Financial Management
Test Bank
Course Introduction
Financial Management is a foundational course that explores the essential principles and practices involved in the effective management of financial resources within an organization. The course covers key topics such as financial analysis, planning and forecasting, capital budgeting, risk and return assessment, cost of capital, and working capital management. Students learn how to make informed investment and financing decisions, manage corporate finances, and utilize financial tools and techniques to maximize shareholder value. Through practical examples and case studies, the course prepares students to critically analyze financial statements, develop financial strategies, and understand the impact of financial decisions on overall business performance.
Recommended Textbook
Multinational Business Finance 13th Edition by
David K. Eiteman
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20 Chapters
1145 Verified Questions
1145 Flashcards
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Chapter 1: Current Multinational Challenges and the Global Economy
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Sample Questions
Q1) Comparative advantage is one of the underlying principles driving the growth of global business.
A)True
B)False
Answer: True
Q2) A well-established, large U.S.-based MNE will probably NOT be able to overcome which of the following obstacles to maximizing firm value?
A)an open market place
B)high quality strategic management
C)access to capital
D)none of the above
Answer: D
Q3) Of the following, which would NOT be considered a way that government interferes with comparative advantage?
A)tariffs
B)managerial skills
C)quotas
D)other non-tariff restrictions
Answer: B
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Chapter 2: Corporate Ownership, Goals, and Governance
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Sample Questions
Q1) If share price rises from $12 to $15 per share, and pays a dividend of $1 per share, what was the rate of return to shareholders?
A)26.67%
B)-13.33%
C)33.33%
D)16.67%
Answer: C
Q2) Agency theory states that unsystematic risk can be eliminated through diversification.
A)True
B)False
Answer: False
Q3) Regarding comparative corporate governance regimes: Bank-based regimes characterized by government influence in bank lending and a lack of transparency is often found in countries such as Korea and Germany.
A)True
B)False
Answer: True
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Chapter 3: The International Monetary System
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Sample Questions
Q1) The International Monetary Fund (IMF):
A)in recent years has provided large loans to Russia, South Korea, and Brazil.
B)was created as a result of the Bretton Woods Agreement.
C)aids countries with balance of payment and exchange rate problems.
D)is all of the above.
Answer: D
Q2) Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods?
A)widely divergent national monetary and fiscal policies among member nations
B)differential rates of inflation across member nations
C)several unexpected economic shocks to member nations
D)all of the above
Answer: D
Q3) Which of the following is NOT an attribute of the "ideal" currency?
A)monetary independence
B)full financial integration
C)exchange rate stability
D)All are attributes of an ideal currency.
Answer: D
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Chapter 4: The Balance of Payments
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Sample Questions
Q1) In the United States and most developed countries, the current account and the combined financial/capital accounts tend to be inversely related in that when one is positive, the other tends to be negative.
A)True
B)False
Q2) When the world went to a system of floating exchange rates, the Balance of Payments became a relic of a system of fixed exchange rates and is no longer watched by serious economic groups.
A)True
B)False
Q3) Which of the following is NOT a part of the Current Account of BOP?
A)net export/import of goods
B)balance of trade
C)net portfolio investment
D)net export/import of services
Q4) For at least the last decade, the United States has consistently run a surplus in services trade income.
A)True
B)False
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Chapter 5: The Continuing Global Financial Crisis
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Sample Questions
Q1) ________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk.
A)Subordination
B)Credit enhancement
C)Derivation
D)Deregulation
Q2) Baring the (hopefully temporary setback of 2008)capital is more mobile today than ever before.
A)True
B)False
Q3) The member nations of the European Union have relative freedom to set their own fiscal policies EXCEPT for which of the following?
A)government spending
B)government taxation
C)government surpluses or deficits
D)government printing of the euro currency
Q4) What is TARP? Provide an argument for why TARP was necessary and successful.
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Chapter 6: The Foreign Exchange Theory and Markets
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Sample Questions
Q1) If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.
A)£0.699/$; £0.699/$
B)$0.699/£; £0.699/$
C)£1.43/£; £0.699/$
D)£0.699/$; $1.43/£
Q2) ________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.
A)Speculators and arbitrageurs
B)Foreign exchange brokers
C)Central banks
D)Treasuries
Q3) NDFs are traded and settled inside the country of the subject currency, and therefore are within the control of the country's government.
