Financial Management of Multinational Corporations Practice Questions
Course Introduction
This course explores the financial management practices and strategies employed by multinational corporations operating in a globalized economy. It covers essential topics such as foreign exchange risk, international capital budgeting, global financing and investment decisions, and the impact of foreign direct investment. Students will analyze the complexities of cross-border cash flows, international financial markets, and global tax environments, developing a comprehensive understanding of how multinational firms optimize value while navigating regulatory, economic, and political challenges internationally.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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21 Chapters
1584 Verified Questions
1584 Flashcards
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs
A)True
B)False
Answer: False
Q2) The theory of comparative advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.
A)True
B)False
Answer: False
Q3) A centralized management style for an MNC results in relatively high agency costs.
A)True
B)False
Answer: False
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) According to the text, international trade (exports plus imports combined) as a percentage of GDP is:
A)higher in the United States than in European countries.
B)lower in the United States than in European countries.
C)higher in the United States than in about half the European countries, and lower in the United States than in the others.
D)about the same in the United States as in European countries.
Answer: B
Q2) Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.
A)low; small
B)high; small
C)low; large
D)high; large
Answer: C
Q3) A balance-of-trade deficit indicates an excess of imports over exports.
A)True
B)False
Answer: True
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Page 4
Chapter 3: International Financial Markets
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Sample Questions
Q1) The LIBOR varies among currencies because the market supply of and the demand for funds vary among currencies.
A)True
B)False
Answer: True
Q2) If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.
A)True
B)False
Answer: False
Q3) The forward rate is the exchange rate used for immediate exchange of currencies. A)True
B)False
Answer: False
Q4) At any given point in time, a bank's bid quote will be greater than its ask quote. A)True
B)False
Answer: False
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.
A)increase; increase; increase
B)decrease; increase; decrease
C)remain unchanged; increase; decrease
D)remain unchanged; increase; increase
Q2) Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.
A)True
B)False
Q3) Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects:
A)an increased demand for British pounds.
B)a decrease in the demand for British pounds.
C)an increase in the supply of British pounds for sale.
D)a decrease in the supply of British pounds for sale.
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?
A)no; -$0.01.
B)yes; $0.01.
C)yes; -$0.01.
D)yes; $0.03.
Q2) A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.
A)True
B)False
Q3) The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
A)True
B)False
Q2) Which of the following is the most likely reason for revaluation of a currency?
A)To reduce inflation.
B)To stimulate the local economy.
C)To increase the amount of exports.
D)To increase balance-of-trade surplus.
Q3) A "dirty" float represents a system of:
A)freely floating exchange rates.
B)fixed exchange rates.
C)floating exchange rates, but the central bank can manipulate the currency.
D)fixed exchange rates, but the central bank can manipulate the currency.
Q4) The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?
A)Spot rate of peso increases; forward rate of peso decreases.
B)Spot rate of peso decreases; forward rate of peso increases.
C)Spot rate of peso decreases; forward rate of peso decreases.
D)Spot rate of peso increases; forward rate of peso increases.
Q2) Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies
A)forward realignment arbitrage
B)triangular arbitrage
C)covered interest arbitrage
D)locational arbitrage
Q3) Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations
A)True
B)False
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) The international Fisher effect (IFE) suggests that the foreign currency will appreciate when:
A)the current home nominal interest rate exceeds the current foreign nominal interest rate.
B)the current home real interest rate exceeds the current foreign real interest rate.
C)the current home inflation rate exceeds the current foreign nominal interest rate. D)the current foreign inflation rate exceeds the current home inflation rate.
Q2) Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?
A)8 percent
B)5 percent
C)3 percent
D)2.78 percent
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10
Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) If a foreign currency is expected to ____ substantially against the parent's currency, the parent may prefer to ____ the remittance of subsidiary earnings.
A)weaken; delay
B)weaken; expedite
C)appreciate; expedite
D)none of the above
Q2) Which of the following forecasting techniques would be most likely to use today's spot exchange rate of the euro to forecast the euro's future exchange rate?
A)fundamental forecasting
B)market-based forecasting
C)technical forecasting
D)mixed forecasting
Q3) Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.
A)True
B)False
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11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A)5.13 percent.
B)2.63 percent.
C)4.33 percent.
D)5.55 percent.
Q2) The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on:
A)the expected percentage change in the currency for the next day.
B)the standard deviation of the daily percentage changes in the currency over a previous period.
C)the current level of interest rates.
D)the confidence level used.
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Page 12
Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.
A)True
B)False
Q2) The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
A)True
B)False
Q3) Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.
