Multinational Financial Management
Final Exam
Course Introduction
Multinational Financial Management focuses on the financial decision-making processes and challenges that arise within organizations operating across international borders. The course explores topics such as foreign exchange markets, international financial markets, exchange rate risk management, global financing and investment strategies, multinational capital budgeting, and the impact of political and economic risks on global operations. Students will examine how multinational corporations manage liquidity, optimize capital structure, allocate resources among foreign subsidiaries, and comply with international tax and regulatory environments. Emphasis is placed on practical tools and analytical frameworks for evaluating global financial opportunities and managing the complexities inherent in cross-border finance.
Recommended Textbook
Fundamentals of Multinational Finance 3rd Edition by Michael H. Moffett
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Page 2
Chapter 1: Globalization and the Multinational Enterprise
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Q1) Which of the following is NOT considered to be a type of competitive advantage that may be enjoyed by an MNE?
A) competitiveness in their home markets
B) foreign exchange risks
C) economies of scale
D) economies of scope
Answer: B
Q2) Three necessary conditions for a firm to reach the top of the "firm value pyramid" are an open market place, high quality strategic management, and access to capital.
A)True
B)False
Answer: True
Q3) Which of the following is NOT considered to be a type of competitive advantage that may be enjoyed by an MNE?
A) managerial and marketing expertise
B) superior technology due to investment in research and development
C) increased agency costs
D) differentiated products
Answer: C
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Page 3
Chapter 2: Financial Goals and Corporate Governance
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Q1) If share price falls from $15 to $12 per share, and pays a dividend of $1 per share, what was the rate of return to shareholders?
A) 13.33%
B) -13.33%
C) 16.67%
D) -16.67%
Answer: B
Q2) Systematic risk can be eliminated through portfolio diversification.
A)True
B)False
Answer: False
Q3) Unsystematic risk can be defined as
A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk that can be systematically diversified away.
Answer: A
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Chapter 3: The International Monetary System
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Q1) Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914. Today we have several different exchange rate regimes in use, but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand. Occasionally several parties still call for the "good old days" and a return to the gold standard. Develop an argument as to why this is a good idea.
Answer: The gold standard forces a nation to maintain sufficient reserves of gold to back its currency's value. This helps control inflation, as a country cannot print additional money without sufficient gold to back it up. The gold standard eases international transactions as there is little uncertainly about exchange rates for trade with foreign countries. A stable currency could also act as a deterrant to the large trade deficits developed by some countries such as the United States.
Q2) Even though the Euro currency has been designed and printed, it is still not available for general use by the public, except for tourists, in the European Union.
A)True
B)False
Answer: False
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Page 5
Chapter 4: The Balance of Payments
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Q1) The J-curve adjustment path for trade balance adjustments assumes that ________ products are predominantly priced in the domestic currency and that ________ products are predominantly priced in the foreign currency
A) import; import
B) import; export
C) export; export
D) export; import
Q2) In general, a country's exports decrease as foreign income decreases.
A)True
B)False
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) In general, the United States goods trade balance has grown increasingly positive over the last 3 years.
A)True
B)False
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Chapter 5: The Foreign Exchange Market
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Q1) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.
Q2) Which of the following may be participants in the foreign exchange markets?
A) bank and nonbank foreign exchange dealers
B) central banks and treasuries
C) speculators and arbitragers
D) All of the above.
Q3) Dealers sometimes use brokers in the foreign exchange market because the dealers desire
A) speed.
B) accuracy.
C) to remain anonymous.
D) all of the above.
Q4) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.
A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction
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Chapter 6: International Parity Conditions
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Q1) According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be ________ and ________ sign to the forward rate discount or premium for the foreign currency, except for transaction costs.
A) equal to; of the same B) less than; of the same C) greater than; opposite in D) equal to; opposite in
Q2) From the viewpoint of a U.S. investor or trader, the indirect quote for a currency exchange rate would be quoted in ________.
A) terms of dollars per unit of foreign currency (e.g., $/£) B) cents
C) 1/8ths
D) terms of foreign currency units per dollar (e.g., £/$)
Q3) If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates.
A)True
B)False
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8
Chapter 7: Foreign Exchange Rate Determination and Forecasting
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Q1) The principle focus of the IMF bailout efforts during the Asian financial crisis was
A) banking liquidity
B) shareholder's wealth
C) reestablishing fixed currency exchange rates in Asia
D) dollarization of Asian currencies
Q2) The authors claim that the theories of international currency values hold better for less liquid and poorly capitalized markets.
