Principles of Managerial Finance, 13e, Global Edition (Gitman) Chapter 19 International Managerial Finance
19.1 Understand the major factors that influence influence the financial operations of multinational companies (MNCs). 1) NAFTA is a treaty estalishin! free trade and open mar"ets et#een $urope and the United Un ited %tates. Ans#er& FA'%$ Topic& North American American Free Trade Area uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) The /orld /orld Trade 0r!aniation is a ne# international ody od y estalished to police #orld tradin! practices and to mediate disputes et#een memer countries. Ans#er& TU$ Topic& /orld /orld Trade 0r!aniation 0r!ania tion uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) 0ffshore Centers are cities or states that ha*e achie*ed prominence as major centers for $uromar"et usiness. Ans#er& TU$ Topic& 0ffshore Centers uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) NAFTA is an international financial mar"et that pro*ides for orro#in! and lendin! currencies outside their country of ori!in. Ans#er& FA'%$ Topic& North American American Free Trade Area uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 4) Fluctuations in forei!n e5chan!e mar"ets can affect forei!n re*enues and profits of a multinational company6 ut they ha*e no impact on its o*erall *alue. Ans#er& FA'%$ Topic& To pic& Forei!n $5chan!e $5chan!e is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 7) The $uromar"et is the international financial mar"et that pro*ides for orro#in! and lendin! currencies outside their country of ori!in. Ans#er& TU$ Topic& The $uromar"et uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1 Copyri!ht 8 1 :earson $ducation
;) 0ne reason for the recent rapid !ro# in the $uromar"et is that it pro*ides multinational companies #ith an oint ?entures ?entures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) The official meldin! of the national currencies of the $uropean Union into one currency6 the $uro6 created the $uropean Monetary Union in . Ans#er& TU$ Topic& To pic& $uropean Union uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 11) The Mercosur ,roup is a major %outh American tradin! loc that includes countries that account for more than half of the total of 'atin America@s ,-:. Ans#er& TU$ Topic& To pic& Mercosur ,roup uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) The Mercosur ,roup is a major $uropean tradin! loc made up of former %o*iet loc countries in $astern $urope. Ans#er& FA'%$ Topic& To pic& Mercosur ,roup uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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12) -isa!reements amon! $uropean Union country memers o*er the disposition of !ara!e and manufacturin! refuse !enerated primarily y $astern $uropean countries ha*e come to e "no#n as the $uro Trash ssue. Ans#er& FA'%$ Topic& To pic& $uropean Union uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 13) n 2B36 the United %tates si!ned a re!ional trade pact #ith the -ominican epulic6 Costa ica6 $l %al*ador6 ,uatemala6 onduras6 and Nicara!ua called the Central American Free Trade A!reement or CAFTA. Ans#er& TU$ Topic& To pic& Central American American Free Trade A!reement uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 14) n 2B36 the United Un ited %tates si!ned a re!ional trade pact #ith south pacific countries includin! the :hilippines6 ndonesia6 Malaysia called the %outh %ou th :acific American Trade A!reement or %:AMTA. Ans#er& FA'%$ Topic& Free Trade A!reements uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 17) The /orld /orld Trade 0r!aniation has in recent years admitted current and former communist countries as memers includin! the ussian Federation and the :eoples epulic of China. Ans#er& TU$ Topic& /orld /orld Trade 0r!aniation 0r!ania tion uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1;) A partnership et#een a multinational company and a forei!n in*estor in #hich contractually specified amounts of money and e5pertise e5p ertise are contriuted y the participants for stated proportions of o#nership and profit is a A) multinational corporation. +) floatin! relationship. C) joint *enture. -) consolidation. Ans#er& C Topic& >oint ?entures ?entures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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1=) The DDDDDDDD is the ta5ation techniEue that increases the U.%. income of an MNC y the amount of forei!n income (efore forei!n ta5es). The U.