International Finance Final
A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment. A) irrevocable B) revocable C) confirmed D) unconfirmed
B
The ________ is the instrument normally used to actually effect payment in international commerce. A) banker's acceptance B) bill of exchange C) bill of lading D) letter of credit
B
Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business? A) affiliated party B) unaffiliated unknown party C) known unaffiliated party D) domestic supplier
B
11) TropiKana Inc., a U.S firm, has just borrowed $1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 6.00% per year, how much interest will they pay in the first year? A) $6,000 B) $60,000 C) $600,000 D) €60,000
B) $60,000
The draft is the instrument normally used in international commerce to: A) transfer product. B) prove ownership. C) transfer title. D) initiate the sale.
C
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
C
In deciding whether to invest abroad, management must first determine whether the firm has a sustainable competitive advantage that enables it to compete effectively in the home market. The competitive advantage must be: A) firm specific. B) not easily copied. C) in a transferable form. D) all of the above
D) all of the above
The owner-specific advantages of OLI must be: A) firm-specific. B) not easily copied. C) transferable to foreign subsidiaries. D) all of the above
D) all of the above
Based on observations of firms that have successfully invested abroad, we can conclude that one of the competitive advantages enjoyed by MNEs is: A) managerial expertise. B) financial strength. C) competitiveness of their home markets. D) all of the above are competitive advantages.
D) all of the above are competitive advantages.
Based on observations of firms that have successfully invested abroad, we can conclude companies are more competitive when: A) facing sophisticated and demanding customers in the home market. B) surrounded by a critical mass of related industries and suppliers. C) located in countries that are naturally endowed with the appropriate factors of production. D) all of the above are true
D) all of the above are true
Which of the following is NOT a market imperfection or genuine comparative advantage that attracts FDI to particular locations: A) low cost and productive labor force. B) unique sources of raw materials. C) defensive investments. D) an expansive monetary policy.
D) an expansive monetary policy.
24) Other things equal, an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing. Answer:
FALSE
25) If a firm's expected returns are more volatile than the expected return for the market portfolio, it will have a beta less than 1.0. Answer:
FALSE
Today, international trade is dominated by transactions between unaffiliated parties (known or unknown). TRUE or FALSE
FALSE
17) Financial theory has at last provided us with a single optimal capital structure for domestic firms.
False
21) The domestic theory of optimal capital structure does not need to be modified for MNEs.
False
6) Most firms raise their initial capital in foreign markets.
False
A strongly competitive home market tends to dull the competitive advantage relative to firms located in less competitive home markets.
False
As a general rule, the decision about where to invest abroad for the first time is the same as the decision about where to reinvest abroad.
False
Economists have observed that firms tend to invest first in countries that are too far distant in psychic distance (similar cultural, legal, and institutional environment).
False
Proactive financial strategies depend on discovering market imperfections.
False
Reactive financial strategies can be formulated in advance by the MNE's financial managers.
False
Small- and medium-size firms often attract foreign investors and achieve a global cost of capital.
False
The authors were unable to identify in lesser developed countries specific firms that are nearing the status of global MNE.
False
Transnationals are firms that have operations in more than one country and conduct their business through branches, foreign subsidiaries, or joint ventures with host country firms.
False
19) In part because of access to global markets, MNEs are better able than their domestic counterparts to maintain their desired debt ratio even when raising new capital.
True
20) When a firm borrows in a foreign currency, the effective cost is the foreign interest rate plus an adjustment for changes in the exchange rate.
True
7) The ultimate step sourcing capital abroad would be to place a directed equity issue in a prestigious target market or a euroequity issue in global equity markets.
True
In practice, when expanding into other countries, firms have been observed to follow a sequential search pattern as described in the behavioral theory of the firm.
True
MNEs that are resident in liquid and unsegmented capital markets are more likely to be able to demonstrate financial strength by achieving and maintaining a global cost and availability of capital.
