Ch 11, 12, 13 fin, Fin 400 Chapter 14 & 15

A portfolio that incurs the smallest risk for a given level of return is called __. A. the efficient frontier B. the optimal portfolio C. the market portfolio D. the international portfolio E. the efficient portfolio

E. the efficient portfolio

MNCs must account for a number of complicated factors to measure debt include all of the following but__. A. MNCs can borrow in eurocurrency markets B. MNCs can borrow international bond markets C. an estimate of interest rates and proportion of debt can be raised in each market D. an estimate of tax rates in each capital market E. the firm's price-earnings ratio

?

B. employee health care

A merger can affect all of the following except ___.

Assume that the per-share prices of a common stock are $40, $50, and $60 for three days. Calculate the average price, the standard deviation, and the coefficient of variation for the stock. A. $50, $10, .20 B. $50, $10, 0.30 C. $40, $20, 0.40 D. $60, $20, 0.50 E. $40, $50, 0.20

A. $50, $10, .20 Solution: Average price = (40 + 50 + 60)/3 = $50. Use Equation (12-1) for the standard deviation: Standard deviation = {[(40 - 50)2 + (50 - 50)2 + (60 - 50)2]/(3 - 1)}½ = $10. The coefficient of variation = 10/50 = 0.20

A firm just paid a dividend of $1.2. Based on your assessment of the riskiness of the common stock, you feel it should pay a return of 20%. If the firm's dividends are expected to have a long-term growth rate of 4%, what is the market value of the stock? A. $7.50 B. $6.20 C. $5.00 D. 4.25 E. $9.99

A. $7.50 Solution: If you rearrange Equation (19-2) for the market price of equity, you will have: market price = dividend/(cost of equity - annual dividend growth rate) = $1.2/(0.20 - 0.04) = $7.50.

The expected rate of return on a market portfolio is 15 percent. The riskless rate of interest is 7 percent. The beta of a company is 1.4. What is the required rate of return on this company's common equity? A. 18.2 B. 22 C. 25.6 D. 31.9 E. 55.6

A. 18.2 Solution: use Equation (12-2): R = .07 + (.15 - .07)1.4 = 18.2%

A correlation coefficient in portfolio management measures __. A. the degree of correlation between two or more securities B. the degree of variance C. the degree of past relationship D. the degree of certainty E. all of the above

A. the degree of correlation between two or more securities

Leads and lags are a form of working capital management by ___. A. accelerating hard-currency payables payments and delaying soft-currency payables payments B. delaying accounts receivable payments and speeding up accounts payable payments C. accelerating both receivables and payables payments D. accelerating both soft-currency payables payments and accelerating hard-currency payables payments E. all of the above

A. accelerating hard-currency payables payments and delaying soft-currency payables payments

Multinational companies frequently unbundle remittances into separate flow categories in order to __. A. avoid taxes B. minimize the size of profit repatriation C. meet the accounting standards D. A and B E. A, B, and C

A. avoid taxes

Because of the degree of correlation among securities depends on economic factors, most pairs of domestic securities have a correlation coefficient ___. A. between 0 and 1.0 B. between 0 and -1. C. greater than +1.0 D. between 0 and 2.0 E. equal to 0

A. between 0 and 1.0

Aggressive stocks are those stocks that have betas __. A. greater than 1 B. smaller than 1 C. equal to 1 D. cannot tell E. greater than 1 but smaller than 2

A. greater than 1

A US company has $10,000 in cash available for 45 days. It can earn 1 percent on 45-day investment in the United States. Alternatively, if it converts the US dollars to Singapore dollars, it can earn 1.5 percent on a Singapore deposit for 45 days. The spot rate of the Singapore dollar is US$0.50. The spot rate 45 days from now is expected to be US$0.40. Should this company invest its cash in the United States or in Singapore? A. in the United States B. in Singapore C. it does not make any difference D. all of the above E. none of the above

A. in the United States Solution: US investment earns 1 percent. Percentage change in Singapore dollar= ($0.40 - $0.50)/$0.50 = -20%. Singapore investment loses 18.8 percent: [(1 + 0.015)(1 + (-0.20)] - 1 = -18.8%.

