International Financial Management, 8e (Eun)

Chapter 12 International Bond Market

1) Eurobonds sold in the United States may not be sold to U.S. citizens.

Answer: TRUE
Topic: National Security Regulation
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2) Domestic bonds account for the largest share of outstanding bonds, equaling
approximately what percent of the total?
A) 78 percent
B) 45 percent
C) 25 percent
D) 15 percent

Answer: A
Topic: The World's Bond Markets: A Statistical Perspective
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3) Proportionately more domestic bonds than international bonds are dominated in

A) the dollar.
B) the yen.
C) the dollar and the yen.
D) none of the options

Answer: C
Topic: The World's Bond Markets: A Statistical Perspective
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4) A "foreign bond" issue is

A) one denominated in a particular currency but sold to investors in national capital markets
other than the country that issued the denominating currency.
B) one offered by a foreign borrower to investors in a national market and denominated in
that nation's currency.
C) for example, a German MNC issuing dollar-denominated bonds to U.S. investors.
D) one offered by a foreign borrower to investors in a national market and denominated in
that nation's currency (e.g., a German MNC issuing dollar-denominated bonds to U.S.
investors).

Answer: D
Topic: Foreign Bonds and Eurobonds
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5) The four currencies in which the majority of domestic and international bonds are
denominated are
A) U.S. dollar, the euro, the Indian rupee, and the Chinese yuan.
B) U.S. dollar, the euro, the pound sterling, and the Swiss franc.
C) U.S. dollar, the euro, the Swiss franc, and the yen.
D) U.S. dollar, the euro, the pound sterling, and the yen.

Answer: D
Topic: Foreign Bonds and Eurobonds
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6) A "Eurobond" issue is
A) one denominated in a particular currency but sold to investors in national capital markets
other than the country that issued the denominating currency.
B) usually a bearer bond.
C) for example, a Dutch borrower issuing dollar-denominated bonds to investors in the U.K.,
Switzerland, and the Netherlands.
D) all of the options

Answer: D
Topic: Foreign Bonds and Eurobonds
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7) Proportionately more domestic bonds than international bonds are denominated in the
and the while more international bonds than domestic bonds are
denominated in the and the .
A) euro; yen; dollar; pound sterling
B) dollar; pound sterling; euro; yen
C) euro; pound sterling; dollar; yen
D) dollar; yen; euro; pound sterling

Answer: D
Topic: Foreign Bonds and Eurobonds
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8) In any given year, rightly 80 percent of new international bonds are likely to be
A) Eurobonds.
B) foreign currency bonds.
C) domestic bonds.
D) none of the options

Answer: A
Topic: Foreign Bonds and Eurobonds
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9) "Yankee" bonds are
A) dollar-denominated foreign bonds originally sold to U.S. investors.
B) yen-denominated foreign bonds originally sold in Japan.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

Answer: A
Topic: Foreign Bonds and Eurobonds
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10) "Samurai" bonds are

A) dollar-denominated foreign bonds originally sold to U.S. investors.
B) yen-denominated foreign bonds originally sold in Japan.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

Answer: B
Topic: Foreign Bonds and Eurobonds
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11) "Dragon" bonds are

A) dollar-denominated foreign bonds originally sold to U.S. investors.
B) dollar-denominated bonds originally sold in Asia with non-Japanese issuers.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

Answer: B
Topic: Foreign Bonds and Eurobonds
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12) "Bulldog" bonds are

A) dollar-denominated foreign bonds originally sold to U.S. investors.
B) yen-denominated foreign bonds originally sold in Japan.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

Answer: C
Topic: Foreign Bonds and Eurobonds
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13) A "bearer bond" is one that

A) shows the owner's name on the bond.
B) the owner's name is recorded by the issuer.
C) possession is evidence of ownership.
D) shows the owner's name on the bond, and the owner's name is recorded by the issuer.

Answer: C
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Topic: Bearer Bonds and Registered Bonds
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14) A "registered bond" is one that

A) shows the owner's name on the bond.
B) the owner's name is recorded by the issuer.
C) the owner's name is assigned to a bond serial number recorded by the issuer.
D) all of the options

Answer: D
Topic: Bearer Bonds and Registered Bonds
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15) U.S. security regulations require Yankee bonds and U.S. corporate bonds sold to U.S.
citizens to be
A) municipal bonds.
B) registered bonds.
C) bearer bonds.
D) none of the options

Answer: B
Topic: Bearer Bonds and Registered Bonds
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16) Eurobonds are usually

A) bearer bonds.
B) registered bonds.
C) bulldog bonds.
D) foreign currency bonds.

Answer: A
Topic: Bearer Bonds and Registered Bonds
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17) Investors will generally accept a lower yield on than on of comparable

terms, making them a less costly source of funds for the issuer to service.
A) bearer bonds; registered bonds
B) registered bonds; bearer bonds
C) Eurobonds; domestic bonds
D) domestic bonds; Eurobonds

Answer: A
Topic: Bearer Bonds and Registered Bonds
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18) With a bearer bond,
A) possession is evidence of ownership.
B) the issuer keeps records indicating only who the current owner of a bond is.
C) the owner's name is on the bond.
D) the owner's name is assigned to the bond serial number, but not indicated on the bond.

Answer: A
Topic: Bearer Bonds and Registered Bonds
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19) Publicly traded Yankee bonds must

A) meet the same regulations as U.S. domestic bonds.
B) meet the same regulations as Eurobonds if sold to Europeans.
C) meet the same regulations as Samurai bonds if sold to Japanese.
D) none of the options

Answer: A
Topic: National Security Regulation
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20) Securities sold in the United States to public investors must be registered with the SEC, and a
prospectus disclosing detailed financial information about the issuer must be provided and made
available to prospective investors. This encourages foreign borrowers wishing to raise U.S.
dollars to use
A) the Eurobond market.
B) their domestic market.
C) bearer bonds.
D) none of the options

Answer: A
Topic: National Security Regulation
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21) Because _ do not have to meet national security regulations, name recognition of the
issuer is an extremely important factor in being able to source funds in the international capital
market.
A) Eurobonds
B) Foreign bonds
C) Bearer bonds
D) Registered bonds

Answer: A
Topic: National Security Regulation
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22) The shorter length of time in bringing a Eurodollar bond issue to market, coupled with the
lower rate of interest that borrowers pay for Eurodollar bond financing in comparison to Yankee
bond financing, are two major reasons why the Eurobond segment of the international bond
market is roughly the size of the foreign bond segment.
A) four times
B) two times
C) ten times
D) one hundred times

Answer: A
Topic: National Security Regulation
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23) The Eurobond segment of the international bond market

A) is roughly four times the size of the foreign bond segment.
B) has considerably less regulatory hurdles than the foreign bond segment.
C) typically has a lower rate of interest that borrowers pay in comparison to Yankee
bond financing.
D) all of the options

Answer: D
Topic: National Security Regulation
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24) U.S. corporations

A) are allowed to issue bearer bonds to non-U.S. citizens.
B) are not allowed to issue bearer bonds.
C) are allowed to issue treasury bonds but not T-bills.
D) none of the options

Answer: A
Topic: Withholding Taxes
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25) The withholding tax on bond income was originally called the interest equalization tax.
A) You can thank John F. Kennedy for imposing this tax.
B) You can thank Ronald Reagan for imposing this tax.
C) You can thank Jimmy Carter for imposing this tax.
D) You can thank George Washington for imposing this tax.

Answer: A
Topic: Withholding Taxes
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26) Shelf registration
A) allows the shelves in a set of bookshelves to remain level.
B) allows an issuer to preregister a securities issue, and then "shelve" the securities for later sale.
C) allows an investment bank to increase the fees they charge by charging for storage of
the "shelved" securities.
D) eliminates the information disclosure that many foreign firms found objectionable in the
foreign bond market.

Answer: B
Topic: Security Regulations that Ease Bond Issuance
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27) Private placement bond issues

A) do not have to meet the strict information disclosure requirements of publicly traded issues.
B) have auditing requirements that do not adhere to publicly traded issues.
C) meet the strict information disclosure requirements of publicly traded issues, but have larger
minimum denominations.
D) none of the options

Answer: A
Topic: Security Regulations that Ease Bond Issuance
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28) One unintended consequence of Sarbanes-Oxley

A) is that international companies are starting to prefer issuing Eurobonds in the private
placement market in the U.S. to avoid costly information disclosure required of registered bonds.
B) is that international companies are starting to prefer to issue Yankee bonds in the private
placement market in the U.S.
C) is that international companies are starting to prefer issuing Yankee bonds in the bearer
bond market in the U.S. to avoid costly information disclosure required of registered bonds.
D) is that international companies have left the bond market in the U.S. to avoid costly
information disclosure required of registered bonds.

Answer: B
Topic: Security Regulations that Ease Bond Issuance
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29) Global bond issues were first offered in

A) 1889.
B) 1989.
C) 1999.
D) 2007.

Answer: B
Topic: Global Bonds
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30) Purchasers of global bonds are
A) mainly institutional investors to date.
B) desirous of the increased liquidity of the issues.
C) have been willing to accept lower yields.
D) all of the options

Answer: D
Topic: Global Bonds
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31) A "global bond" issue

A) is a very large international bond offering by several borrowers pooled together.
B) is a very large international bond offering by a single borrower that is simultaneously sold
in several national bond markets.
C) has higher yields for the purchasers.
D) has a lower liquidity.

Answer: B
Topic: Global Bonds
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32) A global bond issue denominated in U.S. dollars and issued by U.S. corporations
A) trade as Eurobonds overseas.
B) trade as domestic bonds in the U.S. domestic market.
C) trade as Eurobonds overseas and trade as domestic bonds in the U.S. domestic market.
D) none of the options

Answer: C
Topic: Global Bonds
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33) Global bond issues

A) can save U.S. issuers 20 basis points relative to domestic bonds, all else equal.
B) tend to have increased liquidity relative to Eurobonds or domestic bonds.
C) have been partially facilitated by rule 144A.
D) all of the options

Answer: D
Topic: Global Bonds
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34) In terms of the types of instruments offered,
A) the Yankee bond market has been more innovative than the international bond market.
B) the international bond market has been much more innovative than the U.S. market.
C) the most innovations have come from Milan, just like any other fashion.
D) none of the options

Answer: B
Topic: Types of Instruments
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35) Find the present value of a 2-year Treasury bond that pays a semi-annual coupon, has a
coupon rate of 6 percent, a yield to maturity of 5 percent, a par value of $1,000 when the yield to
maturity is 5 percent.
A) $1,018.81
B) $1,231.15
C) $699.07
D) none of the options

Answer: A
Explanation: Inputs are as follows: FV = $1,000; PMT = $30 (0.06/2 = 0.03; 0.03 × 1,000 = 30);
N = 4 (2 years × 2 payments per year = 4); I = 2.5% (5% /2 = 2.5%).
Topic: Straight Fixed-Rate Issues

36) Find the present value of a 3-year bond that pays an annual coupon, has a coupon rate of 6
percent, a yield to maturity of 5 percent, a par value of €1,000 when the yield to maturity is 5
percent.
A) €1,018.81
B) €1,027.23
C) €1,099.96
D) none of the options

Answer: B
Explanation: Inputs are as follows: FV = €1,000; PMT = €60 (0.06 × 1,000 = 60); N = 3 (3 years
× 1 payment per year = 3); I = 5%.
Topic: Straight Fixed-Rate Issues

37) Find the present value of a 30-year bond that pays an annual coupon, has a coupon rate of
6 percent, a yield to maturity of 5 percent, a par value of €1,000 when the yield to maturity is 5
percent.
A) €1,018.81
B) €1,027.23
C) €1,153.73
D) none of the options

Answer: C
Explanation: Inputs are as follows: FV = €1,000; PMT = €60 (0.06 × 1,000 = 60); N = 30 (30
years × 1 payment per year = 30); I = 5%.
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Topic: Straight Fixed-Rate Issues

38) The vast majority of new international bond offerings

A) are straight fixed-rate notes.
B) are callable and convertible.
C) are convertible adjustable rate.
D) are adjustable rate, with interest rate caps and collars.

Answer: A
Topic: Straight Fixed-Rate Issues
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39) The vast majority of new international bond offerings

A) make annual coupon payments.
B) have fixed coupon payments.
C) have a fixed maturity.
D) all of the options

Answer: D
Topic: Straight Fixed-Rate Issues
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40) In contrast to many domestic bonds, which make coupon payments, coupon
interest on Eurobonds is typically paid .
A) semiannual; annually
B) annual; semiannually
C) quarterly; semiannually
D) quarterly; annually

Answer: A
Topic: Straight Fixed-Rate Issues
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41) Straight fixed-rate bond issues have

A) a designated maturity date at which the principal of the bond issue is promised to be repaid.
During the life of the bond, fixed coupon payments, which are a percentage of the face value,
are paid as interest to the bondholders.
B) a designated maturity date at which the principal of the bond issue is promised to be repaid.
During the life of the bond, coupon payments, which are a percentage of the face value, are
computed according to a fixed formula.
C) a fixed payment, which amortizes the debt, like a house payment or car payment.
D) none of the options

Answer: A
Topic: Straight Fixed-Rate Issues
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42) The coupon interest on Eurobonds
A) is paid annually.
B) is paid in cash.
C) is paid in arrears.
D) all of the options

Answer: A
Topic: Straight Fixed-Rate Issues
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43) Eurobonds are usually

A) registered bonds.
B) bearer bonds.
C) floating-rate, callable and convertible.
D) denominated in the currency of the country that they are sold in.

Answer: B
Topic: Straight Fixed-Rate Issues
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44) Unlike a bond issue, in which the entire issue is brought to market at once, is
partially sold on a continuous basis through an issuance facility that allows the borrower to
obtain funds only as needed on a flexible basis.
A) a Euro-medium term note issue
B) bearer bond
C) a Euro-long term note issue
D) a Euro-short term note issue

Answer: A
Topic: Euro-Medium-Term Notes
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45) Euro-medium term notes

A) are typically fixed-rate corporate notes issued with maturities ranging from less than a year to
about ten years.
B) are typically fixed-rate corporate notes issued with maturities ranging from three years to
about ten years.
C) are sold just like bonds in the primary market.
D) none of the options

Answer: A
Topic: Euro-Medium-Term Notes
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46) Six-month U.S. dollar LIBOR is currently 4.25 percent; your firm issued floating-rate notes
indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of the next
semi-annual coupon payment per U.S. $1,000 of face value?
A) $43.75
B) $47.50
C) $23.75
D) $46.875

Answer: C
Explanation: $23.75 = 0.5 × (0.0425 + 0.0050) × $1,000
Topic: Floating-Rate Notes

47) Find the yield to maturity for this floating rate note: The reset date is today; coupons are
paid annually according to the formula (LIBOR + ¼ percent); since issuance, there has not been
a change in the issuer's credit rating. The bond has ten years to maturity and LIBOR = 3.5
percent.
A) 3.5 percent
B) 4 percent
C) 3.75 percent
D) There is not enough information provided to make a determination.

Answer: D
Topic: Floating-Rate Notes
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48) Floating-rate notes (FRN)

A) experience very volatile price changes between reset dates.
B) are typically medium-term bonds with coupon payments indexed to some reference rate
(e.g., LIBOR).
C) appeal to investors with strong need to preserve the principal value of the investment should
they need to liquidate prior to the maturity of the bonds.
D) are typically medium-term bonds with coupon payments indexed to some reference rate (e.g.,
LIBOR), and appeal to investors with strong need to preserve the principal value of the
investment should they need to liquidate prior to the maturity of the bonds.

Answer: D
Topic: Floating-Rate Notes
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49) On a reset date, floating-rate notes

A) experience very volatile price changes.
B) market price will usually gravitate toward par.
C) market price will usually gravitate toward par, unless the borrowers' credit rating has declined.
D) none of the options

Answer: C

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Topic: Floating-Rate Notes
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50) Floating-rate notes
A) are a form of adjustable rate bond.
B) have contractually specified coupon payments, therefore they are fixed rate bonds.
C) always trade at par value.
D) are a form of adjustable rate bond and always trade at par value.

Answer: A
Topic: Floating-Rate Notes
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51) A five-year floating-rate note has coupons referenced to six-month dollar LIBOR, and pays
coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk
premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on
a
$1,000 face value FRN will be
A) $29.375
B) $30,000
C) $30.625
D) $61.250

Answer: C
Explanation: $30.625 = 0.5 × (0.06 + 0.00125) × $1,000
Topic: Floating-Rate Notes

52) Floating rate notes behave differently in response to interest rate risk than straight fixed-rate
bonds.
A) True since FRNs experience only mild price changes between reset dates, over which time the
next period's coupon payment is fixed (assuming, of course, that the reference rate corresponds
to the market rate applicable to the issuer).
B) False since all bonds experience an inverse price change when the market rate of
interest changes.
C) all of the options
D) none of the options

Answer: A
Topic: Floating-Rate Notes
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53) A ten-year floating-rate note (FRN) has coupons referenced to 3-month pound LIBOR, and
pays coupon interest quarterly. Assume that the current 3-month LIBOR is 4 percent. If the risk
premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon
payment on a £1,000 face value FRN will be
A) £31.25.
B) £82.50.
C) £165.00.
D) £41.25.

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Answer: D

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Explanation: £41.25 = 0.25 × (0.04 + 0.00125) × £1,000
Topic: Floating-Rate Notes

54) The floor value of a convertible bond

A) is the "straight bond" value.
B) is the conversion value.
C) is the minimum of the "straight bond" value and the conversion value.
D) is the maximum of the "straight bond" value and the conversion value.

Answer: D
Topic: Equity-Related Bonds
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55) There are two types of equity related bonds:

A) convertible bonds and dual currency bonds.
B) convertible bonds and kitchen sink bonds.
C) convertible bonds and bonds with equity warrants.
D) callable bonds and exchangeable bonds.

Answer: C
Topic: Equity-Related Bonds
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56) Bonds with equity warrants

A) are really the same as convertible bonds if the stated price of exercising the warrant is the
par value of the bond.
B) can be viewed as straight debt with a call option (technically a warrant) attached.
C) can only be exercised on coupon dates.
D) typically are convertible as well.

Answer: B
Topic: Equity-Related Bonds
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57) A convertible bond pays interest annually at a coupon rate of 5 percent on a par value of
$1,000. The bond has 10 years maturity remaining and the discount rate on otherwise identical
non-convertible debt is 6.5 percent. The bond is convertible into shares of common stock at a
conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Today's
closing stock price was $20. What is the floor value of this bond?
A) $800.00
B) $892.17
C) $1,250
D) none of the options

Answer: B
Explanation: Inputs are as follows: N = 10; I = 6.5%; PMT = $50 (0.05 × 1,000 = 50); FV =
$1,000. The present value is $892.17. The conversion value is $800 (40 × $20). The greater of the
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two is the floor value, thus, the answer is $892.17.
Topic: Equity-Related Bonds

58) A convertible bond pays interest annually at a coupon rate of 5 percent on a par value of
$1,000. The bond has 10 years maturity remaining and the discount rate on other-wise identical
non-convertible debt is 5 percent. The bond is convertible into shares of common stock at a
conversion price of $25 per share (i.e., the bond is exchangeable for 40 shares). Today's
closing stock price was $31.25. What is the floor value of this bond?
A) $800.00
B) $1,000
C) $1,250
D) none of the options

Answer: C
Explanation: Inputs are as follows: N = 10; I = 5%; PMT = $50 (0.05 × 1,000 = 50); FV =
$1,000. The present value of the bond is $1,000. The conversion value is $1,250 (40 × $31.25).
The greater of the two is the floor value, thus, the answer is $1,250.
Topic: Equity-Related Bonds

59) Consider a bond with an equity warrant. The warrant entitles the bondholder to buy 25 shares
of the issuer at €50 per share for the lifetime of the bond. The bond is a 30-year zero coupon
bond with a €1,000 par value that has a yield to maturity of i€ = 5 percent. The price of the bond
is €500. What is the value of the warrant?
A) €231.38
B) €268.62
C) €500
D) none of the options

Answer: A
Explanation: Inputs are as follows: N = 30; I = 5% ; PMT = 0 (i.e., zero-coupon bond); and FV =
1,000.
Topic: Equity-Related Bonds

60) Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield
to maturity of i€ = 5 percent.
A) €231.38
B) €432.20
C) €4,321.94
D) none of the options

Answer: A
Explanation: Inputs are as follows: N = 30; I = 5%; PMT = 0 (i.e., zero-coupon bond); and FV =
1,000.
Topic: Zero-Coupon Bonds

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61) U.S. citizens must pay tax on the imputed interest represented by the fact that zero coupon
bonds price gets a bit closer to par value as each year goes by. If you have a 25-year zero
coupon bond with $1,000 par value, how much imputed interest will you record in the coming
year if interest rates stay the same at ten percent?
A) $92.30
B) $10
C) $0
D) none of the options

Answer: B
Explanation: First, find the value of the bond using these inputs: N = 25; PMT = $0; I = 10%;
and FV = $1,000. The value of the bond is $92.30. Now, divide the future value of the bond by
the present value ($1,000 / $92.30), which gives $10.83. Finally, raise $10.83 to the 0.04 power
(calculated as 1/25). This yield $0.0999. Multiply by 100, which gives $10.
Topic: Zero-Coupon Bonds
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62) Zero-coupon bonds issued in 2016 are due in 2026. If they were originally sold at 55 percent
of face value, the implied yield to maturity at issuance is
A) 1.062 percent.
B) 6.17 percent.
C) 8.31 percent.
D) cannot be determined, need more information.

Answer: B
Explanation: YTM = (Par Value / PV of Bond) ^ (1/N) − 1. The easiest way to solve this
problem is to imagine a specific bond. Let's assume the bond has a par value of $1,000. If the
bond was sold at 55 percent of the face value, we know the bond was sold for $550. The formula
then looks like this: (1,000 / 550) ^ (1/10) − 1 = 6.17%.
Topic: Zero-Coupon Bonds

63) Zero coupon bonds

A) pay interest at zero percent.
B) are sold at a discount from par value.
C) are attractive to Japanese investors who are not required to pay taxes on capital gains.
D) pay interest at zero percent and are sold at a discount from par value.

Answer: D
Topic: Zero-Coupon Bonds
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64) Zero coupon bonds
A) have no interest income.
B) are sold at a premium to par value.
C) give only capital gains income.
D) have no interest income and give only capital gains income.

Answer: D
Topic: Zero-Coupon Bonds
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65) When the bond sells at par, the implicit €/$ exchange rate at maturity of a Euro/U.S. dollar
dual currency bond that pays $651.25 at maturity per €1,000, is
A) €1.54/$1.00.
B) €1.22/$1.00.
C) €1.79/$1.00.
D) €1/$1.00.

Answer: A
Explanation: Solve the following proportion for X: ($651.25 / €1,000) = ($1 / X), where X =
€1.54.
Topic: Dual-Currency Bonds

66) When the bond sells at par, the implicit SF/$ exchange rate at maturity of a Swiss
franc/U.S. dollar dual currency bond that pays $581.40 at maturity per SF1,000, is
A) SF0.58/$1.00.
B) SF1.58/$1.00.
C) SF1.72/$1.00.
D) SF1.95/$1.00.

Answer: C
Explanation: Solve the following proportion for X: ($581.40 / SF1,000) = ($1 / X), where X =
SF1.72.
Topic: Dual-Currency Bonds
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67) Consider a British pound—U.S. dollar dual currency bonds that pay £581.40 at maturity per
$1,000 of par value. If at maturity, the exchange rate is $1.90 = £1.00,
A) you should insist on getting paid in dollars.
B) investors holding this bond are better off for the exchange rate.
C) the issuer of the bond is worse off for the exchange rate.
D) investors holding this bond are better off for the exchange rate and the issuer of the bond
is worse off for the exchange rate.

Answer: D
Topic: Dual-Currency Bonds
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68) Assuming that the bond sells at par, the implicit $/€ exchange rate at maturity of a Euro—
U.S. dollar dual currency bond that pays €651.25 at maturity per $1,000 of par value is
A) $1.72/€1.00.
B) $1.54/€1.00.
C) $1.27/€1.00.
D) $1.62/€1.00.

Answer: B
Explanation: Solve the following proportion for X: (€651.25 / $1,000) = (€1 / X) = $1.54.
Topic: Dual-Currency Bonds

69) Assuming that the bond sells at par, the implicit $/£ exchange rate at maturity of a British
pound—U.S. dollar dual currency bond that pays £581.40 at maturity per $1,000 of par value
is A) $1.95/£1.00.
B) $1.72/£1.00.
C) $1.58/£1.00.
D) $0.5814/£1.00.