A)True
B)False
Q3) Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.
A) high; high
B) low; low
C) low; high
D) high; low
Q4) Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?
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Chapter 8: Foreign Currency Derivatives
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Q1) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.
A) buy; sell
B) sell; buy
C) buy; buy
D) none of the above
Q2) Refer to Table 7.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.
A) 1460, 0.68 cents, $425.00
B) 1440, 1.06 cents, $662.50
C) 1450, 1.02 cents, $637.50
D) 1440, 1.42 cents, $887.50
Q3) Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, the call option has ________.
A) a time value of $0.04
B) a time value of $0.00
C) an intrinsic value of $0.00
D) an intrinsic value of -$0.04
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Chapter 9: Transaction Exposure
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Q1) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False
Q2) ________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.
A) Transaction
B) Operating
C) Economic
D) Accounting
Q3) Refer to Instruction 9.2. The cost of a put option to OTI would be ________.
A) $52,500
B) $55,388
C) $58,275
D) There is not enough information to answer this question.
Q4) MNE cash flows may be sensitive to changes in which of the following?
A) exchange rates
B) interest rates
C) commodity prices
D) all of the above
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Chapter 10: Operating Exposure
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Q1) Which of the following is NOT an example of a form of political risk that might be avoided or reduced by foreign exchange risk management?
A) expropriation of assets
B) destruction of raw materials through natural disaster
C) war
D) unfavorable legal changes
Q2) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.
A)True
B)False
Q3) A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary.
A) indirect; U.S.; Canadian
B) indirect; Canadian; U.S.
C) direct; U.S.; Canadian
D) direct; Canadian; U.S.
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Chapter 11: Translation Exposure
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Q1) Gains from forward contracts to hedge translation exposure are taxable whereas losses from hedging translation exposure are not.
A)True
B)False
Q2) If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro the U.S. firm has a translation
A) gain of $25,000
B) loss of $25,000
C) gain of $525,000
D) loss of euro 525,000
Q3) Gains from forward contracts to hedge translation exposure are not taxable whereas losses from hedging translation exposure are.
A)True
B)False
Q4) The temporal rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
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Chapter 12: Global Cost and Availability of Capital
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Q1) ________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market.
A) Systematic
B) Unsystematic
C) Total
D) Diversifiable
Q2) Generally speaking the equity risk premium relative to Bills is greater than the relative equity risk premium to Bonds in most well-established national financial markets.
A)True
B)False
Q3) Capital market imperfections leading to financial market segmentation include
A) asymmetric information between domestic and foreign-based investors
B) high securities transaction costs
C) foreign exchange risks
D) All of the above.
Q4) What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm?
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Chapter 13: Sourcing Equity Capital Globally
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Q1) Investment banking services include WHICH of the following?
A) advising when a security should be cross-listed
B) preparation of stock prospectuses
C) help to determine the price of the issue
D) all of the above
Q2) Negotiable certificates issued by a U.S. bank in the United States to represent the underlying shares of stock, which are held in a trust at a custodian bank in a foreign country, are called ________.
A) SDRs
B) FDRs
C) ADRs
D) IOUs
Q3) According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital.
A) increase
B) decrease
C) have no impact on
D) none of the above
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Chapter 14: Financial Structure and International Debt
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Q1) Madison Finance Inc., has borrowed £75,000 at an interest rate of 5% to be repaid in one year. If the current spot rate is $1.90/£ and the pound appreciates in value against the U.S. dollar by 2% over the next year, what is the effective cost of this loan to Madison?
A) 7.10%
B) 7.00%
C) 5.00%
D) None of the above
Q2) Obtaining local currency debt obligations is particularly attractive to an MNE if the subsidiary has
A) substantial accounts payable in the local currency.
B) substantial financial obligations in foreign currency units.
C) substantial accounts receivable in the local currency.
D) all of the above.
Q3) ________ are domestic currencies of one country on deposit in a second country.
A) LIBORs
B) Eurocurrencies
C) Federal funds
D) Discount window deposits
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Chapter 15: Interest Rate and Currency Swaps
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Q1) Refer to Instruction 15.1. Choosing strategy #3 will
A) guarantee the lowest average annual rate over the next three years.
B) eliminate credit risk but retain repricing risk.
C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
D) preclude the possibility of sharing in lower interest rates over the three-year period.
Q2) Which of the following would be considered an example of a currency swap?