An advantage of multilateral netting by a multinational corporation and its foreign affiliates is that it __. A. reduces the total volume of interafilliate fund flows B. increases the total volume of interaffiliate fund flows C. increases foreign exchange risk D. increases political risk E. reduces the number of employees

A. reduces the total volume of interaffiliate fund flows

Which of the following statements gives the best description of international portfolio? A. stock market returns have lower positive correlations across countries than within a country B. stock market returns have higher positive correlations across countries than within a country C. stock market returns are supposed to have zero correlations across countries D. stock market returns have lower negative correlations across countries than within a country E. stock market returns have independent correlations across countries

A. stock market returns have lower positive correlations across countries than within a country

The most important factor affecting the location of international cash centers is probably __. A. the local government's political stability and its attitude toward foreign-based companies B. having enough cash balances at the local subsidiary C. exchange rate volatility D. the local government's ability to export oil E. all of the above

A. the local government's political stability and its attitude toward foreign-based companies

At present, the riskless rate of return is 5 percent and the expected rate of return on the market portfolio is 11 percent. The expected return for a common stock is 20 percent and the stock's beta is 1.2. This particular common stock is: A. undervalued B. overvalued C. fairly valued D. cannot tell E. none of the above

A. undervalued Solution: use Equation (12-2): R = .05 + (.11 - .05)1.2 = 12.2% < 20%

Global Corp. has debt with a market value of $80,000 and common equity with a market value $120,000. The component costs of the capital structure for Global Corp. are 7.4% for bond and 16.4% for common equity. What is the weighted average cost of capital for Global Corp.? A. 7.4 B. 12.8% C. 16.4% D. 19.6% E. 21.5%

B. 12.8% Solution: use Equation (19-1): cost of capital = (120,000/200,000).164 + (80,000/200,000).074 = 12.8%

A portfolio manager has decided to invest a total of $2 million on US and Japanese portfolios. The expected returns are 12 percent on the US portfolio and 20 percent on the Japanese portfolio. What is the expected return of an international portfolio with 40 percent invested in the US portfolio and 60 percent invested in the Japanese portfolio? A. 32.0% B. 16.8% C. 15.0% D. 12.7% E. 10.0%

B. 16.8% Solution: use Equation (12-4): Rp = (.4)(.12) + (.6)(.20) = 16.8%.

According to an empirical study by Solnick, an efficient international portfolio cuts the systematic risk of an efficient US portfolio by more than %. A. 25 B. 50 C. 75 D. 100 E. 130

B. 50

A. political system

Construction of new plants abroad requires demand forecast. Such a demand forecast does not depend on the following ___.

Economic constraints of an MNC's current asset management include all of the following but___. A. foreign exchange constraints B. arbitrage constraints C. regulatory constraints D. tax constraints E. all of the above are constraints

B. arbitrage constraints

According to the transfer pricing regulations, multinational firms are supposed to charge prices to its foreign affiliates based on the following: A. total cost B. arm's-length prices C. average cost D. internal prices E. none of the above

B. arm's-length prices

Some multinational companies set up a re-invoicing center which normally ___. A. invoices in the same currency for the buyer and seller of goods and services B. buys in one currency and pays in another currency C. buys in the parent currency and pays in the parent currency D. buys in gold and pays in the US dollar E. all of the above

B. buys in one currency and pays in another currency

Major categories of a float do not include the following__. A. invoicing float B. credit float C. mail float D. processing float E. transit float

B. credit float

International portfolio diversification, compared to a purely domestic portfolio diversification, in general will__. A. increase risk B. decrease risk C. have the same amount of risk D. all of the above E. cannot tell

B. decrease risk

Multinational companies may reduce their cost of capital by__. A. increasing foreign direct investment B. diversifying risk across the national boundaries C. increasing political pressure D. exploiting local labor E. none of the above

B. diversifying risk across the national boundaries

Which of the following is not one of the ways that a multinational company can delay its payments? A. mail B. electronic fund transfers C. more frequent requisitions D. floats E. none of the above