Answer: B
Explanation: Solve the following proportion for X: (£581.40 / $1,000) = (£1 / X) = $1.72.
Topic: Dual-Currency Bonds

70) Your firm has just issued five-year floating-rate notes indexed to six-month U.S. dollar
LIBOR plus 1/4 percent. What is the amount of the first coupon payment your firm will pay per
U.S.
$1,000 of face value, if six-month LIBOR is currently 7.2
percent? A) $36.00
B) $37.25
C) $74.50
D) none of the options

Answer: B
Explanation: $37.25 = 0.5 × (0.072 + 0.0025) × $1,000
Topic: Dual-Currency Bonds

71) Which of the following is not one of the five main sovereign rating factors?
A) Religiosity assessment
B) Institutional assessment
C) Economic assessment
D) Monetary assessment

Answer: A
Topic: Assessing the Five Main Sovereign Rating Factors
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72) Which of the following best reflects a country's ability to obtain funds from abroad
necessary to meet its public- and private-sector obligations to nonresidents?
A) Fiscal assessment
B) External assessment
C) Monetary assessment
D) Institutional assessment

Answer: B
Topic: Assessing the Five Main Sovereign Rating Factors
Accessibility: Keyboard Navigation

73) The fiscal assessment considers

A) fiscal flexibility.
B) long-term fiscal trends and vulnerabilities.
C) debt structure.
D) all of the options

Answer: D
Topic: Assessing the Five Main Sovereign Rating Factors
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74) Which of the following factors is not considered in the fiscal assessment?
A) Equity structure
B) Fiscal flexibility
C) Debt structure
D) Funding access

Answer: A
Topic: Assessing the Five Main Sovereign Rating Factors
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75) The extent to which a sovereign's monetary authority can fulfill its mandate while supporting
sustainable economic growth and attenuating major economic or financial shocks is best
described as the
A) external assessment.
B) monetary assessment.
C) institutional assessment.
D) fiscal assessment.

Answer: B
Topic: Assessing the Five Main Sovereign Rating Factors
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76) A potentially significant factor in slowing or preventing a deterioration of
sovereign creditworthiness in times of stress is (are)
A) stringent monetary policy.
B) flexible monetary policy.
C) large credit lines.
D) liquid assets.

Answer: B
Topic: Assessing the Five Main Sovereign Rating Factors
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77) What type of economies tend to produce higher wealth levels because they enable
more efficient allocation of resources to promote sustainable, long-term economic growth?
A) Centrally planned
B) Command
C) Market-oriented
D) none of the options

Answer: C
Topic: Assessing the Five Main Sovereign Rating Factors
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78) Which of the following reflects the sustainability of a sovereign's deficits and debt burden?
A) Institutional assessment
B) External assessment
C) Fiscal assessment
D) Monetary assessment

Answer: C
Topic: Assessing the Five Main Sovereign Rating Factors
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79) "Investment grade" ratings are in these categories.

A) Moody's: AAA to BBB and S&P Global Ratings: Aaa to Baa
B) Moody's: Aaa to Baa and S&P Global Ratings: AAA to BBB
C) Moody's: AAA to A and S&P Global Ratings: Aaa to A
D) Moody's: Aaa to A and S&P Global Ratings: AAA to A

Answer: B
Topic: International Bond Market Credit Ratings
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80) S&P Global Ratings has, for years, provided credit ratings on international bonds.
A) The ratings reflect the safety of principal for a U.S. investor.
B) Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty.
C) Their ratings reflect creditworthiness of the lender and predict the exchange rate expected
to prevail at maturity.
D) The ratings are biased since 40 percent of Eurobond issues are rated AAA and 30 percent are
AA.

Answer: B
Topic: International Bond Market Credit Ratings
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81) A disproportionate share of Eurobonds have high credit ratings in comparison to domestic
and foreign bonds. (Approximately 40 percent of Eurobond issues are rated AAA and 30 percent
are AA). Explanations for this include
A) the issuers receiving low credit ratings invoke their publication rights and have had them
withdrawn prior to dissemination.
B) the Eurobond market is accessible only to firms that have good credit ratings and
name recognition to begin with; hence, they are rated highly.
C) there is "grade inflation" on the part of the bond rating agencies which are paid by the
issuers and have to compete for business.
D) the issuers receiving low credit ratings invoke their publication rights and have had them
withdrawn prior to dissemination, and the Eurobond market is accessible only to firms that have
good credit ratings and name recognition to begin with; hence, they are rated highly.

Answer: D
Topic: International Bond Market Credit Ratings
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82) The credit rating of an international borrower

A) depends on the volatility of the exchange rate.
B) depends on the volatility, but not absolute level, of the exchange rate.
C) is usually never higher than the rating assigned to the sovereign government of the country in
which it resides.
D) is unrelated to the rating assigned to the sovereign government of the country in which it
resides.

Answer: C
Topic: International Bond Market Credit Ratings
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83) Investors in corporate bonds would still be interested in sovereign credit ratings
A) because the sovereign credit rating usually represents a ceiling on corporate credit
ratings within that country.
B) because they might play the TED spread.
C) because they are the rating assigned by the country's regulators.
D) none of the options

Answer: A
Topic: International Bond Market Credit Ratings
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84) One of the five main sovereign rating factors, institutional assessment, comprises an analysis
of how a government's institutions and policymaking affect a sovereign's credit fundamentals by
A) delivering sustainable public finances.
B) promoting balanced economic growth.
C) responding to economic or political shocks.
D) all of the options

Answer: D
Topic: International Bond Market Credit Ratings
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85) The key driver of a sovereign's economic assessment is

A) income levels.
B) growth prospects.
C) economic diversity and volatility.
D) all of the options

Answer: D
Topic: International Bond Market Credit Ratings
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86) In any year, the Eurobond segment of the international bond market accounts
for approximately what percent of new bond offering?
A) 10 percent
B) 25 percent
C) 50 percent
D) 80 percent

Answer: D
Topic: Eurobond Market Structure and Practices
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87) The underwriting syndicate of a bond offering is
A) a group of investment banks, merchant banks, and the merchant banking arms of
commercial banks that agree to buy the bond from the issuer and then resell it.
B) a group of investment fund managers, brokers, and dealers who specialize in the
secondary bond market.
C) a group of investment banks, merchant banks, and the merchant banking arms of
commercial banks that specialize in some phase of a public issuance.
D) none of the options

Answer: C
Topic: Primary Market
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88) Underwriters for an international bond issue will commit their own capital to buy the issue
from the borrower at a discount from the issue price. The discount, or underwriting spread, is
typically
A) in the 1 to 1.5 percent range.
B) in the 2 to 2.5 percent range.
C) in the 3 to 3.5 percent range.
D) in the 4 to 4.5 percent range.

Answer: B
Topic: Primary Market
Accessibility: Keyboard Navigation

89) Underwriters for a domestic bond issue will commit their own capital to buy the issue from
the borrower at a discount from the issue price. The discount, or underwriting spread, is typically
A) in the 1 to 1.5 percent range.
B) in the 2 to 2.5 percent range.
C) in the 3 to 3.5 percent range.
D) in the 4 to 4.5 percent range.

Answer: A
Topic: Primary Market
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90) The role of an underwriter is to

A) help negotiate terms with the borrower.
B) ascertain market conditions.
C) manage the issuance.
D) all of the options

Answer: D
Topic: Primary Market
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91) The secondary market for Eurobonds
A) is an over-the-counter market.
B) is an organized exchange.
C) has never developed—there is only a primary market for Eurobonds.
D) none of the options

Answer: A
Topic: Secondary Market
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92) Eurobond market makers and dealers are members of the , a self-regulatory body
based in Zurich.
A) International Currency Market Association (ICMA)
B) International Bond Marketers Association (IBMA)
C) International Bond Regulators Association (IBRA)
D) International Capital Market Association (ICMA)

Answer: D
Topic: Secondary Market
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93) In the bond market, there are brokers and market makers. Which of the following are true?
A) Brokers accept buy or sell orders from market makers and then attempt to find a matching
party for the other side of the trade; they may also trade for their own account.
B) Brokers charge a small commission for their services to the market maker that engaged them.
C) Brokers do not deal directly with retail clients.
D) all of the options

Answer: D
Topic: Secondary Market
Accessibility: Keyboard Navigation

94) Market makers in the secondary bond market

A) stand ready to buy or sell for their own account.
B) quote bid and ask spreads.
C) trade directly with one another, through a broker or with retail customers.
D) all of the options

Answer: D
Topic: Secondary Market
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95) With regard to clearing procedures for bond transactions
A) it is a system for transferring ownership of bonds.
B) it is a system for ensuring payment from buyers to sellers.
C) most Eurobond trades clear through two major clearing systems.
D) all of the options

Answer: D
Topic: Clearing Procedures
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96) With regard to clearing procedures for bond transactions, when a transaction is conducted,
electronic book entries are made that transfer book ownership of the bond certificates from the
seller to the buyer and transfer funds from the purchaser's cash account to the seller's.
However,
A) physical transfer of the bonds seldom takes place.
B) the physical transfer of the bonds takes place as much as 3 days later.
C) the physical transfer of the bonds takes place as much as 6 weeks later.
D) the physical transfer of bonds only occurs if the depository banks that physically store
bond certificates are different for the buyer and seller.

Answer: A
Topic: Clearing Procedures
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97) Two major clearing systems for international bond transactions are
A) Euroclear and Clearstream International.
B) Euroclear and Clearasil.
C) Deutsche Börse Clearing and Cedel International.
D) none of the options

Answer: A
Topic: Clearing Procedures
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98) A bond market index

A) is a reference rate, like LIBOR, that adjustable rate bonds use to set the coupon.
B) is analogous to a stock market index, but with bond price data instead of stock price data.
C) represents a price-weighted average of all bonds that exist.
D) none of the options

Answer: B
Topic: International Bond Market Indexes
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99) The J. P. Morgan and Company Global Government Bond Index is representation of
the individual country government bond indexes.
A) a value weighted
B) a price weighted
C) an unweighted
D) none of the options

Answer: A
Topic: International Bond Market Indexes
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100) The Wall Street Journal publishes daily values of yields to maturity for Japanese,
German, British, and Canadian Government bonds.
A) Bond market participants can thereby compare the yield curve of the various countries.
B) Bond market participants can thereby compare the term structure of interest rates of the
various countries.
C) Bond market participants can thereby compare the yield curve of the various countries, as
well as the term structure of interest rates of the various countries.
D) none of the options

Answer: C
Topic: International Bond Market Indexes
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International Financial Management, 8e (Eun)
Chapter 13 International Equity Markets

1) In a dealer market, the broker takes the trade through the dealer, who participates in trades as
a principal by buying and selling the security for his own account.

Answer: TRUE
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

2) Public traders do not trade directly with one another in a dealer market.

Answer: TRUE
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

3) The sale of new common stock by corporations to initial investors occurs in

A) the primary market.
B) the secondary market.
C) the OTC market.
D) the dealer market.

Answer: A
Topic: A Statistical Perspective
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4) The sale of previously issued common stock traded between investors occurs in
A) the primary market.
B) the secondary market.
C) the on-the-run market.
D) the dealer market.

Answer: B
Topic: A Statistical Perspective
Accessibility: Keyboard Navigation

5) A "primary" stock market is

A) a big internationally-important market like the NYSE.
B) a market where corporations issue new shares to initial investors.
C) where brokers and market makers trade.
D) none of the options

Answer: B
Topic: A Statistical Perspective
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6) During the 1980s, cross-border equity investment was largely confined to the equity markets of
A) developing countries.
B) developed countries.
C) both developing and developed countries.
D) none of the options

Answer: B
Topic: Market Capitalization
Accessibility: Keyboard Navigation

7) Investment in foreign equity markets became common practice in

the A) 1960s.
B) 1970s.
C) 1980s.
D) none of the options

Answer: C
Topic: Market Capitalization
Accessibility: Keyboard Navigation

8) Only in the did world investors start to invest sizable amounts in the emerging
equity markets.
A) 1970s
B) 1980s
C) 1990s
D) none of the options

Answer: C
Topic: Market Capitalization
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9) Investment in foreign equity markets became common practice in the 1980s as

investors became aware of the benefits of
A) international portfolio diversification.
B) debt forgiveness.
C) international portfolio diversification and debt forgiveness.
D) none of the options

Answer: A
Topic: Market Capitalization
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10) Only in the 1990s did world investors start to invest sizable amounts in the emerging
equity markets, as
A) the economic growth and prospects of the developing countries improved.
B) the economic growth and prospects of the developing countries declined.
C) the economic growth and prospects of the developed countries improved.
D) none of the options

Answer: A
Topic: Market Capitalization
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11) At year-end 2015, total market capitalization of 80 organized stock exchanges tracked by
the World Federation of Exchanges stood at
A) $67,125 billion.
B) $67,125 trillion.
C) $97,125 billion.
D) $97,125 trillion.

Answer: A
Topic: Market Capitalization
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12) Total market capitalization for exchanges increased nearly percent over 2011 to
2015.
A) 10
B) 20
C) 30
D) 40

Answer: D
Topic: Market Capitalization
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13) Which investment is likely to be the most liquid?

A) A share of publicly traded company trading on the NYSE.
B) A bond issued by a Fortune 500 company.
C) A house in a nice part of town.
D) A share of publicly traded company trading on the NYSE and a bond issued by a Fortune
500 company are equally liquid.

Answer: A
Topic: Measures of Liquidity
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14) Which investment is likely to be the least liquid?
A) A share of publicly traded company trading on the NYSE.
B) A bond issued by a Fortune 500 company.
C) A house in a nice part of town.
D) A share of publicly traded company trading on the NYSE and a bond issued by a Fortune 500
company are equally liquid.

Answer: C
Topic: Measures of Liquidity
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15) A liquid stock market

A) is one in which prices reflect all relevant information quickly.
B) is one in which prices reflect all publicly available information quickly.
C) is one in which prices reflect price and volume information quickly.
D) is one in which investors can buy and sell stocks quickly at close to the current quoted prices.

Answer: D
Topic: Measures of Liquidity
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16) A measure of liquidity for a stock market is the turnover ratio; defined as
A) the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market.
B) the ratio the size, or market capitalization, of the stock market divided by the value of the
stock market transactions over a period of time.
C) the ratio of aggregate company sales over a period of time divided by the size, or
market capitalization, of the stock market.
D) none of the options

Answer: A
Topic: Measures of Liquidity
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17) Generally, the higher the turnover ratio,

A) the less liquid the secondary stock market, indicating ease in trading.
B) the more liquid the secondary stock market, indicating ease in trading.
C) the more liquid the primary stock market, indicating ease in trading.
D) the more efficient the stock market is.

Answer: B
Topic: Measures of Liquidity
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18) The turnover velocity percentages for 75 of the stock exchanges beginning with 2011
were measured. Over 40 percent of the exchanges, in most years, had in excess of
A) 15 percent turnover per month.
B) 25 percent turnover per month.
C) 30 percent turnover per month.
D) 75 percent turnover per month.

Answer: C
Topic: Measures of Liquidity
Accessibility: Keyboard Navigation

19) Relatively low turnover ratios

A) indicate poor liquidity.
B) indicate good liquidity.
C) indicate strong investment performance.
D) none of the options

Answer: A
Topic: Measures of Liquidity
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20) A measure of "liquidity" for a stock market is

A) the times interest earned ratio.
B) the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market.
C) the LIBOR rate.
D) the times interest earned ratio, as well as the ratio of stock market transactions over a period
of time divided by the size, or market capitalization, of the stock market.

Answer: B
Topic: Measures of Liquidity
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21) As a measure of liquidity,

A) generally, the lower the turnover, the greater the liquidity of a secondary stock market.
B) generally, the higher the turnover, the greater the liquidity of a secondary stock market.
C) the more a financial asset gurgles when shook the greater the liquidity.
D) none of the options

Answer: B
Topic: Measures of Liquidity
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22) Generally, the lower the turnover ratio,
A) the less liquid the secondary stock market, indicating difficulty in trading.
B) the more liquid the secondary stock market, indicating difficulty in trading.
C) the more liquid the primary stock market, indicating difficulty in trading.
D) the more efficient the stock market is.

Answer: A
Topic: Measures of Liquidity
Accessibility: Keyboard Navigation

23) Many of the small foreign equity markets (e.g., Argentina, Sri Lanka)
A) have poor liquidity at present.
B) are very liquid stock markets, since the poor people living there are eager to sell their securities.
C) have fairly high turnover ratios indicating strong liquidity.
D) none of the options

Answer: A
Topic: Measures of Liquidity
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24) In general, if an investment

A) has poor liquidity, it should offer investors a liquidity premium.
B) can be sold fairly quickly at a fair price, it has good liquidity.
C) has poor liquidity, it should offer investors a liquidity premium. Additionally, if it can be
sold fairly quickly at a fair price, it has good liquidity.
D) none of the options

Answer: C
Topic: Measures of Liquidity
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25) Many of the larger emerging equity markets (e.g., China, India)
A) have poor liquidity at present.
B) are more liquid stock markets than the developed world, since the poor people living in the
developing world are eager to sell their securities.
C) have high turnover ratios.
D) none of the options

Answer: C
Topic: Measures of Liquidity
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26) In which type of market can liquidity "dry up"?
A) A bull market
B) A bear market
C) A speculative bubble
D) A financial panic

Answer: D
Topic: Measures of Liquidity
Accessibility: Keyboard Navigation

27) In which type of policy actions by the Fed can liquidity "dry up"?
A) Easy money
B) Tight money
C) Decrease in the reserve requirement
D) Decrease in the discount rate

Answer: B
Topic: Measures of Liquidity
Accessibility: Keyboard Navigation

28) Fair prices for existing issues is established in the secondary market due to
A) competitive trading between buyers and sellers.
B) decreased trading activity between buyers and sellers.
C) destructive competition between buyers and sellers.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

29) A limit order is an order away from the market price that is held in a until it can be
executed at the desired price.
A) continuous order book
B) limit order book
C) dealer book
D) none of the options

Answer: B
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

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30) OTC stocks are generally
A) unlisted stocks.
B) listed stocks.
C) traded at a discount due to their high risk.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

31) The exchange markets in the U.S. are

A) agency markets.
B) auction markets.
C) agency/auction markets.
D) none of the options

Answer: C
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

32) The first automated national stock market was the

A) NASDAQ.
B) TMX.
C) AMEX.
D) none of the options

Answer: B
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

33) The secondary stock markets

A) are the markets for "pre-owned" or "used" shares of stock.
B) provide marketability to shares.
C) provide price discovery or share valuation.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

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34) The secondary equity markets of the world serve two major purposes. They provide
A) marketability and share valuation.
B) liquidity and price support.
C) price discovery and arbitrage.
D) safety and stability.

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

35) Price discovery in the secondary stock markets

A) occurs due to the competitive trading between buyers and sellers, just like on eBay.
B) is set once a day at the close.
C) is set by the investment bankers at the IPO.
D) all of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

36) An all-or-none order is a limit order either to buy or to sell a security in which the broker is
directed to attempt to fill the entire amount of the order or none of it. An all-or-none order differs
from a fill-or-kill (FOK) order in that
A) with an all-or-none order, immediate execution is not required.
B) with an all-or-none order, immediate execution is required.
C) with an all-or-none order, over subscription is allowed—filling the order for more shares.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs

37) A market order

A) is an instruction from a customer to a broker to buy or sell at the best price available when
the order is received (immediately).
B) is an instruction from a customer to a broker to buy or sell in a particular market (e.g., NYSE).
C) is always and everywhere "fill-or-kill."
D) is always and everywhere "good-till-cancelled."

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

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38) A limit order
A) is an instruction from a customer to a broker to buy or sell in at a particular price (or better).
B) can be a "day order"—that is the order is cancelled if not executed during that day's trading.
C) can be "good-till-cancelled."
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs

39) A stop-limit order is an order to buy or sell a stock that combines the features of a stop order
and a limit order. Once the stop price is touched in the market, the stop-limit order becomes a
limit order to buy or to sell at the limit price. Which of the following are true?
A) The benefit of a stop-limit order is that the investor can control the price at which the trade
will get executed.
B) A stop-limit order may never get filled if the stock's price never reaches the specified
limit price. This may happen especially in fast-moving markets where prices fluctuate
wildly.
C) The use of stop limit orders is much more frequent for stocks that trade on an exchange than
in the over-the-counter (OTC) market.
D) In addition, your broker-dealer may not allow you to place a stop limit order on some
securities or accept a stop limit order for OTC stocks.
E) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

40) Which of the following are true?

A) Unless you give your broker specific instructions to the contrary, orders to buy or sell a
stock are day orders.
B) Orders that have been placed but not executed during regular trading hours will
automatically carry over into after-hours trading but not the next regular trading day.
C) Similarly, day orders placed during after-hours trading will automatically carry over into the
next regular trading day.
D) If your order is not executed during a trading session, you are not allowed to place a new
order in the next trading session.
E) all of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

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41) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as the stop price. When the specified price is reached, your stop order
becomes
A) a market order.
B) a good-till-cancelled (GTC) order.
C) a day order.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

42) Unlike day orders, a good-till-cancelled (GTC) order is an order to buy or sell a security at a
specific or limit price that lasts until the order is completed or cancelled. Which of the following
is true?
A) A GTC order will not be executed until the limit price has been reached, regardless of
how many days or weeks it might take.
B) Investors often use GTC orders to set a limit price that is far away from the current market
price.
C) Some brokerage firms may limit the time a GTC order can remain in effect and may
charge more for executing this type of order.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

43) To avoid buying a stock at a price higher than you intend, you need to place rather
than a market order.
A) a stop-loss order
B) a day order
C) a good-till-cancelled order
D) a limit order

Answer: D
Topic: Market Structure, Trading Practices, and Costs
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44) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as
A) the stop price.
B) the limit price.
C) the last price.
D) the sell price

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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Accessibility: Keyboard Navigation

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45) The advantages of a market order include the fact that
A) you are pretty much guaranteed that your order will be executed.
B) a market order typically has lower commissions than a limit order.
C) market orders increase your liquidity.
D) you are pretty much guaranteed that your order will be executed, and a market order
typically has lower commissions than a limit order.

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

46) Dealers in an OTC market

A) stand ready to buy at the bid and sell at the ask price.
B) set their own bid and ask prices.
C) do not charge commissions.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
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47) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as the stop price. When the specified price is reached, your stop order
becomes a market order. The advantage of a stop order is that
A) you don't have to monitor how a stock is performing on a daily basis.
B) the stop price can be activated by a short-term fluctuation in a stock's price.
C) once your stop price is reached, your stop order becomes a market order and the price you
receive may be much different from the stop price, especially in a fast-moving market where
stock prices can change rapidly.
D) all of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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48) The OTC market

A) does not accept credit—the dealers "only take cash."
B) is a dealer market.
C) includes the NASDAQ in the U.S.
D) is a dealer market and includes the NASDAQ in the U.S.

Answer: D
Topic: Market Structure, Trading Practices, and Costs

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49) A "specialist"
A) makes a market by holding an inventory of a particular security, like IBM or Intel.
B) is a participant on the floor of the exchange, like the NYSE.
C) has a designated station on the floor of the exchange.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
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50) A crowd of floor traders on the NYSE

A) may arrive at a more favorable price for their clients "inside" the specialist's bid and ask quotes.
B) are obliged to execute their trades through a specialist.
C) are allowed to "front run" their own trades ahead of customer trades.
D) all of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

51) A specialist on the NYSE

A) is obliged to fill limit orders if they are more favorable than the specialist's posted bid and ask
quotes.
B) is obliged to fill limit orders at the specialist's posted bid and ask quotes.
C) is actually a computer program, not a human.
D) is obliged to fill limit orders if they are more favorable than the specialist's posted bid and ask
quotes, and is actually a computer program, not a human.

Answer: A
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

52) A "call market"

A) is OTC and over-the-phone.
B) features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day.
C) provides traders with execution at certain prices.
D) features an agent of the exchange that accumulates a batch of orders that are periodically
executed by written or verbal auction throughout the day, and provides traders with execution
at certain prices.

Answer: B
Topic: Market Structure, Trading Practices, and Costs
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53) The Toronto Stock exchange
A) is a fully automated.
B) features electronic matching of public orders.
C) has continuous order flow.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

54) In an agency market, the broker takes the client's order through the agent, who matches it
with another public order. The agent can be viewed as
A) a dealer.
B) a specialist.
C) a broker's broker.
D) none of the options

Answer: C
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

55) In an agency market, the broker takes the client's order through the agent, who matches it
with another public order. Names for the agent are
A) official broker.
B) central broker.
C) a broker's broker.
D) all of the options

Answer: D
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

56) The Paris Bourse was traditionally a call market. In a call market, an agent of the exchange
accumulates, over a period of time, a batch of orders that are periodically executed by written
or verbal auction throughout the trading day. Both market and limit orders are handled in this
way. The major disadvantage of a call market is that
A) traders are not certain about the price at which their orders will transact because bid and ask
quotations are not available prior to the call.
B) traders are not certain about how many shares will be able to sell or buy at the price they
quote because order volume is not available prior to the call.
C) there is a lack of liquidity inter call.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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57) A type of non-continuous exchange trading system is crowd trading.
A) Unlike a call market in which there is a common price for all trades, several bilateral trades
may take place at different prices in crowd trading.
B) Unlike a continuous market in which there is a common price for all trades, several
bilateral trades may take place at different prices.
C) Unlike a call market in which several bilateral trades may take place at different prices there
is a common price for all trades in a call market.
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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58) Which type of trading system is desirable for actively traded issues?
A) Continuous trading systems
B) Call trading systems
C) Crowd trading systems
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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59) Call markets and crowd trading offer advantages for because they mitigate the
possibility of sparse order flow over short time periods.
A) thinly traded issues
B) actively traded issues
C) stocks but not bonds
D) none of the options

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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60) The over-the-counter (OTC) market is a dealer market. Almost all OTC stocks trade on the
National Association of Security Dealers Automated Quotation System (NASDAQ), which is
a computer-linked system that shows
A) the limit orders of all available counterparties.
B) the last price at which a security was sold.
C) the bid (buy) and ask (sell) prices of all dealers in a security.
D) the bid (sell) and ask (buy) prices of all dealers in a security.

