International Corporate Finance
Study Guide Questions
Course Introduction
International Corporate Finance explores the financial management of multinational corporations and the challenges posed by operating in diverse economic and regulatory environments. The course covers topics such as foreign exchange markets, international capital budgeting, cross-border mergers and acquisitions, global financing strategies, risk management, and the impact of international taxation. Students will analyze case studies and real-world scenarios to understand how firms make investment and financing decisions on a global scale, manage currency risk, and adapt to financial market developments and international financial regulations.
Recommended Textbook
International Corporate Finance 1st Edition by J. Ashok Robin
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Page 2
Chapter 1: Introduction
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Q1) Countries generally believe that international trade has what affect on them?
A)It encourages the creation of new businesses which pay more taxes to the countries where they are created.
B)It improves the welfare of their citizens by creating jobs and allowing more variety in goods available.
C)It benefits developed countries the most because they have the most money to spend on international trade.
D)It benefits developing countries the most because they have the most to gain from international trade.
Answer: B
Q2) ______________________________ make(s)loading of ships easier and facilitates transfer of cargo from ships to others transportation.
A)Standardization of cargo
B)Containerization
C)Improvements in cargo handling equipment
D)Better trained stevedores
Answer: B
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Page 3
Chapter 2: International Financial Markets: Structure and Innovation
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Q1) Governments are involved in the foreign currency markets for two primary reasons:
A)because foreign currency can be used as a store of value and to manipulate the value of their own currency.
B)to protect against inflation and to control domestic interest rates.
C)so that they can take advantage of discrepancies in currency values in different markets and to protect the value of their currency.
D)to monitor the value of their currency and to control their balance of trade.
Answer: A
Q2) Most foreign exchange transactions are conducted:
A)through established stock markets such as NASDAQ.
B)over electronic networks like those maintained by Reuters or Bloomberg.
C)as a result of face-to-face negotiations.
D)in established exchange markets in the Middle East.
Answer: B
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4
Chapter 3: Currency and Eurocurrency Derivatives
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Q1) Real options can be described as:
A)similar to financial options but without the involvement of cash or currency.
B)options whose value is determined without reference to the inflation rate.
C)options that have actually been exercised.
D)business opportunities for firms to acquire assets that will increase their cash flow.
Answer: D
Q2) If a long counterparty has the right but not the option to buy the underlying asset but that right can only be exercised at the maturity date of the agreement,the agreement is a(n):
A)American-style option.
B)maturity option.
C)European-style option.
D)delayed option.
Answer: C
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Chapter 4: Currency Systems and Valuation
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Q1) A disadvantage of using a pegged currency system is that:
A)the country whose currency is pegged must decide on its own economic policies.
B)the country whose currency is pegged does not have the option of adopting economic policies different from those of the country to which the currency is pegged.
C)the cost of maintaining the peg is substantial and must be paid by those transacting business in the country whose currency is pegged.
D)international currency markets shun currency whose value is pegged to another currency.
Q2) In the 1960's the United States had a large balance of payments deficit due in large part to:
A)the fact that the USD fixed at 35 per ounce of gold was undervalued.
B)the fact that the USD fixed at 35 per ounce was overvalued.
C)the value of the USD relative to gold was fluctuating.
D)speculators buying and selling USD at rates other than the established rate of USD 35 per ounce of gold.
Q3) What is the difference between nominal and real rates of interest?
Q4) What economic justification is there for regional currencies such as the euro?
Q5) What was the classical gold standard and why is it not observed today?
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Chapter 5: Currency Parity Conditions
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Q1) In a covered interest arbitrage transaction,the borrowed currency is known as the ________________________ and the lent currency is known as the
A)target currency;funding currency
B)funding currency;target currency
C)funding currency;interest-bearing currency
D)swap currency;target currency
Q2) __________________________ say(s)that exchange rates should equalize prices of a basket of goods in two countries.
A)Purchasing Power Parity
B)Product market mechanics
C)Government regulations
D)Currency values
Q3) For MNCs,the discrepancies in the price of currencies that can occur on different markets:
A)means that MNCs have to shop carefully when they need to buy foreign currency.
B)allows MNCs to avoid losses arising out of currency transactions.
C)relieves MNCs from having to plan currency transactions carefully.
D)has allowed MNCs to become the largest speculators in currencies.