%. ta5 calculation is then ased on that hi!her le*el. A) unitary ta5 la# +) !rossin! up procedure C) ,m -) nationaliation procedure Ans#er& + Topic& To pic& ,rossin! Up :rocedure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 19) All of the follo#in! are considered con sidered offshore centers $C$:T A) Cua. +) %in!apore. C) 'ondon. -) Nassau. Ans#er& A Topic& 0ffshore Centers uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) A partnership under #hich the participants ha*e contractually co ntractually a!reed to contriute specified amounts of money and e5pertise e5p ertise in e5chan!e for stated proportions of o#nership and profit is called A) limited partnership. +) ,m. C) %.A..'. -) joint *enture. Ans#er& Topic& >oint ?entures ?entures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) All of the follo#in! are factors that can influence the operations of an MNC $C$:T A) forei!n o#nership of portions of eEuity. +) e5istence of multinational capital mar"ets. C) forei!n currency fluctuations. -) consolidation of financial statements ased on only one on e currency. Ans#er& Topic& To pic& nternational Accountin! and MNCs MNCs uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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) The $uromar"et is dominated y the A) French franc. +) >apanese yen. C) -eutsche mar". -) U.%. dollar. Ans#er& Topic& $uromar"et uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) >oint *enture la#s and restrictions may result in any of o f the follo#in! ne!ati*e implications for the operation of a forei!nBased susidiary $C$:T A) forei!n o#nership may result in disa!reement amon! the partners re!ardin! the distriution of profits. +) operatin! in forei!n countries may result in difficulties otainin! the remission of profits. C) joint *enture a!reements may stem a certain de!ree d e!ree of ris" due to political hostility. -) forei!n mana!ement policies may e detrimental to the usual policies of the MNC. Ans#er& C Topic& >oint ?entures ?entures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) The DDDDDDDD is a si!nificant economic econo mic force currently made up of 4 nations #ith a population of more than 94 million that permits free trade #ithin the the countries that ma"e up this !roup. A) North American Free Trade A!reement (NAFTA) +) Mercosur ,roup C) Asian $conomic Area Net#or" (A%$AN) -) $uropean Union ($U) Ans#er& Topic& To pic& $uropean Union uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 4) The DDDDDDDD is a major %outh American American tradin! loc that includes countries that account for more than half of total 'atin American ,-:. A) North American Free Trade A!reement (NAFTA) +) Mercosur ,roup C) 'atin and %outh American Free Trade Area Area ('A%TA) -) ,roup of %e*en Ans#er& + Topic& To pic& Mercosur ,roup uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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7) The DDDDDDDD is a major trade a!reement si!ned y the United %tates and fi*e Central American Countries. A) North American Free Trade A!reement (NAFTA) +) Mercosur ,roup C) 'atin and %outh American Free Trade Area Area ('A%TA) -) Central American Free Trade A!reement (CAFTA) (CAFTA) Ans#er& Topic& To pic& Central American American Free Trade A!reement uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) DDDDDDDD is an international ody that polices #orld commercial tradin! practices and that mediates disputes et#een t#o or more memer countries. A) NAFTA +) ,ATT C) /T0 -) CAFTA Ans#er& C Topic& /orld /orld Trade 0r!aniation 0r!ania tion uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy =) DDDDDDDD is a treaty that has !o*erned #orld trade throu!hout most of o f the post /orld /orld /ar /ar era. A) NAFTA +) ,ATT C) /T0 -) CAFTA Ans#er& + Topic& ,eneral ,enera l A!reement on Tariffs Tariffs and Trade uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 19. -escrie the "ey differences differences et#een purely domestic domestic and international financial financial statementsGconsolidation6 translation of indi*idual accounts6 and international profits. 1) FA%+ FA%+ No. 4 reEuires U.%. multinationals first to con*ert the financial statement accounts of forei!n susidiaries into their functional currency and then to translate the accounts into the parent firm@s currency usin! the allBcurrentBrate allBcurrentBrate method. Ans#er& TU$ Topic& FA%+ No. 4 uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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) The allBcurrentBrate method is the method y #hich the functional currencyBdenominated financial statements of an MNC@s susidiary are translated into the parent company@s currency. Ans#er& TU$ Topic& To pic& FA%+ FA%+ No. 4 and the Current ate ate Method uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) Current U.