Principles of Managerial Finance, 12e (Gitman)

Chapter 18

International Managerial Finance

Learning Goal 1:

Understand the major factors that influence the financial operations of multinational
companies (MNCs).
1)

NAFTA is a treaty establishing free trade and open markets between Europe and the United States.
Answer:

FALSE
Topic:

North American Free Trade Area

Question Status:

Previous Edition

2)

The World Trade Organization is a new international body established to police world trading practices
and to mediate disputes between member countries.
Answer:

TRUE
Topic:

World Trade Organization

Question Status:

Previous Edition

3)

Offshore Centers are cities or states that have achieved prominence as major centers for Euromarket
business.
Answer:
1
TRUE
Topic:

Offshore Centers
Question Status:

Previous Edition

4)

NAFTA is an international financial market that provides for borrowing and lending currencies outside
their country of origin.
Answer:

FALSE
Topic:

North American Free Trade Area

Question Status:

Previous Edition

5)

Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational
company, but they have no impact on its overall value.
Answer:

FALSE
Topic:

Foreign Exchange Risk

Question Status:

Previous Edition

6)

The Euromarket is the international financial market that provides for borrowing and lending currencies
outside their country of origin.
Answer:

TRUE
2
 Topic:

The Euromarket
Question Status:

Previous Edition

7)

The existence of specific regulations and controls on dollar deposits in the United States, including
interest rate ceiling imposed by the government, have contributed to the growth of the Euromarket.
Answer:

TRUE
Topic:

The Euromarket
Question Status:

Previous Edition

3
 8)

A joint venture is a partnership under which the participants have contractually agreed to contribute
specified amounts of money and expertise in exchange for stated proportions of ownership and profit.
Answer:

TRUE
Topic:

Joint Ventures
Question Status:

Previous Edition

9)

The official melding of the national currencies of the European Union into one currency, the Euro, created
the European Monetary Union in 2002.
Answer:

TRUE
Topic:

European Union
Question Status:

Previous Edition

10)

The Mercosur Group is a major South American trading bloc that includes countries that account for
more than half of the total of Latin America's GDP.
Answer:

TRUE
Topic:

Mercosur Group
Question Status:

Previous Edition

11)
4
The Mercosur Group is a major European trading bloc made up of former Soviet bloc countries in Eastern
Europe.
Answer:

FALSE
Topic:

Mercosur Group
Question Status:

Previous Edition

12)

Disagreements among European Union country members over the disposition of garbage and
manufacturing refuse generated primarily by Eastern European countries have come to be known as the
Euro Trash Issue.
Answer:

FALSE
Topic:

European Union
Question Status:

Previous Edition

13)

In 2003-2004, the United States signed a regional trade pact with the Dominican Republic, Costa Rica, El
Salvador, Guatemala, Honduras, and Nicaragua called the Central American Free Trade Agreement or
CAFTA.
Answer:

TRUE
Topic:

Central American Free Trade Agreement

Question Status:

Previous Edition

14)
5
In 2003-2004, the United States signed a regional trade pact with south pacific countries including the
Philippines, Indonesia, Malaysia called the South Pacific American Trade Agreement or SPAMTA.
Answer:

FALSE
Topic:

Free Trade Agreements

Question Status:

Previous Edition

15)

The World Trade Organization has in recent years admitted current and former communist countries as
members including the Russian Federation and the Peoples Republic of China.
Answer:

TRUE
Topic:

World Trade Organization

Question Status:

Previous Edition

16)

A partnership between a multinational company and a foreign investor in which contractually specified
amounts of money and expertise are contributed by the participants for stated proportions of ownership
and profit is a
A)

multinational corporation.
B)

floating relationship.
C)

joint venture.
D)

6
consolidation.
Answer:

C
Topic:

Joint Ventures
Question Status:

Previous Edition

17)

The ________ is the taxation technique that increases the U.S. income of an MNC by the amount of
foreign income (before foreign taxes). The U.S. tax calculation is then based on that higher level.
A)

unitary tax law

B)

grossing up procedure
C)

