Corporate Finance
Textbook Exam Questions
Course Introduction
Corporate Finance is a foundational course that explores how companies manage their financial resources to maximize shareholder value. The course covers essential topics such as capital budgeting, risk and return, cost of capital, capital structure, dividend policy, working capital management, and financial planning. Through case studies and practical applications, students develop analytical skills to evaluate investment opportunities, assess financial health, and make sound financing decisions. The course equips learners with tools and techniques to address real-world challenges faced by financial managers in both domestic and international contexts.
Recommended Textbook Fundamentals of Multinational Finance 4th Edition by Michael H. Moffett
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Page 2
Chapter 1: Current Multinational Challenges and the Global Economy
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Q1) Refer to Table 1.1.A production unit in Austria has a/an ________ over a production unit in Russia in ________.
A)absolute disadvantage; digital cameras
B)absolute disadvantage; snowboards
C)absolute advantage; both cameras and snowboards
D)none of the above
Answer: C
Q2) Large international firms may be better able to exploit such competitive factors as ________ than are their domestic competitors.
A)economies of scale
B)technological expertise
C)product differentiation
D)all of the above
Answer: D
Q3) Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Financial Goals and Corporate Governance
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Sample Questions
Q1) The authors reference empirical evidence that family-controlled firms all over the world may outperform publicly traded firms.What factors are cited as reasons for this occurring?
Answer: The authors note three primary reasons.1)Family-owned firms focus on the long-run,2.)they stick to their core business,and 3)because the owners are closer to management,fewer conflicts arise between management and ownership - thus reducing the agency problem.
Q2) Unsystematic risk can be defined as
A)the total risk to the firm.
B)the risk of a well-diversified portfolio.
C)the added risk that a firm's shares bring to a diversified portfolio. D)beta.
Answer: A
Q3) What are frequently taught as universal truths in a finance classroom may in fact just be cultural norms.
A)True
B)False
Answer: True
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Chapter 3: The International Monetary System
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Q1) Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).
A)True
B)False
Answer: True
Q2) Since the launch of the euro in January of 1999,one nation has joined the original 11 members and three nations have dropped the euro as their official currency.
A)True
B)False
Answer: False
Q3) In London an investor can buy a U.S.dollar for £0.6102.In New York the £/$ exchange rate is the same as found in London.Given this information,what is the $/£ exchange rate in New York?
A)$1.6388/£
B)£0.6102/$
C)£1.6388/$
D)$0.6102/£
Answer: A
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Chapter 4: The Balance of Payments
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Q1) Under an international regime of fixed exchange rates,countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency.
A)deficit; revaluing; surplus; revaluing
B)deficit; devaluing; surplus; devaluing
C)surplus; devaluing; deficit; revaluing
D)surplus; revaluing; deficit; devaluing
Q2) If your company were to import and export textiles,the transactions would be recorded in the current account subcategory of ________.
A)services trade
B)income trade
C)goods trade
D)current transfers
Q3) The time from 1971 to today has predominately used a regime of variable exchange rates.It has also seen a decrease in capital mobility.
A)True
B)False
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Chapter 5: Current Multinational Financial Challenges: the
Credit Crisis of 2007 - 2009
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Q1) ________ mortgage loans are generally considered low-risk but have a non-conforming element that prevents them from having the highest credit rating.
A)Prime
B)Alt-A
C)Subprime
D)Alt-B
Q2) Explain the process of securitization.In doing so be sure to define liquidity and the concept of originate-to-distribute and how the concept differs from traditional commercial bank lending.
Q3) Traditionally Alt-A mortgages have a default rate of less than ________ but those originated in 2006 now have a default rate in excess of ________.
A)1%; 11%
B)4%; 15%
C)8%; 20%
D)10%; 25%
Q4) To the best of your ability highlight the events from July 2007 through September 30,2008 that culminated with the 777 point fall in the DJIA.
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Chapter 6: The Foreign Exchange Market
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Q1) Most foreign exchange transactions are through the U.S.dollar.If the transaction is expressed as the foreign currency per dollar this is known as ________ whereas ________ are expressed as dollars per foreign unit.
A)European terms; indirect
B)American terms; direct
C)American terms; European terms
D)European terms; American terms
Q2) Refer to Table 6.1.The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.
