Final Exam
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Final Exam

Course Number: ECON 110, Spring 2012

College/University: Houston Downtown

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Fundamentals of Multinational Finance, 4e (Moffett) Chapter 10 Transaction and Translation Exposure Multiple Choice and True/False Questions The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and...

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of Fundamentals Multinational Finance, 4e (Moffett) Chapter 10 Transaction and Translation Exposure Multiple Choice and True/False Questions The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as, Answer backlog, quotation, and billing exposure. billing, backlog, and quotation exposure. quotation, backlog, and billing exposure. quotation, billing, and backlog exposure. 10.1 Types of Foreign Exchange Exposure 1) ________ exposure deals with cash flows that result from existing contractual obligations. A) Operating B) Transaction C) Translation D) Economic Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 2) ________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates. A) Operating B) Transaction C) Translation D) Accounting Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 3) Each of the following is another name for operating exposure EXCEPT ________. A) economic exposure B) strategic exposure C) accounting exposure D) competitive exposure Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 1 Copyright 2012 Pearson Education, Inc. 4) Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates. A) transaction; operating B) operating; transaction C) operating; accounting D) none of the above Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 5) ________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency. A) Transaction B) Operating C) Economic D) Accounting Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 6) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) accounting; Operating B) operating; Transaction C) transaction; Operating D) transaction; Accounting Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 7) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible. A) transaction; Operating B) accounting; Operating C) accounting; Transaction D) transaction; Translation Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 2 Copyright 2012 Pearson Education, Inc. 8) MNE cash flows may be sensitive to changes in which of the following? A) exchange rates B) interest rates C) commodity prices D) all of the above Register to View AnswerDiff: 1 Topic: 10.1 Types of Foreign Exchange Exposure Skill: Recognition 10.2 Why Hedge? 1) ________ is a technique used by MNEs to deal with currency exposure. A) No counter-measure B) Speculation C) Hedging D) All are techniques MNEs could use. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Recognition 2) Hedging, or reducing risk, is the same as adding value or return to the firm. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Conceptual 3) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________. A) increase; not change B) decrease; not change C) not change; increase D) not change; not change Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Conceptual 3 Copyright 2012 Pearson Education, Inc. 4) Which of the following is NOT cited as a good reason for hedging currency exposures? A) Reduced risk of future cash flows is a good planning tool. B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows. C) Currency risk management increases the expected cash flows to the firm. D) Management is in a better position to assess firm currency risk than individual investors. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Recognition 5) There is considerable question among investors and managers about whether hedging is a good and necessary tool. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Recognition 6) Which of the following is cited as a good reason for NOT hedging currency exposures? A) Shareholders are more capable of diversifying risk than management. B) Currency risk management through hedging does not increase expected cash flows. C) Hedging activities are often of greater benefit to management than to shareholders. D) All of the above are cited as reasons NOT to hedge. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Recognition 7) The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core. Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Conceptual 8) ________ exposure may result from a firm having a payable in a foreign currency. A) Transaction B) Accounting C) Operating D) None of the above Register to View AnswerDiff: 1 Topic: 10.2 Why Hedge? Skill: Conceptual 4 Copyright 2012 Pearson Education, Inc. 10.3 Trident's Transaction Exposure 1) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if A) the exchange rate changes to $2.00/. B) the exchange rate changes to $2.05/. C) the exchange rate doesn't change. D) all of the above. Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 2) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.05/ the U.S. firm will realize a ________ of ________. A) loss; $2000 B) gain; $2000 C) loss; 2000 D) gain; 2000 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 3) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.01/ the U.S. firm will realize a ________ of ________. A) loss; $2,000 B) gain; $2,000 C) loss; 2000 D) gain; 2000 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 5 Copyright 2012 Pearson Education, Inc. 4) ________ is NOT a popular contractual hedge against foreign exchange transaction exposure. A) Forward market hedge B) Money market hedge C) Options market hedge D) All of the above are contractual hedges. Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Recognition Instruction 10.1: Use the information for the following problem(s). Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.40/euro The six month forward rate is $1.38/euro Plains States' cost of capital is 11% The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) The U.S. 6-month lending rate is 6% (or 3% for 6 months) December put options for euro 625,000; strike price $1.42, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.43/euro The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro 5) Refer to Instruction 10.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be ________. A) $1,750,000 B) $1,250,000 C) $892,857 D) undeterminable today Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 6 Copyright 2012 Pearson Education, Inc. 6) Refer to Instruction 10.1. If Plains States chooses to hedge its transaction exposure in the forward market, it will ________ euro 1,250,000 forward at a rate of ________. A) sell; $1.38/euro B) sell; $1.40/euro C) buy; $1.38/euro D) buy; $1.40/euro Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 7) Refer to Instruction 10.1. Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be ________. A) $1,750,000 B) $1,250,000 C) $1,725,000 D) $1,787,500 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 8) Refer to Instruction 10.1. If Plains States locks in the forward hedge at $1.38/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange loss" accounting transaction of ________. A) $0 B) $25,000 C) This was not a loss; it was a gain of $25,000. D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 9) Refer to Instruction 10.1. Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct. A) better off; $43,750 B) better off; $62,500 C) worse off; $43,750 D) worse off; $62,500 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 7 Copyright 2012 Pearson Education, Inc. 10) Refer to Instruction 10.1. Plains States could hedge the Euro receivables in the money market. Using the information provided, how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate? A) $1,250,000 B) $1,724,880 C) $1,674,641 D) $1,207,371 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 11) Refer to Instruction 10.1. Money market hedges almost always return more than forward hedges because of the greater risk involved. Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Conceptual 12) Refer to Instruction 10.1. If Plains States chooses to implement a money market hedge for the Euro receivables, how much money will the firm borrow today? A) euro 1,201,923 B) $1,201,923 C) euro 1,196,172 D) $1,196,172 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 13) Refer to Instruction 10.1. A ________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their euro receivables contract while protecting the firm from unfavorable exchange rate changes. A) forward B) call option C) put option D) money market Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Conceptual 8 Copyright 2012 Pearson Education, Inc. 14) Refer to Instruction 10.1. What is the cost of a put option hedge for Plains States' euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) A) $27,694 B) $26,250 C) euro 27,694 D) euro 26,250 Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 15) Refer to Instruction 10.1. The cost of a call option to Plains States would be ________. A) $17,653 B) $16,733 C) $18,471 D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 16) Refer to Instruction 10.1. If Plains States purchases the put option, and the option expires in six months on the same day that Plains States receives the euro 1,250,000, the firm will exercise the put at that time if the spot rate is $1.43/euro. Register to View AnswerDiff: 2 Topic: 10.3 Trident's Transaction Exposure Skill: Analytical 17) The structure of a money market hedge is similar to a forward hedge. The difference is the cost of the money market hedge is determined by the differential interest rates, while the forward hedge is a function of the forward rates quotation. Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Conceptual 18) In efficient markets, interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same. Register to View AnswerDiff: 1 Topic: 10.3 Trident's Transaction Exposure Skill: Conceptual 9 Copyright 2012 Pearson Education, Inc. 10.4 Translation Exposure 1) Translation exposure may also be called ________ exposure. A) transaction B) operating C) accounting D) currency Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 2) ________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction. A) Transaction B) Operating C) Currency D) Translation Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 3) Translation exposure measures A) changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. B) the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. C) an unexpected change in exchange rates impact on short run expected cash flows. D) none of the above. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 4) According to your authors, the main purpose of translation is A) to prepare consolidated financial statements. B) to help management assess the performance of foreign subsidiaries. C) to act as an interpreter for managers without foreign language skills. D) none of the above. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 10 Copyright 2012 Pearson Education, Inc. 5) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Conceptual 6) Historical exchange rates may be used for ________, while current exchange rates may be used for ________. A) fixed asses and current assets; income and expense items B) equity accounts and fixed assets; current assets and liabilities C) current assets and liabilities; equity accounts and fixed assets D) equity accounts and current liabilities; current assets and fixed assets Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Conceptual 7) A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations. A) local B) integrated C) notational dollar D) functional Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 8) The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method. A) current rate; temporal B) temporal; proper timing C) current rate; future rate D) none of the above Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 9) Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 11 Copyright 2012 Pearson Education, Inc. 10) The current rate method is the most prevalent method today for the translation of financial statements. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 11) The temporal rate method is the most prevalent method today for the translation of financial statements. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 12) Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________. A) consolidated statement of cash flow B) consolidated income statement C) consolidated balance sheet D) none of the above Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 13) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 14) Under the current rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 15) Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 12 Copyright 2012 Pearson Education, Inc. 16) The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement. A) monetary; current rate B) temporal; current rate C) temporal; monetary D) current rate; temporal Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Conceptual 17) The current rate method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 18) The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings. Register to View AnswerDiff: 1 Topic: 10.4 Translation Exposure Skill: Recognition 10.5 Trident Corporation's Translation Exposure 1) The main technique to minimize translation exposure is called a/an ________ hedge. A) balance sheet B) income statement C) forward D) translation Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Recognition 13 Copyright 2012 Pearson Education, Inc. 2) A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities A) have a 2:1 ratio of assets to liabilities. B) have a 2:1 ratio of liabilities to assets. C) have a 2:1 ratio of liabilities to equity. D) be equal. Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Conceptual 3) If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then A) the net exposed position is called monetary balance. B) the change of value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) both A and B are true. D) none of the above. Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Conceptual 4) If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge? A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized. B) The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits. C) The foreign subsidiary is operating is a hyperinflationary environment. D) All of the above are appropriate reasons to use a balance sheet hedge. Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Conceptual 5) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a A) 10% foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange gain on the U.S. dollar accounts receivable. C) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded. D) any gain or loss will be recorded only by the parent firm. Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Conceptual 14 Copyright 2012 Pearson Education, Inc. 6) ________ gains and losses are "realized" whereas ________ gains and losses are only "paper." A) Translation; transaction B) Transaction; translation C) Translation; operating D) None of the above Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Recognition 7) A balance sheet hedge is the main technique for managing ________. A) transaction B) operating C) translation D) money market Register to View AnswerDiff: 1 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Recognition 8) If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro the U.S. firm has a translation ________. A) gain of $50,000 B) loss of $50,000 C) gain of $450,000 D) loss of euro 450,000 Register to View AnswerDiff: 2 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Analytical 9) If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro the U.S. firm has a translation ________. A) gain of $25,000 B) loss of $25,000 C) gain of $525,000 D) loss of euro 525,000 Register to View AnswerDiff: 2 Topic: 10.5 Trident Corporation's Translation Exposure Skill: Analytical 15 Copyright 2012 Pearson Education, Inc. 10.6 Managerial Implications 1) If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro then the U.S. firm has a translation ________. A) gain of $50,000 B) loss of $50,000 C) gain of $450,000 D) loss of euro 450,000 Register to View AnswerDiff: 2 Topic: 10.6 Managerial Implications Skill: Analytical 2) If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro then the U.S. firm has a translation ________. A) gain of $25,000 B) loss of $25,000 C) gain of $525,000 D) loss of euro 525,000 Register to View AnswerDiff: 2 Topic: 10.6 Managerial Implications Skill: Analytical 3) Using the table below, estimate the net exposure for Souris River Manufacturing of it's wholly-owned Canadian subsidiary. A) C$40,000 B) C$160,000 C) C$166,000 D) C$200,000 Register to View AnswerDiff: 2 Topic: 10.6 Managerial Implications Skill: Analytical 16 Copyright 2012 Pearson Education, Inc. Essay Questions 10.1 Types of Foreign Exchange Exposure 1) List and define the three types of foreign exchange exposure presented by your authors. Answer: Transaction exposure measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rates change. Thus, it deals with changes in cash flows that result from existing contractual obligations. Translation exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to "translate" foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements. Operating exposure, also called economic exposure, competitive exposure, or strategic exposure, measures the change in the present value of the firm resulting from any change in future operating cash flows of the firm caused by an unexpected change in exchange rates. The change in value depends on the effect of the exchange rate change on future sales volume, prices, and costs. Diff: 3 Topic: 10.1 Types of Foreign Exchange Exposure 10.2 Why Hedge? 1) Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against. Answer: Foreign exchange currency hedging can reduce the variability of foreign currency receivables or payables by locking in a specific exchange rate in the future via a forward contract, converting currency at the current spot rate using a money market hedge, or minimizing unfavorable exchange rate movement with a currency option. None of these hedging techniques, however, increases the expected value of the foreign currency exchange. In fact, expected value should fall by an amount equal to the cost of the hedge. Generally, those in favor of currency risk management find value in the reduction of variability of uncertain cash flows. Those opposed to currency risk management argue the NPV of such activities are $0 or less and that shareholders can reduce risk themselves more efficiently. For a more complete answer to this question, see page 4 where the author outlines several arguments for and against currency risk management. Diff: 3 Topic: 10.2 Why Hedge? 17 Copyright 2012 Pearson Education, Inc. 10.3 Trident's Transaction Exposure 1) Currency risk management techniques include forward hedges, money market hedges, and option hedges. Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract. In your diagram, be sure to label the X and Y-axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/, the price of the option is $0.04 the forward rate is $1.52/ and the current spot rate is $1.48/.) Answer: The student should draw and label a diagram that looks similar to the one found in exhibit 10.4. Diff: 3 Topic: 10.3 Trident's Transaction Exposure 10.4 Translation Exposure 1) The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each. Answer: The current rate method translates almost all line items from the foreign subsidiary to the parent consolidated statements at the current exchange rate. This is the most commonly used method in the world today. Assets and liabilities are translated at current exchange rate and items found on the income statement are translated at the actual exchange rate on the date of transaction, or as an average over the statement period where appropriate. Equity accounts are translated at historical costs. Any gains or loses caused by translation adjustments are typically placed into a special reserve account (such as a CTA). Thus, gains or losses do not go through the income statement and do not increase the volatility of net income. This is perhaps the biggest advantage to using the current rate method. By contrast, the temporal method assumes that several individual financial statement items are periodically restated to reflect their market value. The temporal method translates individual line items based on monetary/nonmonetary criteria where monetary assets such as cash and marketable securities are translated at current exchange rates, but nonmonetary assets such as fixed assets are translated at historical rates. The gains or losses that result from translation remeasurement are recorded on the consolidated income statement and impact upon the volatility of net income. The temporal method of using historical costs may be more consistent with the practice of carrying domestic items at cost on the financial statements. Diff: 3 Topic: 10.4 Translation Exposure 10.5 Trident Corporation's Translation Exposure 1) There are no essay questions for this section. 18 Copyright 2012 Pearson Education, Inc. 10.6 Managerial Implications 1) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified. Register to View Answerbalance sheet hedge attempts to equalize the amount of assets and liabilities of a foreign subsidiary exposed to translation risk. Thus, the gain to the firm from a change in exchange rates will be perfectly offset by an equal and opposite loss. Firms may engage in balance sheet hedges under conditions of hyperinflation, or when the subsidiary is about to be liquidated and the value of the CTA account would be realized. Diff: 3 Topic: 10.6 Managerial Implications 19 Copyright 2012 Pearson Education, Inc. Fundamentals of Multinational Finance, 4e (Moffett) Chapter 11 Operating Exposure Multiple Choice and True/False Questions 11.1 Trident Corporation: A Multinational's Operating Exposure 1) Another name for operating exposure is ________ exposure. A) economic B) competitive C) strategic D) all of the above Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 2) What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates? A) transaction exposure B) accounting exposure C) operating exposure D) translation exposure Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 3) The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes. Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Conceptual 4) ________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity. A) Financing; operating B) Operating; financing C) Operating; accounting D) Accounting; financing Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 20 Copyright 2012 Pearson Education, Inc. 5) Operating cash flows may occur in different currencies and at different times, but financing cash flows may occur only in a single currency. Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 6) Which of the following is NOT an example of a financial cash flow? A) parent invested equity capital B) interest on intrafirm lending C) payment for goods and services D) intrafirm principal payments Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 7) Which of the following is NOT an example of an operating cash flow? A) management fees and distributed overhead B) royalties and license fees C) rent and lease payments D) dividend paid to parent company Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 8) ________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure. A) Operating; translation; transaction B) Transaction; operating; translation C) Accounting; translation; transaction D) Translation; operating; transaction Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Conceptual 9) Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors. Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Conceptual 21 Copyright 2012 Pearson Education, Inc. 10) Under conditions of equilibrium, management would use ________ exchange rate as an unbiased predictor of future spot rates when preparing operating budgets. A) the current spot B) the forward rate C) the black market D) none of the above Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Conceptual 11) Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use today ________ when preparing operating budgets. A) $102,000 B) $101,000 C) $100,000 D) None of the above Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Analytical 12) The three main types of foreign exchange risk are A) operating, transaction, and translation. B) translation, accounting, and operating. C) transaction, accounting, and translation. D) operating, currency, and market. Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 13) Operating exposure referred to as MEDIUM RUN:EQUILIBRIUM has which of the following set of characteristics? A) It lasts two to five years, has complete pass-through of exchange rate changes, and existing competitors begin partial responses. B) It lasts for less than one year, has partial pass-through of exchange rate changes, and existing competitors begin partial responses. C) It lasts for more than five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses. D) It lasts two to five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses. Register to View AnswerDiff: 1 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure Skill: Recognition 22 Copyright 2012 Pearson Education, Inc. 11.2 Measuring Operating Exposure 1) Operating exposure A) creates foreign exchange accounting gains and losses. B) causes exchange rates to fluctuate. C) is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates. D) measures a country's propensity to import and export. Register to View AnswerDiff: 1 Topic: 11.2 Measuring Operating Exposure Skill: Recognition 2) An unexpected change in exchange rates impacts a firm's cash flows at what level(s)? A) short run B) medium run (equilibrium case) C) long run D) all of the above Register to View AnswerDiff: 1 Topic: 11.2 Measuring Operating Exposure Skill: Conceptual 3) Which of the following is NOT an operating cash flow? A) intra-firm payable B) account receivable from an unrelated party C) interest payment by a subsidiary to a parent company D) account payable to a foreign subsidiary Register to View AnswerDiff: 1 Topic: 11.2 Measuring Operating Exposure Skill: Recognition 4) ________ risk measures the change in value of the firm that results from changes in future operating cash flows caused by unexpected changes in exchange rates. A) Transaction B) Accounting C) Operating D) Translation Register to View AnswerDiff: 1 Topic: 11.2 Measuring Operating Exposure Skill: Recognition 23 Copyright 2012 Pearson Education, Inc. 11.3 Strategic Management of Operating Exposure 1) Which of the following is NOT an example of diversifying operations? A) diversifying sales B) diversifying location of operations C) raising funds in more than one country D) sourcing raw materials in more than one country Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Recognition 2) Which of the following is NOT an example of diversification in financing? A) raising funds in more than one market B) raising funds in more than one country C) diversifying sales D) All of the above qualify. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Recognition 3) Management must be able to predict disequilibria in international markets to take advantage of diversification strategies. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Conceptual 4) When disequilibria in international markets occur, management can take advantage by A) doing nothing if they are already diversified and able to realize beneficial portfolio effects. B) recognizing disequilibria faster than purely domestic competitors. C) shifting operational of financing activities to take advantage of the disequilibria. D) all of the above. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Conceptual 5) Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because A) domestic firms lack comparative data from its own sources. B) international firms are already so large. C) all of the domestic firm's raw materials are imported. D) None of the above. Domestic firms are not at a disadvantage. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Conceptual 24 Copyright 2012 Pearson Education, Inc. 6) Which of the following is NOT an advantage of foreign exchange risk management? A) the reduction of the variability of cash flows due to domestic business cycles B) increased availability of capital C) reduced cost of capital D) All of the above are potential advantages of foreign exchange risk management. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Recognition 7) The primary method by which a firm may protect itself against operating exposure impacts is A) money market hedges. B) diversification. C) forward contract hedges. D) balance sheet hedging. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Recognition 8) An advantage of international diversification is the A) reduction in the variability of future cash flows due to domestic business cycles. B) increase in the availability of capital. C) diversification of political risk. D) all of the above. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Recognition 9) Diversifying sources of financing, regardless of the currency of denomination, can lower a firm's cost of capital and increase its availability of capital. Register to View AnswerDiff: 1 Topic: 11.3 Strategic Management of Operating Exposure Skill: Conceptual 11.4 Proactive Management of Operating Exposure 1) Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk? A) matching currency cash flows B) currency swaps C) remaining a purely domestic firm D) parallel loans Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 25 Copyright 2012 Pearson Education, Inc. 2) Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency? A) borrow money in the foreign currency in question B) lend money in the foreign currency in question C) increase sales to that country D) increase sales in this country Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 3) Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency? A) borrow money in the foreign currency in question B) lend money in the foreign currency in question C) rely on the Federal Reserve Board to enact monetary policy favorable to your exposure risk D) none of the above Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 4) The particular strategy of trying to offset inflows of cash from one country with outflows of cash in the same currency is known as ________. A) hedging B) diversification C) matching D) balancing Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 5) Which of the following is NOT an acceptable hedging technique to reduce risk caused by a relatively predictable long-term foreign currency inflow of Japanese yen? A) Import raw materials from Japan denominated in yen to substitute for domestic suppliers. B) Pay suppliers from other countries in yen. C) Import raw materials from Japan denominated in dollars. D) Acquire debt denominated in yen. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 26 Copyright 2012 Pearson Education, Inc. 6) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy is referred to as ________. A) a natural hedge B) currency-switching C) matching D) diversification Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 7) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as ________. A) a natural hedge B) currency-switching C) matching D) diversification Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 8) A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________. A) risk-sharing B) currency-switching C) matching D) a natural hedge Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 9) A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time. A) natural hedge loan B) forward loan C) currency switch loan D) back-to-back loan Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 27 Copyright 2012 Pearson Education, Inc. 10) A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary. A) indirect; U.S.; Canadian B) indirect; Canadian; U.S. C) direct; U.S.; Canadian D) direct; Canadian; U.S. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 11) Which of the following is NOT an important impediment to widespread use of parallel loans? A) difficulty in finding an appropriate counterparty B) the risk that one of the parties will fail to return the borrowed funds when agreed C) the process does not avoid exchange rate risk D) All of the above are significant impediments. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 12) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet. A) forward loan B) currency hedge C) counterparty D) currency swap Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 13) A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts. A) matched flow B) currency swap C) back-to-back loan D) none of the above Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 28 Copyright 2012 Pearson Education, Inc. 14) Currency swaps are exclusively for periods of time under one year. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 15) A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms? A) The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars. B) The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The British firm pays pounds to the swap dealer and receives dollars. C) The British firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars. D) The British firm pays dollars to a swap dealer and receives dollars from the dealer. The U.S. firm pays pounds to the swap dealer and receives pounds. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 16) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 17) Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 18) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 19) Swap agreements are treated as line items on the balance sheet via U.S. accounting methods. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 29 Copyright 2012 Pearson Education, Inc. 20) After being introduced in the 1980s, currency swaps have remained a relatively insignificant financial derivative instrument. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 21) After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 22) Which of the following is NOT one of the commonly employed financial policies used to manage operating and transaction exposure? A) use of natural hedges by matching currency cash flows B) back-to-back or parallel loans C) currency swaps D) All of the above are commonly used financial policies for managing operating exposure. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Recognition 23) Contractual approaches (i.e., options and forwards) have occasionally been used to hedge operating exposure, but are costly and possibly ineffectual. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 24) Which of the following is NOT a proactive policy for managing operating exposure? A) matching currency of cash flow B) back-to-back loans C) cross currency swap agreements D) All of the above are proactive management policies for operating exposure. Register to View AnswerDiff: 1 Topic: 11.4 Proactive Management of Operating Exposure Skill: Conceptual 30 Copyright 2012 Pearson Education, Inc. Essay Questions 11.1 Trident Corporation: A Multinational's Operating Exposure 1) An expected change in foreign exchange rates is not included in the definition of operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. Describe how the expected change in foreign exchange rates would be reflected in the decision-making process from the perspective of a) management, b) debt service, c) the investor, and d) the broader macroeconomic perspective. Answer: From a management perspective, budgeted financial statements already reflect information about the effect of an expected change in exchange rates. From a debt service perspective, expected cash flow to amortize debt should already reflect the international Fisher effect. The level of expected interest and principal repayment should be a function of expected exchange rates rather than existing spot rates. From an investor's perspective, if the foreign exchange market is efficient, information about expected changes in exchange rates should be widely known and thus reflected in a firm's market value. Only unexpected changes in exchange rates, or an inefficient foreign exchange market, should cause market value to change. From a broader macroeconomic perspective, operating exposure is not just the sensitivity of a firm's future cash flows to unexpected changes in foreign exchange rates, but also its sensitivity to other key macroeconomic variables. This factor has been labeled as macroeconomic uncertainty. Diff: 3 Topic: 11.1 Trident Corporation: A Multinational's Operating Exposure 31 Copyright 2012 Pearson Education, Inc. 11.2 Measuring Operating Exposure 1) An unexpected change in exchange rates impacts a firms expected cash flows at four levels; a) the short run, b) medium run: equilibrium, c) medium run: disequilibrium, and d) the long run. Describe the impact on cash flows over each of these categories identifying the time frame for each as well as the price changes, volume changes, and structural changes associated with each stage. Answer: Price Changes Prices are fixed/contracted Complete passthrough of exchange rate changes Medium Run: Two to five Partial passDisequilibriu years through of m exchange rate changes Long Run More than five Completely years flexible Phase Short Run Time Less than one year Medium Run: Two to five Equilibrium years Volume Structural Changes Change Volumes are No competitive contracted market changes Volumes Existing begin a partial competitors begin response to partial responses prices Volumes Existing begin a partial competitors begin response to partial responses prices Completely Threat of new flexible entrants and changing competitor responses Diff: 3 Topic: 11.2 Measuring Operating Exposure 11.3 Strategic Management of Operating Exposure 1) Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk. Answer: An MNE well known in the financial markets could borrow money in a country in which the firm receives foreign currency. The MNE could then use the receivables to repay the loan in the foreign currency and avoid uncertainties in exchange rates. An MNE could establish production facilities in several countries. This could be beneficial in at least two ways. First, such diversification reduces the probability of unfavorable changes in exchange rates for one country from significantly reducing the firm's profitability. Second, an MNE with facilities in several countries is well positioned by using internal sources to recognize when a disequilibria in the market arises. Diff: 3 Topic: 11.3 Strategic Management of Operating Exposure 32 Copyright 2012 Pearson Education, Inc. 11.4 Proactive Management of Operating Exposure 1) A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain. Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider: (a) matching currency cash flows (b) risk-sharing agreements (c) back-to-back or parallel loans Answer: Matching currency cash flows requires that the British firm with dollar receivables must establish an equivalent dollar payable. They could do this by borrowing dollars and repaying the loan with the proceeds from the receivables account. Or they could move all or part of their operations to the U.S. so that both receivables and payables would be in U.S. dollars. Risk-sharing agreements are contractual clauses whereby both parties agree to an acceptable range of exchange rates at the time the international sale is made. A spot rate at time of exchange outside of the agreed upon range results in an adjustment made to the actual exchange rate that shares the difference between the spot rate and the acceptable range of exchange rates. Back-to-back loans provide for parent-subsidiary cross border financing without incurring direct currency exposure. For example, using our British and U.S. firms, the British could firm lend pounds to the U.S. subsidiary in Britain at the same time that the U.S. firm lends an equivalent amount of dollars to the British subsidiary in the U.S. Later, the loans would be simultaneously repaid. Diff: 3 Topic: 11.4 Proactive Management of Operating Exposure 33 Copyright 2012 Pearson Education, Inc. Fundamentals of Multinational Finance, 4e (Moffett) Chapter 12 The Global Cost and Availability of Capital Multiple Choice and True/False Questions 12.1 Financial Globalization and Strategy 1) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation? A) the market value of equity B) the market value of debt C) the risk-free rate of return D) the marginal tax rate Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 2) The weighted average cost of capital (WACC) is A) the required rate of return for all of a firm's capital investment projects. B) the required rate of return for a firm's average risk projects. C) not applicable for use by MNE. D) equal to 13%. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 3) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation? A) the before-tax cost of debt B) the risk-adjusted cost of equity C) the beta of the market portfolio D) the total market value of the firm's securities Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 4) Other things equal, an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 34 Copyright 2012 Pearson Education, Inc. 5) The capital asset pricing model (CAPM) is an approach A) to determine the price of equity capital. B) used by marketers to determine the price of saleable product. C) can be applied only to domestic markets. D) none of the above. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 6) Which of the following is NOT a key variable in the equation for the capital asset pricing model? A) the risk-free rate of interest B) the expected rate of return on the market portfolio C) the marginal tax rate D) All are important components of the CAPM. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 7) ________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market. A) Systematic B) Unsystematic C) Total D) Diversifiable Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 8) Systematic risk A) is the standard deviation of a securities returns. B) is measured with beta. C) is measured with standard deviation. D) none of the above. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 9) If a firm's expected returns are more volatile than the expected return for the market portfolio, it will have a beta less than 1.0. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 35 Copyright 2012 Pearson Education, Inc. 10) Which of the following is generally unnecessary in measuring the cost of debt? A) a forecast of future interest rates B) the proportions of the various classes of debt a firm proposes to use C) the corporate income tax rate D) All of the above are necessary for measuring the cost of debt. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 11) The after-tax cost of debt is found by A) dividing the before-tax cost of debt by (1 - the corporate tax rate). B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt. C) multiplying the before-tax cost of debt by (1 - the corporate tax rate). D) subtracting the corporate tax rate from the before-tax cost of debt. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 12) The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 13) A firm whose equity has a beta of 1.0 A) has greater systematic risk than the market portfolio. B) stands little chance of surviving in the international financial market place. C) has less systematic risk than the market portfolio. D) None of the above is true. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 14) One of the distinct features of international equity markets is that over the last 100 or so years, the average market risk premium is almost identical across major industrial countries. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 36 Copyright 2012 Pearson Education, Inc. 15) The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as ________. A) beta B) the geometric mean C) the market risk premium D) the arithmetic mean Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 16) In general the geometric mean will be ________ the arithmetic mean for a series of returns. A) less than B) greater than C) equal to D) greater than or equal to Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Recognition 17) The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock were A) 9.30% and 8.78%, respectively. B) 9.30% and 7.89%, respectively. C) 9.30% and 7.03%, respectively. D) 9.30% and 6.37%, respectively. Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 18) If a company fails to accurately predict it's cost of equity, then A) the firm's wacc will also be inaccurate. B) the firm may not be using the proper interest rate to estimate NPV. C) the firm my incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity. D) all of the above are true. Register to View AnswerDiff: 1 Topic: 12.1 Financial Globalization and Strategy Skill: Conceptual 37 Copyright 2012 Pearson Education, Inc. 19) Ready Supply Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the expected return on the market portfolio is 10%. If the firm has a beta of 0.90 and an effective tax rate of 30% with a capital structure that is 40% debt and 60% equity, what is the firm's weighted average cost of capital? A) 7.82% B) 9.30% C) 5.60% D) 8.00% Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 20) Johnson Fuel Systems has a weighted average cost of capital of 7.35%. Estimate Johnson's cost of equity given the following information: The firm's effective tax rate is 25%, they have an equal mix of debt and equity, the required return on the market portfolio is 9%, Johnson has a before-tax cost of debt of 6%, and the risk-free rate of return is 3%. A) 2.25% B) 5.10% C) 9.00% D) 10.20% Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 21) LipTea Incorporated purchases raw materials and has processing plants around the world. They also have an international market for their product. Because of their presence in so many countries LipTea has the ability to raise capital around the world in several different markets. LipTea is truly an MNE. If the firm has an average pre-tax cost of debt of 8%, a cost of equity of 13%, and an average tax rate of 40%, what is their after-tax cost of debt? A) 3.2% B) 8.0% C) 4.8% D) 10.5% Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 38 Copyright 2012 Pearson Education, Inc. 22) LipTea Incorporated purchases raw materials and has processing plants around the world. The firm has an average pre-tax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. The risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60% with equity, what is the aftertax WACC? A) 10.08% B) 12.96% C) 11.36% D) 10.50% Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 23) LipTea Incorporated purchases raw materials and has processing plants around the world. The standard deviation of the firms equity returns is 1.2 times as great as the markets standard deviation of returns. If the correlation of LipTeas returns with the markets is 0.80, what is the systematic risk of the firm? A) 1.50 B) 1.20 C) 0.96 D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 24) LipTea Incorporated purchases raw materials and has processing plants around the world. The firm finances 30% of its assets with debt and 70% with equity, has a 30% average tax rate, and can issue bonds at a pre-tax rate of 7%. Their standard deviation of returns is roughly 1.50 times as great as the markets returns, and has a correlation with the market of 0.45. If the risk-free rate of return is 5% and the expected return on the international market portfolio is 14%, what is the firms WACC? A) 7.75% B) 8.38% C) 12.24% D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 12.1 Financial Globalization and Strategy Skill: Analytical 39 Copyright 2012 Pearson Education, Inc. 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors 1) A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other, unsegmented markets. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 2) If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets. A) liquid; segmented B) liquid; large C) illiquid; segmented D) large; illiquid Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 3) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) excessive regulatory control B) perceived political risk C) anticipated foreign exchange risk D) All of the above are contributing factors. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 4) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) lack of transparency B) asymmetric availability of information C) lack of proper reporting of insider trading D) All of the above are contributing factors. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 40 Copyright 2012 Pearson Education, Inc. 5) Other things equal, a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a ________. A) relatively low cost of capital B) relatively high cost of capital C) relatively average cost of capital D) cost of capital that we cannot estimate from this question Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 6) Relatively high costs of capital are more likely to occur in ________. A) highly illiquid domestic securities markets B) highly liquid domestic securities markets C) unsegmented domestic securities markets D) none of the above Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 7) Reasons that firms may find themselves with relatively high costs of capital include: A) The firms reside in emerging countries with undeveloped capital markets. B) The firms are too small to easily gain access to their own national securities market. C) The firms are family owned and they choose not to access public markets and lose control of the firm. D) All of the above. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 8) Which of the following is NOT a portfolio diversification technique used by portfolio managers? A) diversify by type of security B) diversify by the size of capitalization of the securities held C) diversify by country D) All of the above are diversification techniques. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 41 Copyright 2012 Pearson Education, Inc. 9) If all capital markets are fully integrated, securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for ________. A) time of day and language requirements B) political risk and time lags C) foreign exchange risk and political risk D) foreign exchange risk and the spot rate Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 10) Capital market segmentation is a financial market imperfection caused mainly by ________. A) government constraints B) institutional practices C) investor perceptions D) all of the above Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 11) Capital market imperfections leading to financial market segmentation include A) asymmetric information between domestic and foreign-based investors B) high securities transaction costs C) foreign exchange risks D) All of the above. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 12) Capital market imperfections leading to financial market segmentation include A) political risks B) corporate governance differences C) regulatory barriers D) All of the above. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 42 Copyright 2012 Pearson Education, Inc. 13) Several years ago the Danish equity market prohibited ownership of foreign securities thus few institutional analysts outside of Denmark bothered to follow Danish equity securities. This particular fact led to market segmentation due to ________. A) taxation B) political risk C) asymmetric information D) financial risk Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 14) Until 1981 Danish equity securities were taxed at a capital gains rate of 50% for securities held for over two years, and at a speculative gains rate of 75% for securities held for under two years. This led to market segmentation caused by ________. A) taxation B) political risk C) asymmetric information D) financial risk Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 15) Market imperfections do not necessarily imply that national securities markets are inefficient. Register to View AnswerDiff: 1 Topic: 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Conceptual 12.3 The Cost of Capital for MNEs Compared to Domestic Firms 1) Internationally diversified portfolios often have a lower rate of return and almost always have a higher level of portfolio risk than their domestic counterparts. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 2) According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because A) of a lack of competition among international firms. B) of an offset to cash flow variability caused by exchange rate variability. C) returns are not perfectly correlated between countries. D) none of the above. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 43 Copyright 2012 Pearson Education, Inc. 3) Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 4) Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms? A) MNEs tend to rely more on short and intermediate term debt. B) MNEs have greater foreign exchange risk. C) MNEs have greater costs of asymmetric information. D) MNEs have higher agency costs. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 5) The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 6) The optimal financial structure of multinational firms could differ from that of domestic firms because of A) political pressures on the host country. B) the greater availability of capital to multinational firms. C) the ability of multinational firms to diversify their cash flows internationally. D) all of the above. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 7) A MNEs marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 44 Copyright 2012 Pearson Education, Inc. 8) Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally. A) equity ratios B) debt ratios C) temperatures D) none of the above Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 9) Domestic firms rely much more heavily on short and intermediate debt, which lie at the low cost end of the yield curve, than do MNEs. Register to View AnswerDiff: 1 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 12.4 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts? 1) Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts. This could be due to A) the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm. B) the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm. C) the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like. D) none of the above. Systematic risk is less for MNEs than for their domestic counterparts. Register to View AnswerDiff: 1 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? Skill: Conceptual 2) Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of ________. A) political risk B) exchange rate risk C) agency costs D) all of the above Register to View AnswerDiff: 1 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? Skill: Recognition 45 Copyright 2012 Pearson Education, Inc. 3) The international availability of capital to MNEs A) allows the firm to avoid income taxes. B) allows the firm to shift tax payments to other counties. C) allows the firm to lower their cost of equity, relative to domestic firms. D) none of the above. Register to View AnswerDiff: 1 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? Skill: Conceptual 4) Which of the following does NOT constitute a benefit to the investor of diversifying internationally? A) the relatively low degree of correlation between the world's stock markets B) the increase in the expected return from an internationally diversified investment C) a lower total level of nondiversifiable risk D) All of the above are benefits of international diversification. Register to View AnswerDiff: 1 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? Skill: Conceptual 5) Empirical studies show that neither mature domestic firms nor MNEs are typically willing to assume the higher agency costs or bankruptcy risk associated with higher MCCs and capital budgets. Register to View AnswerDiff: 1 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? Skill: Recognition 46 Copyright 2012 Pearson Education, Inc. Essay Questions 12.1 Financial Globalization and Strategy 1) Your authors identify three firm and market characteristics that, in part, determine differences in a firm's cost of capital in a purely domestic market versus a global capital market. What are these three market characteristics and how do they help differentiate a firm's cost of capital? Answer: The three characteristics are 1) firm-specific factors, 2) market liquidity, and 3) market segmentation. In a domestic-only market a firm's securities may be attractive to only domestic investors. This will vary among firms. Some domestic markets are illiquid and have limited access to global markets thus limiting access to capital. Contrast this with highly liquid domestic market and broad international participation. Finally, look at segmented domestic securities markets that prices shares according to domestic standards versus having access to global securities markets that price shares according to international standards. Diff: 3 Topic: 12.1 Financial Globalization and Strategy 12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors 1) What motivates portfolio investors to purchase and hold foreign securities in their portfolio? Answer: Both domestic and international portfolio managers are asset allocators.Their objective is to maximize a portfolios rate of return for a given level of risk, or to minimize risk for a given rate of return.International portfolio managers can choose from a larger bundle of assets than portfolio managers limited to domestic-only asset allocations. As a result, internationally diversified portfolios often have a higher expected rate of return, and they nearly always have a lower level of portfolio risk, since national securities markets are imperfectly correlated with one another. Diff: 3 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms 12.3 The Cost of Capital for MNEs Compared to Domestic Firms 1) What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm? Answer: The WACC considers the proportion or weight of assets financed with debt and the proportion financed with equity. It also looks at the costs of debt and equity financing and the firm's corporate tax rate. The difficulty of such a computation is compounded for an MNE because there are several additional sources of debt financing with different required rates of return and tax rates for an MNE than for a domestic firm. Also, equity may be sourced in several different markets and subject to several different regulations of several different countries. Adding regulatory oversight, multiple sourcing locations, and differing investor expectations may significantly complicate the process of determining an MNE's cost of capital. Diff: 3 Topic: 12.3 The Cost of Capital for MNEs Compared to Domestic Firms 47 Copyright 2012 Pearson Education, Inc. 12.4 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts? 1) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts? Answer: In theory, MNEs should be able to support greater amounts of debt due to reduced variability of cash flows brought about by diversification across countries. And, because of this reduced risk borne by MNEs, they should also have a lower cost of capital. However, empirical research finds that domestic firms tend to use greater amounts of short and intermediate debt than do MNEs and that the cost of capital is greater for MNEs due to increased agency costs, political risk, exchange rate risk, and asymmetric information. Diff: 3 Topic: 12.4 Solving a Riddle: Is the WACC for MNEs Really Higher than for Their Domestic Counterparts? 48 Copyright 2012 Pearson Education, Inc. Fundamentals of Multinational Finance, 4e (Moffett) Chapter 16 Multinational Capital Budgeting and Cross-Border Acquisitions Multiple Choice and True/False Questions 16.1 Complexities of Budgeting for a Foreign Project 1) The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called ________. A) cost of capital analysis B) capital budgeting C) capital structure analysis D) agency theory Register to View AnswerDiff: 1 Topic: 16.1 Complexities of Budgeting for a Foreign Project Skill: Recognition 2) Which of the following is NOT a basic step in the capital budgeting process? A) Identify the initial capital invested. B) Estimate the cash flows to be derived from the project over time. C) Identify the appropriate interest rate at which to discount future cash flows. D) All of the above are steps in the capital budgeting process. Register to View AnswerDiff: 1 Topic: 16.1 Complexities of Budgeting for a Foreign Project Skill: Recognition 3) There are no important differences between domestic and international capital budgeting methods. Register to View AnswerDiff: 1 Topic: 16.1 Complexities of Budgeting for a Foreign Project Skill: Recognition 4) Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project? A) Parent cash flows must be distinguished from project cash flows. B) Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms. C) There are differing rates of inflation between the foreign and domestic economies. D) All of the above add complexity to the international capital budgeting process. Register to View AnswerDiff: 1 Topic: 16.1 Complexities of Budgeting for a Foreign Project Skill: Recognition 49 Copyright 2012 Pearson Education, Inc. 5) It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects. Register to View AnswerDiff: 1 Topic: 16.1 Complexities of Budgeting for a Foreign Project Skill: Recognition 16.2 Project versus Parent Valuation 1) Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint. A) local; be subordinated to; parent's B) local; not be subordinated to; parent's C) parent's; be subordinated to; local D) none of the above Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Recognition 2) A foreign firm that is 20% to 49% owned by a parent is called a/an ________. A) subsidiary B) affiliate C) partner D) rival Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Recognition 3) For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned. A) 20% B) 40% C) 50% D) 75% Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Recognition 50 Copyright 2012 Pearson Education, Inc. 4) Affiliate firms are consolidated on the parent's financial statements on a ________ basis. A) prorated B) 50% C) 75% D) 100% Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Recognition 5) For international investments, relative to project cash flows, parent cash flows are often dependent on the form of financing. Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Conceptual 6) Which of the following considerations is NOT important for a parent firm when considering foreign investment? A) the form of financing B) remittance of funds at risk due to political considerations C) differing rates of national inflation D) All of the above are important considerations. Register to View AnswerDiff: 1 Topic: 16.2 Project versus Parent Valuation Skill: Recognition 16.3 Illustrative Case: Cemex Enters Indonesia 1) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87 krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 51 Copyright 2012 Pearson Education, Inc. 2) When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project? A) an NPV > $0 B) an IRR > the project's required rate of return C) an IRR > $0 D) All of the above are correct indicators. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 3) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87 krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 4) When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary? A) the firm's tax rate B) the firm's cost of debt C) the firm's cost of equity D) All of the above are necessary. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 5) When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary? A) the firm's weight of equity financing B) the accumulated depreciation C) the firm's weight of debt financing D) All of the above are necessary to determine a firm's wacc. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 52 Copyright 2012 Pearson Education, Inc. 6) Of the following, which would NOT be considered an initial outlay at time 0 (today)? A) investment in new equipment B) initial investment in additional net working capital C) shipping and handling costs associated with the new investment D) All of the above are initial outlays. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition Instruction 16.1: Use the information for the following question(s). The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe. 7) Refer to Instruction 16.1. What are the annual after-tax cash flows for the Wheel Deal project? A) euro 400,000 B) euro 240,000 C) euro 120,000 D) euro 360,000 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 8) Refer to Instruction 16.1. What is the initial investment for the Wheel Deal project? A) $1,500,000 B) euro 1,600,000 C) $1,600,000 D) euro 1,500,000 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 53 Copyright 2012 Pearson Education, Inc. 9) Refer to Instruction 16.1. What is the NPV of the European expansion if Wheel Deal first computes the NPV in euros and then converts that figure to dollars using the current spot rate? A) $1,520,000 B) $1,684,210 C) -$75,310 D) -$71,544 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 10) Refer to Instruction 16.1. In euros, what is the NPV of the Wheel Deal expansion? A) euro 1,524,690 B) $1,611,317 C) -euro 75,310 D) -euro 111,317 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 11) Refer to Instruction 16.1. What is the IRR of the Wheel Deal expansion? A) 14.4% B) 10.3% C) 12.0% D) 8.6% Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 12) Refer to Instruction 16.1. The European expansion would have a greater NPV in dollar terms if the euro appreciated in value over the five-year life of the project and the project had a positive NPV, other things equal. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 13) The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 54 Copyright 2012 Pearson Education, Inc. 14) Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%. If Benson is in a 30% tax bracket, and finances 40% of assets with debt, what is the firm's wacc? A) 11.20% B) 10.36% C) 9.72% D) 7.68% Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 15) If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be ________. A) less than the cost of capital B) greater than the cost of capital C) greater than the cost of the project D) cannot be determined from this information Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 16) Generally speaking a firm's cost of ________ capital is greater than the firm's ________. A) debt; equity B) debt; wacc C) equity; wacc D) None of the above is true. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 17) When estimating a firm's cost of equity capital using the CAPM, you need to estimate A) the risk-free rate of return. B) the expected return on the market portfolio. C) the firm's beta. D) all of the above. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 55 Copyright 2012 Pearson Education, Inc. 18) Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%, the firm has a beta of 1.1, and the expected return on the market is 12%. A) 12.8% B) 12.6% C) 13.2% D) 6.6% Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 19) ________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country. A) Exchange risk B) Foreign risk C) Political risk D) Unnecessary risk Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 20) Which of the following is NOT an example of political risk? A) There could be expropriation of cash flows by a foreign government. B) The U.S. government restricts trade with a foreign country where your firm has investments. C) The foreign government nationalizes all foreign-owned assets. D) All of the above are examples of political risk. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition 21) Generally speaking, a firm wants to receive cash flows in a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency. A) appreciating; depreciating B) depreciating; depreciating C) appreciating; appreciating D) depreciating; appreciating Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 56 Copyright 2012 Pearson Education, Inc. 22) When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 23) Projects that have ________ are often rejected by traditional discounted cash flow models of capital budgeting. A) long lives B) cash flow returns in later years C) high risk levels D) all of the above Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Recognition TABLE 16.1 Use the information to answer the following question(s). Jensen Aquatics Inc., which manufactures and sells scuba gear worldwide, is considering an investment in either Europe or Great Britain. Consider the following cash flows for each project, assume a 12% wacc, and consider these to be average risk projects for the firm. Answer the questions that follow. 