Answer: C
Topic: Market Structure, Trading Practices, and Costs
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61) On the NYSE, limit order prices receive preference in establishing the posted bid and
ask prices if they are more favorable than the specialist's. Therefore,
A) a specialist must fill a limit order, if possible, from his own account before trading the flow
of public orders.
B) specialists must fill a limit order, if possible, from the flow of public orders before trading
for his own account.
C) a specialist must change his posted bid and ask prices to reflect the available limit orders.
D) none of the options

Answer: B
Topic: Market Structure, Trading Practices, and Costs
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62) The large exchange markets in the United States are

A) agency markets.
B) call markets.
C) auction markets.
D) agency/auction markets.

Answer: D
Topic: Market Structure, Trading Practices, and Costs
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63) "Call market" and "crowd trading" take place on

A) a non-continuous exchange trading system.
B) a continuous trading exchange system.
C) non-continuous markets and continuous markets, respectively.
D) continuous markets and non-continuous markets, respectively.

Answer: A
Topic: Market Structure, Trading Practices, and Costs
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64) Comparing agency versus dealer markets, which combination of the following statements
is true:

(i) In a "dealer market," the broker takes the client's order through the agent, who matches it with
another public order.
(ii) In an "agency market," the broker takes the trade through the dealer, who participates in
trades as a principal by buying and selling the security for his own account.
(iii) In an "agency market," the broker takes the client's order through the agent, who matches it
with another public order.
(iv) In a "dealer market," the broker takes the trade through the dealer, who participate in trades
as a principal by buying and selling the security for his own account.
(v) An agent can be viewed as a "broker's broker."
(vi) A dealer can be viewed as a "broker's broker."
A) (i), (ii), and (v)
B) (i), (ii), and (vi)
C) (iii), (iv), and (v)
D) (iii), (iv), and (vi)

Answer: C
Topic: Market Structure, Trading Practices, and Costs
Accessibility: Keyboard Navigation

65) A market-value index

A) is calculated such that the proportion of the index a stock represents is determined by its
proportion of the total market capitalization of all stocks in the index.
B) is calculated as the average price of all the stocks in the index that trade that day, one example
is the NASDAQ.
C) is calculated like the DJIA.
D) none of the options

Answer: A
Topic: International Equity Market Benchmarks
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66) Transactions in shares of the iShares Funds will typically generate tax consequences. This
is because
A) iShares Funds are obliged to distribute portfolio gains to shareholders.
B) iShares Funds are not allowed to be held in tax-qualified accounts such as IRAs.
C) iShares Funds feature daily resettlement.
D) none of the options

Answer: A
Topic: iShares MSCI
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67) iShares MSCI are
A) exchange traded funds that are subject to U.S. SEC and IRS diversification requirements.
B) open-end mutual funds sold OTC.
C) exchange traded funds that are NOT subject to U.S. SEC and IRS diversification requirements.
D) none of the options

Answer: A
Topic: iShares MSCI
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68) A firm may cross-list its share to

A) establish a broader investor base for its stock.
B) establish name recognition in foreign capital markets, thus paving the way for the firm to
source new equity and debt capital from investors in different markets.
C) expose the firm's name to a broader investor and consumer groups.
D) all of the options

Answer: D
Topic: Cross-Listing of Shares; Trading in International Equities
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69) Stock in Daimler AG, the famous German automobile manufacturer trades on both the
Frankfurt Stock Exchange in Germany and on the New York Stock Exchange. On the Frankfurt
bourse, Daimler closed at a price of €54.34 on Wednesday, March 5, 2008. On the same day,
Daimler closed in New York at $83.55 per share. To prevent arbitrage trading between the two
exchanges, the shares should trade at the same price when adjusted for the exchange rate. The
$/€ exchange rate on March 5 was $1.5203/€1.00. Thus, €54.34 × $1.5203/€ = $82.61, while the
closing price in New York was $83.55. The difference is easily explainable by the fact that
A) transactions costs exceeded the price difference, so no arbitrage was possible even for
market makers.
B) no one noticed the arbitrage that day, but in a day or so the opening price will adjust.
C) the New York market closes several hours after the Frankfurt exchange, and thus market
prices or exchange rates had changed slightly.
D) none of the options

Answer: C
Topic: Cross-Listing of Shares; Trading in International Equities
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70) Companies domiciled in countries with weak investor protection can reduce agency
costs between shareholders and management
A) by moving to a better county.
B) by listing their stocks in countries with strong investor protection.
C) by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D) having a press conference and promising to be nice to their investors.

Answer: B
Topic: Cross-Listing of Shares; Trading in International Equities
Accessibility: Keyboard Navigation

71) Advantages of cross-listing include

A) providing their shareholders with a higher degree of protection than may be available in
the home country.
B) a possible signal of the company's commitment to shareholder rights.
C) possibly making investors, both at home and abroad, more willing to provide capital and to
increase the value of the pre-existing shares.
D) all of the options

Answer: D
Topic: Cross-Listing of Shares; Trading in International Equities
Accessibility: Keyboard Navigation

72) "Yankee" stock offerings are

A) shares in foreign companies originally sold to U.S. investors.
B) dollar-denominated shares in foreign companies originally sold to U.S. investors.
C) U.S. stocks held abroad.
D) none of the options

Answer: B
Topic: Yankee Stock Offerings
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73) Which factors fuel the sale of "Yankee" stock offerings?

A) Privatization by many Latin American and Eastern European government-owned companies.
B) The rapid growth in the economies of the developing world.
C) The expected large demand for new capital by Mexican companies now that NAFTA has
been approved.
D) all of the options

Answer: D
Topic: Yankee Stock Offerings
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74) Which factors appear to be fueling the sale of Yankee stocks?
A) The push for privatization by many Latin American and Eastern European government-
owned companies.
B) The rapid growth in the economies of the developing countries.
C) The large demand for new capital by Mexican companies following approval of the
North American Free Trade Agreement.
D) all of the options

Answer: D
Topic: Yankee Stock Offerings
Accessibility: Keyboard Navigation

75) Following monetary union and the advent of the euro:

A) The countries of the European union have enacted common securities regulation.
B) A pan-European stock exchange has developed in London, similar to the NYSE in scope
and trading practices.
C) Development of a common securities regulations, even among the countries of the
European Union, has not yet occurred.
D) none of the options

Answer: C
Topic: Market Consolidations and Mergers
Accessibility: Keyboard Navigation

76) The European Stock Exchange, comparable in volume to the NYSE

A) is located in Milan.
B) is located in London.
C) is located in Frankfurt.
D) none of the options

Answer: D
Topic: Market Consolidations and Mergers
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77) The first ADRs began trading as a means of eliminating some of the risks, delays,
inconveniences, and expenses of trading the actual shares.
A) in 1997
B) in 1987
C) in 2017
D) in 1927

Answer: D
Topic: American Depository Receipts
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78) American Depository Receipt (ADRs) represent foreign stocks
A) denominated in U.S. dollars that trade on European stock exchanges.
B) denominated in U.S. dollars that trade on a U.S. stock exchange.
C) denominated in a foreign currency that trade on a U.S. stock exchange.
D) non-registered (bearer) securities.

Answer: B
Topic: American Depository Receipts
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79) Yankee stocks

A) often trade as ADRs and have higher risks than trading the actual shares.
B) often trade as ADRs and have lower risks than trading the actual shares.
C) are bank receipts representing a multiple of foreign shares deposited in a U.S. bank.
D) often trade as ADRs, have lower risks than trading the actual shares, and are bank
receipts representing a multiple of foreign shares deposited in a U.S. bank.

Answer: D
Topic: American Depository Receipts
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80) ADRs
A) are American Depository Receipts.
B) denominated in U.S. dollars that trade on a U.S. stock exchange.
C) are depository receipts for foreign stocks held by the U.S. depository's custodian.
D) all of the options

Answer: D
Topic: American Depository Receipts
Accessibility: Keyboard Navigation

81) Sponsored ADRs

A) are created by a bank at the request of the foreign company that issued the underlying security.
B) can trade on the NASDAQ.
C) can trade on the NYSE.
D) all of the options

Answer: D
Topic: American Depository Receipts
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82) ADR trades
A) clear in three days, just like trades in U.S. shares.
B) settle only after the trade in the underlying stocks clear, which can take time depending on
the clearing practices of the national market.
C) are price in the currency of the underlying security.
D) all of the options

Answer: A
Topic: American Depository Receipts
Accessibility: Keyboard Navigation

83) On the Paris bourse, shares of Avionelle trade at €45. The spot exchange rate is $1.40 =
€1.00. What is the no-arbitrage U.S. dollar price of an Avionelle ADR? Assume that transactions
costs are negligible.
A) $63
B) $32.14
C) $45
D) $45.50

Answer: A
Explanation: Solve the following proportion for X: (X / 45) = (1.4 / 1), where X = $63.
Topic: American Depository Receipts
Accessibility: Keyboard Navigation

84) In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day, the
British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce
trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares
are packaged into one ADR. The no-arbitrage U.S. price of one ADR is
A) $4.87.
B) $5.87.
C) $6.87.
D) $7.87.

Answer: C
Explanation: (£0.875/share) × 5 shares × ($1.00/£0.6366) = $6.87
Topic: American Depository Receipts
Accessibility: Keyboard Navigation

85) ADRs
A) frequently represent a multiple of the underlying shares.
B) can trade on the NYSE.
C) can trade on the NASDAQ.
D) all of the options

Answer: D
Topic: American Depository Receipts
Accessibility: Keyboard Navigation
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86) In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day, the
British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce
trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares
are packaged into one ADR. If the Rolls Royce ADRs were trading at $5.75 when the underlying
shares were trading in London at £0.875, ignoring transaction costs, the arbitrage trading profit
would be
A) $0.00.
B) $1.12.
C) $2.12.
D) $3.12.

Answer: B
Explanation: First, solve the following proportion for X: (0.875 / X) = (0.6366 / 1), where X =
$1.37449. Now, multiply X by 5, where 5($1.37449) = $6.87. Finally, $1.12 = $6.87 – $5.75.
Topic: American Depository Receipts

87) In the Frankfurt market, Aldi stock closed at €5 per share. On the same day, the euro U.S.
dollar spot exchange rate was €.625/$1.00. Aldi trades as an ADR in the OTC market in the
United States. Five underlying Aldi shares are packaged into one ADR. The no-arbitrage U.S.
price of one ADR is
A) €25.00.
B) $15.625.
C) $40.
D) none of the options

Answer: C
Explanation: First, solve the following proportion for X: (5 / X) = (0.625 / 1), where X = $8.
Now, multiply X by 5, where 5($8) = $40.
Topic: American Depository Receipts
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88) Global Registered Shares

A) are created when a MNC issues shares globally.
B) purchased on one exchange (say NYSE) is fully fungible with shares purchased on
another exchange (e.g., Frankfurt Stock Exchange).
C) can trade in multiple currencies.
D) all of the options

Answer: D
Topic: Global Registered Shares
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89) Factors affecting international equity returns are
A) macroeconomic variables that influence the overall economy.
B) exchange rate changes.
C) the industrial structure of the country.
D) all of the options

Answer: D
Topic: Factors Affecting International Equity Returns
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90) Cross-correlations among major stock markets and exchange markets are
A) relatively high.
B) relatively low.
C) essentially perfect.
D) practically zero.

Answer: B
Topic: Factors Affecting International Equity Returns
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91) Macroeconomic factors affecting international equity returns include

A) exchange rate changes.
B) interest rate differentials.
C) changes in inflationary expectations.
D) all of the options

Answer: D
Topic: Macroeconomic Factors
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92) Changes in exchange rates

A) explain a larger portion of the variability foreign bond indexes than foreign equity indexes.
B) do not affect all foreign equity markets equally.
C) affect dollar-denominated foreign equity returns, but this risk can be hedged.
D) all of the options

Answer: D
Topic: Exchange Rates
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93) Calculate the dollar-based percentage return an American would have if he bought a British
stock at ₤50 per share and sold it one year later at ₤60. The spot exchange rate one year ago
was
$1.50 = ₤1 and the spot rate prevailing at the end of the year was $1.20 = ₤1.
A) 36 percent gain
B) 4 percent loss
C) 9.6 percent gain
D) none of the options

Answer: B
Explanation: First, determine the cost of buying the stock by solving the proportion for X: (50 /
X) = (1 / 1.5), where X = $75. Next, determine what the American sold the stock for by solving
the proportion for X: (60 / X) = (1 / 1.2), where X = $72. The percentage change may be found
by the following: (72 – 75) / 75 = –0.04.
Topic: Exchange Rates

94) Calculate the dollar-based percentage return an American would have if he bought a German
stock at €50 per share and sold it one year later at €60. The spot exchange rate one year ago was
$1.50 = €1 and the spot rate prevailing at the end of the year was $1.70 = €1.
A) 36 percent gain
B) 26.47 percent gain
C) 9.6 percent gain
D) none of the options

Answer: A
Explanation: First, determine the cost of buying the stock by solving the proportion for X: (50 /
X) = (1 / 1.5), where X = $75. Next, determine what the American sold the stock for by solving
the proportion for X: (60 / X) = (1 / 1.7), where X = $102. The percentage change may be found
by the following: (102 – 75) / 75 = 0.36.
Topic: Exchange Rates

95) Decompose the return an American would have if he had bought a German stock at €100
per share and sold it one year later at €120. The spot exchange rate one year ago was $1.50 = €1
and the spot rate prevailing at the end of the year was $1.55 = €1.
A) 24 percent total return; 20 percent asset return
B) 20 percent total return; 16.77 percent asset return
C) 16 percent total return; 20 percent asset return
D) none of the options

Answer: A
Explanation: Solve the following proportions for X: (1 / 1.5) = (100 / X), where X = $150; (1 /
1.55) = (120 / X), where X = 186; (100 / 150) = (120 / X), where X = $180. To find the total
return: 0.24 = (186 – 150) / 150 and to find the asset return: 0.20 = (180 – 150) / 150.
Topic: Exchange Rates

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96) A common set of factors that affect equity returns include
A) macroeconomic variables that influence the overall economic environment in which the
firm issuing the security conducts its business.
B) exchange rate changes between the currency of the country issuing the stock and the currency
of other countries where suppliers, customers, and investors of the firm reside.
C) the industrial structure of the country in which the firm operates.
D) all of the options

Answer: D
Topic: Industrial Structure
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97) Asprem (1989) found that changes in industrial production, employment, and imports, the
level of interest rates, and an inflation measure explained only a small portion of the variability
of equity returns for 10 European countries, but that substantially more of the variation was
explained by
A) an international market index.
B) changes in exchange rates.
C) the Herfindahl index.
D) the 4-firm concentration ratio.

Answer: A
Topic: Industrial Structure
Accessibility: Keyboard Navigation

98) Solnik (1984) examined the effect of exchange rate changes, interest rate differentials, the
level of the domestic interest rate, and changes in domestic inflation expectations. He found that
A) international monetary variables had only weak influence on equity returns in comparison to
domestic variables.
B) international monetary variables had a stronger influence on equity returns in comparison
to domestic variables.
C) international monetary variables had no influence at all on equity returns.
D) none of the options

Answer: A
Topic: Industrial Structure
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99) Adler and Simon (1986) examined the exposure of a sample of foreign equity and bond
index returns to exchange rate changes. They found that
A) changes in exchange rates generally explained a smaller portion of the variability of
foreign bond indexes than foreign equity indexes.
B) changes in exchange rates generally explained none of the variability of foreign bond
indexes but completely explained the variability in foreign equity indexes.
C) changes in exchange rates generally explained a larger portion of the variability of
foreign equity indexes than foreign bond indexes.
D) changes in exchange rates generally explained a larger portion of the variability of foreign
bond indexes than foreign equity indexes.

Answer: D
Topic: Industrial Structure
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100) Studies examining the influence of industrial structure on foreign equity returns
A) conclusively show a connection.
B) have been inconclusive.
C) show that industrialized economies outperform lesser developed economies.
D) none of the options

Answer: B
Topic: Industrial Structure
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International Financial Management, 8e (Eun)
Chapter 16 Foreign Direct Investment and Cross-Border Acquisitions

1) In the early 1980s, Honda, the Japanese automobile company, built an assembly plant in
Marysville, Ohio, and began to produce cars for the North American market. As the production
capacity at the Ohio plant expanded, Honda began to export its U.S.-manufactured cars to
Japan.

Answer: TRUE
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

2) Shareholders of U.S. bidders (acquiring firms in M&A) experience significant positive

abnormal returns when firms expand into new industries and geographic markets.

Answer: TRUE
Topic: Cross-Border Mergers and Acquisitions
Accessibility: Keyboard Navigation

3) Shareholders of U.S. targets experience higher wealth gains when they are acquired by
foreign firms than when acquired by U.S. firms.

Answer: TRUE
Topic: Cross-Border Mergers and Acquisitions
Accessibility: Keyboard Navigation

4) Cross-border acquisitions are generally found to be synergy-generating corporate activities.

Answer: TRUE
Topic: Cross-Border Mergers and Acquisitions
Accessibility: Keyboard Navigation

5) Under a 1981 Voluntary Restraint Agreement Japanese automobile manufacturers were

not allowed to increase their exports to the U.S. market. As a result
A) they exited the market.
B) Honda was motivated to circumvent the trade barriers.
C) Honda's FDI may have been part of an overall corporate strategy designed to bolster
their competitive position vis-à-vis their domestic rivals such as Toyota.
D) Honda was motivated to circumvent the trade barriers, and Honda's FDI may have been part
of an overall corporate strategy designed to bolster their competitive position vis-à-vis their
domestic rivals such as Toyota.

Answer: D
Topic: Global Trends in FDI
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6) Following Honda's FDI in the U.S.,
A) the U.S. government imposed a Voluntary Restraint Agreement under which Japanese
automobile manufacturers were not allowed to increase their exports to the U.S. market.
B) Toyota and Nissan made direct investments in America.
C) sales of Hondas declined.
D) none of the options

Answer: B
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

7) Honda's decision to build a plant in Ohio

A) was welcomed by the United Auto Workers.
B) was encouraged by assistance from the state of Ohio, including improved infrastructure
around the plant and abatement of property taxes.
C) involved setting up a special foreign trade zone that allowed Honda to import auto parts
from Japan at a reduced tariff rate.
D) all of the options

Answer: D
Topic: Global Trends in FDI
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8) When firms undertake FDI,

A) they become MNCs.
B) they reduce their tax rate since they can tell each country that they do business in that they
paid their taxes in other countries.
C) they can exploit workers by paying them below-market wages in depreciating currencies.
D) all of the options

Answer: A
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

9) Prior to Honda's decision to build a plant in Ohio,

A) the Japanese government had been urging the automobile companies to begin production in
the United States.
B) the Japanese government had been urging the automobile companies to keep production
in Japan.
C) the Japanese government imposed import quotas on U.S.-made automobiles.
D) none of the options

Answer: A
Topic: Global Trends in FDI
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10) FDI can take the form of
A) Greenfield investment.
B) cross-border M &A.
C) establishing new production facilities in a foreign country.
D) all of the options

Answer: D
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

11) The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar,
a British auto maker.
A) This is an example of cross-border M&A.
B) This was a Greenfield investment.
C) This is an example of cross-border M&A, and was also a Greenfield investment.
D) none of the options

Answer: A
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

12) Firms become multinational

A) when they undertake foreign direct investments (FDI).
B) with the establishment of new production facilities in foreign countries such as Honda's
Ohio plant.
C) when they become involved in mergers with and acquisitions of existing foreign businesses.
D) all of the options

Answer: D
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

13) The United States is the largest initiator, of FDI. The largest recipient of FDI is
A) also the United States.
B) France.
C) Germany.
D) China.

Answer: A
Topic: Global Trends in FDI
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14) According to a recent UN survey, the world FDI stock grew to what amount in 2015?
A) $25 billion
B) $20 billion
C) $10 billion
D) none of the options

Answer: A
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

15) During the six-year period 2010-2015, total annual worldwide FDI outflows amounted to
A) about $1,500 million on average.
B) about $1,394 billion on average.
C) about $1,000 trillion on average.
D) none of the options

Answer: B
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

16) During the six-year period 2010-2015,

A) China received the largest amount of FDI inflows.
B) India received the largest amount of FDI inflows.
C) Mexico received the largest amount of FDI inflows.
D) the United States received the largest amount of FDI inflows.

Answer: D
Topic: Global Trends in FDI
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17) Japan plays a major role as an exporter of FDI. As a recipient of FDI,

A) Japan receives as much FDI as it exports, making it a major player on both fronts.
B) Japan plays a relatively minor role, reflecting a variety of legal, economic, and cultural
barriers to FDI.
C) Japan's receipts of FDI are third in the world.
D) none of the options

Answer: B
Topic: Global Trends in FDI
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18) MNCs might have been lured to invest in China not only by lower labor and material costs,
but also
A) by China's lower labor and material costs.
B) by the desire to preempt the entry of rivals into China's potentially huge market.
C) by the Kung Pao chicken.
D) by the desire to see, if not buy, all the tea in China.

Answer: B
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

19) The third most important source of FDI outflows is

A) the United States.
B) Japan.
C) China.
D) Mexico.

Answer: C
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

20) MNCs have invested in China

A) by lower material costs.
B) by lower labor costs.
C) by a desire to preempt the entry of rivals into China's potentially huge market.
D) all of the options

Answer: D
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

21) FDI stocks

A) are the common shares of multinational companies that invest abroad.
B) are mutual funds that invest in FDI.
C) represent the accumulation of previous years' FDI flows.
D) are the sum total of current year FDI flows.

Answer: C
Topic: Global Trends in FDI
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22) The dominant source of FDI outflows is
A) several developed countries.
B) a few underdeveloped countries next to wealthy neighbors, like Mexico.
C) Africa and China.
D) none of the options

Answer: A
Topic: Global Trends in FDI
Accessibility: Keyboard Navigation

23) Alternatives to firms locating production overseas include

A) exporting from the home country.
B) licensing production to a local firm in the host country.
C) ignoring the foreign market.
D) all of the options

Answer: D
Topic: Why Do Firms Invest Overseas?
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24) The key factors that are important in a firm's decision to invest overseas are
A) trade barriers, imperfect labor market, and intangible assets.
B) vertical integration, product life cycle, and shareholder diversification services.
C) profit maximization, global prestige, and competition.
D) trade barriers, imperfect labor market, and intangible assets, as well as vertical
integration, product life cycle, and shareholder diversification services.

Answer: D
Topic: Why Do Firms Invest Overseas?
Accessibility: Keyboard Navigation

25) Why do firms locate production overseas rather than exporting finished goods?
A) Shipping costs
B) Firms seek to extend corporate control overseas
C) Imperfect factor markets
D) all of the options

Answer: D
Topic: Why Do Firms Invest Overseas?
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26) Unlike the theory of international trade or the theory of international portfolio investment,
A) we do not have a well-developed, comprehensive theory of FDI.
B) the comprehensive theory of FDI focuses on mean-variance efficiency.
C) the comprehensive theory of FDI is an arbitrage argument, like interest rate parity.
D) none of the options

Answer: A
Topic: Why Do Firms Invest Overseas?
Accessibility: Keyboard Navigation

27) While there is no comprehensive theory of FDI, many existing theories emphasize
A) imperfections in product markets.
B) imperfections in capital markets.
C) imperfections in labor markets.
D) all of the options

Answer: D
Topic: Why Do Firms Invest Overseas?
Accessibility: Keyboard Navigation

28) International markets for goods and services are often imperfect. Which is the most common
and most important?
A) Acts of governments
B) Natural barriers like distance
C) Cultural barriers
D) Lack of knowledge

Answer: A
Topic: Trade Barriers
Accessibility: Keyboard Navigation

29) Why do governments regulate international trade?

