Advanced Financial Management
Exam Answer Key
Course Introduction
Advanced Financial Management delves into the strategic decision-making processes that drive the financial success of organizations. This course covers topics such as capital structure optimization, risk management techniques, advanced valuation methods, working capital management, and financial planning and analysis. Students will explore the use of financial instruments, mergers and acquisitions, international financial management, and contemporary issues in corporate finance. Emphasizing case studies, real-world scenarios, and quantitative modeling, the course prepares students to tackle complex financial challenges and to develop effective strategies for value creation and long-term financial health in dynamic environments.
Recommended Textbook
International Financial Management 7th Edition by Cheol S. Eun
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21 Chapters
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Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) The ultimate guardians of shareholder interest in a corporation, are the A)rank and file workers.
B)senior management.
C)boards of directors.
D)all of the above.
Answer: C
Q2) The ascendance of the dollar the dominant global currency reflects several key factors such as
A)the size of the U.S. population.
B)the mature and open capital markets of the U.S. economy.
C)exchange rate stability.
D)all of the above.
Answer: B
Q3) What is the increased amount of goods available in Northern Ireland after trade?
A)400 more bottles of whiskey and 200 more kegs of beer
B)1,000 more bottles of whiskey and 500 more kegs of beer
C)200 more bottles of whiskey and 400 more kegs of beer
Answer: A
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3
Chapter 2: International Monetary System
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Sample Questions
Q1) Advantages of a fixed exchange rates include
A)reduction in exchange rate risk for businesses.
B)reduction in transactions costs.
C)reduction in trading frictions.
D)all of the above
Answer: D
Q2) In the EU, there is a
A)low degree of fiscal integration among EU countries.
B)high degree of fiscal integration among EU countries.
Answer: A
Q3) Under the gold standard, international imbalances of payment will be corrected automatically under the A)Gresham Exchange Rate regime.
B)European Monetary System.
C)Price-specie-flow mechanism.
D)Bretton Woods Accord.
Answer: C
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4
Chapter 3: Balance of Payments
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Sample Questions
Q1) Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer.
A)Payment by McDonalds will be recorded as a debit.
B)The deposit of the funds by the seller will be recorded as a debit.
C)Payment by McDonalds will be recorded as a credit.
D)The deposit of the funds by the buyer will be credit.
Answer: A
Q2) The "one word that haunts the dollar" is
A)(Central bank) diversification.
B)Reunification (Korean).
C)Euro.
D)(Current account) deficit.
Answer: A
Q3) International reserve assets include "foreign exchanges". These are
A)Special Drawing Rights (SDRs) at the IMF.
B)reserve positions in the International Monetary Fund (IMF).
C)foreign currency held by a country's central bank.
D)none of the above
Answer: C
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Page 5
Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) The board of directors may grant stock options to managers in order to
A)save executive compensation costs.
B)use as a substitute for bonus.
C)align the interest of managers with that of shareholders.
D)none of the above
Q2) Several studies document the empirical link between
A)weak investor protection and GDP growth.
B)financial development and economic growth.
C)growth in GDP and concentrated ownership.
D)none of the above
Q3) The objective of corporate governance reform should be what?
A)Strengthen the protection of outside investors from expropriation by managers
B)Strengthen the protection of outside investors from expropriation by controlling insiders
C)Both a and b
D)None of the above
Q4) After a hostile takeover
A)the existing management team is usually fired.
B)the existing management team is usually retained at a higher wage.
C)the target company usually mounts a takeover defense.
Page 6
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Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.
A)In dealer jargon, this is a currency against currency trade.
B)The bank will frequently handle such a trade by selling British pounds for U.S. dollars and then buying Swiss francs with U.S. dollars.
C)The bank would typically sell the British pounds directly for Swiss francs.
D)Both a and b
Q2) What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.
A) 0.5386/CHF
B) 0.5389/CHF
C) 0.5463/CHF
D) 0.5466/CHF
Q3) Spot foreign exchange trading
A)accounts for about 5 percent of all foreign exchange trading.
