Multinational Financial Management Exam Preparation Guide
Course Introduction
Multinational Financial Management explores the financial challenges and opportunities faced by firms operating in a global environment. The course examines foreign exchange markets, exchange rate risk management, international capital budgeting, multinational capital structure decisions, and global investment strategies. Students will analyze the complexities of financing international operations and the impact of cultural, economic, and regulatory differences on financial decision-making. Emphasis is placed on practical tools and techniques for managing international financial risks and optimizing the financial performance of multinational corporations in a rapidly changing global marketplace.
Recommended Textbook
International Financial Management Canadian Perspective 3rd Edition by Don Brean
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) If people in both countries eat the same dish that requires 0.1 kg of tomatoes and 1.4 kg of potatoes to prepare,how much potatoes will be produced in the Republic of Belarus?
A) None
B) 333.33 tons
C) 500 tons
D) 666.67 tons
Answer: C
Q2) David Ricardo's theory of comparative advantage has the following policy implication:
A) Liberalization of international trade will enhance the welfare of the world's citizens
B) International trade is a zero-sum game
C) One country will benefit from trade at the expense of another country
D) Restriction of international trade will enhance the welfare of the world's citizens
Answer: A
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Chapter 2: International Monetary System
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Sample Questions
Q1) Which international organization was created by the Bretton Woods agreement:
A) WTO
B) World Bank
C) IMF
D) NAFTA
Answer: C
Q2) It is said that the gold-exchange system was programmed to collapse in the long run.To satisfy the growing need for reserves,the United States had to run balance-of-payments deficits continuously.Yet,if the United States ran perennial balance-of-payments deficits,it would eventually impair the public confidence in the dollar.This dilemma was known as the
A) Triffin paradox
B) Triffin dilemma
C) Mundell paradox
D) Mundell dilemma
Answer: A
Q3) Before World War I,GBP 2.2474 was needed to buy one ounce of gold.FF 310.00 would also buy one ounce of gold.What was the exchange rate between the French franc and the British Pound?
Answer: FF310/GBP2.2474 = FF137.9372/GBP
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Chapter 3: Balance of Payments
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Sample Questions
Q1) Nokia Inc,a Finnish company,hires a French consulting firm.This transaction will be recorded in Finland's 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: B
Q2) Invisible trade refers to:
A) services that avoid tax payments
B) underground economy
C) legal, consulting, and engineering services
D) tourist expenditures, only
Answer: C
Q3) Foreign direct investment (FDI)occurs:
A) when an investor acquires a measure of control of a foreign business
B) when an investor buys foreign bonds directly
C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control
D) when a company buys foreign government bonds directly
Answer: A
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Chapter 4: The Market for Foreign Exchange
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Sample Questions
Q1) The foreign exchange market closes:
A) Never
B) 4:00 p.m. EST (New York time)
C) 4:00 p.m. GMT (London time)
D) 4:00 p.m. (Tokyo time)
Q2) Most foreign exchange transactions are for:
A) intervention
B) speculation or arbitrage
C) retail trade
D) purchase of currencies
Q3) If the $/£ bid and ask prices are $1.50 and 1.51,respectively,the corresponding £/$ bid and ask prices are:
A) £0.6667 and £0.6623
B) $1.51 and $1.50
C) £0.6623 and £0.6667
D) cannot be determined with the information given
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Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is:
A) 0.07.
B) 0.98.
C) 1.05.
D) 1.20.
Q2) Uncovered interest rate parity: A) is an arbitrage condition. B) holds most of the time. C) is based on expectations. D) will provide guaranteed but small profits.
Q3) 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?
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7
Chapter 6: International Banking and Money Market
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Q1) Short-term notes underwritten by a group of international investment or commercial banks called a "facility" are
A) eurocredits
B) eurocommercial papers
C) euro facilities
D) euronotes
Q2) How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?
Q3) Eurodollars refers to US dollar deposits when the depository bank is located outside of:
A) Europe
B) Europe, and the Caribbean
C) Europe, the Caribbean, or Asia
D) the United States
Q4) Which of the following is an example of a Eurodollar?
A) A dollar deposit in an American bank.
B) A Yen deposit in a Japanese bank.
C) A dollar deposit in a French bank.
D) Euro deposited in European bank.
Q5) Explain Eurocommerical papers.
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Chapter 7: International Bond Market
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Q1) A "Eurobond" issue is:
A) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency.
B) usually a bearer bond.
C) for example a Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands.
D) All of these.
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) Which statement is NOT true about market makers?
A) Market makers stand ready to buy or sell on their own account.
B) Market makers quote two-way bid and ask prices.
C) Market makers trade with one another only.
D) Market makers only make the bid-ask spread and charge no other commission.
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Chapter 8: International Equity Markets
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Sample Questions
Q1) The no arbitrage U.S.price of one ADR is:
A) $4.87.
