividends,and other income on foreign investments that were previously made.
D)none of the options
Answer: A
Q2) The J-curve effect received wide attention when
A)the British trade balance worsened after a strengthening of the pound in 1967.
B)the British trade balance worsened after a devaluation of the pound in 1967.
C)the British trade balance improved after a devaluation of the pound in 1967.
D)none of the options
Answer: B
Q3) A currency depreciation will begin to improve the trade balance immediately
A)if the demand for imports and exports are inelastic.
B)if the demand for imports and exports are elastic.
C)if imports decrease and exports decrease.
D)none of the options
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) When designing an incentive contract,
A)it is important for the board of directors to set up an independent compensation committee that can carefully design the contract and diligently monitor manager's actions.
B)senior executives can be trusted to not abuse incentive contracts by artificially manipulating accounting numbers since the auditors should look in to that.
C)the presence of any incentive is enough,whether it is accounting based or stock-price based.
D)the board of directors should always give the managers a "heads I win,tails you lose" type of option.
Q2) Following the adoption of the Cadbury Code of Best Practice, A)joint CEO/COB (chief executive officer and chairman of the board)positions declined.
B)there has been a significant impact on the internal governance mechanisms of U.K.companies.
C)CEOs have become more sensitive to company performance,strengthening managerial accountability and weakening managerial entrenchment.
D)all of the options
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Chapter 5: The Market for Foreign Exchange
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Q1) Suppose you observe the following exchange rates: 1 = $1.45; £1 = $1.90.Calculate the euro-pound exchange rate.
A) 1.3103 = £1.00
B)£1.3333 = 1.00
C) 2.00 = £1
D) 3 = £1
Q2) Including the transaction costs of the bid-ask spread,the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as
A)S<sup>b</sup>(£/ )= S<sup>b</sup>($/ )× S<sup>b</sup>(£/$)
B)S<sup>a</sup>( /£)= S<sup>a</sup>( /$)× S<sup>a</sup>($/£)
C)S<sup>b</sup>( /£)= S<sup>b</sup>($/ )× \(\frac { 1 } { S ^ { a } ( £ / \$ ) }\)
D)all of the options
Q3) The forward price
A)may be higher than the spot price.
B)may be the same as the spot price.
C)may be less than the spot price.
D)all of the options
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/ and the forward exchange rate,with one-year maturity,is $1.58/ .Assume that an arbitrager can borrow up to $1,000,000 or 625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?
A)$238.65
B)$14,000
C)$46,207
D)$7,000
Q2) In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,
A)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency.
B)it will hold only if the composition of the consumption basket is the same across countries.
C)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries.
D)none of the options
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) The current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is $1.60 = 1.00.Consider a three-month American call option on 62,500 with a strike price of $1.50 = 1.00.Immediate exercise of this option will generate a profit of A)$6,125.
B)$6,125/(1 + \(\ddot { l } _{\$}\) )<sup>3/12</sup>.
C)negative profit,so exercise would not occur.
D)$3,125.
Q2) Yesterday,you entered into a futures contract to buy 62,500 at $1.50 per .Suppose the futures price closes today at $1.46.How much have you made/lost?
A)Depends on your margin balance.
B)You have made $2,500.00.
C)You have lost $2,500.00.
D)You have neither made nor lost money,yet.
Q3) Exercise of a currency futures option results in
A)a long futures position for the call buyer or put writer.
B)a short futures position for the call buyer or put writer.
C)a long futures position for the put buyer or call writer.
D)a short futures position for the call buyer or put buyer.
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Chapter 8: Management of Transaction Exposure
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Q1) Suppose that the exchange rate is 1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of 10,000 with strike prices of £0.80 = 1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of 1.25 = £1.00.For a U.K.firm to hedge a 100,000 receivable,
A)buy 10 call options on the euro with a strike in pounds sterling.
B)buy 10 put options on the euro with a strike in pounds sterling.
C)buy 8 call options on the pound with a strike in euro.
D)buy 10 put options on the euro with a strike in pounds sterling and buy 8 call options on the pound with a strike in euro.
Q2) Suppose that the exchange rate is 1.25 = £1.00.Options (calls and puts)are available on the Philadelphia exchange in units of 10,000 with strike prices of $1.60/ 1.00.Options (calls and puts)are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.For a U.S.firm to hedge a 100,000 receivable,
A)buy 10 call options on the euro with a strike in dollars.
B)buy 10 put options on the pound with a strike in dollars.