True
3) Relatively high costs of capital are more likely to occur in: A) highly illiquid domestic securities markets. B) highly liquid domestic securities markets. C) unsegmented domestic securities markets. D) none of the above
a
10) ________ 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
A
20) ________ risk is measured with beta. A) Systematic B) Unsystematic C) International D) Domestic
A
8) The capital asset pricing model (CAPM) is an approach: A) to determine the price of equity capital. B) used by marketers to determine the price of saleable product. C) that can be applied only to domestic markets. D) none of the above
A
Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an: A) unaffiliated known party transaction. B) unaffiliated unknown party transaction. C) affiliated party transaction. D) none of the above
A
The person or company to whom the draft or bill of exchange is addressed is the: A) drawee. B) drawer. C) maker. D) originator.
A
9) Which of the following were NOT identified by the authors as a variable that needs to be modified in the domestic theory of optimal financial structures to accommodate the case of the multinational enterprise? A) Financial Distress B) Availability of capital C) Diversification of cash flows D) Foreign exchange risk
A) Financial Distress
1) Which financial economists are most closely associated with the financial theory of optimal capital structure? A) Modigliani and Miller B) Fama, Fisher, Jensen, and Roll C) Black and Scholes D) Markowitz and Sharpe
A) Modigliani and Miller
1) The choice of when and how to source capital globally is usually aided early on by the advice of: A) an investment banker. B) your stock broker. C) a commercial banker. D) an underwriter.
A) an investment banker.
An example of economies of scale in financing include: A) being able to access the Euroequity, Eurobond, and Eurocurrency markets. B) being able to ship product in shiploads or carloads. C) being able to use large-scale plant and equipment. D) all of the above
A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
The I in OLI refers to an advantage in a firm's home market that is an: A) internalization. B) industry-specific advantage. C) international abnormality. D) none of the above
A) internalization.
A/An ________ would be an example of an owner-specific advantage for an MNE. A) patent B) economy of scale C) economy of scope D) all of the above
A) patent
8) MNEs situated in countries with small illiquid and segmented markets are most like: A) small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing. B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing. C) small domestic U.S. firms in that they have a strong niche market in the U.S. D) None of the above is true.
A) small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing
11) Systematic risk: A) is the standard deviation of a security's return. B) is measured with beta. C) is measured with standard deviation. D) none of the above
B
18) Which of the following will NOT affect a firm's beta? A) the choice of the market portfolio against which to compare the variability of a firm's returns B) the choice of the risk-free security C) the choice of the time period used to calculate the firm's beta D) None of the above, because each of them affects the calculation of a firm's beta.
B
21) A fully diversified domestic portfolio has a beta of: A) 0.0. B) 1.0. C) -1.0. D) There is not enough information to answer this question.
B
7) The weighted average cost of capital (WACC) is: A) the required rate of return for all of a firm's capital investment projects. B) the required rate of return for a firm's average risk projects. C) not applicable for use by MNE. D) equal to 13%.
B
The L in OLI refers to an advantage in a firm's home market that is a: A) liability in the domestic market. B) location-specific advantage. C) longevity in a particular market. D) none of the above
B) location-specific advantage.
The O in OLI refers to an advantage in a firm's home market that is: A) operator independent. B) owner-specific. C) open-market. D) official designation.
B) owner-specific.
13) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)? A) $55,000 B) $79,750 C) $77,000 D) $37,931
B)$ 79,750
Drafts that have been accepted by banks become: A) clean drafts. B) nonmarketable. C) banker's acceptances. D) none of the above
C
13) The after-tax cost of debt is found by: A) dividing the before-tax cost of debt by (1 - the corporate tax rate). B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt. C) multiplying the before-tax cost of debt by (1 - the corporate tax rate). D) subtracting the corporate tax rate from the before-tax cost of debt.
C
15) The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as: A) beta. B) the geometric mean. C) the market risk premium. D) the arithmetic mean.
C
22) Unsystematic risk: A) is the remaining risk in a well-diversified portfolio. B) is measured with beta. C) can be diversified away. D) all of the above
C
9) Which of the following is NOT a key variable in the equation for the capital asset pricing model? A) the risk-free rate of interest B) the expected rate of return on the market portfolio C) the marginal tax rate D) All are important components of the CAPM.