A)True
B)False
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Chapter 7: International Parity Conditions
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Sample Questions
Q1) Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively elastic demand.
A)True
B)False
Q2) Empirical studies show that the Fisher Effect works best for short-term securities.
A)True
B)False
Q3) COVERED interest arbitrage (CIA), is where investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates. The transaction is "covered," because the investor does not sell the higher yielding currency proceeds forward.
A)True
B)False
Q4) If a market basket of goods cost $100 is the US and 70 in France, then the PPP exchange rate would be $.70/ .
A)True
B)False
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Chapter 8: Foreign Currency Derivatives and Swaps
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Sample Questions
Q1) A call option whose exercise price exceeds the spot price is said to be:
A)in-the-money.
B)at-the-money.
C)out-of-the-money.
D)over-the-spot.
Q2) Historically, interest rate movements have shown less variability and greater stability than exchange rate movements.
A)True
B)False
Q3) The buyer of a long call option:
A)has a maximum loss equal to the premium paid.
B)has a gain equal to but opposite in sign to the writer of the option.
C)has an unlimited maximum gain potential.
D)all of the above
Q4) The main advantage(s)of over-the-counter foreign currency options over exchange traded options is (are):
A)expiration dates tailored to the needs of the client.
B)amounts that are tailor made.
C)client desired expiration dates.
D)all of the above
Page 10
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Sample Questions
Q1) In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.
A)True
B)False
Q2) The ________ provides a means to account for international cash flows in a standardized and systematic manner.
A)parity conditions
B)asset approach
C)balance of payments
D)International Fisher Effect
Q3) The ________ is the Argentine currency unit.
A)peso
B)dollar
C)real
D)peseta
Q4) The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.
A)True
B)False
11
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Chapter 10: Transaction Exposure
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Sample Questions
Q1) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False
Q2) Refer to Instruction 10.2. What is the cost of a call option hedge for CVT's euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.)
A)$57,600
B)$59,904
C)$62,208
D)$63,936
Q3) Which of the following is cited as a good reason for NOT hedging currency exposures?
A)Shareholders are more capable of diversifying risk than management.
B)Currency risk management through hedging does not increase expected cash flows.
C)Hedging activities are often of greater benefit to management than to shareholders.
D)All of the above are cited as reasons NOT to hedge.
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Chapter 11: Translation Exposure
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Sample Questions
Q1) Generally speaking, translation methods by country define the translation process as a function of what two factors?
A)size; location
B)a firm's functional currency; location
C)location; foreign subsidiary independence
D)foreign subsidiary independence; a firm's functional currency
Q2) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars:
A)translation is accomplished through the current rate method.
B)translation is accomplished through the temporal method.
C)translation is not required.
D)the translation method to be used is not obvious.
Q3) If management anticipates an appreciation of the foreign currency, it should decrease net exposed assets to benefit from a gain.
A)True
B)False
Q4) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
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Chapter 12: Operating Exposure
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Sample Questions
Q1) A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.
A)matched flow
B)currency swap
C)back-to-back loan
D)none of the above
Q2) Which of the following is NOT an example of diversifying operations?
A)diversifying sales
B)diversifying location of operations
C)raising funds in more than one country
D)sourcing raw materials in more than one country
Q3) If a firm diversifies its financing sources, it will be pre-positioned to take advantage of temporary deviations from the International Fisher Effect.
A)True
B)False
Q4) Currency swaps are exclusively for periods of time under one year.
A)True
B)False
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Chapter 13: The Global Cost and Availability of Capital
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Sample Questions
Q1) Which of the following is NOT a portfolio diversification technique used by portfolio managers?
A)diversify by type of security
B)diversify by the size of capitalization of the securities held
C)diversify by country
D)All of the above are diversification techniques.
Q2) Capital market imperfections leading to financial market segmentation include:
A)asymmetric information between domestic and foreign-based investors.
B)high securities transaction costs.
C)foreign exchange risks.
D)all of the above
Q3) Which of the following will NOT affect a firm's beta?
A)the choice of the market portfolio against which to compare the variability of a firm's returns
B)the choice of the risk-free security
C)the choice of the time period used to calculate the firm's beta
D)None of the above, because each of them affects the calculation of a firm's beta.