GmbH
D)

nationalization procedure
Answer:

B
Topic:

Grossing Up Procedure
Question Status:

Previous Edition

18)

Several U.S. states have imposed ________, which tax MNCs on a percentage of their total worldwide
income.
A)

7
grossing up procedures
B)

joint ventures
C)

unitary tax laws

D)

national entry control systems

Answer:

C
Topic:

Unitary Tax Laws

Question Status:

Previous Edition

19)

All of the following are considered offshore centers EXCEPT

A)

Cuba.
B)

Singapore.
C)

London.
D)

Nassau.
Answer:

A
Topic:

8
Offshore Centers
Question Status:

Previous Edition

20)

A partnership under which the participants have contractually agreed to contribute specified amounts of
money and expertise in exchange for stated proportions of ownership and profit is called
A)

limited partnership.
B)

GmbH.
C)

S.A.R.L.
D)

joint venture.
Answer:

D
Topic:

Joint Ventures
Question Status:

Previous Edition

21)

Laws in some U.S. states that tax multinationals (both American and foreign) on a percentage of their
total worldwide income rather than the usual taxation of the MNCs' earnings arising within their
jurisdiction are called
A)

multinational tax laws.

B)

state corporate tax laws.

C)
9
unitary tax laws.
D)

universal tax laws.

Answer:

C
Topic:

Unitary Tax Laws

Question Status:

Previous Edition

22)

All of the following are factors that can influence the operations of an MNC EXCEPT
A)

foreign ownership of portions of equity.

B)

existence of multinational capital markets.

C)

foreign currency fluctuations.

D)

consolidation of financial statements based on only one currency.

Answer:

D
Topic:

International Accounting and MNCs

Question Status:

Previous Edition

23)

10
The Euromarket is dominated by the
A)

French franc.
B)

Japanese yen.
C)

Deutsche mark.
D)

U.S. dollar.
Answer:

D
Topic:

Euromarket
Question Status:

Previous Edition

24)

Joint venture laws and restrictions may result in any of the following negative implications for the
operation of a foreign-based subsidiary EXCEPT
A)

foreign ownership may result in disagreement among the partners regarding the distribution of profits.
B)

operating in foreign countries may result in difficulties obtaining the remission of profits.
C)

joint venture agreements may stem a certain degree of risk due to political hostility.
D)

foreign management policies may be detrimental to the usual policies of the MNC.
Answer:

11
C
Topic:

Joint Ventures
Question Status:

Previous Edition

25)

The ________ is a significant economic force currently made up of 25 nations with a population of more
than 295 million that permits free trade within the countries that make up this group.
A)

North American Free Trade Agreement (NAFTA)

B)

Mercosur Group
C)

Asian Economic Area Network (ASEAN)

D)

European Union (EU)

Answer:

D
Topic:

European Union
Question Status:

Previous Edition

26)

The ________ is a major South American trading bloc that includes countries that account for more than
half of total Latin American GDP.
A)

North American Free Trade Agreement (NAFTA)

B)

12
Mercosur Group
C)

Latin and South American Free Trade Area (LASTA)

D)

Group of Seven
Answer:

B
Topic:

Mercosur Group
Question Status:

Previous Edition

27)

The ________ is a major trade agreement signed by the United States and five Central American
Countries.
A)

North American Free Trade Agreement (NAFTA)

B)

Mercosur Group
C)

Latin and South American Free Trade Area (LASTA)

D)

Central American Free Trade Agreement (CAFTA)

Answer:

D
Topic:

Central American Free Trade Agreement

Question Status:

13
Previous Edition

28)

________ is an international body that polices world commercial trading practices and that mediates
disputes between two or more member countries.
A)

NAFTA
B)

GATT
C)

WTO
D)

CAFTA
Answer:

C
Topic:

World Trade Organization

Question Status:

Previous Edition

29)

