Multinational Corporate Finance Exam Review
Course Introduction
Multinational Corporate Finance explores the financial management practices and challenges faced by firms operating in a global context. The course covers key topics such as foreign exchange markets, currency risk management, international capital budgeting, multinational capital structure, global financing strategies, and cross-border mergers and acquisitions. Students will examine how differences in regulations, taxation, and economic systems influence corporate decisions and learn techniques for evaluating and managing financial risks unique to multinational operations. The course emphasizes analytical tools and real-world case studies to prepare students for complex financial decision-making in an international environment.
Recommended Textbook
International Financial Management 8th Edition by Cheol Eun
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21 Chapters
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2036 Flashcards
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Page 2
Chapter 1: International Monetary System
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Sample Questions
Q1) According to the theory of optimum currency areas,
A)the relevant criterion for identifying and designing a common currency zone is the degree of factor (i.e.,capital and labor)mobility within the zone.
B)exchange rates should reflect the degree to which workers are willing to move to get a better job.
C)exchange rates are determined by portfolio managers seeking the highest return. D)none of the options
Answer: A
Q2) 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 would an ounce of gold be worth in U.S.dollars?
A)$29.40
B)$30.00
C)$0.83
D)$1.20
Answer: B
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3
Chapter 2: Globalization and the Multinational Firm
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Sample Questions
Q1) An MNC may gain from its global presence by
A)spreading R&D expenditures and advertising costs over their global sales.
B)pooling global purchasing power over suppliers.
C)utilizing their technological and managerial know-how globally with minimum additional costs.
D)all of the options
Answer: D
Q2) A purely domestic firm that sources its products,sells its products,and raises its funds domestically
A)can face stiff competition from a multinational corporation that can source its products in one country,sell them in several countries,and raise its funds in a third country.
B)can be more competitive than an MNC on its home turf due to superior knowledge of the local market.
C)can still face exchange rate risk,just like an MNC.
D)all of the options
Answer: D
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Chapter 3: Balance of Payments
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Sample Questions
Q1) The notation is Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
Private savings,S,is defined as S = Y C T.Which of the following is also accurate?
A)S = C + I + G + X M C T
B)S = C + I + G + X
C)S = C + X M C T
D)S = C + G + X M C T
Answer: A
Q2) International portfolio investments have boomed in recent years,as a result of A)a depreciating U.S.dollar.
B)increased gasoline and other commodity prices.
C)the general relaxation of capital controls and regulation in many countries.
D)none of the options
Answer: C
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Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) The goal of greater accounting transparency
A)is to impose more rules and harsher penalties for their violation.
B)is to reduce the information asymmetry between corporate insiders and the public.
C)is to discourage managerial self-dealings.
D)is to reduce the information asymmetry between corporate insiders and the public,as well as discourage managerial self-dealings.
Q2) The key weakness of the public corporation is
A)too many shareholders,which makes it difficult to make corporate decisions.
B)relatively high corporate income tax rates.
C)conflicts of interest between managers and shareholders.
D)conflicts of interests between shareholders and bondholders.
Q3) 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.
D)none of the options
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6
Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Consider the following spot and forward rate quotations for the Swiss franc. S($/SFr)= 0.85
F<sub>1</sub>($/SFr)= 0.86
F<sub>2</sub>($/SFr)= 0.87
F<sub>3</sub>($/SFr)=0.88
Calculate the 3-month forward premium in American terms.Assume 30-360 pricing convention.
A)0.353.
B)0.4235.
C)0.1364.
D)0.1412.
Q2) Swap transactions
A)involve the simultaneous sale (or purchase)of spot foreign exchange against a forward purchase (or sale)of approximately an equal amount of the foreign currency. B)account for about half of Interbank FX trading.
C)involve trades of one foreign currency for another without going through the U.S.dollar. D)all of the options
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) Researchers have found that the fundamental approach to exchange rate forecasting
A)outperforms the efficient market approach.
B)fails to more accurately forecast exchange rates than either the random walk model or the forward rate model.
C)fails to more accurately forecast exchange rates than the random walk model but is better than the forward rate model.
D)outperforms the random walk model,but fails to more accurately forecast exchange rates than the forward rate model.
Q2) If IRP fails to hold,
A)pressure from arbitrageurs should bring exchange rates and interest rates back into line.
B)it may fail to hold due to transactions costs.
C)it may be due to government-imposed capital controls.
D)all of the options
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Page 8
Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) Consider an option to buy £10,000 for 12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
\( \begin{array}{lll} spot Rates&&Risk-tree Rates\\
S_{0}(\$ / ) & \$ 1.60= 1.00&i \$ 3.00 \% \\
S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i 4.00 \% \\
S_{0}\left( /£)\right. & 1.25=£ 1.00&i £4.00 \% \end{array}
\) If the call finishes out-of-the-money what is your replicating portfolio cash flow?
