International Business Finance
Mock Exam
Course Introduction
International Business Finance explores the principles and practices involved in financial management within multinational corporations and international markets. The course covers topics such as foreign exchange markets, international financial instruments, global risk management, international funding and investment decisions, and the impact of political, economic, and regulatory environments on cross-border financial operations. Students will learn to analyze financial statements in a global context, evaluate currency exposure, and develop strategies for financing and investing in various countries, preparing them to address the complexities of financial decision-making in an increasingly interconnected world.
Recommended Textbook Fundamentals of Multinational Finance 4th Edition by Michael
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Page 2
H. Moffett
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) The theory that suggests specialization by country can increase worldwide production is ________.
A)the theory of comparative advantage
B)the theory of foreign direct investment
C)the international Fisher effect
D)the theory of working capital management
Answer: A
Q3) Once established abroad,large MNEs internal information networks typically fail to help implement market opportunities compared to their purely domestic counterparts.
A)True
B)False
Answer: False
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Chapter 2: Financial Goals and Corporate Governance
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Q1) The shareholder wealth maximization model assumes as a universal truth that the market is efficient.
A)True
B)False
Answer: True
Q2) In finance,an efficient market is one in which
A)prices are assumed to be correct.
B)prices adjust quickly and accurately to new information.
C)prices are the best allocators of capital in the macro economy.
D)all of the above
Answer: D
Q3) Warren Buffett and his investment firm Berkshire Hathaway is an outstanding example of impatient capital investing.
A)True
B)False
Answer: False
Q4) Systematic risk can be eliminated through portfolio diversification.
A)True
B)False
Answer: False
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Chapter 3: The International Monetary System
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Q1) The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability,full financial integration,and monetary independence.If a country chooses to have a pure float exchange rate regime,which two of the three goals is a country most able to achieve?
A)monetary independence and exchange rate stability
B)exchange rate stability and full financial integration
C)full financial integration and monetary independence
D)A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
Answer: C
Q2) 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) The J-curve adjustment path for trade balance adjustments assumes that ________ products are predominantly priced in the domestic currency and that ________ products are predominantly priced in the foreign currency
A)import; import
B)import; export
C)export; export
D)export; import
Q2) The subcategory that typically dominates the current account is ________.
A)goods (merchandise)trade
B)services trade
C)income trade
D)transfer accounts
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
Q4) What is a country's balance of (merchandise)trade and why is it so widely reported in the financial and popular press?
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Chapter 5: Current Multinational Financial Challenges: the
Credit Crisis of 2007 - 2009
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Q1) The interbank market has historically operated ________.
A)without differentiating credit premiums among qualifying participating institutions
B)without discriminating by name for qualified participants.
C)as a "no-name" market
D)with all of the above characteristics
Q2) The central bank in most countries sets the rate it lends at,it does not dictate the rate at which banks lend either between themselves or to non-bank borrowers.
A)True
B)False
Q3) 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.
Q4) Most commodity prices rose in the first half of 2008 but then oil prices plummeted while other commodity prices continued to rise.
A)True
B)False
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Chapter 6: The Foreign Exchange Market
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Q1) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?
A)The transfer of purchasing power between countries.
B)Obtaining or providing credit for international trade transactions.
C)Minimizing the risks of exchange rate changes.
D)All of the above were identified as functions of the foreign exchange market.
Q2) Identify and explain the three functions of the foreign exchange market.
Q3) A spot transaction in the interbank market for foreign exchange would typically involve a two-day delay in the actual delivery of the currencies,while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait.
A)True
B)False
Q4) When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank,a triangular arbitrage opportunity exists.
A)True
B)False
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Chapter 7: International Parity Conditions
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Q1) The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world.The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore,the price should be the same.If a Big Mac costs $3.73 in the United States and 320 yen in Japan,what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?
A)$0.015/¥
B)87.2¥/$
C)$0.00012/¥
D)85.5¥/$
Q2) Empirical tests fail to conclusively demonstrate that PPP is an accurate predictor of future exchange rates.
A)True
B)False
Q3) If a market basket of goods cost $100 is the US and 70 euros in France,then the PPP exchange rate would be $.70/euro.
A)True
B)False
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Chapter 8: Foreign Currency Derivatives and Swaps
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Q1) Refer to Instruction 8.1.The risk of strategy #1 is that interest rates might go down or that your credit rating might improve.The risk of strategy #2 is (Assume your firm is borrowing money.)
A)that interest rates might go down or that your credit rating might improve.
B)that interest rates might go up or that your credit rating might improve.
C)that interest rates might go up or that your credit rating might get worse.
D)none of the above.
Q2) Refer to Instruction 8.1.After the fact,under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)
A)Your credit rating stayed the same and interest rates went up.
B)Your credit rating stayed the same and interest rates went down.
C)Your credit rating improved and interest rates went down.
D)Not enough information to make a judgment.
Q3) Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?
Q4) In option valuation,total value is equal to the intrinsic value plus the time value of the option.Define the latter two terms.
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Q1) Prior to July 2,1997,the Thai government
A)allowed the Thai Bhat to float against major currencies.
B)fixed the Bhat's value against the Korean won only.
C)fixed the Bhat's value against major currencies especially the U.S. dollar.
D)None of the above.
Q2) Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.
A)True
B)False
Q3) The more efficient the foreign exchange market is,the more likely it is that exchange rate movements are random walks.