C)sell 10 call options on the euro with a strike in dollars.
D)sell 8 put options on the pound with a strike in dollars.
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Page 10
Chapter 9: Management of Economic Exposure
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Q1) Suppose a U.S.firm has an asset in Britain whose local currency price is random.For simplicity,suppose there are only three states of the world and each state is equally likely to occur.The future local currency price of this British asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world. \(\begin{array}{cccc}
\text { State } & \text { Probability } & P^{*} & S & S \times P^{*} \\
1 & 1 / 3 & £ 1,000&\$ 1.40/£ & \$ 1,400\\
2 & 1 / 3 & £ 933 &\$ 1.50 /£ & \$ 1,400 \\
3 & 1 / 3 & £ 875&\$ 1.60 /£ & \$ 1,400 \end{array}\) Which of the following statements is most correct?
A)The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.
B)The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.
C)The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound.
D)Since randomness is involved,no hedging is possible.
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Chapter 10: Management of Translation Exposure
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Q1) A translation exposure report shows,for each account that is included in the consolidated balance sheet,
A)the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest.
B)the amount of foreign exchange exposure that exists on a net basis for the firm.
C)the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure.
D)none of the options
Q2) Translation exposure measures
A)the effect that an anticipated change in exchange rates will have on the consolidated financial reports of an MNC.
B)economic exposure.
C)the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency,as a result of exchange rate change fluctuations,when viewed from the perspective of the parent firm.
D)all of the options
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Chapter 11: International Banking and Money Market
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Q1) Consider a U.S.importer desiring to purchase merchandise from a Dutch exporter invoiced in euros,at a cost of 160,000.The U.S.importer will contact his U.S.bank (where,of course,he has an account denominated in U.S.dollars)and inquire about the exchange rate,which the bank quotes as 0.6250/$1.00.The importer accepts this price,so his bank will proceed to ________ the importer's account in the amount of ________.
A)debit; $256,000
B)credit; 512,100
C)credit; $500,000
D)debit; 100,000
Q2) The current exchange rate is £1.00 = $2.00.Compute the correct balances in Bank A's correspondent account(s)with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.
A)Bank A's dollar-denominated account at B will fall by $90,000.
B)Bank B's dollar-denominated account at A will rise by $90,000.
C)Bank A's pound-denominated account at B will rise by £45,000.
D)Bank B's pound-denominated account at A will fall by £45,000.
E)all of the options
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Chapter 12: International Bond Market
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Q1) Underwriters for a domestic bond issue will commit their own capital to buy the issue from the borrower at a discount from the issue price.The discount,or underwriting spread,is typically
A)in the 1 to 1.5 percent range.
B)in the 2 to 2.5 percent range.
C)in the 3 to 3.5 percent range.
D)in the 4 to 4.5 percent range.
Q2) In any given year,rightly 80 percent of new international bonds are likely to be A)Eurobonds.
B)foreign currency bonds.
C)domestic bonds.
D)none of the options
Q3) Eurobonds sold in the United States may not be sold to U.S.citizens.
A)True
B)False
Q4) Proportionately more domestic bonds than international bonds are dominated in A)the dollar.
B)the yen.
C)the dollar and the yen.
D)none of the options
Page 14
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Chapter 13: International Equity Markets
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Q1) In an agency market,the broker takes the client's order through the agent,who matches it with another public order.Names for the agent are
A)official broker.
B)central broker.
C)a broker's broker.
D)all of the options
Q2) At year-end 2015,total market capitalization of 80 organized stock exchanges tracked by the World Federation of Exchanges stood at
A)$67,125 billion.
B)$67,125 trillion.
C)$97,125 billion.
D)$97,125 trillion.
Q3) In a dealer market,the broker takes the trade through the dealer,who participates in trades as a principal by buying and selling the security for his own account.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Swaps are said to offer market completeness.
A)This means that all types of debt instruments are not regularly available for all borrowers.Thus interest rate swap markets assist in tailoring financing to the type desired by a particular borrower.
B)In that the swap market offers price discovery to the market
C)Because you can trade across both currencies and fixed and floating market segments
D)none of the options
Q2) Consider the situation of firm A and firm B.The current exchange rate is $1.50/ .Firm
A is a U.S.MNC and wants to borrow 40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings.
\[\begin{array} { l l l }
& \$ & \\
\text { A } & \$ 7 \% & 6 \% \\
B & \$8 \% & 5\%
\end{array}\] Explain how this opportunity affects which swap firm A will be willing to participate in.