B. electronic fund transfers

Centralized international cash management requires each local subsidiary to ___. A. do whatever it wants with its excess cash B. hold the minimum cash balance C. investment in foreign exchange markets D. invest in local capital markets E. investment in long-term securities

B. hold the minimum cash balance

The optimal capital culture__. A. is where the debt ratio remains fixed, but the amount of capital to be obtained B. is the combination of debt and equity that yields the lowest cost of capital C. within the same industry stays the same from country to country D. all of the above statements are true E. none of the above

B. is the combination of debt and equity that yields the lowest cost of capital

According to a study by Levy and Lerman, an investment in US bonds compared to iinternationally diversified bond portfolios is ___. A. more efficient B. Less efficient C. about the same D. cannot tell E. relatively efficient

B. less efficient

According to a study by Levy and Lerman, an investment in US stocks compared to internationally diversified stock portfolios is __. A. more efficient B. less efficient C. about the same D. highly efficient E. none of the above

B. less efficient

The weighted average cost of capital usually goes down up to a certain point if we add A. more equity B. more debt C. more preferred stock D. none of the above E. all of the above

B. more debt

A 1996 study by Ricci and Morrison found that 80 percent of Fortune 200 companies use wire transfers__50 percent pool their cash___, and almost half net payments and transfer funds electronically___. A sometimes; sometimes; sometimes B. often; often; often C. often; sometimes; rarely D. rarely; rarely; rarely E. often; often; rarely

B. often; often; often

methods of international diversification do not include the following ___. A. international mutual funds B. purchases of US government securities for US investors C. American depository receipts D. hedge funds E. direct purchases of foreign securities

B. purchases of US government securities for US investors

The weighted average cost of capital consists of the following ___. A. the cost of debt and the cost of preferred stock B. the cost of debt, the cost of preferred stock and the cost of equity C. the cost of debt, the cost of preferred stock, and the cost of retained earnings D. the cost of common stock and the cost of retained earnings E. the cost of debt, the cost of preferred stock, and the cost of retained earnings

B. the cost of debt, the cost of preferred stock and the cost of equity

The optimum capital budget is defined as the amount of investment that maximizes __. A. the market share of the company B. the value of the company C. the net cash flow of the company D. earning before taxes of the company E. all of the above

B. the value of the company

Multinational companies may lower their cost of capital mainly because __. A. they are smart B. they can obtain additional capital internationally C. they have different national work forces D. they have political clout E. none of the above

B. they can obtain additional capital internationally

Global Corp. has bonds outstanding. The bond's yield to maturity (before-tax cost of the bond) is 12.4% and the firm's tax rate is 40 percent. What is the after-tax cost of the bond? A. 12.4% B. 10.9% C. 7.4% D. 6.2% E. 4.1%

C. 7.4%

The "just-in-time" inventory was initiated by___. A. the United States B. Germany C. Japan D. the United Kingdom E. Korea

C. Japan

Re-invoicing centers are set up in tax haven countries to do the following __. A. charge higher prices B. meet different accounting standards C. bypass government restrictions and/or avoid taxes D. A and B E. a, b, and c

C. bypass government restrictions and/or avoid taxes

In international cash management, which of the following items is most important? A. interest rate differential between two countries B. inflation differential between two countries C. interest rate and foreign exchange rate comparisons between two countries D. A and B E. A, B, and C

C. interest rate and foreign exchange rate comparisons between two countries

The equation known as the security market line consists of the __. A. commercial rate of interest and systematic risk B. commercial rate of interest and a risk premium C. riskless rate of interest and a risk premium D. nominal rate of interest and a risk premium E. national average rate of interest and a risk premium

C. riskless rate of interest and a risk premium

The cost of equity can be derived from the following model: A. an inventory model B. a cash flow model C. the capital asset pricing model D. a debt model E. none of the above

C. the capital asset pricing model

The marginal cost of capital means that__. A. it is inferior B. it is superior C. the company incurs additional cost by raising additional funds D. it is always constant E. none of the above

C. the company incurs additional cost by raising funds

In foreign investment analysis, the optimum capital budget is obtained at the point where __. A. the net present value is maximized B. the internal rate of return is maximized C. the internal rate of return crosses the marginal cost of capital D. all of the above E. none of the above

