Multinational Corporate Finance
Midterm Exam
Course Introduction
Multinational Corporate Finance examines the financial management strategies and challenges faced by corporations operating in a global environment. The course covers foreign exchange markets, risk management techniques, international capital budgeting, cross-border investments, and financial structures of multinational firms. Students explore how political, economic, and regulatory differences across countries impact financial decision-making, and analyze strategies for optimizing capital allocation, financing, and performance on an international scale. Through case studies and real-world examples, participants gain insight into the complexities of managing financial operations across diverse markets and currencies.
Recommended Textbook
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) When corporate governance breaks down
A)shareholders are unlikely to receive fair returns on their investments.
B)managers may be tempted to enrich themselves at shareholder expense.
C)the board of directors is not doing its job.
D)all of the above
Answer: D
Q2) Privatization
A)has spurred a tremendous increase in cross-border investment.
B)has allowed many governments to have the funds to nationalize important industries.
C)has guaranteed that new ownership will be limited to the local citizens.
D)has generally decreased the efficiency of the enterprise.
Answer: A
Q3) What is the increased amount of goods available in Northern Ireland after trade?
A)400 more bottles of whiskey and 200 more kegs of beer
B)1,000 more bottles of whiskey and 500 more kegs of beer
C)200 more bottles of whiskey and 400 more kegs of beer
Answer: A
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3
Chapter 2: International Monetary System
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Q1) Once capital markets are integrated,it is difficult for a country to maintain a fixed exchange rate.Why?
A)The market forces may be stronger than the exchange rate intervention that the government can muster.
B)Portfolio managers will not invest in countries with fixed exchange rates.
C)Because of the Tobin Tax.
D)None of the above
Answer: A
Q2) In the United States,bimetallism was adopted by the Coinage Act of 1792 and remained a legal standard until 1873,
A)when Congress dropped the silver dollar from the list of coins to be minted.
B)when Congress dropped the twenty-dollar gold piece from the list of coins to be minted.
C)when gold from the California gold rush drove silver out of circulation.
D)when gold from the California gold rush drove gold out of circulation.
Answer: A
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Chapter 3: Balance of Payments
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Q1) When Honda,a Japanese auto maker,built a factory in Ohio,
A)it was engaged in foreign direct investment.
B)it was engaged in portfolio investment.
C)it was engaged in a cross-border acquisition.
D)none of the above.
Answer: A
Q2) If a country is grappling with a major balance-of-payment difficulty,it may not be able to expand imports from the outside world.Instead,the country may be tempted to A)impose measures to restrict imports.
B)impose measures to discourage capital outflows.
C)Both a) and b)
D)None of the above
Answer: C
Q3) The world's largest debtor nation and creditor nation,respectively,are A)Japan and the U.S.
B)The U.S.and Japan.
C)The U.S.and Canada.
D)Great Britain and Mexico.
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) What is the difference between control rights and cash flow rights?
A)Since all shareholders benefit only from pro-rata cash flows, control rights and cash flow rights are the same thing.
B)Large investors may be able to derive private benefits from control, thus control rights can exceed cash flow rights.
C)Cash flow rights are more important than control rights since the only reason to invest in anything is to generate cash.
D)None of the above
Q2) The agency problem refers to the possible conflicts of interest between
A)self-interested managers as principals and shareholders of the firm who are the agents.
B)altruistic managers as agents and shareholders of the firm who are the principals.
C)self-interested managers as agents and shareholders of the firm who are the principals.
D)dutiful managers as principals and shareholders of the firm who are the agents.
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Chapter 5: The Market for Foreign Exchange
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Q1) Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points.This is convenient because
A)forward points may change faster than spot and forward quotes.
B)forward points may remain constant for long periods of time, even if the spot rates change frequently.
C)traders who are looking for violations of covered interest arbitrage are less interested in the actual spot and forward exchange rates, but are interested in the premium or discount differential measured in forward points.
D)both c) and d) are correct
Q2) Market microstructure refers to
A)the basic mechanics of how a marketplace operates.
B)the basics of how to make small (micro-sized) currency trades.
C)how macroeconomic variables such as GDP and inflation are determined.
D)none of the above
Q3) The standard size foreign exchange transactions are for
A)$10 million U.S.
B)$1 million U.S.
C) 1 million.
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
Q2) Covered Interest Arbitrage (CIA)activities will result in
A)an unstable international financial markets.
B)restoring equilibrium quite quickly.
C)a disintermediation.
D)no effect on the market.
Q3) There is (at least)one profitable arbitrage at these prices.What is it?
Q4) 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
Q5) If the exchange rate follows a random walk
A)the future exchange rate is unpredictable.
B)the future exchange rate is expected to be the same as the current exchange rate, S<sub>t</sub> = E(S<sub>t+1</sub>).
