chapter19 mafin 2013 ed

8/10/2019 Chapter19 MAFIN 2013 ed

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Principles of Managerial Finance, 13e, Global Edition(Gitman)

Chapter 19 International Managerial Finance

19.1 Understand the major factors that influence the financial operations of multinationalcompanies (MNCs).

1) NAFTA is a treaty estalishin! free trade and open mar"ets et#een $urope and the United%tates.Ans#er& FA'%$Topic& North American Free Trade Areauestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) The /orld Trade 0r!aniation is a ne# international ody estalished to police #orld tradin!practices and to mediate disputes et#een memer countries.Ans#er& TU$

Topic& /orld Trade 0r!aniationuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) 0ffshore Centers are cities or states that ha*e achie*ed prominence as major centers for$uromar"et usiness.Ans#er& TU$Topic& 0ffshore Centersuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) NAFTA is an international financial mar"et that pro*ides for orro#in! and lendin!currencies outside their country of ori!in.Ans#er& FA'%$Topic& North American Free Trade Areauestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

4) Fluctuations in forei!n e5chan!e mar"ets can affect forei!n re*enues and profits of amultinational company6 ut they ha*e no impact on its o*erall *alue.Ans#er& FA'%$Topic& Forei!n $5chan!e is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

7) The $uromar"et is the international financial mar"et that pro*ides for orro#in! and lendin!currencies outside their country of ori!in.Ans#er& TU$Topic& The $uromar"etuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

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;) 0ne reason for the recent rapid !ro# in the $uromar"et is that it pro*ides multinationalcompanies #ith an


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12) -isa!reements amon! $uropean Union country memers o*er the disposition of !ara!e andmanufacturin! refuse !enerated primarily y $astern $uropean countries ha*e come to e "no#nas the $uro Trash ssue.Ans#er& FA'%$Topic& $uropean Union

uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

13) n 2B36 the United %tates si!ned a re!ional trade pact #ith the -ominican epulic6Costa ica6 $l %al*ador6 ,uatemala6 onduras6 and Nicara!ua called the Central American FreeTrade A!reement or CAFTA.Ans#er& TU$Topic& Central American Free Trade A!reementuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

14) n 2B36 the United %tates si!ned a re!ional trade pact #ith south pacific countriesincludin! the :hilippines6 ndonesia6 Malaysia called the %outh :acific American TradeA!reement or %:AMTA.Ans#er& FA'%$Topic& Free Trade A!reementsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

17) The /orld Trade 0r!aniation has in recent years admitted current and former communistcountries as memers includin! the ussian Federation and the :eoples epulic of China.Ans#er& TU$Topic& /orld Trade 0r!aniationuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1;) A partnership et#een a multinational company and a forei!n in*estor in #hich contractuallyspecified amounts of money and e5pertise are contriuted y the participants for statedproportions of o#nership and profit is aA) multinational corporation.+) floatin! relationship.C) joint *enture.-) consolidation.Ans#er& C

Topic& >oint ?enturesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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1=) The DDDDDDDD is the ta5ation techniEue that increases the U.%. income of an MNC y theamount of forei!n income (efore forei!n ta5es). The U.%. ta5 calculation is then ased on thathi!her le*el.A) unitary ta5 la#+) !rossin! up procedure

C) ,m-) nationaliation procedureAns#er& +Topic& ,rossin! Up :rocedureuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

19) All of the follo#in! are considered offshore centers $C$:TA) Cua.+) %in!apore.C) 'ondon.-) Nassau.Ans#er& ATopic& 0ffshore Centersuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) A partnership under #hich the participants ha*e contractually a!reed to contriute specifiedamounts of money and e5pertise in e5chan!e for stated proportions of o#nership and profit iscalledA) limited partnership.+) ,m.C) %.A..'.-) joint *enture.Ans#er& -Topic& >oint ?enturesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) All of the follo#in! are factors that can influence the operations of an MNC $C$:TA) forei!n o#nership of portions of eEuity.+) e5istence of multinational capital mar"ets.C) forei!n currency fluctuations.-) consolidation of financial statements ased on only one currency.