A) exchanging a dollar interest obligation for a British pound obligation
B) exchanging a eurodollar interest obligation for a dollar obligation
C) exchanging a eurodollar interest obligation for a British pound obligation
D) All of the above are example of a currency swap.
Q3) A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to
A) do nothing.
B) pay floating and receive fixed.
C) pay floating and pay fixed.
D) none of the above.
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Chapter 16: International Portfolio Theory and Diversification
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Q1) The standard deviation of the risk-free security is
A) less than the standard deviation of the optimal risky domestic portfolio.
B) less than the standard deviation of the optimal international portfolio.
C) is equal to zero.
D) all of the above.
Q2) According to the capital asset pricing model (CAPM), which of the following is true?
A) The expected return on an asset is equal to the risk-free rate plus the amount of risk, beta, multiplied by the market risk premium.
B) The expected return on an asset is equal to the market rate plus the amount of risk, beta, multiplied by the market risk premium.
C) The expected return on an asset is equal to the risk-free rate plus the amount of risk, standard deviation, multiplied by the market risk premium.
D) None of the above.
Q3) Capital markets around the world are on average less integrated today than they were 20 years ago.
A)True
B)False
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Page 18
Chapter 17: Foreign Direct Investment Theory and Strategy
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Q1) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
Q2) Which of the following is NOT a strategy employed by the firms included in the text list of emerging market MNEs?
A) taking brands global
B) leveraging natural resources
C) acquiring offshore assets
D) All of the above are techniques used by emerging MNEs.
Q3) List and explain three strategic motives why firms become multinationals and give an example of each.
Q4) Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?
A) MNEs initially invest in countries with a similar "national psychic."
B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.
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19
Chapter 18: Political Risk Assessment and Management
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Q1) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
Q2) Of the following, which would NOT be considered an issue for an investment agreement prior to investing in a foreign country?
A) the basis for setting transfer prices
B) the right to export to third-country markets
C) provision for arbitration of disputes
D) All of the above could be negotiated prior to investing.
Q3) Negotiations under the General Agreement on Tariffs and Trade (GATT) have NOT had much impact on reducing the level of tariffs over the last several decades.
A)True
B)False
Q4) ________ is the ability to exercise effective control over a foreign subsidiary within a country's legal and political environment.
A) Political risk
B) Portfolio risk
C) Interest rate risk
D) Governance risk
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Chapter 19: Multinational Capital Budgeting
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Q1) Capital budgeting analysis for a foreign project is more complex than for the domestic case for all of the following reasons EXCEPT:
A) differences in national inflation rates.
B) parent cash flows must be distinguished from project cash flows.
C) the possibility of unanticipated foreign exchange rate changes.
D) All of the above are correct.
Q2) Refer to Table 19.1. The NPV for the European investment is estimated at ________.
A) euro 4,945
B) $4,945
C) $6,420
D) euro 6,420
Q3) Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.
A) appreciating; depreciating
B) depreciating; depreciating
C) appreciating; appreciating
D) depreciating; appreciating
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21
Chapter 20: International Trade Finance
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Q1) Which are NOT types of letter of credit?
A) insurable vs. noninsurable
B) confirmed vs. unconfirmed
C) revocable vs. irrevocable
D) None are letters of credit.
Q2) Custom Granite Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?
A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%
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.
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Page 22
Chapter 21: Multinational Tax Management
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Q1) Refer to Table 21.1. If MetroCity set the payout rate from the Ukraine subsidiary at 25%, how should MetroCity set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill?
A) 28.5%
B) 24.5%
C) 42.6%
D) 82.3%
Q2) Which of the following factors is not important for U.S. corporations for determining the amount of foreign tax credit allowed for direct taxes paid on income in a foreign country?
A) the Foreign corporate income tax rate
B) the U.S. corporate income tax rate
C) the foreign corporate dividend withholding tax rate
D) All of the above are important factors.
Q3) The primary objective of multinational tax planning is to minimize the firm's worldwide tax burden.
A)True
B)False
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23
Chapter 22: Working Capital Management
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Q1) Which of the following statements is true?
A) A/R provide part of the funding for inventory.
B) A/P provide part of the funding for A/R and inventory.
C) Inventory pays for A/R and A/P.
D) None of the above is true.
Q2) Polaris Corporation (US) has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the
A) quotation period.
B) input sourcing period.
C) cash conversion cycle.
D) accounts payable cycle.
Q3) Refer to Instruction 22.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?
A) 7.3%
B) 9.5%
C) 10.4%
D) 22.9%
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