Multinational Corporate Finance Study Guide
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Course Introduction
Multinational Corporate Finance examines the financial decision-making processes within firms operating across national borders. The course explores the unique challenges and opportunities introduced by international financial markets, including foreign exchange risk management, cross-border investments, global capital structure, and international cash management. Students analyze how multinational corporations develop strategies for raising and investing capital worldwide, assess political and country risk, and understand the impact of international taxation and regulations on corporate financial operations. The course blends theoretical concepts with real-world case studies to equip students with the tools necessary to navigate the complexities of global finance.
Recommended Textbook
International Financial Management Canadian Perspectives 2nd Edition by Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) If people in both countries eat the same dish that requires 0.1kg or tomatoes and 1.4kg of potatoes to prepare,how much potatoes will be produced in Byelorussia?
A)None
B)333.33 tons
C)500 tons
D)666.67 tons
Answer: C
Q2) The "Big Bang" refers to:
A)Deregulation of the Japanese stock market
B)Deregulation of the German stock market
C)Deregulation of the British stock market
D)Deregulation of the Mexican stock market
Answer: C
Q3) The euro zone has
A)A common fiscal policy
B)A common monetary policy
C)A common taxation policy
D)A common immigration policy
Answer: B
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Page 3
Chapter 2: International Monetary System
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Q1) The key arguments for flexible exchange rates are:
A)Easier external adjustments and national policy autonomy
B)Easier internal adjustments and national policy autonomy
C)Easier external adjustments and easier international trade
D)Easier internal adjustments and easier international trade
Answer: A
Q2) Bretton-Woods system:
A)is an example of a fixed exchange rate regime
B)is an example of a flexible exchange rate regime
C)gave birth to the introduction of the Euro
D)was used to smooth transition from bimetallism to the classical gold standard
Answer: A
Q3) The euro currently in use is the common currency of
A)11 EU member countries
B)12 EU member countries
C)all EU member countries
D)all European countries
Answer: B
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4
Chapter 3: Balance of Payments
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Q1) PetroCanada exports oil to New York.This transaction will be recorded in the balance of payments as
A)a credit in the current account
B)a debit in the current account
C)a credit in the capital account
D)a debit in the capital account
Answer: A
Q2) If a country has a flexible exchange rate system and a deficit on current account
A)the balance of payments must be zero.
B)The balance of payments must be positive.
C)The balance on capital account must be negative.
D)The balance on capital account must be positive.
Answer: D
Q3) The reserve account of the Balance of Payments records:
A)the stock of foreign exchange held by the government
B)changes in foreign exchange reserves held by the government
C)the stock of gold held by foreign governments
D)changes in foreign exchange reserves held by foreign governments
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) The world's largest foreign exchange trading center is:
A)New York
B)Tokyo
C)London
D)Hong Kong
Q2) The current spot exchange rate is $1.6/euro and the 6-months forward rate is $1.63/euro.You think that the spot rate will be $1.62/euro in six months.Assume that you can buy or sell euro100,000.
a)What would be your expected profit from speculating in the forward market?
b)What would be you profit if the actual spot rate in 6 months is $1.60/euro?
Q3) The 3 month forward rate between British pound and the Swiss franc is £0.5.A speculator predicts the spot rate in three months to be £0.51 and has £1,000,000 for speculation.The speculator should not
A)get a long position on British pounds
B)get a short position on Swiss francs
C)speculate
D)get a long position on Swiss francs
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Page 6
Chapter 5: The Market for Foreign Exchange
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Q1) Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?
Q2) Germany has a higher rate of inflation than Japan.The nominal exchange rate is constant.
A)Germany experiences an increase in its real exchange rate
B)Germany experiences a decrease in its real exchange rate
C)Japan experiences an increase in its real exchange rate
D)German goods are cheaper now
Q3) The forward expectations parity states that
A)any forward premium or discount is equal to the expected change in the exchange rate
B)any forward rate is equal to the expected change in the exchange rate
C)the forward premium or discount is equal to the expected change in the real exchange rates
D)the forward premium or discount is equal to the expected change in purchasing power parity
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Chapter 6: International Parity Relationships and Forecasting Foreign
Exchange Rates
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Q1) The payment amount under this FRA is:
A)$9,985
B)$10,111
C)$60,667
D)$120,000
Q2) The payment amount under this FRA is:
A)$2,510
B)$2,526
C)$25,555
D)$100,000
Q3) Which of the following statements is true?
A)ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 92-day FRA period
B)XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 92-day FRA period
C)ABC Bank will pay XYZ Bank a cash settlement at the end of the 92-day FRA period
D)XYZ Bank will pay ABC Bank a cash settlement at the end of the 92-day FRA period
Q4) Explain Eurocommerical papers.
8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) A five-year $1,000 face value floating-rate note (FRN)has coupons referenced to six-month dollar LIBOR,and pays coupon interest semiannually.Assume that the last six-month LIBOR was 6.5 percent and the current six-month LIBOR is 6 percent.If the risk premium above LIBOR that the issuer must pay is .25% by how much did the coupon payment change?