A) To raise revenue
B) Protect domestic industries
C) Pursue other economic objectives
D) all of the options

Answer: D
Topic: Trade Barriers
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30) Governments regulate international trade
A) to raise revenue (e.g., through tariffs).
B) to protect domestic industries.
C) to pursue other economic policy objectives (e.g., North Korea forgoing trade).
D) all of the options

Answer: D
Topic: Trade Barriers
Accessibility: Keyboard Navigation

31) A classic example for trade barrier-motivated FDI is

A) Honda's investment in Ohio.
B) Bridgestone's investment in Japan.
C) NAFTA.
D) none of the options

Answer: A
Topic: Trade Barriers
Accessibility: Keyboard Navigation

32) Such products as mineral ore and cement that are heavy or bulky relative to their
economic values
A) may be suitable for exporting because high transportation costs will be overcome by high
profit margins in oligopolistic industries.
B) have high "value-to-weight ratios" that protect profit margins.
C) may not be suitable for exporting because high transportation costs will substantially
reduce profit margins.
D) none of the options

Answer: C
Topic: Trade Barriers
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33) Trade barriers can arise naturally. Which of the following are natural barriers to trade?
A) Transportation costs
B) Quotas
C) Tariffs
D) Transactions costs

Answer: A
Topic: Trade Barriers
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34) In a push to serve the North American market Samsung, a Korean firm, chose to
locate production facilities in Mexico, mainly because
A) of lower labor costs in Mexico.
B) to circumvent trade barriers imposed by NAFTA.
C) because of colder weather in Canada.
D) none of the options

Answer: A
Topic: Imperfect Labor Market
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35) Labor services in a country might be underpriced relative to productivity because

A) workers are not allowed to freely move across national boundaries to seek higher wages.
B) some countries do a bad job of educating their work force, consequently they are not
very productive.
C) in some countries there is a shortage of capital investment.
D) all of the options are equally important

Answer: A
Topic: Imperfect Labor Market
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36) Labor services in a country can be severely underpriced relative to its productivity
A) because workers are not allowed to freely move across national boundaries to seek higher
wages.
B) because among all factor markets, the labor market is the most imperfect.
C) because workers may choose to not move across national boundaries to seek higher wages
due to the cultural differences.
D) all of the options

Answer: D
Topic: Imperfect Labor Market
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37) Severe imperfections in the labor market lead to persistent wage differentials among countries
A) because workers are not allowed to freely move across national boundaries to seek higher
wages.
B) because workers may choose to not move across national boundaries to seek higher wages
due to the cultural differences.
C) but these differences are offset by low productivity in low labor cost countries.
D) because workers are not allowed to freely move across national boundaries to seek higher
wages, and because workers may choose to not move across national boundaries to seek
higher wages due to the cultural differences.

Answer: D
Topic: Imperfect Labor Market
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38) Factors of production include land, labor, capital, and entrepreneurial ability. Of all the
factor markets, the most imperfect is the
A) labor market.
B) capital market.
C) real estate market.
D) market for entrepreneurial ability.

Answer: A
Topic: Imperfect Labor Market
Accessibility: Keyboard Navigation

39) Severe imperfections in the labor market lead to

A) persistent wage differentials among countries.
B) persistent exchange rate volatility among countries.
C) persistent interest rate differentials among countries.
D) none of the options

Answer: A
Topic: Imperfect Labor Market
Accessibility: Keyboard Navigation

40) Severe imperfections in the labor market arise from immobility of workers due to
immigration barriers. As a response, firms should consider
A) moving to the workers.
B) moving to countries where labor services are the lowest in absolute terms.
C) moving to countries where labor services are underpriced relative to productivity.
D) hiring illegal immigrants.

Answer: C
Topic: Imperfect Labor Market
Accessibility: Keyboard Navigation

41) Coca-Cola has invested in bottling plants all over the world rather than licensing local firms
A) because the foreigners can't be trusted to follow the secret recipe.
B) because Coca-Cola wanted to protect the formula for its famous soft drink.
C) because of the internalization theory of FDI.
D) because Coca-Cola wanted to protect the formula for its famous soft drink and because of the
internalization theory of FDI.

Answer: B
Topic: Intangible Assets
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42) The boomerang effect is defined as
A) the possibility that if the secret formula of Coca-Cola were leaked, that other firms would
come up with similar products and hurt Coca-Cola's sales.
B) the possibility that FDI in an undeveloped nation will lead to a group of workers who have
enough money to afford the firm's products, leading to an increase of sales and increase of
workers and so on.
C) the possibility that FDI in an undeveloped nation will lead to a group of domestic workers
no longer have enough money to afford the firm's products, leading to an decrease of sales.
D) none of the options

Answer: A
Topic: Intangible Assets
Accessibility: Keyboard Navigation

43) Examples of intangible assets include

A) technological, managerial, and marketing know-how.
B) superior R&D capabilities.
C) brand names.
D) all of the options

Answer: D
Topic: Intangible Assets
Accessibility: Keyboard Navigation

44) In the 1960s, Coca-Cola, which had bottling plants in India, faced strong pressure from the
Indian government to reveal the Coke formula as a condition for continued operations in India.
As a result,
A) Coke agreed to reveal the formula to the Indian government, which has maintained it as a
state secret to this day.
B) instead of revealing the formula, Coke withdrew from the Indian market.
C) Coke was able to successfully lobby the government to withdraw this demand.
D) none of the options

Answer: B
Topic: Intangible Assets
Accessibility: Keyboard Navigation

45) MNCs may undertake overseas investment projects in a foreign country, despite the fact
that local firms may enjoy inherent advantages. This implies that
A) MNCs are making a mistake in this case and will have to eventually withdraw.
B) MNCs should have significant advantages over local firms such as comparative advantages
due to intangible assets.
C) the local firms will not have to compete due to their inherent advantages over the foreigners.
D) none of the options

Answer: B
Topic: Intangible Assets
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Accessibility: Keyboard Navigation

46) Intangible assets are often hard to package and sell to foreigners
A) because they usually default on the contracts that they sign.
B) and as a result, there is more FDI than there might otherwise be.
C) because property rights in intangible assets are difficult to establish and protect, especially
in foreign countries where legal recourse may not be readily available.
D) because property rights in intangible assets are difficult to establish and protect, especially in
foreign countries where legal recourse may not be readily available. As a result of intangible
assets being difficult to package and sell to foreigners, there is more FDI than there might
otherwise be.

Answer: D
Topic: Intangible Assets
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47) According to the internalization theory of FDI,

A) firms that have intangible assets with a public good property tend to invest directly in
foreign countries.
B) property rights in intangible assets are difficult to establish and protect, especially in
foreign countries where legal recourse may not be readily available.
C) firms that have intangible assets with a public good property tend to invest directly in foreign
countries. Additionally, property rights in intangible assets are difficult to establish and protect,
especially in foreign countries where legal recourse may not be readily available.
D) none of the options

Answer: A
Topic: Intangible Assets
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48) Firms that have intangible assets with a public good property tend to invest directly in
foreign countries. This is
A) in order to use these assets on a larger scale.
B) to avoid the misappropriation that may occur while transacting in foreign countries through
the market mechanism.
C) in order to use these assets on a larger scale, and to avoid the misappropriation that may
occur while transacting in foreign countries through the market mechanism.
D) none of the options

Answer: C
Topic: Intangible Assets
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49) What kind of integration is vertical integration?
A) When the government outlaws discrimination against both short and tall people.
B) When two firms join together in a conglomerate merger.
C) When two firms related in the production process are owned by the same firm, as in a
plywood manufacturer owning a logging company.
D) all of the options

Answer: C
Topic: Vertical Integration
Accessibility: Keyboard Navigation

50) The conflicts between the upstream and downstream firms can be resolved,
A) if the two firms form a horizontally integrated firm.
B) if the two firms form a vertically integrated firm.
C) if the two firms form a linearly integrated firm.
D) none of the options

Answer: B
Topic: Vertical Integration
Accessibility: Keyboard Navigation

51) Many MNCs involved in extractive/natural resources industries

A) tend to directly own oil fields, mine deposits, and forests.
B) tend to lease their oil fields, mine deposits, and forests.
C) tend to partner with local firms, leveraging their intangible assets.
D) none of the options

Answer: A
Topic: Vertical Integration
Accessibility: Keyboard Navigation

52) Also, MNCs often find it profitable to locate manufacturing/processing facilities near
A) the home office to exploit their assets in place.
B) the natural resources in order to save transportation costs.
C) their competitor's manufacturing plant to even out the playing field with regard to shipping
costs.
D) none of the options

Answer: B
Topic: Vertical Integration
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53) FDI vertical integration is backward
A) when FDI involves an industry abroad that produces inputs for MNCs.
B) when FDI involves an industry abroad that sells the MNC's outputs.
C) none of the options
D) when FDI involves an industry abroad that produces inputs for MNCs, as well as when FDI
involves an industry abroad that sells the MNC's outputs.

Answer: A
Topic: Vertical Integration
Accessibility: Keyboard Navigation

54) The majority of foreign vertical integration is

A) backward.
B) forward.
C) sideways.
D) none of the options

Answer: A
Topic: Vertical Integration
Accessibility: Keyboard Navigation

55) An example of forward vertical FDI is when

A) U.S. car makers built their own network of dealerships in Japan to help sell their cars.
B) U.S. car makers began to source parts in Japan to lower the cost of their cars.
C) U.S. car makers entered into joint partnerships with car makers in Japan to help sell their cars.
D) none of the options

Answer: A
Topic: Vertical Integration
Accessibility: Keyboard Navigation

56) U.S. car makers were forced to build their own network of dealerships to enter the
Japanese market.
A) This is an example of backward vertical integration.
B) This is an example of forward vertical integration.
C) This is an example of sideways vertical integration.
D) none of the options

Answer: B
Topic: Vertical Integration
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57) Which of the following statements is true about product life cycle theory?
A) In the early stages of the product life cycle, the demand for the new product is
relatively insensitive to the price and thus a pioneering firm can charge a relatively high
price.
B) It predicts that over time the U.S. switches from an exporting country of new products to
an importing country.
C) It has an "S"-shaped curve when plotting "quantity sold" versus "time."
D) all of the options

Answer: D
Topic: Product Life Cycle
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58) According to Raymond Vernon (1966),

A) U.S. firms undertake FDI at a particular stage in the life cycle of the products that they
initially introduced.
B) the majority of new products, such as computers, televisions, and mass-produced cars,
were developed by U.S. firms and first marketed in the United States.
C) in the early stage of the product life cycle, the demand for the new product is
relatively insensitive to the price and thus the pioneering firm can charge a relatively high
price.
D) all of the options

Answer: D
Topic: Product Life Cycle
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59) The product life-cycle theory predicts that

A) over time the United States switches from an exporting country of new products to an
importing country.
B) over time the United States switches from a comparative advantage in R&D to a
service economy.
C) over time the United States education system maintains the country's dominant position in
the world economy.
D) none of the options

Answer: A
Topic: Product Life Cycle
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60) Which of the following statements is true about product life cycle theory?
A) The theory was developed in the 1960s when the U.S. was the leader in R&D.
B) The international system of production is becoming too complicated to be explained by
a simple version of the product life cycle theory.
C) It predicts that over time the U.S. switches from an exporting country of new products to
an importing country.
D) all of the options

Answer: D
Topic: Product Life Cycle
Accessibility: Keyboard Navigation

61) Since shareholders of MNCs may indirectly benefit from corporate international
diversification,
A) firms are motivated to undertake FDI for the purpose of providing shareholders with
diversification services.
B) firms are motivated to undertake FDI for the purpose of being part of the global minimum
variance portfolio.
C) firms are motivated to undertake FDI for the purpose of staying on the efficient frontier.
D) none of the options

Answer: D
Topic: Shareholder Diversification Services
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62) Considering the fact that many barriers to international portfolio investments have
been dismantled in recent years,
A) capital market imperfections as a motivating factor for FDI are likely to become
more important going forward.
B) capital market imperfections as a motivating factor for FDI are likely to become less relevant.
C) labor market imperfections as a motivating factor for FDI are likely to become less relevant.
D) none of the options

Answer: B
Topic: Shareholder Diversification Services
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63) When a firm holds assets in many countries,

A) the firm's cash flows are internationally hedged.
B) shareholders of the firm can indirectly benefit from international diversification even if they
are not directly holding foreign shares.
C) shareholders of the firm can directly benefit from international diversification even if they are
not directly holding foreign shares.
D) none of the options

Answer: B
Topic: Shareholder Diversification Services
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64) Which of the following is the most disingenuous argument in favor of FDI?
A) Shareholder diversification
B) The internalization theory of FDI
C) The promise of synergistic gains
D) Vertical integration

Answer: A
Topic: Shareholder Diversification Services
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65) A "greenfield" investment

A) involves soybeans in the spring, corn in the summer.
B) is generally less politically sensitive than the acquisition of an existing foreign firm.
C) is generally more politically sensitive than the acquisition of an existing foreign firm.
D) none of the options

Answer: B
Topic: Cross-Border Mergers and Acquisitions
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66) As a mode of entry into a foreign market, cross-border acquisition

A) involves building new production facilities in a foreign country.
B) offer faster speed over greenfield investment.
C) can offer access to proprietary assets.
D) offer faster speed over greenfield investment, and can also offer access to proprietary assets.

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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67) Cross-border acquisition involves

A) building new production facilities in a foreign country.
B) buying an existing foreign business.
C) building new production facilities in a foreign country and buying an existing foreign business.
D) none of the options

Answer: B
Topic: Cross-Border Mergers and Acquisitions
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68) The rapid increase in cross-border M&A deals can be attributed to
A) the end of the greenfield era—we are running out of land.
B) the lack of domestic investment opportunity.
C) the ongoing liberalization of capital markets and the integration of the world economy.
D) none of the options

Answer: C
Topic: Cross-Border Mergers and Acquisitions
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69) As a mode of FDI entry, cross-border M&A offers two key advantages over
greenfield investments:
A) speed and access to proprietary assets.
B) firms bolster their competitive positions in the world market by acquiring special assets from
other firms or using their own assets on a larger scale.
C) firms can better leverage their intangible assets and on a larger scale.
D) none of the options

Answer: A
Topic: Cross-Border Mergers and Acquisitions
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70) Mergers and acquisitions are a popular mode of investment for firms wishing to protect,
consolidate and advance their global competitive positions. Examples include
A) selling off divisions that fall outside the scope of their core competence.
B) acquiring strategic assets that reduce their competitiveness.
C) firms can better leverage their intangible assets and on a larger scale through licensing.
D) none of the options

Answer: A
Topic: Cross-Border Mergers and Acquisitions
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71) Synergistic gains refers to

A) gains from hedging.
B) gains obtained when the value of the acquiring and target firms, combined, is greater than
the stand-alone valuations of the individual firms.
C) gains arising if the combined companies can save on the costs of production, marketing,
distribution, and R&D.
D) gains obtained when the value of the acquiring and target firms, combined, is greater than
the stand-alone valuations of the individual firms. It also refers to gains arising if the combined
companies can save on the costs of production, marketing, distribution, and R&D.

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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72) Whether or not cross-border acquisitions produce synergistic gains and how such gains are
divided between acquiring and target firms
A) are important issues from the perspective of shareholder welfare.
B) are important issues from the perspective of public policy.
C) are important issues from the perspective of stakeholders in the target firms.
D) all of the options

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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73) Imperfections in the market for intangible assets can also play a major role in motivating
firms to undertake cross-border acquisitions. According to the internalization theory,
A) cross-border acquisitions may also be motivated by the acquirer's desire to acquire
and internalize the target firm's intangible assets.
B) a firm with intangible assets that have a public good property such as technical and
managerial know-how may acquire foreign firms as a platform for using its special assets on a
larger scale and, at the same time, avoid the misappropriation that may occur while transacting in
foreign markets through a market mechanism.
C) the internalization, thus, may proceed forward to internalize the acquirer's assets, or
backward to internalize the target's assets.
D) all of the options

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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74) In a study of the effect of international acquisitions on the stock prices of U.S. firms, U.S.
acquiring firms with information-based intangible assets experience a significantly positive stock
price reaction upon foreign acquisition.
A) This is consistent with the finding that the market value of the firm is positively related to its
multinationality because of the firm's intangible assets, such as R&D capabilities, with public
good nature.
B) It is not the multinationality per se that contributes to the firm's value.
C) Their empirical findings support the (forward-) internalization theory of FDI.
D) all of the options

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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75) Synergistic gains
A) are obtained when the acquiring firm is greater in value than the stand-alone valuations of the
target firm(s).
B) can only be obtained by increases in market power.
C) are obtained when the value of the combined firm is greater than the stand-alone valuations of
the individual (acquiring and target) firms.
D) none of the options

Answer: C
Topic: Cross-Border Mergers and Acquisitions
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76) If cross-border acquisitions generate synergistic gains,

A) then both the acquiring and target shareholders gain wealth at the same time.
B) then one can argue that cross-border acquisitions are mutually beneficial and thus should not
be thwarted both from a national and global perspective.
C) then the value of the combined firm is greater than the stand-alone valuations of the
individual (acquiring and target) firms.
D) all of the options.

Answer: D
Topic: Cross-Border Mergers and Acquisitions
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77) OPIC is the

A) Overseas Pirate Investment Corporation.
B) Overseas Private Investment Corporation.
C) Organization Petroleum Importing Countries.
D) none of the options

Answer: B
Topic: Cross-Border Mergers and Acquisitions
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78) Cross-border acquisitions of businesses are a politically sensitive issue,

A) as most countries prefer to retain foreign control of domestic firms.
B) as most countries prefer to retain local control of domestic firms.
C) as most countries prefer to retain local control of foreign firms.
D) none of the options

Answer: B
Topic: Political Risk and FDI
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79) Political risk refers to
A) the potential losses to the parent firm of an MNC resulting from adverse political
developments in the host country.
B) macroeconomic risks.
C) microeconomic risks.
D) bankruptcy or high inflation rates.

Answer: A
Topic: Political Risk and FDI
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80) Transfer risk refers to the risk which arises from the uncertainty about
A) the host's country's policies affecting the local operations of an MNC.
B) the host's country's policy regarding ownership and control of local operations.
C) cross-border flows of capital, payment, know-how, and the like.
D) none of the options

Answer: C
Topic: Political Risk and FDI
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81) Operational risk refers to the risk which arises from the uncertainty about
A) the host's country's policies affecting the local operations of an MNC.
B) the host's country's policy regarding ownership and control of local operations.
C) cross-border flows of capital, payment, know-how, and the like.
D) none of the options

Answer: A
Topic: Political Risk and FDI
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82) Countries may welcome greenfield investments,

A) as they are viewed as representing new investment and employment opportunities.
B) as they are viewed as substitutes for foreign firms' bids to acquire domestic firms.
C) but they are also often resisted and sometimes even resented by the local firms.
D) none of the options

Answer: A
Topic: Political Risk and FDI
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83) Country risk refers to
A) political risk.
B) credit risk, and other economic performances.
C) every risk except political risk.
D) political risk, credit risk, and other economic performances.

Answer: C
Topic: Political Risk and FDI
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84) More than fifty percent of FDI in dollar terms

A) takes the form of cross-border mergers and acquisitions.
B) takes the form of greenfield investment.
C) is initiated by governments.
D) none of the options

Answer: A
Topic: Political Risk and FDI
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85) An increase in political risk can be managed by

A) adjusting a foreign investment project's NPV by either reducing its expected cash flows, or
by increasing the cost of capital.
B) forming joint venture with a local company.
C) purchasing insurance against the hazard of political risk.
D) all of the options

Answer: D
Topic: Political Risk and FDI
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78
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86) Some of the risks that a U.S.-based MNC can encounter in its foreign investments are

(i) an increase in the cost of borrowing due to a rise in interest rates.

(ii) increase in inflation rates.
(iii) dumping.
(iv) unfair competition by local companies.
(v) inconvertibility of foreign currencies.
(vi) expropriation.
(vii) destruction of properties due to war, revolution, and other violent political events in
foreign countries.
(viii) loss of business income due to political violence.
A) (i), (ii), (iii), and (iv)
B) (v), (vi), (vii), and (viii)
C) (i), (ii), (iii), (iv), (v), (vi), (vii), and (viii)
D) none of the options

Answer: B
Topic: Political Risk and FDI
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87) The communist victory in China in 1949 is an example of

A) micro risk.
B) macro risk.
C) both micro and macro risk.
D) none of the options

Answer: B
Topic: Political Risk and FDI
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88) Examples of transfer risk include

A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options

Answer: A
Topic: Political Risk and FDI
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79
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89) Examples of operational risk include
A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options

Answer: B
Topic: Political Risk and FDI
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90) Examples of control risk include

A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options

Answer: C
Topic: Political Risk and FDI
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91) Once a MNC decides to undertake a foreign project, it can take various measures to
minimize its exposure to political risk. These include
A) the MNC can form a joint venture with a local company.
B) the MNC may also consider forming a consortium of international companies to undertake
the foreign project.
C) the MNC can use local debt to finance the foreign project.
D) the MNC may purchase insurance against the hazard of political risk.
E) all of the options

Answer: D
Topic: Political Risk and FDI
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92) One particular type of political risk that MNCs and investors may face is corruption
associated with the abuse of public office for private benefits.
A) Investors may often encounter demands for bribes from politicians and government officials
for contracts and smooth bureaucratic processes.
B) If companies refuse to make grease payments, they may lose business opportunities or face
difficult bureaucratic red tape.
C) They may risk violating laws or being embarrassed when the payments are discovered
and reported in the media.
D) all of the options

Answer: D
Topic: Political Risk and FDI
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93) In evaluating political risk, experts focus their attention on a set of key factors such as
A) integration of the host country into the world political/economic system.
B) the host country's ethnic and religious stability.
C) the host country's regional security, and key economic indicators.
D) all of the options

Answer: D
Topic: Political Risk and FDI
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94) When evaluating a foreign investment project, it is important for the MNC to consider the
effect of political risk, as a sovereign country can change "the rules of the game." To account
for this
A) the MNC may adjust the cost of capital upward.
B) the MNC may lower the expected cash flows from the foreign project.
C) the MNC may purchase insurance policies against the hazard of political risks.
D) all of the options

Answer: D
Topic: Political Risk and FDI
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95) In evaluating political risk, experts focus their attention on a set of key factors such as
A) the host country's political/government system.
B) historical records of political parties and their relative strengths.
C) integration of the host country into the world political/economic system.
D) all of the options

Answer: D
Topic: Political Risk and FDI
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96) Country risk
A) is a broader measure of risk than political risk.
B) encompasses political risk, credit risk, and other economic performances.
C) all of the options
D) none of the options

Answer: C
Topic: Political Risk and FDI
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97) North Korea, Iran, and Cuba are examples of

A) countries with low levels of political risk.
B) countries with high levels of political risk.
C) countries that are politically and economically isolated from the rest of the world.
D) countries with high and low levels of political risk.

Answer: C
Topic: Political Risk and FDI
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98) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled
by Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which
of the following is(are) true?
A) Upon the news release of the project cancellation, Enron's share price fell immediately by
about 10 percent.
B) In the process of structuring the deal, Enron made a profound political miscalculation:
Instead of waiting for the next election results, Enron rushed to close the deal and began
construction, apparently believing that a new government would find it difficult to unwind the
deal when construction was already under way.
C) Enron had the last laugh, however when they went bankrupt and left the power plant
unfinished.
D) all of the options

Answer: D
Topic: Enron versus Bombay Politicians
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99) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled
by Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which
of the following is(are) true?
A) This move by the government played well with Indian voters with visceral distrust of
foreign companies since the British colonial era.
B) This move by the government was widely criticized in India on the grounds that it would
deter future foreign investment.
C) This move by the government was widely criticized in India on the grounds that severe
power shortages have been one of the bottlenecks hindering India's economic growth.
D) none of the options

Answer: A
Topic: Enron versus Bombay Politicians
Accessibility: Keyboard Navigation

100) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled
by Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which
of the following are true?
A) Subsequently, Maharashtra invited Enron to renegotiate its contract.
B) The lack of an effective means of enforcing contracts in a foreign country is clearly a major
source of political risk associated with FDI.
C) In an effort to pressure Maharashtra to reverse its decision, Enron "pushed like hell" the U.S.
Energy Department to make a statement in June 1995 to the effect that canceling the Enron deal
could adversely affect other power projects. The statement only compounded the situation. The
BJP politicians immediately criticized the statement as an attempt by Washington to bully
India.
D) all of the options

Answer: D
Topic: Enron versus Bombay Politicians
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International Financial Management, 8e (Eun)
Chapter 18 International Capital Budgeting

1) The financial manager's responsibility involves

A) increasing the per share price of the company's stock at any cost and by any means, ways
and fashion that is possible.
B) the shareholder wealth maximization.
C) which capital projects to select.
D) the shareholder wealth maximization and which capital projects to select.

Answer: D
Topic: Review of Domestic Capital Budgeting
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2) Perhaps the most important decisions that confront the financial manager are
A) which capital projects to select.
B) the correct capital structure for the firm.
C) the correct capital structure for projects.
D) none of the options

Answer: A
Topic: Review of Domestic Capital Budgeting
Accessibility: Keyboard Navigation

3) Capital budgeting analysis is very important, because it

A) involves, usually expensive, investments in capital assets.
B) has to do with the productive capacity of a firm.
C) will determine how competitive and profitable a firm will be.
D) all of the options

Answer: D
Topic: Review of Domestic Capital Budgeting
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84
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85) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

What is the unlevered after-tax incremental cash flow for year 0?

