International Finance Review Questions

1. When a firm analyzes the feasibility of a project, it should consider the:
variability of the project's cash flow.
correlation of the project's cash flow relative to the prevailing cash flows of the MNC.
A and B
none of the above

2. The __________ a project's variability in cash flows, and the __________ the positive correlation between the project's cash flow and MNC's cash flow, the lower the risk of the project.
higher; higher
higher; lower
lower; lower
lower; higher

4. Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of ______ motives by U.S. firms that engage in direct foreign investment.
revenue-related
cost-related
A and B
none of the above

5. Which of the following is a reason to consider international business?
economies of scale.
exploit monopolistic advantages.
diversification.
all of the above

6. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:
is the top point.
is the point closest to the vertical axis.
is the point half way between the two end points.
cannot be determined since firms vary in their willingness to accept risk.

7. Direct foreign investment would typically be welcomed if:
the products to be produced are substitutes for other locally produced products.
people from its headquarters country are transferred to the foreign country to work at the subsidiary.
the products to be produced are going to be exported.
all of the above

8. Assume a U.S. firm initiates direct foreign investment in the U.K.. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should _______. The parent may request that the subsidiary _______ in order to benefit from the expectation about the pound.
increase; postpone remitting earnings until the pound strengthens
decrease; postpone remitting earnings until the pound strengthens
decrease; remit earnings immediately before the pound strengthens
increase; remit earnings immediately before the pound strengthens

9. Assume the correlation coefficient between the returns on the existing project and the return on a proposed foreign project is 1. Also assume the returns on existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ___________ the variance of the firm's overall returns.
decrease
increase
decrease or increase, depending on the exact size of the returns and standard deviations
none of the above

10. When a firm perceives that a foreign currency is _________, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively _______.
overvalued; high
overvalued; low
undervalued; high
undervalued; low

11. To enter markets where superior profits are possible, an MNC should:
acquire a competitor that has controlled its local market.
establish a subsidiary or acquire a competitor in a new market.
establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

12. To use foreign factors of production, an MNC should:
establish a subsidiary in a new market that can sell products produced elsewhere.
establish a subsidiary in a market that has relatively low costs of labor or land.
establish a subsidiary in a market where raw materials are cheap and accessible.
participate in a joint venture in order to learn about a production process or other operations.

13. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.
strengthening euro
stable euro
weak euro
B and C are both ideal.

14. When evaluating international project cash flows, which of the following factors is relevant?
future inflation.
blocked funds.
exchange rates.
all of the above

15. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:
the cost of borrowing funds in the U.K.
the cost of borrowing funds in the U.S.
the parent's cost of capital.
A and B

16. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso _______, the dollar amount of remitted funds _______.
appreciates; decreases
depreciates; is unaffected
appreciates; is unaffected
depreciates; decreases
B and C

17. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
the subsidiary finances the entire investment by local borrowing.
the subsidiary finances most of the investment by local borrowing.
the parent finances most of the investment.
the parent finances the entire investment.

18. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be _______ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be _______ affected by the project.
adversely; adversely
favorably; adversely
favorably; favorably
adversely; favorably

19. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ________.
fixed
volatile
stable
none of the above, as the firm is not exposed

20. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _______ in the host country and there are _______ investment opportunities in the host country.
very high; limited
very low; limited
very low; numerous
very high; numerous

21. One foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be _______ from the parent's perspective.
negative
higher than that for the Hungarian project
lower than that for the Hungarian project
the same as that for the Hungarian project
A and C

22. A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to __________ its estimate of the previously computed net present value.
lower
increase
lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
none of the above

23. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
$2,905,817.
-$94,183.
$916,128.
none of the above

24. Which of the following is not a characteristic of a country to be considered within an MNC's international tax assessment?
corporate income taxes.
withholding taxes.
provisions for carrybacks and carryforwards.
tax treaties.
all of the above are characteristics to be considered.

25. If the parent's government imposes a _______ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the _________ point of view.
high; subsidiary's
high; parent's
low; parent's
A and C
none of the above

26. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:
the parent's perspective should be used to evaluate a foreign project.
the subsidiary's perspective should be used to evaluate a foreign project.
the foreign project should enhance the value of both the parent and the subsidiary.
none of the above

27. An international project's NPV is _________ related to the size of the initial investment and _________ related to the project's required rate of return.
positively; positively
positive; negatively
negatively; positively
negatively; negatively

28. Everything else being equal, the _________ the depreciation expense is in a given year, the ________ a foreign project's NPV will be.
higher; lower
higher; higher
lower; higher
none of the above

29. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation __________ included explicitly in the cash flow analysis, and debt payments by the subsidiary _________ included explicitly in the cash flow analysis.
should be; should be
should definitely not be; should definitely not be
should definitely not be; should be
should be; should definitely not be

30. According to the text, the cost of capital for an international project will:
always be greater than the firm's cost of capital.
always be less than the firm's cost of capital.
always be the same as the firm's cost of capital.
none of the above

31. Which of the following factors is not expected to generally have a favorable impact on the firm's cost of capital according to the text?
easy access to international capital markets.
high degree of international diversification.
volatile exchange rate fluctuations.
all of the above

32. The capital asset pricing theory is based on the premise that:
only unsystematic variability in cash flows is relevant.
only systematic variability in cash flows is relevant.
both systematic and unsystematic variability in cash flows are relevant.
neither systematic nor unsystematic variability in cash flows is relevant.

33. One argument for why subsidiaries should be only partly-owned by the parent is:
that the potential conflict of interests between the MNC's managers and shareholders is avoided.
that the potential conflict of interests between the MNC's majority shareholders and minority shareholders is avoided.
that the potential conflict of interests between the MNC's existing creditors is avoided.
to offer some protection against threats of any adverse actions by the host government.

34. Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are _______ likely to rescue them (in the event of failure), and if their home countries are _______ likely to experience a recession.
more; more
less; more
less; less
more; less

35. When an MNC's firm's cost of capital rises, it would be _______ likely to divest an existing project, other things held constant.
more
less
neither; there is no effect
neither; MNCs do not ever divest projects

36. Which of the following is not a factor that favorably affects an MNC's cost of capital, according to your text?
exchange rate risk.
size.
access to international capital markets.
international diversification.

37. MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on MNC stock?
21%.
41%.
16%.
13%.
none of the above

38. A firm's cost of ___________ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
debt
retained earnings
new common equity
none of the above

39. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany: U.S. risk-free rate = 4%; German risk-free rate = 5%; Risk premium on dollar-denominated debt provided by U.S. creditors = 3%; Risk premium on Euro-denominated debt provided by German creditors = 4%; Beta of project = 1.2; Expected U.S. market return = 10%; U.S. corporate tax rate = 30%; German corporate tax rate = 40%. What is Pexi's cost of dollar-denominated debt?
7.0%.
8.0%.
6.3%.
4.9%.

40. According to the CAPM, the required rate of return on stock is a positive function of all of the following, except:
the risk-free rate of interest.
the market rate of return.
the stock's beta.
the company's earnings.