FINA4315 Chapter 1

____ are most commonly classified as a direct foreign investment. a. Foreign acquisitions b. Purchases of international stocks c. Licensing agreements d. Exporting transactions

a. Foreign acquisitions

Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries? a. assembly line production. b. specialized professional services. c. nuclear missile planning. d. planning for more sophisticated computer technology.

a. assembly line production.

Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations. a. depreciates; appreciates b. appreciates; appreciates c. appreciates; depreciates d. depreciates; depreciates

a. depreciates; appreciates

The Sarbanes-Oxley Act improves corporate governance of MNCs because it: a. makes executives more accountable for verifying financial statements b. eliminates stock options as a form of compensation c. ties executive compensation to firm performance d. places a limit on the amount of funds that managers can spend

a. makes executives more accountable for verifying financial statements

Which of the following theories identifies specialization as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of these

a. theory of comparative advantage.

Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co? a. $200,000 b. $559,500 c. $582,500 d. $393,500

b. $559,500

Which of the following does not constitute a form of direct foreign investment? a. Franchising b. International trade c. Joint ventures d. Acquisitions of existing operations e. Establishment of new foreign subsidiaries

b. International trade

Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co? a. Joint venture b. Licensing c. Partial acquisition of existing Japanese firm d. Establishment of Japanese subsidiary

b. Licensing

An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds b. a widely dispersed set of individual investors c. a few pension funds d. all of these would prevent agency problems

b. a widely dispersed set of individual investors

Which of the following theories identifies the non-transferability of resources as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of these

b. imperfect markets theory.

According to the text, a disadvantage of licensing is that: a. it prevents a firm from importing. b. it is difficult to ensure quality control of the production process. c. it prevents a firm from exporting. d. none of these

b. it is difficult to ensure quality control of the production process.

Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____. a. a specialized sales or service strategy; its technology b. its technology; a specialized sales or service strategy c. its technology; its technology d. a specialized sales or service strategy; a specialized sales or service strategy e. its technology; an initial investment

b. its technology; a specialized sales or service strategy

For the MNC, agency costs are typically: a. non-existent. b. larger than agency costs of a small purely domestic firm. c. smaller than agency costs of a small purely domestic firm. d. the same as agency costs of a small purely domestic firm.

b. larger than agency costs of a small purely domestic firm.

The commonly accepted goal of the MNC is to: a. maximize short-term earnings. b. maximize shareholder wealth. c. minimize risk. d. A and C. e. maximize international sales.

b. maximize shareholder wealth.

With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____. a. shareholder wealth; short-term earnings b. shareholder wealth; shareholder wealth c. short-term earnings; sales volume d. short-term earnings; shareholder wealth

b. shareholder wealth; shareholder wealth

Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.? a. $100,000 b. $200,000 c. $160,000 d. $60,000

c. $160,000

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value? a. A weaker Mexican economy b. Lower Mexican interest rates c. Depreciation of the Mexican peso d. Appreciation of the Mexican peso.

c. Depreciation of the Mexican peso

The least risky method by which firms conduct international business is: a. Franchising. b. The acquisitions of existing operations. c. International Trade. d. The establishment of new subsidiaries. e. Licensing

c. International Trade.

Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. Establishing a centralized database of information b. Ensuring that all data are reported consistently among subsidiaries c. Speeding the process by which all departments and all subsidiaries have access to the data that they need d. Making executives more accountable for financial statements by personally verifying their accuracy e. All of these are common methods used by MNCs to improve their internal control process.

c. Speeding the process by which all departments and all subsidiaries have access to the data that they need

The goal of a multinational corporation (MNC) is a. The minimization of taxes remitted from foreign subsidiaries. b. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. c. The maximization of shareholder wealth. d. The maximization of social benefits resulting from actions such as the employment of foreign managers.

c. The maximization of shareholder wealth.

Which of the following is not a way in which agency problems can be reduced through corporate control? a. executive compensation. b. threat of hostile takeover. c. acquisition of a foreign subsidiary. d. monitoring by large shareholders.

c. acquisition of a foreign subsidiary.

MNCs can improve their internal control process by all of the following, except: a. establishing a centralized data base of information b. ensuring that all data are reported consistently among subsidiaries c. ensuring that the MNC always borrows from countries where interest rates are lowest d. using a system that checks internal data for unusual discrepancies

c. ensuring that the MNC always borrows from countries where interest rates are lowest

Which of the following is not mentioned in the text as an additional risk resulting from international business? a. exchange rate fluctuations. b. political risk. c. interest rate risk. d. exposure to foreign economies.

c. interest rate risk.

Which of the following theories suggests that firms seek to penetrate new markets over time? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of these

c. product cycle theory.

Which of the following is an example of direct foreign investment? a. exporting to a country. b. establishing licensing arrangements in a country. c. purchasing existing companies in a country. d. investing directly (without brokers) in foreign stocks.

c. purchasing existing companies in a country.

The agency costs of an MNC are likely to be lower if it: a. scatters its subsidiaries across many foreign countries. b. increases its volume of international business. c. uses a centralized management style. d. A and B.

c. uses a centralized management style.

Which of the following is not an example of political risk? a. Government may impose taxes on subsidiary b. Government may impose barriers on subsidiary c. Consumers may boycott the MNC d. Consumers' income levels will decrease, thus decreasing consumption.

d. Consumers' income levels will decrease, thus decreasing consumption.

Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation? a. International Trade b. Licensing c. Franchising d. Direct foreign investment

d. Direct foreign investment

The MNC's value depends on all of the following, except: a. MNC's required rate of return b. Amount of MNC's cash flows in particular currency c. The exchange rate at which cash flows are converted to dollars d. The value of MNC depends on all of the above factors

d. The value of MNC depends on all of the above factors

Which of the following could reduce agency problems for an MNC? a. stock options as managerial compensation. b. hostile takeover threat. c. investor monitoring. d. all of these are forms of corporate control that could reduce agency problems for an MNC.

d. all of these are forms of corporate control that could reduce agency problems for an MNC.

International trade: a. is a relatively conservative approach to foreign market penetration. b. entails minimal risk. c. does not require large amount of investment. d. all of these.

d. all of these.

In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI. a. higher; higher b. higher; lower c. lower; lower d. lower; higher

d. lower; higher

International trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business. a. higher; lower b. higher; higher c. lower; higher d. lower; lower

d. lower; lower

Due to the risks involved in international business, firms should: a. only consider international business in major countries. b. maintain international business to no more than 20% of total business. c. maintain international business to no more than 35% of total business. d. none of these

d. none of these

Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because a. Monitoring of managers located in foreign countries is more difficult. b. Foreign subsidiary managers raised in different cultures may not follow uniform goals. c. MNCs are relatively large. d. All of these e. A and B only

e. A and B only

Which of the following is not mentioned in the text as a theory of international business? a. Theory of Comparative Advantage b. Imperfect Markets Theory c. Product Cycle Theory d. Globalization of Business Theory e. All of these are mentioned in the text as theories of international business

e. All of these are mentioned in the text as theories of international business

The most risky method(s) by which firms conduct international business is (are): a. Franchising. b. The acquisitions of existing operations. c. The establishment of new subsidiaries. d. All of these e. B and C only

e. B and C only