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Chapter 14: Raising Equity and Debt Globally
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Sample Questions
Q1) What are the two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Explain which school of thought you hold to and why.
Q2) Level ________ is the easiest standard to satisfy for issuing ADRs.
A)144a
B)III
C)II
D)I
Q3) By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to accomplish which of the following?
A)improve the liquidity of its existing shares
B)increase its share price
C)increase the firm's visibility
D)all of the above
Q4) Investment banking services include which of the following?
A)advising when a security should be cross-listed
B)preparation of stock prospectuses
C)help to determine the price of the issue
D)all of the above
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Chapter 15: Multinational Tax Management
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Sample Questions
Q1) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
A)True
B)False
Q2) Bacon Signs Inc. is based in a country with a territorial approach to taxation but generates 100% of its income in a country with a worldwide approach to taxation. The tax rate in the country of incorporation is 25%, and the tax rate in the country where they earn their income is 50%. In theory, and barring any special provisions in the tax codes of either country, Bacon should pay taxes at a rate of:
A)75%.
B)62.5%.
C)0%.
D)50%.
Q3) Among the G7 nations, the U.S. has a below average corporate income tax rate that makes it attractive for other countries to invest in the U.S.
A)True
B)False
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Chapter 16: International Portfolio Theory and Diversification
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Sample Questions
Q1) An internationally diversified portfolio:
A)should result in a portfolio with a lower beta than a purely domestic portfolio.
B)has the same overall risk shape as a purely domestic portfolio.
C)is only about 12% as risky as the typical individual stock.
D)all of the above
Q2) If the addition of a foreign security to the portfolio of the investor aids in the reduction of risk for a given level of return, then the security adds value to the portfolio.
A)True
B)False
Q3) In some respects, internationally diversified portfolios are different from a domestic portfolio because:
A)investors may also acquire foreign exchange risk.
B)international portfolio diversification increases expected return but does not decrease risk.
C)investors must leave the country to acquire foreign securities.
D)all of the above
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18
Chapter 17: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.
A)licensing
B)joint ventures
C)foreign direct investment
D)strategic alliances
Q2) Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk.
A)firm-specific
B)country-specific
C)global-specific
D)cultural-specific
Q3) A/An ________ would be an example of an internalization advantage for an MNE.
A)patent
B)economy of scale
C)unique source of raw materials
D)possession of proprietary information
Q4) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Sample Questions
Q1) Which of the following is NOT an example of political risk?
A)Expropriation of cash flows by a foreign government.
B)The U.S. government restricts trade with a foreign country where your firm has investments.
C)The foreign government nationalizes all foreign-owned assets.
D)All of the above are examples of political risk.
Q2) For purposes of international capital budgeting, which of the following statements is NOT true?
A)Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows.
B)Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value.
C)An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent.
D)All of the above are true statements.
Q3) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
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Page 20
Chapter 19: Working Capital Management
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Sample Questions
Q1) Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:
A)accounts receivable are so much longer than accounts payable.
B)accounts payable are so much longer than accounts receivable.
C)accounts receivable and accounts payable are equal.
D)This doesn't really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.
Q2) The proper order of events for the operating cycle is:
A)input serving period, accounts receivable period, inventory period, quotation period.
B)quotation period, accounts receivable period, inventory period, input servicing period.
C)quotation period, input servicing period, inventory period, accounts receivable period.
D)accounts receivable period, input servicing period, quotation period, inventory period.
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Chapter 20: International Trade Finance
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Sample Questions
Q1) The draft is the instrument normally used in international commerce to:
A)transfer product.
B)prove ownership.
C)transfer title.
D)initiate the sale.
Q2) The person or company initiating the draft or bill of exchange is known as the:
A)maker.
B)drawer.
C)originator.
D)any of the above
Q3) The Export-Import Bank is an independent agency of the U.S. government established in 1934 to:
A)ship money abroad.
B)import agricultural products during the recession.
C)facilitate and stimulate foreign trade of the United States.
D)none of the above
Q4) If a foreign exchange transaction calls for payment in the importer's currency, the exporter has the foreign exchange risk.
A)True
B)False
Page 22
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