Managing Multinational Corporations
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Course Introduction
This course delves into the complexities of managing multinational corporations (MNCs) in a globalized business environment. Students will explore strategic, organizational, and cultural challenges that arise when operating across diverse markets and legal systems. Topics include international entry strategies, cross-border mergers and acquisitions, global supply chain management, leadership in multicultural contexts, risk analysis, and ethical considerations. Through case studies and practical examples, students will develop the critical skills needed to navigate the dynamic environment facing todays global managers.
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International Financial Management 6th Edition by
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Page 2
Cheol S. Eun Bruce G. Resnick
Chapter 1: Globalization and the Multinational Firm
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Q1) A corporation that can source its products in one country,sell them in another country,and raise the funds in a third country
A)is a multinational corporation.
B)is a domestic firm if all of the shareholders are from the same country.
C)enjoys a built-in hedge against exchange rate risk.
D)enjoys a built-in hedge against political risk.
Answer: A
Q2) Japan has experienced large trade surpluses.Japanese investors have responded to this by
A)liquidating their positions in stocks to buy dollar denominated bonds.
B)investing heavily in U.S.and other foreign financial markets.
C)lobbying the U.S.government to depreciate its currency.
D)lobbying the Japanese government to allow the yen to appreciate.
Answer: B
Q3) What is the relative price of a gun in terms of butter in North Carolina?
A)1 gun costs 3 butters
B)3 guns cost 1 butter
C)1 gun costs 2 butters
D)2 gun costs 1 butter
Answer: A
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Chapter 2: International Monetary System
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Q1) Suppose that Britain pegs the pound to gold at six pounds per ounce,whereas the exchange rate between pounds and U.S.dollars is $5 = £1.What should an ounce of gold be worth in U.S.dollars?
A)$29.40
B)$30.00
C)$0.83
D)$1.20
Answer: B
Q2) The Mexican peso crisis is significant in that
A)it is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital.
B)selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system.
C)it provides a cautionary tale that as the world's financial markets are becoming more integrated, this type of contagious financial crisis is likely to occur more often.
D)all of the above.
Answer: D
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Chapter 3: Balance of Payments
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Q1) Invisible trade refers to
A)services that avoid tax payments.
B)the underground economy.
C)legal, consulting, and engineering services.
D)tourist expenditures, only.
Answer: C
Q2) The difference between Foreign Direct Investment and Portfolio Investment is that
A)Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.
B)Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds.
C)Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.
D)All of the above
Answer: A
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Chapter 4: Corporate Governance Around the World
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Q1) The major components of the Sarbanes-Oxley Act include all of the following except
A)accounting regulation-The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients.
B)audit committee-the company should appoint independent "financial experts" to its audit committee.
C)shareholder voting rights reform-"one share one vote" is now the law of the land.
D)executive responsibility-CEOs and CFOs must sign off on the company's financial statements.
Q2) If an incentive contract specifies certain accounting performance
A)that accounting number will likely be the focus of managers.
B)managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth.
C)managers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized.
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Chapter 5: The Market for Foreign Exchange
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Q1) Relative to the spot price the forward price will be
A)usually less than the spot price.
B)usually more than the spot price.
C)usually equal to the spot price.
D)usually less than or more than the spot price more often than it is equal to the spot price.
Q2) Indirect exchange rate quotations from the U.S.perspective are
A)the price of one unit of the foreign currency in terms of the U.S.dollar.
B)the price of one U.S.dollar in the foreign currency.
Q3) Spot foreign exchange trading
A)accounts for about 5 percent of all foreign exchange trading.
B)accounts for about 20 percent of all foreign exchange trading.
C)accounts for about 33 percent of all foreign exchange trading.
D)accounts for about 70 percent of all foreign exchange trading.
Q4) At the wholesale level
A)most trading takes place OTC between individuals on the floor of the exchange.
B)most trading takes place over the phone.
C)most trading flows over Reuters and EBS platforms.
D)most trading flows through specialized "broking" firms.
Q5) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/ and the one-year forward exchange rate,is $1.16/ .Assume that an arbitrageur can borrow up to $1,000,000.
A)This is an example where interest rate parity holds.
B)This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C)This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D)None of the above
Q2) If a foreign county experiences a hyperinflation,
A)its currency will depreciate against stable currencies.
B)its currency may appreciate against stable currencies.
C)its currency may be unaffected-it's difficult to say.
D)none of the above
Q3) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward ASK exchange rate in $ per that that satisfies IRP from the perspective of a customer.
Q4) If you borrowed 1,000,000 for one year,how much money would you owe at maturity?
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) The Black-Scholes option pricing formulae
A)are used widely in practice, especially by international banks in trading OTC options.
B)are not widely used outside of the academic world.
C)work well enough, but are not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor.