A)True
B)False
Q4) If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
A)True
B)False
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13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
A)True
B)False
Q2) Tennessee Co. conducts business in the United States and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are expected to be $200,000. To reduce the sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:
A)purchase Canadian supplies
B)increase its borrowings in United States.
C)decrease prices on Canadian goods.
D)decrease its borrowed funds in Canada.
Q3) Managing economic exposure is generally perceived to be ____ managing transaction exposure.
A)more difficult than B)less difficult than C)just as difficult as D)none of the above
Page 14
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in Western Europe.
A)True
B)False
Q2) According to the text, a firm may be able to achieve a "more efficient" project portfolio if it:
A)focuses solely on one product.
B)focuses solely on one location to market what it produces.
C)A and B
D)none of the above
Q3) To fully benefit from use of foreign raw materials:
A)establish a subsidiary in a market where raw materials are cheap and accessible.
B)sell the finished product to countries where the raw materials are more expensive.
C)establish a subsidiary in a new market that can sell products produces elsewhere.
D)A and B
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:
A)the taxes are the same as in the United States.
B)there are no blocked fund restrictions.
C)the currency of the host country is expected to depreciate consistently.
D)none of the above; a discrepancy is not possible.
Q2) Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.
A)True
B)False
Q3) Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent?
A)-$17,602.62
B)$8,000,000
C)$1,048,829
D)$645,147
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very high and is expected to decrease over time.
A)True
B)False
Q2) If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
A)True
B)False
Q3) A foreign target's expected future cash flows generally vary among different MNCs valuing the target.
A)True
B)False
Q4) The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted funds from the target.
A)True B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) Country risk analysis is important because it:
A)focuses on whether to hedge contractual transactions.
B)focuses on the competitor firms in the industry.
C)can be used to improve the analysis used to make long-term investing decisions.
D)all of the above
Q2) A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.
A)True
B)False
Q3) If a foreign country's consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is to:
A)use a licensing arrangement with a local firm in that country.
B)enter into a joint venture in that country.
C)develop a subsidiary (under the U.S. name) that manufactures and sells products in that country.
D)develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.
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Page 18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
A)lower than its cost of equity.
B)higher than its cost of equity.
C)lower than the country's risk-free rate.
D)lower than its credit risk premium.
Q2) An argument for an MNC to have a debt-intensive capital structure is that:
A)it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent.
B)it can reduce the chance of bankruptcy.
C)it spreads the shareholder base.
D)it forces subsidiaries to pay dividends to shareholders.
Q3) If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.
A)True
B)False
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Page 19
Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) Lantana Co. pays for many imports denominated in Canadian dollars. It is a major exporter to France and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in:
A)U.S. dollars.
B)euros.
C)Canadian dollars
D)none of the above
Q2) If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.
A)appreciates; increase
B)depreciates; decrease
C)appreciates; decrease
D)depreciates; increase
E)A and B
Q3) Floating-rate bonds are oFten issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
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Page 20
Chapter 19: Financing International Trade
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Sample Questions
Q1) In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping documents and the collection of payment.
A)True
B)False
Q2) Which of the following is a reason why commercial banks may facilitate international trade?
A)The exporter may not wish to accept the credit risk of the importer.
B)The government may impose foreign exchange controls that prevent payment by the importer to the exporter.
C)The exporter may need financing until payment for the products is received.
D)All of the above
Q3) There is an active secondary market for banker's acceptances.
A)True
B)False
Q4) The risk to the exporter is highest with the ____ payment method.
A)prepayment
B)letter of credit
C)sight draft
D)open account
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) Assume that interest rate parity holds between the United States and Japan. The U.S. one-year interest rate is 7 percent, and Japan's one-year interest rate is 6 percent. What is the approximate effective financing rate of a one-year loan denominated in Japanese yen assuming that the MNC covered its exposure by purchasing yen one year forward?
A)6 Percent
B)7 Percent
C)1 Percent
D)cannot answer without more information
Q2) Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars.
A)depreciate; about 3.74 percent
B)appreciate; about 3.74 percent
C)appreciate; about 4.53 percent
D)depreciate; about 4.53 percent
Q3) The interest rate of Euronotes is based on the T-bill rate.
A)True
B)False
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Page 22
Chapter 21: International Cash Management
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Sample Questions
Q1) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True
B)False
Q2) Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:
A)negative.
B)zero.
C)positive, but less than the interest rate of their respective countries.
D)more than the interest rate of their respective countries.
Q3) Refer to Exhibit 21-1 above. What is the probability that the yield of the two-currency portfolio is less than the domestic yield?
A).1575
B).35
C).6425
D)1
E)none of the above
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Page 23