Advanced Corporate Finance
Chapter Exam Questions
Course Introduction
Advanced Corporate Finance delves into the complex financial decisions facing modern corporations, building on foundational concepts to explore topics such as capital structure optimization, financial risk management, mergers and acquisitions, corporate governance, and valuation techniques. The course integrates theoretical frameworks with real-world case studies to equip students with the analytical tools necessary to evaluate corporate policies, investment opportunities, and financing strategies. Emphasis is placed on understanding how financial markets, economic forces, and regulatory environments influence corporate financial decisions, preparing students for strategic roles in finance, consulting, and investment management.
Recommended Textbook
International Corporate Finance 1st Edition by
J. Ashok Robin
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Page 2
Chapter 1: Introduction
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Q1) One impediment to the free flow of some factors of production,especially in the case of raw materials,is:
A)political restrictions.
B)currency risks.
C)competition.
D)high transaction costs.
Answer: D
Q2) An MNC acquiring ownership in a foreign branch or subsidiary is an example of:
A)globalization.
B)foreign direct investment.
C)international trade.
D)political risk.
Answer: B
Q3) Positive externalities that can cause firms in an industry to locate in the same area include:
A)industry-friendly environmental and labor policies.
B)favorable tax rates and economic incentives.
C)exchange of ideas and shared labor pools.
D)closeness to markets and low cost power supplies.
Answer: C
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Chapter 2: International Financial Markets: Structure and Innovation
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Q1) Floating rate notes are financial instruments with interest rates linked to _____________ that are traded on the _________________________.
A)US Treasury bill rates;foreign exchange markets
B)LIBOR;Eurocredit market
C)LIBOR;foreign debt markets
D)US Treasury bill rates;Eurocurrency markets
Answer: B
Q2) Foreign exchange transactions are easy and inexpensive and even large transactions can be made without affecting market prices because:
A)of the government regulations that apply to foreign exchange markets.
B)speculators keep the foreign exchange markets very active.
C)the foreign exchange markets are so large.
D)the foreign exchange markets are so old and well-established.
Answer: C
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Chapter 3: Currency and Eurocurrency Derivatives
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Q1) The typical counterparties in a derivative contract are the:
A)the spot seller and the forward buyer.
B)the offeror and the offeree.
C)the long (buyer)and the short (seller).
D)the put option and the call option.
Answer: C
Q2) Why would a rise in interest rates adversely affect MNCs that produce durable goods?
A)A rise in interest rates increases the cost that consumers of those durable goods have to pay and,therefore,reduces the demand for those durable goods.
B)A rise in interest rates causes the value of the domestic currency to decrease,making the cost of the durable goods worldwide more expensive.
C)A rise in interest rates indicates economic disruption in the country and makes it more difficult for MNCs to sell their products worldwide.
D)A rise in interest rates signals the MNCs inability to continue to produce at the level it has been producing,and lower product means lower profits.
Answer: A
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Page 5
Chapter 4: Currency Systems and Valuation
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Q1) The traditional view of currency values focuses on:
A)aggregate supply and demand in all transactions in which the currency is used.
B)the current account in a country's balance of payments.
C)how long the currency has been in existence and the long term trends in the value of the currency.
D)volatility of the currency on international currency markets.
Q2) In a fixed currency system:
A)the value of the currency is "fixed" in that its value is determined by some anchor,usually another currency.
B)a definite value of the currency is established.
C)the total amount of a currency that can be issued is established and cannot be changed without action by the central bank.
D)the value of the currency is directly linked to the price of gold.
Q3) The first step in making the euro the single currency of Europe was:
A)taking steps to make all of the currencies in use in Europe have equal value.
B)linking the value of all currencies in Europe to the USD.
C)the institution of several policies including the freeing of capital flow among member states.
D)obtaining the approval of the International Monetary Fund.
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Page 6
Chapter 5: Currency Parity Conditions
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Q1) In a covered interest arbitrage transaction,the borrowed currency is known as the ________________________ and the lent currency is known as the
A)target currency;funding currency
B)funding currency;target currency
C)funding currency;interest-bearing currency
D)swap currency;target currency
Q2) Purchasing Power Parity is:
A)the law of one price applied to national price indices.
B)not a valid index of prices and currency values.
C)used to determine if a country's currency regulations are affecting the value of its currency.
D)used to determine the proper forward premium of a currency.
