Chapter 21 International Financial Management PDF

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Textbook: Brigham, Ehrhardt, Gessaroli and Nason. Financial Management Theory and Practice, Third Canadian Edition, Nelson Education Ltd. 2017...

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT 1. Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries. a. True b. Fals e ANSWER: Fals e 2. Exchange rate quotations consist solely of direct quotations. a. True b. Fals e ANSWER: Fals e 3. When our Canadian dollar appreciates against another country’s currency, we may purchase more of the foreign currency with a dollar. a. True b. Fals e ANSWER: True 4. If Canada is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the Canadian dollar. a. True b. Fals e ANSWER: Fals e 5. Canada and most other major industrialized nations currently operate under a system of floating exchange rates. a. True b. Fals e ANSWER: True 6. Exchange rate risk refers to the risk that cash flows from a foreign project, when converted to the parent company’s currency, will be worth less than was originally projected because of exchange rate fluctuations. a. True b. Fals e ANSWER: True 7. A Eurocanadian is Canadian dollar deposited in a bank outside Canada. a. True b. Fals Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT e ANSWER: True 8. The Eurocurrency market is essentially a long-term market; most loans and deposits in this market have maturities longer than 1 year. a. True b. Fals e ANSWER: Fals e 9. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller North American corporations. a. True b. Fals e ANSWER: Fals e 10. Because political risk is seldom negotiable, it cannot be explicitly addressed in international corporate financial analysis. a. True b. Fals e ANSWER: Fals e 11. Credit policy for international firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the creditworthiness of many foreign customers. a. True b. Fals e ANSWER: True 12. Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms. a. True b. Fals e ANSWER: Fals e 13. Exchange rates influence a multinational firm’s inventory policy because changing currency values can affect the value of inventory. a. True b. Fals Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT e ANSWER: True 14. The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed. a. True b. Fals e ANSWER: True 15. Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate. a. True b. Fals e ANSWER: Fals e 16. If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the foreign currency is said to be selling at a discount to the spot rate. a. True b. Fals e ANSWER: True 17. If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the foreign currency is said to be selling at a premium to the spot rate. a. True b. Fals e ANSWER: True 18. On average, foreign currency will depreciate against the Canadian dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of Canada. a. True b. Fals e ANSWER: True 19. The interest rate paid on Eurocurrency deposits depends on the particular bank’s lending rate and on rates available on its domestic money market instruments. a. True b. Fals e ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT 20. The cash flows relevant for a foreign investment should, from the parent company’s perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country. a. True b. Fals e ANSWER: Fals e 21. The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky. a. True b. Fals e ANSWER: True 22. When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification. a. True b. Fals e ANSWER: True 23. Which of the following is NOT likely to be a reason that companies move into international operations? a. to take advantage of lower production costs in regions where labour costs are relatively low b. to develop new markets for the firm’s products c. because important raw materials are located abroad d. to diversify the risk of global terrorist attacks ANSWER: d 24. What is NOT one of the requirements of international financial management? a. that the effects of changing currency values be included in financial analyses b. that legal and economic differences be considered in financial decisions c. that markets be considered to be efficient d. that unique cultural heritages be respected in the conduct of business ANSWER: c 25. If the inflation rate in Canada is greater than the inflation rate in Britain, other things held constant, what will happen to the British pound? a. It will appreciate against the Canadian dollar. b. It will depreciate against the Canadian dollar. c. It will remain unchanged against the Canadian dollar. d. It will appreciate against other major currencies. Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT ANSWER: a 26. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In Canada, 90-day securities have a 4% annualized return and 180-day securities have a 4.5% annualized return. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which statement about the exchange rate is true? a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market. b.The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market. c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market. ANSWER: a 27. Which of the following statements is NOT correct? a. Any bond sold outside the country of the borrower is called an international bond. b.Foreign bonds and Eurobonds are two important types of international bonds. c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold. d.The term “Eurobond” applies only to foreign bonds denominated in US currency. ANSWER: d 28. If one Swiss franc can purchase 0.966 Canadian dollars, how many Swiss francs can one Canadian dollar buy? a. 0.50 b. 0.71 c. 1.00 d. 1.04 ANSWER: d 29. If one US dollar buys 1.0613 Canadian dollars, how many US dollars can you purchase for one Canadian dollar? a. 0.37 b. 0.61 c. 0.94 d. 1.00 ANSWER: c 30. Suppose 104 yen could be purchased in the foreign exchange market for one Canadian dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one Canadian dollar buy tomorrow? a. 123.5 yen b. 112.3 yen c. 104.0 yen d. 95.7 yen ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT 31. Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor’s required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return? a. 9.00% b. 10.20 % c. 11.28% d. 12.50 % ANSWER: d 32. Suppose DeGraw Corporation, a Canadian exporter, sold a solar heating station to a Japanese customer at a price of 106.0875 million yen, when the exchange rate was 103.5 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 110.2 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for Canadian dollars? a. $1,060,875 b. $1,025,000 c. $962,681 d. $929,404 ANSWER: c 33. Suppose the exchange rate between Canadian dollars and Swiss francs is SF 1.10 = $1.00, and the exchange rate between the Canadian dollar and the euro is $1.00 = 0.68 euros. What is the cross-rate of Swiss francs to euros? a. 0.43 b. 0.86 c. 1.41 d. 1.62 ANSWER: d 34. Suppose that currently 1 British pound equals 1.98 Canadian dollars and 1 Canadian dollar equals 1.04 Swiss francs. What is the cross exchange rate between the pound and the franc? a. 1 British pound equals 3.2400 Swiss francs. b. 1 British pound equals 2.0592 Swiss francs. c. 1 British pound equals 1.9037 Swiss francs. d. 1 British pound equals 1.0000 Swiss francs. ANSWER: b 35. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then what is the forward rate for the Israeli shekel selling at? a. a premium of 8% to the spot rate Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT b. a premium of 18% to the spot rate c. a discount of 18% to the spot rate d. a discount of 8% to the spot rate ANSWER: d 36. In 1997, a certain Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 110 yen per dollar, what would the car be selling for today in Canadian dollars? a. $8,200 b. $10,250 c. $12,628 d. $13,418 ANSWER: d 37. Suppose one British pound can purchase 1.82 US dollars today in the foreign exchange market, and currency forecasters predict that the US dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? a. 1.12 b. 1.63 c. 1.82 d. 2.04 ANSWER: d 38. Stover Corporation, a Canadian importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $38,610, at the spot rate of 1.035 francs per dollar. The terms of the purchase are net 90 days, and the Canadian firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.099 francs. If the spot rate in 90 days is actually 1.062 francs, how much will the Canadian firm have saved or lost in Canadian dollars by hedging its exchange rate exposure? a. $2,557 b. $1,267 c. –$1,079 d. –$1,243 ANSWER: b 39. Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In Canada, 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.96. If interest rate parity holds, what is the spot exchange rate? a. 1 pound = $1.9700 b. 1 pound = $1.8582 c. 1 pound = $1.4308 d. 1 pound = $0.8500 ANSWER: a 40. Suppose in the spot market 1 US dollar equals 1.0613 Canadian dollars. Six-month Canadian securities have an Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the US dollar–Canadian dollar exchange rate in the 180-day forward market? a. 1 US dollar = 0.6235 Canadian dollars b. 1 US dollar = 0.6265 Canadian dollars c. 1 US dollar = 1.0587 Canadian dollars d. 1 US dollar = 1.5961 Canadian dollars ANSWER: c 41. A product sells for $750 in Canada. The exchange rate is $1 to 9.55 pesos. If the law of one price holds, what is the price of the product in Mexico? a. 4,375.00 pesos b. 5,545.50 pesos c. 6,750.00 pesos d. 7,162.50 pesos ANSWER: d 42. Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.9423 US dollars. If absolute purchasing power parity (PPP) holds, what is the price of hockey skates in the United States? a. $63.00 b. $74.55 c. $85.88 d. $98.94 ANSWER: d 43. A box of candy costs 12.80 euros in Germany and $20 in Canada. Assuming that the law of one price holds, what is the current exchange rate? a. 1 Canadian dollar equals 0.64 euros b. 1 Canadian dollar equals 0.85 euros c. 1 Canadian dollar equals 1.21 euros d. 1 Canadian dollar equals 1.56 euros ANSWER: a 44. Suppose 6 months ago a British investor bought a 6-month Canadian Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.9516 dollars per pound. Today, at maturity, the exchange rate is 2.0751 dollars per pound. What is the annualized rate of return to the British investor? a. – 6.26% b. – 3.13% c. 6.00% Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT d. 8.25% ANSWER: a 45. Suppose 1 year ago Hein Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was £1 = 2 Canadian dollars. This year, the exchange rate is £1 = 1.82 Canadian dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in Canadian dollars as a result of the change in exchange rates? a. –$240,000 b. –$43,200 c. $0 d. $43,200 ANSWER: b 46. Blenman Corporation, based in Canada, arranged a 2-year, $1,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 10.1366 pesos per dollar, but it dropped to 9.5511 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Blenman must convert Canadian dollars into Mexican pesos to make its payments. If the exchange rate remains at 9.5511 pesos per dollar through the end of the loan period, what effective interest rate will Blenman end up paying on the loan? a. 11.50% b. 12.44 % c. 13.00 % d. 15.80 % ANSWER: d 47. Chen Transport, a Canadian company, is considering expanding its operations into a foreign country for 5 years. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. Due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. In addition, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen’s cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV? a. $1.01 million b. $2.77 million c. $3.09 million d. $5.96 million ANSWER: b 48. Suppose a Canadian firm buys $200,000 worth of television tubes from a Norwegian manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising Canadian deficit has caused the dollar to depreciate against the krone recently. The current exchange rate is 5.50 krones per Canadian dollar. The 90day forward rate is 5.45 krones/dollar. The firm goes into the forward market today and buys enough Norwegian krones at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 krones per Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT Canadian dollar. How much in Canadian dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge? a. $0 b. $1,834.86 c. $4,517.26 d. $5,712.31 ANSWER: d 49. Which of the following best describes the work of a financial analyst in a multinational context? a. Multinational financial management requires that financial analysts consider the effects of changing currency values. b.Multinational financial management requires that financial analysts consider the effects of changing public policy values. c. Multinational financial management requires that financial analysts consider the effects of changing languages. d.Multinational financial management requires that financial analysts consider the effects of changing values of commodity prices. ANSWER: a 50. Which of the following best describes how one would determine a currency cross rate? a. Calculating a currency cross rate involves determining the exchange rate for two currencies by using a widely held commodity index as a base. b.Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base. c. Calculating a currency cross rate involves determining the exchange rate for two currencies by using two other currencies as a base. d.Calculating a currency cross rate involves determining the exchange rate for a basket of currencies by using a third currency as a base. ANSWER: b 51. A product sells for $7,500 in Canada. The exchange rate is $1USD:$1.33CAD. If the law of one price holds, what is the price of the product in United States? a. $5,639 USD b. $9,975 USD c. $6,750 USD d. $7,162 USD ANSWER: a 52. An American citizen is travelling to Canada for 6 months. If the exchange rate is $1USD:$1.33CAD, what is the value (in CAD) of his or her travel spending money (assume he or she has saved $25,000 for the trip to Canada)? a. $25,000 CAD b. $33,250 CAD c. $18,797 Copyright Cengage Learning. Powered by Cognero.

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CHAPTER 21 - INTERNATIONAL FINANCIAL MANAGEMENT CAD d. $33,250 USD ANSWER: b 53. Suppose one British pound can purchase 2.12 US dollars today in the foreign exchange market, and currency forecasters predict that the US dollar will depreciate by 22.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? a. 2.59 b. 2.63 c. 1.74 d. 2.04 ANSWER: a

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