A) –$3,660,000
B) –$5,100,000
C) –$4,000,000
D) –$4,010,000

Answer: D
Explanation: –$4,010,000 = − [$1,000,000 + $3,000,000 + $10,000]
Topic: Review of Domestic Capital Budgeting

85
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86) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

What is the unlevered after-tax incremental cash flow for year 2?

A) –$4,610
B) $102,300
C) $202,300
D) $255,000

Answer: C
Explanation: $155,000 × 0.66 + $100,000 = $202,300
Topic: Review of Domestic Capital Budgeting

86
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87) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

What is the unlevered after-tax incremental cash flow for year 30?
A) $12,432,300
B) $12,225,390
C) $12,332,300
D) $12,485,000

Answer: A
Explanation: $202,300 + $10,000 + $18,000,000 − 0.34 ($18,000,000 − $1,000,000) =
$12,432,300
Topic: Review of Domestic Capital Budgeting

87
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88) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year
loan at 10.0 percent APR with annual payments.

What is the levered after-tax incremental cash flow for year 0?

A) −$1,010,000
B) −$1,000,000
C) −$660,000
D) −$2,100,000

Answer: A
Explanation: $3,000,000 − $4,010,000 = −$1,010,000
Topic: The Adjusted Present Value Model

88
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89) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year
loan at 10.0 percent APR with annual payments.

What is the levered after-tax incremental cash flow for year 1?

A) $4,300
B) −$202,610
C) −$95,700
D) $57,000

Answer: A
Explanation: −$145,000 × 0.66 + $100,000 = $4,300
Topic: The Adjusted Present Value Model

89
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90) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year
loan at 10.0 percent APR with annual payments.

What is the levered after-tax incremental cash flow for year 30?
A) $9,027,390
B) $9,234,300
C) $9,134,300
D) $9,287,000

Answer: B
Explanation: −$145,000 × 0.66 + $100,000 − $3,000,000 + $10,000 + $18,000,000 − 0.34 ×
$17,000,000 = $9,234,300
Topic: The Adjusted Present Value Model

90
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91) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only
30-year loan at 8.0 percent APR with annual payments. Note that eight percent is less than the 10
percent that they normally borrow at. What is the NPV of the loan?
A) $198,469
B) $53,979.83
C) $102,727.55
D) $1,334,851.09

Answer: D
Explanation: Use the following inputs: CF0 = $3,000,000; CF1 = −$158,400 = − $3,000,000 ×
0.08 × 0.66; CF2 = − $3,158,400; F01 = 29; I = 10 percent. Then, NPV = $1,334,851.09
Topic: The Adjusted Present Value Model

91
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92) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

The firm's tax rate is 34 percent. The firm's pre-tax cost of debt is 8 percent; the firm's
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5;
the market risk premium is 9 percent. What is the firm's cost of equity capital?
A) 33.33 percent
B) 10.85 percent
C) 13.12 percent
D) 16.5 percent

Answer: D
Explanation: 16.5% = 3% + 1.5 × 9%
Topic: The Adjusted Present Value Model

92
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93) Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost
$3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the
pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are
= 10.0% = 11.20%

= 15.0% tax rate = 34% =3

= 24.9% = 2%

The firm's tax rate is 34 percent. The firm's pre-tax cost of debt is 8 percent; the firm's
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5;
the market risk premium is 9 percent. What is the required return on assets?
A) 33.33 percent
B) 10.85 percent
C) 13.12 percent
D) 16.5 percent

Answer: B
Explanation: Solve the following equation for X: 16.5% = X + 3 (X − 8%) (1 − 0.34), where X =
10.85%
Topic: The Adjusted Present Value Model

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13)
i = rdebt = 6% OCF0 = −$100,000
Ku = rassets = 12% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 27.84% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a
maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line
to zero over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There
are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of
product at
$5; variable costs are $3; there are no fixed costs.

What is the NPV of the project using the WACC methodology?

A) $49,613.03
B) $58,028.68
C) $102,727.55
D) $315,666.16

Answer: B
Explanation: Use the following inputs: CF0 = −$100,000; CF1 = $39,800; CF2 = $43,100; F01
= 4; I = 8.74. Then, NPV = $58,028.68.
Topic: The Adjusted Present Value Model

14)
i = rdebt = 6% OCF0 = −$100,000
Ku = rassets = 12% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 27.84% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a
maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line
to zero over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There
are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of
product at
$5; variable costs are $3; there are no fixed costs.

What is the NPV of the project using the APV methodology?

A) $49,613.03
B) $198,469
C) $102,727.55
D) $149,580.12

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13)
i = rdebt = 6% OCF0 = −$100,000
Ku = rassets = 12% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 27.84% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
Answer: D
Explanation: −$98,937.49 + $186,457.36 + $50,048.59 + $12,011.66 = $149,580.12

95
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Topic: The Adjusted Present Value Model

15)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.

What is the NPV of the project using the WACC methodology?

A) $58,028.68
B) $49,613.03
C) $48,300.47
D) $102,727.55

Answer: C
Explanation: Using the cash flow menu of a financial calculator: CF0 = −$100,000; C01 =
$39,800; F01 = 4; C02 = $43,100; I = rWACC = 11.20; NPV = $48,300.47
Topic: The Adjusted Present Value Model

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16)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.

When using the APV methodology, what is the NPV of the depreciation tax shield?
A) $32,051.52
B) $25,777.35
C) $22,794.65
D) $97,152.98

Answer: B
Explanation: Use the following inputs: N = 5; PMT = $6,800; I/YR = 10%. Then, PV =
$25,777.35
Topic: The Adjusted Present Value Model

17)
i = rdebt = 10% OCF0 = −$100,000
Ku = rassets = 15% OCF1-4 = $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
Kl = requity = 24.9% OCF5 = $43,100 = $39,800 + $5,000 × (1 − 0.34)
K = rWACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the
5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other
start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.

When using the APV methodology, what is the NPV of the interest tax shield?
A) $9,666.51
B) $12,019.32
C) $9,377.31
D) $7,000.73

Answer: A
Explanation: Use the following inputs: N = 5; PMT = $2,550; I/YR = 10%. Then, PV = $9,666.51
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Topic: The Adjusted Present Value Model

18) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8
percent. What is the APV of this subsidized loan? If you rounded in your intermediate steps, the
answer may be slightly different from what you got. Choose the closest.
A) −$3,497,224.43
B) $417,201.05
C) $840,797
D) none of the options

Answer: B
Explanation: Use the following inputs for the final answer: CF0 = $6,502,775.57; CF1 =
−$3,386,677.24; CF2 = −$3,440,602.70; I = 8%. Then, NPV = $417,201.05.
Topic: The Adjusted Present Value Model

19) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due December 31, 2009 and your taxes are due
January 1 of each year on the previous year's income. The yield to maturity on your firm's
existing debt is 8 percent. What is the APV of this subsidized loan? Note that I did not round my
intermediate steps. If you did, your answer may be off by a bit. Select the answer closest to
yours. A) −$3,497,224.43
B) $417,201.05
C) $840,797
D) none of the options

Answer: C
Explanation: Use the following inputs for the final answer: CF0 = $10,000,000; CF1 =
−$3,502,085 (found by − $3,172,085 − 0.66 × $500,000); CF2 = −$3,556,011; CF3 =
−$3,612,632; I = 8%. Then, NPV = $840,797. Note that you must first find the payment using
the following inputs: PV = $10,000,000; I = 5%; N = 3. Then, PMT = $3,672,085.
Topic: The Adjusted Present Value Model

20) The required return on assets is 18 percent. The firm can borrow at 12.5 percent; firm's target
debt to value ratio is 3/5. The corporate tax rate is 34 percent, and the risk-free rate is 4 percent
and the market risk premium is 9.2 percent.

What is the weighted average cost of capital?

A) 12.15 percent
B) 13.02 percent
C) 14.33 percent
D) 23.45 percent

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Answer: C
Explanation: 14.33% = (2/5) × 23.45% + (3/5) (1 − 0.34) (12.5%)
Topic: The Adjusted Present Value Model

21) Your firm is in the 34 percent tax bracket. The yield to maturity on your existing bonds is 8
percent. The state of Georgia offers to loan your firm $1,000,000 with a two year amortizing loan
at a 5 percent rate of interest and annual payments due at the end of the year.
The interest will be deductible at the time that you pay. What is the APV of this below-market
loan to your firm? I did not round any of my intermediate steps. You might be a little bit off.
Pick the answer closest to yours.
A) $64,157.38
B) $417,201.05
C) $840,797
D) none of the options

Answer: A
Explanation: First, find the payment = $537,804.88 using the following inputs: PV =
$1,000,000; I = 5%; N = 2. Next, use the following inputs to find the NPV = $64,157.38: CF0 =
$1,000,000; CF1 = −$520,804.88; CF2 = −$529,097; I = 8%
Topic: The Adjusted Present Value Model

22) The firm's tax rate is 34 percent. The firm's pre-tax cost of debt is 8 percent; the firm's
debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5;
the market risk premium is 9 percent. Calculate the weighted average cost of capital.
A) 33.33 percent
B) 8.09 percent
C) 9.02 percent
D) 16.5 percent

Answer: B
Explanation: 0.0809 = 8.09% = (1/4) × 16.5% + (3/4) (1 − 0.34) (8%)
Topic: The Adjusted Present Value Model

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23) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right answer.
A) −$1,406,301.25
B) $12,494,643.75
C) $36,580,767.55
D) $108,994.618.20

Answer: B
Explanation: To find the WACC, do the following two steps: 12.64% = 10% + 2 (10% − 8%) × (1
− 0.34); 116/15 = 12.64% (1/3) + (8%) (2/3) (0.66)
Topic: The Adjusted Present Value Model

24) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

What is the levered after-tax incremental cash flow for year 2?

A) $185,796,000
B) $215,152,000
C) $267,952,000
D) $284,848,000

Answer: B
Explanation: LCF = $250,000,000 − 8% × $660,000,000 (1 − 0.34) = $215,152,000
Topic: The Adjusted Present Value Model

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25) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

What is the levered after-tax incremental cash flow for year 4?

A) $281,704,000
B) $465,152,000
C) −$194,848,000
D) $460,796,000

Answer: C
Explanation: LCF = $500,000,000 − $660,000,000 − 8% × $660,000,000 (1 − 0.34) =
−$193,848,000
Topic: The Adjusted Present Value Model

26) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the flow to equity methodology, what is the value of the equity claim?
A) −$1,540,000
B) $446,570,866.00
C) $36,580,767.55
D) $470,953,393.70

Answer: C
Explanation: CF0 = −$330,000,000; CF1 = $90,152,000; CF2 = $215,152,000; CF3 =
$340,152,000; CF4 = −$194,848,000.
Topic: The Adjusted Present Value Model

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27) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the APV method, what is the value of this project to an all-equity firm?
A) −$46,502,288.10
B) $12,494,643.75
C) $36,580,767.55
D) −$67,163,445.12

Answer: A
Explanation: Simply discount the unlevered cash flows at 10%.
CF0 = −$330,000,000; CF1 = $90,152,000; CF2 = $215,152,000; CF3 = $340,152,000; CF4 =
−$194,848,000.
Topic: The Adjusted Present Value Model

28) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the APV method, what is the value of the debt side effects?
A) $239,072,652.70
B) $66,891,713.66
C) $59,459,301.03
D) $660,000,000

Answer: C
Explanation: CF0 = $660,000,000; CF1 = −$34,848,000 (calculated as 8% × $660,000,000 × (1
− 0.34); F01 = 3; CF2 = −$694,848,000 (calculated as − $660,000,000 − 8% × $660,000,000 ×
0.66); I = 8%
Topic: The Adjusted Present Value Model

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29) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right answer.
A) −$1,406,301.25
B) $12,494,643.75
C) $36,580,767.55
D) $108,994.618.20

Answer: A
Topic: The Adjusted Present Value Model

30) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

What is the levered after-tax incremental cash flow for year 2?

A) $185,796,000
B) $215,152,000
C) $267,952,000
D) $284,848,000

Answer: A
Topic: The Adjusted Present Value Model

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31) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

What is the levered after-tax incremental cash flow for year 4?

A) −$281,704,000
B) $465,152,000
C) −$194,848,000
D) $460,796,000

Answer: A
Topic: The Adjusted Present Value Model

32) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the flow to equity methodology, what is the value of the equity claim?
A) −$1,540,000
B) $446,570,866.00
C) $36,580,767.55
D) $30,716,236.13

Answer: D
Topic: The Adjusted Present Value Model

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33) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the APV method, what is the value of this project to an all-equity firm?
A) −$46,502,288.10
B) $12,494,643.75
C) $36,580,767.55
D) −$67,163,445.12

Answer: D
Explanation:
Topic: The Adjusted Present Value Model

34) Consider a project of the Cornell Haul Moving Company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:

The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity, the required
return would be 10 percent.

Using the APV method, what is the value of the debt side effects?
A) $239,072,652.70
B) $66,891,713.66
C) $59,459,301.03
D) $660,000,000

Answer: B
Explanation:
Topic: The Adjusted Present Value Model

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35) In the APV model
A) interest tax shields are discounted at i.
B) operating cash flows are discounted at Ku.
C) depreciation tax shields are discounted at i.
D) all of the options

Answer: D
Explanation:
Topic: The Adjusted Present Value Model

36) Your firm's existing bonds trade with a yield to maturity of eight percent. The state of
Missouri has offered to loan your firm $10,000,000 at zero percent for five years. Repayment
will be of the form of $2,000,000 per year for five years; the first payment is due in one year.

What is the value of this offer?

A) $4,729,622.75
B) $2,014,579.93
C) $0
D) $196,929.88

Answer: B
Explanation: Use the following inputs: N = 5; I/Y = 8%; PMT = $2,000,000. The PV =
$7,985,420.07. Next, $10,000,000 − $7,985,420.07 = $2,014,579.93.
Topic: The Adjusted Present Value Model

37) What proportion of the firm is financed by debt for a firm that expects a 15 percent return
on equity, a 12 percent return on assets, and a 10 percent return on debt?

The tax rate is 25 percent.

A) 20 percent
B) 1/3
C) 60 percent
D) 2/3

Answer: D
Explanation: First, find the D/E ratio. Solve for X: 15% = 12% + X (12% − 10%) (1 − 0.25),
where X = 2. Thus, D/V = 2 / (2+1) = 2/3.
Topic: The Adjusted Present Value Model

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38) The required return on equity for a levered firm is 10.60 percent. The debt to equity ratio is
½ the tax rate is 40 percent, the pre-tax cost of debt is 8 percent. Find the cost of capital if this
firm were financed entirely with equity.
A) 10 percent
B) 12 percent
C) 8.67 percent
D) none of the options

Answer: A
Explanation: (10.6% + 2.4%) / 1.3 = 10%
Topic: The Adjusted Present Value Model

39) The required return on equity for an all-equity firm is 10.0 percent. They are considering a
change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40 percent, the pre-tax
cost of debt is 8 percent. Find the new cost of capital if this firm changes capital structure.
A) 14.93 percent
B) 8.67 percent
C) 7.40 percent
D) none of the options

Answer: B
Explanation: (2/3) × 10.6% + (1/3) (8%) (1 − 0.40) = 8.67%
Topic: The Adjusted Present Value Model

40) The required return on equity for an all-equity firm is 10.0 percent. They currently have a
beta of one and the risk-free rate is 5 percent and the market risk premium is 5 percent. They are
considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40 percent,
the pre-tax cost of debt is 8 percent. Find the beta if this firm changes capital structure.
A) 1.12
B) 1
C) 7.4 percent
D) none of the options

Answer: A
Explanation: First, solve the following: 10% + (1/2) (10% − 8%) (1 − 0.40) = 10.60%. Next,
solve X = (10.6% − 5%) / 5%, where X = 1.12.
Topic: The Adjusted Present Value Model

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41) What is the expected return on equity for a tax-free firm with a 15 percent expected return
on assets that pays 12 percent on its debt, which totals 25 percent of assets?
A) 24 percent
B) 15.60 percent
C) 16 percent
D) 20 percent

Answer: C
Explanation: If D/V = 1/4, then D/E = 1/3. Now, solve the following: 15% + (1/3) (15% − 12%)
(1 − 0) = 16%
Topic: The Adjusted Present Value Model

42) What is the expected return on equity for firm in the 40 percent tax bracket with a 15
percent expected return on assets that pays 12 percent on its debt, which totals 25 percent of
assets?
A) 24 percent
B) 15.60 percent
C) 16 percent
D) 20 percent

Answer: B
Explanation: If D/V = 1/4, then D/E = 1/3. Now, solve the following: 15% + (1/3) (15% − 12%)
(1 − 0.40) = 15.6%
Topic: The Adjusted Present Value Model

43) Assume that XYZ Corporation is a leveraged company with the following information:

Kl = cost of equity capital for XYZ = 13%

i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%

Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average
cost of capital of 9.3 percent.
A) 35 percent
B) 40 percent
C) 45 percent
D) 50 percent

Answer: D
Explanation: 0.093 = (1 − X) × 0.13 + X (1 − 0.30) × 0.08, where X = 0.50 = 50%
Topic: The Adjusted Present Value Model

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44) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8
percent. What is the NPV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit.
Select the answer closest to yours.
A) $406,023.10
B) $840,797
C) $64,157.38
D) $20,659.77

Answer: A
Explanation: First, use the following inputs to find the payment: PV = $10,000,000; I = 5%; N =
3; and PMT = −$3,497,224.43. Next, use the following inputs: CF0 = $6,502,775.57; CF1 =
−$3,497,224.43; CF2 = −$3,386,667.24; CF3 = −$56,621.73; I = 8%. Then, NPV = $406,023.10.
Topic: The Adjusted Present Value Model

45) Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8
percent.

What is the €-denominated NPV of this project? I did not round my intermediate steps, if you
did, select the answer closest to yours.
A) €5,563.23
B) €2,270.79
C) €7,223.14
D) €3,554.29

Answer: A
Topic: Capital Budgeting from the Parent Firm's Perspective

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46) The spot exchange rate is ¥125 = $1. The U.S. discount rate is 10 percent; inflation over the
next three years is 3 percent per year in the U.S. and 2 percent per year in Japan. Calculate the
dollar NPV of this project.

I did not round my intermediate steps, if you did, select the answer closest to yours.
A) $267,181.87
B) $14,176.67
C) $2,536.49
D) $2,137.46

Answer: D
Explanation: (1.10) / (1.03) × 1.02 − 1 = 0.0893 = 8.93%, and then convert the yen-dominated
cash flows ($267,181.87) to dollars using the spot exchange rate.
Topic: Capital Budgeting from the Parent Firm's Perspective

47) Some of the factors (with selected explanations) used in calculating the basic "net
present value" and the "incremental" cash flows of a capital project are:

(i) expected after-tax terminal value, including recapture of working capital

(ii) net income, which belongs to the equity holders of the firm
(iii) initial investment at inception
(iv) depreciation, and the fact that depreciation is a noncash expense (i.e., it is removed from the
calculation of net income, for tax purposes, but added back because it did not actually flow out
of the firm)
(v) weighted-average cost of capital
(vi) the firm's after-tax payment of interest to debtholders
(vii) economic life of the capital project in years

The "net present value" of a capital project is calculated by using

A) (i), (ii), and (iii).
B) (ii), (iv), and (vi).
C) (i), (iii), (v), and (vii).
D) (iv), (v), (vi), and (vii).

Answer: C
Topic: Capital Budgeting from the Parent Firm's Perspective

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48) Some of the factors (with selected explanations) used in calculating the basic "net
present value" and the "incremental" cash flows of a capital project are:

(i) expected after-tax terminal value, including recapture of working capital

(ii) net income, which belongs to the equity holders of the firm
(iii) initial investment at inception
(iv) depreciation, and the fact that depreciation is a noncash expense (i.e., it is removed from the
calculation of net income, for tax purposes, but added back because it did not actually flow out of
the firm)
(v) weighted-average cost of capital
(vi) the firm's after-tax payment of interest to debtholders
(vii) economic life of the capital project in years

The "incremental" cash flows of a capital project is calculated by using

A) (i), (ii), and (iii).
B) (ii), (iv), and (vi).
C) (i), (iii), (v), and (vii).
D) (iv), (v), (vi), and (vii).

Answer: B
Topic: Capital Budgeting from the Parent Firm's Perspective

49) In the context of the capital budgeting analysis of an MNC that has strong foreign
competitors, "lost sales" refers to
A) the cannibalization of existing projects by new projects.
B) the entire sales revenue of a new foreign manufacturing facility representing the
incremental sales revenue of the new project.
C) the cannibalization of existing projects by new projects and the entire sales revenue of a
new foreign manufacturing facility representing the incremental sales revenue of the new
project.
D) none of the options

Answer: C
Topic: Capital Budgeting from the Parent Firm's Perspective

50) Which of the following statements is false about "borrowing capacity"?

A) It is an especially important point in international capital budgeting analysis because of
the frequency of large concessionary loans.
B) It creates tax shields for APV analysis regardless of how the project is actually financed.
C) It is synonymous to the "project debt."
D) It is based on the firm's optimal capital structure.

Answer: C
Topic: Capital Budgeting from the Parent Firm's Perspective

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51) The adjusted present value (APV) model that is suitable for an MNC is the basic net
present value (NPV) model expanded to
A) distinguish between the market value of a levered firm and the market value of an
unlevered firm.
B) discern the blocking of certain cash flows by the host country from being legally remitted to
the parent.
C) consider foreign currency fluctuations or extra taxes imposed by the host country on
foreign exchange remittances.
D) all of the options

Answer: D
Topic: Capital Budgeting from the Parent Firm's Perspective

52) Sensitivity analysis in the calculation of the adjusted present value (APV) allows the
financial manager to
A) analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.)
inherent in the investment.
B) more fully understand the implications of planned capital expenditures.
C) consider in advance actions that can be taken should an investment not develop as anticipated.
D) all of the options

Answer: D
Topic: Capital Budgeting from the Parent Firm's Perspective

53) The ABC Company, a U.S.-based MNC, plans to establish a subsidiary in Spain to
manufacture and sell water pumps. ABC has total assets of $80 million, of which $60 million is
equity financed. The remainder is financed with debt. ABC considers its current capital structure
optimal. The construction cost of the facility in Spain is estimated to be €8,500 million, of
which
€6,500 million is to be financed at a below-market rate of interest arranged by the Spanish
government. The proposed project will increase the borrowing capacity by
A) €1,215 million.
B) €2,215 million.
C) €3,215 million.
D) €4,215 million.

Answer: B
Topic: Capital Budgeting from the Parent Firm's Perspective

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54) Given the following information for a levered and unlevered firm, calculate the difference in
the cash flow available to investors. Assume the corporate tax rate is 40 percent.
(Hint: Calculate the tax savings arising from the tax deductibility of interest payments).

Levered Unlevered
Revenue $ 250 $ 250
Operating cost −$ 100 −$ 100
Interest expense −$ 20 $ 0
A) $8
B) $18
C) $78
D) $90

Answer: A
Topic: Capital Budgeting from the Parent Firm's Perspective

55) As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to
prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the
one-year forward rate that should prevail?
A) €1.00 = $1.2379
B) €1.00 = $1.2139
C) €1.00 = $0.9903
D) $1.00 = €1.2623

Answer: A
Explanation: €1 = ($1.25 × 1.02) / 1.03 = $1.2379
Topic: Capital Budgeting from the Parent Firm's Perspective

56) As of today, the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to
prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the
one-year forward rate that should prevail?
A) €1.00 = $1.5147
B) €1.00 = $1.4854
C) €1.00 = $0.6602
D) $1.00 = €0.6602

Answer: B
Explanation: €1 = ($1.50 × 1.02) / 1.03 = $1.4854
Topic: Estimating the Future Expected Exchange Rate

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57) As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to
prevail for the next three years in the U.S. is 2 percent and 3 percent in the euro zone. What
spot exchange rate should prevail three years from now?
A) €1.00 = $1.2379
B) €1.00 = $1.2139
C) €1.00 = $0.9903
D) $1.00 = €1.2623

Answer: B
Explanation: €1 = ($1.25 × 1.023) / 1.033 = $1.2139
Topic: Estimating the Future Expected Exchange Rate

58) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is CF0 in dollars?

Answer: $(1,180,000.00) = $1 million investment + after-tax cost of $300,000 lease payment

Topic: Estimating the Future Expected Exchange Rate

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59) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is CF1 in
dollars?

Answer:
T = 1,2,3,4
Revenue $ 1,000,000.00
Variable cost $ 250,000.00
Fixed cost $ 300,000.00
Depreciation $ 198,000.00 = (1,000,000 − 10,000)/5
EBIT $ 252,000.00
NI $ 151,200.00
OCF $ 349,200.00 = 151,200 + 198,000
Topic: Estimating the Future Expected Exchange Rate

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60) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is CF5 in
dollars?