Q3) When a foreign interest rate is higher than a domestic interest rate,the foreign currency's forward rate will be less than its spot rate.That means that:
A)the value of the foreign currency is expected to decline in the future.
B)the value of the foreign currency is expected to increase in the future.
C)the foreign interest rate is expected to increase in the future.
D)the foreign interest rate is expected to decline in the future.
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Page 7
Chapter 6: Currency Risk Exposure Measurement
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Q1) The risks posed to a firm's operating cash flow by currency-related changes is called:
A)operating exposure.
B)currency risks.
C)economic exposure.
D)transaction risks.
Q2) In general,currency value changes:
A)very little over a year's time.
B)by 10% or more each year.
C)significantly but the positive changes cancel the negative changes.
D)by a few percentages in a year but very seldom more than 5% in any one year.
Q3) The use of standard deviation as a measure of currency risk assumes that currency changes are independent.This means that:
A)a currency change is not related to the change in value of any other currency.
B)a currency change is not in the same percentage as the most recent currency change.
C)each currency change is unrelated to previous or subsequent currency changes.
D)each currency change occurs in a different time period than the prior currency change.
Q4) What is the difference between operating exposure and transaction exposure?
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Chapter 7: Currency Exposure Management
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Q1) In dealing with options,the strike price is:
A)the price that the parties negotiate the option price when the option is exercised.
B)the set price at which the option is exercised.
C)not relevant.
D)set by the seller of the currency subject to the option.
Q2) Using derivatives such as forwards,options and money markets to control currency exposure is called:
A)swapping.
B)gambling.
C)debt contracting.
D)hedging.
Q3) In the context of international corporate finance,"repatriation" refers to:
A)repayment of funds owed to creditors in foreign countries.
B)payment of funds to foreign governments as compensation for the privilege of operating in those countries.
C)the recovery of investments made in foreign firms.
D)cash flows between parent and subsidiary corporations in the form of dividends,interest and fees.
Q4) How significant is currency risk compared to other risks that an MNC might face?
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Chapter 8: Capital Budgeting
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Q1) Typically,______________________ are arrangements in which an MNC agrees to undertake a project in a foreign country in conjunction with local firms and to share both the responsibilities and profits involved in the project.
A)partnerships
B)joint venture agreements
C)trade agreements
D)sale and manufacture agreements
Q2) The most important variable in determining cash flow and the variable that affects most other cash flow variable is:
A)price of the units predicted to be sold.
B)number of units of product predicted to be sold.
C)number of units of product sold in the previous period.
D)average number of units of product sold in the last year.
Q3) The least difficult aspect of the cash flow calculation is:
A)determining the profit that the firm can expect from the project.
B)determining the tax consequences of the project to the firm.
C)estimating the direct operating expenses that the project will require.
D)estimating the initial investment that the firm has to make in the project.
Q4) How can firms stabilize their cash flow by pursuing foreign projects?
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Chapter 9: Advanced Capital Budgeting
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Q1) Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:
A)does not affect the parent's estimate of NPV from the proposed project.
B)makes the parent's real cost of capital in its home market lower and increases the parent's estimate of NPV from the proposed project.
C)makes the parent's real cost of capital in its home market higher and decreases the parent's estimate of NPV from the proposed project.
D)makes the parent's real cost of capital in its home market higher and increases the parent's estimate of NPV from the proposed project.
Q2) Modification to projects undertaken by MNCs:
A)are often required.
B)are resisted at all costs.
C)should never be required.
D)indicate that the project was flawed from the inception.
Q3) What are the causes of parent-subsidiary asymmetry?
Q4) What are side effects and how are they related to the value of international projects?
Q5) What are real options and how do they affect the estimated value of projects?
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Chapter 10: Long-Term Financing
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Q1) How does a syndicate affect the interest rate that an MNC can expect to pay for a loan?
A)Since syndicates pool resources to make loans,each participant in the syndicate assumes less risk related to the loan,and lower risk usually results in a lower interest rate on the loan.
B)Since syndicates are government-sponsored institutions,they can obtain funds at less cost than other institutions,so they can loan money to MNCs at a lower interest rate.
C)Since there is a significant cost involved in forming a syndicate,the interest rates charged by syndicates on the loans they make are higher to compensate for the increased costs.
D)Since syndicates loan money to MNCs,the interest rates that they charge are the same interest rates that the MNC could obtain from any other source of funds.
Q2) Bank loans typically take the form of either:
A)debt or equity.
