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TEST BANK
BUSINESS/FINANCE
182
Chapter 1
Introduction
1
...
*
3
...
*
5
...
*
Which of the following is the primary objective of a firm?
A
...
satisfaction of customers
C
...
prompt payment to creditors
E
...
A
...
different interest and inflation rates
C
...
A and B
E
...
A
...
industrialization and growth of the developing world
C
...
increased globalization
E
...
A
...
agents
C
...
suppliers
E
...
market imperfection
B
...
portfolio effect
D
...
company advantage
Incentives for multinational company managers include the following except ___
...
stock options
B
...
perquisites
D
...
vacation
183
7
...
*
9
...
*
11
...
*
Environmental factors affecting international operations are as follows except ___
...
foreign customs
B
...
foreign political situations
D
...
international distance
Three major risks in international business are ___
...
political, financial and weather
B
...
political, financial and regulatory
D
...
marketing, ethics and political
Conflicts of interest for multinational corporations do not include ___
...
the interests of sovereign governments may be different
B
...
some conflicts may exist within multinational subsidiaries
D
...
multinational managers live in different time zones
The conflict between owners, employees, suppliers, and customers of a company is
known as ___
...
regulatory risk
B
...
conflict of multiple environments
D
...
none of the above
The main differences between domestic and international companies from a financial
manager's point of view are largely due to differences in ___
...
risks
B
...
economic factors
D
...
all of the above
A global company is an organization that attempts to ___
...
have a worldwide presence in its market
B
...
standardize operations in one or more of the company's functional areas
D
...
A, B, and C
184
13
...
*
15
...
*
17
...
A
...
profit
C
...
asset turnover
E
...
A
...
direct negotiation with management
C
...
A and C only
The OECD Principles of Corporate Governance covers ___
...
the rights of shareholders
B
...
the responsibilities of the board
D
...
all of the above
The political, regulatory, technological, and economic forces radically changing the
global competitive environment include ___
...
the collapse of communism
B
...
the revolution in information technologies
D
...
all of the above
All of the following have played an important role in the globalization process of the
world economy except ___
...
advances in information technologies
B
...
reductions in trade barriers
D
...
reductions in technological barriers
185
18
...
*
20
...
*
Reductions in transportation and communication costs have ___
...
facilitated international production activities
B
...
enabled companies to exploit international cost differentials
D
...
all of the above
Reasons for management to focus on stockholder wealth maximization include ___
...
stockholders are the owners of the company
B
...
a high stock price provides the best defense against a hostile takeover
D
...
all of the above
Which of the following statements about financial planning and control is not true?
A
...
the preparation of budgets is a planning function, but their administration is a
controlling function
C
...
the foreign exchange market plays a key role in MNC financial planning and
control
E
...
A
...
financial planning and control
C
...
multiple environments
E
...
*
2
...
*
According to the classical economic theory, international trade takes place between
countries based on the
...
absolute advantage of land
B
...
absolute advantage of technology
D
...
comparative advantage of cost
According to the theory of factor endowments, a country must specialize in the
production and export of any good that uses its large amount of
production factors
...
scarce
B
...
wasteful
D
...
small
A product life cycle theory works only
...
in international trade
B
...
in both international trade and foreign investment
D
...
with an importer who has a comparative advantage
4
...
forfaiting
B
...
non-tariff barriers
D
...
countervailing duties
5
...
administrating its trade agreements
B
...
technical assistance and training for developing countries
D
...
the establishment of trade centers around the world
*
187
...
*
7
...
*
9
...
*
11
...
a free trade area
B
...
customs union
D
...
political union
...
national security
B
...
domestic employment
D
...
A, B, and C
Which of the following is not a main objective of the free trade agreement between the
United States and Canada?
A
...
phase out tariffs between the two countries
C
...
grant "national treatment" with each other
E
...
A
...
ASEAN and EU
C
...
NAFTA and EU
E
...
A
...
Snart
C
...
Nehrt
E
...
the theory of comparative advantage
B
...
eclectic theory
D
...
none of the above
188
12
...
A
...
raw materials
C
...
new knowledge
E
...
*
Which of the following is not one of benefits of open trade?
A
...
comparative advantage
C
...
increased productivity
E
...
*
Which of the following is not an example of trading bloc?
A
...
North American Free Trade Agreement
C
...
the Central American Common Market
E
...
Tariffs on imported goods can be imposed for the following reason(s)
A
...
national pride
C
...
retaliation
E
...
*
17
...
A
...
maximum
C
...
small
E
...
amounts of certain products to be imported during a given
The portfolio theory of foreign investment relies on the following variable(s)
A
...
technology
C
...
market share
E
...
18
...
*
20
...
*
22
...
many
B
...
15
D
...
about 25
firms dominate the market
...
A
...
more
C
...
perfectly positively
E
...
access to technology
B
...
access to capital
D
...
all of the above
Corporate responses to trading blocs include ___
...
direct investment in major trading blocs
B
...
strategic alliances with firms in major trading blocs
D
...
A, B, and C
John Dunning argues that a company is willing to invest abroad when it has ___
...
ownership-specific advantages
B
...
internationalization advantages
D
...
A, C, and D
190
23
...
*
25
...
it is a synergistic effect said to exist when the whole is worth more than the mere
sum of its parts
B
...
each country should specialize in a limited number of products in which it has a
comparative advantage
D
...
the functions of production, marketing and purchasing can be consolidated
The synergistic effect said to exist when the whole is worth more than the mere sum of its
parts is called ___
...
economies of scale
B
...
the theory of factor endowments
D
...
the theory of comparative advantage
Antidumping duties are ___
...
imposed for technical and health regulations
B
...
additional import duties imposed to offset an export subsidy by another country
D
...
customs duties imposed on an imported product whose price is higher than that of
the same product in the home market
191
Chapter 3
The Balance of Payments
1
...
*
3
...
*
5
...
merchandise exports
B
...
current transfer items
D
...
merchandise imports
The financial account in the balance of payments does not include the following __
...
foreign direct investment
B
...
foreign bank loans
D
...
investment on foreign bonds
Official reserve assets do not include
A
...
convertible foreign exchange
C
...
British pound
E
...
Credit transactions in the balance of payments do not include ___
...
exports of goods and services
B
...
investment and interest earnings
D
...
investments and loans from foreign residents
The general trend of the US service trade account has been
A
...
an increasing deficit
C
...
a falling deficit
E
...
...
*
7
...
*
9
...
*
11
...
current account
B
...
financial account
D
...
profit account
The financial account in the balance of payments does not include ____
...
foreign direct investments
B
...
exports of goods and services
D
...
A, B, and D
The accounting statement that summarizes all the economic transactions between a
country's residents and foreign residents is called the balance of
...
merchandise trade
B
...
capital account
D
...
payments
In a freely floating exchange rate system, a current account deficit should produce a
financial account
...
surplus
B
...
balance
D
...
all of the above
During the 1990s, the United States had a
A
...
deficit
C
...
both A and B
E
...
As the real value of the yen rises, the balance on Japan's current account is likely to
A
...
improve
C
...
cannot tell
E
...
12
...
*
14
...
*
16
...
A
...
deteriorate
C
...
cannot tell
E
...
A
...
increase the value of its currency
C
...
all of the above
E
...
merchandise account
B
...
capital account
D
...
financial account
The current account includes
...
merchandise exports and imports
B
...
unilateral transfer items
D
...
A, B, and C
Official reserve assets are composed of
A
...
convertible foreign exchanges
C
...
all of the above
E
...
194
...
*
18
...
*
20
...
*
The balance of payments identify states that the combined balance of current account,
capital account, financial account, net errors and omissions, and reserves and related
items must be
...
greater than one (1)
B
...
equal to zero (0)
D
...
between 1 and 0
World output has grown _____ than world trade during the 1990s
...
faster
B
...
ten times faster
D
...
none of the above
The J-curve effect holds that a country's currency depreciation causes its trade balance to
____
...
deteriorate for a short time
B
...
significantly improve in the long run
D
...
A and B only
To reduce its trade deficit, a country should do all of the following but ____
...
deflate the economy
B
...
adopt foreign exchange controls
D
...
increase money supply
All of the following statements concerning a country’s balance of payments are true
except ___
...
it is commonly defined as the record of transactions between the country’s
residents and foreign residents over a specific period
B
...
it records only the transactions of business firms
D
...
it is used to forecast the direction of exchange rates
195
22
...
*
All of the following statements concerning a country’s balance of payments are true
except ___
...
it is a sources-and-uses of funds statement
B
...
it reflects changes in assets, liabilities, and net worth during a specified period
D
...
it records transactions between domestic and foreign residents
A country incurs a surplus in its balance of payments when ___
...
credit transactions exceed debit transactions
B
...
autonomous receipts exceed autonomous payments
D
...
all of the above
196
Chapter 4
The International Monetary System
1
...
*
3
...
*
5
...
countries can maintain independent monetary policy
B
...
countries can maintain independent fiscal policy
D
...
Central banks do not need to maintain large reserves
Under the purely fluctuating exchange rate system, the balance of payments imbalances
are automatically corrected by the following mechanism
...
speculation
B
...
interest rate changes
D
...
none of the above
Which of the following is not directly related to the Bretton Woods system?
A
...
the fixed exchange rate system
C
...
the International Monetary Fund
E
...
U
...
balance of payments deficits
B
...
S
...
the decline of international reserves
D
...
none of the above
The Group of Ten got together at the Smithsonian Institution to agree on a wider band
system so that exchange rates can fluctuate
...
5% above and below the central rate
B
...
25% above and below the central rate
C
...
4% above and below the central rate
E
...