Answer:
T=5
Revenue $ 1,000,000.00
Variable cost $ 250,000.00
Fixed cost –
Depreciation $ 198,000.00
EBIT $ 552,000.00
NI $ 331,200.00
OCF $ 539,200.00 = 529,200 + 198,000 + 10,000

Note that in year 5 we've prepaid the lease and there's the salvage value
Topic: Estimating the Future Expected Exchange Rate

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61) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is the NPV of the U.S.-based project to the Irish firm?

Answer: NPV$ = $299,349.95

Topic: Estimating the Future Expected Exchange Rate

62) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is
considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is the dollar-denominated IRR?

Answer: IRR$ = $17.826%

Topic: Estimating the Future Expected Exchange Rate

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63) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

What is the euro-denominated IRR?

Answer: Just convert IRR$ using PPP: IRR€ = 16.68% using

1 + IRR$ = 1 + IRR€ = 1.17826 = 1 + IRR€

1 + i$ 1 + i€ 1.03 1.02
Topic: Estimating the Future Expected Exchange Rate

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64) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is
considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

Find the break-even price (in dollars) and break-even quantity for the U.S.

project. Answer: PBE 17.43

QBE 41,435.77

To find these first find the pv of the costs of the project (equipment, rent). Then find the
equivalent annual cost by solving for payment. Then Work back through the income statement.

CF0 = −1,180,000
CF1 = −100,800 = −180,000 + 198,000 × 0.4 = after-tax rent + depreciation tax shield
CF5 = 89,200 = 10,000 + 198,000 × 0.4
NPV at 9.06% = −1,448,324.86
Solve for PMT over 5 year and you have 372,921.89
Notice that we have already taken depreciation into account so to solve for P and Q solve
372,921.89/0.60 = 621,536.48 = QP − 5Q
If P = $20 then Q = 41,435.77
If Q = 50,000 then P = $17.43
Topic: Estimating the Future Expected Exchange Rate

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65) Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and
is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2
percent.

Repeat the above project analysis assuming that the Irish firm could replicate the project in
Ireland. (i.e. cash flow out the project in Ireland and find break-even price (in €), quantity, NPV,
IRR (in euro not dollars).

Answer: This is likely too much work for a test but here it is:
CF0 = −€841,666.67

1 2 3 4 5
Revenue € 660,194.17 € 653,784.52 € 647,437.10 € 641,151.30 € 660,194.17
Variable cost € 165,048.54 € 163,446.13 € 161,189.28 € 160,287.83 € 165,048.54
Fixed cost € 198,058.25 € 196,135.36 € 194,231.13 € 192,345.39 € −
Depreciation € 132,063.48 € 132,063.48 € 132,063.48 € 132,063.48 € 132,063.48
EBIT € 165,023.90 € 162,139.55 € 159.283.21 € 156,454.61 € 363,082.15
NI € 144,395.91 € 141,872.11 € 139,372.81 € 136.897.78 € 317,696.88
OCF € 276,459.39 € 273,935.59 € 271,436.29 € 268,961.26 € 456,109.63
This includes salvage value.

Note that salvage value of $10,000 is converted to euro the spot rate expected to prevail in 5

years. Notice that NPV and IRR are much higher with a tax rate of 12.5% instead of 40%.
NPV = €372,759
IRR = 22.45%
PBE €16.73
QBE 39,103.22503
Topic: Estimating the Future Expected Exchange Rate

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66) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Answer: −$4,211.32
There are two equally valid approaches each of these problems

Convert the cash flows to dollars

use i$ = 8% as a discount rate

= −$102,400 = −€64,000 ×
= $266,039.22 = €160,000 ×

= −$172,795.08 = −

€100,000 ×

i$ = 8%
Compute NPV = −$4,211.32

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Convert the interest rate from i$ = 8% to i€ = 3.92% using

CF0 = −€64,000
CF1 = €160,000
CF2 = −€100,000

= -1
i€ = 3.92%
Compute NPV = −€598.18
Convert to dollars at spot rate

−$4,211.32 = -€2,632.08 ×
Topic: Estimating the Future Expected Exchange Rate

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67) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Answer: −$4,211.32
There are two equally valid approaches each of these problems

Convert the cash flows to dollars

use i$ = 8% as a discount rate

= −$102,400 = −€64,000 ×
= $266,039.22 = €160,000 ×

= −$172,795.08 = −

€100,000 ×

i$ = 8%
Compute NPV = −$4,211.32

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 Convert the interest rate from i$ = 8% to i€ = 3.92% using

CF0 = −€64,000
CF1 = €160,000
CF2 = −€100,000

= -1
i€ = 3.92%
Compute NPV = −€598.18
Convert to dollars at spot rate

−$4,211.32 = -€2,632.08 ×
Topic: Estimating the Future Expected Exchange Rate

68) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the dollar-denominated IRR of this project?

Answer:
29.90% 1 + IRR$ = 1 + IRR€ = 1.25 = 1 + IRR€
1 + i$ 1 + i€ 1.02 1.06
Topic: Estimating the Future Expected Exchange Rate

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125) Consider the following international investment opportunity. It involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires environmental
clean-up.

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the euro-denominated IRR of this project?

Answer: Use IRR button with cash flow menu or solve this quadratic:
100X2 − 160X + 64 = 0
(10X − 8) (10X − 8) = 0 → 10X − 8 = 0

X= = IRR = −1

25.00%
Topic: Estimating the Future Expected Exchange Rate

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126) Consider the following international investment opportunity. It involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires environmental
clean-up.

The current exchange rate is $1.55 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Answer: −$957.09
There are two equally valid approaches each of these problems

Convert the euro cash flows to dollars

use i$ = 8% as a discount rate

= −$40,000 = −€25,000 ×
= $99,764 = €60,000 ×

= −$62,206.23 = −

€36,000 ×

i$ = 8%
Compute NPV = −$957.09

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Convert the interest rate from i$ = 8% to i€ = 3.92% using

CF0 = −€25,000
CF1 = €60,000
CF2 = −€36,000

= −1
i€ = 3.92%
Compute NPV = −€598.18

Convert to dollars at spot rate

−$957.09 = -€598.18 ×
Topic: Estimating the Future Expected Exchange Rate

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71) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.55 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Answer: −$957.09
There are two equally valid approaches each of these problems

Convert the euro cash flows to dollars

use i$ = 8% as a discount rate

= −$40,000 = −€25,000 ×
= $99,764 = €60,000 ×

= −$62,206.23 = −

€36,000 ×

i$ = 8%
Compute NPV = −$957.09

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Convert the interest rate from i$ = 8% to i€ = 3.92% using

CF0 = −€25,000
CF1 = €60,000
CF2 = −€36,000

= −1
i€ = 3.92%
Compute NPV = −€598.18

Convert to dollars at spot rate

−$957.09 = -€598.18 ×
Topic: Estimating the Future Expected Exchange Rate

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72) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.55 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the dollar-denominated IRR of this project?

Answer: Easily computed with a financial calculator if you converted the cash flows into dollars.
Topic: Estimating the Future Expected Exchange Rate

73) Consider the following international investment opportunity. It involves a gold mine that can
be opened at a cost, then produces a positive cash flow, but then requires environmental clean-
up.

The current exchange rate is $1.55 = €1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the euro-denominated IRR of this project?

Answer: Use IRR button with cash flow menu or solve this quadratic:

36x2 − 60x + 25 = 0
(6x − 5) (6x − 5) = 0 → 6x − 5 = 0

x= = IRR = −

1 20.00%
Topic: Estimating the Future Expected Exchange Rate

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74) Consider the following international investment opportunity:

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

Answer: −$10,421.23
There are two equally valid approaches each of these problems

Convert the cash flows to dollars

use i$ = 8% as a discount rate

= −$80,000 = −€50,000 ×
= $24,235.29 = €15,000 ×

= $24,472.89 = €15,000 ×

= $32,950.43 = €20,000 ×

i$ = 8%
Compute NPV = −$10,421.23

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Convert the interest rate from i$ = 8% to i€ = 6.95% using

CF0 = −€25,000
CF1 = €60,000
CF2 = −€36,000

= -1
i€ = 6.95%
Compute NPV = −€6,513.27
Convert to dollars at spot rate

−$10,421.23 = -€6,513.27 ×
Topic: Estimating the Future Expected Exchange Rate

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75) Consider the following international investment opportunity:

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Answer: −$10,421.23
There are two equally valid approaches each of these problems

Convert the cash flows to dollars

use i$ = 8% as a discount rate

= −$80,000 = −€50,000 ×
= $24,235.29 = €15,000 ×

= $24,472.89 = €15,000 ×

= $32,950.43 = €20,000 ×

i$ = 8%
Compute NPV = −$10,421.23

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Convert the interest rate from i$ = 8% to i€ = 6.95% using

CF0 = −€25,000
CF1 = €60,000
CF2 = −€36,000

= -1
i€ = 6.95%
Compute NPV = −€6,513.27
Convert to dollars at spot rate

−$10,421.23 = -€6,513.27 ×
Topic: Estimating the Future Expected Exchange Rate

76) Consider the following international investment opportunity:

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the dollar-denominated IRR of this project?

Answer: 0.98%

= -1

Alternatively convert cash flows to dollars and solve for IRR

Topic: Estimating the Future Expected Exchange Rate

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77) Consider the following international investment opportunity:

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.

What is the euro-denominated IRR of this project?

Answer: 0% Obvious if you notice that sum of the cash flows is zero.
Topic: Estimating the Future Expected Exchange Rate

78) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the ex post IRR in euro for the French firm if they undertake the project today and then the
exchange rate falls to S1(€/£) = €1.80 per £.

Answer: IRR = 3.5%

Topic: Estimating the Future Expected Exchange Rate

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136) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find th e ex post IRR in euro for the French firm if they undertake the project today and then the
exchange rate rises to S1(€/£) = €2.20 per £.

Answer: IRR = 26.5%

Topic: Estimating the Future Expected Exchange Rate

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137) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the IRR in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(€/£) = €2.20 per £.

Answer: IRR = 15%

Topic: Estimating the Future Expected Exchange Rate

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81) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(€/£) = €2.20 per £.

Answer: NPV = €100 = -€2,000 +

Topic: Estimating the Future Expected Exchange Rate

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82) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the IRR in euro for the French firm if they wait one year to undertake the project after the
exchange rate falls to S1(€/£) = €1.80 per £.

Answer: IRR = 15%

Topic: Estimating the Future Expected Exchange Rate

139
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83) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate falls to S1(€/£) = €1.80 per £.

Answer: NPV = €81.82 = -€1,800 +

Topic: Estimating the Future Expected Exchange Rate

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84) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

The CFO who has a CFA notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.

Answer: The project cash flows look like this:

Year 0 Year 1

-€2,000 €2,500 if (€∣£) = €2.20 per £.

or
$2,070 if (€∣£) = €1.80 per £.

This project can be valued as a risk-free bond plus an at-the-money call option on £1,150 with a
strike price of €2/£.

= +

Topic: Estimating the Future Expected Exchange Rate

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142) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Your banker quotes the euro-zone risk-free rate at i€ = 6% and the British risk free rate at i£ =
6%. Find the value of the option and thereby the project.

Answer: Using the risk-neutral valuation methods of chapter 7, the risk neutral probability is 1/2

ρ= = = = 1/2

The value of the option is thereby €216.98 = 1/2 × €460 / 1.06

The NPV of the project if undertaken today is −€2,000 + $2,070/1.06 + €216.98 = €169.81
Topic: Estimating the Future Expected Exchange Rate

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143) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Using your results to the last question, make a recommendation vis-à-vis when to undertake the
project.

Answer: If we undertake the project today the NPV = €169.81

If we wait 1 year then NPV is either €100 or €81.82
Clearly undertaking the project today the project is a win -big/lose-big kind of gamble, but we
should do it since taking the project on today has a higher (and sooner received) NPV than waiting
one year.
Topic: Estimating the Future Expected Exchange Rate

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87) A French firm is considering a one-year investment in the United Kingdom with a
pound-denominated rate of return of i£ = 15%. The firm's local cost of capital is i€ = 10%. The
project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is
€2.00 = £1.00.

Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:

S1 (€/£) = €2.20 per £

S1 (€/£) = €1.80 per £

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Using the notion of a hedge ratio, make a recommendation vis-à-vis how to undertake the project
today without "buying" the option.

Answer: Notice that the hedge ratio of the option is 1 = (€460 − 0)/(€2530 − €2070)
Recall from chapter 7 that if you write a call you hedge with a long position in the underlying.
Here we own the call so we hedge with a short position in the underlying.
So if we were to sell forward £1,150 today at the 1-year forward rate prevailing today, our gains
and losses would be invariant to the exchange rate:
If the exchange rate that prevails in one year is

Given that we have the same riskless rates in both countries, the forward rate equals today's spot
rate so the IRR = 15%
Topic: Estimating the Future Expected Exchange Rate

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88) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate falls to S1($/€) = $1.40 per €.

Answer: IRR = -2% =

Topic: Estimating the Future Expected Exchange Rate

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89) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate rises to S1($/€) = $1.80 per €.

Answer: IRR = 26.0%

Topic: Estimating the Future Expected Exchange Rate

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90) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($/€) = $1.80 per €. Assume that i€ doesn't change.

Answer: IRR = 5%

Topic: Estimating the Future Expected Exchange Rate

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91) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the NPV in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($/€) = $1.80 per €. Assume that i€ doesn't change.

Answer: NPV = $17.30 = -$1,800 +

Topic: Estimating the Future Expected Exchange Rate

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92) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate falls to S1($/€) = $1.40 per €. Assume that i€ doesn't change.

Answer: IRR = 5%

Topic: Estimating the Future Expected Exchange Rate

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150) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:
S1 ($/€) = €1.80 per €
S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Find the NPV in euro for the American firm if they wait one year to undertake the project after
the exchange rate falls to S1($/€) = $1.40 per €. Assume that i€ doesn't change.

Answer: NPV = $13.46 = -$1,400 +

Topic: Estimating the Future Expected Exchange Rate

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151) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:
S1 ($/€) = €1.80 per €
S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

The hedge fund manager notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.

Answer: The project cash flows look like this:

Year 0 Year 1

-$1,500 $1,890 if ($∣€) = $1.80 per €.

or
$1,470 if ($∣€) = $1.40 per €.
This project can be valued as a risk-free bond plus an at-the-money call option on €1,400 with a
strike price of $1.50/€

= +

Topic: Estimating the Future Expected Exchange Rate

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95) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Your banker quotes the euro-zone risk-free rate at i€ = 5% and the U.S. risk free rate at i$ = 4%.
Find the value of the option and thereby the correct value of the bond to a U.S. investor.

Answer: ρ = = = 0.2143

The value of the option is $86.54 = 0.2143 × $420/1.04

The NPV of the bond if purchased today is $1500 + $1470/104 + $86.54 = 0
This can be interpreted as the bond does not represent an arbitrage opportunity for the American
hedge fund manager—it is appropriately priced.
Topic: Estimating the Future Expected Exchange Rate

96) An American Hedge Fund is considering a one-year investment in an Italian government

bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Using your results to the last question, make a recommendation vis-à-vis when to buy the bond.

Answer: If we buy the bond today the NPV = $0

If we wait 1 year then NPV is either $13.64 or $17.30

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clearly buying the bond today is less desirable than waiting one year.
Topic: Estimating the Future Expected Exchange Rate

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97) An American Hedge Fund is considering a one-year investment in an Italian government
bond with a one-year maturity and a euro-denominated rate of return of i€ = 5%. The bond costs
€1,000 today and will return €1,050 at the end of one year without risk. The current exchange
rate is €1.00
= $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4
percent. Suppose that the European Central Bank is considering either tightening or loosening its
monetary policy. It is widely believed that in one year there are only two possibilities:

S1 ($/€) = €1.80 per €

S1 ($/€) = €1.40 per €

Following revaluation, the exchange rate is expected to remain steady for at least another year.

Using the notion of hedging, make a recommendation vis-à-vis how to undertake the project
today without "buying" the option.

Answer: If we were to sell forward €1,050 today at today's 1-year forward rate,

($∣€) =

Then our gains and losses would be invariant to the exchange

rate: If the exchange rate that prevails in one year is

Year 0 Year 1

-$1,500 $1,560 = $1,890 - €1,050 × ($1.80 - $1.4857) if S1 ($/€) = €1.80 per €.

or
$1,560 = $1,470 + €1,050 × ($1.4857 - $1.40) if S1 ($/€) = €1.40 per €.
Topic: Estimating the Future Expected Exchange Rate

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 98) The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so
it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management
believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold
per year. The expansion, including the cost of the land, will cost $500,000. The current price of
gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 × (1.06).
Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.

Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold
reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the
foreseeable future. On the other hand, management believes there is some possibility that the
world will soon return to a gold reserve international monetary system. In the latter event, the
price of gold would increase to at least $460 per ounce. The course of the future price of gold
bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by
buying a purchase option on the land for $25,000.

Compute the NPV at the current price of gold. Hint: think of the gold mine as a perpetuity.

Answer:
NPV = $500,000 = ($425 − $375) × 2,000 −$500,000
0.10
Topic: Estimating the Future Expected Exchange Rate

99) The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so
it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management
believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold
per year. The expansion, including the cost of the land, will cost $500,000. The current price of
gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 × (1.06).
Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.

Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold
reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the
foreseeable future. On the other hand, management believes there is some possibility that the
world will soon return to a gold reserve international monetary system. In the latter event, the
price of gold would increase to at least $460 per ounce. The course of the future price of gold
bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by
buying a purchase option on the land for $25,000.

Compute the NPV at the two possible prices of gold.

Answer:
NPV = $1,200,000 = ($460 − $375) × 2,000 −$500,000
0.10

NPV = $1,200,000 = ($390 − $375) × 2,000 −$500,000

0.10
Topic: Estimating the Future Expected Exchange Rate
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International Financial Management, 8e (Eun)
Chapter 19 Multinational Cash Management

1) Many of the skills necessary for effective cash management are the same regardless of
whether the firm has only domestic operations or if it operates internationally.

Answer: FALSE
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

2) The cash manager of a domestic firm should source funds internationally to obtain the lowest
borrowing cost and to place excess funds wherever the greatest return can be earned regardless
of currency.

Answer: TRUE
Explanation: Given IRP and hedging opportunities this is true. Likely a contentious question.
Topic: Blocked Funds
Accessibility: Keyboard Navigation

3) A netting center necessarily implies that the MNC has a central cash manager.

Answer: FALSE
Topic: Blocked Funds
Accessibility: Keyboard Navigation

4) A multilateral netting system is beneficial in reducing the number of and the expense
associated with inter-affiliate foreign exchange transactions.

Answer: TRUE
Topic: Blocked Funds
Accessibility: Keyboard Navigation

5) A central cash manager has a global view of the most favorable borrowing rates and
most advantageous investment rates.

Answer: TRUE
Topic: Blocked Funds
Accessibility: Keyboard Navigation

6) A centralized cash pool assists in reducing the problem of mislocated funds and in
funds mobilization.

Answer: TRUE
Topic: Blocked Funds
Accessibility: Keyboard Navigation

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7) A centralized cash management system with a cash pool can reduce the investment the
MNC has in precautionary cash balances, saving the firm money.

Answer: TRUE
Topic: Blocked Funds
Accessibility: Keyboard Navigation

8) Efficient cash management techniques can

A) reduce the investment in cash balances and foreign exchange transaction expenses.
B) provide for maximum return from the investment of excess cash.
C) result in borrowing at lowest rate when a temporary cash shortage exists.
D) all of the options

Answer: D
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

9) Cash management refers to

A) the decision to grant credit to customers or to remain "cash and carry."
B) the investment the firm has in transaction balances and precautionary balances.
C) a domestic firm's investment in foreign currency.
D) none of the options

Answer: B
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

10) Precautionary cash balances

A) are necessary in case the firm has underestimated the amount of cash needed to
cover transactions.
B) are necessary to cover scheduled outflows of funds during a cash budgeting period.
C) are necessary in case the firm has underestimated the amount of cash needed to cover
transactions, and are also necessary to cover scheduled outflows of funds during a cash
budgeting period.
D) none of the options

Answer: A
Topic: The Management of International Cash Balances
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11) Precautionary cash balances
A) represent an increasingly-important source of interest income for many MNCs.
B) are necessary in case the firm has underestimated the amount needed to cover transactions.
C) are synonymous with speculative cash balances.
D) none of the options

Answer: B
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

12) Multinational cash management

A) is really no different for an MNC than for a purely domestic firm in a closed economy.
B) concerns itself with the size of cash balances, their currency denominations, and where
these cash balances are located among the MNC's affiliates.
C) concerns itself with the size of cash balances and their currency denominations, but not where
these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not
an issue.
D) none of the options

Answer: B
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

13) Good cash management boils down to

A) investing excess funds at the most favorable interest rate and borrowing at the lowest rate
when there is a temporary cash shortage.
B) investing excess funds at the lowest rate and borrowing at the highest rate when there is
a temporary cash shortage.
C) hedging currency exposure with judicious use of futures, forwards, and currency
option contracts.
D) none of the options

Answer: A
Topic: The Management of International Cash Balances
Accessibility: Keyboard Navigation

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159) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong
Kong and the Unites States. For a recent month, the following payments matrix of inter-affiliate
cash flows, stated in Singapore dollars, was forecasted.

ABC Trading Company Payments Matrix (S$000)

Disbursements by:
Singapore Hong Kong U.S.
Receipts by:
Singapore 80 110
Hong Kong 16 44
U.S. 22 50

Calculate, in Singapore dollars, the amount that the inter-affiliate foreign exchange transaction
will be reduced by with multilateral netting.
A) S$152,000
B) S$170,000
C) S$322,000
D) S$405,000

Answer: B
Explanation: (S$16,000 + S$22,000 + S$80,000 + S$110,000 + S$50,000 + S$44,000) −
(S$70,000 + S$82,000) = S$322,000 − S$152,000 = S$170,000
Topic: CASE APPLICATION: Teltrex's Cash Management System

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160) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong Kong
and the Unites States. For a recent month, the following payments matrix of inter-affiliate cash
flows, stated in Singapore dollars, was forecasted.

ABC Trading Company Payments Matrix (S$000)

Disbursements by:
Singapore Hong Kong U.S.
Receipts by:
Singapore 80 110
Hong Kong 16 44
U.S. 22 50

If foreign exchange transactions cost ABC 0.45 percent, what savings results from netting?
A) S$684
B) S$765
C) S$1,449
D) S$1,823

Answer: B
Explanation: S$170,000 (from problem above) × 0.0045 = S$765.
Topic: CASE APPLICATION: Teltrex's Cash Management System

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16) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown at left. Use bilateral netting to reduce the number of foreign exchange
transactions by half.

A)

B)

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C)

D) none of the options

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

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17) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown at left. Use multilateral netting to reduce the number of foreign exchange
transactions.

A)

B)

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C)

D) none of the options

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows

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18) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown at left. Use multilateral netting with a central depository to reduce the
number of foreign exchange transactions.

A)

B)

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C)

D) none of the options

Answer: B
Topic: Bilateral Netting of Internal and External Net Cash Flows

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19) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong
Kong and the Unites States. For a recent month, the following payments matrix of inter-affiliate
cash flows, stated in Singapore dollars, was forecasted.

ABC Trading Company Payments Matrix (S$000)

Disbursements by:
Singapore Hong Kong U.S.
Receipts by:
Singapore 80 110
Hong Kong 16 44
U.S. 22 50

Which of the following is an accurate chart of their current situation?

A)

B)

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C)

D)

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

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20) Find the net exposure of the U.S. MNC with the following intra-affiliate transactions shown.

A) $55
B) $65
C) $800
D) none of the options

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

21) Find the net exposure of the British subsidiary of the U.S. MNC with the following intra
affiliate transactions shown.

A) $40 out
B) $65 in
C) ₤20 out
D) none of the options

Answer: B
Topic: Bilateral Netting of Internal and External Net Cash Flows

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22) Benefits of a multilateral netting system include
A) the decrease in the expense associated with funds transfer, which in some cases can be over
$1,000 for a large international transfer of foreign exchange.
B) the reduction in the number of foreign exchange transactions and the associated cost of
making fewer but larger transactions.
C) the reduction in intra-company float, which is frequently as high as five days even for
wire transfers.
D) the benefits that accrue from the establishment of a formal information system, which serves
as the foundation for centrally managing transaction exposure and the investment of excess
funds.
E) all of the options

Answer: E
Topic: Bilateral Netting of Internal and External Net Cash Flows
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23) With a centralized cash depository

A) there is less chance for an MNC's funds to be denominated in the wrong currency.
B) the central cash manager has a global view of the MNC's overall cash position.
C) there is less chance of mislocated funds.
D) all of the options

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows
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24) With a centralized cash depository

A) an MNC can facilitate fund mobilization.
B) system-wide excess cash is invested at the most advantageous rates.
C) system-wide cash shortages are borrowed at the most advantageous rates.
D) all of the options

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows
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25) Not all countries allow MNCs the freedom to net payments,
A) by limiting netting, more needless foreign exchange transactions flow through the
local banking system.
B) MNCs can avoid these restrictions by using a Centralized Cash Depository.
C) MNCs can avoid these restrictions by using wire transfers.
D) MNCs can avoid these restrictions by using a Centralized Cash Depository, as well as by
using wire transfers.

