Practice Questions&Answers Quiz 2 PDF

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practice and answers for quiz 2 of this course...

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Practice Questions for Quiz 2

1. Translation exposure reflects: a. the exposure of a firm's international transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations. 2. Which of the following operations benefits from appreciation of the firm's local currency? a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. b. receiving earnings dividends from foreign subsidiaries c. purchasing supplies locally rather than overseas d. exporting to foreign countries 3. A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____. a. weak; somewhat stable b. weak; favorably affected c. weak; adversely affected d. None of these are correct. 4. Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will: a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position. 5. Griffith Ltd. is an Australian company that has exposure to the euro and the British pound. It has net inflows of 600 million euros and net outflows of 300 million pounds. The present exchange rate of the euro is about $1.4 while the present exchange rate of the pound is $1.8. Griffith Ltd. has not hedged these positions. Assume that euro and pound are highly correlated in their movements against the dollar. If the dollar strengthens, then Griffith Ltd. will: a. benefit, because the dollar value of its pound position exceeds the dollar value of its euro position. b. benefit, because the dollar value of its euro position exceeds the dollar value of its pound position. c. be adversely affected, because the dollar value of its euro position exceeds the dollar value of its pound position. d. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its euro position.

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6. Which of the following is an example of economic exposure but not an example of transaction exposure? a. An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. b. An increase in the pound's value increases a U.S. firm's cost of British pound payables. c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables. d. A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank. 7. If a U.S. firm's expenses are more susceptible to exchange rate movements than its revenue is, the firm will ____ if the dollar ____. a. benefit; weakens b. be unaffected; weakens c. be unaffected; strengthens d. benefit; strengthens 8. OmuOmu Ltd. is an Australian firm and has some expenses and revenue in USD. If its revenues are more sensitive to exchange rate movements than its expenses is, it could reduce economic exposure by ____. a. purchase forward contract b. increasing local revenues c. increasing foreign revenues d. decreasing foreign expenses 9. ____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements. a. Translation b. Transaction c. Economic d. None of these are correct. 10. To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency. a. purchase the currency forward b. sell the currency forward c. purchase futures contracts of the currency d. purchase the currency forward AND purchase futures contracts of the currency e. None of these are correct. 11. Which of the following is a possible strategy for reducing economic exposure? a. hedging with forward contracts b. purchasing foreign supplies c. financing with foreign funds d. All of these are correct.

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12. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure. a. True b. False 13. A foreign subsidiary with expenses that are more susceptible to exchange rate movements than its revenue will be favorably affected by an appreciation of the foreign currency. a. True b. False 14. 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 ____. a. overvalued; high b. overvalued; low c. undervalued; high d. undervalued; low 15. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand. a. True b. False 16. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries a. True b. False 17. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders. a. True b. False 18. A micro-assessment of country risk: a. is adjusted for the particular business of the firm involved. b. excludes aspects relevant to a particular firm or project. c. is adjusted for the particular business of the firm involved AND excludes aspects relevant to a particular firm or project. d. None of these are correct. 19. The Delphi technique: a. is a method of purchasing information about inspections of the country being evaluated. b. requires the use of discriminant analysis to assess country risk. c. involves the collection of independent opinions on country risk. d. None of these are correct.

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20. To best reduce exposure to a host government takeover, a subsidiary could: a. use a long-run profit perspective for business in that country. b. hire people from its own country (where the parent is located). c. attempt to obtain supplies from its parent for which substitutes are not available. d. borrow funds from its parent rather than from the host country's creditors. 21. Country risk assessment should be used when: a. determining whether to establish a subsidiary in a foreign country. b. determining whether to continue business in a foreign country. c. determining whether to establish a subsidiary in a foreign country AND determining whether to continue business in a foreign country. d. None of these are correct. 22. Which of the following is NOT a form of financial risk? a. exchange rate movements b. inflation rates c. business license requirements imposed on an MNC by the host government d. All of these are forms of financial risk. 23. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____. a. appreciates; decreases b. depreciates; is unaffected c. appreciates; is unaffected d. depreciates; decreases e. depreciates; is unaffected AND appreciates; is unaffected 24. A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____. a. fixed b. volatile c. stable d. None of these are correct, as the firm is not exposed. 25. If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment. a. True b. False 26. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____. a. appreciate; low b. appreciate; high c. depreciate; high d. depreciate; low

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27. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project. a. True b. False 28. Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa. a. True b. False 29. Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value. a. True b. False 30. The cost of an MNC’s capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity. a. True b. False 31. It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries. a. True b. False 32. Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project. a. higher; higher b. lower; higher c. higher; lower d. lower; higher AND higher; lower e. None of these are correct. 33. Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital? a. 10.8 percent b. 12.4 percent c. 9.2 percent d. None of these are correct. 34. An MNC’s "global" capital structure is: a. the MNC’s capital structure in the United States. b. the MNC’s capital structure relative to the structures of competitors across all countries. c. the MNC’s capital structure where it has its largest subsidiary. d. the combination of the capital structures of the parent and all of its subsidiaries.

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35. One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the: a. parent’s managers and board of directors. b. parent and managers at the subsidiary who are minority shareholders. c. parent and existing creditors. d. subsidiary’s managers and creditors. 36. Calculate the cost of equity of a company if the company’s beta is 1.3, the market interest rate is 5% and the risk free rate is 3%. a. 9.5 percent b. 5.6 percent c. 6.5 percent d. 2.6 percent 37. A beta of 0.8 implies: a. the company is considered riskier than the overall market b. the company is considered less risky than the overall market c. the company’s stock price likely to fluctuate more than the overall market d. the company’s stock price likely to fluctuate less than the overall market e. both b and d are correct

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