*
7
...
*
9
...
*
The Jamaican Agreement was held to amend the Bretton Woods Agreement of the fixed
exchange rate system in
...
1973
B
...
1976
D
...
1979
Factors that cause demand and supply schedules for foreign exchange to shift do not
include :
A
...
relative interest rates
C
...
relative income levels
E
...
A
...
15%
C
...
17%
E
...
to promote international monetary cooperation
B
...
to create standby reserves
D
...
none of the above
...
A
...
50
C
...
80
E
...
*
12
...
*
14
...
*
16
...
US dollar
B
...
Swiss franc
D
...
British pound
Special drawing rights are used to settle payments by the following organizations except
A
...
prescribed organizations
C
...
multinational corporations
E
...
A
...
2000
C
...
2003
E
...
1969
B
...
1976
D
...
1980
...
A
...
Plaza Accord
C
...
Jamaica Agreement
E
...
Korea
B
...
Indonesia
D
...
Philippines
199
...
*
18
...
*
20
...
*
The September 1992 currency crisis in Europe was mainly attributable to
A
...
the increase in German interest rate
C
...
the French currency policy
E
...
The proposal under which a par value of a currency is adjusted intermittently is referred
to as a
...
wide band
B
...
crawling peg
D
...
gliding band
The quota allotted to a member country of the IMF, which it can borrow at will, is known
as
tranche
...
gold
B
...
member
D
...
reserve
Economists regard the creation of the Euro as a new European currency in the
international monetary system as the most important development since
...
1953
B
...
1973
D
...
1993
A country may link its exchange rate to the value of a major currency, often the US
dollar
...
A
...
a currency peg
C
...
a currency basket
E
...
*
23
...
*
25
...
*
If and when the value of the Japanese yen against the US dollar goes up 15%, it affects
the following items
...
the price of imported Japanese cars
B
...
the price of Japanese pearls sold in Troy, Ohio
D
...
all of the above
Which of the following currencies is directly linked to the value of gold?
A
...
Japanese yen
C
...
British pound
E
...
A
...
is an exchange rate which does not fluctuate
C
...
is the price of one currency expressed in terms of another currency
E
...
A
...
will have a par value
C
...
B and C
E
...
A
...
is an extreme form of the fixed exchange rate system
C
...
B and C
E
...
*
A currency devaluation is ___
...
an official increase in the value of a currency by the government of that currency
B
...
a decrease in the value of a currency against other currencies under a floating
system
D
...
a currency board
202
Chapter 5
The Foreign Exchange Market and Parity Conditions
1
...
*
3
...
*
5
...
The currency exchange is usually made through the
following methods
...
buyers and sellers of foreign exchange meet at a physical location
...
buyers and sellers of foreign exchange meet through a telephone network
C
...
A and B
E
...
they operate the payment mechanism
B
...
they extend credit
D
...
they buy and sell foreign exchange
Which of the following is not a characteristic of speculation
A
...
exchange rate fluctuation
C
...
risk taking
E
...
A cross rate is an exchange rate between ___ and ___
...
The US dollar and the Japanese yen
B
...
the Mexican peso and the euro
D
...
the euro and the Japanese yen
A US company is expected to receive £100,000 in 120 days
...
A
...
sell British pounds forward
C
...
sell British pounds 120 days from now
E
...
*
Speculation in foreign exchange markets entails
...
covering in the forward market
B
...
hedging in the option market
D
...
covering in the futures market
7
...
A
...
you have inside information
C
...
market information is secretive
E
...
The theory of purchasing power parity says that
...
the inflation rates in two countries are unrelated
B
...
the inflation rate is greater than the interest rate
D
...
the interest rate and the inflation rate are identical
*
9
...
*
The Fisher Effect assumes that the
...
real interest rate is equal to the nominal interest rate
B
...
inflation rate is equal to the real interest rate
D
...
nominal interest rate is lower than the inflation rate
The International Fisher Effect says that the
...
exchange rate difference reflects the inflation rate difference between two
countries
B
...
future spot rate reflects the forward rate
D
...
all of the above
204
11
...
*
13
...
*
15
...
*
The theory of interest rate parity means that the
...
interest rates are equal in two countries
B
...
difference between the spot rate and the future spot rate reflects the interest rate
difference between two countries
D
...
all of the above
A forward rate is equal to a future spot rate if foreign exchange markets are
A
...
efficient
C
...
are partially controlled by the International Monetary Fund
E
...
banks
B
...
individuals
D
...
all of the above
...
Commercial banks play the flowing role in international transactions ___
...
they operate the payment mechanism
B
...
they help reduce risk
D
...
all of the above
___ is used a major means of reducing risk in international transactions
...
exchange trading
B
...
letter of credit
D
...
bank trading rooms
Central banks ___
...
attempt to control the growth of the money supply within their jurisdictions
B
...
strive to maintain the value of their own currency against any foreign currency
D
...
all of the above
205
17
...
30 and the six month forward rate of the
ringgit is $
...
premium; about 14
...
discount; about 14
...
premium; about 13
...
discount; about 13
...
premium; about 16
...
32 -
...
30] x (360/180) = 13
...
*
19
...
32 and the six month forward rate is $
...
discount; 11
...
premium; 11
...
premium; 12
...
discount; 12
...
premium; 22
...
30 -
...
32] x (360/180) = -12
...
86 and the Brazilian real is equal to $
...
about
...
about
...
about 1
...
about 1
...
about
...
28/
...
3256
20
...
0035 six months ago and is worth $
...
appreciated; about 29%
B
...
depreciated; about 20%
D
...
appreciated; about 15%
Solution: use Equation (5-1)
(
...
0035)/
...
*
Assume: (1) the US annual interest rate = 10%; (2) the Malaysian annual interest rate =
4%; and (3) the 90-day forward rate for the Malaysian ringgit = $
...
At what current
spot rate will interest rate parity hold?
A
...
3922
B
...
3855
C
...
3807
D
...
3752
E
...
6000
Solution: use Equation (5-8)
[(
...
10 -
...
3807
22
...
If the current spot rate for the Cambodian riel (KHR) is
3342
...
$6053
...
$6350
...
$3342
...
$6685
...
$7800
...
Remember that the reciprocal of 3342
...
0002991
...
0002991[(1 +
...
90)]
= $
...
0001653 = KHR6053
...
*
If the expected inflation rate is 4% and the real required return is 5%, what is the nominal
interest rate?
A
...
9%
C
...
5%
E
...
Nominal rate = 5% + 4% = 9%
Use the following information to answer the next three questions
...
800; the 90-day forward rate of the pound is $1
...
207
24
...
in the United States
B
...
cannot tell
D
...
in Germany
Solution: invest in the US: $10,000 x 1
...
Buy pounds at the present spot rate:
$10,000/1
...
015 = £5,638
sell pounds forward: £5,638 x 1
...
25
...
1
...
1
...
1
...
1
...
2
...
800)/1
...
04 - 0
...
809
26
...
6
...
8
...
4
...
6
...
8
...
[(1
...
800)/1
...
04 - if
if = 0
...
64 per Swiss franc on January 1 in one recent
year to $0
...
27
...
5
...
6
...
7
...
8
...
9
...
% Change = (0
...
64)/0
...
0625 or 6
...
*
What is the percentage change in the franc spot rate using indirect quotes for a US
company?
A
...
C
...
E
...
25%
7
...
88%
9
...
55%
Solution: Converting the above example into indirect quotations, the Swiss franc
changes from 1
...
4706 francs
...
% Change = (1
...
4706)/1
...
25%
29
...
64 for the Canadian dollar and the ask price is $0
...
What is the bid-ask spread for the Canadian dollar?
A
...
77%
B
...
77%
C
...
75%
D
...
25%
E
...
25%
Solution: Use Equation (5-3)
...
68 - 0
...
64 = 0
...
25%
209
Chapter 6
Currency Futures and Options
1
...
*
3
...
*
The International Monetary Market in the Chicago Mercantile Exchange trades
A
...
bonds
C
...
currency futures
E
...
price range
B
...
size of contract
D
...
all of the above
The buyer and the seller in currency future markets agree on
A
...
the price to be paid
C
...
all of the above
E
...
make a profit
B
...
make sure that foreign bills are collected
D
...
none of the above
...
5
...
A
...
in flexible maturity dates
C
...
tailored to the desire of the seller
E
...
*
The forward market of foreign exchange offers contracts
...
tailored to meet the needs of the buyers and sellers
B
...
which have a standardized maturity date
D
...
which are available in a pre-determined amount
210
...
7
...
A
...
actually settled for delivery
C
...
handled by commercial banks
E
...
The lifetime high and low figures in the currency futures quotation table mean
A
...
the highest and lowest prices during the day
C
...
the highest and lowest prices for each week
E
...
*
10
...
*
12
...
The "open interest" in a currency futures quotation table refers to the
...
total number of contracts traded
B
...
total number of interested parties
D
...
none of the above
Margin requirements in currency futures markets are a form of
A
...
collateral deposit
C
...
compensation
E
...
covered by options contracts
B
...
usually making profits
D
...
always losing money
...
A
...
Chicago Mercantile Exchange
C
...
Singapore Stock Exchange
E
...
13
...
A
...
seller the right to sell the underlying currency
C
...
seller the right to buy the currency futures contracts
E
...
A currency put option gives the
A
...
buyer the right to sell
C
...
seller the right to sell
E
...
15
...
option can be exercised
B
...
option can be sold
D
...
none of the above
16
...
A
...
below the exchange rate of the underlying currency
C
...
below the forward rate
E
...
S
...
*
18
...
