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International Finance

International Finance - Practice Questions for Exam...

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Unformatted text preview: Practice Questions for Exam Preparation IMPORTANT NOTE ABOUT THIS DOCUMENT This file contains practice questions to test your understanding of the material and to help prepare for exams. As you review the questions, keep the following in mind: 0 These questions are based on your text, but have not been updated by the author for several years. As such, some of the material may be outdated or even incorrect today. 0 I have crossed out some questions that may be out of date. Other questions that I crossed out may still be relevant, but I am not covering those topics. Some questions that I crossed out may be current and correct, but will be covered in a different chapter. 0 I did not read every question in this document. It is likely that some questions should be omitted, so you need to use your discretion in some instances. 0 Some of the questions have answers filled in by hand. This was done by students who borrowed the original book from me in the past. The handwritten answers may be incorrect? 0 An answer key follows each section of questions. Be warned that in some rare instances, even the answer key may be incorrect. - Do not rely on this document as your primary source of learning. Inmclass notes are your primary source, followed by the latest edition of the text, with this study guide as the third source. 1,0. [Pivatizatio ll n l the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits an advantage a country possesses in the manufacture of .ijroduct Cycle Theory . ” oods 6 Answers to Key Terms Matching 9‘99???” b 7. h k 8. j g 9. e a 10.i d 11.f c I A Definitional Problems 1. _As for a purely domestic firm, the goal of a multinational corporation (MNC) is the 2. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of 3. Executive stock options, the threat of hostile takeover, and investor monitoring are all forms of that can be used to reduce agency problems in MNCs. “n.7— 4. Among the constraints interfering with the realization of the goal of an MNC are , , and constraints. 5. A management style trades off reduced agency costs with potentially poor decisions by parent company managers. 6. A management style trades potentially good decisions by subsidiary managers with increased agency costs. 7. The; " states that countries tend to use their advantages to specialize in the production of goods that can be producedwith relative efficiency, while trading for other w- "goods. 8. The . states that factors of production are somewhat immobile, allowing firms g to capitalize on a foreign country’s resources. 9. The, states that firms first become established in their home country and then penetrate foreign markets via geographic and/or product differentiation. 10. The least risky method of conducting international business is probably Multinational Financial Management: An Overview 5 11. obligates a firm to provide its technology, such as patents, in exchange for fees or some other specified benefit. 12. A venture jointly owned and operated by a domestic and a foreign firm is referred to as a 13. The,.mo primary methods of conducting international business that constitute foreign direct Westment are and 14. Due to an increased opportunity set, the marginal return on projects for an MNC is generally 1"" than that of a purely domestic firm. Analogously, due to a larger opportunity set of funding sources, the cost of capital for an MNC is generally than that of a purely domestic firm. 15. If MNCS have more projects to select from and a lower cost of capital than purely domestic xkfirrhs, their size should be than that of a purely domestic firm. 16. By expanding internationally, a firm may be less exposed to fluctuations in the home country economy. Nevertheless, MNCs occur additional risks in the form of 5 . and _ 1. maximization of shareholder wealth 11. Licensing 2. agency problems 12. joint venture 3. corporate control 13. the acquisition of existing operations; 4. environmental; regulatory; ethical the establishment of new foreign 5. centralized subsidiaries 6. decentralized 14. higher; lower . 7. Theory of Comparative Advantage 15. greater 8. Imperfect Markets Theory 16. exchange rate risk; exposure to foreign 9. Product Cycle Theory economic conditions; political risk 10. international trade (importing and exporting) f’ True/False Problems @ 1. Ely’goal of a multinational corporation (MNC) is the maximization of shareholder wealth. [I 2. If a firm were/edfnqposed of only one owner who was also the sole manager, the agency problem wofild not be completely eliminated. V” I! 3. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. & 4. A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an automatic increase in agency costs. 5. 19. 20. . , In recent y Chapter 1 A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary’s operations. e use of stock to finance business has on in other re 1 an increasing focus on maximizin ome more co countries, U.S.-based institutions rare are typically not monitored by mutual funds and pension funds, as these 1d stock in MNCs. Although MNés may be confronted with additional pollution controls (an environmental constraint), these are irrelevant, as the MNC is fully reimbursed by the US. government for any additional costs upon remittance of proper receipts. A given country’s government, if it chooses to, may prevent the remittance of earnings by a subsidiary to the parent company. In some countries, bribes are commonplace. If a U.S.-based MNC decides to adhere to a strict code of ethics and not pay bribes, its subsidiary may be at a competitive disadvantage in the foreign country. The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country’s resources. . Under the Theory of Comparative Advantage, trade between countries results from the nonproduction of certain goods in a given country due to inefficiency. . Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting. Franchising obligates a firm to provide its technology (such as copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits. In a joint venture, one firm is obligated to provide another firm with a specialized sales or service strategy in exchange for periodic fees. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries. While allowing for the highest degree of control of foreign business, the acquisition of existing operations in a foreign country and/or the establishment of foreign subsidiaries also entail the highest degree of risk when compared to the other methods of conducting international business. International trade is the most common form of direct foreign investment (DFI). Many MNCs use a combination of methods to increase international business. Multinational Financial Management: An Overview 7 21. Purely domestic firms face a larger opportunity set than MNCs and their projects provide a lower marginal return than projects faced by MNCs. can choose, an MNC may be able to obtain capital at a lower cost than a purely domestic % 22. Due to the larger opportunity set of funding sources around the world firom which an MNC firm. 2 . The Single European Act of 1987 made regulations more uniform among European countries. However, the cost of achieving this goal resulted in the imposition of additional taxes on goods traded between these countries. 24. The recent admission of many Eastern European countries to the EU is relevant because restrictions on their trade with Western Europe will be reduced. 2 U: The North American Free Trade Agreement (NAFTA) of 1993 eliminated trade barriers between the United States and Mexico. 2" Although MNCs may need to convert currencies occasionally, they do not face any exchange % 2 1 rate risk, as exchange rates are stable overtime. 2 T" When the parent’s home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency. I 28. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. 29. Although the exposure of MNCs to fluctuations in the home country’s economy is less than that of a purely domestic firm, it is more highly exposed to economic fluctuations of the foreign country in which it operates. 30. One form of an exposure to political risk is terrorism. Answers to T rue/F alse Problems 1. T 16. F 2. F 17. T 3. F 18. T 4. F 19. F 5. T 20. T' 6. T 21. F 7. F 22. T 8. F 23. F 9. T 24. T 10. T 25. T 11. F 26. F 12. F 27. F 13. T 28. T 14. T 29. T 15. F 30. T 8 Chapter 1 Multiple Choice Problems ““I. The goal of a multinational corporation (MNC) is - a. The minimization of taxes remitted from foreign subsidiaries. b. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. - c,, The maximization of shareholder wealth. d. The maximization of social benefits resulting from actions such as the employment of foreign managers. [I 2. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because ail/Monitoring of managers located in foreign countries is more difficult. b " oreign subsidiary managers raised in different cultures may not follow uniform goals. cl Cs are relatively large. d. a and b only c. All of the above- 3. Which of thelfgllgwingis correct regarding the monitoring offlforeign subsidiary managers? a. A centralized managemenWWosts butbéttermdecision making by subsidiary managers. b. A decentralized management style results in increased agency costs but poor decision making by subsidiary managers. c. It is generally easier for an MNC to monitor the decisions made by subsidiary managers than manifestingiglftieiitstéas'rfiay'ae’monnored by the parent’s management. e. Since an'MNC’s fore‘ig—n‘siibsidiaries are separate legal entities, the monitoring of subsidiary managers is inconsequential. i is for a purely domestic firm. n d. ome MNCs allow subsidiary managers to make the key decisions about their respective W 4. Which of the following a form of corporate control that can be used to reduce agency problems in MNCs? ' " " ' ' a. $6612 options b. Hostile takeover threat 0. Investor monitoring fix A decentralized management style c. All of the ab0ve are forms of corporate control that can be used to reduce agency problems in MNCS (w- 5. Which of the following is not @ioned in the text as a constraint interfering with an MNC’s goal? mat—ml. . . . . . . ___ 7 _ seawLegal constraints b. Environmental constraints 6. Regulatory constraints d. Ethical constraints 6. All of the above are mentioned in the text as constraints interfering with an MNC’s goal Multinational Financial Management: An Overview 6. g a. ' b. C. Which of the following is not mentioned in the text {sfa theory of international business??- Theory of Comparative Advantage w 7 Imperfect Markets Theory Product Cycle Theory Globalization of Business Theory 6. g 7. i av b. C. d. 6. i s. a. All of the above are mentioned in the text as theories of international business Which of the following events would coWypamfiveAfivantage? U.S. firm manufacturing computers imports the needed components from Taiwan. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. A U.S. fmn manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. All of the above None of the above Which of the following events would confirm the lm erf {Aw-rm A U.S. firm manufacturing computers imports the needed components from Taiwan. -- bgflh U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. C. d. e. i2: b. C. d. e. t a. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. All of the above None of the above A U.S. firm manufacturing computers imports the nEEdEdWESmponents from Taiwan. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. All of the above None of the above Which of the following events would confirm the Product Cycle Theogflfl 10. The most risky method(s) by which firinsconduct international business is (are) Franchismg. he acquisitions of existing operations. " c/"The establishment of new subsidiaries. d L e. £13 and c only All of the above M 11. Thgleast riskde by which firms conduct international business is a .. .. i ,, , .. .. .. b. c. d. a e. Franchising. The acquisitions of existing operations. Hlxlgterfitional trade. The establishment of new subsidiaries. Licensing. g 12. Which of the following does not constitute a form of direct foreign investment? a. -_ ‘ Wfiv _._ A. Franchising. International trade C. d. e. Joint ventures/ Acquisitions qfiexisting operations Establishment of negyidreign subsidiaries 10 A 13. a. b. C. C. 14. a. Chapter 1 obligates a firm to provide a specialized sales or service strategy, support assistance, and possible an initial investment in exchange for periodic fees. Franchising International trade A,joint venture icensing None of the above Which of the following is not mentioned in the text as a reason for the increased Gyms?» r An increase in GNP of virtually all countries in recent years globalization lamp/An increase in international trade c1 ,/Growth in direct foreign investment in recent years d. ,lncreased privatization in recent years .I, as. a. b. MMNCs generally face a larger opportunity set than purely domestic firms due to possible cost .r" eL. An increased standardization of products and serv1ces across countries in recent years Which of the following is true regarding MNCs generally face a smaller oppoiztfinty set than purely domestic firms because it is more costly to establish subsidiaries in foreign countries. advantages and/or revenue opportunities. Q/JIVf-NCS may be able to obtain financing at a lower cost than purely domestic firms. d. e. w . b. 17. are ncreased regulatory uniformitfamong European countries a and c only b31141.me . Which of the following is true regarding MNCs? The marginal return on projects fiébdby’MWEsis always lower than the return on projects faced by purely domestic firms. The cost of capital faced by MNCs is always larger than that faced by purely domestic firms. The cost of capital faced by MNCs is always smaller than that faced by purely domestic firms. (flyfit’l’though MNCs may have an advantage relative to purely domestic firms in terms of funding “A sources, its cost of capital may be higher than that of a purely domestic firm because foreign projects are riskier than domestic projects. There are always feasible foreign projects for an MNC. ich of the following is not a provision or result of the Single European Act of .r‘____ h.“_____‘_.___e———«-—-"-—--r-r— . The phasing in of a common currency for all European countries by 1992 01/ The removal of many taxes on goods traded between European countries dvr’ Firms’ ability to achieve economies of scale eWAll of the above Multinational Financial Management: An Overview 1 1 18. Which of the following is not mentioned in the text as an additionalfrislgrgsulting from international business? "M" m a. “Exchange rate fluctuations ‘m-J . . . bvrPohtical risk mafinancial risk dn./ Country risk e ,- Exposure to foreign economies g 19. Many U.S. firms view " a” as the country with the highest growth potential. a China b. Japan c. Germany (1 Mexico e Korea g 20. Which of the following is not an example of hogan MNC can be affected by exchange rate 7M..—..___,,._..-u—v‘“" - . ............. ..-,...i-..,~.-——-w-——-wavv —- ---——_.77 ,--.-,‘,V._...M__ ,___..,,7... MW, ,_,, . a. fDue to exchange rate fluctuations, the number of units of a firm’s home currency needed to V purchase foreign supplies can change even if suppliers have not adjusted their prices. b. When the home currency strengthens, products denominated in that currency become more I” expensive to foreign customers, which may reduce foreign demand for the MNC’s products. 9., ' When the home currency weakens, products denominated in that currency become cheaper to v foreign customers, which may increase foreign demand for the MNC’s products. 'd\ Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a ' stronger home currency. e. X’Remitted earnings from the foreign subsidiary of a U.S.—based MNC may increase due to a L/ weaker home currency. .4. ‘ . . . . I .Eliylflflg ' .. . W21. Licensmg obligates a firm togprovide fir r; it: ‘— t , whil franchising obligates a firm to provide f ;; act '5 w"? t.rg’ty'«£. 5e "Iii-Hit”. ti a A specialized s ies or service strategy; its technology "A _ b. Its technology; a specialized sales or service strategy ’ c. Its technology; its technology d e A specialized sales or service strategy; a specialized sales or service strategy Its technology; an initial investment . I gen 21], MNCs may be expected to are a iii ii I marginal return on projects than p e domestic firms and a i - 4‘ cost ofcapital. 2. er, higher b. ; lower c Lowe higher d. iHigher; lower. ._ ... e None of the above 5% 23. Which of the following is not a way in which agency problems can be reduced through corporate iiiiii i./‘--"‘——'—'m—#-M~—’r—““~fi—~-—--——-~- - dew-~- ---- «em-w- ----—.. at, Executive compensation Threat of hostile takeover es\_Acquisition of a foreign subsidiary Monitoring by large shareholders e. None of the above 12 Chapter 1 1. c 13. d 2. e 14. a 3. d 15. e 4. d 16. d 5. a 17. b 6. d 18. c 7. a 19. a 8. b 20. d 9. c 21. b 10. d 22. d 11. c 23. c 12. b in foreign countries that can be business operations : sting long-term financial assets (such as tween countries that do not affect the Definitional Problems 1. The is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time. 2. The account and the account are the two primary components of the balance of payments. 3. Changes in country ownership of long-term and short—term assets are measured in the balance of payments with the 4. One of the primary components of the current account is the , which is the difference between merchandise and service exports and imports. t/W- _, 5. rep ts income in the form of intere ta MS received by investors on foreign i ment in financial assets. 6. Among the factors affecting international trade flows are , and movements. 1M» 7. represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. 8. represents the investment in fixed assets in foreign countries that can be used to conduct business operations. 9. Two agreements that influenced US. trade with other countries are and 18 Chapter 2 10. Exporting of products by one country t...
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