%. ta5 la#s reEuire the consolidation of o f financial statements of susidiaries accordin! to the percenta!e of o#nership y the parent company. Ans#er& TU$ Topic& Ta5es ssues elated to MNCs uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) The temporal method reEuires specific assets and liailities to e translated at soBcalled historic e5chan!e rates6 and that forei!nBe5chan!e translation !ains or losses e reflected in the current year@s income. Ans#er& TU$ Topic& Temporal Method uestion %tatus& Ne# AAC%+ ,uidelines& -ynamics of the !loal economy 4) Current U.%. ta5 la#s reEuire the separation of financial statements of susidiaries and the operatin! results for some susidiaries are e5cluded from the parent entirely for some countries such as China and ndia. Ans#er& FA'%$ Topic& Ta5es ssues elated to MNCs uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 7) A functional currency is the currency of the parent company@s country. Ans#er& FA'%$ Topic& To pic& Functional Currency uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) A functional currency is the currency of the host country in #hich a susidiary primarily !enerates and e5pends cash and in #hich its accounts are maintained. Ans#er& TU$ Topic& To pic& Functional Currency uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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=) FA%+ FA%+ No. 4 is a statement issued y y the Financial Accountin! %tandards +oard reEuirin! American MNCs to first con*ert the financial statement accounts of forei!n susidiaries into the country@s DDDDDDDD currency and then translate the accounts into the parent firm@s currency usin! the DDDDDDDD method. A) spotH historical rate +) functionalH allBcurrentBrate C) principalH a*era!e rate -) for#ard rateH #ei!hted a*era!e Ans#er& + Topic& To pic& FA%+ FA%+ No. 4 and the Current ate ate Method uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 9) The allBcurrentBrate method dictated y the FA%+ No. 4 statement reEuires the translation of all alance sheet accounts at the DDDDDD rate and all income statement items at the DDDDDDDD rates. A) closin!H a*era!e +) a*era!eH closin! C) historicalH current -) a*era!eH historical Ans#er& A Topic& To pic& FA%+ FA%+ No. 4 and the Current ate ate Method uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I1646 efore local ta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. The forei!n income ta5 rate is 2 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 and the firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if forei!n ta5es can e applied as a credit a!ainst the MNC@s U.%. ta5 liailityJ A) I736;4 +) I3464 C) I4;64 -) I;246 Ans#er& A Topic& Ta5 Credits and MNCs uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills
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11) Nico Minin!6 a U.%.Based MNC has a forei!n susidiary that earns I 1646 efore local ta5es6 #ith all the after ta5 funds to e a*ailale to the parent in the form of di*idends. The forei!n income ta5 rate is 2 percent6 the forei!n di*idend #ithholdin! ta5 rate is 14 percent6 and the firm@s U.%. ta5 rate is 24 percent. /hat are the funds a*ailale to the parent MNC if no ta5 credits are allo#edJ A) I736;4 +) I3464 C) I4;64 -) I;246 Ans#er& C Topic& Ta5 Credits and MNCs uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills 1) A U.%.Based MNC has three susidiaries& %1 (3 percent o#ned y the MNC)H % (22 percent o#ned y %1)6 and %2 ( percent o#ned y %). The ta5ale income for each firm is I1 million. The local ta5es for each firm are I14 million6 I million6 and I1 million6 respecti*ely. respecti*ely. The MNC@s ta5 rate is 3 percent. (a) Can the MNC apply all of its local ta5es as a credit a!ainst its U.%. ta5esJ () +ased on the
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12) A U.%Based MNC has a susidiary in China #here the local currency is the enmini (M+). The alance sheets and income statements of the susidiary are presented in the tale elo#. 0n 0n -ecemer 216 46 the e5chan!e rate #as =.; M+OU%I. Assume the local currency fi!ures in the statement elo# remain the same on -ecemer 216 7. Calculate the U.%. dollar translated fi!ures for the t#o endin! time periods assumin! that et#een -ecemer 216 4 and -ecemer 216 76 the Chinese !o*ernment re*alues (appreciates) the M+ y percent. Translation of Income Statement
Translation of Balance Sheet
Ans#er& This sho#s that an appreciation of the forei!n currency a!ainst the dollar for a susidiary in that country #ill result in hi!her *alues on oth oth the alance sheet and income statement once those *alues are translated into dollars e*en if the local currency *alues didn@t chan!e at all. The opposite #ould e the case if the forei!n currency depreciates de preciates a!ainst the dollar. Translation of Income Statement