Ans#er& -Topic& nternational Accountin! and MNCsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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) The $uromar"et is dominated y theA) French franc.+) >apanese yen.C) -eutsche mar".-) U.%. dollar.

Ans#er& -Topic& $uromar"etuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) >oint *enture la#s and restrictions may result in any of the follo#in! ne!ati*e implicationsfor the operation of a forei!nBased susidiary $C$:TA) forei!n o#nership may result in disa!reement amon! the partners re!ardin! the distriutionof profits.+) operatin! in forei!n countries may result in difficulties otainin! the remission of profits.C) joint *enture a!reements may stem a certain de!ree of ris" due to political hostility.

-) forei!n mana!ement policies may e detrimental to the usual policies of the MNC.Ans#er& CTopic& >oint ?enturesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) The DDDDDDDD is a si!nificant economic force currently made up of 4 nations #ith apopulation of more than 94 million that permits free trade #ithin the countries that ma"e up this!roup.A) North American Free Trade A!reement (NAFTA)+) Mercosur ,roupC) Asian $conomic Area Net#or" (A%$AN)-) $uropean Union ($U)Ans#er& -Topic& $uropean Unionuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

4) The DDDDDDDD is a major %outh American tradin! loc that includes countries that accountfor more than half of total 'atin American ,-:.A) North American Free Trade A!reement (NAFTA)+) Mercosur ,roupC) 'atin and %outh American Free Trade Area ('A%TA)

-) ,roup of %e*enAns#er& +Topic& Mercosur ,roupuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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7) The DDDDDDDD is a major trade a!reement si!ned y the United %tates and fi*e CentralAmerican Countries.A) North American Free Trade A!reement (NAFTA)+) Mercosur ,roupC) 'atin and %outh American Free Trade Area ('A%TA)

-) Central American Free Trade A!reement (CAFTA)Ans#er& -Topic& Central American Free Trade A!reementuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) DDDDDDDD is an international ody that polices #orld commercial tradin! practices and thatmediates disputes et#een t#o or more memer countries.A) NAFTA+) ,ATTC) /T0

-) CAFTAAns#er& CTopic& /orld Trade 0r!aniationuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

=) DDDDDDDD is a treaty that has !o*erned #orld trade throu!hout most of the post /orld /ar era.A) NAFTA+) ,ATTC) /T0-) CAFTAAns#er& +Topic& ,eneral A!reement on Tariffs and Tradeuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

19. -escrie the "ey differences et#een purely domestic and international financialstatementsGconsolidation6 translation of indi*idual accounts6 and international profits.

1) FA%+ No. 4 reEuires U.%. multinationals first to con*ert the financial statement accounts offorei!n susidiaries into their functional currency and then to translate the accounts into theparent firm@s currency usin! the allBcurrentBrate method.

Ans#er& TU$Topic& FA%+ No. 4uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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) The allBcurrentBrate method is the method y #hich the functional currencyBdenominatedfinancial statements of an MNC@s susidiary are translated into the parent company@s currency.Ans#er& TU$Topic& FA%+ No. 4 and the Current ate Methoduestion %tatus& e*ised

AAC%+ ,uidelines& -ynamics of the !loal economy

2) Current U.%. ta5 la#s reEuire the consolidation of financial statements of susidiariesaccordin! to the percenta!e of o#nership y the parent company.Ans#er& TU$Topic& Ta5es ssues elated to MNCsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) The temporal method reEuires specific assets and liailities to e translated at soBcalledhistoric e5chan!e rates6 and that forei!nBe5chan!e translation !ains or losses e reflected in the

current year@s income.Ans#er& TU$Topic& Temporal Methoduestion %tatus& Ne#AAC%+ ,uidelines& -ynamics of the !loal economy

4) Current U.%. ta5 la#s reEuire the separation of financial statements of susidiaries and theoperatin! results for some susidiaries are e5cluded from the parent entirely for some countriessuch as China and ndia.Ans#er& FA'%$Topic& Ta5es ssues elated to MNCsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