A)£1.4484/$; $0.6904/£
B)$1.4481/£; £0.6906/$
C)$1.4484/£; £0.6904/$
D)£1.4487/$; $0.6903/£
Q3) Identify and explain the three functions of the foreign exchange market.
Q4) Because the market for foreign exchange is worldwide,the volume of foreign exchange currency transactions is level throughout the 24-hour day.
A)True
B)False
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Chapter 7: International Parity Conditions
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Q1) ________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.
A)The Fisher Effect
B)The International Fisher Effect
C)Absolute Purchasing Power Parity
D)Relative Purchasing Power Parity
Q2) A ________ is an exchange rate quoted today for settlement at some time in the future.
A)spot rate
B)forward rate
C)currency rate
D)yield curve
Q3) The current U.S.dollar-yen spot rate is 85¥/$.If the 90-day forward exchange rate is 88 ¥/$ then the yen is at a forward premium.
A)True
B)False
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Chapter 8: Foreign Currency Derivatives and Swaps
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Q1) Refer to Table 8.2.If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e.the internal rate of return)for Polaris for the entire loan?
A)4.00%
B)4.50%
C)5.25%
D)5.60%
Q2) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.
A)0%
B)5%
C)50%
D)95%
Q3) All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.
A)exchange rate
B)country
C)counterparty
D)none of the above
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Q1) The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks,as well as the expected future levels and rates of growth of monetary stock
A)balance of payments
B)monetary
C)asset market
D)law of one price
Q2) Argentina's economic performance in the 1990s while their peso was pegged to the U.S.dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.
A)high; high
B)low; low
C)low; high
D)high; low
Q3) It is safe to say that the Russian transition from a communist economy to a capitalist economy has been smooth for the Russian people
A)True
B)False
Q4) Describe the Russian ruble collapse through August of 1998.
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Chapter 10: Transaction and Translation Exposure
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Q1) According to your authors,the main purpose of translation is
A)to prepare consolidated financial statements.
B)to help management assess the performance of foreign subsidiaries.
C)to act as an interpreter for managers without foreign language skills.
D)none of the above.
Q2) List and define the three types of foreign exchange exposure presented by your authors.
Q3) The current rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
Q4) Under the current rate method,specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.
A)True
B)False
Q5) The temporal rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
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Chapter 11: Operating Exposure
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Q1) Which of the following is NOT an acceptable hedging technique to reduce risk caused by a relatively predictable long-term foreign currency inflow of Japanese yen?
A)Import raw materials from Japan denominated in yen to substitute for domestic suppliers.
B)Pay suppliers from other countries in yen.
C)Import raw materials from Japan denominated in dollars.
D)Acquire debt denominated in yen.
Q2) After being introduced in the 1980s,currency swaps have gained increasing importance as financial derivative instruments.
A)True
B)False
Q3) Which of the following is NOT one of the commonly employed financial policies used to manage operating and transaction exposure?
A)use of natural hedges by matching currency cash flows
B)back-to-back or parallel loans
C)currency swaps
D)All of the above are commonly used financial policies for managing operating exposure.
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Chapter 12: The Global Cost and Availability of Capital
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Q1) The weighted average cost of capital (WACC)is
A)the required rate of return for all of a firm's capital investment projects.
B)the required rate of return for a firm's average risk projects.
C)not applicable for use by MNE.
D)equal to 13%.
Q2) If a firm's expected returns are more volatile than the expected return for the market portfolio,it will have a beta less than 1.0.
A)True
B)False
Q3) The after-tax cost of debt is found by
A)dividing the before-tax cost of debt by (1 - the corporate tax rate).
B)subtracting (1 - the corporate tax rate)from the before-tax cost of debt.
C)multiplying the before-tax cost of debt by (1 - the corporate tax rate).
D)subtracting the corporate tax rate from the before-tax cost of debt.
Q4) What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?
Q5) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
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Chapter 13: Sourcing Equity and Debt Globally
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Q1) Level ________ is the easiest standard to satisfy for issuing ADRs.
A)144a
B)III
C)II
D)I
Q2) If a MNE needed to obtain,outside of its domestic market,medium-term credit with an established secondary market it would most likely pursue ________.