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Translation of Balance Sheet
Topic& Translation Topic& Translation of Financial %tatements uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills 19.2 -iscuss e5chan!e rate ris" and political ris"6 and e5plain ho# MNCs MNCs mana!e them. them. 1) The spot e5chan!e rate is the rate of e5chan!e et#een t#o currencies at some specified future date. Ans#er& FA'%$ Topic& To pic& FA%+ FA%+ No. 4 and the Current ate ate Method uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) The for#ard e5chan!e rate is the rate of e5chan!e et#een t#o currencies on any !i*en day. da y. Ans#er& FA'%$ Topic& To pic& For#ard $5chan!e ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) The functional currency is the currency of the economic en*ironment in #hich a usiness entity primarily !enerates and e5pends cash6 and an d in #hich its accounts are maintained. Ans#er& TU$ Topic& To pic& Functional Currency uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) Accountin! e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the translated *alue of a firm@s financial statement accounts denominated in a !i*en forei!n currency. Ans#er& TU$ Topic& Accountin! $5posure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 11 Copyri!ht 8 1 :earson $ducation
4) $conomic e5posure is the ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the firm@s *alue. Ans#er& TU$ Topic& To pic& $conomic $5posure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 7) The three asic types of ris" associated #ith international cash flo#s are 1) usiness and financial ris"s6 ) inflation and forei!n e5chan!e ris"s6 and 2) political ris"s. Ans#er& TU$ Topic& To pic& Ty Types pes of is" in nternational Cash Flo#s uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) Countries that e5perience hi!h inflation rates #ill see their currencies d ecline in *alue relati*e to the currencies of countries #ith lo#er inflation rates. Ans#er& TU$ Topic& To pic& nflation is" and nternational Cash Flo#s uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy =) /hen more units of a forei!n currency are reEuired to uy one dollar6 the currency is said to ha*e appreciated #ith respect to the dollar. Ans#er& FA'%$ Topic& To pic& Forei!n $5chan!e is" and nternational Cash Flo#s uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 9) Althou!h Althou!h se*eral economic and political factors can influence forei!n e5chan!e rate mo*ements6 y far the most important e5planation for lon!Bterm chan!e s in e5chan!e rates is a differin! inflation rate et#een t#o countries. co untries. Ans#er& TU$ Topic& To pic& For#ard $5chan!e ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) Althou!h Althou!h se*eral economic and political factors can influence forei!n e5chan!e rate mo*ements6 y far the most important e5planation for lon!Bterm chan!e s in e5chan!e rates is fiscal policy that a country adopts. Ans#er& FA'%$ Topic& To pic& For#ard $5chan!e ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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11) Macro political ris" is the ris" faced y all forei!n firms in a host country related to political chan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!es in o#nership structure6 closure or e5propriation. Ans#er& TU$ Topic& :olitical :olitica l is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) Micro political ris" is the ris" faced y all forei!n firms in a host country related to political chan!e6 re*olution6 and the adoption of ne# policies of a !o*ernment that may result in chan!es in o#nership structure6 closure or e5propriation. Ans#er& FA'%$ Topic& :olitical :olitica l is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 12) ecent years ha*e seen the emer!ence of a third path to political ris" that encompasses
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1;) +oth theory and empirical e*idence indicate that the capital structures of MNCs are no different from those of purely domestic firms. Ans#er& FA'%$ Topic& To pic& MNC Capital Capital %tructure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1=) All of the follo#in! are considered to e major or apanese yen. +) the +ritish pound. C) the Me5ican peso. -) the U.%. dollar. Ans#er& C Topic& To pic& Forei!n $5chan!e uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 19) /hen fe#er units of a forei!n currency are reEuired to uy one dollar6 the currency is said to ha*e DDDDDDDD #ith respect to the dollar. A) appreciated +) depreciated C) consolidated -) remained fi5ed Ans#er& A Topic& To pic& Forei!n $5chan!e uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the translated *alue of a firm@s accounts denominated in a !i*en forei!n currency is A) economic e5posure. +) macro political ris". C) accountin! e5posure. -) micro political ris". Ans#er& C Topic& Accountin! $5posure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) The ris" resultin! from the effects of chan!es in forei!n e5chan!e rates on the firm@s *alue is A) economic e5posure. +) macro political ris". C) accountin! e5posure. -) micro political ris". Ans#er& A Topic& To pic& $conomic $5posure uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 13 Copyri!ht 8 1 :earson $ducation
