Exam 3
Which of the following statement is FALSE?
In the APV model, all cash flows are discounted at the firm's weighted average cost of capital.
Which of the following statements is FALSE?
In the APV model, depreciation tax shields are discounted at the cost of equity.
Your firm has a British customer who is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use?
$1.90 = £1.00
The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i) - the company can expand its potential investor base (ii) - issues involving the disclosure and listing requirements (iii) - creates a secondary market for the company's shares (iv) - liquidity (v) - volatility spillover from the overseas markets (vi) - control of the company by foreigners (vii) - enhances the visibility of the company's name and its products in foreign marketplaces Which of the following represent all the potential BENEFITS of the cross-border listings of stocks?
(i), (iii), (iv), and (vii)
The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i) - the company can expand its potential investor base (ii) - issues involving the disclosure and listing requirements (iii) - creates a secondary market for the company's shares (iv) - liquidity (v) - volatility spillover from the overseas markets (vi) - control of the company by foreigners (vii) - enhances the visibility of the company's name and its products in foreign marketplacesWhich of the following represent all the potential COSTS of the cross-border listings of stocks?
(ii), (v), and (vi)
For an exporter to successfully hedge its FX receivable exposure, the exporter should buy FX forward
False
Which of the following statement is FALSE? Cutting interest rates can lead to easy credits to households and businesses, which may fuel demand for imports. A higher interest rate curbs domestic consumption and hence can improve current account deficit. A conventional view held by economists and central bankers is that high interest rate leads to inflation. When investors become confident to invest in a country, that country's currency tends to strengthen. Investors view a lack of independence of the central bank as a major risk.
A conventional view held by economists and central bankers is that high interest rate leads to inflation.
Blockage of fund transfers
A host government may block ...
Currency inconvertibility
A host government may not allow ...
Indigenization laws
A host government may require ...
Which of the following statements is FALSE? ADR is quoted and traded in USD on a U.S. securities market. A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects. If a firm's cash inflows come from sources all over the world, those cash inflows may be more stable because the firm's total sales will not be highly influenced by a single economy. Firms can create value for their shareholders by issuing securities in foreign as well as domestic markets when international financial markets are not fully integrated. An MNC's access to the international capital markets may allow it to obtain funds at a lower cost than that paid by domestic firms.
A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects.
When exchange rates change, ___________________.
All of the statements are correct
With regard to the financial structure of a foreign subsidiary, _____________ .
All the statements are correct
Which of the following can cause the incremental cash flows to the subsidiary to be different from the parent?
All the statements correctly identify a cause
Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?
All the strategies, executed correctly, will hedge the FX risk.
Which of the following statement is FALSE?
An exporter can successfully hedge its account receivables by buying FX forward.
(MMH_Importer, 3/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge?
Boeing borrows $8,450,704.23 in the United States now
Which of the following statements is FALSE? A firm creates equity by retaining earnings or by issuing new stock. The greater the use of debt, the greater the interest expenses and the greater the tax savings due to tax deductibility of debt interest payments. As an MNC increases its proportion of equity, the rate of return required by potential new shareholders will increase to reflect the higher probability of bankruptcy. There is an advantage to using debt rather than equity as capital because the interest payments on debt are tax deductible.
As an MNC increases its proportion of equity, the rate of return required by potential new shareholders will increase to reflect the higher probability of bankruptcy.
(MMH-exporter, 1/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge?
Boeing borrows £9,708,737.86 in the United Kingdom at the prevailing interest rate of 3%
(MMH_Importer, 2/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge?
Boeing buys British pounds in the spot market
(MMH-exporter, 2/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge?
Boeing buys US dollars in the spot market
(MMH_Importer, 1/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge?
Boeing borrows $8,450,704 in the United States at the prevailing interest rate of 6.0%
(MMH-exporter, 3/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge?
Boeing lends $10,873,786.41 in the United States now
Will a domestic firm, say a bicycle manufacturer, that sources, produces, and sells only in the U.S be impacted by FX fluctuation? i. Yes, if the firm's product competes against imported bicycles. ii. Yes, because the firm's customers are comparing the cost and features of the domestic bicycles against imported foreign bicycles iii. No, because changes in exchange rates only affect firms that are directly engaged in international trade, but not purely domestic firms. iv.The domestic firm will only be negatively impacted if the dollar is depreciating again the currencies whose countries export bicycles to the United States.
Both i and ii
A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail strategies using options that will eliminate exchange rate risk. Strike Euro €62,500 ¥125 = €1.00 Yen ¥1,250,000 €0.008 = ¥1.00
Buy 16 put options on euro or buy 10 call options on yen
Which of the following countries face the highest level of political risk in the form of corruption?
Cambodia
War
Conflicts with neighboring countries ...
Which of the following is correct?
Cost of common equity > weighted average cost of capital > cost of debt
Which of the following statement is FALSE?