Q4) What is the law of one price?
Page 7
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Chapter 6: Currency Risk Exposure Measurement
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Q1) Changes in the value of currencies:
A)occur only in floating currency systems.
B)can occur in floating currency systems,in managed floating systems,and even in fixed systems.
C)occur only in floating and managed floating currency systems.
D)occur uniformly in all currency systems.
Q2) The standard deviation of a currency is:
A)plus or minus the average value of the currency over a specific period.
B)square root of the variance of the currency.
C)the average of squared deviations from the mean.
D)an average of the deviations from the currency.
Q3) The use of standard deviation as a measure of currency risk assumes that currency changes are independent.This means that:
A)a currency change is not related to the change in value of any other currency.
B)a currency change is not in the same percentage as the most recent currency change.
C)each currency change is unrelated to previous or subsequent currency changes.
D)each currency change occurs in a different time period than the prior currency change.
Q4) What is the difference between operating exposure and transaction exposure?
Page 8
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Chapter 7: Currency Exposure Management
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Q1) A potentially significant difference between using a forward hedge and a money market hedge is that the:
A)forward hedge is less risky.
B)money market hedge produces less cash flow.
C)forward hedge produces less cash flow.
D)money market hedge involves greater transaction costs.
Q2) For a US-based MNC to rely on invoice currency to reduce transaction exposure means that the firm:
A)will invoice its customers in terms of US dollars.
B)will invoice its customers in the home currency of each customer.
C)will increase its cost related to collection of amounts owed to it.
D)will not be concerned about the currency in which its receivables are expressed.
Q3) "On Balance Sheet Commitments" are:
A)items such as receivables that constitute a significant part of a firm's transaction exposure.
B)items such as inventory that is not involved in a firm's transaction exposure.
C)items in connection with which the firm has some liability.
D)obligations owed by a firm to another firm that depends on currency values at a particular time.
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Page 9
Chapter 8: Capital Budgeting
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Q1) What effect does the NPV of a project have on the value of the firm undertaking the project?
A)The firm's value increases or decreases by the NPV of the project.
B)The value of a firm is not affected by the NPV of the projects it undertakes.
C)The firm's value increases but cannot decrease because of the NPV of a project.
D)The firm's value increases by an amount equal to the NPV of a project times the firm's effective tax rate.
Q2) What is decentralization and what does it mean for MNCs?
Q3) In an NPV calculation,the final cash flow is typically the:
A)final payment on the investment in the assets used in the project.
B)proceeds from the sale of the last products produced by the project.
C)salvage value obtained by the firm by selling the remaining assets of the project.
D)tax credits that the firm earns through the investment in the project.
Q4) Two common organizational forms of foreign projects are:
A)joint ventures and outsourcing.
B)outsourcing and foreign branches of an MNC.
C)foreign subsidiaries of an MNC and outsourcing.
D)foreign branches of an MNC and foreign subsidiaries of an MNC.
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Page 10
Chapter 9: Advanced Capital Budgeting
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Q1) In valuing real options for international projects,one of the key factors is:
A)political risk.
B)economic risk.
C)currency volatility.
D)the discount rate.
Q2) What pre-planning can a firm do in anticipation that the demand for products produced by a project will not meet expectations?
A)The firm can wait until the demand is determined before committing to the project.
B)The firm can arrange for a buyer to buy the project in the event that demand is below expectations.
C)The firm can arrange to outsource components of the product and can use temporary labor that can be reduced quickly.
D)The firm can produce as expected despite the demand.
Q3) In an industry that requires high levels of human capital,the option to abandon:
A)has relatively little value.
B)is of the utmost importance.
C)has diminished value but the option is still very valuable.
D)has not value whatsoever.
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Chapter 10: Long-Term Financing
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Q1) Bank loans typically take the form of either:
A)debt or equity.
B)unsecured or secured loans.
C)installment or balloon loans.
D)term loans or lines-of-credit.
Q2) A __________________ is a bond that stipulates that coupon payments will be made in one specified currency and that the principal repayment will be made in another specified currency.
A)split-payment bond
B)multiple-currency bond
C)flexible-payment bond
D)dual-currency bond
Q3) MNCs might raise equity funds through an IPO or through a seasoned offering.What is the difference between an IPO and a seasoned offering?
Q4) The cost of debt to a firm is equivalent to:
A)the yield from the investors' perspective.
