Q&A Hero

Q: When the ________ of two assets is _______, then the two variables rise together and fall together. a. Covariance, negative b. Covariance, positive c. Variability, negative d. Variability, positive

Q: According to the theory of capital flows, there should exist one-way capital flow which will stop when interest rates are: a. Greater then international average in one country. b. Low in country receiving capital, but high in the other. c. Below the international average of interest rates. d. Exactly the same.

Q: For an investor, nonsystematic risk can be eliminated through: a. Portfolio diversification b. Avoiding transaction costs c. Increased variance d. Sterilization

Q: The ________ the variance of variability of returns on a portfolio, the more ________ the returns on the portfolio. a. Smaller, dangerous b. Smaller, diversified c. Larger, diversified d. Larger, uncertain

Q: Investors often hold ________ to reduce risk associated with investments. a. Domestic currency contracts b. Letters of credit c. Diversified portfolios d. Forward contracts only

Q: A stock market in which foreign investors are not allowed to buy domestic stocks and domestic investors are not allowed to buy foreign stocks is called a segmented market.

Q: The surprisingly low level of international assets in investment portfolios reflect investors decisions to hold undiversified portfolios is known as the home-bias puzzle.

Q: The return on the portfolio is a weighted average of the returns on the individual assets.

Q: The risk present in all investment opportunities is known as systematic risk.

Q: Portfolio diversification eliminates the systematic risk that is unique to an individual asset although nonsystematic risk will remain.

Q: Risk premiums decrease for domestic assets when: a. The domestic government prohibits foreign investors b. Domestic investors fail to properly diversify internationally c. A country moves from a global market to a segmented market d. A country moves from a segmented market to a global market

Q: A foreign firm has stock that can be purchased in New York, London, and Tokyo. The firm must be using a(n): a. GDR b. ADR c. Variant stock d. Preferred stock

Q: ADRs are used by domestic investors because the certificates provide: a. Greater returns than foreign stocks purchased in foreign markets. b. A way to avoid transaction costs associated with currency exchange. c. A tax-free investment. d. A way to avoid foreign exchange risk

Q: A certificate that represents shares of a foreign stock issued by a U.S. bank is called a(n): a. Letter of credit b. American depository receipt c. Foreign credit d. Exchange contract

Q: Consider two securities known as Security A and B. If returns on Security A decrease 10% while returns on Security B also decrease 10%, then the correlation coefficient is: a. Positive b. Negative c. Zero d. Impossible to determine

Q: Which of the following reasons does not support the home-bias theory? a. Nationalism support of home stock b. Knowledge about domestic firms c. Knowledge about foreign firms d. Stocks measured against local conditions

Q: Which of the following are possible explanations for incomplete portfolio diversification? I. Transaction costs II. Home bias III. Information costs IV. Taxes a. I and II b. II and III c. II and IV d. I, II, III, and IV

Q: The home-bias puzzle could be used to describe: a. The gains investors earn when over investing in foreign markets. b. The lack of international diversification in the United States. c. The increased preference for high variance investments in the domestic market. d. The surprisingly low level of domestic investment in the United States.

Q: When an investor prefers a portfolio that is diverse, has a smaller return than an alternative, and has a much smaller variance then the investor must be: a. Risk seeking b. Risk loving c. Risk neutral d. Risk averse

Q: When the ________ of two assets is _______, then the two variables move in opposite directions: when one rises the other falls. a. Covariance, negative b. Covariance, positive c. Variability, negative d. Variability, positive

Q: Investors include various assets in the portfolio, to ________ the variability of the portfolios returns. a. Simplify b. Increase c. Decrease d. Equalize

Q: The risk present in all investment opportunities is known as ________ risk. a. Systematic b. Nonsystematic c. Portfolio d. Diversification

Q: When a country moves from segmented capital market to globalized capital market, a firm located in this country can achieve: a. lower cost of capital b. greater availability of capital c. lower risk premium on domestic assets d. All of the above are correct.

Q: Capital market segmentation is a financial market imperfection caused mainly by: a. Government regulations b. High transactions costs c. Political risk d. All of the above contribute to the imperfection in financial markets.