Empirical research shows a positive relation between a country's geopolitical risk and foreign direct investment in that country.
Currency futures contract is a more popular way for firms to hedge FX exposure because it allows firms to tailor the contract terms firm-specific needs.
False
Which of the following statements is FALSE? While a cross-border listing can signal better protection of shareholders' interests and a greater commitment to transparency, this transparency has a cost in management time and comes with greater risk of shareholder lawsuits and regulatory scrutiny. A non-U.S. firm's willingness to comply with U.S. disclosure requirements and securities regulations signals its quality and provides better protection of shareholders' interests. Foreign listing allows a firm's stock to become part of the global portfolio. European firms represent the largest contingent of foreign listings on U.S. exchanges
European firms represent the largest contingent of foreign listings on U.S. exchanges
Which of the following represents the most extreme form of political risk?
Expropriation risk
Which one of the following country risks make a country uninvestable?
Expropriation risk
Which of the follow statements is FALSE? If a currency is depreciating, a firm can use the lead and lag strategy to reduce its transaction exposure by paying the obligations denominated in the depreciating currency as late as the contracts will allow. When the competition is intense, the lead and lag strategy may be infeasible to deploy. However, a multinational company can aggressively use the lead and lag strategy to deal with intrafirm payables and receivables. If a currency is appreciating, it is beneficial for a firm to pay its bills denominated in that currency early and let customers in that country pay late as long as they are paying in that currency. Facing a depreciating currency, the firm should give incentives to its customers who owe the firm in that currency to pay late.
Facing a depreciating currency, the firm should give incentives to its customers who owe the firm in that currency to pay late.
Currency forward contract is the most direct and popular way of hedging transaction exposure because _______________________.
Forwards can be tailored made in terms of contract size and delivery date to meet the clients' needs
A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year. Detail a strategy using forward contracts that will hedge his exchange rate risk. Spot exchange rate 1-year forward rate Contract size $1.00 = ¥100 $1.00 = ¥120 ¥12,500,000
Go short in 12 yen forward contracts
Boeing imported a Rolls-Royce jet engine for £5 million in one year. Which of the following is true, given the market conditions of i$=6%, i£ = 6.5%, S0 = $1.80/£, F1 = $1.75/£?
If Boeing decides to use a currency option contract to hedge its pound payable, it should buy call option
Which of the following statement is FALSE? When making capital budgeting decisions, a subsidiary should use the discount rate that is specific to the risk of the project that the subsidiary is undertaking in the foreign country rather than the parent's cost of capital. If subsidiaries use firm-level, rather than project-specific, cost of capital to make capital budgeting decisions, over time risky projects with negative investment returns will be accepted. In the APV model, operating cash flows are discounted at subsidiaries' unlevered cost of equity.
In the APV model, operating cash flows are discounted at subsidiaries' unlevered cost of equity.
Which of the following is NOT an economic risk?
Inefficient bureaucracy
Which of the following may be a motivation for firms to undertake hedging?
Investors face inherent information asymmetry about the firm's operation including its foreign exchange exposure. Therefore, the firm's management is in the best position to hedge.
In graph
Kl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures.
(MMH_Importer, 4/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Is there a profitable money market hedging opportunity for Boeing compared to forward market hedge?
No, because the intrinsic interest rate in the US is less than the market rate
Which of the following countries has the highest home bias?
Peru
Which of the following strategies can a firm deploy to manage its economic exposure?
Selecting low cost production sites
A Brazilian exporter to Europe invoices goods in EUR and expects to receive EUR 4 million in 3-months. A 3-month forward contract is available at a EURBRL rate of 2.7513. How should the Brazilian exporter construct a forward market hedge to manage the FX exposure?
The Brazilian exporter takes a short position in the forward contract of EUR 4 million at the 3-month forward EURBRL rate of 2.7513
Which of the following countries face the lowest level of political risk in the form of corruption?
The United States
Which of the following countries has the lowest implied cost of capital?
The United States
Which of the following statement is FALSE?
The choice between a forward market hedge and a money market hedge often comes down to fisher effect.
Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg under an internationalized capital structure. The take-away lesson from the graph is that ________________________________ .
The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's value
Which of the following may explain that the APV is lower for the subsidiary than for the parent?
The foreign tax rate is higher
What may be the reasons that the APV is higher for the subsidiary than for the parent?
The host country imposes restrictions on remittances
Which of the following statement is FALSE? Generally speaking, investors from all countries exhibit home bias. There is a negative relation between home bias and the cost of capital. An MNC can face a higher cost of capital than a domestic firm if the MNC is highly exposed to exchange rate risk or country risk. If a firm generates sales from all over the world, the firm's revenue may be more stable because it will not be highly influenced by a single economy. If the United States is your home country and if you have zero home bias, then you should invest 20% of your money in global stocks if the US equity market is 80% of the global equity market.
There is a negative relation between home bias and the cost of capital.
