Fin410 Ch 14, Intl. Fin. CH. 11, Chapter 11, International Finance Final, FIN 384 Exam 2 (Dr. Shen), Chapter 10

6) The initial issuance of shares by a company in an IPO typically represents no more than: A) 25%. B) 35%. C) 45%. D) 55%.

A) 25%

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

3) The stock exchange with the greatest value of shares traded is: A) NYSE. B) Tokyo. C) Nasdaq. D) London.

A) NYSE

8) Level II ADRs must meet: A) U.S. GAAP standards. B) home country accounting standards. C) both U.S. GAAP and home country standards. D) none of the above

A) U.S. GAAP standards.

3) Each ADR represents ________ of the shares of the underlying foreign stock. A) a multiple B) 100 C) 1 D) ADRs have nothing to do with foreign stocks.

A) a multiple

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.

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

A) balance sheet

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

A) current rate; temporal

2) 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/€ to $1.26/€ the U.S. firm has a translation:

A) gain of $8,000.

4) If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

A) gain of €12,500.

4) The number of foreign firms traded on the London exchange is ________ than the number traded on the NYSE, and the costs of listing and disclosure in London are ________ those for the NYSE. A) less than; less than B) less than; greater than C) greater than; less than D) greater than; greater than

A) less than; less than

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

6) Who pays the costs of creating a sponsored ADR? A) the foreign firm whose stocks underlie the ADR B) the U.S. bank creating the ADR C) both the U.S. bank and the foreign firm D) the SEC since they require the regulation

A) the foreign firm whose stocks underlie the ADR

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

A) to prepare consolidated financial statements.

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

2) Depositary receipts traded outside the United States are called ________ depositary receipts. A) Euro B) Global C) American D) none of the above

B) Global

8) Which of the following high profile euroequity issue was NOT also a privatization? A) British Telecommunications B) Gucci C) YPF Sociedad Anónima D) Telefonos de Mexico

B) Gucci

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

B) 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.

5) The public pathway to raise equity capital outside of its home market includes the following EXCEPT: A) Euroequity issue B) Strategic Partner/Alliance C) shares sold to a specific market or exchange D) seasoned offering

B) Strategic Partner/Alliance

1) A/An ________ is defined as one that is targeted at investors in a single country and underwritten in whole or part by investment institutions from that country. A) SEC rule 144a placement B) directed public share issue C) Euroequity public issue D) strategic alliance

B) directed public share issue

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

B) equity accounts and fixed assets; current assets and liabilities

8) 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.

B) integrated foreign entity

1) If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:

B) loss of $75,000.

3) If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a translation:

B) loss of €5,000.

4) A multinational firm that proceeds to raise capital outside of its domestic market is ultimately in search of an issuance - the IPO or SPO. But often issuances must be preceded by listings, in which the shares are traded on an exchange and, therefore, in a specific country market. The listing serves the following purposes EXCEPT: A) gaining name recognition B) reducing the compliance costs C) gaining visibility D) preparing the market for an issuance

B) reducing the compliance costs

3) Translation exposure measures:

B) 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.

7) Under U.S. accounting and translation practices, use of the current rate method is termed ________ while use of the temporal method is termed ________.

B) translation; remeasurement

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

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

3) 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:

C) Both A and B are true.

1) ________ are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank. A) Negotiable CDs B) International mutual funds C) Depositary receipts D) Eurodeposits

C) Depositary Receipts

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

C) Financial Accounting Standards Board (FASB)

5) ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are: A) facilitated. B) unfacilitated. C) sponsored. D) unsponsored.

C) Sponsored

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

C) Translation gains or losses; operating gains or losses

2) Private equity funds (PEF) differ from traditional venture capital (VC) funds in that: A) VC operates mainly in lesser-developed countries while PEF do not. B) VC typically invests in family business whereas PEF do not. C) VC is almost unavailable to emerging markets while PEF capital is available. D) All of the above are true.

C) VC is almost unavailable to emerging markets while PEF capital is available

1) Translation exposure may also be called ________ exposure.

C) accounting

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

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

C) consolidated balance sheet.

6) If an imbalance results from the accounting method used for translation, the imbalance is taken either to ________ or ________.

C) current income; equity reserves

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

9) 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.

