Quiz 8 10 11 12 13 18

NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from The Allofit Territories Company (ATC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition. In response to NRI's request, ATC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference between the spot rate and the base rate. If NRI has a payable of C$100,000 due today and the current spot rate is C$1.17/$, how much does LBC owe in U.S. dollars?

$83,333

A swap agreement may involve currencies or interest rates, but never both.

FALSE

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

FALSE

For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

FALSE

The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate

FALSE

The ________ determines accounting policy for U.S. firms.

Financial Accounting Standards Board (FASB)

If the European subsidiary of a U.S. firm has net exposed assets of 200,000, and the euro increases in value from $1.22/EUR to $1.26/EUR the U.S. firm has a translation:

Gain of $8,000

A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if: A) the exchange rate changes to $1.52/£. B) the exchange rate changes to $1.58/£. C) the exchange rate doesn't change. D) all of the above

all of the above

Which of the following is NOT an example of an operating cash flow?

dividend paid to parent company

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

do nothing

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

functional

Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity.

integrated; self-sustaining

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an

interest rate swap

An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an

interest rate swap.

A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.52/£ the U.S. firm will realize a________of ______.

loss; $4,500

The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as:

matching

Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project

$1,500,000

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:

relatively high cost of capital.

The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

the market risk premium.

Translation exposure measures:

the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.

According to your authors, the main purpose of translation is:

to prepare consolidated financial statements.

According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is:

transaction exposure.

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

debt ratios

Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric motorcycles both domestically and internationally. A sudden and unexpected appreciation of the U.S. dollar should allow sales to ________ at home and ________ abroad. (Assume other factors remain unchanged.)

decrease; decrease

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

decrease; not change

A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an_______loan to the_____subsidiary while effectively financing the ________subsidiary.

direct; U.S.; Canadian

Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because:

domestic firms lack comparative data from its own sources.

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.

eliminate translation; transaction

Historical exchange rates may be used for ________, while current exchange rates may be used for ________.

equity accounts and fixed assets; current assets and liabilities

Generally speaking, translation methods by country define the translation process as a function of what two factors?

foreign subsidiary independence; a firm's functional currency

A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a ________ of ________.

gain; 4500

Relatively high costs of capital are more likely to occur in:

highly illiquid domestic securities markets.

The optimal capital budget:

occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects.

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

operating exposure

Which of the following is NOT an example of a financial cash flow?

payment for goods and services

The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as:

quotation, backlog, and billing exposure.

Which of the following is NOT an example of diversifying operations?

raising funds in more than one country

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because:

returns are not perfectly correlated between countries.

Which of the following will NOT affect a firm's beta?

the choice of the risk-free security

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

the marginal tax rate

The capital asset pricing model (CAPM) is an approach:

to determine the price of equity capital.

*Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.

transaction; Operating

*Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible.

transaction; Translation

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

transaction; operating

Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the local currency is the functional currency, then:

translation is accomplished through the current rate method.

Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the U.S. dollar is the functional currency, then:

translation is accomplished through the temporal method.

Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars:

translation is not required.

Portfolio theory assumes that investors are risk-averse. This means that investors:

will accept some risk, but not unnecessary risk.

Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?

€360,000

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from EUR1.35/£ to EUR1.30/£, the European firm has a translation:

Gain of EUR 12,500

Which of the following is an unlikely reason for firms to participate in the swap market? A) To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. B) Firms may raise capital in one currency but desire to repay it in another currency. C) Firms desire to swap fixed and variable payment or receipt of funds. D) All of the above are likely reasons for a firm to enter the swap market

All of the above are likely reasons for a firm to enter the swap market

Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate

-71,544

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a:

10% foreign exchange loss on the U.S. dollar accounts receivable.

For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned

50%

________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.

Accounting (aka translation)

Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

Accounting rate of return

Which of the following is NOT an example of political risk? The foreign government nationalizes all foreign-owned assets. Expropriation of cash flows by a foreign government. The U.S. government restricts trade with a foreign country where your firm has investments. All of the above are examples of political risk

All of the above are examples of political risk

The main technique to minimize translation exposure is called a/an ________ hedge.

Balance sheet

Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency?

Borrow money in the foreign currency in question

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then: A) the net exposed position is called monetary balance. B) the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) Both A and B are true. D) none of the above

Both A and B are true.

NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from the Allofit Territories Company (ATC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition. In response to NRI's request, ATC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20?

C$1.14/$ - C$1.26/$

Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound?

Coventry might try to lower domestic prices because competing imports are now priced higher in England.

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set

Credit risk; Repricing risk

The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.

Current rate; temporal

Each of the following is another name for operating exposureA) economic exposure. B) strategic exposure. C) accounting exposure. D) competitive exposure.

EXCEPT: accounting exposure.

Which of the following primary principles of U.S. translation procedures in NOT true?

If the financial statements of the foreign subsidiary are maintained in the local currency and the local currency is the functional currency, they are translated by the temporal method.

A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent

Integrated foreign entity

Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?

MNEs tend to rely more on short and intermediate term debt

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

Operating

All are important components of the CAPM_____ 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.

Systematic

Historically, interest rate movements have shown less variability and greater stability than exchange rate movements.

TRUE

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt

TRUE

Swap rates are derived from the yield curves in each major currency.

TRUE

________ exposure deals with cash flows that result from existing contractual obligations.

Transaction

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

Transaction; translation

________________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

Translation

________ occur as a result of changes in the value of currency, whereas ________ occur as a result of ongoing business activities

Translation gains or losses; operating gains or losses

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity, currency of composition, and fixed/floating pricing.

TRUE

The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

TRUE

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

TRUE

Recently the Canadian dollar realized an unexpected appreciation in value. Which of the following actions being considered by Tall Timber Exports, a Canadian logging firm specializing in exporting raw forest products, would be considered a highly unlikely response to the appreciation of the Canadian dollar?

Tall Timber Exports might raise export prices only slightly in an effort to increase market share.

________ cash flows arise from intracompany and intercompany receivables and payments, while ________ cash flows are payments for the use of loans and equity.

Operating; financing

________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure

Operating; translation; transaction

Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use ________ today when preparing operating budgets.

$101,000

Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows. Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value. All of the above are true statements

All of the above are true statements

_______ are transactions for which there are, at present, no contracts or agreements between Parties.

Anticipated exposure

Another name for operating exposure is exposure. A) economic B) competitive C) strategic D) all of the above

all of the above

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

all of the above

When disequilibria in international markets occur, management can take advantage by: A) doing nothing if they are already diversified and able to realize beneficial portfolio effects. B) recognizing disequilibria faster than purely domestic competitors. C) shifting operational of financing activities to take advantage of the disequilibria. D) all of the above

all of the above

A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time..

back-to-back loan

For a firm that competes internationally to sell its products, a depreciation of its domestic currency relative to markets where the firm exports goods, should eventually result in ________ sales at home and ________ sales abroad, other things equal.

greater; greater

The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called

capital budgeting

When considering the phases of adjustment and response to operating exposure in the LONG RUN, price changes tend to be_______ and volume changes tend to be_______.

completely flexible; completely flexible.

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the

consolidated balance sheet.

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

counterparty risk.

A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.

currency swap

A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.

currency swap

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

current rate; temporal

Which of the following is NOT an example of diversification in financing?

diversifying sales

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:

be equal