Q: A portfolio manager has decided to invest a total of $10 million on U.S. and Japanese portfolios. The expected returns are 12 percent on the U.S. portfolio and 20 percent on the Japanese portfolio. What is the expected return of an international portfolio with 40 percent invested in the U.S. portfolio and 60 percent invested in the Japanese portfolio? a. 32.0% b. 16.8% c. 16.0% d. 12.7%

Q: Assume that the expected returns of the four portfolios are the same but their variances are as follows. Which of these four portfolios would you select? a. 0.015 b. 0.020 c. 0.150 d. 0.095

Q: Assume that the expected returns of the four portfolios are the same but their variances are as follows. Which of these four portfolios is the most risky? a. 0.015 b. 0.020 c. 0.150 d. 0.095

Q: ADR is: a. a type of Eurodollar loans. b. international mutual funds c. a certificate represents shares of a foreign stock issued by a U.S. bank. d. international reserve created by the IMF.

Q: Rather than directly issuing stock in the U.S. to obtain equity funds, foreign corporations can issue ___________, which are certificates representing underlying bundles of stock. a. American Depositary Receipts b. Special Drawing Rights c. Mortgage backed securities d. Put option

Q: Assume that you are considering a portfolio of two assets, A and B, with 40% invested in asset A and invested 60% in asset B. Assume also that the assets have the following statistics: ReturnVarianceCovarianceAsset A20 %0.20-0.01Asset B15 %0.10 a. Variance = 0.0480b. Variance = 0.0632c. Variance = 0.0656d. Variance = 0.0728

Q: Based on this table of correlation coefficients of real dollar returns of assets in different countries, which two countries appear to provide the greatest amount of benefit from diversification? U.S.JapanChinaBrazilU.S. Japan0.85 China0.510.93 Brazil0.120.210.06 a. The U.S. and Japanb. China and Japanc. Japan and Brazild. China and Brazil

Q: Use the following information to answer questions 8-9.An investor is considering a portfolio consisting of 60% invested in Stock X and 40% invested in Stock Y. The expected returns for the stocks are 10% for Stock X and 8% for Stock Y. Variance of the stock returns are 0.04 for Stock X and 0.02 for Stock Y, and a covariance of -0.01 between the two stocks.What is the variance of the proposed portfolio?a. 0.0128b. 0.0152c. 0.0224d. 0.0272

Q: Which of the following statements is TRUE? I. Diversification is a process of removing systematic risk from a portfolio. II. Diversification is a process of maximizing possible returns of a portfolio. a. Only I is true. b. Only II is true. c. Both I and II are true. d. Neither I nor II are true.

Q: Which of the following would not be considered a source of systematic risk? a. a hostile takeover of a firm b. a rise in inflation c. a fall in GDP d. a panic on Wall Street

Q: Which of the following statements regarding portfolio risk and number of stocks is generally true? a. Adding more stocks increases risk. b. Adding more stocks decreases risk but does not eliminate it. c. Adding more stocks has no effect on risk. d. Adding more stocks increases only systematic risk.

Q: To minimize transaction costs on foreign subsidiary profits in low-tax countries, firms may use transfer prices.

Q: Multinational cash management is used by the firm to move cash to keep overall cash needs low.

Q: A letter of credit (LOC) is a contract written by a bank to guarantee that the exporter will pay the importer the amount of money owed.

Q: The firms management style determines whether to decentralize or centralize its financial management between the parent and the foreign subsidiaries.

Q: Multinational cash management involves managing the parent-firms capital holdings separately from any foreign capital holdings.

Q: A(n) ________ letter of credit where the agreement can be modified by the importer of the goods is considered: a. Completed b. Irrevocable c. Revocable d. Drafted

Q: Which of the following are advantages of netting? V. Avoiding transaction costs VI. Shifting profits to different subsidiaries VII. Avoiding taxes for the parent firm VIII. Increasing flexibility in the parent firm a. I only b. II only c. I and IV d. II, III, and IV

Q: In capital budgeting, a multinational firm often: a. Forecasts exchange rates b. Ignores capital seizures risks c. Provides a bill of lading d. Transfers profits to one foreign subsidiary

Q: A contractual obligation of a bank for a future payment is called a(n): a. Letter of contract b. Export netting agreement c. Transfer price d. Bankers acceptance

Q: Assume a letter of contract is in place. If the importer does not pay the bank, then under the letter of contract the _______ is still obligated to pay the exporter. a. Domestic government b. Foreign government c. Importer d. Bank