Answer: A
Topic: Cash Management Systems in Practice
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26) With regard to cash management systems in practice, studies suggest that the benefits of
a multilateral netting system include
A) the decrease in the expense associated with funds transfer, which in some cases can be over
$1,000 for a large international transfer of foreign exchange.
B) the savings in administrative time.
C) the reduction in intra company float, which is frequently as high as five days, even for
wire transfers.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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27) Several international banks offer multilateral netting software packages. These packages
A) calculate the net currency positions of each affiliate.
B) can integrate the netting function with foreign exchange exposure management.
C) only work on the Mac platform.
D) calculate the net currency positions of each affiliate and can integrate the netting function
with foreign exchange exposure management.

Answer: D
Topic: Cash Management Systems in Practice
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28) MNCs can reduce their exchange rate expense

A) by using bilateral netting.
B) by using a centralized cash management system.
C) by using multilateral netting.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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29) Which of the following statements about multilateral netting system are correct?

(i) Each affiliate nets all its inter-affiliate receipts against all its disbursements.
(ii) Each affiliate transfers or receives a balance, depending on whether it is a net payer or receiver.
(iii) The net funds to be received by the affiliates will equal the net disbursements to be made
by the affiliates.
(iv) Only two foreign exchange transactions are necessary since the affiliates' net receipts
will always be equal to zero.
(v) Only two foreign exchange transactions are necessary since the affiliates' net disbursements
will always be equal to zero.
A) (i) and (ii)
B) (i), (ii), and (iii)
C) (i), (ii), (iii), and (iv)
D) (i), (ii), (iii), and (v)

Answer: B
Topic: Cash Management Systems in Practice
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30) Assuming that the inter-affiliate cash flows are uncorrelated with one another, calculate the
standard deviation of the portfolio of cash held by the centralized depository for the following
affiliate members:

Expected Standard
Affiliate Transactions Deviation
U.S. $ 100,000 $ 40,000
Canada $ 150,000 $ 60,000
Mexico $ 175,000 $ 30,000
Chile $ 200,000 $ 70,000
A) $34,960.33
B) $139,841.33
C) $104,880.88
D) none of the options

Answer: C
Explanation: ($40,0002 + $60,0002 + $30,0002 + $70,0002)0.5 = $104,880.88
Topic: Cash Management Systems in Practice

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31) Assuming that the inter-affiliate cash flows are uncorrelated with one another, calculate the
minimum cash balance to have if the firm follows a conservative policy of having three
standard deviations of cash for precautionary purposes.

Expected Standard
Affiliate Transactions Deviation
U.S. $ 100,000 $ 40,000
Canada $ 150,000 $ 60,000
Mexico $ 175,000 $ 30,000
Chile $ 200,000 $ 70,000
A) $34,960.33
B) $314,642.65
C) $104,880.88
D) none of the options

Answer: B
Explanation: 3 × ($40,0002 + $60,0002 + $30,0002 + $70,0002)0.5 = $314,642.65
Topic: Cash Management Systems in Practice

32) If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes Affiliate
A €2,000 when the exchange rate is $1.10 = €1.00. The net payment between A and B should be
A) €1,091 from B to A.
B) €1,091 from A to B.
C) $1,200 from B to A.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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33) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:

Disbursement From:
Receipts by: France Britain U.S.
France € 500 € 800
Britain £ 300 £ 400
U.S. $ 1,000 $ 500

Use multilateral netting to find the net payment from the British affiliate to the U.S. affiliate.

The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home currency.
A) $60
B) $20
C) $0
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice

34) The U.S. IRS allows transfer prices to be set using comparable uncontrolled price
method. This method requires
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an
amount sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: A
Topic: Cash Management Systems in Practice
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35) The U.S. IRS allows transfer prices to be set using the resale price method
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an
amount sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: B
Topic: Cash Management Systems in Practice
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36) The U.S. IRS allows transfer prices to be set using the cost plus approach
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an
amount sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: C
Topic: Cash Management Systems in Practice
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37) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:

Disbursement From:
Receipts by: France Britain U.S.
France € 500 € 800
Britain £ 300 £ 400
U.S. $ 1,000 $ 500

The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home
currency. Use multilateral netting to find the net payments to and from all parties.

Which of the following is an accurate chart of their current situation?

A)

B)

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C)

D) none of the options

Answer: C
Topic: Cash Management Systems in Practice

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38) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:

Disbursement From:
Receipts by: France Britain U.S.
France € 500 € 800
Britain £ 480 £ 300
U.S. $ 600 $ 960

The spot exchange rates are $1.20 = €1.00 and $2.00 = £1.00; affiliates get paid in home
currency. Use multilateral netting to find the net payments to and from all parties.

Which of the following is an accurate chart of their current situation?

A)

B)

C)

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D) none of the options

Answer: D
Topic: Cash Management Systems in Practice

39) Simplify the following set of intra company cash flows for this U.S.
firm. Use the following exchange rates:

£ 1.00 = $ 2.00
€ 1.00 = $ 1.50
SFr 1.00 = $ 0.80

The fewest number of intra-affiliate cash flows is

A) zero.
B) one.
C) two.
D) three.

Answer: C

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Topic: Cash Management Systems in Practice

40) Simplify the following set of intra-company cash flows for this Swiss firm.

Use the following exchange rates:

£ 1.00 = $ 2.00
€ 1.00 = $ 1.50
SFr 1.00 = $ 0.80

The fewest number of intra-affiliate cash flows is

A) zero.
B) one.
C) two.
D) three.

Answer: B
Topic: Cash Management Systems in Practice

41) Which will reduce the number of foreign exchange transactions the most for an MNC?
A) Multilateral netting
B) Bilateral netting
C) Fish netting
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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42) Under multilateral netting
A) each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is the net payer or receiver.
B) each pair of affiliates determines the net amount due between them, and only the net amount
is transferred.
C) no inter-affiliate payments are made or even computed, since no real cash flows are involved.
D) all of the options

Answer: A
Topic: Cash Management Systems in Practice
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43) One benefit of a centralized cash depository is

A) the MNC's investment in precautionary cash balances can be substantially reduced without
a reduction in its ability to cover unforeseen expenses.
B) each affiliate will have greater autonomy in managing its own cash balances.
C) exchange rate restrictions can be easily circumvented.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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44) If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes
Affiliate A €2,000 when the exchange rate is $1.50 = €1.00. The net payment between A and B
should be closest to
A) $2,000 from B to A.
B) €2,000 from A to B.
C) $1,000 from B to A.
D) none of the options

Answer: A
Explanation: Solve the proportion for X to convert euros to dollars: €2,000 / X = €1 / $1.50,
where X = $3,000. If A owes B $1,000, and B owes A $3,000 (from conversion), then $2,000 is
paid from B to A (calculated as $3,000 − $1,000).
Topic: Cash Management Systems in Practice

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45) For the U.S. affiliate shown below, net all its inter-affiliate receipts against all its
disbursements.
Use the following exchange rates.

£ 1.00 = $ 2.00
€ 1.00 = $ 1.50
SFr 1.00 = $ 0.80

The net inter-affiliate cash flow for the U.S. affiliate is

A) $0.
B) −$135.
C) $135.
D) $405.

Answer: A
Topic: Cash Management Systems in Practice

46) The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method.
This method is difficult to apply in practice because many factors enter into the pricing of
goods and services. Examples include
A) differences in the terms of sale.
B) differences in quantity and or quality sold.
C) differences in location or date of sale.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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47) Ad valorem duties are best described as
A) a percentage tax levied at customs on the assessed value of the imported good.
B) a value-added tax on domestic production.
C) a percentage tax levied at customs on the value added by shipping the good.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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48) According to a recent survey by Ernst and Young, the most important tax issue
that multinational enterprises now face is
A) transfer pricing.
B) choice of accounting method to use in preparing consolidated income statements when firms
have subsidiaries in countries with different tax treatments of expense items.
C) choice of accounting method to use in preparing consolidated income statements when
firms have subsidiaries in countries with different tax treatments of income recognition.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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49) Which of the following statements about transfer pricing is true?

A) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division.
B) Very high markup policy used in the transfer pricing to a subsidiary makes the adjusted
present value (APV) of that subsidiary's capital expenditure appear less attractive.
C) Very low markup policy used in the transfer pricing to a subsidiary makes the adjusted
present value (APV) of that subsidiary's capital expenditure appear less attractive.
D) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division. In addition, very high markup policy used in the transfer pricing to a
subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure
appear less attractive.

Answer: D
Topic: Cash Management Systems in Practice
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50) The lower the transfer price

A) the higher the net profit reported by the MNC.
B) the lower the gross profit of the transferring division relative to the receiving division.
C) the higher the gross profit of the receiving division relative to the transferring division.
D) none of the options

Answer: B
Topic: Cash Management Systems in Practice
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Accessibility: Keyboard Navigation

51) Multinational cash management

A) is really no different for an MNC than for a purely domestic firm in a closed economy.
B) concerns itself with the size of cash balances, their currency denominations, and where
these cash balances are located among the MNC's affiliates.
C) concerns itself with the size of cash balances and their currency denominations, but not where
these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not
an issue.
D) none of the options

Answer: B
Topic: Cash Management Systems in Practice
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52) In reference to establishing "transfer prices" between the affiliates of an MNC, which of
the following relates to the "resale" price approach?
A) Comparable uncontrolled price between unrelated firms.
B) The price at which the good is resold by the distribution affiliate is reduced by an amount to
cover overhead costs and a reasonable profit.
C) Assumes that the manufacturing cost is readily available.
D) Is based on financial and economic models and econometric techniques.

Answer: B
Topic: Cash Management Systems in Practice
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53) "Unbundling fund transfers" from an MNC and to its affiliates refers to the following activity:
A) instead of lumping all costs into a single transfer price, for the MNC (parent firm) to
recognize the cost of the physical good and each service separately that it provides to its
affiliates.
B) in addition to charging for the cost of the physical good, for the parent firm to charge for
technical training of the affiliates' staff, cost of worldwide advertising, royalty, licensing fee, and
technology, whenever applicable, to facilitate for the MNC to present and support to the taxing
authority of a host country that each charge is legitimate and can be well substantiated.
C) used for removing blocked funds from a host country that is enforcing foreign
exchange restrictions.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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54) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at
$1,000, but it can go as high as $1,250.

Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is
used.
A) $250,000
B) $500,000
C) $1,000,000
D) $1,250,000

Answer: A
Explanation: $10,000 × ($1,000 − $1,250) × (0.20 − 0.30) = $250,000
Topic: Cash Management Systems in Practice

55) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at
$1,000, but it can go as high as $1,250.

Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate
the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A) $50,000
B) $100,000
C) $125,000
D) $250,000

Answer: C
Explanation: First, calculate the effective marginal tax rate for Y: (1 + 0.07) × (0.30 − 0.07) =
24.64%, which rounds to 25%. Next, solve the following: $10,000 × ($1,250 − $1,000) × (0.20 −
0.25) = − $125,000
Topic: Cash Management Systems in Practice

56) Which term correctly describes the following situation? When a country imposes exchange
restrictions on its own currency, limiting conversion to other currencies, an MNC's frustrated
remittance of profits from a subsidiary would be
A) blocked funds.
B) stopped funds.
C) constipated funds.
D) money down the toilet.

Answer: A
Topic: Blocked Funds
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57) On blocked funds strategy is
A) transferring personnel from corporate headquarters to the subsidiary offices.
B) using the national airlines of the host country when possible for the international travel of
all MNC executives.
C) holding business conferences of the MNC in the host country, where all expenses are paid
by the local subsidiary.
D) all of the options

Answer: D
Topic: Blocked Funds
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58) Reasons for a country to impose exchange restrictions on its own currency, limiting
conversion to other currencies include
A) enticing more foreign investment from MNCs.
B) for a variety of reasons, the country may find itself short of foreign currency reserves.
C) creating a home-grown business climate.
D) all of the options

Answer: B
Topic: Blocked Funds
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59) Why can blocked funds be detrimental to all concerned?

A) Host countries want to attract foreign industries that benefit their economic
development; blocked funds make MNCs less willing to invest.
B) MNCs should not be expected to make beneficial investment where they may not be able
to receive an appropriate return.
C) Local competitors may be able to reap monopoly profits.
D) Host countries want to attract foreign industries that benefit their economic development;
blocked funds make MNCs less willing to invest. Additionally, MNCs should not be expected
to make beneficial investment where they may not be able to receive an appropriate return.

Answer: D
Topic: Blocked Funds
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60) When engaged in bilateral netting
A) total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) we can reduce the number of foreign exchange transactions among an MNC with N affiliates

to or less.
C) each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options

Answer: D
Topic: Blocked Funds

61) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates

to or less.
C) Each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options

Answer: B
Topic: Blocked Funds

62) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates

to or less.
C) Each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is a net receiver or payer respectively.
D) all of the options

Answer: C
Topic: Blocked Funds

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63) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts need not always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates

to or less.
C) Each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options

Answer: A
Topic: Blocked Funds

64) Bilateral netting can reduce the number of foreign exchange transactions among an MNC with
N affiliates to

A)

B)

C)
D) none of the options

Answer: C
Topic: Blocked Funds

65) Mislocated funds are defined as

A) funds being found in the wrong account.
B) funds being denominated in the wrong currency.
C) funds being invested with the wrong maturity.
D) none of the options

Answer: B
Topic: Blocked Funds
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66) A firm keeps a precautionary cash balance to cover unexpected transactions during the
budget period. The size of this balance depends on how safe the firm desires to be in its ability to
meet unexpected transactions.
A) The larger the precautionary cash balance, the greater is the firm's ability to meet unexpected
expenses.
B) The larger the precautionary cash balance, the less is the risk of financial embarrassment
and loss of credit standing.
C) The larger the precautionary cash balance, the greater the potential opportunity cost.
D) all of the options

Answer: D
Topic: Blocked Funds
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67) The formula for the standard deviation of cash held by the centralized depository for N
affiliates is

A) The formula assumes that inter-affiliate cash flows have a correlation coefficient of −1.
B) The formula assumes that inter-affiliate cash flows have a correlation coefficient of +1.
C) The formula assumes that inter-affiliate cash flows have a correlation coefficient of 0.
D) none of the options

Answer: C
Topic: Blocked Funds

68) Some countries allow inter-affiliate transactions to be settled only on a gross basis. That is,
A) all receipts for a settlement period must be grouped into a single large receipt and
all disbursements must be grouped into a single large payment.
B) all receipts and disbursements for a settlement period must be handled individually.
C) all receipts and disbursements for a settlement period must be netted against each other and
then a single large payment is made.
D) each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers
or receives the balance, respectively, if it is a net payer or receiver.

Answer: A
Topic: Blocked Funds
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69) Not all countries allow MNCs the freedom to net payments,
A) the U.S., Canada, and Great Britain allow only netting between each other.
B) some countries require the MNC to ask permission, and some countries limit netting.
C) but that is fine, since netting typically has costs that outweigh the benefits for an MNC.
D) All of the options may be correct.

Answer: B
Topic: Blocked Funds
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70) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 30 35 60 125
Canada 20 10 40 70
Germany 10 25 30 65
U.K. 40 30 20 90
Total Disbursements 70 85 65 130

Find the net cash flow in (out of) the U.S. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: A
Explanation: $125,000 − $70,000 = $55,000
Topic: Blocked Funds

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71) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 30 35 60 125
Canada 20 10 40 70
Germany 10 25 30 65
U.K. 40 30 20 90
Total Disbursements 70 85 65 130

Find the net cash flow in (out of) the Canadian affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: B
Explanation: $70,000 − $85,000 = $15,000
Topic: Blocked Funds

72) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 30 35 60 125
Canada 20 10 40 70
Germany 10 25 30 65
U.K. 40 30 20 90
Total Disbursements 70 85 65 130

Find the net cash flow in (out of) the German affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: C
Explanation: $65,000 − $65,000 = $0
Topic: Blocked Funds

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73) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 30 35 60 125
Canada 20 10 40 70
Germany 10 25 30 65
U.K. 40 30 20 90
Total Disbursements 70 85 65 130

Find the net cash flow in (out of) the U.K. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: D
Explanation: $90,000 − $130,000 = −$40,000
Topic: Blocked Funds

74) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 10 15 15 40
Canada 10 10 10 30
Germany 5 5 5 15
U.K. 20 20 20 60
Total Disbursements 35 35 45 30

Find the net cash flow in (out of) the U.S. affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 in
D) $30,000 out

Answer: A
Explanation: $40,000 − $35,000 = $5,000
Topic: Blocked Funds

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75) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 10 15 15 40
Canada 10 10 10 30
Germany 5 5 5 15
U.K. 20 20 20 60
Total Disbursements 35 35 45 30

Find the net cash flow in (out of) the Canadian affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 in
D) $30,000 out

Answer: B
Explanation: $30,000 − $45,000 = −$5,000
Topic: Blocked Funds

76) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 10 15 15 40
Canada 10 10 10 30
Germany 5 5 5 15
U.K. 20 20 20 60
Total Disbursements 35 35 45 30

Find the net cash flow in (out of) the German affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 out
D) $30,000 in

Answer: C
Explanation: $15,000 − $45,000 = −$30,000
Topic: Blocked Funds

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77) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K. Total Receipts
U.S. 10 15 15 40
Canada 10 10 10 30
Germany 5 5 5 15
U.K. 20 20 20 60
Total Disbursements 35 35 45 30

Find the net cash flow in (out of) the U.K. affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 out
D) $30,000 in

Answer: D
Explanation: $60,000 − $30,000 = $30,000
Topic: Blocked Funds

78) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K.
U.S. 10 5 15
Canada 10 5 20
Germany 5 5 5
U.K. 15 20 5

Find the net cash flow in (out of) the U.S. affiliate.
A) $0 in or out
B) $5,000 out
C) $10,000 in
D) $15,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

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79) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K.
U.S. 10 5 15
Canada 10 5 20
Germany 5 5 5
U.K. 15 20 5

Find the net cash flow in (out of) the Canadian affiliate.
A) $0 in or out
B) $20,000 out
C) $15,000 in
D) $30,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

80) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K.
U.S. 10 5 15
Canada 10 5 20
Germany 5 5 5
U.K. 15 20 5

Find the net cash flow in (out of) the German affiliate.
A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

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81) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K.
U.S. 10 5 15
Canada 10 5 20
Germany 5 5 5
U.K. 15 20 5

Find the net cash flow in (out of) the U.K. affiliate.
A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

82) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000):

Disbursements
Receipts U.S. Canada Germany U.K.
U.S. 10 5 15
Canada 10 5 20
Germany 5 5 5
U.K. 15 20 5

Find the net cash flow for the entire firm

A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

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International Financial Management, 8e (Eun)
Chapter 20 International Trade Finance

1) Forfaiting (forfeiting) meets Islamic finance practices.

Answer: TRUE
Topic: International Finance in Practice: First Islamic Forfaiting Fund Set Up
Accessibility: Keyboard Navigation

2) International trade is more difficult and risky from the exporter's perspective than is
domestic trade because
A) the exporter may not be familiar with the buyer, and thus not know if the importer is a
good credit risk.
B) if the merchandise is exported abroad and the buyer does not pay, it may prove difficult, if
not impossible, for the exporter to have any legal recourse.
C) political instability makes it risky to ship merchandise abroad to certain parts of the world.
D) all of the options

Answer: D
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

3) Conducting international trade transactions is difficult in comparison to domestic trades.

Which of the following are false statements regarding this reality?
A) Commercial and political risks enter into the equation, which are not factors in domestic trade.
B) It is important for a country to be competitively strong in international trade in order for
its citizens to have the goods and services they need and demand.
C) It is generally the case that the costs of international trade outweigh the benefits.
D) all of the options

Answer: C
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

4) A typical foreign trade transaction requires three basic documents:

A) letter of credit, time draft, and bill of lading.
B) letter of credit, banker's acceptance, and bill of lading.
C) letter of credit, time draft, and a banker's acceptance.
D) none of the options

Answer: A
Topic: A Typical Foreign Trade Transaction
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5) A time draft can become a negotiable money market instrument called
A) Eurodollars.
B) a banker's acceptance.
C) a letter of credit.
D) a bill of lading.

Answer: B
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

6) Forfaiting, in which a bank purchases at a discount from an importer, is a series of promissory

notes in favor of an exporter,
A) is a short-term form of trade financing.
B) is a medium-term form of trade financing.
C) is a long-term form of trade financing.
D) none of the options

Answer: B
Topic: Forfeiting
Accessibility: Keyboard Navigation

7) When a bank purchases at a discount from an importer a series of promissory notes in favor
of an exporter, this is called
A) accounts receivable financing.
B) asset backed commercial paper.
C) discounting.
D) forfeiting.

Answer: D
Topic: Forfeiting
Accessibility: Keyboard Navigation

8) The Export-Import Bank provides competitive assistance to U.S. exporters through

A) direct loans to foreign importers.
B) loan guarantees.
C) credit insurance to U.S. exporters.
D) all of the options

Answer: D
Topic: Government Assistance in Exporting
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9) Countertrade transactions are
A) becoming obsolete as a means of conducting international trade transactions.
B) gaining renewed prominence as a means of conducting international trade transactions.
C) strictly a form of barter.
D) none of the options

Answer: B
Topic: Countertrade
Accessibility: Keyboard Navigation

10) There are several types of countertrade transactions

A) none of which involve the use of money.
B) and in each type, the seller provides the buyer with goods or services in return for a
reciprocal promise from the seller to purchase goods or services from the buyer.
C) and in each type, the seller provides the buyer with goods or services in return for a
reciprocal promise from the buyer to stand ready to sell goods or services to the buyer.
D) none of the options

Answer: B
Topic: Countertrade
Accessibility: Keyboard Navigation

11) The three basic documents needed in a foreign trade transaction are
A) letter of credit, time draft, and proof of inspection.
B) letter of credit, time draft, and a bill of lading.
C) letter of credit, bill of lading, and insurance.
D) time draft, bill of lading, and a pro forma statement.

Answer: B
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

12) The primary methods of payment for foreign trades, ranked in the order of most secure to
least secure for the exporter is
A) open account, consignment, letter of credit/time draft, and cash in advance.
B) consignment, letter of credit/time draft, cash in advance, and open account.
C) cash in advance, letter of credit/time draft, consignment, and open account.
D) cash in advance, letter of credit/time draft, open account, and consignment.

Answer: C
Topic: A Typical Foreign Trade Transaction
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13) A bill of lading
A) is a document issued by the common carrier specifying that it has received the goods
for shipment; it can serve as title to the goods.
B) later becomes a banker's acceptance.
C) is a time draft that calls for payment upon physical delivery of goods.
D) none of the options

Answer: A
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

14) A time draft

A) is a document issued by the common carrier specifying that it has received the goods
for shipment; it can serve as title to the goods.
B) later becomes a banker's acceptance.
C) is a written order instructing the importer or his agent that calls for payment the
amount specified on its face on a certain date.
D) none of the options

Answer: C
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

15) A banker's acceptance is created when

A) a document issued by the common carrier specifies that it has received the goods for
shipment; it can serve as title to the goods.
B) after taking title to the goods via a bill of lading, the importer's bank accepts the time draft.
C) a time draft calls for payment upon physical delivery of goods matures.
D) none of the options

Answer: B
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

16) In a consignment sale

A) the importer only pays the exporter once he sells the merchandise.
B) the exporter retains title to the merchandise that is shipped.
C) if the goods do not sell, the importer can return them to the exporter.
D) all of the options

Answer: D
Topic: A Typical Foreign Trade Transaction
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17) Suppose the face amount of a promissory note is $1,000,000 and the importer's bank
charges an acceptance commission of 1.5 percent. The note is for 60 days. Calculate the amount
of the acceptance commission that the bank will charge.
A) $997,500
B) $15,000 = $1,000,000 × (0.015)
C) $2,500
D) none of the options

Answer: C
Explanation: $1,000,000 × 0.015 = $15,000 / 12 = $1,250 (per month) × 2 = $2,500 (for 2
months, or 60 days).
Topic: A Typical Foreign Trade Transaction

18) The sends a purchase order to the . The applies to his bank for
a letter of credit.
A) importer; exporter; exporter
B) exporter; importer; importer
C) importer; exporter; importer
D) exporter; importer; exporter

Answer: C
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

19) The 's bank sends the letter of credit to the 's bank. After sending
the merchandise, the gives the shipping
documents and time draft to his bank.
A) importer; exporter; exporter
B) exporter; importer; importer
C) importer; exporter; importer
D) exporter; importer; exporter

Answer: A
Topic: A Typical Foreign Trade Transaction
Accessibility: Keyboard Navigation

20) Banker's acceptances usually have maturities ranging from

A) 30 to 180 days.
B) 90 to 360 days.
C) 1 year to 5 years.
D) over 5 years.