) The ris" attached to international cash flo#s are all of the follo#in! $C$:T A) usiness and financial ris"s. +) inflation and forei!n e5chan!e ris"s. C) political ris"s. -) ris" of local mana!ement. Ans#er& Topic& To pic& Ty Types pes of is" in nternational Cash Flo#s uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) Macro political ris" and micro political ris" in international usiness refer to the ris" A) that #ill affect all forei!n firms and the ris" that #ill affect an indi*idual firm or specific industry6 respecti*ely. +) of nationaliation of the oil industry and the ris" of a political re*olution6 respecti*ely. C) that #ill affect an indi*idual firm or specific industry and the ris" that #ill affect all forei!n firms6 respecti*ely. respecti*ely. -) of sudden ta5es on e5portin! the manufactured !oods of a particular pa rticular industry and the ris" of the de*aluation of the host country@s currency6 respecti*ely. Ans#er& A Topic& :olitical :olitica l is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) A political ris" that mi!ht affect all forei!n firms in a host ho st country is termed a DDDDDDDD ris"H a political ris" that mi!ht affect only an indi*idual firm or specific industry in a host country is termed a DDDDDDDD ris". A) macro politicalH micro political +) micro politicalH macro political p olitical C) micro politicalH forei!n e5chan!e -) forei!n e5chan!eH micro political Ans#er& A Topic& :olitical :olitica l is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 4) All of the follo#in! are positi*e approaches of copin! #ith political ris" $C$:T A) use of locals in mana!ement. +) joint *enture #ith local an"s. C) license or patent restrictions under international a!reement. -) local sourcin!. Ans#er& C Topic& :olitical :olitica l is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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7) For DDDDDDDD currencies6 chan!es in the *alue of forei!n e5chan!e rates are called DDDDDDDD. A) floatin!H appreciation +) floatin!H re*aluation or de*aluation C) fi5edH re*aluation or de*aluation -) fi5edH appreciation or depreciation Ans#er& C Topic& To pic& Fi5ed *ersus Floatin! Floatin! ate Currencies uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) +et#een t#o major currencies6 the spot e5chan!e rate is the rate DDDDDDDD and the for#ard e5chan!e rate is the rate DDDDDDDD. A) on that dateH today +) at some specified future dateH today C) todayH on that date -) on that dateH at some specified future date Ans#er& Topic& To pic& %pot and For#ard $5chan!e ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy =) Forei!n e5chan!e ris" refers to the ris" created y A) the potential seiure of an MNC@s operations in a host country +) the *aryin! e5chan!e rate et#een t#o currencies C) the fi5ed e5chan!e rate et#een t#o currencies -) the potential nationaliation of the MNC@s operations y a host !o*ernment Ans#er& + Topic& To pic& Forei!n $5chan!e $5chan!e is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 9) f the e5chan!e rate et#een the U.%. dollar and the $uro is I1. per $uro and the e5chan!e rate et#een the U.%. dollar and the >apanese yet is 1 Pen Pen per dollar6 then #hat is the $uro per Pen e5chan!e rateJ A) .1 +) 133. C) .79 -) 1. Ans#er& C Topic& To pic& $5chan!e ates uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills
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2) f the e5chan!e rate et#een the U.%. dollar and the $uro is I1. per $uro and the annual rate of inflation is 4 percent in the United %tates and 1 percent in $urope6 #hat #ill e U.%. dollar per $uro e5chan!e rate in one yearJ A) 1.134 +) .