C)the best predictor of future exchange rates is the forward rate F<sub>t</sub> = E(S<sub>t+1</sub>|I<sub>t</sub>).
D)both b) and c)
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Calculate the current /£ spot exchange rate.
Q2) Calculate the current /£ spot exchange rate.
Q3) For European options,what of the effect of an increase in S<sub>t</sub>?
A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls, increase the value of puts ceteris paribus
D)Increase the value of calls, decrease the value of puts ceteris paribus
Q4) Empirical tests of the Black-Scholes option pricing formula
A)have faced difficulties due to nonsynchronous data.
B)suggest that when using simultaneous price data and incorporating transaction costs they conclude that the PHLX American currency options are efficiently priced.
C)suggest that the European option-pricing model works well for pricing American currency options that are at- or out-of-the money, but does not do well in pricing in-the-money calls and puts.
D)all of the above
Q5) Calculate the hedge ratio.
Q6) If the call finishes out-of-the-money what is your replicating portfolio cash flow?
Q7) If the call finishes out-of-the-money what is your portfolio cash flow?
Page 9
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Chapter 8: Management of Transaction Exposure
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Q1) A study of Fortune 500 firms hedging practices shows that
A)over 90 percent of Fortune 500 firms use forward contracts.
B)over 90 percent of Fortune 500 firms use options contracts.
C)both a) and b)
D)none of the above
Short Answer Questions
Q2) Suppose that the exchange rate is 1.25 = £1.00. Options (calls and puts)are available on the London exchange in units of 10,000 with strike prices of £0.80 = 1.00. Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of 1.25 = £1.00.
For a U.K.firm to hedge a 100,000 payable,
A)buy 10 call options on the euro with a strike in pounds sterling.
B)buy 8 put options on the pound with a strike in euro.
C)sell 10 call options on the euro with a strike in pounds sterling.
D)sell 8 put options on the pound with a strike in euro.
E)both a) and b)
F)both c) and d)
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Chapter 9: Management of Economic Exposure
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Q1) If the stock market of a foreign country is consistently up when the dollar value of the currency is down,
A)there may not be a great deal of exchange rate risk for a U.S.-based investor.
B)there will be a great deal of exchange rate risk for a U.S.-based investor.
C)then investors can ignore diversification.
D)none of the above
Q2) While maintaining multiple production sites does provide a firm valuable options,
A)a firm may miss out on economies of scope.
B)a firm may miss out on economies of scale.
C)a firm may find that exchange rate changes can fully offset the advantage of multiple manufacturing sites.
D)both a) and b)
Q3) Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent fiscal year came from skillfully executing currency options.
A)5%
B)10%
C)15%
D)75%
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11
Chapter 10: Management of Translation Exposure
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Q1) XYZ Corporation,a U.S.parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service to the local market. Assume that:
1)the functional currency of ABC is the pound
2)the reporting currency is the dollar
3)the initial exchange rate $1.00 = £ 0.67
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $500,000 in the affiliate.Under FASB 52,the intercompany debt and investment will appear on the consolidated balance sheet as A)£200,000.
B)$201,493.
C)$298,507.
D)none of the above
Q2) Translation exposure,
A)is not entity specific, rather it is currency specific.
B)is not currency specific, rather it is entity specific.
C)involves restatement from Italian to French.
D)none of the above
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Page 12
Chapter 11: International Banking and Money Market
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Q1) The major legislation controlling the operation of foreign banks in the U.S.
A)specifies that foreign branch banks operating in the U.S.must comply with U.S.banking regulations just like U.S.banks.
B)specifies that foreign branch banks operating in the U.S.must comply with their country-of-origin banking regulations just like U.S.banks operating abroad.
C)specifies that the "shell" branches are illegal for U.S.and foreign banks.
D)both a) and c)
Q2) ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London.Three month LIBOR is currently 5.5 percent.Suppose that over the second three-month interval LIBOR falls to 5.0 percent.How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A)$50,000
B)$100,000
C)$118,000
D)$120,000
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Chapter 12: International Bond Market
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Q1) Global bond issues were first offered in A)1889
B)1989
C)1999
D)2007
Q2) Global bond issues
A)can save U.S.issuers 20 basis points relative to domestic bonds, all else equal.
B)tend to have increased liquidity relative to Eurobonds or domestic bonds.
C)have been partially facilitated by rule 144A.
D)all of the above
Q3) 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.
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14
Chapter 13: International Equity Markets
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Q1) Yankee stocks
A)often trade as ADRs and have higher risks than trading the actual shares.
B)often trade as ADRs and have lower risks than trading the actual shares.
C)are bank receipts representing a multiple of foreign shares deposited in a U.S.bank.
D)both b) and c)
Q2) Which type of trading system is desirable for actively traded issues?