________ is a treaty that has governed world trade throughout most of the post World War II era.
A)

NAFTA
B)

GATT
C)

WTO
D)

14
CAFTA
Answer:

B
Topic:

General Agreement on Tariffs and Trade

Question Status:

Previous Edition

Learning Goal 2:

Describe the key differences between purely domestic and international financial
statements–consolidation, translation of individual accounts, and international profits.
1)

FASB No. 52 requires U.S. multinationals first to convert the financial statement accounts of foreign
subsidiaries into their functional currency and then to translate the accounts into the parent firm's
currency using the all-current-rate method.
Answer:

TRUE
Topic:

FASB No. 52
Question Status:

Previous Edition

2)

The all-current-rate method is the method by which the functional currency-denominated financial
statements of an MNC's subsidiary are translated into the parent company's currency.
Answer:

TRUE
Topic:

FASB No. 52 and the Current Rate Method

Question Status:

15
Previous Edition

3)

Current U.S. tax laws require the consolidation of financial statements of subsidiaries according to the
percentage of ownership by the parent company.
Answer:

TRUE
Topic:

Taxes Issues Related to MNCs

Question Status:

Previous Edition

4)

Current U.S. tax laws require the separation of financial statements of subsidiaries and the operating
results for some subsidiaries are excluded from the parent entirely for some countries such as China and
India.
Answer:

FALSE
Topic:

Taxes Issues Related to MNCs

Question Status:

Previous Edition

5)

A functional currency is the currency of the parent company's country.

Answer:

FALSE
Topic:

Functional Currency
Question Status:

16
Previous Edition

6)

A functional currency is the currency of the host country in which a subsidiary primarily generates and
expends cash and in which its accounts are maintained.
Answer:

TRUE
Topic:

Functional Currency
Question Status:

Previous Edition

7)

FASB No. 52 is a statement issued by the Financial Accounting Standards Board requiring American
MNCs to first convert the financial statement accounts of foreign subsidiaries into the country's ________
currency and then translate the accounts into the parent firm's currency using the ________ method.
A)

spot; historical rate

B)

functional; all-current-rate
C)

principal; average rate

D)

forward rate; weighted average

Answer:

B
Topic:

FASB No. 52 and the Current Rate Method

Question Status:

Previous Edition

17
18
 8)

The all-current-rate method dictated by the FASB No. 52 statement requires the translation of all balance
sheet accounts at the ______ rate and all income statement items at the ________ rates.
A)

closing; average
B)

average; closing
C)

historical; current
D)

average; historical
Answer:

A
Topic:

FASB No. 52 and the Current Rate Method

Question Status:

Previous Edition

9)

Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all
the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30
percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent.
What are the funds available to the parent MNC if foreign taxes can be applied as a credit against the
MNC's U.S. tax liability?
A)

$624,750
B)

$425,250
C)

$257,250

19
 D)

$735,000
Answer:

A
Topic:

Tax Credits and MNCs

Question Status:

Previous Edition

10)

Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all
the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30
percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent.
What are the funds available to the parent MNC if no tax credits are allowed?
A)

$624,750
B)

$425,250
C)

$257,250
D)

$735,000
Answer:

C
Topic:

Tax Credits and MNCs

Question Status:

Previous Edition

20
21
 11)

A U.S.-based MNC has three subsidiaries: S1 (40 percent owned by the MNC); S2 (33 percent owned by
S1), and S3 (20 percent owned by S2). The taxable income for each firm is $100 million. The local taxes for
each firm are $15 million, $20 million, and $10 million, respectively. The MNC's tax rate is 40 percent.
(a) Can the MNC apply all of its local taxes as a credit against its U.S. taxes?
(b) Based on the "grossing up" concept, calculate all tax credits applicable to the MNC.
Answer:

(a) Determine the degree of ownership of each subsidiary:

S1: 40% directly owned by the MNC.
S2: (40% × 33%) = 13.2% owned by the MNC.
S3: (40% × 33% × 20%) = 2.6% owned by the MNC.
Based on these results, S1 and S2 can be included but S3 cannot.
(b) The maximum credit against U.S. taxes = 40% × ($100 million + $100 million) = $80 million. The local
taxes paid by S1 and S2, or $35 million, can be used as a U.S. tax credit by the MNC.
Topic:

MNCs and Taxes

Question Status:

Previous Edition

22
 12)

A U.S-based MNC has a subsidiary in China where the local currency is the Renminbi (RMB). The
balance sheets and income statements of the subsidiary are presented in the table below. On December
31, 2005, the exchange rate was 8.27 RMB/US$. Assume the local currency figures in the statement below
remain the same on December 31, 2006. Calculate the U.S. dollar translated figures for the two ending
time periods assuming that between December 31, 2005 and December 31, 2006, the Chinese government
revalues (appreciates) the RMB by 20 percent.

Translation of Income Statement

Translation of Balance Sheet

23
 Answer:

This shows that an appreciation of the foreign currency against the dollar for a subsidiary in that country
will result in higher values on both the balance sheet and income statement once those values are
translated into dollars even if the local currency values didn't change at all. The opposite would be the
case if the foreign currency depreciates against the dollar.

Translation of Income Statement

Translation of Balance Sheet

Topic:

Translation of Financial Statements

Question Status:

Previous Edition

Learning Goal 3:

Discuss exchange rate risk and political risk, and explain how MNCs manage them.
1)

The spot exchange rate is the rate of exchange between two currencies at some specified future date.
Answer:

FALSE
24
 Topic:

FASB No. 52 and the Current Rate Method

Question Status:

Previous Edition

2)

The forward exchange rate is the rate of exchange between two currencies on any given day.
Answer:

FALSE
Topic:

Forward Exchange Rates

Question Status:

Previous Edition

3)

The functional currency is the currency of the economic environment in which a business entity primarily
generates and expends cash, and in which its accounts are maintained.
Answer:

TRUE
Topic:

Functional Currency
Question Status:

Previous Edition

25
 4)

Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the
translated value of a firm's financial statement accounts denominated in a given foreign currency.
Answer:

TRUE
Topic:

Accounting Exposure
Question Status:

Previous Edition

5)

Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the firm's
value.
Answer:

TRUE
Topic:

Economic Exposure
Question Status:

Previous Edition

6)

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2)
inflation and foreign exchange risks, and 3) political risks.
Answer:

TRUE
Topic:

Types of Risk in International Cash Flows

Question Status:

Previous Edition

7)
26
Countries that experience high inflation rates will see their currencies decline in value relative to the
currencies of countries with lower inflation rates.
Answer:

TRUE
Topic:

Inflation Risk and International Cash Flows

Question Status:

Previous Edition

8)

When more units of a foreign currency are required to buy one dollar, the currency is said to have
appreciated with respect to the dollar.
Answer:

FALSE
Topic:

Foreign Exchange Risk and International Cash Flows

Question Status:

Previous Edition

9)

Although several economic and political factors can influence foreign exchange rate movements, by far
the most important explanation for long-term changes in exchange rates is a differing inflation rate
between two countries.
Answer:

TRUE
Topic:

Forward Exchange Rates

Question Status:

Previous Edition

10)
Although several economic and political factors can influence foreign exchange rate movements, by far
27
the most important explanation for long-term changes in exchange rates is fiscal policy that a country
adopts.
Answer:

FALSE
Topic:

Forward Exchange Rates

Question Status:

Previous Edition

11)

Macro political risk is the risk faced by all foreign firms in a host country related to political change,
revolution, and the adoption of new policies of a government that may result in changes in ownership
structure, closure or expropriation.
Answer:

TRUE
Topic:

Political Risk
Question Status:

Previous Edition

12)

Micro political risk is the risk faced by all foreign firms in a host country related to political change,
revolution, and the adoption of new policies of a government that may result in changes in ownership
structure, closure or expropriation.
Answer:

FALSE
Topic:

Political Risk
Question Status:

Previous Edition

13)
28
National entry control systems are comprehensive rules, regulations, and incentives introduced by host
governments to regulate inflows of foreign direct investment from MNCs and at the same time extract
more benefits from their presence.
Answer:

TRUE
Topic:

National Entry Control Systems

Question Status:

Previous Edition

14)

National entry control systems are comprehensive rules, regulations, and immigration policies
introduced by xenophobic host governments to regulate inflows of foreign workers.
Answer:

FALSE
Topic:

National Entry Control Systems

Question Status:

Previous Edition

15)

Both theory and empirical evidence indicate that the capital structures of MNCs differ from those of
purely domestic firms.
Answer:

TRUE
Topic:

MNC Capital Structure

Question Status:

Previous Edition

16)
Both theory and empirical evidence indicate that the capital structures of MNCs are no different from
29
those of purely domestic firms.
Answer:

FALSE
Topic:

MNC Capital Structure

Question Status:

Previous Edition

17)

All of the following are considered to be major or "hard" currencies EXCEPT

A)

the Japanese yen.

B)

the British pound.

C)

the Mexican peso.

D)

the U.S. dollar.

Answer:

C
Topic:

Foreign Exchange
Question Status:

Previous Edition

18)

When fewer units of a foreign currency are required to buy one dollar, the currency is said to have
________ with respect to the dollar.
A)

30
appreciated
B)

depreciated
C)

consolidated
D)

remained fixed
Answer:

A
Topic:

Foreign Exchange
Question Status:

Previous Edition

31
 19)

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's
accounts denominated in a given foreign currency is
A)

economic exposure.
B)

macro political risk.

C)

accounting exposure.
D)

micro political risk.

Answer:

C
Topic:

Accounting Exposure
Question Status:

Previous Edition

20)

The risk resulting from the effects of changes in foreign exchange rates on the firm's value is
A)

economic exposure.
B)

macro political risk.

C)

accounting exposure.
D)

micro political risk.

32
A
Topic:

Economic Exposure
Question Status:

Previous Edition

21)

The risk attached to international cash flows are all of the following EXCEPT
A)

business and financial risks.

B)

inflation and foreign exchange risks.

C)

political risks.
D)

risk of local management.

Answer:

D
Topic:

Types of Risk in International Cash Flows

Question Status:

Previous Edition

22)

Macro political risk and micro political risk in international business refer to the risk
A)

that will affect all foreign firms and the risk that will affect an individual firm or specific industry,
respectively.
B)

33
of nationalization of the oil industry and the risk of a political revolution, respectively.
C)

that will affect an individual firm or specific industry and the risk that will affect all foreign firms,
respectively.
D)

of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the
devaluation of the host country's currency, respectively.
Answer:

A
Topic:

Political Risk
Question Status:

Previous Edition

23)

A political risk that might affect all foreign firms in a host country is termed a ________ risk; a political
risk that might affect only an individual firm or specific industry in a host country is termed a ________
risk.
A)

macro political; micro political

B)

micro political; macro political

C)

micro political; foreign exchange

D)

foreign exchange; micro political

Answer:

A
Topic:

34
Political Risk
Question Status:

Previous Edition

24)

All of the following are positive approaches of coping with political risk EXCEPT
A)

use of locals in management.

B)

joint venture with local banks.

C)

license or patent restrictions under international agreement.

D)

local sourcing.
Answer:

C
Topic:

Political Risk
Question Status:

Previous Edition

25)

For ________ currencies, changes in the value of foreign exchange rates are called ________.
A)

floating; appreciation
B)

floating; revaluation or devaluation

C)

fixed; revaluation or devaluation

35
 D)

fixed; appreciation or depreciation

Answer:

C
Topic:

Fixed versus Floating Rate Currencies

Question Status:

Previous Edition

26)

Between two major currencies, the spot exchange rate is the rate ________ and the forward exchange rate
is the rate ________.
A)

on that date; today

B)

at some specified future date; today

C)

today; on that date

D)

on that date; at some specified future date

Answer:

D
Topic:

Spot and Forward Exchange Rates

Question Status:

Previous Edition

27)
Foreign exchange risk refers to the risk created by ________.