=;2 C) 1.4; -) .;944 Ans#er& A Topic& To pic& $5chan!e ates and nflation uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills 19.3 -escrie forei!n direct in*estment6 in*estment6 in*estment cash flo#s and decisions6 the MNCs@ capital structure6 and the international det and eEuity instruments a*ailale to MNCs. 1) Forei!n ond is an international ond on d that is sold primarily in countries other than the country of the currency in #hich the issue is denominated. Ans#er& FA'%$ Topic& To pic& Forei!n +onds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) n !eneral6 an international ond is one that is initially sold in the country of the orro#er and6 then6 often distriuted in se*eral countries. Ans#er& FA'%$ Topic& To pic& nternational +onds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) +ecause of their access to the international ond and eEuity mar"ets6 MNCs may ha*e lo#er costs of *arious sources of lon!Bterm financin!6 thus resultin! in differences et#een the capital structures of these firms and those of purely domestic companies. Ans#er& TU$ Topic& To pic& Cost of Capital Capital for MNCs MNCs uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) The forei!n direct in*estment (F-) is a multiBnational corporation@s transfer of capital6 mana!erial6 and technical assets from a host country to its home country. Ans#er& FA'%$ Topic& To pic& Forei!n -irect -irect n*estment n*estment uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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4) A multiBnational corporation (MNC) can !i*e some protection to international cash flo#s y reducin! its liailities if the currency is appreciatin!6 or y reducin! its financial assets if the currency is depreciatin!. Ans#er& TU$ Topic& To pic& MNCs and nternational nternational Cash Flo#s uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 7) Comprehensi*e rules6 re!ulations6 and incenti*es aimed at re!ulatin! the inflo# of direct forei!n in*estments in*ol*in! MNCs and at e5tractin! more enefits from their presence are termed A) unitary ta5 la#s. +) forei!n direct in*estments. C) $urocurrency mar"ets. -) national entry control con trol systems. Ans#er& Topic& To pic& National $ntry Control %ystems %ystems uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) The transfer y a multinational firm of capital6 mana!erial6 and technical assets from its home country to a host country is termed A) an MNC. +) an %-. C) an F-. -) a CA:M. Ans#er& C Topic& To pic& Forei!n -irect -irect n*estment n*estment uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy =) An international ond that is sold primarily in countries other than the country of the currency in #hich the issue is denominated is called A) international ond. +) forei!n ond. C) $uroond. -) none of the ao*e. Ans#er& C Topic& $uroonds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 9) For forei!n onds6 interest rates are usually not directly co rrelated #ith the domestic rates pre*ailin! in the respecti*e countries. Ans#er& FA'%$ Topic& To pic& Forei!n +onds uestion %tatus& Ne# AAC%+ ,uidelines& -ynamics of the !loal economy 1= Copyri!ht 8 1 :earson $ducation
1) For a $urodollar ond6 the interest rate #ill reflect se*eral different rates6 most notaly the U.%. lon!Bterm rate6 the $urodollar rate6 and lon!Bterm rates in other countries. Ans#er& TU$ Topic& $uroonds uestion %tatus& Ne# AAC%+ ,uidelines& -ynamics of the !loal economy 11) n capital ud!etin! for a multinational6 the startin! discount rate to #hich ris"s stemmin! from forei!n e5chan!e and political factors can e added6 and from #hich enefits reflectin! the parent@s lo#er capital costs may e sutracted is A) the cost of capital of the parent (multinational) company. +) the ris"Bfree rate of the parent company6 adjusted for ris" rele*ant to the forei!n susidiary. susidiary. C) the local cost of eEuity capital applicale to the local usiness and financial en*ironments #ithin #hich a susidiary operates. -) the #ei!hted a*era!e cost of capital applicale to all forei!n susidiaries comined. Ans#er& C Topic& To pic& Multinational Capital +ud!etin! uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) Theory and empirical e*idence indicate that the capital structures of multinational companies A) are asically the same as those of domestic firms. +) differ6 ut all multinationals are similar no matter the domicile country. C) not only differ from domestic firms6 ut differ also ased upon the country in #hich they are domiciled. -) differ only ecause of their operatin! structure. Ans#er& C Topic& To pic& Multinational Capital %tructures %tructures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 12) elati*e to cash flo#s of domestic firms6 y di*ersifyin! d i*ersifyin! internationally6 internationally6 multinationals A) can increase cash flo#s. +) can achie*e further ris" reduction. C) are unale to chan!e the ris". -) are not attemptin! to chan!e ris". Ans#er& + Topic& To pic& Multinationals and -i*ersification -i*ersification uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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13) The