Q2) A put option on $15,000 with a strike price of 10,000 is the same thing as a call option on 10,000 with a strike price of $15,000.
A)True B)False
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Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) Your firm is bidding on a large construction contract in a foreign country.This contingent exposure could best be hedged
A)with put options on the foreign currency.
B)with call options on the foreign currency.
C)both with put and call options on the foreign currency,depending upon the specifics ("the rest of the story").
D)with futures contracts.
Q2) ABC Inc.,an exporting firm,expects to earn $20 million if the dollar depreciates,but only $10 million if the dollar appreciates.Assume that the dollar has an equal chance of appreciating or depreciating.Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown.Corporate income tax rate = 15% for the first $7,500,000.Corporate income tax rate = 30% for earnings exceeding $7,500,000.
A)$3,375,000
B)$6,000,000
C)$1,500,000
D)$4,500,000
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) When exchange rates change,
A)this can alter the operating cash flow of a domestic firm.
B)this can alter the competitive position of a domestic firm.
C)this can alter the home currency values of a multinational firm's assets and liabilities.
D)all of the options
Q2) The price elasticity of demand for commodity products tends to be
A)highly elastic.
B)highly inelastic.
C)highly elastic and highly inelastic.
D)none of the options
Q3) The firm may not be subject to high degrees of operating exposure
A)when changes in real exchange rates are exactly offset by the inflation differential.
B)when changes in nominal exchange rates are exactly matched by the inflation differential.
C)when changes in nominal exchange rates are exactly offset by the inflation differential.
D)none of the options
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11
Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) The stated objectives of FASB 52 are
A)to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity.
B)to reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S.generally accepted accounting principles.
C)to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity,and to reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S.generally accepted accounting principles.
D)none of the options
Q2) The simplest of all translation methods to apply is
A)current/noncurrent method.
B)monetary/nonmonetary method.
C)temporal method.
D)current rate method.
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12
Chapter 11: International Banking and Money Market
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Sample Questions
Q1) A U.S.-based multinational bank
A)would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits.
B)would have to provide deposit insurance and meet reserve requirements on foreign currency deposits.
C)would not have to provide deposit insurance but would have to meet reserve requirements on foreign currency deposits.
D)would have to provide deposit insurance but not meet reserve requirements on foreign currency deposits.
Q2) Who benefits from debt-for-equity swaps?
A)The creditor bank
B)The LDC
C)The market maker
D)all of the options
Q3) By far the most important international finance centers are
A)New York and London.
B)New York,London,and Tokyo.
C)New York,London,Tokyo,Paris,and Zurich.
D)New York,London,Tokyo,Paris,Zurich,and Frankfurt.
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Page 13
Chapter 12: International Bond Market
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Sample Questions
Q1) Private placement bond issues
A)do not have to meet the strict information disclosure requirements of publicly traded issues.
B)have auditing requirements that do not adhere to publicly traded issues.
C)meet the strict information disclosure requirements of publicly traded issues,but have larger minimum denominations.
D)none of the options
Q2) Purchasers of global bonds are
A)mainly institutional investors to date.
B)desirous of the increased liquidity of the issues.
C)have been willing to accept lower yields.
D)all of the options
Q3) With regard to clearing procedures for bond transactions
A)it is a system for transferring ownership of bonds.
B)it is a system for ensuring payment from buyers to sellers.
C)most Eurobond trades clear through two major clearing systems.
D)all of the options
Q4) Eurobonds sold in the United States may not be sold to U.S.citizens.
A)True
B)False
Page 14
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Chapter 13: International Equity Markets
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Sample Questions
Q1) Transactions in shares of the iShares Funds will typically generate tax consequences.This is because
A)iShares Funds are obliged to distribute portfolio gains to shareholders.
B)iShares Funds are not allowed to be held in tax-qualified accounts such as IRAs.
C)iShares Funds feature daily resettlement.
D)none of the options
Q2) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
Q3) The European Stock Exchange,comparable in volume to the NYSE
A)is located in Milan.
B)is located in London.
C)is located in Frankfurt.
D)none of the options
Q4) Dealers in an OTC market
A)stand ready to buy at the bid and sell at the ask price.
B)set their own bid and ask prices.
C)do not charge commissions.
D)all of the options
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Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) In an interest-only currency swap
A)the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire.They must also hedge with forward contracts on the currency.
B)the counterparties periodically exchange the amortized portions of the notational principals.
C)the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire.They must also hedge with forward contracts on the currency.Additionally,the counterparties periodically exchange the amortized portions of the notational principals.
D)none of the options
Q2) In the swap market,which position potentially carries greater risks,broker or dealer?
A)Broker
B)Dealer
C)They are the same swaps,therefore the same risks.