Q: The evaluation of prospective investment alternatives and the commitment of funds to preferred projects is referred to as: a. Capital budgeting b. Cash management c. Flow budgeting d. Decentralized management

Q: The price that one subsidiary charges another subsidiary of internal good transfers is called a(n): a. Transfer price b. Transaction price c. Strike price d. Subsidiary price

Q: A detailed list of the content that is shipped, and can be used to identify missing or damaged items is called a(n): a. Adjusted payment b. Import contract c. Contract guarantee d. Bill of lading

Q: A contract written by a bank to guarantee that the bank will pay the exporter the amount of money owed by the importer is called a: a. Letter of credit b. Export contract c. Import contract d. Contract guarantee

Q: Suppose Banana Computers has a foreign subsidiary with a 3 million pound payable due on October 1, as well as 2 million pound receivable due on September 1. One way the firm could avoid transaction costs is: a. Lagging currency flows b. Capital budgeting c. Risk analysis d. Transfer pricing

Q: By using netting, firms are able to minimize: a. Labor costs b. Penalty payments c. Transaction costs d. Transfer prices

Q: Centralization of cash management allows the parent to offset subsidiary payables and receivables in a process called: a. Internalizing b. Outsourcing c. Risk shifting d. Netting

Q: For a multinational firm using a decentralized management style, the subsidiary would be expected: a. To focus on meeting goals set by the parent firm. b. To make most of the financing and production decisions. c. To allow the parent firm move resources to maximize total firm value. d. To operate efficiently under directives from the parent firm.

Q: If multinational businesses want managers of foreign subsidiaries to be involved in international financing issues, then subsidiary profits should be measured in: a. The foreign currency b. The domestic currency c. U.S. dollars only. d. Swiss francs only.

Q: Capital budgeting refers to the evaluation of prospective investment alternatives and the commitment of funds to preferred projects.

Q: The sum of the projects initial investment cost, the present values of cash flows, and all financial effects related to the investment is called the adjusted present value.

Q: A transfer price is the price that one subsidiary charges another subsidiary of internal good transfers.

Q: Because cash earns no interest, firms engage in multinational cash management to use this liquid resource as efficiently as possible.

Q: For a multinational firm using a decentralized management style, the subsidiary would be expected to meet goals for key variables such as sales and labor costs.

Q: The sum of the projects initial investment cost, the present values of cash flows, and all financial effects related to the investment is called: a. Subsidiary investment total b. Transfer total c. Cost above investment d. Adjusted present value

Q: When a multinational firm calculates a project for a foreign subsidiary with ________ net value, then the project should probably be ________. a. Zero, delayed b. Positive, sold c. Negative, accepted d. Positive, accepted

Q: Which of the following are advantages of netting? I. Avoiding transaction costs II. Shifting profits to different subsidiaries III. Avoiding taxes for the parent firm IV. Increasing flexibility in the parent firm a. I only b. II only c. I and IV d. II, III, and IV

Q: A(n) ________ letter of credit where the agreement cannot be modified without the express permission of all parties is considered: a. Completed b. Irrevocable c. Revocable d. Drafted

Q: The U.S. Internal revenue service requires subsidiaries set transfer prices by charging prices that an unrelated buyer and seller would willingly pay or using: a. Minimal cost pricing b. Marginal cost pricing c. Arms-length pricing d. Deposit pricing

Q: Political instability and currency conversion are reasons why ________ is more complicated for foreign subsidiaries than domestic ones. a. Currency lagging b. Capital budgeting c. Patterning cash flows d. Forward financing

Q: After considering the long-term implications of the project such as political risk and foreign tax regulations, a multinational firm called Company X decides to purchase a foreign company to merge with its foreign subsidiary. This is an example of: a. Cash management b. Projection analysis c. Capital budgeting d. Decentralized management

Q: Letters of credit are used because: a. Subsidiaries often have little capital b. Profits are taxed differently in different countries c. Contracts are difficult to enforce internationally d. They prevent seizures by foreign governments

Q: When the subsidiary manager is focused on meeting goals set by the parent firm, then the multinational firm is probably using a(n) ________ style of management. a. Multinational cash b. Decentralized c. Centralized d. Goal-orientated