A)international bank loans
B)syndicated credits
C)some type of euronote
D)the international bond market
Q3) An unsponsored ADR may be initiated without the approval of the foreign firm with the underlying stock.
A)True
B)False
Q4) By cross-listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish one or more objectives.List and briefly explain each of the five objectives identified by your authors.
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Chapter 14: Multinational Tax Management
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Q1) Which of the following is NOT a disadvantage of the value-added tax?
A)The tax may have an inflationary impact.
B)It is a regressive tax.
C)It increases the total tax burden.
D)All are disadvantages.
Q2) Some countries assess extremely low corporate income tax rates on foreign source income in order to
A)attract tax haven affiliates of foreign multinationals.
B)boost the value of their domestic currency.
C)support higher taxes of their domestic companies.
D)none of the above.
Q3) The territorial approach to taxation policy is also termed the ________ approach. A)source
B)ethical
C)greedy
D)location
Q4) Explain the worldwide and territorial approaches of national taxation.The authors state that the United States uses both approaches.How can this be? Give an example of each taxation approach.
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Chapter 15: Foreign Direct Investment and Political Risk
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Q1) A country can react to the potential for blocked funds prior to making an investment,during operations,or by investing in the local country in assets than maintain their value.
A)True
B)False
Q2) ________,also known as micro risks,are political risks that affect the MNE at the project and corporate level but do not originate at the country level.
A)Firm-specific risks
B)Country-specific risks
C)Global-specific risks
D)Transfer risks
Q3) The L in OLI refers to an advantage in a firm's home market that is a A)liability in the domestic market.
B)location-specific advantage.
C)longevity in a particular market.
D)none of the above.
Q4) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
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Chapter 16: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Refer to Instruction 16.1.In euros,what is the NPV of the Wheel Deal expansion?
A)euro 1,524,690
B)$1,611,317
C)-euro 75,310
D)-euro 111,317
Q2) When dealing with international capital budgeting projects,the value of the project is NOT sensitive to the firm's cost of capital.
A)True
B)False
Q3) What is project financing and what are the factors critical to its success?
Q4) What is real option analysis? How does it differ from the discounted cash flow approach to project evaluation? Why do some decision-makers prefer the real option approach over the DCF approach?
Q5) Capital budgeting typically requires some type of sensitivity analysis.In the case of international capital budgeting from the project perspective,analysts consider political risk,foreign exchange risk and foreign exchange risk.Identify and discuss the important aspects of these two types of risk considerations.
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Chapter 17: International Portfolio Theory and Diversification
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Q1) The maximum benefits of portfolio construction are obtained when the correlation between assets is ________.
A)-1.0
B)0.0
C)+1.0
D)none of the above
Q2) The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier
A)down and to the left.
B)up and to the right.
C)up and to the left.
D)down and to the right.
Q3) Refer to Table 17.1.What is the value of the Treynor Measure for the Netherlands?
A)0.197
B)0.0109
C)Either A or B
D)Neither A nor B
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Chapter 18: Working Capital Management
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Q1) ________ are compensation for the use of intellectual property belonging to some other party.
A)Royalty fees
B)License fees
C)Remittance fees
D)Repositioning fees
Q2) Refer to Instruction 18.1.What is the amount of money SureDrip will save on accounts payable if they accept the discount?
A)$400,000
B)$8,000
C)$33,333
D)$20,000
Q3) Refer to Table 18.1.NWC currently makes up what percentage of total firm value for Polaris?
A)6.6%
B)5.1%
C)11.8%
D)9.2%
Q4) What are the advantages to the parent firm of unbundling the remittance of profits?
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Chapter 19: International Trade Finance
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Q1) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years.However,the firms have communicated regularly since the last sale three years ago.This is an example of an A)unaffiliated known party transaction.
B)unaffiliated unknown party transaction.
C)affiliated party transaction.
D)none of the above.
Q2) Refer to Instruction 19.1.What is the size of the commission Jackson Automotive will pay the bank for the banker's acceptance?
A)$7,000
B)$5,000
C)$12,000
D)$14,000
Q3) The major advantage to the exporter of a letter of credit is that the exporter does not receive any funds until the documents have arrived at a local port or airfield.
A)True
B)False
Q4) What is the trade dilemma and how is the dilemma generally solved?
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