B)accounts for about 20 percent of all foreign exchange trading.
C)accounts for about 33 percent of all foreign exchange trading.
D)accounts for about 70 percent of all foreign exchange trading.
Q4) Using the table what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) If you borrowed 1,000,000 for one year, how much money would you owe at maturity?
Q2) 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% and 3% in the euro zone. What is the one-year forward rate that should prevail?
A) 1.00 = $1.2379
B) 1.00 = $1.2623
C) 1.00 = $0.9903
D)$1.00 = 1.2623
Q3) An arbitrage is best defined as
A)a legal condition imposed by the CFTC.
B)the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.
C)the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.
D)None of the above
Q4) If you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you receive?
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) If the call finishes out-of-the-money what is your replicating portfolio cash flow?
Q2) A CME contract on 125,000 with September delivery
A)is an example of a forward contract.
B)is an example of a futures contract.
C)is an example of a put option.
D)is an example of a call option.
Q3) What paradigm is used to define the futures price?
A)IRP
B)Hedge Ratio
C)Black Scholes
D)Risk Neutral Valuation
Q4) Three days ago, you entered into a futures contract to sell 62,500 at $1.50 per . Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost?
A)Lost $0.04 per or $2,500
B)Made $0.04 per or $2,500
C)Lost $0.06 per or $3,750
D)None of the above
Q5) If the call finishes in-the-money what is your replicating portfolio cash flow?
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Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) A stock market investor would pay attention to
A)anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.
B)unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.
Q2) ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10 million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000. Corporate income tax rate = 30% for earnings exceeding $7,500,000.
A)$3,375,000
B)$6,000,000
C)$1,500,000
D)$4,500,000
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) The variability of the dollar value of an asset (invested overseas) depends on
A)the variability of the dollar value of the asset that is related to random changes in the exchange rate.
B)the dollar value variability that is independent of exchange rate movements.
C)both a and b
D)none of the above
Q2) Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate
A)can have significant economic consequences for U.S. firms.
B)can have significant economic consequences for Japanese firms.
C)can have significant economic consequences for both U.S. and Japanese firms.
D)none of the above
Q3) What is the objective of managing operating exposure?
A)Stabilize accounting results in the face of fluctuating exchange rates.
B)Selecting low cost production sites.
C)Increase the variability of cash flows in the face of fluctuating exchange rates.
D)None of the above
Q4) Estimate your exposure (b) to the exchange risk.
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Page 11
Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) The underlying principle of the monetary/nonmonetary method is A)assets and liabilities should be translated based on their maturity.
B)monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.
C)monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.
D)all balance sheet accounts are translated at the current exchange rate, except for stockholders' equity. A "plug" equity account named cumulative translation adjustment (CTA) is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method.
Q2) A balance sheet hedge seeks to
A)eliminate any mismatch of net assets and net liabilities denominated in the same currency.
B)transfer accounting exposure to transaction exposure.
C)create cumulative translation adjustment.
D)none of the above
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Chapter 11: International Banking and Money Market
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Sample Questions
Q1) A bank sold a 3 × 9 FRA. Payment is made when?
A)At the end of 3 months
B)At the end of 6 months
C)At the end of 9 months
D)None of the above
Q2) Eurocredits
A)are often so large that individual banks cannot handle them.
B)short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations.
C)frequently require the use of a banking syndicate.
D)all of the above
Q3) An Edge Act bank is typically located in a state different from that of its parent in order to get around the prohibition on interstate branch banking.
A)True
B)False
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13
Chapter 12: International Bond Market
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Sample Questions
Q1) When the bond sells at par, the implicit SF/$ exchange rate at maturity of a Swiss franc/U.S. dollar dual currency bonds that pay $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.
Q2) Standard & Poor's 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.
Q3) 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 above
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Page 14
Chapter 13: International Equity Markets
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Sample Questions
Q1) 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.