36
 A)

the potential seizure of an MNC's operations in a host country

B)

the varying exchange rate between two currencies

C)

the fixed exchange rate between two currencies

D)

the potential nationalization of the MNC's operations by a host government

Answer:

B
Topic:

Foreign Exchange Risk

Question Status:

Previous Edition

28)

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate between
the U.S. dollar and the Japanese yet is 120 Yen per dollar, then what is the Euro per Yen exchange rate?
A)

0.0100
B)

144.00
C)

0.0069
D)

100.00
Answer:

37
C
Topic:

Exchange Rates
Question Status:

Previous Edition

38
 29)

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation
is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate
in one year?
A)

1.145.
B)

0.8730.
C)

1.257.
D)

0.7955.
Answer:

A
Topic:

Exchange Rates and Inflation

Question Status:

Previous Edition

Learning Goal 4:

Describe foreign direct investment, investment cash flows and decisions, the MNCs'
capital structure, and the international debt and equity instruments available to MNCs.
1)

Foreign bond is an international bond that is sold primarily in countries other than the country of the
currency in which the issue is denominated.
Answer:

FALSE
Topic:

39
Foreign Bonds
Question Status:

Previous Edition

2)

In general, an international bond is one that is initially sold in the country of the borrower and, then,
often distributed in several countries.
Answer:

FALSE
Topic:

International Bonds
Question Status:

Previous Edition

3)

Because of their access to the international bond and equity markets, MNCs may have lower costs of
various sources of long-term financing, thus resulting in differences between the capital structures of
these firms and those of purely domestic companies.
Answer:

TRUE
Topic:

Cost of Capital for MNCs

Question Status:

Previous Edition

4)

The foreign direct investment (FDI) is a multi-national corporation's transfer of capital, managerial, and
technical assets from a host country to its home country.
Answer:

FALSE
Topic:

40
Foreign Direct Investment
Question Status:

Previous Edition

5)

A multi-national corporation (MNC) can give some protection to international cash flows by reducing its
liabilities if the currency is appreciating, or by reducing its financial assets if the currency is depreciating.
Answer:

TRUE
Topic:

MNCs and International Cash Flows

Question Status:

Previous Edition

41
 6)

Comprehensive rules, regulations, and incentives aimed at regulating the inflow of direct foreign
investments involving MNCs and at extracting more benefits from their presence are termed
A)

unitary tax laws.

B)

foreign direct investments.

C)

Eurocurrency markets.
D)

national entry control systems.

Answer:

D
Topic:

National Entry Control Systems

Question Status:

Previous Edition

7)

The transfer by a multinational firm of capital, managerial, and technical assets from its home country to
a host country is termed
A)

an MNC.
B)

an SDI.
C)

an FDI.
D)

42
a CAPM.
Answer:

C
Topic:

Foreign Direct Investment

Question Status:

Previous Edition

8)

An international bond that is sold primarily in countries other than the country of the currency in which
the issue is denominated is called
A)

international bond.
B)

foreign bond.
C)

Eurobond.
D)

None of the above.

Answer:

C
Topic:

Eurobonds
Question Status:

Previous Edition

9)

In capital budgeting for a multinational, the starting discount rate to which risks stemming from foreign
exchange and political factors can be added, and from which benefits reflecting the parent's lower capital
costs may be subtracted is

43
 A)

the cost of capital of the parent (multinational) company.

B)

the risk-free rate of the parent company, adjusted for risk relevant to the foreign subsidiary.
C)

the local cost of equity capital applicable to the local business and financial environments within which a
subsidiary operates.
D)

the weighted average cost of capital applicable to all foreign subsidiaries combined.
Answer:

C
Topic:

Multinational Capital Budgeting

Question Status:

Previous Edition

44
 10)

Theory and empirical evidence indicate that the capital structures of multinational companies
A)

are basically the same as those of domestic firms.