A
...
the seller the right to sell a particular currency futures contract
C
...
the buyer the right to buy a particular currency futures contract
E
...
A
...
the seller the right to sell a particular currency futures contract
C
...
both the seller and the buyer to sell a particular currency futures contract
E
...
19
...
*
21
...
*
23
...
*
Option premiums consist of
...
intrinsic value, time value, and current value
B
...
current value, time value, and volatility
D
...
all of the above
Futures contracts of the following currencies are traded on the Chicago Mercantile
Exchange except ____
...
British pound
B
...
Japanese yen
D
...
New Zealand dollar
A long currency futures position means that an investor has the following situation
A
...
a call option
C
...
a futures hedge
E
...
currency futures
B
...
interest swap
D
...
all of the above
Organized exchanges trade the following futures instruments:
A
...
standardized currency futures
C
...
currency futures sold in any currency
E
...
Currency futures contracts are acquired for the following purposes ___
...
hedging
B
...
arbitrage
D
...
all of the above
213
...
*
26
...
credit
B
...
settlement
D
...
all of the above
A multinational company wants to use a currency put option to hedge 10 million
Singapore dollars in accounts receivable
...
55 US is $
...
If the option is exercised, what is the total amount of
US dollars received after accounting for the premium payment?
A
...
B
...
C
...
D
...
E
...
Solution:
27
...
total receipts = Singapore dollars 10,000,000 x
...
05 =
500,000
net receipts
=
$5,000,000
The premium for a British put pound with an exercise price of $1
...
05
...
$1
...
B
...
65
...
$1
...
D
...
60
...
$2
...
Solution: breakeven point = $1
...
05 = $1
...
*
You purchase a call option on British pounds for a premium of $
...
65
...
If the spot rate on the expiration date is $1
...
$
...
B
...
02
...
-$
...
D
...
04
...
$
...
Solution: Use Equation (6-2) :
profit or loss = $1
...
65 + $
...
02
214
Use the following information to answer the next three questions:
On October 23, the closing exchange rate of British pounds was $1
...
Calls which
would mature the following January with a strike price of $1
...
10
...
*
The call options were
...
in the money
...
at the money
...
out of the money
...
below the money
...
above the money
...
*
$1
...
85 = -$0
...
-$
...
B
...
05
...
$
...
D
...
10
...
$
...
Solution: The mathematical value of the option is negative (-$0
...
31
...
00 prior to the January option expiration
date, what is the percentage return on investment for an investor who purchased a call on
October 23?
A
...
45%
C
...
55%
E
...
00 - $1
...
10)/$0
...
*
2
...
*
4
...
*
Financial swap markets have emerged in recent years because of the following reasons
___
...
exchange rates fluctuate widely
B
...
forward markets may not function properly
D
...
all of the above
Financial swaps are used by the following organizations ___
...
multinational companies
B
...
world organizations
D
...
all of the above
The origins of the swap market are usually regarded as an outgrowth of the following
financial instruments ___
...
parallel loans
B
...
commercial paper
D
...
A and B
Typically, parallel loans involve the following parties
A
...
three multinational firms
C
...
five multinational firms
E
...
two, two
B
...
three, three
D
...
all of the above
companies in
216
...
6
...
*
8
...
*
10
...
*
The shortcomings of parallel and back-to-back loans include
A
...
a non-compliance by one of the parties
C
...
A and B
E
...
Currency swaps overcome the shortcomings of parallel and back-to-back loans because
of
...
specialized swap dealers and brokers
B
...
their cost effectiveness
D
...
A, B, and C
The first currency swap between the World Bank and IBM was arranged in 1981 by
A
...
BankAmerica
C
...
Merrill Lynch
E
...
an end user
B
...
a currency speculator
D
...
all of the above
...
A
...
is strictly an agent to take orders from her client
C
...
A and B
E
...
A
...
exchange debt for stock
C
...
A and B
E
...
12
...
one currency
B
...
foreign stocks
D
...
none of the above
...
*
Call swaptions are attractive when interests are expected to
A
...
rise
C
...
A and B
E
...
An interest rate floor in currency swaps sets
...
a maximum rate on floating interest rate payments
B
...
a minimum rate on floating interest rate payments
D
...
none of the above
*
15
...
The basic motivations for swaps include___
...
to provide protection against future changes in exchange rates
B
...
to reduce financing costs
D
...
all of the above
16
...
they have short-term liabilities and long-term assets
B
...
they have mortgage loans
D
...
none of the above
17
...
A
...
perfect
C
...
A and B
E
...
18
...
*
20
...
A
...
include the right of offset
C
...
A and B
E
...
A
...
involve two counterparties agreeing to make payments to each other on the basis
of some quantity of underlying assets
C
...
A and B
E
...
A
...
are used to calculate interest payments
C
...
B and C
E
...
The notional principal for the swap was $7
...
The floating rate that you
will receive is 8
...
21
...
$10,000
B
...
$25,000
D
...
$55,000
Solution: $7,500,000 x (0
...
08) = $15,000
...
*
What is the net present value of your swap agreement at a discount rate of 8 percent?
A
...
$25,993
C
...
$59,895
E
...
993 = $59,895
...
*
If the floating rate stays the same for the first two years and then falls by 1
...
B
...
D
...
$ 75,000
$ 90,000
$100,000
-$150,900
-$262,500
Solution: You will receive a total of $30,000 for the first two years [$7,500,000 x
(0
...
080) x 2]
...
2% - 1
...
7%
...
067 - 0
...
Thus, your net payment over the five years will be -$262,500 ($30,000 $292,500)
...
One dollar is currently worth 1
...
The American dollar payor will
provide $500,000
...
The swap calls for a life of three years with annual payments
...
*
How much will the provider of the dollar pay at the outset?
A
...
SFr500,000
C
...
SFr200,000
E
...
4 = SFr700,000
...
*
If the interest rates do not change, what is the annual dollar interest payment for the
foreign borrower of dollars?
A
...
$40,000
C
...
$50,000
E
...
09 = $45,000
...
*
If a net payment is recorded for interest in year one and exchange rates do not change,
what will be the net payment?
A
...
$2,000
C
...
$5,000
E
...
09 - 0
...
27
...
SFr756,000
B
...
SFr400,000
D
...
SFr 53,500
Solution: SFr700,000 (1
...
28
...
$150,000
B
...
$540,000
D
...
$600,000
Solution: $500,000 (1
...
221
Chapter 8
Exchange Rate Forecasting
1
...
*
3
...
*
5
...
A
...
exchange rates reflect all available information
C
...
transaction costs are negligible
E
...
A
...
semistrong-form
C
...
semiweak-form
E
...
inflation rates
B
...
national income growth
D
...
price trends
A technical analysis in exchange rate forecasting involves the following except
A
...
volume movements
C
...
political factors
E
...
These are
A
...
semi-strong form efficient market
C
...
perfectly efficient form market
E
...
...
6
...
*
8
...
*
10
...
These three methods
are
...
technical analysis, fundamental analysis, and forward rates
B
...
fundamental analysis, market-based forecasts, and forward rates
D
...
all of the above
Dufey and Giddy suggested that currency forecasting can be consistently useful or
profitable only if one of four conditions is met
...
A
...
the forecaster has consistent access to information before other investors
C
...
A and B
E
...
A
...
efficient
C
...
B and C
E
...
hedging decision
B
...
long-term investment analysis
D
...
speculation
Two primary methods of technical analysis consist of
...
charting and mechanical rules
B
...
mechanical rules and spot rates
D
...
multiple regression analysis and spot rates
223
...
*
12
...
*
14
...
*
Two major qualities of mechanical rules as compared with chartists are
A
...
consistency and superior judgement
C
...
consistency and discipline
E
...
Filter rule is a rule that belongs to the following forecasting method
...
fundamental analysis
B
...
econometrics model
D
...
technical analysis
Market-based forecasts consist of
...
spot rate, forward rate, and inflation rate
B
...
spot rate, forward rate, and interest rate
D
...
technical analysis and fundamental analysis
The four-step sequence as a general forecasting procedure under a fixed rate system
consists of
...
assessing the balance of payments outlook
B
...
timing of adjustment
D
...
all of the above
There are at least three ways to determine the size of the change in the exchange rate
required to bring the balance of payments back into equilibrium
...
the theory of purchasing power parity
B
...
free market or black market rate
D
...
none of the above
224
16
...
*
18
...
*
20
...
A
...
momentary
C
...
fiscal
E
...
A
...
tight fiscal policy
C
...
higher government spending
E
...
A
...
borrowed funds denominated in foreign currencies
C
...
A and B
E
...
A
...
short-term investment decisions
C
...
interest rates
E
...
A
...
a forecast based on market indicators such as forward rates
C
...
A and B
E
...
Assume that the Canadian dollar appreciates from US$0
...
70 at the end of the year
...
*
What is the percentage appreciation of the Canadian dollar?
A
...
69%
B
...
69%
C
...
69%
D
...
69%
E
...
69%
Solution: Use Equation (8-1):
Percentage Change = (0
...
65)/0
...
69%
22
...
-7
...
-6
...
-5
...
-8
...
-9
...
65 - 0
...
70 = -7
...
Suppose that the Swiss franc appreciates from US$0
...
44 at the end of the year
...
23
...
11
...
11
...
10
...
10
...
12
...
44 - 0
...
40 = 10%
226
24
...
$0
...
$0
...
$0
...
$0
...
$0
...
4 x [(1 + 0
...
03)]
= $0
...
*
What is the real depreciation (-) or real appreciation of the Swiss franc during the year?
A
...
4%
B
...
1%
C
...
9*
D
...
6%
E
...
9%
Solution: (0
...
4078)/0
...