24) Refer to Table 16.1. The NPV for the British investment is estimated at ________. A) $3,092 B) $6,420 C) 3,092 D) $0 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 57 Copyright 2012 Pearson Education, Inc. 25) Refer to Table 16.1. The NPV for the European investment is estimated at ________. A) euro 4,945 B) $4,945 C) $6,420 D) euro 6,420 Register to View AnswerDiff: 2 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 26) Refer to Table 16.1. Which of the following best summarizes the preliminary results of the investment analysis for the two prospective investments? A) The British investment should be accepted, the European investment rejected. B) The British investment is superior to the European investment. C) Both investments are acceptable. D) None of the above is true. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 27) Refer to Table 16.1. If the euro was forecast to remain constant at $1.00/euro throughout the investment period, how would the investment decision now be characterized? A) The project would be even better than forecast. B) The British investment should be chosen over the European investment. C) The NPV is $6,420. D) All of the above are true. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Analytical 28) When a foreign project is analyzed from the parent's point of view, the additional risk that stems from it's "foreign" location is typically measured by ________ or ________. A) adjusting the discount rates; adjusting the timing B) adjusting the timing; adjusting the cash flows C) adjusting the discount rates; adjusting the cash flows D) none of the above Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 58 Copyright 2012 Pearson Education, Inc. 29) Which is NOT considered a shortcoming of the parent simply adjusting discount rates to account for the additional risk that stems from a project's foreign location? A) Cash flows are already highly subjective. B) Two-sided risk in that foreign currency may appreciate or depreciate. C) Increased sales volume might offset the lower value of a local currency. D) These are all shortcomings associated with discount rate adjustment. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 30) Hydrotech Manufacturing of Houston Texas expects to receive dividends each year from a foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate of 7% per year. If the euro appreciates in value against the dollar at a rate of 2% per year over the life of the dividends, then the present value of the euro dividends to Hydrotech will be ________ if there had been no change in the relative values of the euro and dollar. A) less than B) greater than C) the same as D) There is not enough information to answer this question. Register to View AnswerDiff: 1 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia Skill: Conceptual 16.4 Real Option Analysis 1) Real option analysis allows managers to analyze all of the following EXCEPT A) the option to defer. B) the option to abandon. C) the option to alter capacity. D) All of the above may be analyzed using real option analysis. Register to View AnswerDiff: 1 Topic: 16.4 Real Option Analysis Skill: Recognition 2) At its core, real option analysis is a cross between decision-tree analysis and pure option-based valuation. Register to View AnswerDiff: 1 Topic: 16.4 Real Option Analysis Skill: Conceptual 59 Copyright 2012 Pearson Education, Inc. 3) Real option analysis is a particularly powerful device when addressing potential investment projects ________. A) that do not commence until future dates. B) with extremely long life spans. C) both A and B. D) None of the above. Register to View AnswerDiff: 1 Topic: 16.4 Real Option Analysis Skill: Conceptual 4) Real option analysis treats cash flows in terms of future value in a negative sense, whereas DCF treats future cash flows positively. Register to View AnswerDiff: 1 Topic: 16.4 Real Option Analysis Skill: Recognition 16.5 Project Financing 1) Project financing is the arrangement of financing for very large individual long-term capital projects. Register to View AnswerDiff: 1 Topic: 16.5 Project Financing Skill: Recognition 2) Which of the following is NOT a factor critical to the success of project financing? A) separability of the project from its investors B) long-lived and capital intensive singular projects C) cash flow predictability from third part commitments D) All of the above are critical factors for project financing. Register to View AnswerDiff: 1 Topic: 16.5 Project Financing Skill: Conceptual 16.6 Cross-Border Mergers and Acquisitions 1) The process of acquiring an enterprise anywhere in the world has the following common elements EXCEPT ________. A) identification and valuation of the target B) the tender offer C) management of the post-acquisition transition D) All of the above are common elements in the process. Register to View AnswerDiff: 1 Topic: 16.6 Cross-Border Mergers and Acquisitions Skill: Recognition 60 Copyright 2012 Pearson Education, Inc. 2) Which of the following would NOT be a potential reason for firms to pursue a cross-border merger or acquisition? A) gaining access to strategic proprietary assets B) gaining market power and dominance C) diversification and the spreading of risk D) All of the above are potential reasons for an M & A. Register to View AnswerDiff: 1 Topic: 16.6 Cross-Border Mergers and Acquisitions Skill: Recognition 3) Generally speaking, currency risk decreases as time prior to acquisition of a foreign firm decreases. Register to View AnswerDiff: 1 Topic: 16.6 Cross-Border Mergers and Acquisitions Skill: Conceptual Essay Questions 16.1 Complexities of Budgeting for a Foreign Project 1) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting. Answer: The evaluation of foreign projects must consider several risks that are either nonexistent or much less important in domestic capital budgeting. First, if revenues and expenses are in a foreign currency, then the parent firm must estimate the exchange rate at which the foreign currency will be converted into the domestic currency. To estimate future exchange rates, the parent firm must estimate expected rates of inflation and interest rates in both countries, economic growth in each country, as well as consumer preferences and tastes in more than one country. Then, aspects of political risk must be considered. What is the likelihood that all or part of the cash flows accruing to the parent firm will be restricted through some political act? The firm must now consider the possibility of changing tax rates, new taxes, and additional restrictions on the flow of funds. Furthermore, local norms may differ from usual firm practice in terms of financing or dividend policy. Domestic capital budgeting may seem quite easy in comparison. Diff: 3 Topic: 16.1 Complexities of Budgeting for a Foreign Project 61 Copyright 2012 Pearson Education, Inc. 16.2 Project versus Parent Valuation 1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm. Register to View Answerproject might have a positive NPV from the local viewpoint, but fail to consider relevant cash flows from the parent viewpoint. For example, a positive NPV project in one country may result from the erosion of revenues in another. A local manager would not necessarily be expected to be aware of such erosion. It may not be possible to remit all or part of the local cash flows to the parent company and reinvestment opportunities in the local economy may be inferior to what the parent could do elsewhere, thus, a less than maximum use of funds. Political and exchange rate risk add to the uncertainty of cash flows and thus increase the required rate of return by stockholders. Cash flows may be more difficult to estimate especially long-term cash flows in lesser-developed countries. Diff: 3 Topic: 16.2 Project versus Parent Valuation 16.3 Illustrative Case: Cemex Enters Indonesia 1) Capital budgeting typically requires some type of sensitivity analysis. In the case of international capital budgeting from the project perspective, analysts consider political risk, foreign exchange risk and foreign exchange risk. Identify and discuss the important aspects of these two types of risk considerations. Answer: Political risk is identified as the risk that the target firm's government may block or delay the repatriation of funds to the parent firm. The capital budgeting impact of such a delay or expropriation of funds must consider: 1. When the expropriation occurs, in terms of number of years after the business began operation 2. How much compensation the foreign government will pay, and how long after expropriation the payment will be made 3. How much debt is still outstanding to foreign lenders, and whether the parent will have to pay this debt because of its parental guarantee 4. The tax consequences of the expropriation 5. Whether the future cash flows are forgone Foreign exchange risk involves the unexpected change in value of foreign-denominated cash flows when they are received by the parent firm. Such risk can be partially offset with derivative contracts and these costs must be computed into the cost of the project. However, unexpected changes may still occur and the effect of unexpected changes should be considered. Diff: 3 Topic: 16.3 Illustrative Case: Cemex Enters Indonesia 62 Copyright 2012 Pearson Education, Inc. 16.4 Real Option Analysis 1) What is real option analysis? How does it differ from the discounted cash flow approach to project evaluation? Why do some decision-makers prefer the real option approach over the DCF approach? Answer: Real options is a different way of thinking about investment values.At its core, it is a cross between decision-tree analysis and pure option-based valuation. The DCF approach has long had its critics. Investments that have long lives, cash flow returns in later years, or higher levels of risk than those typical of the firm's current business activities are often rejected by traditional DCF financial analysis. Real option analysis treats cash flows in terms of future value in a positive sense, whereas DCF treats future cash flows negatively (on a discounted basis). Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans, or investments that do not commence until future dates. Real option analysis acknowledges the way information is gathered over time to support decision making. Management learns from both active (searching it out) and passive (observing market conditions) knowledge gathering and then uses this knowledge to make better decisions. Diff: 3 Topic: 16.4 Real Option Analysis 16.5 Project Financing 1) What is project financing and what are the factors critical to its success? Answer: Project finance refers to the arrangement of financing for long-term capital projects, large in scale, long in life, and generally high in risk. Often refers to large scale projects that had traditionally been funded by governments. Factors critical to the success of project financing are as follows. Separability of the Project from Its Investors. The project is established as an individual legal entity, separate from the legal and financial responsibilities of its individual investors. This not only serves to protect the assets of equity investors, but also it provides a controlled platform upon which creditors can evaluate the risks associated with the singular project, the ability of the project's cash flows to service debt, and to rest assured that the debt service payments will be automatically allocated by and from the project itself (and not from a decision by management within an MNE). Long-Lived and Capital-Intensive Singular Projects. Not only must the individual project be separable and large in proportion to the financial resources of its owners, but also its business line must be singular in its construction, operation, and size (capacity).The size is set at inception, and is seldom, if ever, changed over the project's life. Cash Flow Predictability from Third Party Commitments. Finite Projects with Finite Lives. Even with a longer-term investment, it is critical that the project have a definite ending point at which all debt and equity has been repaid. There is no capital appreciation, but only cash flow. Diff: 3 Topic: 16.5 Project Financing 63 Copyright 2012 Pearson Education, Inc. 16.6 Cross-Border Mergers and Acquisitions 1) Compared to a greenfield investment, list advantages and disadvantages of a cross-border merger or acquisition. Answer: As opposed to greenfield investment, a cross-border acquisition has a number of significant advantages. First and foremost, it is quicker. Greenfield investment frequently requires extended periods of physical construction and organizational development. By acquiring an existing firm, the MNE shortens the time required to gain a presence and facilitate competitive entry into the market. Second, acquisition may be a cost-effective way of gaining competitive advantages such as technology, brand names valued in the target market, and logistical and distribution advantages, while simultaneously eliminating a local competitor. Third, specific to cross-border acquisitions, international economic, political, and foreign exchange. As with all acquisitions - domestic or cross-border - there are problems of paying too much or suffering excessive financing costs. Melding corporate cultures can be traumatic. Managing the post-acquisition process is frequently characterized by downsizing to gain economies of scale and scope in overhead functions. This results in nonproductive impacts on the firm as individuals attempt to save their own jobs. Internationally, additional difficulties arise from host governments intervening in pricing, financing, employment guarantees, market segmentation, and general nationalism and favoritism. In fact, the ability to successfully complete cross-border acquisitions may itself be a test of competency of the MNE when entering emerging markets. Diff: 3 Topic: 16.6 Cross-Border Mergers and Acquisitions 64 Copyright 2012 Pearson Education, Inc.