B)

differ, but all multinationals are similar no matter the domicile country.
C)

not only differ from domestic firms, but differ also based upon the country in which they are domiciled.
D)

differ only because of their operating structure.

Answer:

C
Topic:

Multinational Capital Structures

Question Status:

Previous Edition

11)

Relative to cash flows of domestic firms, by diversifying internationally, multinationals

A)

can increase cash flows.

B)

can achieve further risk reduction.

C)

are unable to change the risk.

D)

are not attempting to change risk.

Answer:

45
B
Topic:

Multinationals and Diversification

Question Status:

Previous Edition

12)

The capital structures of MNCs are influenced by all of the factors below EXCEPT
A)

international capital markets.

B)

international diversification.
C)

country factors.
D)

all of the above.

Answer:

D
Topic:

Capital Structure and MNCs

Question Status:

Previous Edition

13)

The first international capital market, a market with uniform rules and regulations governing major stock
exchanges, was finally established and began operations in 2002
A)

at The Hague.
B)

46
in New York.
C)

in London.
D)

none of the above.

Answer:

D
Topic:

International Capital Market

Question Status:

Previous Edition

47
 14)

A multinational company has two subsidiaries, one in Ireland (local currency, Irish pound) and the other
in West Germany (local currency, Deutsche mark). Pro forma statements of operations indicate the
following short-term financial needs for each subsidiary (in equivalent U.S. dollars): Ireland: $25 million
excess cash to be invested (lent); West Germany: $10 million funds to be raised (borrowed)
The following financial data is also available:

(a) Determine the effective rates of interest for Irish pound and Deutsche mark in both the Euromarket
and the domestic market.
(b) Where should the funds be invested?
(c) Where should the funds be raised?
Answer:

(a)

(b) $25 million should be invested in U.S. dollars in the Euromarket.

(c) $10 million should be raised in Deutsche marks in the
Topic:

MNCs and Financing Decisions

Question Status:

Previous Edition

Learning Goal 5:

Discuss the role of the Eurocurrency market in short-term borrowing and investing
(lending) and the basics of international cash, credit, and inventory management.
1)

48
In the international context, the nominal interest rate is the stated interest rate charged on financing when
only the MNC parent's currency is involved.
Answer:

TRUE
Topic:

MNCs and Interest Rates

Question Status:

Previous Edition

2)

In the case of short-term financing, the forces of supply and demand are among the main factors
determining exchange rates in Eurocurrency markets.
Answer:

TRUE
Topic:

Eurocurrency Markets
Question Status:

Previous Edition

49
 3)

Hedging strategies are techniques used to offset or protect against risk; in the international context these
include borrowing or lending in different currencies, undertaking contracts in the forward, futures,
and/or options markets, and also swapping assets/liabilities with other parties.
Answer:

TRUE
Topic:

Hedging Foreign Exchange Risk

Question Status:

Previous Edition

4)

The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate inside
the United States.
Answer:

TRUE
Topic:

Euromarket Interest Rates

Question Status:

Previous Edition

5)

In the international context, the effective interest rate equals to the nominal rate plus (or minus) any
forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.
Answer:

TRUE
Topic:

MNCs and Interest Rates

Question Status:

Previous Edition

50
 6)
Exchange rate risk hedging tools include forward contracts, options, interest rate swaps, currency swaps,
and hybrid securities.
Answer:

TRUE
Topic:

Hedging Exchange Rate Risk

Question Status:

Previous Edition

7)

Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and
inventory swaps.
Answer:

FALSE
Topic:

Hedging Exchange Rate Risk

Question Status:

Previous Edition

8)

The center of the Euro-equity market, which deals in international equity issues is
A)

New York.
B)

Geneva.
C)

Tokyo.
D)

London.

