Exam 3

Question 1

What are the two sources of working capital?

Answer 1

Intra-Corporate & Parent Loan

Question 2

An intra-corporate source of fund increases?

Answer 2

equity stock of the subsidiary

Question 3

Most multi-national companies prefer what type of working capital?

Answer 3

Parental Loan

Question 4

The reasons why parental loans are most favorable are because

Answer 4

interest is tax deductible while dividends are not. Less control by the host government over interest than dividend payment. Parent would not let subsidiary go bankrupt because they have too much loan from them.

Question 5

What are the disadvantages of a loan?

Answer 5

Increased debt rate

Question 6

What is a more complex parental loan to the subsidiaries should they want to deal with future political risk?

Answer 6

Fronting Loan

Question 7

A fronting loan involves

Answer 7

the parent depositing money with the 3rd party, which in turn loans the money to the subsidiary.

Question 8

Another way to use internal source of funds is the leads in

Answer 8

accounts payable or lags in accounts receivable.

Question 9

What is a transfer price?

Answer 9

It is the use of internal source fund to provide working capital by manipulation.

Question 10

When a subsidiary needs additional working capital, the parent company can reduce prices of goods provided by the parent to the subsidiary.

Answer 10

Transfer Price

Question 11

What are the disadvantages of transfer price?

Answer 11

Conflict between the MNC and the host country; dual sets of accounting books to see actual subsidiary’s performance and end up conflicting with own interests (pay less income tax to local govt. but end up paying more tariffs on increased prices.)

Question 12

A subsidiary can also borrow from an International Market such but may require what?

Answer 12

The parent company’s guarantee on the loan.

Question 13

What is the most preferred method of borrowing working capital of multi-national companies?

Answer 13

Borrowing from local banks

Question 14

The reasons why borrowing from local banks is the best?

Answer 14

Borrowing without the parent’s guarantee for limited liability in case of bankruptcy, hedge against political risk, and inflation

Question 15

Is the degree to which a firm’s financial statements are influenced by exchange rate fluctuation.

Answer 15

Translation Exposure

Question 16

Does not cause any changes in real cash flow only paper gains and losses due to wide inflation variations. Also called Accounting Exposure

Answer 16

Translation Exposure

Question 17

Is the degree to which a firm’s actual cash flow is influenced by exchange rate fluctuations.

Answer 17

Transaction Exposure

Question 18

What are some strategies to reduce transaction exposure?

Answer 18

Forward Contacts, Future Contracts or options to lock in specific rates regardless of spot rate.

Question 19

Is the degree to which a firm’s value (stock price) is influenced by long-term and fundamental exchange rate fluctuations.

Answer 19

Economic Exposure

Question 20

What are some strategies to deal with economic exposure?

Answer 20

Diversify the market to disperse the risk from one currency flotation and entry mode diversification is another option.

Question 21

Is the process of making an investment decision when there is a limited amount of capital.

Answer 21

Capital Budgeting

Question 22

What is the most widely used methods to do capital budgeting?

Answer 22

Net Present Value

Question 23

In order to make a Net Present Value calculation more accurately, what factors must be incorporated

Answer 23

Exchange Rates, Local Inflation, Taxes, Rate of Discount of Future Cash Inflows and Political Risk

Question 24

What type of payment method do buyers love because the goods are shipped out first and then the customer pays later?

Answer 24

Open Account

Question 25

What type of payment method do sellers love where the customers pay first?

Answer 25

Cash Advance

Question 26

An unconditional order of payment made by the exporter to the importer or an official payment request.

Answer 26

Draft

Question 27

A certain amount of risk still remains when settling with a draft because under draft,

Answer 27

the payments are still contingent upon the buyer's willingness and ability to pay.

Question 28

The most important instrument used to reduce the risk of non-payment is

Answer 28

Letter of Credit

Question 29

What are some strategies to eliminate Translation Exposure?

Answer 29

Do Nothing

Question 30

The majority of International Trade is settled in terms of

Answer 30

Irrevocable Letters of Credit

Question 31

Which type of LOC is used to eliminate the risk of importer's bank bankruptcy?

Answer 31

Confirmed LOC

Question 32

A document against payment (D/P), requires that payments be made immediately to take the shipping documents when presented.

Answer 32

Sight Draft

Question 33

Document against acceptance (D/A), requires only acceptance in order to take the shipping documents.

Answer 33

Time Draft

Question 34

By endorsing the buyer legally promises to pay at a later time frequently used when exporter and importer trust each other.

Answer 34

Time Draft

Question 35

A payment guarantee made by importer's bank at the moment of presenting proper documents.