capital structures of MNCs are influenced y all of the factors elo# $C$:T A) international capital mar"ets. +) international di*ersification. C) country factors. -) all of the ao*e. Ans#er& Topic& To pic& Capital %tructure %tructure and MNCs uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 14) The first international capital mar"et6 a mar"et #ith uniform rules and re!ulations !o*ernin! major stoc" e5chan!es6 #as finally estalished and e!an operations in A) at The a!ue. +) in Ne# Por". C) in 'ondon. -) none of the ao*e. Ans#er& Topic& To pic& nternational Capital Mar"et uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 17) A multinational company has t#o susidiaries6 one in reland (local currency6 rish pound) and the other in /est /est ,ermany (local currency6 -eutsche mar"). :ro forma statements of operations indicate the follo#in! shortBterm financial needs for each susidiary (in eEui*alent U.%. dollars)& reland& I4 million e5cess cash to e in*ested (lent)H /est /est ,ermany& I1 million funds to e raised (orro#ed) The follo#in! financial data is also a*ailale&
(a) -etermine the effecti*e effecti*e rates of interest for rish pound and -eutsche mar" mar" in oth the $uromar"et and the domestic mar"et. () /here should should the funds funds e in*este in*estedJ dJ (c) /here should should the the funds funds e raisedJ raisedJ
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Ans#er& (a)
() I4 million should e in*ested in U.%. dollars in the $uromar"et. (c) I1 million million should should e raised in -eutsche -eutsche mar"s mar"s in the Topic& To pic& MNCs and Financin! -ecisions uestion %tatus& e*ised AAC%+ ,uidelines& ,uidelines& Analytic s"ills 19.4 -iscuss the role of the $urocurrency mar"et in shortBterm orro#in! orro#in! and in*estin! in*estin! (lendin!) and the asics of international cash6 credit6 and in*entory mana!ement. 1) n the international conte5t6 the nominal interest rate is the stated interest rate char!ed on financin! #hen only the MNC parent@s currency is in*ol*ed. Ans#er& TU$ Topic& To pic& MNCs and nterest ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) n the case of shortBterm financin!6 the forces of supply and demand are amon! the main factors determinin! e5chan!e rates in $urocurrency mar"ets. Ans#er& TU$ Topic& To pic& $urocurrency Mar"ets uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 2) ed!in! strate!ies are techniEues used to offset or protect a!ainst ris"H in the international conte5t these include orro#in! or lendin! in different currencies6 underta"in! contracts in the for#ard6 futures6 andOor options mar"ets6 and also s#appin! assetsOliailities assetsOliailities #ith other parties. p arties. Ans#er& TU$ Topic& To pic& ed!in! Forei!n $5chan!e is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 3) The interest rates offered in the $uromar"et on the U.%. dollar are !reatly affected y the prime rate inside the United %tates. Ans#er& TU$ Topic& To pic& $uromar"et nterest nterest ates ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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4) n the international conte5t6 the effecti*e interest rate eEuals to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a forei!n currency relati*e to the currency of the MNC parent. Ans#er& TU$ Topic& To pic& MNCs and nterest ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 7) $5chan!e rate ris" hed!in! tools include for#ard contracts6 options6 interest rate s#aps6 currency s#aps6 and hyrid securities. Ans#er& TU$ Topic& To pic& ed!in! $5chan!e ate is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ;) $5chan!e rate ris" hed!in! tools include Monte Carlo s#aps6 synthetic insurance contracts6 and in*entory s#aps. Ans#er& FA'%$ Topic& To pic& ed!in! $5chan!e ate is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy =) The center of the $uroBeEuity mar"et6 #hich deals in international eEuity issues is A) Ne# Por". +) ,ene*a. C) To"yo. -) 'ondon. Ans#er& Topic& To pic& $uroB$Euity Mar"et uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 9) The usual capital mar"ets used y U.%.Based MNCs that desire international o#nership of their eEuity are A) /estern /estern $urope and an d >apan. +) Me5ico and Canada. C) %audi Araia and %outh Africa. -) 'iechtenstein and :anama. Ans#er& A Topic& To pic& MNCs and Capital Mar"ets uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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1) A $uroond is A) a ond sold primarily to $uropeans. +) a ond sold primarily in countries other than the country of the currency in #hich the issue is denominated. C) a det instrument sold e5clusi*ely in $urope. -) a ond issued in 'iechtenstein. Ans#er& + Topic& $uroonds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 11) The e5istence of DDDDDDDD allo#s multinationals to ta"e ad*anta!e of unre!ulated financial mar"ets to in*est and raise shortBterm funds in a *ariety of coun tries and to protect themsel*es from forei!n e5chan!e e5posure. A) a stron! U.