Q: A documentary credit is issued to importer to pay exporter for an amount of GBP 40,000 payable with drafts drawn at 30 days from the date of shipment. Document is presented with bills of lading. This is an example of: a. Export netting b. Swap contract c. Letter of credit d. Future contract

Q: Use this information to answer questions 13-15. Big Can, Inc., a U.S. firm, manufactures and sells aluminum cans worldwide. Because of a rising price of aluminum in the U.S., the company is considering to build a new plant in Europe. The plant will cost 20 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the European government (zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project. Table 9.2 Year 0 Year 1 Year 2 Year 3 Europe Net cash flows (in euro) -20.0 0 8.0 8.0 Forecast exchange rate ($/ ) 1.0 0.96 0.94 0.92 Discount rate = 10% Comparing with information in Table 9.2, if the forecast exchange rate ($/) remains constant at $1.0 per pound throughout the life of the project, which of the following is true? a. The net present value of this project increases. b. The net present value of this project decreases. c. The net present value of this project becomes more positive. d. The net present value of this project remains unchanged.

Q: Use the following information to answer questions 10-12. General Candy, Inc., a U.S. firm, manufactures and sells candies worldwide. Because of a rising price of sugar in the U.S., the company is considering to build a new plant in the U.K. The plant will cost 15 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the British government (zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project. Table 9.1: Year 0 Year 1 Year 2 Year 3 U.K. Net cash flows (in pound) -15.0 5 7.5 7.5 Forecast exchange rate ($/) 1.5 1.46 1.45 1.44 Discount rate = 10% Comparing with information in Table 9.1, if the forecast exchange rate ($/) remains constant at $1.5 per pound throughout the life of the project, which of the following is true? a. The net present value of this project increases. b. The net present value of this project decreases. c. The net present value of this project becomes negative. d. The net present value of this project remains unchanged.

Q: Which of the following is NOT a reason why capital budgeting for a foreign project is more complicated than a domestic project? a. Cash flows from the foreign project have to be converted into the domestic currency. b. The foreign project can be affected by political instability in foreign country. c. The foreign project involves larger amount of working capital than the domestic project. d. The foreign project can be affected by different foreign taxes and regulations.

Q: Which of the following is NOT a step in the capital budgeting process? a. Identify the initial outlay of the investment project. b. Estimate net future cash flows over the lifetime of the project. c. Identify appropriate interest rate to discount the future cash flows. d. Use foreign inflation rates to discount the future cash flows.

Q: Transfer pricing has been used by multinational corporation to: a. Minimize tax payments in foreign countries b. Minimize import tariffs c. Minimize foreign exchange controls d. All of the above are correct.

Q: Which of the following is NOT an objective of international cash management by MNCs? a. To increase the firms liquidity. b. To increase the firms returns on investment. c. To ensure that all subsidiaries have the same pattern of cash flows. d. To reduce foreign exchange risk.

Q: To reduce transfer pricing distortion, multinational firms are supposed to charge prices to their foreign subsidiaries that are __________. a. Average variable costs b. Total costs c. Marginal costs d. Arms-length prices

Q: An advantage of netting of a multinational corporation and its subsidiaries is that it: a. increases foreign exchange risk. b. decreases the total volume of inter-subsidiary fund flows. c. increases the total amount of currency conversion. d. decreases the number of employees.

Q: Which of the following is correct about a decentralized management style of the financial management over foreign operations? a. There is no monitoring of subsidiary managers, since an MNCs foreign subsidiaries are separate legal entities. b. MNCs allow subsidiary managers to make the key decisions about their respective operations, but the decisions may be monitored by the parents management. c. Subsidiary foreign managers respond to directive from the top of the parents management. d. Financial managers at the parent company make most of the key decisions.

Q: The goal of a multinational corporation (MNC) is a. The minimization of taxes remitted from foreign subsidiaries. b. The establishment of subsidiaries in any country where operations would provide a return above the cost of capital, even if better projects are available domestically. c. The maximization of shareholder wealth. d. The maximization of social benefits to the host country through knowledge spillover effects.

Q: Which of the following is probably NOT an example of the use of forward contracts by a multinational corporation (MNC)? a. Hedging pound payables by selling pounds forward b. Hedging peso receivables by selling pesos forward c. Hedging yen payables by purchasing yen forward d. All of the above are examples of using forward contracts