Multinational Business Finance
Exam Review
Course Introduction
Multinational Business Finance explores the financial management practices of firms operating in an international environment. The course examines topics such as foreign exchange markets, international financial markets, currency risk management, international investment decisions, and cross-border financing strategies. Students will learn how global economic, political, and regulatory factors impact financial decisions, and develop an understanding of the complex risks and opportunities associated with conducting business across national borders. Emphasis is placed on practical tools for analyzing international projects, managing exchange rate exposure, and formulating strategies for value creation in multinational corporations.
Recommended Textbook
Multinational Business Finance 13th Edition by
David K. Eiteman
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20 Chapters
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Page 2
Chapter 1: Current Multinational Challenges and the Global Economy
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Sample Questions
Q1) 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
Q2) The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm.
A)rulers of sovereign states and unsavory customs officials
B)corporate insiders and attorneys
C)corporate insiders and rulers of sovereign states
D)attorneys and unsavory customs officials
Answer: C
Q3) Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporate Ownership, Goals, and Governance
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Q1) Under the Shareholder Wealth Maximization Model (SWM)of corporate governance, poor firm performance is likely to be faced with all but which of the following?
A)sale of shares by disgruntled current shareholders
B)shareholder activism to attempt a change in current management
C)as a maximum threat, initiation of a corporate takeover
D)prison time for executive management
Answer: D
Q2) The stakeholder capitalism model:
A)typically avoids the flaw of impatient capital.
B)tries to meet the desires of multiple stakeholders.
C)may leave management without a clear signal about tradeoffs among the several stakeholders.
D)all of the above
Answer: D
Q3) State Owned Enterprises (SOEs)by their very name cannot be traded on stock exchanges because they are government owned.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The International Monetary System
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Q1) According to the authors, what is the single most important mandate of the European Central Bank?
A)Promote international trade for countries within the European Union.
B)Price, in euros, all products for sale in the European Union.
C)Promote price stability within the European Union.
D)Establish an EMU trade surplus with the United States.
Answer: C
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) Today, the United States has been ejected from the International Monetary Fund for refusal to pay annual dues.
A)True
B)False
Answer: False
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Page 5
Chapter 4: The Balance of Payments
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Q1) Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curve adjustment path?
A)Imports become relatively more expensive.
B)Exports become relatively less expensive.
C)The balance of trade gets worse.
D)All of the above are true.
Q2) In 2010 the United States posted a current account deficit of -$471 billion. The bulk of the negative value came from:
A)a net transfer deficit.
B)an income balance deficit.
C)a goods trade deficit.
D)an income trade deficit.
Q3) Significant amounts of United States Treasury issues are purchased by foreign investors, therefore the U.S. must earn foreign currency to repay this debt.
A)True
B)False
Q4) The BOP must be in balance, but the current account need not be.
A)True
B)False
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Chapter 5: The Continuing Global Financial Crisis
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Q1) Which of the following statements concerning credit default swaps is FALSE?
A)As of year-end 2008, CDSs are completely outside of regulatory boundaries.
B)A CDS is a derivative security that may be used for hedging risk or for speculative purposes.
C)In order be a party to a CDO, at least one of either the buyer or seller must own the underlying asset.
D)CDSs allow banks to severe their links to their borrowers, thereby reducing their incentive to screen and monitor the ability of borrowers to repay.
Q2) Subprime mortgages did not exceed 8% of all outstanding mortgage obligations by 2007, but by the end of 2008 they were the source of 65% of bankruptcy filings by homeowners in the United States.
A)True
B)False
Q3) The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 explicitly allowed corporate combinations of commercial banks with other types of financial institutions such as insurance companies and investment banking firms.
A)True
B)False
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Chapter 6: The Foreign Exchange Theory and Markets
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Q1) A confusing "quirk" of international exchange rates occurs when calculating the percentage change in spot rates from one period to another. The percent change in the spot rate from one period to another when quoted using foreign currency terms is always greater than the percent changes quoted when using home currency terms.
A)True
B)False
Q2) Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.
A)£1.4484/$; $0.6904/£
B)$1.4481/£; £0.6906/$
C)$1.4484/£; £0.6904/$
D)£1.4487/$; $0.6903/£
Q3) Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.
A)True
B)False
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Chapter 7: International Parity Conditions
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Q1) In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and = the expected rate of inflation.
A)i = (r)( )
B)i = r + + (r)( )
C)i = r +
D)i = r + 2
Q2) The authors describe an application of uncovered interest arbitrage (UIA)known as "yen carry trade." Define UIA and describe the example of yen carry trade. Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy?
Q3) Empirical studies show that the Fisher Effect works best for short-term securities. A)True
B)False
Q4) The Fisher Effect is a familiar economic theory in the domestic market. In words, define the Fisher Effect and explain why you think it is also appropriately applied to international markets.
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Page 9
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) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:
A)buy a pound put option.
B)sell a pound put option.
C)buy a pound call option.
D)sell a pound call option.
Q3) A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:
A)pay fixed-rate interest and receive floating rate interest.
B)pay floating rate and receive fixed rate.
C)pay fixed rate and receive fixed rate.
D)pay floating rate and receive floating rate.
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Q1) Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
A)flows; stocks
B)stocks; flows
C)import; export
D)export; import
Q2) The asset market approach to forecasting is not applicable to emerging markets. A)True
B)False
Q3) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.
Q4) Indirect intervention for domestic currency valuation typically uses tools of monetary policy as opposed to using tools of fiscal policy.