B) $5.87.
C) $6.87.
D) $7.87.
Q2) If the Rolls Royce ADRs were trading at $5.75 when the underlying shares were trading in London at £0.875,ignoring transaction costs,the arbitrage trading profit would be:
A) $0.00.
B) $1.12.
C) $2.12.
D) $3.12.
Q3) Cross-listing is a process when:
A) bonds and shares of the same company sold as a package.
B) shares of two or more companies are sold as a package.
C) shares of the same company are sold on different stock exchanges in different countries.
D) shares of different companies are sold on different stock exchanges of a particular country.
Q4) What factors go into the decision to cross-list on a foreign exchange?
Page 10
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Chapter 9: Futures and Options on Foreign Exchange
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Q1) In reference to the derivatives market,a "speculator":
A) attempts to profit from a change in the futures price.
B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position. C) plays a zero-sum game.
D) passes off the risk of price variation to other player, who is better able, or at least more willing, to bear this risk.
Q2) When the LIBOR yield drops,the:
A) value of a eurodollar futures contract drops.
B) value of a eurodollar futures contract remains unchanged.
C) value of a eurodollar futures contract increases.
D) value of a eurodollar futures contract might drop or increase depending on the circumstances.
Q3) 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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11
Chapter 10: Interest Rate and Currency Swaps
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Sample Questions
Q1) Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR - 1 percent.Determine the price of the swap on the first reset date,assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged.
Q2) The following information is given.
\(\begin{array}{lll} & \text { Fixed Rate } \$(\%) & \text { Floating Rate Euro (\%) } \\ \text { Boeing } & 5.5 \% & \text { LIBOR }+0.25 \% \\ \text { Airbus } & 5.7 \% & \text { LIBOR }+0.05 \%
\end{array}\) Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms.Each firm will save the same amount in percentage terms.
a)Does Boeing prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
b)Does Airbus prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
c)What are the total interest savings available in this interest rate swap?
d)Which company has the advantage in fixed rate debt?
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Page 12
Chapter 11: International Portfolio Investment
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Sample Questions
Q1) To evaluate the gains from holding international portfolios over purely domestic portfolios we can use:
A) the increase in the Sharpe performance measure.
B) the increase in the portfolio return.
C) Both the increase in the sharpe performance measure and the increase in the portfolio return.
D) cannot be evaluated
Q2) Calculate the investor's annual percentage rate of return in terms of the U.S.dollars. (Do not round intermediate calculations.)
A) 0.20%
B) 20.00%
C) 0.28%
D) 28.00%
Q3) In May 2003 when the exchange rate was Yen 110/$,Nissan Motor Company invested
¥1,100,000,000 in pure-discount U.S.bonds and liquidated the investment one year later when the exchange rate was Yen 105/$.The Yen rate of return earned on this investment was 10%.
a)Calculate the dollar amount that the bonds were sold at.
b)Calculate the dollar rate of return of this investment.
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Page 13
Chapter 12: Management of Economic Exposure
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Sample Questions
Q1) It is conventional to classify foreign currency exposures into the following types:
A) economic exposure, transaction exposure, and translation exposure.
B) economic exposure, non-economic exposure, and political exposure.
C) national exposure, international exposure, and trade exposure.
D) conversion exposure, and exchange exposure.
Q2) Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.6/euro,all else equal?
Q3) ABC Inc.,a Canadian paper manufacturer,has a subsidiary in the United States which sources its wood from Canada.The US dollar depreciates rapidly.Discuss the likely competitive and conversion effects of the depreciation of the US dollar.
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14
Chapter 13: Management of Transaction Exposure
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Sample Questions
Q1) In evaluating the pros and cons of corporate risk management,"market imperfections" refer to:
A) information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.
B) leading and lagging, receivables and payables, and diversification costs.
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D) management costs, corporate costs, liquidity costs, and trading costs.
Q2) 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 true?
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.
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Page 15
Chapter 14: Management of Translation Exposure
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Sample Questions
Q1) XYZ Corporation,a Canadian parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service to the local market. Assume that:
1)the functional currency of ABC is the pound
2)the reporting currency is the dollar
3)the initial exchange rate $1.00 = £ 0.67
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $300,000 in the affiliate.Under CICA 1650,the intercompany debt and investment will appear on the consolidated balance sheet as:
A) £200,000.
B) $201,493.
C) $298,507.
D) None of these.
Q2) Which of the following statements hold true in general?
A) Eliminating transaction exposure will also eliminate translation exposure.
B) Eliminating transaction exposure will increase translation exposure.
C) Eliminating transaction exposure will reduce translation exposure.
D) None of these.
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Page 16
Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions
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Sample Questions
Q1) The following are barriers to trade except:
A) Tariffs
B) Transportation costs
C) Telecommunications
D) Import taxes
Q2) Cross-border acquisition involves:
A) building new production facilities in a foreign country.