7) A functional currency is the currency of the parent company@s country.Ans#er& FA'%$Topic& Functional Currencyuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) A functional currency is the currency of the host country in #hich a susidiary primarily!enerates and e5pends cash and in #hich its accounts are maintained.Ans#er& TU$

Topic& Functional Currencyuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

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=) FA%+ No. 4 is a statement issued y the Financial Accountin! %tandards +oard reEuirin!American MNCs to first con*ert the financial statement accounts of forei!n susidiaries into thecountry@s DDDDDDDD currency and then translate the accounts into the parent firm@s currency usin!the DDDDDDDD method.A) spotH historical rate

+) functionalH allBcurrentBrateC) principalH a*era!e rate-) for#ard rateH #ei!hted a*era!eAns#er& +Topic& FA%+ No. 4 and the Current ate Methoduestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

9) The allBcurrentBrate method dictated y the FA%+ No. 4 statement reEuires the translation ofall alance sheet accounts at the DDDDDD rate and all income statement items at the DDDDDDDDrates.

A) closin!H a*era!e+) a*era!eH closin!C) historicalH current-) a*era!eH historicalAns#er& ATopic& FA%+ No. 4 and the Current ate Methoduestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I1646 efore localta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. Theforei!n income ta5 rate is 2 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 andthe firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if forei!nta5es can e applied as a credit a!ainst the MNC@s U.%. ta5 liailityJA) I736;4+) I3464C) I4;64-) I;246Ans#er& ATopic& Ta5 Credits and MNCsuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills

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11) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I1646 efore localta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. Theforei!n income ta5 rate is 2 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 andthe firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if no ta5credits are allo#edJ

A) I736;4+) I3464C) I4;64-) I;246Ans#er& CTopic& Ta5 Credits and MNCsuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills

1) A U.%.Based MNC has three susidiaries& %1 (3 percent o#ned y the MNC)H % (22percent o#ned y %1)6 and %2 ( percent o#ned y %). The ta5ale income for each firm is

I1 million. The local ta5es for each firm are I14 million6 I million6 and I1 million6respecti*ely. The MNC@s ta5 rate is 3 percent.(a) Can the MNC apply all of its local ta5es as a credit a!ainst its U.%. ta5esJ() +ased on the

%1& 3K directly o#ned y the MNC.%& (3K L 22K) 12.K o#ned y the MNC.%2& (3K L 22K L K) .7K o#ned y the MNC.+ased on these results6 %1 and % can e included ut %2 cannot.

() The ma5imum credit a!ainst U.%. ta5es 3K L (I1 million I1 million) I=million. The local ta5es paid y %1 and %6 or I24 million6 can e used as a U.%. ta5 credit y theMNC.Topic& MNCs and Ta5esuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills



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12) A U.%Based MNC has a susidiary in China #here the local currency is the enmini(M+). The alance sheets and income statements of the susidiary are presented in the taleelo#. 0n -ecemer 216 46 the e5chan!e rate #as =.; M+OU%I. Assume the localcurrency fi!ures in the statement elo# remain the same on -ecemer 216 7. Calculate theU.%. dollar translated fi!ures for the t#o endin! time periods assumin! that et#een -ecemer

216 4 and -ecemer 216 76 the Chinese !o*ernment re*alues (appreciates) the M+ y percent.

Translation of Income Statement

Translation of Balance Sheet

Ans#er& This sho#s that an appreciation of the forei!n currency a!ainst the dollar for asusidiary in that country #ill result in hi!her *alues on oth the alance sheet and incomestatement once those *alues are translated into dollars e*en if the local currency *alues didn@tchan!e at all. The opposite #ould e the case if the forei!n currency depreciates a!ainst thedollar.

Translation of Income Statement



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Translation of Balance Sheet

Topic& Translation of Financial %tatementsuestion %tatus& e*ised

AAC%+ ,uidelines& Analytic s"ills

19.2 -iscuss e5chan!e rate ris" and political ris"6 and e5plain ho# MNCs mana!e them.