B)the firm's cost of capital.
C)the firm's tax rate.
D)the yield of its long-term debt.
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Chapter 11: Optimizing and Financing Working Capital
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Q1) The principle objective of a lockbox system is to:
A)ensure the safety of accounts receivable collections.
B)allow collected accounts receivable to earn interest while they are being processed.
C)reduce mailing and processing time for accounts receivable.
D)provide an accurate accounting of accounts receivable collections.
Q2) The most liquid of assets and a necessity for working capital transactions is:
A)marketable securities.
B)accounts receivable.
C)current assets.
D)cash.
Q3) What is the primary benefit that a firm can achieve by using multiple-currency financing?
A)It will lower cost of capital.
B)It provides new sources of capital.
C)It provides access to more capital markets.
D)It results in diversity and risk reduction.
Q4) In the context of cash management,what are opportunity costs?
Q5) What is the difference between ex ante and ex post financing costs,and what effects do these costs have on an MNC's financing strategy?
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Chapter 12: International Alliances and Acquisitions
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Q1) When an MNC merges with a firm that is in a related industry to the acquiring firm,the merger is called a:
A)horizontal merger.
B)equal-partner merger.
C)vertical merger.
D)downward merger.
Q2) Why is overcapacity sometimes a negative condition for a firm?
Q3) An important use of joint ventures in cross-border situations is:
A)to avoid double taxation.
B)to create a joint venture to take advantage of local financing or incentives.
C)to keep the investment by foreign entities in a country secret from officials in that country.
D)to avoid local remittance restrictions.
Q4) What is the difference between a vertical merger and a horizontal merger?
Q5) In valuing a target of a merger or acquisition,the WACC is used to:
A)discount free cash flow and salvage values.
B)value all assets of the target.
C)determine the political risk that the target faces.
D)determine the future value of the assets of the target.
Q6) How is outsourcing related to a firm's core competencies?
Page 14
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Chapter 13: International Trade
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Q1) What characteristics do open account arrangements and consignment arrangements have in common?
A)Both arrangements require the intervention of a third party to ensure that the arrangement is carried out on all sides.
B)Both arrangements are based on the assumption that the exchange rate between the importer's currency and the exporter's currency will not change.
C)Both arrangements require that the exporter rely on the importer's promise to pay for the goods at a specific time in the future.
D)Both arrangements rely on government guarantees to reduce counterparty risk.
Q2) What factors can reduce or eliminate the many of the risks that importer and exporters face in international transactions?
A)Counterparty knowledge and trust
B)Well drafted contracts and liquidated damage provisions
C)Security deposits and established collection policies
D)Limitations on credit sales and factoring
Q3) Describe the process by which a letter of credit is paid.
Q4) Explain the relationship between GATT and WTO.
Q5) Explain the process of documentary collections.
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Chapter 14: International Taxation and Accounting
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Q1) What does transfer pricing mean in the context of the operations of MNCs?
Q2) What approach to accounting reflects economic income better and appears to be more transparent?
A)Code law accounting
B)Historical accounting
C)Common law accounting
D)Pro forma accounting
Q3) How can MNCs use payments received from subsidiaries to reduce the overall tax burden of the MNC-subsidiary group?
Q4) If a country taxes entities within its taxing jurisdiction on all income wherever that income is earned,that country takes a ____________________ approach to taxation.
A)cross-border
B)international
C)world-wide
D)multi-national
Q5) How can MNCs benefit from using foreign tax credits?
Q6) How does the separate entity approach to taxation differ from the integrated system approach?
Q7) How does the concept of double taxation apply to MNCs?
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Chapter 15: International Portfolio Investments
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Q1) __________________________ is the term used to identify the propensity of investors to invest in ownership interests in firms rather than in other types of investments.
A)Ownership bias
B)Safe investing
C)Equity culture
D)International investing
Q2) One of the primary factors that discourages direct foreign equity investment is:
A)government regulation.
B)currency risk.
C)high transaction costs.
D)political risk.
Q3) The _________________________________ relies on a transparent accounting system that communicates financial information to stockholders and reduces informational asymmetry.
A)Anglo-Saxon model of corporate governance
B)European model of corporate governance
C)common law model of corporate governance
D)government regulation model of corporate governance
Q4) Compare open-end and closed-end mutual funds.
Page 17
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