C) integrated; self-sustaining

7) Level I ADRs trade primarily: A) on the New York Stock Exchange. B) on the American Stock Exchange. C) over the counter or pink sheets. D) Level I ADRs typically do not trade at all, but instead are privately issued and held until maturity.

C) over the counter or pink sheets.

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%

6) 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:

C) translation is accomplished through the temporal method.

4) 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:

C) translation is not required.

4) Which of the following is NOT an advantage of ADRs to U.S. shareholders? A) Transfer of ownership is done in the U.S. in accordance with U.S. laws. B) In the event of the death of the shareholder, the estate does not go through a foreign court. C) Settlement for trading is generally faster in the United States. D) All of the above are advantages of ADRs.

D) All of the above are advantages of ADRs.

1) Which of the following were NOT identified by the authors as an alternative instrument to source equity in global markets? A) sale of a directed public share issue to investors in a target market B) private placements under SEC rule 144a C) sale of shares to private equity funds D) All of the above are alternatives to source equity instruments.

D) All of the above are alternatives to source equity instruments.

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.

9) Level ________ is the easiest standard to satisfy for issuing ADRs. A) 144a B) III C) II D) I

D) I

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

3) Strategic alliances are normally formed by firms that expect to gain synergies from which of the following? A) economies of scale B) economies of scope C) complementary marketing 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

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

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

D) be equal.

3) 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.

D) current rate; temporal

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

D) foreign subsidiary independence; a firm's functional currency

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

D) functional

7) Which of the following is a characteristic of an euroequity issue? A) an initial public offering of euro denominated securities B) the issuers are located in Europe C) the investors are located in Europe D) is an offering on multiple exchanges in multiple countries at the same time

D) is an offering on multiple exchanges in multiple countries at the same time

2) The term "euro" as used in the euro equity market implies: A) the issuers are located in Europe. B) the investors are located in Europe. C) both A and B D) none of the above

D) none of the above

10) Level III ADR commitment applies to: A) firms that want to list existing shares on the NYSE. B) banks issuing foreign mutual funds. C) ADR issues of under $25,000. D) the sale of a new equity issued in the United States.

D) the sale of new equity issued in the United States

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

5) 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:

D) translation is accomplished through the current rate method.

11) A euroequity issue is an initial public offering of euro denominated securities.

False

11) ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage cannot keep the prices in line with the foreign price of the stock.

False

12) An unsponsored ADR may be initiated without the approval of the foreign firm with the underlying stock.

False

15) One of the benefits of investing in Global Registered Shares (GRS) is that GRS allow to invest in foreign companies without foreign exchange risk.

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

24) A significant advantage of borrowing foreign currency-denominated bonds is that the borrower need not worry about relative changes in the value of the home currency.

False

6) Most firms raise their initial capital in foreign markets.

False

2) ________ 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

10) A distinction about the publicly traded firm's shares is that they raise capital with the daily rise and fall of their share prices.

True

13) ADRs are considered an effective way for firms to improve the liquidity of their stock, especially if the home market is small and illiquid.

True

14) Depositary Receipts intra-market trades account for more than 90% of all DR trading today.

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

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

2) Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly correlated. The same reasoning is often argued for MNEs diversifying into international markets.

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

23) In theory multinational firms are in a better position than domestic firms to support higher debt ratios.

True

25) For firms to raise capital in international markets, it is more important to adhere to capital structure ratios similar to those found in the United States and United Kingdom than to those in the firm's home country.

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

9) Once a firm has "gone public," it is open to a considerably higher level of public scrutiny.

True

10) Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not.

false

12) The temporal rate method is the most prevalent method today for the translation of financial statements.

false

15) It is highly unusual for a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

false

11) The current rate method is the most prevalent method today for the translation of financial statements.

true

12) It is possible to use different exchange rates for different line items on a financial statement.

true

13) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

true

13) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

true

14) A foreign subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows.

true

14) Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

true

15) The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

true

16) : The current rate method and the temporal method are two basic methods for translation that are employed worldwide

true

17) Under U.S. accounting and translation practices, use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."

true

18) If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method.

true

19) Translation gains or losses can be quite different from operating gains or losses not only in magnitude but also in sign.

true