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University of Toronto - RSM - 100
Chapter1.IntroducingtheContemporaryBusinessWorldTheConceptofBusinessandProfito Business:Organizationthatproducesorsellgoodsorservicesinanefforttomakeprofito Profit:Remainsafterbusinessexpenseshavebeensubtractedfromitsrevenueso Risktaking:Profitsreward
University of Toronto - RSM - 100
Chapter2.UnderstandingtheEnvironmentsofBusinessOrganizationalBoundariesandEnvironmentsareoperationswithinexternalenvironmentwhich consistsofeverythingoutsideanorganizationsboundaries.OrganizationalBoundariesseparates theorganizationfromitsenvironmentan
University of Toronto - RSM - 100
Chapter3.ConductingBusinessEthicallyandResponsiblyEthics:Beliefsaboutwhatisright/wrongEthicbehaviorbehaviorthatconformstoindividualbeliefsandsocialnormsabout right/wrongIndividualethics:Individualsdeveloptheirownvaluesandmoralsthatcontributeto ethica
University of Toronto - RSM - 100
PART1:INTRODUCINGTHECONTEMPORARYBUSINESSWORLDChapter4:UnderstandingEntrepreneurship,SmallBusiness,andNewVentureCreationSmallBusiness(ownermanagedbusinesswith>100employees):IndustryCanadarelieson2sourcesofinfo:>BusinessRegisterAbusinessneedonepaidemp
University of Toronto - RSM - 100
Chapter5:UnderstandingInternationalBusinessThecontemporaryGlobalEconomy:Asmorefirmsengageininternationalbusiness,theworldeconomyisfastbecomingasingle, interdependentsystemglobalization:theintegrationofmarketsgloballyImports:Productsthataremadeorgrown
University of Toronto - RSM - 100
Chapter18.UnderstandingmoneyandbankingTheCharacteristicsofmoney Portability Divisibility:adollarcanbeexchangedforfourquarters,10dimes,20 nickels,100pennies,etc Durability:moderncurrencydoesnotspoil,doesnotwearout,orreplaced easily Stability:thevalu
University of Toronto - ECO - 100
Chapter1EconomicsisthestudyofhowsocietymanagesitsscarceresourcesHowpeoplemakedecisions:o PeopleFaceTradeoffs Efficiency(societyisgettingthemostfromscarceresources)VSEquity (benefitsofthoseresourcesaredistributedfairlyamongsocietys members)o Thecost
University of Toronto - ECO - 100
Chapter2(Econ=Science)Economicmodelsarebuiltfromassumptionsthatdifferintermsoflong/shortruno Circularflowdiagram Theinteractionbetweenfirmsandhouseholdsintheirmarkets forgoodsandservices(firmssell)andfactorsofproduction(householdsells)o TheProducti
University of Toronto - ECO - 100
Chapter5ThePriceElasticityofDemandanditsDeterminantsThepriceelasticityofdemandmeasureshowmuchthequantitydemanded respondstoachangeinprice.DemandforagoodissaidtobeELASTICifthe quantitydemandedrespondstoachangeinprice,etc.Factorsthatinfluencedemandofel
University of Toronto - PHL - 243
1. What is special about philosophical questions, as opposed to scientific or historical questions?Philosophy is like and unlike science because Like science, it proceed by argument and is open to refutation (the central attitude isskepticism) Unlike
University of Toronto - ENG - 100
EnglishStudyGuide*PartII:LogicalFallacies Inductive:o Atypeoflogicinwhichonegoesfromaspecificinstancetogeneral statemento Observation>Analysis>Inference>ConfirmationEx)Thisandthatisacrowblack>notunblackcrowsseen>allcrows areblack Deductive:o Atyp
University of Toronto - ECO - 209
CHAP1w=nominalwage(W)/PModelsaremadeofendogenousvariablesandexogenousvariablesSpeedofadjustment(speedtoreachequilibrium),summarizedbyPHILIPSCURVEClassicalparadigm:pricesareflexibleKeynesian(pricesmoveslowly,stickyprice)Timeframe:Verylongrun:assume
University of Toronto - ECO - 209
Chap5Currentaccount:netexports,netincomefromassetsandnettransfersCapitalandFinancialaccount:o capital:inheritancesandtradeinintellectualpropertyo financialaccount:directinvestmentandportfolioinvestmento officialreserves:positivemeansBoChassoldforeign
University of Toronto - ECO - 209
CHAP10TheconsumptionfunctionYD=YTA+TRC=C(autonomousspending)+c(mpc)YDMPC:increaseinconsumptionperincreaseinincomeTheconsumptionfunctionandaggregatedemandExogenous:I,G,NX=A0Ao=C+cYD+I+G+NXEquilibriumincomeEquilibriumiswhenY=ADChangeinY=[1/(1c)]ch
University of Toronto - RSM - 219
Increaseinrevenue>increaseinretainedearnings>increasein shareholdersequity>increaseinCREDITTheAccountingCycleAnalyzebusinesstransactions,journalize,and post(ing)togeneralledgeraccounts(chartofaccounts),prepareatrial balance(alistofgeneralledgeraccoun
University of Toronto - RSM - 230
RSM230 Midterm One NotesOverview:-Household value of the average Canadian: $182 000-Households funds everything, through consumption and investments-Note: We only owe 10% of held private assets, and only country pay down its debtAssets:-Real Ass
University of Toronto - RSM - 250
CHAP 1Marketing: managing profitable customer relationships. It is utilized to satisfycustomer needs in a socially responsible and ethical manner1.Marketing mix: marketing tools that work to satisfy customer needs (ads)Marketing Process1. Understand
University of Toronto - RSM - 250
CHAP 5(1) Marketing information and customer insightsThe value of market is not determined by the number of studies, but by thecustomer insight that it providesMarketing info system: consists of people and procedures for assessinginformation needs(2
University of Toronto - RSM - 250
CHAP 6Consumption behavior Psychological FactorsMotivation Sigmund Freud: behavior influenced subconsciously (urge not controlled) Utilize motivation research, now even interpretive consumer research Abraham Maslow: human needs hierarchy, physiologic
University of Toronto - RSM - 250
CHAP8ShotgunapproachtoRifleapproach(targetmarketing)Fourmajorstepsindesigningcustomerdrivenmarketingstrategy1) Marketsegmentation:dividemarketinsmallgroupsusingseparate marketingstrategiesormixGeographicsegmentation:manycompanieslocalize(selltofitnee
University of Toronto - RSM - 250
CHAP9Products,services,andexperiencesMarketoffering:marketingmixplanningbeginswithbuildingan offeringthatbringsvaluetotargetcustomers,whichmayconsistpure tangiblegood/pureservicesLevelsofproductandservicesBasiclevel:corecustomervalue,whatisthebuyerr
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #2BSAD 42410/9/122009031941.The challenges that a current value basis for accounting faces are due to thefact that, under most circumstances, conditions are not ideal. Accountants disagreewhether or not historical cost or current value i
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #3BSAD 42430/10/122009031941.Positive accounting theory is by definition concerned with predicting suchactions as the choices of accounting policies by firm managers and how managers willrespond to proposed new accounting standards. This
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #4BSAD 42411/7/122009031941. a)The adverse selection problem is a type of information asymmetry wherebyone or more parties to a business transaction, or potential transaction, have aninformation advantage over other parties. It exists be
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #5BSAD 42411/29/122009031941. a)GlaxoSmithKline appears to be using an earnings management policy relatedto revenue recognition.b)From a managers standpoint, revenue recognition plays an important role inmanaging earnings. If net incom
St. Francis Xavier, Antigonish - BSAD - 241
Research Paper Part 2Inventories, CICA 3031200903194This section of the paper discusses the relation between the accounting treatment for inventories and theCICA Handbook Section 1000. According to the CICA Handbook, one of the primary issues surround
St. Francis Xavier, Antigonish - BSAD - 241
Research Paper Part 3Inventories, CICA 3031200903194This section of the paper discusses the current studies and academic research on the accounting treatmentfor inventories. Inventory accounting research has a significant focus on the three inventory
St. Francis Xavier, Antigonish - BSAD - 241
Research Paper Part 4Inventories, CICA 3031200903194This section of the paper discusses the accounting treatment of inventories and its relationship withaccounting theory. The accounting treatment of inventories deals with how inventories should be me
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INVENTORIESCICA 303127/11/2012BSAD 424200903194