A)increase by $2.5
B)decrease by $2.5
C)increase by $5
D)decrease by $5
Q2) Bonds with fixed coupon payments in regular intervals and a designated maturity date are called
A)straight-fixed rate bonds
B)euro-medium term bonds
C)floating-rate bonds
D)equity-related bonds
Q3) ZZZ Corp.wants to issue zero-coupon bonds with a 10-year maturity.The implied yield to maturity on these bonds is 5% and ZZZ Corp.wants to raise $10,000,000.(Assume no transaction costs).How much money will ZZZ Corp.have to pay at maturity of the bond?
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Chapter 8: Management of Transaction Exposure
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Q1) The major national stock market index for the Tokyo stock exchange is the
A)FTSE 100
B)DAX
C)Hang Seng
D)Nikkei 300
Q2) What factors go into the decision to cross-list on a foreign exchange?
Q3) American Depository Receipt (ADRs)represent foreign stocks
A)denominated in U.S.dollars that trade on European stock exchanges
B)denominated in U.S.dollars that trade on a U.S.stock exchange
C)denominated in a foreign currency that trade on a U.S.stock exchange
D)non-registered (bearer) securities
Q4) A liquid stock market is one in which
A)investors can buy and sell shares quickly at close to the current quoted prices
B)investors can buy shares quickly at close to the current quoted prices
C)investors can sell shares quickly at close to the current quoted prices
D)investors can buy and sell shares quickly above the current quoted prices
Q5) Assume that Nestle shares are trading at SF 300 in Zurich and $ 51 in New York.Each share equals 4 ADRs.The current exchange rate is SF1.5/$.In the absence of transaction costs,can you make an arbitrage profit?
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Chapter 9: Management of Economic Exposure
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Q1) Assume that the spot Euro is $1.2000 and the six-months forward rate is $1.2100.Determine the minimum price for which a six-month American put should sell for.The strike price is $1.1900 and the annualized six-month Eurodollar rate is 4%.
Q2) Which of the following statements is true?
A)The buyer of a forward contract holds a short position.
B)The buyer of a futures contract holds a losing position.
C)The buyer of a forward contract holds a wining position.
D)The buyer of a futures contract holds a long position.
Q3) Today's settlement price on a Chicago Mercantile Exchange (CME)Euro futures contract is $1.2010/EUR.Your margin account currently has a balance of $2,500.The next two days' settlement prices are $1.2210/EUR and $1.2010/EUR.(The contractual size of one CME EURO contract is EUR 125,000).Calculate your margin account balance at the end of the first and second day if you have a long position on Euro futures.
Q4) The value of a European call will increase with all of the following except:
A)the spot exchange rate
B)the exercise price
C)time to maturity
D)the foreign interest rate
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Chapter 10: Management of Translation Exposure
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Q1) The primary reasons for a counterparty to use a currency swap are:
A)to hedge and to speculate
B)to play in the futures and forward markets
C)to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure
D)a and b
Q2) Which combination of the following statements is true about a swap bank?
(i)- it is a generic term to describe a financial institution that facilitates swaps between counterparties
(ii)- it can be an international commercial bank
(iii)- it can be an investment bank
(iv)- it can be a merchant bank
(v)- it can be an independent operator
A)(i) and (ii)
B)(i), (ii) and (iii)
C)(i), (ii), (iii) and (iv)
D)(i), (ii), (iii), (iv) and (v)
Q3) The following information is given:
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Page 12
Chapter 11: International Banking and Money Market
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Q1) Gains from portfolio diversification are largest when
A)The securities are perfectly positively correlated
B)The securities are not correlated
C)The securities are perfectly negatively correlated
D)Need more information
Q2) Investors can use of the following to diversify their portfolios internationally except:
A)International mutual funds
B)ADRS
C)WEBS
D)STAS
Q3) The "Sharpe performance measure" (SHP)is:
A)a "risk-adjusted" performance measure
B)the excess return (above and beyond the risk-free interest rate) per standard deviation risk
C)the sensitivity level of a national market to world market movements
D)a and b
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Chapter 12: International Bond Market
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Q1) Operating exposure can be defined as:
A)the future home currency values of the firm's assets and liabilities
B)the extent to which the firm's operating cash flows would be affected by random changes in exchange rates
C)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
D)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates
Q2) A firm's operating exposure is:
A)defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates
B)determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products
C)determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing
D)all of these
Q3) How can operating exposure be managed?
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Chapter 13: International Equity Markets
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Q1) Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is false?
A)If the spot rate is greater than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
B)If the spot rate is less than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
C)If the spot rate is equal to the forward rate at maturity, Encana is better off with the hedge than without the hedge.
D)Need more information
Q2) Which of the following is not an operational hedge?