1) The spot e5chan!e rate is the rate of e5chan!e et#een t#o currencies at some specifiedfuture date.Ans#er& FA'%$Topic& FA%+ No. 4 and the Current ate Methoduestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) The for#ard e5chan!e rate is the rate of e5chan!e et#een t#o currencies on any !i*en day.Ans#er& FA'%$Topic& For#ard $5chan!e atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) The functional currency is the currency of the economic en*ironment in #hich a usinessentity primarily !enerates and e5pends cash6 and in #hich its accounts are maintained.Ans#er& TU$Topic& Functional Currencyuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) Accountin! e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rateson the translated *alue of a firm@s financial statement accounts denominated in a !i*en forei!ncurrency.Ans#er& TU$Topic& Accountin! $5posureuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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4) $conomic e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rateson the firm@s *alue.Ans#er& TU$Topic& $conomic $5posureuestion %tatus& e*ised


7) The three asic types of ris" associated #ith international cash flo#s are 1) usiness andfinancial ris"s6 ) inflation and forei!n e5chan!e ris"s6 and 2) political ris"s.Ans#er& TU$Topic& Types of is" in nternational Cash Flo#suestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) Countries that e5perience hi!h inflation rates #ill see their currencies decline in *alue relati*eto the currencies of countries #ith lo#er inflation rates.

Ans#er& TU$Topic& nflation is" and nternational Cash Flo#suestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

=) /hen more units of a forei!n currency are reEuired to uy one dollar6 the currency is said toha*e appreciated #ith respect to the dollar.Ans#er& FA'%$Topic& Forei!n $5chan!e is" and nternational Cash Flo#suestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

9) Althou!h se*eral economic and political factors can influence forei!n e5chan!e ratemo*ements6 y far the most important e5planation for lon!Bterm chan!es in e5chan!e rates is adifferin! inflation rate et#een t#o countries.Ans#er& TU$Topic& For#ard $5chan!e atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) Althou!h se*eral economic and political factors can influence forei!n e5chan!e ratemo*ements6 y far the most important e5planation for lon!Bterm chan!es in e5chan!e rates isfiscal policy that a country adopts.Ans#er& FA'%$Topic& For#ard $5chan!e atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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11) Macro political ris" is the ris" faced y all forei!n firms in a host country related to politicalchan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!esin o#nership structure6 closure or e5propriation.Ans#er& TU$Topic& :olitical is"


1) Micro political ris" is the ris" faced y all forei!n firms in a host country related to politicalchan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!esin o#nership structure6 closure or e5propriation.Ans#er& FA'%$Topic& :olitical is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

12) ecent years ha*e seen the emer!ence of a third path to political ris" that encompasses

13) National entry control systems are comprehensi*e rules6 re!ulations6 and incenti*esintroduced y host !o*ernments to re!ulate inflo#s of forei!n direct in*estment from MNCs andat the same time e5tract more enefits from their presence.Ans#er& TU$Topic& National $ntry Control %ystemsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

14) National entry control systems are comprehensi*e rules6 re!ulations6 and immi!rationpolicies introduced y 5enophoic host !o*ernments to re!ulate inflo#s of forei!n #or"ers.Ans#er& FA'%$Topic& National $ntry Control %ystemsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

17) +oth theory and empirical e*idence indicate that the capital structures of MNCs differ fromthose of purely domestic firms.Ans#er& TU$Topic& MNC Capital %tructureuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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1;) +oth theory and empirical e*idence indicate that the capital structures of MNCs are nodifferent from those of purely domestic firms.Ans#er& FA'%$Topic& MNC Capital %tructureuestion %tatus& e*ised


1=) All of the follo#in! are considered to e major or apanese yen.+) the +ritish pound.C) the Me5ican peso.-) the U.%. dollar.Ans#er& CTopic& Forei!n $5chan!euestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

19) /hen fe#er units of a forei!n currency are reEuired to uy one dollar6 the currency is said toha*e DDDDDDDD #ith respect to the dollar.A) appreciated+) depreciatedC) consolidated-) remained fi5edAns#er& ATopic& Forei!n $5chan!euestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the translated*alue of a firm@s accounts denominated in a !i*en forei!n currency isA) economic e5posure.+) macro political ris".C) accountin! e5posure.-) micro political ris".Ans#er& CTopic& Accountin! $5posureuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the firm@s *alue isA) economic e5posure.+) macro political ris".C) accountin! e5posure.-) micro political ris".Ans#er& ATopic& $conomic $5posureuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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) The ris" attached to international cash flo#s are all of the follo#in! $C$:TA) usiness and financial ris"s.+) inflation and forei!n e5chan!e ris"s.C) political ris"s.-) ris" of local mana!ement.