Q2) 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 above
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Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Explain how firm B could use the forward exchange markets to redenominate a 2-year 40m 5% euro loan into a 2-year USD-denominated loan.
Q2) What would be the interest rate?
Q3) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.
Q4) Explain how this opportunity affects which swap firm B will be willing to participate in.
Q5) Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent. The means
A)the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR.
B)the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
C)both a and b
D)none of the above
Q6) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q7) What would be the interest rate?
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Page 16
Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Is it reasonable to conclude that your portfolio is on the efficient frontier? If not, then prove your point by finding just one portfolio weighting between A and B that offers more return with less risk. If you think it is on the efficient frontier, why do you think this? No points for guessing.
Q2) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54.
Spot exchange rates at the start and end of the year are shown in the table.
Q3) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54. Spot exchange rates at the start and end of the year are shown in the table.
Q4) U.S.-based mutual funds known as country funds.
A)Invest in the government securities of different sovereign governments, giving risk-free portfolios effective exchange rate diversification.
B)Invests exclusively in stocks of a single country.
C)Invests exclusively in government securities of a single country.
D)None of the above
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) 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 above
Q2) Labor services in a country might be underpriced relative to productivity because A)workers are not allowed to freely mover 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 above are equally important
Q3) 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 above
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Page 18
Chapter 17: International Capital Structure and the Cost of Capital
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Sample Questions
Q1) The majority of publicly traded Swiss corporations have up to three classes of common stock: 1) Registered stock
2) Voting bearer stock
3) Nonvoting bearer stock
Until recently, foreigners were not allowed to buy registered stocks: in the case of Nestlé this had the effect of
A)distorting the prices of registered stock downward.
B)distorting the prices of registered stock upward.
C)this had no effect on prices.
D)none of the above
Q2) In the notation of the book, K = (1 - )K<sub>l</sub> + (1 - )i Which of the following are correct?
A)The debt-to-equity ratio is
B)The cost of equity capital for a levered firm is K<sub>l</sub>
C)The after-tax cost of debt capital is i
D)All of the above
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19
Chapter 18: International Capital Budgeting
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Sample Questions
Q1) Find the NPV in euro for the American firm if they wait one year to undertake the project after the exchange rate falls to S<sub>1</sub>($| ) = $1.40 per . Assume that i doesn't change.
Q2) What should Strik-it-Rich's management do?
Q3) Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
Q4) What is the levered after-tax incremental cash flow for year 1?
A)$4,300
B)-$202,610
C)-$95,700
D)$57,000
E)None of the above
Q5) What is CF5 in dollars?
Q6) What is the NPV of the U.S.-based project to the Irish firm?
Q7) Using the notion of a hedge ratio, make a recommendation vis-à-vis how to undertake the project today without "buying" the option.
Q8) What is the euro-denominated IRR?
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Q9) Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate falls to S<sub>1</sub>($| ) = $1.40 per .
Chapter 19: Multinational Cash Management
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Q1) 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.
Given IRP and hedging opportunities this is true. See page 461. Likely a contentious question.
A)True
B)False
Q2) 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
E)None of the above
Q3) 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 above
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Page 21
Chapter 20: International Trade Finance
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Sample Questions
Q1) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
Q2) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q3) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q4) 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
Q5) 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.
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) In general the United States claims
A)only a limited taxing jurisdiction over nonresident alien individuals and foreign corporations.
B)unlimited taxing jurisdiction over nonresident alien individuals and foreign corporations.
C)unlimited taxing jurisdiction over resident alien individuals and foreign corporations. D)none of the above
Q2) A withholding tax is defined by your textbook as
A)the money that the government takes for every worker's paycheck.
B)social security taxes.
C)a tax levied on income earned by an individual (or corporation) of one country within the tax jurisdiction of another county.
D)a tax levied on passive income earned by an individual (or corporation) of one country within the tax jurisdiction of another county.
Q3) A withholding tax is
A)an indirect tax.
B)a direct tax.
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Page 23