B)unsecured or secured loans.
C)installment or balloon loans.
D)term loans or lines-of-credit.
Q3) How does a line of credit differ from a term loan?
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Page 12
Chapter 11: Optimizing and Financing Working Capital
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Q1) A bank loan made for a fixed period of time at a fixed interest rate requiring periodic payments of principle and interest is called a:
A)term loan.
B)line of credit.
C)fixed loan.
D)secured loan.
Q2) In the context of working capital management in MNCs,credit policy involves consideration of:
A)optimizing cash balances across countries where the MNC operates.
B)pricing and credit terms.
C)currency risk and local market conditions.
D)credit rating of customers and competition.
Q3) What is the difference between ex ante and ex post financing costs,and what effects do these costs have on an MNC's financing strategy?
Q4) What is commercial paper,and how does it differ from other financing vehicles that an MNC might use?
Q5) In the context of cash management,what are opportunity costs?
Q6) What is working capital,and how is working capital affected by short-term financing?
Page 13
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Chapter 12: International Alliances and Acquisitions
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Q1) What category of merger costs are typically incurred post-merger?
A)Transaction costs
B)Merger costs
C)Transition costs
D)Explicit costs
Q2) What is terminal value and why is it important in evaluating the value of a potential acquisition?
Q3) An important use of joint ventures in cross-border situations is:
A)to avoid double taxation.
B)to create a joint venture to take advantage of local financing or incentives.
C)to keep the investment by foreign entities in a country secret from officials in that country.
D)to avoid local remittance restrictions.
Q4) Large financial entities and very wealthy individuals who have funds to invest are the primary source of:
A)private equity funds.
B)cross-border M&A funds.
C)hedge funds.
D)globalized funds.
Q5) How is outsourcing related to a firm's core competencies?
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Chapter 13: International Trade
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Q1) In a transaction involving a letter of credit,in addition to the importer and the exporter,what other two parties are usually involved?
A)The extending bank and the receiving bank
B)The issuing bank and the confirming bank
C)The paying banks and the paid bank
D)The authorizing bank and the approving bank
Q2) What is an open account in the context of international trade?
A)An open account is an arrangement whereby the exporter automatically ships a specific quantity of a specific good to the importer at regular intervals.
B)An open account is an arrangement whereby the importer and the exporter agree on a time of payment after the importer receives the goods sold by the exporter.
C)An open account is an arrangement in which the importer and exporter agree to trade goods and net the amount owed rather than each paying the other for goods purchased.
D)An open account is an arrangement in which the importer agrees to pay the exporter for goods that have been shipped by the exporter but not received by the importer.
Q3) Explain the relationship between GATT and WTO.
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Page 15
Chapter 14: International Taxation and Accounting
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Q1) The development of capital markets is directly related to demands placed on accounting systems,so:
A)highly developed capital markets demand sophisticated accounting systems.
B)highly developed capital markets have no use for accounting systems.
C)highly developed capital markets need the support of only the most basic accounting systems.
D)highly developed capital markets function without regard to the accounting system.
Q2) Tax strategies involving transfer pricing depend on ________________ rather than ______________________.
A)marginal tax rates rather than average tax rates
B)marginal tax rates;published tax rates
C)average tax rates;published tax rates
D)published tax rates;average tax rates
Q3) How does the separate entity approach to taxation differ from the integrated system approach?
Q4) How can MNCs use payments received from subsidiaries to reduce the overall tax burden of the MNC-subsidiary group?
Q5) What does transfer pricing mean in the context of the operations of MNCs?
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Chapter 15: International Portfolio Investments
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Q1) The phenomenon that is evidenced by an underrepresentation of foreign investments in a portfolio is known as:
A)weighted-average investing.
B)home bias.
C)foreign bias.
D)portfolio investing.
Q2) Why do the values of ADRs closely track the values of the underlying stock?
A)If there is a discrepancy between the value of ADRs and the values of the underlying stock,arbitragers will quickly cause the values to converge.
B)The only way to value ADRs is in relation to the values of the underlying stock.
C)ADRs have no value except in relation to the underlying stock.
D)Investors will not allow discrepancies between the values of ADRs and the values of underlying stock.
Q3) International investment can affect the Sharpe Index positively by:
A)increasing both return and risk.
B)decreasing return and increasing risk.
C)decreasing both return and risk.
D)increasing return and decreasing risk.
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