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Chapter 15: International Portfolio Investment
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Q1) Assume that you have invested $100,000 in Japanese equities.When purchased the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively.At selling time,one year after purchase,they were ¥110 and ¥110/$1.00.The dollar rate of return would be
A)0 percent.
B)4.32 percent.
C)28 percent.
D) 9.09 percent.
Q2) Systematic risk
A)is also known as non-diversifiable risk.
B)is market risk.
C)refers to the risk that remains even after investors fully diversify their portfolio holdings.
D)all of the options
Q3) A closed-end mutual fund
A)invests in bonds of a particular maturity,when they mature,the fund closes.
B)trades on a stock exchange just like a publicly traded corporation.
C)always trades at Net Asset Value.
D)all of the options
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) OPIC is the
A)Overseas Pirate Investment Corporation.
B)Overseas Private Investment Corporation.
C)Organization Petroleum Importing Countries.
D)none of the options
Q2) Since shareholders of MNCs may indirectly benefit from corporate international diversification,
A)firms are motivated to undertake FDI for the purpose of providing shareholders with diversification services.
B)firms are motivated to undertake FDI for the purpose of being part of the global minimum variance portfolio.
C)firms are motivated to undertake FDI for the purpose of staying on the efficient frontier. D)none of the options
Q3) The majority of foreign vertical integration is
A)backward.
B)forward.
C)sideways.
D)none of the options
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Solve for the weighted average cost of capital. \(\begin{aligned}
14.20 \% &=K_{1} \\
7 / 9 &=\lambda \\
8.0 \% &=i \\
40.0 \% 0 &=\tau
\end{aligned}\)
A)7.00 percent
B)6.89 percent
C)6.73 percent
D)6.67 percent
Q2) The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 4; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.Calculate the weighted average cost of capital.
A)33.33 percent
B)8.09 percent
C)9.02 percent
D)16.5 percent
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Chapter 18: International Capital Budgeting
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Q1) The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10 percent; inflation over the next three years is 3 percent per year in the U.S.and 2 percent per year in Japan.Calculate the dollar NPV of this project. \[\begin{array} { c c c c } \text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\
\hline ¥1,000,000 & ¥ 500,000 & ¥ 500,000 & ¥ 500,000 \end{array}\] I did not round my intermediate steps,if you did,select the answer closest to yours.
A)$267,181.87
B)$14,176.67
C)$2,536.49
D)$2,137.46
Q2) The financial manager's responsibility involves
A)increasing the per share price of the company's stock at any cost and by any means,ways and fashion that is possible.
B)the shareholder wealth maximization.
C)which capital projects to select.
D)the shareholder wealth maximization and which capital projects to select.
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Chapter 19: Multinational Cash Management
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Q1) Not all countries allow MNCs the freedom to net payments, A)the U.S.,Canada,and Great Britain allow only netting between each other.
B)some countries require the MNC to ask permission,and some countries limit netting.
C)but that is fine,since netting typically has costs that outweigh the benefits for an MNC.
D)All of the options may be correct.
Q2) The U.S.IRS allows transfer prices to be set using comparable uncontrolled price method.This method requires A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.
Q3) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False
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21
Chapter 20: International Trade Finance
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Q1) International trade is more difficult and risky from the exporter's perspective than is domestic trade because
A)the exporter may not be familiar with the buyer,and thus not know if the importer is a good credit risk.
B)if the merchandise is exported abroad and the buyer does not pay,it may prove difficult,if not impossible,for the exporter to have any legal recourse.
C)political instability makes it risky to ship merchandise abroad to certain parts of the world.
D)all of the options
Q2) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days.The importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As is 5 percent.
Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q3) Forfaiting (forfeiting)meets Islamic finance practices.
A)True
B)False
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Affiliate A sells a million units to Affiliate B per year.The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent.The transfer price can be set at any level between $100 and $200.Which transfer price between A and B should the parent select?
A)$200
B)$100
C)$150
D)none of the options
Q2) A withholding tax is defined in your textbook as A)the money that the government takes for every worker's paycheck.
B)social security taxes.
C)a tax levied on income earned by an individual (or corporation)of one country within the tax jurisdiction of another county.
D)a tax levied on passive income earned by an individual (or corporation)of one country within the tax jurisdiction of another county.
Q3) An income tax is a direct tax.
A)True
B)False
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