C. the internal rate of return crosses the marginal cost of capital

When we calculate the weighted average cost of capital, which of the following methods is superior? A. the book value of debt B. the book value of equity C. the market value of debt and equity D. the market value of assets E. none of the above

C. the market value of debt and equity

A firm's next year earnings are expected to be $4.00 per share, and the firm follows a practice of paying out 60% of earnings as dividends. The long-term growth rate for this firm is 5% and the appropriate discount rate is 12%. What is the price of this stock? A. $10.25 B. $20.45 C. $30.00 D. $ 34.29 E. $30.25

D. $34.29

A Canadian investor has Canadian $100,000 to invest for one year. US Treasury bills offer a yield of 11 percent. The current exchange rate of the Canadian dollar is US$0.50. What is the yield on the investment if the exchange rate of the Canadian dollar is US$0.46 at the end of the year? A. 10.25% B. 12.55% C. 15.00% D. 20.65% E. 25.00%

D. 20.65% Solution: Convert Canadian $100,000 to US$50,000 at $0.50 rate. Invest US$50,000 in the US at 11 percent. ($50,000 x 1.11 = $55,500) Reconvert US dollars to Canadian dollars. ($55,500/$0.46 = Canadian $120,652) Yield = (Canadian $120,652 - Canadian $100,000)/Canadian $100,000 = 20.65%

A study by Morgan Stanley found that American investors could enjoy higher returns and less risk if they held a portfolio that contained up to __ percent investment in foreign stocks. A. 20% B. 30% C. 40% D. 50% E. 60%

D. 50%

A US company borrows Mexican pesos for one year at 30%. During the year, the peso depreciates 15% against the dollar. The US tax rate is 35%. What is the after-tax cost of this debt in US dollar terms? A. 5.66% B. 6.00% C. 6.80% D. 6.83% E. 7.00%

D. 6.83% Solution: Use Equation (19-6): The before-tax cost of debt = 0.30 x 0.85 - 0.15 = 0.105. After-tax cost of debt = 0.105 (1 - 0.35) = 6.83%

Potential problems in using the capital asset pricing model include__. A. how to compute beta B. the market may not be in equilibrium C. risk-adverse investors seek to diversify their risks D. A and B E. all of the above

D. A and B

Which of the following is not a popular cash center location? A. Luxembourg B. The Netherlands C. Bermuda D. Chile E. the Bahamas

D. Chile

Credit swaps do not include the following party___. A. the parent company B. the foreign company C. a bank D. a foreign government E. both A and B

D. a foreign government

The cost of debt should be derived from the following consideration: A. debt capacity of a firm B. solvency of a firm C. liquidity of a firm D. after tax interest income E. none of the above

D. after tax interest income

A firm may base their subsidiary cost of capital on __. A. the cost of capital to the parent company B. the cost of capital to the subsidiary C. a weighted average of the cost of capital to the parent company and the cost of capital to the subsidiary D. all of the above E. none of the above

D. all of the above

Empirical studies (1988) on cultural values and capital structure have found that: A. capital structure norms for companies vary widely from one country to another B. cultural factors cause debt ratios to cluster by country C. Southeastern Asian, Latin American, and Anglo-American countries have low debt ratios D. all of the above E. none of the above

D. all of the above

The company's optimum capital structure is compatible with __. A. minimizing the company's weighted average cost of capital B. maximizing the value of the company C. maximizing the company's share price D. all of the above E. none of the above

D. all of the above

Which of the following statements about international investment correlation is not true? A. stock market returns have lower positive correlations across countries that within a country B. member countries of the European Union have relatively high correlations C. the US and Japan have a high correlation D. both B and C are not true E. all of the above are not true

D. both B and C are not true

The ability to relocate working cash balances and profits on a global basis provides multinational firms with several types of arbitrage opportunities. These types of arbitrage opportunities do not include arbitrage. A. Tax B. financial market C. regulatory system D. commodity market E. both A and B