D)none of the above
Q2) If you think that the dollar is going to appreciate against the euro,you should
A)buy put options on the euro.
B)sell call options on the euro.
C)buy call options on the euro.
D)none of the above
Q3) Find the value today of your replicating today portfolio in euro.
Q4) Find the risk neutral probability of an "up" move.
Q5) Draw the tree.
Q6) Most exchange traded currency options
A)mature every month, with daily resettlement.
B)have original maturities of 1, 2, and 3 years.
C)have original maturities of 3, 6, 9, and 12 months.
D)mature every month, without daily resettlement.
Page 9
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Chapter 8: Management of Transaction Exposure
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Q1) Suppose that $2 = £1,$1.60 = 1,and the cross exchange rate is 1.25 = £1.00.If you own a call option on £10,000 with a strike price of $1.50,you would exercise this option at maturity if
A)the $/£ exchange rate is at least $1.60/£.
B)the $/ exchange rate is at least $1.60/ .
C)the /£ exchange rate is at least 1.25/£.
D)none of the above
Q2) Which of the following options strategies are internally consistent?
A)Sell puts and buy calls
B)Buy puts and sell calls
C)Buy puts and buy calls
D)Both a) and b)
Q3) An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of A)paying or collecting early.
B)paying or collecting late.
C)paying late, collecting early.
D)paying early, collecting late.
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Chapter 9: Management of Economic Exposure
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Q1) Consider a U.S.-based MNC with a wholly-owned French subsidiary.Following a depreciation of the dollar against the euro,which of the following best describes the mechanism of any effect of the depreciation?
A)The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product.
B)A given operating cash flow in euro will be translated to a higher U.S.dollar cash flow regardless of the firm's hedging program.
C)Both a) and b)
D)None of the above
Q2) A purely domestic firm that sources and sells only domestically,
A)faces exchange rate risk to the extent that it has international competitors in the domestic market.
B)faces no exchange rate risk.
C)should never hedge since this could actually increase its currency exposure.
D)both b) and c)
Q3) Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.
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Chapter 10: Management of Translation Exposure
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Q1) The source of translation exposure
A)is a mismatch of net assets and net liabilities denominated in the same currency.
B)is a mismatch of net assets and net liabilities denominated in different currencies.
C)is a mismatch of current assets and current liabilities denominated in different currencies.
D)none of the above
Q2) A translation exposure report shows,for each account that is included in the consolidated balance sheet,
A)the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest.
B)the amount of foreign exchange exposure that exists on a net basis for the firm.
C)the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure.
D)none of the above
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Chapter 11: International Banking and Money Market
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Q1) One enduring truth of banking is that
A)for some reason, bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay.
B)credit ratings work, but only in the aggregate.
C)when liquidity dries up, bankers are typically able to ride out the storm by buying up other investors debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge profit.
D)none of the above
Q2) With regard to creating money,
A)only central banks such as the Federal Reserve can create money.
B)money is created when a bank customer invests in a time deposit.
C)commercial banks can create money when a bank lends out funds borrowed from another customer who invested in a time deposit.
D)none of the above
Q3) Eurodollars refers to dollar deposits when the depository bank is located in A)Europe.
B)Europe, and the Caribbean.
C)Outside the United States.
D)United States.
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Chapter 12: International Bond Market
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Q1) Standard & Poor's has for years provided credit ratings on international bonds.
A)The ratings reflect the safety of principal for a U.S.investor.
B)Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty.
C)Their ratings reflect creditworthiness of the lender and predict the exchange rate expected to prevail at maturity.
D)The ratings are biased since 40 percent of Eurobond issues are rated AAA and 30 percent are AA.
Q2) U.S.security regulations require Yankee bonds and U.S.corporate bonds sold to U.S.citizens to be
A)municipal bonds.
B)registered bonds.
C)bearer bonds.
D)none of the above
Q3) "Investment grade" ratings are in the following categories:
A)Moody's: AAA to BBB - S&P's: Aaa to Baa
B)Moody's: Aaa to Baa - S&P's: AAA to BBB
C)Moody's: AAA to A - S&P's: Aaa to A
D)Moody's: Aaa to A - S&P's: AAA to A
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Chapter 13: International Equity Markets
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Q1) The secondary equity markets of the world serve two major purposes.They provide
A)marketability and share valuation.
B)liquidity and price support.
C)price discovery and arbitrage.
D)safety and stability.
Q2) Generally,the higher the turnover ratio,
A)the less liquid the secondary stock market, indicating ease in trading.
B)the more liquid the secondary stock market, indicating ease in trading.
C)the more liquid the primary stock market, indicating ease in trading.
D)the more efficient the stock market is.
Q3) A "primary" stock market is
A)a big internationally-important market like the NYSE.
B)a market where corporations issue new shares to initial investors.
C)where brokers and market makers trade.