Answer: A
Topic: A Typical Foreign Trade Transaction
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21) Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 90-day B/As is 6.0 percent. Calculate the amount the exporter will receive if
he discounts the B/A with the importer's bank.
A) $1,993,750
B) $1,999,375
C) $1,963,750
D) $1,009,375

Answer: C
Explanation: $2,000,000 × (1 − (0.06 + 0.0125) × (90/360)) = $1,963,750
Topic: A Typical Foreign Trade Transaction

22) Assume the time from acceptance to maturity on a $1,000,000 banker's acceptance is 180
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 180-day B/As is 5.0 percent. Calculate the amount the exporter will receive if
he discounts the B/A with the importer's bank.
A) $906,250
B) $909,375
C) $968,750
D) $993,750

Answer: C
Topic: A Typical Foreign Trade Transaction

23) Assume the time from acceptance to maturity on a $5,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1.5 percent and that the
market rate for 90-day B/As is 6.0 percent. Calculate the amount the exporter will receive if he
discounts the B/A with the importer's bank.
A) $4,981,750
B) $4,906,250
C) $4,009,375
D) none of the options

Answer: B
Topic: A Typical Foreign Trade Transaction

24) Assume the time from acceptance to maturity on a $4,000,000 banker's acceptance is 180
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 90-day B/As is 3.0 percent. Calculate the amount the exporter will receive if
he discounts the B/A with the importer's bank.
A) $3,993,750
B) $3,915,000
C) $3,975,000
D) $3,009,375

Answer: B
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Topic: A Typical Foreign Trade Transaction

25) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1 percent and that the
market rate for 90-day B/As is 3.0 percent. Calculate the amount the exporter will receive if he
discounts the B/A with the importer's bank.
A) $9,993,750
B) $9,900,000
C) $9,975,000
D) $9,009,375

Answer: B
Topic: A Typical Foreign Trade Transaction

26) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1 percent and that the
market rate for 90-day B/As is 3.0 percent. Calculate the amount the banker will receive if the
exporter discounts the B/A with the importer's bank.
A) $200,000
B) $100,000
C) $25,000
D) $75,000

Answer: C
Topic: A Typical Foreign Trade Transaction

27) Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 90-day B/As is 6.0 percent. Calculate the amount the exporter will receive if
he holds it to maturity.
A) $1,993,750
B) $1,999,375
C) $1,963,750
D) $1,009,375

Answer: A
Explanation: $2,000,000 × (1 − 0.0125 × (90/360)) = $1,993,750
Topic: A Typical Foreign Trade Transaction

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28) Assume the time from acceptance to maturity on a $1,000,000 banker's acceptance is 180
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 180-day B/As is 5.0 percent. Calculate the amount the exporter will receive if
he holds it to maturity.
A) $906,250
B) $909,375
C) $968,750
D) $993,750

Answer: D
Topic: A Typical Foreign Trade Transaction

29) Assume the time from acceptance to maturity on a $5,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1.5 percent and that the
market rate for 90-day B/As is 6.0 percent. Calculate the amount the exporter will receive if he
holds it to maturity.
A) $4,981,250
B) $4,906,250
C) $4,009,375
D) none of the options

Answer: A
Explanation: $5,000,000 × (1 − 0.015 × (90/360)) = $4,981,250
Topic: A Typical Foreign Trade Transaction

30) Assume the time from acceptance to maturity on a $4,000,000 banker's acceptance is 180
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 90-day B/As is 6.0 percent. Calculate the amount the exporter will receive if
he holds it to maturity.
A) $3,993,750
B) $3,999,375
C) $3,975,000
D) $3,009,375

Answer: C
Explanation: $4,000,000 × (1 − 0.0125 × (90/360)) = $3,975,000
Topic: A Typical Foreign Trade Transaction

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31) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1 percent and that the
market rate for 90-day B/As is 3.0 percent. Calculate the amount the exporter will receive if he
holds it to maturity.
A) $9,993,750
B) $9,999,375
C) $9,975,000
D) $9,009,375

Answer: C
Topic: A Typical Foreign Trade Transaction

32) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1 percent and that the
market rate for 90-day B/As is 3.0 percent. The bond equivalent yield that the exporter pays in
discounting the B/A is
A) 3.05 percent.
B) 3.01 percent.
C) 3.07 percent.
D) none of the options

Answer: A
Explanation: [($9,900,000 / $9,975,000) − 1] × (365/90) = − 0.0305 = − 3.05%, where
$9,975,000 = $10,000,000 (1 − 0.01 × (90/360)) and $9,900,000 = $10,000 × (1 − (0.03 + 0.01) ×
(90/360)). The time from acceptance to maturity on a $3,000,000 banker's acceptance is 90 days.
Topic: A Typical Foreign Trade Transaction

33) The time from acceptance to maturity on a $3,000,000 banker's acceptance is 90 days.

If the importing bank's acceptance commission is 1.25 percent, determine the amount the exporter
will receive if he holds the B/A until maturity.
A) $2,945,625
B) $2,990,625
C) $2,906,250
D) $3,009,375

Answer: B
Explanation: $3,000,000 × (1 − 0.0125 × (90/360)) = $2,990,625
Topic: A Typical Foreign Trade Transaction

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34) The time from acceptance to maturity on a $3,000,000 banker's acceptance is 90 days.

If the market rate for 90-day B/As is 6.0 percent, calculate the amount the exporter will receive if
he discounts the B/A with the importer's bank.
A) $2,945,625
B) $2,990,625
C) $3,000,000
D) $3,009,375

Answer: A
Explanation: $3,000,000 × (1 − (0.06 + 0.0125) × (90/360)) = $2,945,625
Topic: A Typical Foreign Trade Transaction

35) The time from acceptance to maturity on a $3,000,000 banker's acceptance is 90 days.

The bond equivalent yield that the exporter pays in discounting the B/A is
A) 6.10 percent.
B) 9.29 percent.
C) 6.02 percent.
D) none of the options

Answer: A
Explanation: [($2,945,625 / $2,990,625) − 1] × (365 / 90) = − 0.0610 = − 6.10%, where
$2,990,625 = $3,000,000 × (1 − 0.0125 × (90/360)) and $2,945,625 = $3,000,000 × (1 − (0.06 +
0.0125) × (90/36))
Topic: A Typical Foreign Trade Transaction

36) Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90
days. Further assume that the importing bank's acceptance commission is 1 percent and that the
market rate for 90-day B/As is 3.0 percent. The bond equivalent yield that the bank earns in
holding the B/A to maturity is:
A) 0.2287 percent
B) 0.102 percent
C) 0.406 percent
D) none of the options

Answer: C
Explanation: [($10,000,000 / $9,990,000) − 1] × (365/90) = 0.004059 = 0.406%, where
$9,990,000 = $10,000,000 × (1 − (0.03 + 0.01) × (90/360))
Topic: A Typical Foreign Trade Transaction

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37) Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 180
days. Further assume that the importing bank's acceptance commission is 1.25 percent and that
the market rate for 180-day B/As is 5.0 percent. The bond equivalent yield that the bank earns in
holding the B/A to maturity is
A) 13.08 percent.
B) 6.54 percent.
C) 4.06 percent.
D) none of the options

Answer: B
Explanation: [($2,000,000 / $1,937,500) − 1] × (365/180) = 0.0654 = 6.54%, where $1,937,500 =
$2,000,000 × (1 − (0.05 + 0.0125) × (180/360))
Topic: A Typical Foreign Trade Transaction

38) The term "forfaiting"

A) means relinquishing, waiving, yielding, and penalty.
B) is a type of medium-term trade financing used to finance the sale of capital goods.
C) involves the sale of promissory notes signed by the importer in favor of the exporter, who
might sell the notes at a discount from face value.
D) is a type of medium-term trade financing used to finance the sale of capital goods, and
involves the sale of promissory notes signed by the importer in favor of the exporter, who might
sell the notes at a discount from face value.

Answer: D
Topic: Forfaiting
Accessibility: Keyboard Navigation

39) In a forfaiting transaction, the forfait is usually

A) the importer.
B) the exporter.
C) the bank.
D) the title to the goods, or the bill of lading.

Answer: C
Topic: Forfaiting
Accessibility: Keyboard Navigation

40) In a forfaiting transaction, the forfait

A) buys the notes at a discount from face value from the importer.
B) buys the notes at a discount from face value from the exporter.
C) redeems the notes at a face value to the exporter.
D) none of the options

Answer: B
Topic: Forfaiting
Accessibility: Keyboard Navigation

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41) In the event of a default
A) the forfait does not have recourse against the exporter in the event of a default by the importer.
B) the forfait does have recourse against the exporter in the event of a default by the importer
C) the exporter will have to return the goods to the importer.
D) none of the options

Answer: A
Topic: Forfaiting
Accessibility: Keyboard Navigation

42) One of the steps to follow to develop an investment fund which has been structured to adhere
to Shari'ah principles whilst at the same time making use of forfaiting assets was
A) the fund sponsors had to be careful in ensuring that the pool of non-Islamic forfaiting assets
was not used to directly satisfy the Islamic compliant obligations under the commodity and trade
financing arrangements.
B) screening is required to ensure that the products underlying the LCs do not run counter
to Shari'ah principles.
C) there had to be a sign off by Islamic scholars to verify that Shari'ah strictures had been met
with.
D) all of the options

Answer: D
Topic: International Finance in Practice: First Islamic Forfaiting Fund Set Up
Accessibility: Keyboard Navigation

43) Under the terms of Islamic finance (Shari'ah)

A) selling debt at a reduced value is strictly forbidden.
B) charging interest is OK, but short selling stock is forbidden.
C) buying low and selling high is forbidden.
D) none of the options

Answer: A
Topic: International Finance in Practice: First Islamic Forfaiting Fund Set Up
Accessibility: Keyboard Navigation

44) Among the reasons put forth for government assistance in exporting
A) success in international trade is fundamentally important for a country.
B) success in exporting implies that there is demand for a country's products, that its labor force
is employed, and that some resources are used for technological advancement.
C) to be successful in international trade means that the government is popular.
D) success in international trade is fundamentally important for a country, and success in
exporting implies that there is demand for a country's products, that its labor force is employed,
and that some resources are used for technological advancement.

Answer: D
Accessibility: Keyboard Navigation

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Topic: Government Assistance in Exporting

Accessibility: Keyboard Navigation

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45) Export-Import Bank (Ex-Im bank) is an independent agency of the United States
government that facilitates and finances U.S. export trade. Ex-Im bank's purpose is to provide
financing in situations where private financial institutions are unable or unwilling to because of
which of the following reasons:

(i) The loan maturity is too long.

(ii) The amount of the loan is too large.
(iii) The loan risk is too great.
(iv) The importing firm has difficulty obtaining hard currency for payment.
(v) There are no futures or forward contracts available for foreign exchange transactions.

A) (i) and (ii)

B) (i), (ii), and (iii)
C) (i), (ii), (iii), and (iv)
D) (i), (ii), (iii), (iv), and (v)

Answer: C
Topic: The Export-Import Bank and Affiliated Organizations
Accessibility: Keyboard Navigation

46) Through its Export Credit Insurance Program, Ex-Im bank helps U.S. exporters develop
and expand their overseas sales by
A) protecting them against loss should a foreign buyer default.
B) guaranteeing the loans made by private financial institutions to foreign importers.
C) providing liquidity via the purchase of notes issued by Ex-Im bank to finance the loans.
D) none of the options

Answer: A
Topic: The Export-Import Bank and Affiliated Organizations
Accessibility: Keyboard Navigation

47) Through its Medium and Long-Term Guarantee Program, Ex-Im bank helps U.S.
exporters develop and expand their overseas sales by
A) protecting them against loss should a foreign buyer default.
B) guaranteeing the loans made by private financial institutions to foreign importers.
C) providing liquidity via the purchase of notes issued by Ex-Im bank to finance the loans.
D) none of the options

Answer: B
Topic: The Export-Import Bank and Affiliated Organizations
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48) The British version of the Ex-Im bank
A) helps U.S. exporters develop and expand their overseas sales.
B) is called Inland Revenue.
C) is called the Exports Credits Guarantee Department.
D) is called Ex-Im bank U.K.

Answer: C
Topic: The Export-Import Bank and Affiliated Organizations
Accessibility: Keyboard Navigation

49) The Ex-Im bank helps U.S. exporters develop and expand their overseas sales by
A) working capital guarantees.
B) direct loans to foreign borrowers.
C) loan guarantees.
D) credit insurance.

Answer: D
Topic: The Export-Import Bank and Affiliated Organizations
Accessibility: Keyboard Navigation

50) The term "countertrade" refers to

A) many different types of transactions in which the seller provides a buyer with goods or
services and promises in return to purchase goods or services from the buyer.
B) barter, clearing arrangement, and switch trading.
C) buy-back, counterpurchase, and offset.
D) all of the options

Answer: D
Topic: Countertrade
Accessibility: Keyboard Navigation

51) A clearing arrangement

A) is also called a bilateral clearing agreement.
B) is a form of barter.
C) involves two parties agreeing to buy a specified amount of goods or services from one another.
D) all of the options

Answer: D
Topic: Countertrade
Accessibility: Keyboard Navigation

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52) A switch trade
A) is the purchase by a third party of one country's a clearing agreement balance for hard currency.
B) is a form of barter.
C) involves two parties agreeing to buy a specified amount of goods or services from one another.
D) all of the options

Answer: A
Topic: Countertrade
Accessibility: Keyboard Navigation

53) A buy-back transaction

A) is also called a bilateral clearing agreement.
B) involves a technology transfer via the sale of a manufacturing plant: as part of the terms,
the seller of the plant agrees to purchase a certain portion of the plant output.
C) involves two parties agreeing to buy a specified amount of goods or services from one another.
D) all of the options

Answer: B
Topic: Countertrade
Accessibility: Keyboard Navigation

54) A counterpurchase
A) involves a technology transfer via the sale of a manufacturing plant: as part of the terms,
the seller of the plant agrees to purchase a certain portion of the plant output.
B) is similar to a buy-back transaction but the seller of the plant agrees to buy unrelated goods.
C) is a form of barter.
D) involves two parties agreeing to buy a specified amount of goods or services from one another.

Answer: B
Topic: Countertrade
Accessibility: Keyboard Navigation

55) An offset transaction

A) can be viewed as a counterpurchase trade agreement involving the aerospace/defense industry.
B) involves a technology transfer via the sale of a manufacturing plant: as part of the terms,
the seller of the plant agrees to purchase a certain portion of the plant output.
C) is the purchase by a third party of one country's a clearing agreement balance for hard currency.
D) none of the options

Answer: A
Topic: Countertrade
Accessibility: Keyboard Navigation

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56) A buy-back transaction
A) can be viewed as direct foreign investment in the purchasing country.
B) can be viewed as direct foreign investment in the exporting country.
C) can be viewed as indirect foreign investment in the purchasing country.
D) none of the options

Answer: A
Topic: Countertrade
Accessibility: Keyboard Navigation

57) Countertrade transactions

A) are included in official trade statistics.
B) are not included in official trade statistics.
C) reduce trade imbalances and trade deficits.
D) are included in official trade statistics, and also reduce trade imbalances and trade deficits.

Answer: B
Topic: Countertrade
Accessibility: Keyboard Navigation

58) The armed forces of leads all government agencies in countertrade.

A) the United States
B) Great Britain
C) China
D) the Philippines

Answer: D
Topic: International Finance in Practice: Armed Forces Tops in Countertrade List
Accessibility: Keyboard Navigation

59) Arguments in favor of countertrade include benefits such as

A) conservation of cash or hard currency.
B) improvement of trade imbalances.
C) maintenance of export prices.
D) all of the options

Answer: D
Topic: Some Generalizations about Countertrade
Accessibility: Keyboard Navigation

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60) A typical foreign trade transaction requires which three basic documents?
A) letter of credit, bill of lading, and shipping documents
B) time draft, banker's acceptance, and bill of lading
C) letter of credit, time draft, and bill of lading
D) letter of credit, banker's acceptance, and bill of lading

Answer: C
Topic: Summary
Accessibility: Keyboard Navigation

61) The time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 1.25 percent and the market rate for 90-day B/As is 6
percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $2,000,000 × = $1,993,750.

Topic: Summary

62) The time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 1.25 percent and the market rate for 90-day B/As is 6
percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $2,000,000 × = $1,963,750.

Topic: Summary

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63) The time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 1.25 percent and the market rate for 90-day B/As is 6
percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$2,000,000 × = $1,993,750.

If the exporter discounts the B/A with the importer bank he will receive

$2,000,000 × = $1,963,750.

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0610
Topic: Summary

64) The time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 1.25 percent and the market rate for 90-day B/As is 6
percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 6.1% compounded quarterly (EAR = 6.24%), he should discount
the B/A. The exporter pays the acceptance commission regardless of whether he discounts the
B/A or holds it to maturity, hence it is not marginal to a decision to discount the B/A. You could
also make this determination based on this calculation:

$1,963,750 × = $2,017,753 > $1,993,750

Topic: Summary

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65) The time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 1.25 percent and the market rate for 90-day B/As is 6
percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $6,250 = $2,000,000 × (0.0125) ×

Topic: Summary

66) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60 days. The
importing bank's acceptance commission is 1.00 percent and that the market rate for 60-day B/As
is 5 percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $1,000,000 × = $998,333.33.

Topic: Summary

67) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60 days. The
importing bank's acceptance commission is 1.00 percent and that the market rate for 60-day B/As
is 5 percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $1,000,000 × = $990,000.

Topic: Summary

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68) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60 days. The
importing bank's acceptance commission is 1.00 percent and that the market rate for 60-day B/As
is 5 percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$1,000,000 × = $998,333.33.

If the exporter discounts the B/A with the importer bank he will receive

$1,000,000 × = $990,000.

The bond equivalent yield that the exporter pays in discounting the B/A is

× + -0.050
Topic: Summary

69) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60 days. The
importing bank's acceptance commission is 1.00 percent and that the market rate for 60-day B/As
is 5 percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 5% compounded six times per year (EAR = 5.11%), he should
discount the B/A. The exporter pays the acceptance commission regardless of whether he
discounts the B/A or holds it to maturity, hence it is not marginal to a decision to discount the
B/A.

You could also make this determination based on this calculation:

$990,000 × = $1,013,709.71 > $998,333.33

Topic: Summary

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70) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60 days. The
importing bank's acceptance commission is 1.00 percent and that the market rate for 60-day B/As
is 5 percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $1,666.67 = $1,000,000 × (0.01) ×

Topic: Summary

71) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days. The
importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day
B/As is 4 percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $500,000 × = $497,187.50

Topic: Summary

72) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days. The
importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day
B/As is 4 percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $500,000 × = $482,187.50

Topic: Summary

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73) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days. The
importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day
B/As is 4 percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$500,000 × = $497,187.50

If the exporter discounts the B/A with the importer bank he will receive

$500,000 × = $482,187.50

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0408
Topic: Summary

74) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days. The
importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day
B/As is 4 percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 4.08% compounded 1⅓ times per year (EAR = 4.10%), he should
discount the B/A. The exporter pays the acceptance commission regardless of whether he
discounts the B/A or holds it to maturity, hence it is not marginal to a decision to discount the
B/A. You could also make this determination based on this calculation:

$482,187.50 × = $521,967.97 > $497,187.50

Topic: Summary

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75) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days. The
importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day
B/As is 4 percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $2,812.50 = $500,000 × (0.0075) ×

Topic: Summary

76) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.
The importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As
is 3 percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $6,000,000 × = $5,880,000.

Topic: Summary

77) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.
The importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As
is 3 percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $6,000,000 × = $5,700,000.

Topic: Summary

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78) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.The
importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As is 3
percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$6,000,000 × = $5,880,000.

If the exporter discounts the B/A with the importer bank he will receive

$6,000,000 × = $5,700,000.

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.031
Topic: Summary

79) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.
The importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As
is 3 percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 3.1% compounded annually (EAR = 3.10%), he should discount
the B/A. The exporter pays the acceptance commission regardless of whether he discounts the
B/A or holds it to maturity, hence it is not marginal to a decision to discount the B/A. You could
also make this determination based on this calculation:

$5,700,000 × = $6,372,000 > $5,880,000

Topic: Summary

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80) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.
The importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As
is 3 percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $120,000 = $6,000,000 × (0.02) ×

Topic: Summary

81) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days. The
importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is
2 percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $50,000 × = $49,375.

Topic: Summary

82) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days. The
importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is
2 percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $50,000 × = $48,875.

Topic: Summary

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83) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days. The
importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is
2 percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$50,000 × = $49,375.

If the exporter discounts the B/A with the importer bank he will receive

$50,000 × = $48,875.

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0205
Topic: Summary

84) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days. The
importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is 2
percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 2.05% compounded semiannually (EAR = 2.06%), he should
discount the B/A. The exporter pays the acceptance commission regardless of whether he
discounts the B/A or holds it to maturity, hence it is not marginal to a decision to discount the
B/A. You could also make this determination based on this calculation:

$48,875 × = $51,563.13 > $49,375

Topic: Summary

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85) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days. The
importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is
2 percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $625 = $50,000 × (0.025) ×

Topic: Summary

86) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days. The
importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4
percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $300,000 × = $299,250.

Topic: Summary

87) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days. The
importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4
percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $300,000 × = $298,250.

Topic: Summary

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88) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days. The
importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4
percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$300,000 × = $299,250.

If the exporter discounts the B/A with the importer bank he will receive

$300,000 × = $298,250.

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0407
Topic: Summary

89) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days. The
importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4
percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 4.07% compounded monthly (EAR = 4.14%), he should discount
the B/A. The exporter pays the acceptance commission regardless of whether he discounts the
B/A or holds it to maturity, hence it is not marginal to a decision to discount the B/A. You could
also make this determination based on this calculation:

$298,250 × = $300,983.96 > $299,250

Topic: Summary

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90) The time from acceptance to maturity on a $300,000 banker's acceptance is 30 days.The
importing bank's acceptance commission is 3 percent and the market rate for 30-day B/As is 4
percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $750 = $300,000 × (0.03) ×

Topic: Summary

91) The time from acceptance to maturity on a $30,000,000 banker's acceptance is 45 days. The
importing bank's acceptance commission is 1.5 percent and that the market rate for 45-day B/As
is 4½ percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $30,000,000 × = $29,943,750

Topic: Summary

92) The time from acceptance to maturity on a $30,000,000 banker's acceptance is 45 days. The
importing bank's acceptance commission is 1.5 percent and that the market rate for 45-day B/As
is 4½ percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $30,000,000 × = $29,775,000

Topic: Summary

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93) The time from acceptance to maturity on a $30,000,000 banker's acceptance is 45 days. The
importing bank's acceptance commission is 1.5 percent and that the market rate for 45-day B/As
is 4½ percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$30,000,000 × = $29,943,750

If the exporter discounts the B/A with the importer bank he will receive

$30,000,000 × = $29,775,000

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0457
Topic: Summary

94) The time from acceptance to maturity on a $30,000,000 banker's acceptance is 45 days. The
importing bank's acceptance commission is 1.5 percent and that the market rate for 45-day B/As
is 4½ percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 4.57% compounded semi quarterly (EAR = 4.66%), he should
discount the B/A. The exporter pays the acceptance commission regardless of whether he
discounts the B/A or holds it to maturity, hence it is not marginal to a decision to discount the
B/A. You could also make this determination based on this calculation:

$29,775,000 × = $30,184,406.25 > $29,943,750

Topic: Summary

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95) The time from acceptance to maturity on a $30,000,000 banker's acceptance is 45 days. The
importing bank's acceptance commission is 1.5 percent and that the market rate for 45-day B/As
is 4½ percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $56,250 = $30,000,000 × (0.015) ×

Topic: Summary

96) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As
is 5 percent.

Determine the amount the exporter will receive if he holds the B/A until maturity.

Answer: $1,000,000 × = $991,250.

Topic: Summary

97) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As
is 5 percent.

Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.

Answer: $1,000,000 × = $978,750.

Topic: Summary

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98) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As
is 5 percent.

Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with
the exporter.

Answer: If the exporter holds the B/A to maturity, he will receive

$1,000,000 × = $991,250.

If the exporter discounts the B/A with the importer bank he will receive

$1,000,000 × = $978,750.

The bond equivalent yield that the exporter pays in discounting the B/A is

× = -0.0511
Topic: Summary

99) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As
is 5 percent.

If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to
maturity?

Answer: If his cost of funds > 5.11% compounded quarterly (EAR = 5.21%), he should discount
the B/A. The exporter pays the acceptance commission regardless of whether he discounts the
B/A or holds it to maturity, hence it is not marginal to a decision to discount the B/A. You could
also make this determination based on this calculation:

$978,750 × = $1,005,665.63 > $991,250

Topic: Summary

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100) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90 days. The
importing bank's acceptance commission is 3½ percent and that the market rate for 90-day B/As
is 5 percent.

Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's
bank.

Answer: $8,750 = $$1,000,000 × (0.035) ×

Topic: Summary

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