9%
26
...
50 per Australian dollar
...
If these interest rates remain constant,
then what is the US dollar market forecast of the spot rate for the Australian dollar in five
years?
A
...
669
B
...
999
C
...
997
D
...
447
E
...
668
Solution: Use Equation (8-5):
Predicted Rate = $0
...
12)5/(1 + 0
...
5997
27
...
A
...
false
C
...
none of the above
E
...
227
Chapter 9
Managing Transaction Exposure and Economic Exposure
1
...
A
...
sales are made in cash
C
...
an outstanding obligation denominated in a home currency is settled
E
...
*
If a foreign currency depreciates, exchange losses will occur when exposed
A
...
payments are greater than exposed receipts
C
...
receipts and exposed payments are the same
E
...
Economic exposure measures the impact of actual exchange conversion involving the
following cases except
...
cash flows from a foreign investment
B
...
a foreign subsidiary imports raw materials
D
...
none of the above
*
4
...
*
A forward market hedge involves the following except
A
...
forward rate
C
...
future spot rate
E
...
A money-market hedge does not involve the following
A
...
interest rate
C
...
marketable securities
E
...
228
...
*
An option-market hedge in foreign exchange risk management is a form of a(n)
A
...
open position
C
...
swap
E
...
A currency swap involves the following
A
...
forward market only
C
...
options and futures markets
E
...
*
...
In the case of a credit swap, a parent company
...
buys a foreign currency in the spot market and sells it in the forward market
B
...
deposits a home currency at a home bank on behalf of a foreign bank and the
foreign bank lends money in a foreign currency to the company's foreign
subsidiary
D
...
none of the above
9
...
A
...
exchange cash flows of long-term debt with cash flows of short-term debt
C
...
all of the above
E
...
*
Back-to-back loans involve the following transaction
...
equal loans are arranged by two multinational parent companies in two different
countries
B
...
equal loans are arranged by one multinational corporation in two different rates
D
...
none of the above
229
11
...
*
13
...
*
15
...
diversified production
B
...
diversified financing
D
...
diversified operations
The three types of foreign exchange exposures are
A
...
translation, economic, and transaction
C
...
transaction, political, and devaluation
E
...
B
...
D
...
...
a firm has dividends payable denominated in foreign currency, the firm is said to
...
A
...
does not exist when all currencies are fixed
C
...
decreases with the effects of globalization
E
...
A
...
is a technique designed to hedge exposure in one currency by the use of futures or
other contracts on another currency that is correlated with the first currency
C
...
involves a loan contract and a source of funds to carry out that contract in order to
hedge transaction exposure
E
...
*
Economic exposure management ___
...
is designed to neutralize the impact of unexpected exchange-rate changes on net
cash flows
B
...
uses diversified operations and financing to reduce economic exposure
D
...
The additional information is as follows:
British pound spot rate:
$2
...
0032
3-month interest rate in the US:
2%
3-month interest rate in the UK:
3%
17
...
$20,000,000
B
...
$20,032,000
D
...
$10,000,000
Solution: US dollar value = $2
...
*
What will be the approximate value of the accounts receivable in US dollars if the
company makes a money-market hedge?
A
...
about $20,093,000
C
...
about $20,293,000
E
...
03)
buy $19,699,030 in exchange for £9,708,739
invest $19,699,030 in the US at 2%
receive $20,093,010 ($19,699,031 x 1
...
To obtain 4 million shekels for the subsidiary in
Israel, the parent must open a $1 million credit in favor of as Israeli bank
...
The parent's opportunity cost on the $1 million deposit is 20%
...
19
...
direct loan
B
...
both alternatives are equally expensive
D
...
depends on the government policy
Solution: Annual interest of the direct loan = 20%
Annual interest of the credit swap = 30%
20
...
direct loan
B
...
equally attractive
D
...
depends on the government policy
Solution: The direct loan is cheaper but subject to exchange risk; the credit swap is
more expensive and has no exchange risk
...
21
...
Israel shekel 4
...
Israel shekel 4
...
Israel shekel 4
...
Israel shekel 5
...
Israel shekel 9
...
4
232
22
...
If the company's prediction proves correct, which alternative
is cheaper?
A
...
credit swap
C
...
cannot tell
E
...
*
If market analysts predict that the exchange rate will be 5 Israel shekels per dollar at the
maturity of the loan, which alternative would rational decision-makers recommend?
A
...
credit swap for sure
C
...
all of the above
E
...
233
Chapter 10
Translation Exposure Management
1
...
*
3
...
*
5
...
A
...
currency conversion takes place in foreign exchange market
C
...
a firm covers its foreign exchange risk in the forward markets
E
...
A
...
the difference between exposed assets and accounts receivable
C
...
the difference between exposed revenues and exposed expenses
E
...
cash
B
...
accounts payable
D
...
long-term debt
...
cash
B
...
inventory
D
...
accounts payable
...
A
...
accounts receivables at market price
C
...
inventory at market price
E
...
*
7
...
*
9
...
*
FASB No
...
current/non-current method
B
...
temporal method
D
...
exchange rate method
FASB No
...
quarterly income statement
B
...
stockholders' equity account
D
...
none of the above
...
The functional currency is defined as the currency of the environment in which the entity
primarily generates and expends cash, and usually refers to the
currency
...
parent
B
...
reporting
D
...
home
The US dollar is the functional currency for ___
...
those foreign operations whose cash flows directly affect the parent’s US dollar
cash flows
B
...
foreign subsidiaries in countries with runaway inflation
D
...
all of the above
When an MNC has several subsidiaries, a variety of funds adjustment techniques can be
used to reduce its translation loss
...
A
...
increase soft-currency assets, increase soft-currency liabilities
C
...
decrease hard-currency assets, increase hard-currency liabilities
E
...
*
12
...
*
14
...
*
The following statement does not apply to transfer prices _____
...
they are prices of goods and services sold between related parties
B
...
they are usually the subject of government policing mechanisms
D
...
they are frequently different from arm’s length prices
Translation exposure ___
...
is sometimes called accounting exposure
B
...
refers to the potential change in the value of outstanding obligations due to
changes in the exchange rate between the inception of a contract and the
settlement of the contract
D
...
A and C
Translation exposure affects a company’s ___
...
ability to raise capital
B
...
stock price
D
...
all of the above
Translation exposure ___
...
measures the affect of an exchange rate change on published financial statement
of a firm
B
...
does not present any financial risk to a firm
D
...
all of the above
Which of the following items is not related to a balance sheet hedge in translation
exposure management?
A
...
tighten credit
C
...
increase hard-currency assets
E
...
236
Cash and receivables C$ 800
Inventory
900
Fixed assets
700
Total assets
C$2,400
Payables
C$ 900
Long-Term Debt
500
Net Worth
1,000
Total claims
C$2,400
Suppose the Canadian dollar depreciates from US$1
...
80 during the period
...
*
Under the monetary/non-monetary method, what is ABC's translation gain or loss?
A
...
- $120
C
...
- $200
E
...
20 x C$600 = $120
17
...
+ $160
B
...
+ $220
D
...
+ $700
Solution: net exposure = C$900 - C$1,700 = -C$800
gain or loss = $
...
*
Under the current rate method, what is ABC's translation gain or loss?
A
...
- $200
C
...
- $250
E
...
20 x (-C$1,000) = -$200
237
Chapter 11
International Financial Markets
1
...
*
3
...
*
5
...
A
...
inside the country of issue
C
...
in Europe only
E
...
New York
B
...
London
D
...
Detroit
Eurodollars can be created in
A
...
Asia
C
...
Africa
E
...
...
A
...
S
...
banks always keep their money in non-U
...
banks
C
...
all of the above
E
...
A
...
Switzerland
C
...
Germany
E
...
*
7
...
*
The Eurodollar market is probably the most efficient because there are no
A
...
interest ceilings on deposits
C
...
all of the above
E
...
S
...
A
...
reduce the Eurodollar market
C
...
increase U
...
bank deposits
E
...
These three Cs are
...
consultation, cooperation, and common sense
B
...
consultation, cooperation, and conditions
D
...
none of the above
9
...
A
...
Eurocommercial paper, Euronotes, and Eurostocks
D
...
none of the above
10
...
lower
B
...
higher
D
...
*
...
lower
B
...
higher
D
...
all of the above
239
than those on US deposits
...
12
...
*
14
...
*
Eurobonds are long-term obligations denominated in
A
...
US dollars
C
...
British pounds
E
...
a fixed interest rate
B
...
unsecured debentures
D
...
none of the above
outside the country of issue
...
The interest rate on floating rate bonds is usually adjusted every
A
...
six months
C
...
twelve months
E
...
interest payment made at maturity
B
...
sales at a deep discount
D
...
no periodic interest to pay
...
...
*
The
A
...
C
...
E
...
Which of the following does not contribute to the efficiency of the Eurodollar market?
A
...
foreign entities are free to transact with US banks
C
...
no reserve requirements for Eurodollar time deposits
E
...
US dollar
Japanese yen
German mark
British pound
French franc
240
18
...
*
20
...
*
22
...
*
Which of the following is related to the Eurodollar market?
A
...
LIBOR
C
...
MIBOR
E
...
Asian dollar deposits
B
...
political instability in Asia
D
...
none of the above
Interest rates on Eurodollar deposits may be higher than the rates on deposits in the US
because
...
Eurobanks are more efficient
B
...
Eurobanks are free of reserve requirements
D
...
A, B, and C
The Bank for International Settlements recommends that globally active banks maintain
capital equal to at least ___ percent of their assets
...
10
B
...
8
D
...
6
The popularity Euronotes in comparison with Euro Commercial paper is
A
...
smaller
C
...