C
A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________. A) exporter's; portfolio risk B) importer's; blocked foreign exchange C) exporter's; blocked foreign exchange D) none of the above
C
Which of the following is NOT true regarding a letter of credit? A) The importer and exporter agree on a transaction. B) The importer applies to its local bank for the issuance of a letter of credit. C) The exporter applies to its local bank for the issuance of a letter of credit. D) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of the importer.
C
12) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/€ at the time the loan was made to $1.35/€ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)? A) $55,000 B) €74,250 C) $74,250 D) $77,000
C) $74,250
From a financial management perspective, all of the following are primary risks associated with an international trade transaction EXCEPT: A) currency risk B) default risk C) noncompletion risk D) interest rate risk
D
7) Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include: A) the industry in which it operates. B) the volatility of its sales and operating income. C) the collateral value of its assets. D) all of the above
D) all of the above
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.
C) Initial investments tend to be much larger than subsequent ones.
3) Which of the following is the typical order of sourcing capital abroad? A) an international bond issue, then cross listing the outstanding issues on other exchanges, then an international bond issue in the target market B) an international bond issue in the target market, then cross listing the outstanding issues on other exchanges, then an international bond issue C) an international bond issue in less prestigious markets, then an international bond issue in the target market, and ultimately a eurobond issue D) cross listing the outstanding issues on other exchanges, then an international bond issue, then an international bond issue in the target market
C) an international bond issue in less prestigious markets, then an international bond issue in the target market, and ultimately an eurobond issue
4) Which of the following is the typical first step sourcing capital abroad? A) an international bond issue placed on a more prestigious foreign market B) an international bond issue in the eurobond market C) an international bond issue placed on a less prestigious foreign market D) issue equity in one of the less prestigious markets to attract the attention of international investors first
C) an international bond issue placed on a less prestigious foreign market
The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture. A) licensing B) joint ventures C) foreign direct investment D) strategic alliances
C) foreign direct investment
10) In theory, the MNE should support ________ debt ratios than a purely domestic firm because their cash flows are ________. A) lower; more stable due to international diversification B) lower; less stable due to international diversification C) higher; more stable due to international diversification D) higher; less stable due to international diversification
C) higher; more stable due to international diversification
2) For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases
C) increases, increases
6) Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________. A) point; 50% B) point; 25% C) range; 30%-60% D) range; 10%-40%
C) range; 30%-60%
A/An ________ would be an example of a location-specific advantage for an MNE. A) patent B) economy of scale C) unique source of raw materials D) possession of proprietary information
C) unique source of raw materials
19) Beta may be defined as: A) the measure of systematic risk. B) a risk measure of a portfolio. C) the ratio of the variance of the portfolio to the variance of the market. D) all of the above
D
A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit. A) irrevocable; unconfirmed B) revocable; confirmed C) confirmed; irrevocable D) unconfirmed; confirmed
D
12) Which of the following is generally unnecessary in measuring the cost of debt? A) a forecast of future interest rates B) the proportions of the various classes of debt a firm proposes to use C) the corporate income tax rate D) All of the above are necessary for measuring the cost of debt.
D
14) A firm whose equity has a beta of 1.0: A) has greater systematic risk than the market portfolio. B) stands little chance of surviving in the international financial market place. C) has less systematic risk than the market portfolio. D) None of the above is true.
D
16) If a company fails to accurately predict it's cost of equity, then: A) the firm's wacc will also be inaccurate. B) the firm may not be using the proper interest rate to estimate NPV. C) the firm may incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity. D) All of the above are true.
D
17) Which of the following statements is NOT true regarding beta? A) Beta will have a value of less than 1.0 if the firm's returns are less volatile than the market. B) Beta will have a value of greater than 1.0 if the firm's returns are more volatile than the market. C) Beta will have a value of equal to 1.0 if the firm's returns are of equal volatility to the market. D) All of the statements above are true.