Ans#er& -Topic& Types of is" in nternational Cash Flo#suestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) Macro political ris" and micro political ris" in international usiness refer to the ris"A) that #ill affect all forei!n firms and the ris" that #ill affect an indi*idual firm or specificindustry6 respecti*ely.+) of nationaliation of the oil industry and the ris" of a political re*olution6 respecti*ely.C) that #ill affect an indi*idual firm or specific industry and the ris" that #ill affect all forei!nfirms6 respecti*ely.-) of sudden ta5es on e5portin! the manufactured !oods of a particular industry and the ris" ofthe de*aluation of the host country@s currency6 respecti*ely.Ans#er& ATopic& :olitical is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) A political ris" that mi!ht affect all forei!n firms in a host country is termed a DDDDDDDD ris"Ha political ris" that mi!ht affect only an indi*idual firm or specific industry in a host country istermed a DDDDDDDD ris".A) macro politicalH micro political+) micro politicalH macro politicalC) micro politicalH forei!n e5chan!e-) forei!n e5chan!eH micro politicalAns#er& ATopic& :olitical is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

4) All of the follo#in! are positi*e approaches of copin! #ith political ris" $C$:TA) use of locals in mana!ement.+) joint *enture #ith local an"s.C) license or patent restrictions under international a!reement.

-) local sourcin!.Ans#er& CTopic& :olitical is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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7) For DDDDDDDD currencies6 chan!es in the *alue of forei!n e5chan!e rates are calledDDDDDDDD.A) floatin!H appreciation+) floatin!H re*aluation or de*aluationC) fi5edH re*aluation or de*aluation

-) fi5edH appreciation or depreciationAns#er& CTopic& Fi5ed *ersus Floatin! ate Currenciesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) +et#een t#o major currencies6 the spot e5chan!e rate is the rate DDDDDDDD and the for#arde5chan!e rate is the rate DDDDDDDD.A) on that dateH today+) at some specified future dateH todayC) todayH on that date-) on that dateH at some specified future dateAns#er& -Topic& %pot and For#ard $5chan!e atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

=) Forei!n e5chan!e ris" refers to the ris" created yA) the potential seiure of an MNC@s operations in a host country+) the *aryin! e5chan!e rate et#een t#o currenciesC) the fi5ed e5chan!e rate et#een t#o currencies-) the potential nationaliation of the MNC@s operations y a host !o*ernmentAns#er& +Topic& Forei!n $5chan!e is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

9) f the e5chan!e rate et#een the U.%. dollar and the $uro is I1. per $uro and the e5chan!erate et#een the U.%. dollar and the >apanese yet is 1 Pen per dollar6 then #hat is the $uro perPen e5chan!e rateJA) .1+) 133.C) .79-) 1.

Ans#er& CTopic& $5chan!e atesuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills



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2) f the e5chan!e rate et#een the U.%. dollar and the $uro is I1. per $uro and the annualrate of inflation is 4 percent in the United %tates and 1 percent in $urope6 #hat #ill e U.%.dollar per $uro e5chan!e rate in one yearJA) 1.134+) .=;2

C) 1.4;-) .;944Ans#er& ATopic& $5chan!e ates and nflationuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills

19.3 -escrie forei!n direct in*estment6 in*estment cash flo#s and decisions6 the MNCs@capital structure6 and the international det and eEuity instruments a*ailale to MNCs.