A)True B)False
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Chapter 10: Transaction Exposure
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Questions
Q1) Currency risk management techniques include forward hedges, money market hedges, and option hedges. Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract. In your diagram, be sure to label the X and Y-axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/£, the price of the option is $0.04 the forward rate is $1.52/£ and the current spot rate is $1.48/£.)
Q2) ________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.
A)Operating
B)Transaction
C)Translation
D)Accounting
Q3) Although rarely acknowledged by the firms themselves, selective hedging is essentially speculation.
A)True
B)False
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Chapter 11: Translation Exposure
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Q1) If the European subsidiary of a U.S. firm has net exposed assets of 750,000, and the euro drops in value from $1.30/euro to $1.20/ the U.S. firm has a translation:
A)gain of $75,000.
B)loss of $75,000.
C)gain of $625,000.
D)loss of 576,923.
Q2) If the European subsidiary of a U.S. firm has net exposed assets of 200,000, and the euro increases in value from $1.22/ to $1.26/ the U.S. firm has a translation:
A)gain of $8,000.
B)loss of $8,000.
C)gain of $252,000.
D)loss of 252,000.
Q3) Under U.S. accounting and translation practices, use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."
A)True
B)False
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Chapter 12: Operating Exposure
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Q1) Operating cash flows may occur in different currencies and at different times, but financing cash flows may occur only in a single currency.
A)True
B)False
Q2) The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.
A)True
B)False
Q3) Diversifying the financing base means diversifying sales, location of production facilities, and raw material sources.
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 13: The Global Cost and Availability of Capital
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Q1) Empirical studies indicate that MNEs have a lower debt/capital ratio than domestic counterparts, indicating that MNEs have a lower cost of capital.
A)True
B)False
Q2) Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.
A)True
B)False
Q3) Firms acquire debt in either the form of loans from commercial banks, or by selling new common stock.
A)True
B)False
Q4) Empirical tests of market efficiency fail to show that most major national markets are reasonably efficient.
A)True
B)False
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Chapter 14: Raising Equity and Debt Globally
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Q1) Your authors note several empirical studies that have found:
A)no share price effect for foreign firms that cross-list on major U.S. exchanges.
B)a positive share price effect for foreign firms that cross-list on major U.S. exchanges.
C)a negative share price effect for foreign firms that cross-list on major U.S. exchanges.
D)none of the above
Q2) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/ at the time the loan was made to $1.45/ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?
A)$55,000
B)$79,750
C)$77,000
D)$37,931
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Chapter 15: Multinational Tax Management
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Q1) Refer to Instruction 15.1. If the U.S. has no bilateral trade agreement with the host country, what is the total amount of income taxes Green Valley Exporters will pay?
A)$25,000
B)$35,000
C)$51,250
D)$60,000
Q2) The territorial approach, also referred to as the source approach to tax policy, levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned (domestically or abroad).
A)True
B)False
Q3) The territorial approach to taxation policy is also termed the ________ approach.
A)source
B)ethical
C)greedy
D)location
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Chapter 16: International Portfolio Theory and Diversification
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Q1) Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of 57. What is the investor's average rate of return before converting the stock back into dollars?
A)5.0%
B)-3.0%
C)-5.0%
D)3.0%
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) Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of 57. What is the investor's average rate of return after converting the stock back into dollars?
A)-1.35%
B)5.0%
C)-5.0%
D)-7.24%
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Chapter 17: Foreign Direct Investment and Political Risk
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Q1) Which of the following is NOT an advantage to a joint venture?
A)Possible loss of opportunity to enter the foreign market with FDI later.
B)The local partner understands the customs and mores of the foreign market.
C)The local partner can provide competent management at many levels.
D)May be a realistic alternative when 100% foreign ownership is not allowed.
Q2) Banks are very hesitant to engage in fronting loans because of the low probability of repayment and thus their risk exposure up to a 100% loss.
A)True
B)False
Q3) ________ industries are NOT typically "protected" by government policy.
A)Textiles
B)Defense
C)Agriculture
D)"Infant" industries
Q4) Greenfield investments are typically ________ and ________ than cross-border acquisition.
A)slower; more uncertain
B)faster; of greater certainty
C)slower; of greater certainty
D)faster; more uncertain
Page 19
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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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) When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?
A)the firm's tax rate
B)the firm's cost of debt
C)the firm's cost of equity
D)All of the above are necessary.
Q3) Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.
A)local; be subordinated to; parent's
B)local; not be subordinated to; parent's
C)parent's; be subordinated to; local
D)none of the above
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Chapter 19: Working Capital Management
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Q1) Typically, the inventory period and the accounts receivable period at least partially overlap in the firms operating cycle.
A)True
B)False
Q2) Working capital management involves the management of:
A)current and long-term assets.
B)current assets and current liabilities.
C)current liabilities and long-term assets.
D)current liabilities and long-term debt and equity.
Q3) If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.
A)True
B)False
Q4) The Clearing House Interbank Payment System (CHIPS)is:
A)the largest publicly operated payments system in the world.
B)owned and operated by the world's seven largest central banks.
C)a computerized network that connects banks globally.
D)none of the above
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Chapter 20: International Trade Finance
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Q1) A draft is sometimes called a revocable letter of credit.
A)True
B)False
Q2) A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.
A)irrevocable; unconfirmed
B)revocable; confirmed
C)confirmed; irrevocable
D)unconfirmed; confirmed
Q3) The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:
A)unaffiliated known.
B)affiliated party.
C)unaffiliated unknown.
D)any of the above
Q4) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.
A)True
B)False
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