D)none of the options
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16
Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock.One year after investment,the stock pays a £1 dividend,and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,although he sold £8,800 forward at the forward rate of 1.28 per pound.
Q2) Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels (i)the volatility of the investment due to the volatility of the exchange rate
(ii)the contribution of the cross-product term
(iii)its covariance with the local market returns
Which of the following contributes and accounts for most of the volatility?
A)(i)and (ii)
B)(ii)and (iii)
C)(i)and (iii)
D)only (ii)
Q3) The "world beta" measures the A)unsystematic risk.
B)sensitivity of returns on a security to world market movements.
C)risk-adjusted performance.
D)risk of default and bankruptcy.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Sample Questions
Q1) As a mode of FDI entry,cross-border M&A offers two key advantages over greenfield investments:
A)speed and access to proprietary assets.
B)firms bolster their competitive positions in the world market by acquiring special assets from other firms or using their own assets on a larger scale.
C)firms can better leverage their intangible assets and on a larger scale.
D)none of the options
Q2) Unlike the theory of international trade or the theory of international portfolio investment,
A)we do not have a well-developed,comprehensive theory of FDI.
B)the comprehensive theory of FDI focuses on mean-variance efficiency.
C)the comprehensive theory of FDI is an arbitrage argument,like interest rate parity.
D)none of the options
Q3) FDI can take the form of
A)Greenfield investment.
B)cross-border M &A.
C)establishing new production facilities in a foreign country.
D)all of the options
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 3/4
A)1
B)2
C)3
D)4
Q2) The parent company should decide the financing method for its own subsidiaries
A)with a view toward minimizing the parent's overall cost of capital.
B)by copying the norms of the host country.
C)with a view toward gaming the bankruptcy system of the host country.
D)none of the options
Q3) When the parent company is fully responsible for the subsidiary's obligations,
A)the independent financial structure of the subsidiary is irrelevant.
B)potential creditors will examine the parent's overall financial condition,not the subsidiary's.
C)the independent financial subsidiary can have the same capital structure as the parent.
D)all of the options
Q4) In the real world,does the cost of capital differ among countries?
A)Yes
B)No
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Chapter 18: International Capital Budgeting
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Sample Questions
Q1) The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.Calculate the weighted average cost of capital.
A)33.33 percent
B)8.09 percent
C)9.02 percent
D)16.5 percent
Q2) Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due December 31,2009 and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.
A) $3,497,224.43
B)$417,201.05
C)$840,797
D)none of the options
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Page 20
Chapter 19: Multinational Cash Management
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Sample Questions
Q1) A centralized cash management system with a cash pool can reduce the investment the MNC has in precautionary cash balances,saving the firm money.
A)True
B)False
Q2) On blocked funds strategy is
A)transferring personnel from corporate headquarters to the subsidiary offices.
B)using the national airlines of the host country when possible for the international travel of all MNC executives.
C)holding business conferences of the MNC in the host country,where all expenses are paid by the local subsidiary.
D)all of the options
Q3) Mislocated funds are defined as
A)funds being found in the wrong account.
B)funds being denominated in the wrong currency.
C)funds being invested with the wrong maturity.
D)none of the options
Q4) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False
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Chapter 20: International Trade Finance
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Q1) One of the steps to follow to develop an investment fund which has been structured to adhere to Shari'ah principles whilst at the same time making use of forfaiting assets was
A)the fund sponsors had to be careful in ensuring that the pool of non-Islamic forfaiting assets was not used to directly satisfy the Islamic compliant obligations under the commodity and trade financing arrangements.
B)screening is required to ensure that the products underlying the LCs do not run counter to Shari'ah principles.
C)there had to be a sign off by Islamic scholars to verify that Shari'ah strictures had been met with.
D)all of the options
Q2) Banker's acceptances usually have maturities ranging from
A)30 to 180 days.
B)90 to 360 days.
C)1 year to 5 years.
D)over 5 years.
Q3) Forfaiting (forfeiting)meets Islamic finance practices.
A)True
B)False
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Page 22
Chapter 21: International Tax Environment and Transfer
Pricing
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Sample Questions
Q1) Assume that a product has the following three stages of production: \(\begin{array}{ccc}
\text { Production Stage } & \text { Selling Price } \\
1 & 600 \\
2 & 1,40 \mathrm{C} \\
3 & 1,70 \mathrm{C}
\end{array}\) If the value-added tax (VAT)rate is 15 percent,what would be the VAT over all stages of production?
A) 90
B) 120
C) 465
D) 255
Q2) A tax haven is
A)a country that has a low corporate income tax rate and low withholding tax rates on passive income.
B)a country with no taxes and no enforcement of foreign tax laws within its borders. C)any country with a higher tax rate than available domestically.
D)none of the options
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