A and C
E
...
international bond market
B
...
Eurocurrency market
D
...
A and B
241
...
24
...
*
26
...
*
28
...
A
...
outside the country in whose currency they are denominated
C
...
A and B
E
...
A
...
five predetermined currencies
C
...
A and B
E
...
interest rate risk
B
...
sovereign risk
D
...
all of the above
Governments privatize state-owned companies to
A
...
raise money
C
...
replace public-sector decision-making
E
...
...
A
...
banks cannot make a market in equity securities
C
...
banks cannot actively vote shares held in trust for their banking clients
E
...
*
By crosslisting its shares on foreign exchanges, an MNC hopes to accomplish all but the
following ______
...
avoid security regulations of all countries where their shares are listed
B
...
provide another market to support a new issuance
D
...
establish a presence in an additional country
243
Chapter 12
International Banking Issues and Country Risk Analysis
1
...
*
3
...
*
5
...
A
...
obtains local market information
C
...
issues letters of credit
E
...
branch banking
B
...
informal banking relationship
D
...
none of the above
...
its own charter
B
...
its own stockholders
D
...
none of the above
The Clearing House Interbank Payments System (CHIPS)
...
accepts international deposits
B
...
clears foreign exchange transactions
D
...
moves foreign currencies between New York and Hong Kong
The Clearing House Payments Assistance System (CHPAS)
...
accepts international deposits
B
...
clears foreign exchange transactions
D
...
all of the above
244
6
...
banks from different countries
B
...
countries
D
...
Japanese banks
7
...
political risk
B
...
objective criteria
D
...
none of the above
*
8
...
*
10
...
*
...
The World Bank classifies the debt burden of developing countries according to a set of
_____ ratios
...
five
B
...
three
D
...
two
Country risk rankings can be found in the following journal ___
...
IMF Staff Papers
B
...
the Journal of International Business Studies
D
...
Journal of Finance
Two financial service firms
and
assign letter ratings to indicate the quality of
sovereign-government bonds
...
Dow Jones Company and Moody's Investor Service
B
...
Citibank and Moody's Investor Service
D
...
P
...
Moody's Investor Service and Standard & Poor's
The international debt crisis of the 1980s started when the following countries could not
make international debt payments
...
Mexico, Brazil, and Taiwan
B
...
Argentina, Brazil, and Korea
D
...
all of the above
245
12
...
*
14
...
*
16
...
Korea
B
...
Malaysia
D
...
Philippines
...
A
...
the pessimistic view and the panic view
C
...
the pessimistic view and the optimistic view
E
...
political risk
B
...
legal risk
D
...
A, B, and C
...
closed many ailing banks
B
...
encouraged surviving banks to merge with other banks
D
...
none of the above
A consortium bank _____
...
does not have its own charter
B
...
is usually owned by shareholder banks from the same country
D
...
has little contact with its parent banks
246
...
*
18
...
*
20
...
A
...
has vastly increased the multiplicity of formats used by banks in different parts of
the world
C
...
causes banks to execute international payments more expensively
E
...
A
...
refinancing debt
C
...
creating broad economic policies
E
...
A
...
they are highly marketable
C
...
originated from the Brady Plan, named after US Treasury Secretary Nicholas
Brady
E
...
A
...
there were no visible warning signs of the impending crisis
C
...
the crisis was caused by international investors’ irrational behavior
E
...
*
2
...
*
4
...
*
Which of the following is not a document involved in foreign trade?
A
...
commercial paper
C
...
draft
E
...
contain an unconditional promise or order to pay
B
...
payable on sight or at a specified time
D
...
all of the above
A draft or a bill of exchange in international trade financing is an order to pay written by
___
...
an importer
...
am importer's bank
C
...
an exporter
E
...
bills of lading
B
...
letters of credit
D
...
commercial paper
The types of drafts include
...
a sight draft
B
...
a documentary draft
D
...
all of the above
248
...
*
7
...
*
9
...
*
11
...
A
...
receipt
C
...
letter of credit
E
...
A
...
an exporter
C
...
a government
E
...
A
...
importers can receive merchandise sooner
C
...
banks are responsible for the quality of goods
E
...
importer
B
...
bank
D
...
all of the above
...
unconfirmed letter of credit
B
...
non-revolving letter of credit
D
...
free letter of credit
Other documents which generally accompany the draft as specified in the letter of credit
include a(n)
...
commercial invoice
B
...
consular invoice
D
...
all of the above
249
12
...
*
Forms of countertrade include the following except ___
...
simple barter
B
...
switch trade
D
...
mutual agreement
Switch trading is a form of countertrade
...
A
...
financed by a creditor country who lends money to a debtor country
C
...
financed by the World Bank
E
...
*
A counterpurchase involves a return purchase of goods by a seller from
A
...
a third party
C
...
a bank
E
...
A buy-back agreement is an agreement by the seller to receive a portion of payment in
products produced by
...
the buyer
B
...
a third party country
D
...
the US government
*
16
...
A
...
the importer borrows from a bank
C
...
the importer purchases with a specified credit term
E
...
17
...
A
...
allow US banks to invest in commercial enterprises for export purposes
C
...
purchase a company’s accounts receivables on a non-recourse basis
E
...
*
An offset agreement is frequently called
A
...
indirect offset
C
...
counterpurchase
E
...
A forfaiting arrangement in international trade financing normally does not require
A
...
long term financing
C
...
a recourse privilege
E
...
*
21
...
...
an independent agency of the US government
B
...
commercial bank-loan guarantees
D
...
mobilizes private capital
The Private Export Funding Corporation (PEFCO) was created in 1970 at the initiation of
the Bankers’ Association for Foreign Trade with the support of the following
organizations except
...
the United Nations
B
...
the US Ex-Im Bank
D
...
large US banks
251
22
...
*
24
...
*
26
...
*
The Foreign Credit Insurance Association (FCIA) did not provide the following type of
insurance
...
failure of importer
B
...
revolution
D
...
civil war
Documentation in foreign trade is meant to ___
...
assure that the exporter will receive the payment and the importer will receive the
merchandise
B
...
reduce foreign exchange risk
D
...
all of the above
Noncompletion risk ___
...
is greater in foreign trade than in domestic trade
B
...
can be reduced through the use of foreign trade documents
D
...
all of the above
Which of the following is not a type of bill of lading?
A
...
documentary
C
...
clean
E
...
A
...
is necessary to obtain customs clearance
C
...
A and B
E
...
A
...
is difficult to measure in volume due to secrecy
C
...
A and B
E
...
*
What is the cost of not taking cash discount for the following term: 3/10, net 100?
Assume 360 days a year
...
12
...
12
...
14
...
16
...
20
...
3/(100 - 3) x 360/90 = 12
...
29
...
Assume that the invoice date is March 20 and that there are 30 days in a month
...
75%, $960, March 30
b
...
75%, $960, March 30
d
...
75%, $860, March 30
Solution:
4/(100 - 4) x 360/20 = 75%; $1,000 (1 - 0
...
Use the following information to answer the next two questions:
A multinational company has factored its accounts receivable of $20,000 due in one
month
...
5 percent per month,
and 2 percent commission
...
30
...
$15,000
...
$14,700
...
$14,550
...
$14,550
...
$14,381
...
5% interest on advance
Net proceeds from advance
$20,000
5,000
400
$14,600
219
$14,381
253
31
...
45
...
35
...
29
...
21
...
15
...
06%
...
*
2
...
*
4
...
*
Internal sources of funds available for foreign investment do not include
A
...
the parent direct loans
C
...
intersubsidiary fund transfers
E
...
Many multinational companies are reluctant to make large equity investments in their
foreign subsidiaries because
...
dividends to foreign shareholders are normally subject to local income taxes
B
...
dividends to foreign shareholders are usually subject to foreign exchange risk
D
...
all of the above
Parent loans to foreign subsidiaries are usually more popular than equity contributions
because
...
parent loans give a parent company greater flexibility in repatriating funds
B
...
intracompany loans require cumbersome paperwork
D
...
none of the above
When a foreign subsidiary has difficulty in borrowing money, a parent may provide its
subsidiary a loan guarantee through the following form(s)
...
the parent may sign a purchase agreement to buy its subsidiary's promissory note
from the lender
B
...
the parent may guarantee all loans to the subsidiary
D
...
none of the above
Many foreign subsidiaries in developing countries are not always free to remit their
earnings in hard currency mainly because
...
many developing countries do not have sufficient international reserves
B
...
foreign subsidiaries do not want to repatriate earnings to their parent
D
...
the parent company wants its subsidiaries to have financial stability
255
6
...
an internal source of funding
B
...
an external source of borrowing
D
...
none of the above
7
...
joint ventures with local investors
B
...
bank loans from the host country
D
...
all of the above
*
...
8
...
the customer can write checks beyond deposits
B
...
the bank cannot charge interest
D
...
these loans are not allowed in most industrialized countries
9
...
they can receive large sums of funding
B
...
bookkeeping costs of secured loans are high
D
...
they require large compensating balances
*
...
*
Bridge loans are short-term renewal loans because
...
they are repaid when the permanent financing is arranged
B
...
they are not related to long-term loans
D
...
their maturity is less than one year
11
...
A
...
foreign exchange arbitrage
C
...
options market hedge
E
...
12
...
international banking
B
...
financing foreign industrial projects
D
...
accept foreign deposits
...
*
The privileges of International Banking Facilities (IBFs) do not include
...
exemption from the Federal income tax
B
...
exemption from some state income taxes
D
...
B, C, and D
14
...
accept time deposits from foreign customers
B
...
extend credit to foreigners
D
...
none of the above
*
15
...