%. dollar +) the nternational Monetary Fund C) $urocurrency mar"ets -) $uropean $conomic Council Ans#er& C Topic& To pic& $urocurrency Mar"ets uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1) n the international conte5t6 the DDDDDDDD DD DDDDDD interest rate in*ol*es only the MNC parent@s currency6 #hile #hile the DDDDDDDD interest rate includes any forecast appreciation or depreciation of a forei!n currency relati*e to that of the MNC parent. A) effecti*eH nominal +) macroH nominal C) nominalH effecti*e -) nominalH micro Ans#er& C Topic& To pic& MNCs and nterest ates uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 12) A shortBterm financial decision ased on an MNC mana!ement@s e5pectation that the local forei!n currency #ill appreciate may e A) increasin! local customers@ accounts recei*ale and increasin! local notes payale. +) decreasin! local notes recei*ale and decreasin! accruals. C) increasin! local in*entories and increasin! local notes pa yale. -) increasin! local accounts recei*ale and decreasin! local accounts payale. Ans#er& Topic& To pic& MNCs and %hortBterm Finance uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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13) As a forei!n e5chan!e hed!in! tool6 options ha*e all of the follo#in! characteristics $C$:T A) the ri!ht to uy or sell an amount of forei!n currency. +) specifies price. C) specifies time period. -) represents an oli!ation to uy or sell. Ans#er& Topic& To pic& ed!in! Forei!n $5chan!e is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 14) As a forei!n e5chan!e hed!e6 currency s#aps ha*e all of the follo#in! characteristics $C$:T A) an initial e5chan!e y t#o parties of t#o principal amounts in t#o different currencies. +) principal amounts are re*ersed at the spot rate at maturity. C) each party pays the other@s o ther@s interest payment. -) principal amounts are re*ersed at a preBa!reed rate at maturity. Ans#er& + Topic& To pic& ed!in! Forei!n $5chan!e is" uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 17) n terms of in*entory mana!ement multinational firms A) must deal mainly #ith e5chan!e rate fluctuations and tariffs. +) must deal #ith a #ide numer of factors6 includin! e5chan!e rate fluctuations6 tariffs6 nonB tariff arriers6 inte!ration inte!ration schemes such as the $$C6 and other rules and re!ulations. C) ha*e only economic factors to consider6 since this is a current asset and is minimally affected y political factors. -) ha*e only political factors to consider6 since in*entory is minimally affected y forei!n economic factors. Ans#er& + Topic& To pic& MNCs and n*entory Mana!ement uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 1;) Forei!n onds are sold primarily in A) countries other than the country in #hich the issue is denominated. +) /estern $urope. C) >apan. -) the country of the currency of issue. Ans#er& Topic& To pic& Forei!n +onds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy
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1=) A ond that is initially sold primarily in countries other than the co untry of the currency in #hich the issue is denominated is called A) an international ond. +) a forei!n ond. C) a $uroond. -) a doule -utch ond. Ans#er& C Topic& $uroonds uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy 19.7 e*ie# recent trends in international mer!ers mer!ers and joint *entures. 1) The creation of international joint *entures has increased sustantially durin! the past t#o decades. Ans#er& TU$ Topic& nternational nterna tional >oint ?entures ?entures uestion %tatus& e*ised AAC%+ ,uidelines& -ynamics of the !loal economy ) n the U.%. o*er the past 2 years6 forei!n direct in*estment (F-) came o*er#helmin!ly in the form of mer!ers and acEuisitions rather than throu!h estalishments. Ans#er& TU$ Topic& To pic& Forei!n -irect -irect n*estment n*estment uestion %tatus& Ne# AAC%+ ,uidelines& -ynamics of the !loal economy 2) n the most emer!in!Ode*elopin! countries (includin! China) o*er the past 2 years6 forei!n direct in*estment (F-) came o*er#helmin!ly in the form or mer!ers and acEuisitions rather than throu!h estalishments. Ans#er& FA'%$ Topic& To pic& Forei!n -irect -irect n*estment n*estment uestion %tatus& Ne# AAC%+ ,uidelines& -ynamics of the !loal economy
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