D)none of the above
Q4) Macroeconomic factors affecting international equity returns include
A)exchange rate changes.
B)interest rate differentials.
C)changes in inflationary expectations.
D)all of the above
Page 15
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.
Q2) Floating for floating currency swaps
A)the reference rates are different for the different currencies: e.g.dollar LIBOR versus euro LIBOR.
B)the reference rates can be the same but have different frequencies.
C)both a) and b)
D)none of the above
Q3) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q4) When an interest-only swap is established on an amortizing basis
A)the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
B)the debt service exchanges are the same each year, but the level of interest and principal changes as the loans amortize.
C)there is no such thing as an amortizing interest-only swap. D)none of the above
Q5) What would be the interest rate?
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Chapter 15: International Portfolio Investment
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Q1) Assume that the correlation of expected return between A and B is negative 1.Calculate the standard deviation of expected return of the portfolio in the last question.
Q2) The less correlated the securities in a portfolio,
A)the lower the portfolio risk.
B)the higher the portfolio risk.
C)the lower the unsystematic risk.
D)the higher the diversifiable risk.
Q3) Assume that you have invested $100,000 in British equities.When purchased the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively.At selling time,one year after purchase,they were £45 and £0.60/$1.00.If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00,the dollar rate of return would be:
A)-27.27%
B)-17.42%
C)28.00%
D)-9.09%
Q4) Find the Global Minimum Variance Portfolio.
Q5) Find the Global Minimum Variance Portfolio. With a correlation coefficient of negative one we know that the efficient
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Intangible assets are often hard to package and sell to foreigners
A)because they usually default on the contracts that they sign.
B)as a result, there is more FDI than there might otherwise be.
C)because property rights in intangible assets are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available.
D)both b) and c)
Q2) Also,MNCs often find it profitable to locate manufacturing/processing facilities near
A)the home office to exploit their assets in place.
B)the natural resources in order to save transportation costs.
C)their competitor's manufacturing plant to even out the playing field with regard to shipping costs.
D)none of the above
Q3) In evaluating political risk,experts focus their attention on a set of key factors such as
A)the host country's political/government system.
B)historical records of political parties and their relative strengths.
C)integration of the host country into the world political/economic system.
D)all of the above
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) One likely effect of a company or government instituting foreign equity ownership restrictions is
A)a decrease in domestic stock prices.
B)an increase in domestic stock prices.
C)a transfer of wealth from international shareholders to domestic shareholders.
D)none of the above
Q2) Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 5/6.
Q3) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of ½.
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Chapter 18: International Capital Budgeting
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Q1) What is the unlevered after-tax incremental cash flow for year 0?
A)-$3,660,000
B)-$5,100,000
C)-$4,000,000
D)-$4,010,000
E)None of the above
Q2) The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the firm's cost of equity capital?
A)33.33%
B)10.85%
C)13.12%
D)16.5%
E)None of the above
Q3) The "incremental" cash flows of a capital project is calculated by using:
A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)
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Chapter 19: Multinational Cash Management
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Q1) Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise.Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A)$50,000
B)$100,000
C)$125,000
D)$250,000
Q2) Using your results to the last question,use bilateral netting to simplify.
Q3) Cash management refers to
A)the decision to grant credit to customers or to remain "cash and carry".
B)the investment the firm has in transaction balances and precautionary balances.
C)a domestic firm's investment in foreign currency.
D)none of the above
Q4) Find the net cash flow in (out of)the Canadian affiliate.
A)$0 in or out
B)$20,000 out
C)$15,000 in
D)$30,000 out
E)None of the above
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Chapter 20: International Trade Finance
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Q1) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q2) Assume the time from acceptance to maturity on a $4,000,000 banker's acceptance is 180 days.Further assume that the importing bank's acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 6.0 percent.Calculate the amount the exporter will receive if he holds it to maturity.
A)$3,993,750
B)$3,999,375
C)$3,975,000
D)$3,009,375
Q3) If the market rate for 90-day B/As is 6.0 percent,calculate the amount the exporter will receive if he discounts the B/A with the importer's bank.
A)$2,945,625
B)$2,990,625
C)$3,000,000
D)$3,009,375
Q4) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Transfer pricing can have an effect on share value
A)to the extent that financial markets are inefficient.
B)to the extent that security analysts do not understand the transfer pricing strategy being used.
C)to the extent that third parties benefit from the transfer price.
D)both a) and b)
Q2) The territorial method of declaring a national tax jurisdiction is to
A)tax all income earned within the country by any taxpayer, domestic or foreign.
B)tax national residents of the country on their worldwide income no matter in which country it is earned.
C)also known as the residential method.
D)none of the above
Q3) An income tax is a direct tax
A)True
B)False
Q4) An overseas affiliate of a U.S.MNC can be organized
A)as a branch.
B)as a subsidiary.
C)both a) and b)
D)none of the above
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