D
The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following? A) the risk of noncompletion B) the risk of foreign exchange risk (when combined with a various hedging techniques) C) the risk that financing will not be available due to foreign exchange risk D) All of these risks are reduced when using these trade implements
D
The person or company initiating the draft or bill of exchange is known as the: A) maker. B) drawer. C) originator. D) any of the above
D
The risk of default on the part of the importer - risk of noncompletion - is present as soon as: A) a price quote is given. B) goods are received. C) the export contract is signed. D) the financing period begins
D
The risk of noncompletion is most important when: A) the international trade is recurrent in nature. B) there is a sustained relationship between the buyer and seller. C) with an outstanding agreement for recurring shipments. D) when the relationship is between countries whose currencies are considered strong
D
Which of the following is NOT a financial instrument that may be included in an international trade transaction? A) Letter of Credit B) Sight Draft C) Order bill of lading D) Federal funds transaction
D
Which of the following purposes is NOT served by the bill of lading? A) It acts as a receipt. B) It acts as a contract. C) It acts as a document of title. D) It acts as all of the above.
D
Which of the following is NOT a factor of Porter's "diamond of national advantage"? A) factor conditions B) demand conditions C) related and supporting industries D) All of the above are factors of the diamond of national advantage.
D) All of the above are factors of the diamond of national advantage.
5) Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing? A) increased agency costs B) increased probability of financial distress (bankruptcy) due to fixed interest payments C) alternative tax shields to those supplied by interest payments D) All of the above offset the tax advantage of debt as a source of financing.
D) All of the above offset tax advantage of debt as a source of financing.
2) 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
D) all of the above
5) By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to accomplish which of the following? A) improve the liquidity of its existing shares B) increase its share price C) increase the firm's visibility D) all of the above
D) all of the above
A/An ________ would be an example of an internalization advantage for an MNE. A) patent B) economy of scale C) unique source of raw materials D) possession of proprietary information
D) possession of proprietary information
4) One of the most important factors in making debt less expensive than equity is: A) the seniority of equity obligations to debt claims. B) the tax deductibility of dividends. C) the tax deductibility of equity. D) the seniority of debt obligations to equity claims.
D) the seniority of debt obligations to equity claims
3) One of the most important factors in making debt less expensive than equity is: A) the tax deductibility of depreciation. B) the tax deductibility of equity. C) the tax deductibility of dividends. D) the tax deductibility of interest.
D) the tax deductibility of interest
23) A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other, unsegmented markets. Answer:
TRUE
An advantage of trading with an affiliated party for an MNE, compared to an unaffiliated party, could be reduced contracting costs and less to even no need to protect against nonpayment. TRUE OR FALSE
TRUE
Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex. TRUE OR FALSE
TRUE
If a foreign exchange transaction calls for payment in the exporter's currency, the importer has the foreign exchange risk. TRUE OR FALSE
TRUE
If a foreign exchange transaction calls for payment in the importer's currency, the exporter has the foreign exchange risk. TRUE OR FALSE
TRUE
In the case of international trade, the risk of nonpayment is essentially eliminated with the use of a letter of credit issued through a trustworthy bank. TRUE OR FALSE
TRUE
The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land. TRUE OR FALSE
TRUE
18) Financial practice suggests that there is a range for an optimal capital structure for a firm within an industry rather than a specific optimal ratio of debt to equity.
True
2) Other things equal, a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a: A) relatively low cost of capital. B) relatively high cost of capital. C) relatively average cost of capital. D) cost of capital that we cannot estimate from this question.
b
1) If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets. A) liquid; segmented B) liquid; large C) illiquid; segmented D) large; illiquid
c
4) Reasons that firms may find themselves with relatively high costs of capital include: A) The firms reside in emerging countries with undeveloped capital markets. B) The firms are too small to easily gain access to their own national securities market. C) The firms are family owned and they choose not to access public markets and lose control of the firm. D) all of the above
d
5) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) excessive regulatory control B) perceived political risk C) anticipated foreign exchange risk D) All of the above are contributing factors.
d
6) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) lack of transparency B) asymmetric availability of information C) insider trading D) All of the above are contributing factors.
d