*
17
...
Which of the following is not a major advantage of forming a joint venture from a
multinational firm's point of view?
A
...
local marketing expertise
C
...
less political risk
E
...
short-term commercial loans
B
...
loans for long-term social infrastructures
D
...
investment in former communist countries
...
A
...
industrial projects
C
...
educational facilities
E
...
*
19
...
*
21
...
*
The International Development Association (IDA) was established in 1960 as an affiliate
of the World Bank Group and its credit terms are generally extended for
years
...
25
B
...
50
D
...
7
Which of the following banks is not a regional development bank?
A
...
European Bank for Reconstruction and Development
C
...
African Development Bank
E
...
A
...
the US Treasury Department
C
...
the US Justice Department
E
...
A
...
investment in Latin America
C
...
investment in Russia
E
...
Canada, the United States, and Mexico
B
...
the United States and 19 Latin American countries
D
...
none of the above
258
...
*
24
...
*
26
...
*
The European Bank for Reconstruction and Development was established in 1990 as a
development bank for the following region
...
Western Europe
B
...
the NATO countries
D
...
A, B, and C
The European Investment Bank was established in 1958 by the member countries of the
European Community to support the following activities
...
to make loans to the member governments
B
...
to make loans to European banks
D
...
A, B, and C
The Asian Development Bank was formed in 1966 by 17 Asian countries in partnership
with the following countries
...
the United States
B
...
Great Britain
D
...
all of the above
Global partnerships and alliances have flourished in recent years because of the following
reasons
...
reduce high development costs
B
...
reduce critical time to market
D
...
A, B, and C
Project finance has been used to finance a variety of infrastructure projects except ___
...
airports
B
...
bridges
D
...
power generation projects
259
28
...
*
30
...
*
32
...
licensing agreements
B
...
joint ventures
D
...
all of the above
...
A
...
long; non-recourse
C
...
short; recourse
E
...
A
...
overdraft
C
...
currency swaps
E
...
A
...
an MNC forms a joint venture with host-country companies
C
...
companies from two or more countries establish a venture in a third country
E
...
What is the effective rate of interest if the loan is
discounted?
A
...
00%
B
...
12%
C
...
64%
D
...
99%
E
...
00%
Solution: Dollar interest cost = $20,000 x 0
...
Effective interest rate = $2,400/($20,000 - $2,400) = 13
...
260
33
...
What is the effective rate of interest if the
principal and its interest are paid at maturity?
A
...
11%
B
...
00%
C
...
50%
D
...
00%
E
...
45%
Solution: Dollar interest cost = $20,000 x 0
...
Effective rate of interest = $2,000/$20,000 = 10%
...
*
What is the effective interest rate on a $10,000 loan at 12 percent interest rate if the bank
requires a 20-percent compensating balance and a payment of the interest at maturity?
A
...
14%
C
...
12%
E
...
35
...
12
...
13
...
15
...
16
...
17
...
65%
...
*
A US company borrows Swiss francs for one year at 8 percent
...
What is the effective
interest rate of the loan in US dollar terms?
A
...
00%
B
...
52%
C
...
00%
D
...
50%
E
...
11%
Solution: Use Equation (14-1)
...
08)(1 + (-0
...
52%
...
*
A US company borrows British pounds for one year at 6 percent
...
The one-year forward rate of the pound is $1
...
The spot rate
of the pound at the beginning is $1
...
The pound's spot rate is $2
...
Based on the information, compute the percentage change in pound and the
effective interest rate of the loan in US dollar terms
...
5
...
0%
B
...
1%, 11
...
5
...
4%
D
...
0%, 12
...
8
...
5%
Solution: Percentage change in pound = ($2
...
95)/$1
...
1%
...
06) (1 + 0
...
4%
...
*
The one-year US interest rate is 10 percent, and the one-year Italian interest rate is 13
percent
...
-10
...
- 6
...
- 4
...
- 2
...
- 1
...
0
...
13)(1 + ie) - 1; solve the equation for ie (percentage depreciation)
...
10/(1 + 0
...
65%
...
*
A US investor has $5 million in excess cash that it has invested in Chile at an annual
interest rate of 60 percent
...
By how much would the
Chilean peso have to depreciate to cause such a strategy to backfire?
A
...
55%
B
...
00%
C
...
88%
D
...
00%
E
...
50%
Solution:
Use Equation (14-1)
...
09 = (1 + 0
...
ie = (1 + 0
...
60) - 1 = -31
...
262
Chapter 15
International Working Capital Management
1
...
*
3
...
*
5
...
These types of arbitrage
opportunities do not include
arbitrage
...
tax
B
...
regulatory system
D
...
both A and B
Fund flows from parent to subsidiary do not include
A
...
intracompany loans from the parent
C
...
added investments from the parent
E
...
Which of the following is not a major component of fund flows from subsidiary to
parent?
A
...
interest payments from subsidiary
C
...
payments for goods received from the parent
E
...
A
...
increases the total volume of interaffiliate fund flows
C
...
increases political risk
E
...
A
...
delaying accounts receivable payments and speeding up accounts payable
payments
C
...
accelerating soft-currency payables payments and accelerating hard-currency
payables payments
E
...
*
7
...
*
9
...
*
According to the transfer pricing regulations, multinational firms are supposed to charge
prices to its foreign affiliates based on the following:
A
...
arm's-length prices
C
...
internal prices
E
...
A
...
buys in one currency and pays in another currency
C
...
buys in gold and pays in the US dollar
E
...
direct loans
B
...
paralell loans
D
...
investment credit
Credit swaps do not include the following party
A
...
the foreign company
C
...
a foreign government
E
...
...
A
...
management fees
C
...
adjustment of transfer prices
E
...
*
12
...
*
14
...
*
Which of the following is not related to the traditional objectives of multinational firms'
cash management?
A
...
to improve liquidity
C
...
to reduce risks
E
...
do whatever it wants with its excess cash
B
...
invest in foreign exchange markets
D
...
invest in long-term securities
...
A
...
having enough cash balances at the local subsidiary
C
...
the local government's ability to export oil
E
...
A
...
credit float
C
...
processing float
E
...
the United States
B
...
Japan
D
...
Korea
265
...
*
17
...
*
19
...
*
21
...
A
...
often; often; often
...
often; sometimes; rarely
...
rarely; rarely; rarely
...
often; often; rarely
...
minimize income taxes
B
...
minimize foreign exchange controls
D
...
all of the above
Re-invoicing centers are set up in tax haven countries to do the following
A
...
meet different accounting standards
C
...
A and B
E
...
Multinational companies frequently unbundle remittances into separate flow categories in
order to
...
avoid taxes
B
...
meet the accounting standards
D
...
A, B, and C
Which of the following is not a popular cash center location
...
Luxembourg
B
...
Bermuda
D
...
the Bahamas
Intracompany loans do not include
...
direct loans
B
...
back to back loans
D
...
loans from the World Bank
266
22
...
*
24
...
*
26
...
interest rate differential between two countries
B
...
interest rate and foreign exchange rate comparisons between two countries
D
...
A, B, and C
Which of the following is not one of the ways that a multinational company can delay its
payments?
A
...
electronic fund transfers
C
...
floats
E
...
A
...
accounts payable
C
...
A and B
E
...
A
...
arbitrage constraints
C
...
tax constraints
E
...
A
...
minimize the investment in accounts receivable
C
...
B and C
E
...
*
A US company has $10,000 in cash available for 45 days
...
Alternatively, if it converts the US dollars to
Singapore dollars, it can earn 1
...
The spot
rate of the Singapore dollar is US$0
...
The spot rate 45 days from now is expected to be
US$0
...
Should this company invest its cash in the United States or in Singapore?
A
...
in Singapore
C
...
all of the above
E
...
Percentage change in Singapore dollar= ($0
...
50)/$0
...
Singapore investment loses 18
...
015)(1 + (-0
...
8%
...
*
A Canadian investor has Canadian $100,000 to invest for one year
...
The current exchange rate of the Canadian dollar is US$0
...
What is the yield on the investment if the exchange rate of the Canadian dollar is
US$0
...
10
...
12
...
15
...
20
...
25
...
50 rate
...
($50,000 x 1
...
($55,500/$0
...
65%
...
*
International portfolio diversification, compared to a purely domestic portfolio
diversification, in general will
...
increase risk
B
...
have the same amount of risk
D
...
cannot tell
2
...
B
...
D
...
is not a major cause of systematic (undiversifiable) risk
...
B
...
D
...
is/are not a major cause of unsystematic (diversifiable) risk
...
B
...
D
...
is not a major component of the capital asset pricing model
...
*
4
...
*
A correlation coefficient in portfolio management measures
...
the degree of correlation between two or more securities
B
...
the degree of past relationship
D
...
all of the above
269
6
...
Which of these five portfolios is most risky?
A
...
5%
B
...
0%
C
...
5%
D
...
0%
E
...
0%
7
...
stock market returns have lower positive correlations across countries than within
a country
B
...
stock market returns are supposed to have zero correlations across countries
D
...
stock market returns have independent correlations across countries
8
...
A
...
50
C
...
100
E
...
*
Aggressive stocks are those stocks that have betas ___
...
greater than 1
B
...
equal to 1
D
...
greater than 1 but small than 2
...
A portfolio that incurs the smallest risk for a given level of return is called ___
...
the efficient frontier
B
...
the market portfolio
D
...
the efficient portfolio
*
270
11
...
*
13
...
*
15
...
A
...
purchases of US government securities for US investors
C
...
hedge funds
E
...
US portfolio of stocks and bonds
B
...
internationally diversified portfolio of stocks
D
...