1) Forei!n ond is an international ond that is sold primarily in countries other than the countryof the currency in #hich the issue is denominated.Ans#er& FA'%$Topic& Forei!n +ondsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) n !eneral6 an international ond is one that is initially sold in the country of the orro#er and6then6 often distriuted in se*eral countries.Ans#er& FA'%$Topic& nternational +ondsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) +ecause of their access to the international ond and eEuity mar"ets6 MNCs may ha*e lo#ercosts of *arious sources of lon!Bterm financin!6 thus resultin! in differences et#een the capitalstructures of these firms and those of purely domestic companies.Ans#er& TU$Topic& Cost of Capital for MNCsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) The forei!n direct in*estment (F-) is a multiBnational corporation@s transfer of capital6mana!erial6 and technical assets from a host country to its home country.

Ans#er& FA'%$Topic& Forei!n -irect n*estmentuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

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4) A multiBnational corporation (MNC) can !i*e some protection to international cash flo#s yreducin! its liailities if the currency is appreciatin!6 or y reducin! its financial assets if thecurrency is depreciatin!.Ans#er& TU$Topic& MNCs and nternational Cash Flo#s


7) Comprehensi*e rules6 re!ulations6 and incenti*es aimed at re!ulatin! the inflo# of directforei!n in*estments in*ol*in! MNCs and at e5tractin! more enefits from their presence aretermedA) unitary ta5 la#s.+) forei!n direct in*estments.C) $urocurrency mar"ets.-) national entry control systems.Ans#er& -

Topic& National $ntry Control %ystemsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) The transfer y a multinational firm of capital6 mana!erial6 and technical assets from its homecountry to a host country is termedA) an MNC.+) an %-.C) an F-.-) a CA:M.Ans#er& CTopic& Forei!n -irect n*estmentuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

=) An international ond that is sold primarily in countries other than the country of the currencyin #hich the issue is denominated is calledA) international ond.+) forei!n ond.C) $uroond.-) none of the ao*e.Ans#er& CTopic& $uroonds


9) For forei!n onds6 interest rates are usually not directly correlated #ith the domestic ratespre*ailin! in the respecti*e countries.Ans#er& FA'%$Topic& Forei!n +ondsuestion %tatus& Ne#AAC%+ ,uidelines& -ynamics of the !loal economy

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1) For a $urodollar ond6 the interest rate #ill reflect se*eral different rates6 most notaly theU.%. lon!Bterm rate6 the $urodollar rate6 and lon!Bterm rates in other countries.Ans#er& TU$Topic& $uroondsuestion %tatus& Ne#


11) n capital ud!etin! for a multinational6 the startin! discount rate to #hich ris"s stemmin!from forei!n e5chan!e and political factors can e added6 and from #hich enefits reflectin! theparent@s lo#er capital costs may e sutracted isA) the cost of capital of the parent (multinational) company.+) the ris"Bfree rate of the parent company6 adjusted for ris" rele*ant to the forei!n susidiary.C) the local cost of eEuity capital applicale to the local usiness and financial en*ironments#ithin #hich a susidiary operates.-) the #ei!hted a*era!e cost of capital applicale to all forei!n susidiaries comined.Ans#er& C

Topic& Multinational Capital +ud!etin!uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) Theory and empirical e*idence indicate that the capital structures of multinational companiesA) are asically the same as those of domestic firms.+) differ6 ut all multinationals are similar no matter the domicile country.C) not only differ from domestic firms6 ut differ also ased upon the country in #hich they aredomiciled.-) differ only ecause of their operatin! structure.Ans#er& CTopic& Multinational Capital %tructuresuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

12) elati*e to cash flo#s of domestic firms6 y di*ersifyin! internationally6 multinationalsA) can increase cash flo#s.+) can achie*e further ris" reduction.C) are unale to chan!e the ris".-) are not attemptin! to chan!e ris".Ans#er& +Topic& Multinationals and -i*ersificationuestion %tatus& e*ised




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13) The capital structures of MNCs are influenced y all of the factors elo# $C$:TA) international capital mar"ets.+) international di*ersification.C) country factors.-) all of the ao*e.