A)Continuous trading systems
B)Call trading systems
C)Crowd trading systems
D)None of the above
Q3) Many of the larger emerging equity markets (e.g.Korea,India)
A)have poor liquidity at present.
B)are more liquid stock markets than the developed world, since the poor people living in the developing world are eager to sell their securities.
C)have high turnover ratios.
D)none of the above
Q4) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan.
Q2) Explain how firm B could use the forward exchange markets to redenominate a 2-year 40m 5% euro loan into a 2-year USD-denominated loan.
Q3) A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".
A)The swap bank could just sell the company X side of the swap.
B)Company X should lobby Y to "get on board".
C)Company Y should calculate the QSD and subtract that from their best outside offer.
D)None of the above
Q4) 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
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16
Chapter 15: International Portfolio Investment
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Q1) Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago.You had invested 10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro.You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro.How much of the return is due to the exchange rate movement?
A)3.75%
B)3.33%
C)12.50%
D)16.25%
Q2) Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago.You had invested 10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro.You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro.Compute the rate of return on your investment in euro terms.
A)12.50%
B)16.25%
C)28.00%
D)-9.09%
Q3) Find the Global Minimum Variance Portfolio.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Examples of transfer risk include
A)the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B)unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C)restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D)none of the above
Q2) OPIC is the
A)Overseas Pirate Investment Corporation.
B)Overseas Private Investment Corporation.
C)Organization Petroleum Importing Countries.
D)None of the above
Q3) Shareholders of U.S.targets experience higher wealth gains when they are acquired by foreign firms than when acquired by U.S.firms.
A)True
B)False
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40%,a levered cost of equity of 12% and a pre-tax cost of debt of 9%.
A)7.6%
B)7.968%
C)10%
D)none of the above
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 above
Q3) In the Capital Asset Pricing Model (CAPM),the term Beta,\(\beta\),is
A)a measure of systematic risk inherent in a security.
B)calculated as the "covariance of future returns between a specific security and the market portfolio" divided by the "variance of returns of the market portfolio".
C)both a) and b)
D)none of the above
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Page 19
Chapter 18: International Capital Budgeting
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Q1) Repeat the above project analysis assuming that the Irish firm could replicate the project in Ireland.(i.e.cash flow out the project in Ireland and find break-even price (in ),quantity,NPV,IRR (in euro not dollars).
Q2) What is the euro-denominated IRR?
Q3) What is the levered after-tax incremental cash flow for year 1?
A)$4,300
B)-$202,610
C)-$95,700
D)$57,000
E)None of the above
Q4) What is the dollar-denominated IRR of this project?
Q5) Find the break-even price (in dollars)and break-even quantity for the U.S.project.
Q6) 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
Q7) What is the dollar-denominated IRR of this project?
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Using your results to the last question,use multilateral netting to simplify.
Q2) Many of the skills necessary for effective cash management are the same regardless of whether the firm has only domestic operations or if it operates internationally.
A)True
B)False
Q3) Find the net cash flow in (out of)the U.K.affiliate.
A)$0 in or out
B)$5,000 out
C)$30,000 in
D)$30,000 out
E)None of the above
Q4) The lower the transfer price
A)the higher the net profit reported by the MNC.
B)the lower the gross profit of the transferring division relative to the receiving division.
C)the higher the gross profit of the receiving division relative to the transferring division.
D)none of the above
Q5) Fill out the following figure with the initial situation shown in the table.
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Chapter 20: International Trade Finance
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Q1) Assume the time from acceptance to maturity on a $5,000,000 banker's acceptance is 90 days.Further assume that the importing bank's acceptance commission is 1.5 percent and that 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)$4,981,750
B)$4,906,250
C)$4,009,375
D)none of the above
Q2) A counterpurchase
A)involves a technology transfer via the sale of a manufacturing plant: as part of the terms, the seller of the plant agrees to purchase a certain portion of the plant output.
B)is similar to a buy-back transaction but the seller of the plant agrees to buy unrelated goods.
C)is a form of barter.
D)involves two parties agreeing to buy a specified amount of goods or services from one another.
Q3) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Transfer pricing can have an effect on how divisions of a MNC are perceived by the local banks.Which transfer price would leave a local affiliate that imports components from the parent with less impressive financial statements?
A)High transfer price
B)Low transfer price
C)None of the above
Q2) An income tax is defined by your textbook as is
A) direct tax.
B)is an indirect tax.
C)is collected with a withholding tax.
D)none of the above
Q3) Tax evasion is more difficult under a VAT because
A)at each stage in the production process producers have an incentive to obtain documentation from the previous stage that the VAT was paid in order to get the greatest tax credit possible.
B)customers can't convince retailers to sell things without a receipt.
C)the cost of record keeping under a VAT system imposes an economic hardship on small businesses.
D)none of the above
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