German portfolio of stocks and bonds
According to a study by Levy and Lerman, an investment in US bonds compared to
internationally diversified bond portfolios is
...
more efficient
B
...
about the same
D
...
relatively efficient
According to a study by Levy and Lerman, an investment in US stocks compared to
internationally diversified stock portfolios is
...
more efficient
B
...
about the same
D
...
none of the above
The capital asset pricing model (CAPM) assumes that
...
the undiversifiable risk of a security could be diversified if certain financial
parameters are present
B
...
the total risk of a security can be partially diversified if certain financial
parameters are present
D
...
the total risk of a security consists of systematic and unsystematic risks
271
16
...
*
18
...
*
20
...
commercial rate of interest and systematic risk
B
...
riskless rate of interest and a risk premium
D
...
national average rate of interest and a risk premium
...
A
...
correlated or independent of each other
C
...
uncorrelated or independent of each other
E
...
A
...
0
B
...
0
C
...
0
D
...
0
E
...
A
...
standard deviation of return for a portfolio of US and foreign portfolios
C
...
expected return of portfolios in industrial countries
E
...
US securities alone
Which of the following statements about international investment correlation is not true?
A
...
member countries of the European Union have relatively high correlations
C
...
both B and C are not true
E
...
*
22
...
A
...
30%
C
...
50%
E
...
The riskless rate of
interest is 7 percent
...
4
...
2%
...
22
...
C
...
6%
...
31
...
E
...
6%
...
07 + (
...
07)1
...
2%
23
...
The expected return for a common stock is 20 percent and
the stock's beta is 1
...
This particular common stock is:
A
...
overvalued
C
...
cannot tell
E
...
05 + (
...
05)1
...
2% < 20%
24
...
The expected returns are 12 percent on the US portfolio and 20 percent on the
Japanese portfolio
...
32
...
16
...
15
...
12
...
10
...
4)(
...
6)(
...
8%
...
*
Kenneth Shad has decided to invest a total of $200,000 on US and French portfolios
...
The international portfolio consists of 60 percent invested in the US portfolio
and 40 percent invested in the French portfolio
...
11%
B
...
13%
D
...
15%
Solution: use Equation (16-4):
0
...
60)(Rus) + (0
...
20)
...
26
...
Calculate the average price, the standard deviation, and the coefficient of variation for the
stock
...
$50, $10, 0
...
$50, $10, 0
...
$40, $20, 0
...
$60, $20, 0
...
$40, $50, 0
...
Use Equation (16-1) for the standard deviation:
Standard deviation = {[(40 - 50)2 + (50 - 50)2 + (60 - 50)2]/(3 - 1)}½ = $10
...
20
...
*
2
...
*
4
...
*
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
...
10
B
...
30
D
...
60
Which of the following is not an oligopoly-created advantage of foreign direct investment
for investing companies?
A
...
management know-how
C
...
political advantage
E
...
foreign investment induces the transfer of technology
B
...
foreign investment contributes to tax revenues
D
...
foreign investment creates jobs for foreigners
Which of the following is not part of the argument against foreign investment for host
countries?
A
...
foreign investment exploits local natural resources
C
...
foreign investment lowers local wages
E
...
licensing requires a relatively small amount of investment
B
...
companies obtain an opportunity to penetrate foreign markets
...
licensing may create a possible competitor
E
...
*
7
...
construction of new plants abroad
B
...
mergers and acquisitions of foreign firms
D
...
international equity alliances
...
Such a demand forecast
does not depend on the following ___
...
political system
B
...
income
D
...
economic conditions
8
...
tangible and intangible
B
...
better customer-service and tangible
D
...
lower cost and higher tax
9
...
A
...
nine
C
...
eleven
E
...
*
11
...
a merger is a transaction that combines two companies into one new company
B
...
Keiretsu is a Japanese word that stands for financially linked groups of firms
E
...
A
...
actual profits
C
...
additional sales
E
...
12
...
*
14
...
*
16
...
These gaps do not
include ___
...
a product-line gap
B
...
a local gap
D
...
a competitive gap
A merger can affect all of the following except ___
...
earnings before taxes
B
...
taxes
D
...
debt capacity
The appropriate mix of debt and equity ___ the overall cost of capital
...
increases
B
...
does not change
D
...
A and B
In general, international mergers and acquisitions tend to decrease risk and increase
earnings capabilities by the following factors except
...
international tax advantage
B
...
increasing debt capacity
D
...
increasing earnings before taxes
The market-based system of corporate governance is primarily used in ___
...
South Africa
B
...
Japan
D
...
China
277
17
...
A
...
the United States
C
...
Korea
E
...
Host countries can benefit from foreign direct investment because it
...
contributes to tax revenues and helps balance their international balance of
payments
B
...
induces the transfer of technology and skills which are frequently in short supply
D
...
all of the above
*
19
...
*
21
...
A
...
which usually require very large sums of money
C
...
which are not readily reversible once they are made
E
...
A
...
the foreign operations can be tailored to exact needs
C
...
allows for the purchase of only part of a firm
E
...
A
...
a venture that is owned by two or more firms
C
...
an agreement where an MNC allows a foreign company to sell products or
services under a brand name
E
...
*
23
...
*
25
...
This decline was due to ___
...
the regional recession undermined investment incentives
B
...
the process of privatization had moved towards completion
D
...
none of the above
Obstacles to improving a country’s investment climate include ____
...
bad roads
B
...
lack of local capital
D
...
all of the above
Mergers are often more difficult to evaluate than purchases because ___
...
the financial manager must carefully define benefits
B
...
special tax and legal issues must be addressed
D
...
all of the above
A US firm is considering the acquisition of a Mexican company for $2 million
...
The Mexican company has expected cash flows
of $90,000 per year
...
What is the present value of net cash flows from this merger?
A
...
$1,400,000
C
...
$1,200,000
E
...
26
...
To use these
losses and to diversify its operations, a US company has acquired the Canadian company
through a merger
...
Assume: the US company is in the 40-percent tax bracket and all the losses can
be carried forward
...
$180,000
B
...
$300,000
D
...
$500,000
279
Solution: Reduction in tax = the loss involved multiplied by the tax rate:
$450,000 x 0
...
27
...
What are the company's weighted average cost of capital and its
market value?
A
...
8%, $150,000
B
...
8%, $172,414
C
...
2%, $172,414
D
...
9%, $190,214
E
...
7%, $200,000
Solution: Weighted average cost of capital = 0
...
06(1 - 0
...
40 x 0
...
058
...
058 = $172,414
...
*
Assume that a company with a tax rate of 40 percent has acquired a firm with $5 million
book value for $12 million
...
The goodwill can be written off for a
maximum of ten years
...
$2
...
$2
...
$2
...
$3
...
$4
...
Tax savings = goodwill x tax rate
= $7 million x 0
...
8 million
...
*
2
...
*
4
...
*
Which of the following is not directly related to the cash flow analysis of a foreign
investment project?
A
...
foreign taxes
C
...
management changes
E
...
to maximize the project cash flows
B
...
to maximize the project earnings
D
...
to maximize the subsidiary cash flows
Which of the following capital budgeting techniques is considered to be superior to other
methods?
A
...
the payback method
C
...
the rule-of-thumb method
E
...
A
...
the same as normal risk
C
...
cannot tell
E
...
A
...
cash flow
C
...
interest rate
E
...
*
The last three phases of a foreign investment analysis are:
A
...
implementation, control, and the publication of annual financial reports
C
...
control, post audit, and planning
E
...
The portfolio theory relies on the following variable(s)
A
...
project maturity
C
...
both A and C
E
...
*
9
...
When net present value and internal rate of return produce different answers, net present
value is better because:
A
...
the primary goal of a firm is to maximize the value of the firm, which coincides
with the net present value approach
C
...
a single project may have more than one internal rate of return
E
...
A
...
minimize risk
C
...
minimize risk for a given level of return
E
...
The
firm's cost of capital is 12 percent, but the international financial manager perceives the
risk of this particular project is much higher than 12 percent
...
10
...
1
...
B
...
5 years
...
2
...
D
...
0 years
...
4
...
282
Solution: payback period = 1 + (15,000 - 8,000)/9,000
= 1
...
11
...
about $15,000
...
about $13,400
...
about $11,500
D
...
$12,000
...
12) + $9,000/(1
...
12)3 + $10,000/(1
...
12
...
about $9,000
B
...
about $7,900
D
...
$8,000
...
20) + $9,000/(1
...
20)3 + $10,000/(1
...
13
...
The company's cost of capital is 12
percent
...
The project with no
salvage value after two years is expected to generate net cash flows of 12 million euros in
year 1 and 30 million euros in year 2
...
60 per euro
...
about $30 million
B
...
about $11 million
D
...
about $ 8 million
Solution: Year 1: 12,000,000 euros x $0
...
60 = $18,000,000
Net present value = $7,200,000/(1
...
18)2 - $8,000,000 =
$11,029,015
...
*
A foreign project has an initial investment of $1,400
...
The certainty equivalent
coefficients of the project are 0
...
55, and 0
...
With a
6-percent riskless rate of return, determine the certain net present value of the project
...
about $140
B
...
about $1,500
D
...
about $2,400
Solution: NPV = $900 (0
...
06) + $1,000(0
...
06)2 + $1,400(0
...
06)3 $1,400 = $138
...
*
16
...
*
18
...
expropriation
B
...
tax changes
D
...
high inflation rates
Which of the following is not a major reason for the nationalization of both foreign and
domestic companies by many governments?
A
...
the government believes that companies are concealing their profits
C
...
the government wants to operate business firms
E
...