Ans#er& -Topic& Capital %tructure and MNCsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

14) The first international capital mar"et6 a mar"et #ith uniform rules and re!ulations !o*ernin!major stoc" e5chan!es6 #as finally estalished and e!an operations in A) at The a!ue.+) in Ne# Por".C) in 'ondon.-) none of the ao*e.

Ans#er& -Topic& nternational Capital Mar"etuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

17) A multinational company has t#o susidiaries6 one in reland (local currency6 rish pound)and the other in /est ,ermany (local currency6 -eutsche mar"). :ro forma statements ofoperations indicate the follo#in! shortBterm financial needs for each susidiary (in eEui*alentU.%. dollars)& reland& I4 million e5cess cash to e in*ested (lent)H /est ,ermany& I1 millionfunds to e raised (orro#ed)The follo#in! financial data is also a*ailale&

(a) -etermine the effecti*e rates of interest for rish pound and -eutsche mar" in oth the$uromar"et and the domestic mar"et.() /here should the funds e in*estedJ(c) /here should the funds e raisedJ

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Ans#er&(a)

() I4 million should e in*ested in U.%. dollars in the $uromar"et.(c) I1 million should e raised in -eutsche mar"s in theTopic& MNCs and Financin! -ecisionsuestion %tatus& e*isedAAC%+ ,uidelines& Analytic s"ills

19.4 -iscuss the role of the $urocurrency mar"et in shortBterm orro#in! and in*estin!(lendin!) and the asics of international cash6 credit6 and in*entory mana!ement.

1) n the international conte5t6 the nominal interest rate is the stated interest rate char!ed onfinancin! #hen only the MNC parent@s currency is in*ol*ed.Ans#er& TU$Topic& MNCs and nterest atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) n the case of shortBterm financin!6 the forces of supply and demand are amon! the mainfactors determinin! e5chan!e rates in $urocurrency mar"ets.Ans#er& TU$Topic& $urocurrency Mar"etsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

2) ed!in! strate!ies are techniEues used to offset or protect a!ainst ris"H in the internationalconte5t these include orro#in! or lendin! in different currencies6 underta"in! contracts in thefor#ard6 futures6 andOor options mar"ets6 and also s#appin! assetsOliailities #ith other parties.Ans#er& TU$Topic& ed!in! Forei!n $5chan!e is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

3) The interest rates offered in the $uromar"et on the U.%. dollar are !reatly affected y theprime rate inside the United %tates.

Ans#er& TU$Topic& $uromar"et nterest atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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4) n the international conte5t6 the effecti*e interest rate eEuals to the nominal rate plus (orminus) any forecast appreciation (or depreciation) of a forei!n currency relati*e to the currencyof the MNC parent.Ans#er& TU$Topic& MNCs and nterest ates


7) $5chan!e rate ris" hed!in! tools include for#ard contracts6 options6 interest rate s#aps6currency s#aps6 and hyrid securities.Ans#er& TU$Topic& ed!in! $5chan!e ate is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

;) $5chan!e rate ris" hed!in! tools include Monte Carlo s#aps6 synthetic insurance contracts6

and in*entory s#aps.Ans#er& FA'%$Topic& ed!in! $5chan!e ate is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

=) The center of the $uroBeEuity mar"et6 #hich deals in international eEuity issues isA) Ne# Por".+) ,ene*a.C) To"yo.-) 'ondon.Ans#er& -Topic& $uroB$Euity Mar"etuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

9) The usual capital mar"ets used y U.%.Based MNCs that desire international o#nership oftheir eEuity areA) /estern $urope and >apan.+) Me5ico and Canada.C) %audi Araia and %outh Africa.-) 'iechtenstein and :anama.Ans#er& A

Topic& MNCs and Capital Mar"etsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

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1) A $uroond isA) a ond sold primarily to $uropeans.+) a ond sold primarily in countries other than the country of the currency in #hich the issue isdenominated.C) a det instrument sold e5clusi*ely in $urope.