B) buying existing foreign business.
C) purchasing minor intangible assets in existing foreign business.
D) None of these.
Q3) Greenfield investment:
A) is an investment in agricultural industry.
B) is an investment in a an environmentally friendly technology.
C) can be a result of a cross-border acquisition of any existing and operational business abroad.
D) None of these.
Q4) How can Export Development Canada (EDC)help firms to deal with political risk?
Q5) Explain the role of market imperfections in FDI.
Q6) How can firms establish a wholly owned subsidiary in a foreign country? What are the advantages and disadvantages of each method? Page 17
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Page 18
Chapter 16: International Capital Structure and the Cost of Capital
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Q1) 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.(Do not round intermediate calculations and round your percentage final answer to 1 decimal place.)
A) 14.0%
B) 14.8%
C) 16.0%
D) 16.8%
Q2) Which one of the following is not an approach to determine a subsidiary's financial structure?
A) Conform to the parent company's norm.
B) Conform to the local norm of the country where the subsidiary operates.
C) Vary judiciously.
D) Vary randomly.
Q3) Capital structure refers to all of the following except:
A) right-hand side of the corporate balance sheet.
B) a description of how the company is financed.
C) the debt-equity ratio.
D) what assets the firm has.
Page 19
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Chapter 17: International Capital Budgeting
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Q1) Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to:
A) analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment.
B) more fully understand the implications of planned capital expenditures.
C) consider in advance actions that can be taken should an investment not develop as anticipated.
D) All of these.
Q2) Company Y,a Canadian manufacturer of boats,is currently exporting $100,000 worth of boats to the United States.The firm is considering opening a production facility in the United States because without a presence in the United States,the entire US market would be lost to a competitor.The new facility would produce boats for about $800,000 and the firm anticipates total sales in the United States to be $900,000.When analyzing this project,Company Y should:
A) ignore the exports of $100,000 since they are not an incremental cash flow from the project.
B) ignore the exports of $100,000 since they are not part of the project.
C) include $100,000 as lost export sales in the capital budget.
D) None of these.
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Page 20
Chapter 18: Multinational Cash Management
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Q1) If inter-affiliate cash flows are uncorrelated with one another,what is the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members:
Q2) If the transfer price is $8,000,what is the net income in Canada?
A) $800
B) $1,200
C) $2,000
D) $2,400
Q3) Assume that the US and Canadian governments impose no restrictions on transfer pricing.What transfer price should Company ABC charge?
A) $5,000.
B) $6,000.
C) $7,000.
D) $10,000.
Q4) Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?
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Chapter 19: Exports and Imports
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Q1) The ________ sends a purchase order to the ________. The ________ applies to his bank for a letter of credit.
A) importer; exporter; exporter
B) exporter; importer; importer
C) importer; exporter; importer
D) exporter; importer; exporter
Q2) The ________'s bank sends the letter of credit to the ________'s bank.After sending the merchandise,the ________ gives the shipping documents and time draft to his bank.
A) importer; exporter; exporter
B) exporter; importer; importer
C) importer; exporter; importer
D) exporter; importer; exporter
Q3) If the market rate for 90-day B/As is 6.0 percent,calculate the amount the exporter will receive if he discounts the B/A with the importer's bank.(Assume 360 days in a year)
A) $2,945,625.
B) $2,990,625.
C) $3,000,000.
D) $3,009,375.
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Page 22
Chapter 20: International Tax Environment
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Q1) To tax national residents of a country on their worldwide income is called:
A) worldwide or residential taxation.
B) worldwide or source taxation.
C) territorial or residential taxation.
D) territorial or source taxation.
Q2) To tax all income earned within the country by any taxpayer is called:
A) worldwide or residential taxation.
B) worldwide or source taxation.
C) territorial or residential taxation.
D) territorial or source taxation.
Q3) 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 direct 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 international sales tax.
D) 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.
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Chapter 21: Corporate Governance Around the World
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Q1) Sarbanes-Oxley Act of 2002 stipulates that:
A) a public accounting oversight board be created.
B) the company should appoint independent financial experts to its audit committee.
C) CEO and CFO sign off the company's financial statements.
D) All of these.
Q2) Weak investor protection is associated with all of the following except:
A) valuable stock markets.
B) sharp market declines during a financial crisis.
C) lower stock market capitalization.
D) fewer publicly traded companies.
Q3) Free cash flows refer to:
A) a firm's cash reserve in excess of tax obligation.
B) a firm's funds in excess of what's needed for undertaking all profitable projects.
C) a firm's cash reserve in excess of interest and tax payments.
D) a firm's income tax refund that is due to interest payments on borrowing.
Q4) How can listing overseas benefit the corporate governance of a public company?
Q5) Explain the agency problem and how it can be remedied.
Q6) Discuss the major advantage and key weakness of a public corporation.
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