A
...
locally shared ownership
C
...
confiscation of business assets
E
...
A
...
1980 and 1989
C
...
1950 and 1959
E
...
*
The Delphi technique of political risk analysis involves
A
...
using an outside consultant
C
...
all of the above
E
...
Defensive measures before investment to avoid political risk of a foreign project include
___
...
planned divestment
B
...
adapting to host-country goals
D
...
all of the above
*
21
...
*
...
A
...
the economic consequences of mass expropriation have been negative
C
...
the enhanced capabilities of developing countries
E
...
A
...
hire local people for managerial positions
C
...
deflate the subsidiary's profits
E
...
*
Countrywide political risks depend on the following three broad groups of variables:
A
...
political climate, economic climate, and tax laws
C
...
foreign relations, tax laws, and inflation rates
E
...
Some popular techniques of political-risk assessment include the following
A
...
the grand tour
C
...
quantitative analysis
E
...
25
...
increased slightly
B
...
decreased slightly
D
...
stayed the same
since 1979
...
*
The grand tour relies on the
visiting the countries where investment is considered
...
opinions of company executives
B
...
opinions of bankers
D
...
none of the above
27
...
net cash flows are subject to exchange-rate changes
B
...
foreign investment projects are subject to exchange controls
D
...
all of the above
*
28
...
*
30
...
A
...
policies
C
...
A and B
E
...
the cash outflows and inflows should be analyzed on an after-tax basis
B
...
foreign exchange rates need not be considered
D
...
two sets of cash flows must be made, one for the project itself and one for the
parent company
When the host country has a stable exchange rate ___
...
no cash flow problems are presented
B
...
permission is required to buy foreign exchange
D
...
none of the above
286
Chapter 19
The Cost of Capital for Foreign Projects
1
...
*
3
...
*
5
...
the cost of equity
B
...
the value of the firm's debt
D
...
the value of the firm's equity
The cost of equity can be derived from the following model:
A
...
a cash flow model
C
...
a debt model
E
...
debt capacity of a firm
B
...
liquidity of a firm
D
...
none of the above
The weighted average cost of capital consists of the following ___
...
the cost of debt and the cost of preferred stock
B
...
the cost of debt, the cost of preferred stock, and the cost of retained earnings
D
...
the cost of debt, the cost of preferred stock, and the cost of retained earnings
When we calculate the weighted average cost of capital, which of the following methods
is superior?
A
...
the book value of equity
C
...
the market value of assets
E
...
*
7
...
*
9
...
*
11
...
more equity
B
...
more preferred stock
D
...
all of the above
The company's optimum capital structure is compatible with
...
minimizing the company's weighted average cost of capital
B
...
maximizing the company's share price
D
...
none of the above
Multinational companies may lower their cost of capital mainly because
A
...
they can obtain additional capital internationally
C
...
they have political clout
E
...
The marginal cost of capital means that
...
it is inferior
B
...
the company incurs additional cost by raising additional funds
D
...
none of the above
In foreign investment analysis, the optimum capital budget is obtained at the point where
___
...
the net present value is maximized
B
...
the internal rate of return crosses the marginal cost of capital
D
...
none of the above
The main reasons why the international cost of capital may be different from the purely
domestic cost of capital are due to the following:
A
...
tax advantages in different countries
C
...
A and B
E
...
*
13
...
*
15
...
increasing foreign direct investment
B
...
increasing political pressure
D
...
none of the above
...
A
...
the value of the company
C
...
earning before taxes of the company
E
...
A
...
systematic risk is inconsequential
C
...
intelligent risk-adverse investor seek to diversify their risks
E
...
A
...
the market may not be in equilibrium
C
...
A and B
E
...
MNCs must account for a number of complicated factors to measure debt including all of
the following but ___
...
MNCs can borrow in Eurocurrency markets
B
...
an estimate of interest rates and proportion of debt to be raised in each market
D
...
the firm’s price-earnings ratio
17
...
A
...
the cost of capital to the subsidiary
C
...
all of the above
E
...
*
19
...
*
21
...
the discount rate should be increased to account for inflation
B
...
the cost of capital to the foreign subsidiary should never be used as the cost of
capital
D
...
none of the above statements is true
The optimal capital structure ___
...
is where the debt ratio remains fixed, but the amount of capital to be obtained
changes
B
...
within the same industry stays the same from country to country
D
...
none of the above statements is true
Empirical studies (1988) on cultural values and capital structure have found that:
A
...
cultural factors cause debt ratios to cluster by country
C
...
all of the above
E
...
is selling at $54 per share
...
What
is the cost of the common stock?
A
...
7%
...
14
...
C
...
0%
...
15
...
E
...
4%
...
09 = 16
...
*
Global Corp
...
The bond's yield to maturity (before-tax cost of the
bond) is 12
...
What is the after-tax cost of the
bond?
A
...
4%
...
10
...
C
...
4%
...
6
...
E
...
1%
...
124(1 -
...
4%
23
...
has debt with a market value of $80,000 and common equity with a market
value of $120,000
...
are 7
...
4 percent for common equity
...
?
A
...
4%
...
12
...
C
...
4%
...
19
...
E
...
5%
...
164 + (80,000/200,000)
...
8%
24
...
2
...
5
...
6
...
7
...
7
...
8
...
06 + (0
...
06)1
...
4%
...
*
A US company borrows Mexican pesos for one year at 30 percent
...
The US tax rate is 35 percent
...
5
...
6
...
6
...
6
...
7
...
30 x 0
...
15 = 0
...
After-tax cost of debt = 0
...
35) = 6
...
*
The price-earnings ratio of a company is 25
...
25%
B
...
10%
D
...
4%
Solution: Use Equation (19-4):
The cost of common stock = 1/25 = 4%
...
*
A firm just paid a dividend of $1
...
Based on your assessment of the riskiness of the
common stock, you feel it should pay a return of 20 percent
...
$7
...
$6
...
$5
...
$4
...
$9
...
2/(0
...
04) = $7
...
292
28
...
00 per share, and the firm follows a
practice of paying out 60 percent of earnings as dividends
...
What is the price of
this stock?
A
...
25
B
...
45
C
...
00
D
...
29
E
...
25
Solution: Solve Equation (19-2) for the market price of equity:
Because the dividend per share is $2
...
00 x 0
...
4/(0
...
05) = $34
...
293
Chapter 20
Corporate Performance of Foreign Operations
1
...
*
3
...
*
5
...
1970
B
...
1977
D
...
1985
...
This amendment makes
corporate executives criminally liable:
A
...
if they were negligent
C
...
all of the above
E
...
transfer pricing and performance evaluation
B
...
inflation
D
...
positioning of funds
A study by Abdallah and Keller concludes that the following items are considered to be
important in evaluating financial performance of foreign operations
...
return on investment (ROI)
B
...
budgeted ROI compared with actual ROI
D
...
all of the above
Which of the following is not an indirect tax?
A
...
tariffs
C
...
both A and B
E
...
*
7
...
*
9
...
American companies in the United States
B
...
foreign companies in foreign countries
D
...
all of the above
International taxation affects the following aspects of multinational companies except
___
...
the choice of location in the investment decision
B
...
the method of finance
D
...
the method of transfer pricing
In addition to direct and indirect taxes, multinational companies may have to pay the
following taxes
...
property taxes
B
...
stamp and registration taxes
D
...
all of the above
In general, there are three classes of tax systems around the world, which consist of ___,
___, and ___
...
single tax, direct tax, and indirect tax
B
...
partial double tax, single tax, and payroll tax
D
...
single tax, double tax, and value added tax
...
*
The main purpose of the foreign tax credit is to
A
...
avoid withholding taxes
C
...
maximize tax collection on a global basis
E
...
Which of the following is not a necessary condition to become a tax haven country?
A
...
low taxes
C
...
no national tax treaties
E
...
295
...
*
13
...
*
15
...
*
Tax havens include the following countries except ___
...
Bahamas
B
...
Vietnam
D
...
Switzerland
Which of the following does not necessarily mitigate the effect of double taxation?
A
...
foreign subsidiaries in industrial countries
C
...
transfer pricing
E
...
A
...
compounding effect of capital taxes
C
...
effect of income taxes
E
...
A
...
avoid taxation; encourage the free flow of investments internationally
C
...
avoid excessive regulatory steps; encourage the free flow of investments
internationally
E
...
A
...
collection of custom duties
C
...
other import restrictions
E
...
*
18
...
*
20
...
*
Advantages of the foreign trade zone to exporters appear to have been
A
...
well known
C
...
well documented
E
...
Which of the following countries is not a tax haven?
A
...
the Channel Islands
C
...
Bermuda
E
...
A
...
income tax minimization
C
...
avoiding financial problems
D
...
A
...
low; high
C
...
low; low
E
...
Subsidiary B
then sells the finished goods with a cost of $15 to a domestic independent third party for
$25
...
A
...
15
C
...
27
E
...
*
23
...
*
25
...
*
Which of the following is not a major transfer-pricing objective?
A
...
import duty minimization
C
...
avoiding financial problems
E
...
A
...
the effect of exchange-rate fluctuations on profits is less than the effect of a
comparable local inflation rate
C
...
there is no effect on profits
E
...
A
...
marketing functions
C
...
all of the above
E
...
A
...
total assets
C
...
all of the above
E
...
A
...
caused embarrassment with allies and foes alike
C
...
tarnished the world’s image of the US
E
...
*
Tax morality ___
...
is a tax that would not affect the location of the investment or the nationality of
the investor
B
...
are those taxes imposed by host governments on dividend and interest payments
to foreign investors and debt holders
D
...
is the excess of deductible expenses over gross income
299