D. commodity market

Which of the following statements concerning the appropriate cost of capital is true? A. the discount rate should be increased to account for inflation B. an MNC should not use a cost of capital determined world-wide C. the cost of capital to the foreign subsidiary should never be used as the cost of capital D. if a parent company finances the entire cost of its foreign project by itself, the cost of capital the the parent cony ay be used as the appropriate cost of capital E.none of the above are true

D. if a parent company finances the entire cost of its foreign project by itself, the cost of capital to the parent company may be used as the appropriate cost of capital

The capital asset pricing model is based on the assumption that __. A. no risk is awarded with a risk premium B. systematic risk is inconsequential C. undiversifiable risk is inconsequential D. intelligent risk-adverse investor seek to diversify their risks E. beta may not be estimated on historical data

D. intelligent risk-adverse investor seek to diversify their risks

According to an empirical study by Levy and Lerman, which of the following portfolios performed best? A. US portfolio of stocks and bonds B. internationally diversified portfolio of bonds C. internationally diversified portfolio of stocks D. internationally diversified portfolio of stocks and bonds E. German portfolio of stocks and bonds

D. internationally diversified portfolio of stocks and bonds

The weighted average cost of capital does not deal with the following components: A. the cost of equity B. the cost of debt after tax C. the value of the firm's debt D. the cost of inventory E. the value of the firm's equity

D. the cost of inventory

A correlation coefficient of zero means that the two sets of returns for two securities are __. A. correlated or dependent on each other B. correlated or independent of each other C. uncorrelated or dependent on each other D. uncorrelated or independent of each other E. none of the above

D. uncorrelated or independent of each other

__ is/are not a major cause of unsystematic (diversifiable) risk. A. wildcat strikes B. new competitors C. new product management D. worldwide inflation E. both B and C

D. worldwide inflation

Kenneth Shad has decided to invest a total of $200,000 on US and French portfolios. The expected returns are 20 percent on the French portfolio and 17 percent on an international portfolio. The international portfolio consists of 60 percent invested in the US portfolio and 40 percent invested in the French portfolio. What is the expected return on the US portfolio? A. 11% B. 12% C. 13% D. 14% E. %15

E. 15% Solution: use Equation (12-4): 0.17 = (0.60)(Rus) + (0.40)(0.20). Rus = 15%

The common stock of Global Corp. is selling at $54 per share. It expects to pay a dividend of $4 per share and the dividend will grow at a rate of 9 percent per year. What is the cost of the common stock? A. 13.7% B. 14.9% C. 15.0% D. 15.5% E. 16.4%

E. 16.4% Solution: use Equation (19-2): cost of common stock = 4/54 + .09 = 16.4%

The price-earnings ratio of a company is 25. What is the cost of the common stock for this company? A. 25% B. 20% C. 10% D. 5% E. 4%

E. 4% Solution: Use Equation (19-4): The cost of common stock = 1/25 = 4%.

Assume that the expected returns of the five portfolios are the same but their standard deviations are as follows. Which of these five portfolios is most risky? A. 1.5% B. 2.0% C. 2.5% D. 3.0% E. 4.0%

E. 4.0%

The riskless rate of interest is 6%, the expected rate of return on a market portfolio is 8%, and the beta coefficient of a common stock is 1.2. What is the cost of this common stock? A. 5.0% B. 6.3% C. 7.3% D. 7.9% E. 8.4%

E. 8.4% Solution: Use Equation (19-3): Cost of common stock = 0.06 + (0.08 - 0.06)1.2 = 8.4%.

The main reasons why international cost of capital may be different from the purely domestic cost of capital are due to the following: A. the company's accessibility to international capital markets B. tax advantages in different countries C. exchange rate risk D. A and B E. A, B, and C

E. A, B, and C

Multinational firms may be able to repatriate funds from foreign affiliates through the following method(s)__. A. royalty payments B. management fees C. dividend payments D. adjustment of transfer prices E. all of the above

E. all of the above

Net working capital includes __. A. accounts receivable B. accounts payable C. inventory D. A and B E. All of the above

E. all of the above

The principal goal of speeding the collection process is to ___. A. reduce floats B. minimize the investment in accounts receivable C. reduce banking and transaction fees D. B and C E. all of the above