A)Invoice currency selection
B)Lead/lag strategy
C)Exposure netting
D)Money market hedge
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Translation exposure refers to:
A)accounting exposure
B)the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC
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 these
Q2) Under the current rate method
A)All balance sheet and all income statement items are translated at the current exchange rate
B)All balance sheet and some income statement items are translated at the current exchange rate
C)Some balance sheet and all income statement items are translated at the current exchange rate
D)Some balance sheet and some income statement items are translated at the current exchange rate
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Page 16
Chapter 15: International Portfolio Investment
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Q1) The most important mode of entering a foreign market via FDI in the last few years is
A)Greenfield investments
B)Brownfield investments
C)Mergers & acquisitions
D)All modes are equally important
Q2) Political risk refers to:
A)the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country
B)macro-economic risks
C)micro-economic risks
D)bankruptcy or high inflation rates
Q3) Explain the role of market imperfections in FDI.
Q4) The key factors that are important in a firm's decision to invest overseas are:
A)Trade barriers, imperfect labor market, and intangible assets
B)vertical integration, product life cycle, and shareholder diversification services
C)profit maximization, global prestige, and competition
D)a and b
Q5) How can Export Development Canada (EDC)help firms to deal with political risk?
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) What are the alternative financial structures for a subsidiary? Which of the alternatives is the best?
Q2) Which of the following factors is not important when a firm chooses its subsidiary's financial structure?
A)Corporate tax rates
B)Value-added taxes
C)Political risk
D)Cost of capital
Q3) Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the systematic risk inherent in the stock of ABC Corporation is 1.80,using the Capital Asset Pricing Model (CAPM)calculate the expected return of ABC.
A)14.0%
B)14.8%
C)16.0%
D)16.8%
Q4) What are the potential benefits of cross-listing shares on a foreign stock exchange?
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Is it possible that a project has a positive APV from the subsidiary's perspective and a negative APV from the parent's perspective?
Q2) In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:
A)the cannibalization of existing projects by new projects
B)the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project
C)a and b
D)none of these
Q3) Which of the following statements is false about "borrowing capacity"?
A)it is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans
B)it creates tax shields for APV analysis regardless of how the project is actually financed
C)is synonymous to the "project debt"
D)is based on the firm's optimal capital structure
Q4) Which cash flows are relevant for the international capital budgeting analysis?
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Chapter 18: International Capital Budgeting
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Q1) Efficient cash management techniques can:
A)reduce the investment in cash balances and foreign exchange transaction expenses
B)provide for maximum return from the investment of excess cash
C)result in borrowing at lowest rate when a temporary cash shortage exists
D)all of these
Q2) Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?
Q3) Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A)$250,000
B)$500,000
C)$1,000,000
D)$1,250,000
Q4) Which of the following statements in not true about a centralized cash depository?
A)All cash is remitted to the central cash pool
B)Excess cash is remitted to the central cash pool
C)The central cash manager arranges to cover shortages of cash
D)It facilitates fund moblization
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Chapter 19: Multinational Cash Management
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Q1) The time from acceptance to maturity on a banker's acceptance (B/A)is 90 days,the importing bank's acceptance commission is 1 percent and the B/A's discounted value at the time of acceptance is $1,000,000.What is the 90-day B/A rate if the value at maturity is $1,034,000?
Q2) Name and explain the three most important documents in a typical international trade transaction.
Q3) The term "countertrade" refers to:
A)many different types of transactions in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer
B)barter, clearing arrangement, and switch trading
C)buy-back, counter purchase, and offset
D)All of these
Q4) If the importing bank's acceptance commission is 1.25 percent,determine the amount the exporter will receive if he holds the B/A until maturity.
A)$2,945,625
B)$2,990,625
C)$3,000,000
D)$3,009,375
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Page 21
Chapter 20: International Trade Finance
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Q1) Value-added tax (VAT)is:
A)a direct national tax levied on the value added in the production of a good (or service) as it moves through various stages of production
B)an indirect national tax levied on the value added in the production of a good (or service) as it moves through various stages of production
C)the equivalent of imposing a national sales tax
D)b and c
Q2) Income tax is
A)a tax levied on passive income earned by an individual or corporation of one country within the jurisdiction of another country
B)a direct tax on personal and corporate income
C)an indirect national tax levied on the value added in the production of a good or service
D)an indirect national tax levied on personal and corporate income
Q3) A product sells for EUYR 1,6000 in the first production stage,EUR2,000 the second and EUR2,700 in the third and last production stage.If the value-added tax (VAT)rate is 20%,what would be the incremental VAT at each state of production?
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Page 22
Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Private benefits of corporate control will tend to be higher in
A)in French civil law countries than in English common law countries.
B)in English common law countries than in French civil law countries.
C)in French civil law countries than in Scandinavian civil law countries.
D)In English common law countries than in German civil law countries.
Q2) The main weakness of the 'public corporation' is
A)too many shareholders, which makes it difficult to make corporate decision.
B)relatively high corporate income tax rates.
C)conflicts of interest between managers and shareholders.
D)conflicts of interests between shareholders and bondholders.
Q3) How are investors protected under English common law? What are the implications?
Q4) Dominant investors may acquire control through all of the following except:
A)interfirm cross-holdings
B)intrafirm cross-holdings
C)shares with superior voting rights
D)pyramidal ownership structure
Q5) Explain the agency problem and how it can be remedied.
Q7) Discuss the concept of "private benefits of corporate control". Page 23
Q6) How can listing overseas benefit the corporate governance of a public company?
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