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As an equity holder, I would vote in favor of the POR. Equity holders would receive acombination of new stock along with rights to buy new shares as well as multiple warrants(Exhibit 5). The value estimated for the new securities would be very important
St. Francis Xavier, Antigonish - BSAD - 241
EquityDebtShares OutstandingInterest RateCurrent$488,363,000059,052,000N/AProposed$229,363,00050,000,00045,052,0006.75%EBITInterestEBTTax (@30.8%)Net Income77,451,000077,451,000(23,821,000)53,630,00077,451,000(3,375,000)60,571,00
St. Francis Xavier, Antigonish - BSAD - 241
Proposed Share Repurchase:An investment banker has informed Blaine Kitchenware Inc. that their capital structure hascaused them to be over-liquid and under-levered. There has been proposed a share repurchase thatwould involve using $209 million in cash
St. Francis Xavier, Antigonish - BSAD - 241
Nov 26th, 2012PHIL 230Essay #2Alex Cameron200903194Is Aristotles Criticism of Platos analysis of the soul sound?The soul cannot follow the tripartite structure that Plato presents in his analysis of the soul. Thereason for this is that there are ma
St. Francis Xavier, Antigonish - BSAD - 241
ChappellInc.ConsolidatedStatementofComprehensiveIncomeandRE/SCEYearEndedDecember31,20X6SalesInterestDividendsTotalRevenueCOGSDepreciationExpenseAdministrativeExpenseIncomeTaxExpenseOtherOperatingExpensesTotalExpensesNetIncomeRetainedEarnings
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #1Sept 27th, 2012(4)1) Dec 15, 20X0 (purchase)Value of sharesOption purchase priceEmployment incomeJun 15, 20X3 (sell)Selling priceValue at purchase dateCapital gainTaxable capital gain2) Dec 15, 20X0 (purchase)Value of sharesOptio
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #2BSAD 454Alex Cameron200903194CH 8 Problem 9Business Income:Sale of GWFranchise, CCA recap(24000-40000)Office equip and Lib, Term. Loss(6800-5000)20X6 reserve for bad debts20X7 bad debt exp20X6 unpaid bonusBus. Income904016000
St. Francis Xavier, Antigonish - BSAD - 241
Assignment #3BSAD 454CH 10 Problem 5Employment IncomeSalaryOp. benefit (.24x12000)Standby chg (40000x.02x12)Life insuranceStock option (1000x(7-6)TotalBusiness IncomeSale of apartmentReserve (720/800x150)TotalProperty IncomeEligible CDN div
St. Francis Xavier, Antigonish - BSAD - 241
Assignment 3BSAD 322200903194200902269Applied Pharmaceuticals is a manufacturing company, whereas Destination Resorts International isa service provider. Despite these two companies providing two completely different things, their strategiesfor reac
St. Francis Xavier, Antigonish - BSAD - 241
Chapter 83. Organizations practice market segmentation because it allows the organization to seewhat markets could be potentially profitable, select a target market and then focus theresources on marketing to that target market. This increases profitab
St. Francis Xavier, Antigonish - BSAD - 241
Chapter 117. Managerial judgment is important in determining the specific price to be assigned to aproduct because such a crucial matter should not be left to mathematical tools alone.Managerial judgment, supported by marketing research, is needed in o
St. Francis Xavier, Antigonish - BSAD - 241
Chapter 138. a) The agent would have knowledge of similar markets that the new companywould not-The new company may not have the financial resources just starting out so anagent would make sense in this caseb) The agent could be used in low market
St. Francis Xavier, Antigonish - BSAD - 241
PHIL- Study notes and handout summaryECON- Study quizzes and textbook ch. 20,21,24,25,26,28- 85-90 multiple choiceSTAT- Study quizzes/midterm and textbook (refer to syllabus)BSAD- Study powerpoint slides and midterm- 100 multiple choiceCHEM- St
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Grades:October MidtermDecember FinalOverall39%58%
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Grades:October Midterm60%December Final72%February Midterm45%April Final
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Grades:ECON 101October Midterm88%December FinalOverall88%ECON 102February MidtermApril FinalOverall67%
St. Francis Xavier, Antigonish - BSAD - 241
Grades:February MidtermApril FinalOverall90%
St. Francis Xavier, Antigonish - BSAD - 241
Grades:February MidtermApril FinalOverall82%
St. Francis Xavier, Antigonish - BSAD - 241
IndustryBenchmarkReport2009FinancialResultsSharePriceDividendPerShareShareholderValue(SHV)CumulativeChangeinSHViBikeAmarokEastCoastCycles WikeddBikes Pyrnes6StarBikesFirm7$9.18$0.00$9.181%$9.24$0.00$9.241%$9.45$0.00$9.452%$9.46$0.0
St. Francis Xavier, Antigonish - BSAD - 241
Major Presentation SpeechHello everyone, as you can tell we sell our products at discount prices. The retailprice of $500 for our mountain bike was the lowest in the industry and far below theindustry average of $534. Our youth bikes retail price of $2
St. Francis Xavier, Antigonish - BSAD - 241
SalesRevenueofPyrennesfromtheYears2008to2014SalesRevenue2014$14,604,8271.10%2013#10%201220112010# 95.20% $6,727,668 5.71% $7,135,70020090.86% $7,075,02820080.28% $7,055,620CostofGoodsSoldforPyreneesfromtheYears2008to2014SalesRevenueCosto
St. Francis Xavier, Antigonish - BSAD - 241
PyrnesCompany AnalysisAlex Cameron 200903194Jessie Mcewen 200905842Logan Burke 200701863Gabriel Besnard 201001589Romain Batut 201001595StrategyLow price, highvolumeMountain andYouth BikesControl marketshareMost successfuldiscount bikeprodu
St. Francis Xavier, Antigonish - BSAD - 241
APPENDIX1:INCOMESTATEMENTFORTHEYEARSENDING2010,2009and2008SalesSalesRevenueLess:CostofGoodsSoldGROSSMARGIN2010 200920102009 200820092008$7,135,700 0.86% $7,075,028 0.28% $7,055,620$4,095,360 6.13% $4,362,918 15.74% $3,769,576$3,040,340 12.10% $
St. Francis Xavier, Antigonish - BSAD - 241
To the Board of Directors of PyrnesThis report presents a preliminary marketing analysis of Pyrnes. The report is based onfinancial statement analysis of the years 2009-2010.Overview of the FirmPyrneshasimplementedalowprice,lowbrandingstrategyinthemou
St. Francis Xavier, Antigonish - BSAD - 241
To the Board of Directors of PyrnesThis report presents a preliminary financial analysis of Pyrnes. The report is based onfinancial statement analysis of the years 2009-2010.Overview of the FirmPyrneshasimplementedalowprice,lowbrandingstrategyinthemou
St. Francis Xavier, Antigonish - BSAD - 241
PyrnesCompany AnalysisAlex Cameron 200903194Jessie Mcewen 200905842Logan Burke 200701863Gabrielle BesnardRomain BatutIntroductionProduction capacity and inventoryEfficient operations (wastage, idle time)Quality and performanceConclusionProduct
St. Francis Xavier, Antigonish - BSAD - 241
Missed Classes:CHEM XPHILCHEMPHILCHEM XSTATBSADSTATSTATPHILPHILSTATBSADCHEMJan 12thJan 14thJan 15thFeb 4thFeb 12thFeb 18thFeb 18thFeb 23rdMar 9thMar 11thMar 15thMar 16thMar 16thMar 18thECON2 classes, date unknownMany unknown
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40Count60Mean days1008040200addA8060200UtilitiesTransportationTelecommunicationsTechnology EquipmentSoftware & ServicesServices/SuppliesSemiconductorsRetailingOil & GasMediaMaterialsInsuranceHousehold/Personal ProductsHotels/Re
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185.0180.0READING175.0170.0165.0160.0155.00.020.040.060.080.0100.060.080.0100.0POVERTY190.0MATH180.0170.0160.0150.00.020.040.0POVERTY8764.847.54639.635.631.6annrisk30.728.32726.726.325.724.523.82321.819.618.5
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PyrnesAlex Cameron 200903194Jessie McewenLogan BurkeRomain BatutGabriel Besnard
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Scorecard PerspectiveFinancialObjectives-MeasureIncrease return onstockholders equity.-Return on equity-EPSCustomer-To provide thecustomer with thebest possible productand do so the earliest.-Measure customerretention and brandloyalty
St. Francis Xavier, Antigonish - BSAD - 451
Accruals W/PAccrued LiabilitiesAudit FeesPower BillLegal Fees$9,000.00$225.00$5,365.10$14,590.10Accrued PayrollGross Wages (Dec 13-24)Gross Wages (Dec 25-31)$6,192.46$3,679.94$9,872.40Accrued Payroll LiabilitiesPayroll CostsEmployee Benef