E. all of the above

Transfer pricing has been used by multinational firms to achieve the following objectives: A minimize income taxes B. minimize tariff payments C. minimize foreign exchange controls D. operate working capital effectively E. all of the above

E. all of the above

___ is not a major cause of systematic (undiversifiable) risk. A. a worldwide recession B. a world war C. world energy supply D. both A and B E. company management change

E. company management change

One way to measure the benefits of international diversification is to compare the ___. A. expected return for a portfolio of US and foreign portfolios B. standard deviation of return for a portfolio of US and foreign portfolios C. expected return and standard deviation of return for a portfolio of foreign countries D. expected return of portfolios in industrial countries E. expected return and standard deviation of return for a portfolio of US and foreign securities combined vs. US securities alone

E. expected return and standard deviation of return for a portfolio of US and foreign securities combined vs. US securities alone

Intracompany loans do not include the following transaction (s) ___. A. direct loans B. credit swaps C. parallel loans D. both B and C E. investment credit

E. investment credit

Intracompany loans do not include __. A. direct loans B. credit swaps C. back to back loans D. loans under parent guarantees E. loans from the World Bank

E. loans from the World Bank

Which of the following is not a major component of fund flows from subsidiary to parent? A. dividend payments from subsidiary B. interest payments from subsidiary C. royalty payments from subsidiary D. payments for goods received form the parent E. tax payments from subsidiary

E. tax payments from subsidiary

__ is not a major component of the capital asset pricing model. A. an expected rate of return on a security B. the riskless rate of return C. the market rate of return D. systematic risk E. the historical price of the stock

E. the historical price of the stock

The capital asset pricing model (CAPM) assumes that __. A. the undiversifiable risk of a security could be diversified if certain financial parameters are present B. risks are worth taking as long as they can be diversified C. the total risk of a security can be partially diversified if certain financial parameters are present D. the total risk of a security can be totally diversified if certain financial parameters are present E. the total risk of a security consists of systematic and unsystematic risks

E. the total risk of a security consists of systematic and unsystematic risks

Fund flows from parent to subsidiary do not include___. A. the initial investment from the parent B. intracompany loans from the parent C. purchase of goods from the parent D. added investments from the parent E. the transfer of employees from the parent

E. the transfer of employees from the parent

Which of the following is not related to the traditional objectives of multinational firms' cash management? A. to minimize the cost of funds B. to improve liquidity C. to improve the return on investment D. to reduce risks E. to pay the same amount of dividend year after year

E. to pay the same amount of dividend year after year

A. tangible and intangible

Ferdows classifies benefits of foreign direct investment into two categories: and .

E. all of the above

Host countries can benefit from foreign direct investment because it .

D. increasing overhead

In general, international mergers and acquisitions tend to decrease risk and increase earnings capabilities by the following factors except .

B. exports

Modes of foreign direct investments do not include the following .

C. a local gap

Newman said that a growth-oriented company can globally close four types of growth gaps between its sales potential and its current actual performance. These gaps do not include ___.

A. 10

The United States Department of Commerce defines foreign direct investment as investment in either real capital assets or financial assets with a minimum of % equity ownership in a foreign firm.

B. reduces

The appropriate mix of debt and equity ___ the overall cost of capital.

A. Japan

The bank-based system of corporate governance is primarily used in ___.

B. the United States

The market-based system of corporate governance is primarily used in ___.

A. goodwill

The use of the purchase-of-assets method in case of a merger creates ___.

C. ten

Total private flows to developing countries grew more than ___ fold between 1992 and 1999.

D. licensing may create a possible competitor

Which of the following is not an advantage of foreign licensing arrangement over foreign investment?

D. political advantage

Which of the following is not an oligopoly-created advantage of foreign direct investment for investing companies?

E. foreign investment creates jobs for foreigners

Which of the following is not directly related to benefits of foreign direct investment to host countries?

D. foreign investment lowers local wages

Which of the following is not part of the argument against foreign investment for host countries?

C a tender offer is an offer to sell a certain number of shares

Which of the following statements is false?