-) a ond issued in 'iechtenstein.Ans#er& +Topic& $uroondsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

11) The e5istence of DDDDDDDD allo#s multinationals to ta"e ad*anta!e of unre!ulated financialmar"ets to in*est and raise shortBterm funds in a *ariety of countries and to protect themsel*esfrom forei!n e5chan!e e5posure.A) a stron! U.%. dollar+) the nternational Monetary Fund

C) $urocurrency mar"ets-) $uropean $conomic CouncilAns#er& CTopic& $urocurrency Mar"etsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1) n the international conte5t6 the DDDDDDDD interest rate in*ol*es only the MNC parent@scurrency6 #hile the DDDDDDDD interest rate includes any forecast appreciation or depreciation of aforei!n currency relati*e to that of the MNC parent.A) effecti*eH nominal+) macroH nominalC) nominalH effecti*e-) nominalH microAns#er& CTopic& MNCs and nterest atesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

12) A shortBterm financial decision ased on an MNC mana!ement@s e5pectation that the localforei!n currency #ill appreciate may eA) increasin! local customers@ accounts recei*ale and increasin! local notes payale.+) decreasin! local notes recei*ale and decreasin! accruals.

C) increasin! local in*entories and increasin! local notes payale.-) increasin! local accounts recei*ale and decreasin! local accounts payale.Ans#er& -Topic& MNCs and %hortBterm Financeuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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13) As a forei!n e5chan!e hed!in! tool6 options ha*e all of the follo#in! characteristics$C$:TA) the ri!ht to uy or sell an amount of forei!n currency.+) specifies price.C) specifies time period.

-) represents an oli!ation to uy or sell.Ans#er& -Topic& ed!in! Forei!n $5chan!e is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

14) As a forei!n e5chan!e hed!e6 currency s#aps ha*e all of the follo#in! characteristics$C$:TA) an initial e5chan!e y t#o parties of t#o principal amounts in t#o different currencies.+) principal amounts are re*ersed at the spot rate at maturity.C) each party pays the other@s interest payment.

-) principal amounts are re*ersed at a preBa!reed rate at maturity.Ans#er& +Topic& ed!in! Forei!n $5chan!e is"uestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

17) n terms of in*entory mana!ement multinational firmsA) must deal mainly #ith e5chan!e rate fluctuations and tariffs.+) must deal #ith a #ide numer of factors6 includin! e5chan!e rate fluctuations6 tariffs6 nonBtariff arriers6 inte!ration schemes such as the $$C6 and other rules and re!ulations.C) ha*e only economic factors to consider6 since this is a current asset and is minimally affectedy political factors.-) ha*e only political factors to consider6 since in*entory is minimally affected y forei!neconomic factors.Ans#er& +Topic& MNCs and n*entory Mana!ementuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

1;) Forei!n onds are sold primarily inA) countries other than the country in #hich the issue is denominated.+) /estern $urope.C) >apan.

-) the country of the currency of issue.Ans#er& -Topic& Forei!n +ondsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy



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1=) A ond that is initially sold primarily in countries other than the country of the currency in#hich the issue is denominated is calledA) an international ond.+) a forei!n ond.C) a $uroond.

-) a doule -utch ond.Ans#er& CTopic& $uroondsuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

19.7 e*ie# recent trends in international mer!ers and joint *entures.

1) The creation of international joint *entures has increased sustantially durin! the past t#odecades.Ans#er& TU$

Topic& nternational >oint ?enturesuestion %tatus& e*isedAAC%+ ,uidelines& -ynamics of the !loal economy

) n the U.%. o*er the past 2 years6 forei!n direct in*estment (F-) came o*er#helmin!ly inthe form of mer!ers and acEuisitions rather than throu!h estalishments.Ans#er& TU$Topic& Forei!n -irect n*estmentuestion %tatus& Ne#AAC%+ ,uidelines& -ynamics of the !loal economy

2) n the most emer!in!Ode*elopin! countries (includin! China) o*er the past 2 years6 forei!ndirect in*estment (F-) came o*er#helmin!ly in the form or mer!ers and acEuisitions ratherthan throu!h estalishments.Ans#er& FA'%$Topic& Forei!n -irect n*estmentuestion %tatus& Ne#AAC%+ ,uidelines& -ynamics of the !loal economy

chapter19 mafin 2013 ed

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