A)True
B)False
Q4) The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
A)balance of payments
B)monetary
C)asset market
D)law of one price
11
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Chapter 10: Transaction and Translation Exposure
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Q1) Refer to Instruction 10.1.The cost of a call option to Plains States would be ________.
A)$17,653
B)$16,733
C)$18,471
D)There is not enough information to answer this question.
Q2) A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.05/£ the U.S.firm will realize a ________ of ________.
A)loss; $2000
B)gain; $2000
C)loss; £2000
D)gain; £2000
Q3) In efficient markets,interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same.
A)True
B)False
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Chapter 11: Operating Exposure
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Q1) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.
A)forward loan
B)currency hedge
C)counterparty
D)currency swap
Q2) The primary method by which a firm may protect itself against operating exposure impacts is
A)money market hedges.
B)diversification.
C)forward contract hedges.
D)balance sheet hedging.
Q3) Currency swaps are exclusively for periods of time under one year.
A)True
B)False
Q4) Swap agreements are treated as line items on the balance sheet via U.S.accounting methods.
A)True
B)False
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Chapter 12: The Global Cost and Availability of Capital
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Q1) Other things equal,an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing.
A)True
B)False
Q2) Which of the following is NOT a key variable in the weighted average cost of capital (WACC)equation?
A)the before-tax cost of debt
B)the risk-adjusted cost of equity
C)the beta of the market portfolio
D)the total market value of the firm's securities
Q3) According to your authors,diversifying cash flows internationally may help MNEs reduce the variability of cash flows because
A)of a lack of competition among international firms.
B)of an offset to cash flow variability caused by exchange rate variability.
C)returns are not perfectly correlated between countries.
D)none of the above.
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?
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Page 14
Chapter 13: Sourcing Equity and Debt Globally
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Q1) An MNE may cross list its shares on a foreign stock exchange so that it can
A)create a secondary market so that shares may be used to compensate top local managers.
B)create a secondary market so that shares can be used to acquire local firms.
C)increase the firm's visibility to its customers and employees.
D)accomplish all of the above.
Q2) Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary.Funding from sister subsidiaries are considered external funding.
A)True
B)False
Q3) Eurocredits are
A)bank loans to MNEs and others denominated in a currency other than that of the country where the bank is located.
B)typically variable rate and tied to the LIBOR.
C)usually for maturities of six months or less.
D)All of the above are true.
Q4) How does market segmentation impact the effect on share prices from cross-listing on foreign stock exchanges?
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Chapter 14: Multinational Tax Management
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Q1) The United States taxes all earnings on U.S.soil by both domestic and foreign firms.This is an example of a ________ approach to levying taxes.
A)worldwide
B)neutral
C)territorial
D)none of the above
Q2) The U.S.Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income.In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making,thus establishing a "guilty until proven innocent" tax approach.
A)True
B)False
Q3) All indications are that the value-added tax will soon be the dominant form of taxation in the U.S.
A)True
B)False
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Page 16
Chapter 15: Foreign Direct Investment and Political Risk
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Q1) ________ risks are those that affect the MNE at the local or project level,and originate at the country level.
A)Country-specific
B)Firm-specific
C)Global-specific
D)None of the above
Q2) The O in OLI refers to an advantage in a firm's home market that is ________.
A)operator independent
B)owner-specific
C)open-market
D)official designation
Q3) ________ is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm's assets.
A)Inconvertibility
B)Expropriation
C)Business income risk
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) When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?
A)the firm's weight of equity financing
B)the accumulated depreciation
C)the firm's weight of debt financing
D)All of the above are necessary to determine a firm's wacc.
Q2) It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.
A)True
B)False
Q3) 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?
Q4) Real option analysis treats cash flows in terms of future value in a negative sense,whereas DCF treats future cash flows positively.
A)True
B)False
Q5) What is project financing and what are the factors critical to its success?
Page 18
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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) A U.S.investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S.dollar by 8%.What is the investor's total return?
A)22.00%
B)23.12%
C)6.00%
D)4.88%
Q3) 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.
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Chapter 18: Working Capital Management
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Q1) The accounts payable period of the operating cycle
A)may be equal to the inventory period.
B)may run concurrently but shorter than the inventory period.
C)may run concurrently but longer than the inventory period.
D)any one of the above may be true.
Q2) Dividends are the most tax-efficient way to repatriate funds because they are distributed on an after-tax basis.
A)True
B)False
Q3) Increases to cash flows can be anticipated if which of the following occurs?
A)A receivables contract is denominated in an appreciating foreign currency.
B)Sales are less than anticipated.
C)Days in accounts receivable increase by 15 days.
D)None of the above.
Q4) An Edge Act corporation is a subsidiary of a U.S.bank located outside of the U.S.and incorporated to engage in international banking and financing operations.
A)True
B)False
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Page 20
Chapter 19: International Trade Finance
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Q1) The person or company to whom the draft or bill of exchange is addressed is the
A)drawee.
B)drawer.
C)maker.
D)originator.
Q2) An exporter has just received a banker's acceptance created by an international transaction.If the banker's acceptance has a face value of $250,000,current rates on banker's acceptances are 6%,and the bank charges a commission of 1% per annum,how much will the exporter receive if he sells the acceptance in the secondary market six months prior to maturity?
A)$250,000
B)$244,000
C)$242,500
D)$241,250
Q3) Explain what a letter of credit (L/C)is,who the principle parties are,what the principle advantage is,and how the L/C facilitates international trade.
Q4) What is the Import-Export Bank and how can it aid in export financing?
Q5) What is the trade dilemma and how is the dilemma generally solved?
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