51
 Answer:

D
Topic:

Euro-Equity Market
Question Status:

Previous Edition

9)

The usual capital markets used by U.S.-based MNCs that desire international ownership of their equity
are
A)

Western Europe and Japan.

B)

Mexico and Canada.

C)

Saudi Arabia and South Africa.

D)

Liechtenstein and Panama.

Answer:

A
Topic:

MNCs and Capital Markets

Question Status:

Previous Edition

10)

A Eurobond is
A)

52
a bond sold primarily to Europeans.
B)

a bond sold primarily in countries other than the country of the currency in which the issue is
denominated.
C)

a debt instrument sold exclusively in Europe.

D)

a bond issued in Liechtenstein.

Answer:

B
Topic:

Eurobonds
Question Status:

Previous Edition

11)

The existence of ________ allows multinationals to take advantage of unregulated financial markets to
invest and raise short-term funds in a variety of countries and to protect themselves from foreign
exchange exposure.
A)

a strong U.S. dollar

B)

the International Monetary Fund

C)

Eurocurrency markets
D)

European Economic Council

Answer:

53
 Topic:

Eurocurrency Markets
Question Status:

Previous Edition

12)

In the international context, the ________ interest rate involves only the MNC parent's currency, while the
________ interest rate includes any forecast appreciation or depreciation of a foreign currency relative to
that of the MNC parent.
A)

effective; nominal
B)

macro; nominal
C)

nominal; effective
D)

nominal; micro
Answer:

C
Topic:

MNCs and Interest Rates

Question Status:

Previous Edition

13)

A short-term financial decision based on an MNC management's expectation that the local foreign
currency will appreciate may be
A)

increasing local customers' accounts receivable and increasing local notes payable.
B)

54
decreasing local notes receivable and decreasing accruals.
C)

increasing local inventories and increasing local notes payable.

D)

increasing local accounts receivable and decreasing local accounts payable.

Answer:

D
Topic:

MNCs and Short-term Finance

Question Status:

Previous Edition

14)

As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT
A)

the right to buy or sell an amount of foreign currency.

B)

specifies price.
C)

specifies time period.

D)

represents an obligation to buy or sell.

Answer:

D
Topic:

Hedging Foreign Exchange Risk

Question Status:

55
Previous Edition

15)

As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT
A)

an initial exchange by two parties of two principal amounts in two different currencies.
B)

principal amounts are reversed at the spot rate at maturity.

C)

each party pays the other's interest payment.

D)

principal amounts are reversed at a pre-agreed rate at maturity.

Answer:

B
Topic:

Hedging Foreign Exchange Risk

Question Status:

Previous Edition

16)

In terms of inventory management multinational firms

A)

must deal mainly with exchange rate fluctuations and tariffs.

B)

must deal with a wide number of factors, including exchange rate fluctuations, tariffs, non-tariff barriers,
integration schemes such as the EEC, and other rules and regulations.
C)

have only economic factors to consider, since this is a current asset and is minimally affected by political
factors.

56
 D)

have only political factors to consider, since inventory is minimally affected by foreign economic factors.
Answer:

B
Topic:

MNCs and Inventory Management

Question Status:

Previous Edition

17)

Foreign bonds are sold primarily in

A)

countries other than the country in which the issue is denominated.

B)

Western Europe.
C)

Japan.
D)

the country of the currency of issue.

Answer:

D
Topic:

Foreign Bonds
Question Status:

Previous Edition

18)

57
A bond that is initially sold primarily in countries other than the country of the currency in which the
issue is denominated is called
A)

an international bond.
B)

a foreign bond.
C)

a Eurobond.
D)

a double Dutch bond.

Answer:

C
Topic:

Eurobonds
Question Status:

Previous Edition

Learning Goal 6:

Review recent trends in international mergers and joint ventures.

1)

The creation of international joint ventures has increased substantially during the past two decades.
Answer:

TRUE
Topic:

International Joint Ventures

Question Status:

Previous Edition

58