Boeing imported a Rolls-Royce jet engine for £4 million in one year. Which of the following is true, given the market conditions of i$=6%, i£ = 5.5%, S0 = $1.80/£, F1 = $1.75/£?
To hedge this FX exposure using forward contracts, Boeing should buy £4 million forward in exchange for $7,000,000
Which of the following statements is FALSE? While many managers understand the effects of random exchange rate changes on the dollar value of their firms' assets and liabilities denominated in foreign currencies, they often do not understand the effect of volatile exchange rates on operating cash flows. A firm's economic exposure is determined by a firm's ability to mitigate the effect of FX changes by adjusting its market, product mix, and sourcing. Transaction exposure can be managed by balancing the sensitivity of revenue and expenses to exchange rate fluctuations.
Transaction exposure can be managed by balancing the sensitivity of revenue and expenses to exchange rate fluctuations.
A CFO should be least worried about ____________.
Translation exposure
FX payables are hedged using call options on FX (i.e., the FX is bought at the option exercise/strike price in home currency)
True
Which of the following strategies can a firm deploy to manage its transaction exposure?
Using financial instruments such as forwards and options
Which of the following statement is FALSE?
WRONG If you owe a foreign currency denominated debt, you can hedge with buying the foreign currency today and investing it in the foreign county. The most direct and popular way of hedging transaction exposure is by currency forward contracts. If you own a foreign currency denominated bond, you can hedge with a swap contract where pay the cash flows of the bond in exchange for dollars.
(MMH-exporter, 4/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Is there a profitable money market hedging opportunity for Boeing compared to forward market hedge?
WRONG No, because the intrinsic interest rate in the UK is greater than the market rate Yes, because the intrinsic interest rate in the US is greater than the market rate
Which of the following statements make the best argument for why firms should NOT hedge exchange rate risks?
WRONG Exchange rate risk is irrelevant for multinational companies (MNCs) because an MNC generates cash flows in numerous currencies. The exchange rate movements of many currencies can easily, exactly offset each other. Exchange rate risk is irrelevant because many multinational companies are similarly affected by exchange rate movements.
Which of the following statement is FALSE?
WRONG If you owe a foreign currency denominated debt, you can hedge with buying the foreign currency today and investing it in the foreign county. The most direct and popular way of hedging transaction exposure is by currency future contracts.
To mitigate country risk, an MNC can ____________ . i) increase the required rate of return ii) extend the minimum payback period iii) adjust operating cash flows iv) buy insurance v) risk sharing
WRONG all i, ii, and iii
Expropriation risk
a host government forcibly takes over the ownership of privately owned property with little, if any, compensation to the owners
Which of the following corporate stakeholders may prefer firms to hedge foreign exchange risks?
all choices are correct
Which of the following strategies can a firm deploy to manage its economic exposure?
all of them are correct
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. How many call or put options should the UK firm to hedge a €100,000 receivables?
both choices are correct
A purely domestic firm that sources and sells only domestically _____________.
faces exchange rate risk to the extent that it has international competitors in the domestic market
An exporter faced with exposure to an appreciating currency benefits by collecting early
false
Firms can receive shift exchange rate risks by invoicing foreign sales in home currency especially when the competition intensifies
false
In spring 2021, Chinese consumers boycotted buying products from MNCs including H&M and Nike because these firms expressed concerns about the use of forced labor in Xinjiang or pledged to not source from there. This incident represents economic risk
false
Sunk costs such as the research expense of the feasibility study of the project are the future cash flows of the project and hence should be part of the NPV calculation of the project
false
successful product differentiation gives the firm greater elastic demand -- which may translate into less exchange rate risks
false
The _______ technique is a subjective method because it requires the financial manager to exercise his or her judgement and intuition
heuristic
Assume that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. Assume i$=6.1%, i£ = 10.9%, S0 = $1.50/£, F1 = $1.46/£ and S1= $1.60/£. By implementing this forward hedging strategy, Boeing ___________________.
lost $1.4 million
An MNC faced with exposure to an appreciating foreign currency can reduce transaction exposure with a strategy of ____________________.
paying early, collecting late
An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of _______________.
paying late, collecting early
When the choice of financing a foreign subsidiary is between external debt and equity financing, _________________.
political risk considerations tend to favor debt financing
Economic exposure measures _____________________.
the extent to which the value of the firm would be affected by unanticipated changes in exchange rate
MNC's access to the international capital markets may allow it to obtain funds at a lower cost that that paid by domestic firms
true
The APV model has an advantage over the NPV model in making international capital budget decisions because APC is more flexible in treating incremental cash flows.
true
There's a positive relation between home bias and the cost of capital
true
it is more difficult for financial managers to assess the impact of unexpected FX movements on corporate operating cash flows (operating exposure) than the impact on assets and liabilities (asset exposure)
true
The parent company should decide the financing method for its own subsidiaries ________________.
with a view toward minimizing the parent's overall cost of capital