Answer 35

Letter of Credit

Question 36

What are the two steps in international financial reporting?

Answer 36

Translation & Consolidation

Question 37

Most MNC prefer to use which type of translation method?

Answer 37

Current Method

Question 38

The current method of translation is preferred because

Answer 38

paper gain or loss would appear on the balance sheet rather than on the income statement which can generate a false sense that the company is risky.

Question 39

According to the FASB the currency by which the major business activity of the foreign subsidiary is conducted is called

Answer 39

Functional Currency

Question 40

Designed to avoid double taxation and to ensure tax neutrality regardless of income sources?

Answer 40

Tax Credit

Question 41

Under the tax credit concept for foreign sourced income, the domestic tax liability of US firms on foreign sourced income...

Answer 41

will be reduced by the amount of tax that they have paid to a foreign government.

Question 42

Originally designed to encourage foreign business activity of the US firms by delaying the collection of US income tax on foreign sourced income until it is remitted back to the US.

Answer 42

Tax Deferral

Question 43

Are not eligible for tax deferral and are an extension of the parent company?

Answer 43

Branch Office

Question 44

Are eligible for tax deferral as a separate legal entity?

Answer 44

Subsidiary

Question 45

Parent companies prefer branch offices in the early stages to take advantage of

Answer 45

losses from domestic tax liability

Question 46

Parent companies prefer subsidiary once profits are generated so

Answer 46

they can benefit from tax deferral.

Question 47

Cayman Islands and Bahamas are considered to be

Answer 47

tax havens

Question 48

The US tax authorities have identified two types of subsidiaries?

Answer 48

non-controlled foreign subsidiary and Controlled

Question 49

The US partner is a minority stockholder with little room for maneuver tax evasive planning such as manipulating transfer price?

Answer 49

Non-controlled Subsidiary

Question 50

US Partner would be a majority stockholder and can do whatever they want including tax evasion.

Answer 50

Controlled Subsidiary

Question 51

The two types of controlled subsidiary are?

Answer 51

Active and Passive

Question 52

The Controlled Subsidiary type that tax deferral is applied to is

Answer 52

Active

Question 53

The most preferred and mostly used method to assess potential market demand in target countries is

Answer 53

Cross-National Analysis

Question 54

This method assumes that the demand for your product is a function of certain variables such as national income.

Answer 54

Cross-National Analysis

Question 55

This potential demand method is appropriate when you have a previous record of sales in the country (historical data) and want to forecast the future demand.

Answer 55

Time Series Analysis

Question 56

The potential demand method uses the underlying assumption that income is the single most important variable that will influence demand.

Answer 56

Elasticity

Question 57

Bread and Milk have

Answer 57

Low elasticity

Question 58

Cars and furniture have

Answer 58

High elasticity

Question 59

This potential demand method found that demand of a certain type of product displays almost identical patterns across nations.

Answer 59

Regional Leads and Lags Method

Question 60

Regional Leads and Lags Method will have a difference between actual sales and potential demand. What type of analysis is to be performed?

Answer 60

GAP Analysis

Question 61

Companies have 3 different product policies

Answer 61

Standardized (Nike), Localized (Campbell Soup), and Adaptation a hybrid of the other two (Pizza Hut, Coke, Cars).

Question 62

Companies have two pricing decisions

Answer 62

Uniform and Differentiated Pricing

Question 63

MNC that have strong brand name and consumers will buy their products with little resistance ex: McDonald's use what type of pricing

Answer 63

Uniform

Question 64

Transportion costs and unrecognized brand name can force companies to use this type of pricing method

Answer 64

Differentiated

Question 65

What are the three objectives of pricing?

Answer 65

Marketing Holding, Market Skimming, Market Penetration

Question 66

Where there is only one component of cost, the variable cost to cover the pricing consideration and used in what market?

Answer 66

Marginal Cost Pricing, Market Penetration

Question 67

Marketing promotion where the product is presented directly to the customer through direct sales or door to door selling.

Answer 67

Push

Question 68

Marketing promotion where the product is presented through point of purchase with TV ads, magazines, etc.

Answer 68

Pull

Question 69

For sparsely populated regions the ____ approach may be too expensive.

Answer 69

Push

Question 70

For densely populated regions the ____ approach may be the best.

Answer 70

Push

Question 71

For sparsely populated regions the ____ approach may be best.

Answer 71

Pull

Question 72

This is a special brand name effect "made in effect"

Answer 72

Country of Origin Effect

Question 73

Internal Channel is a relatively passive form of channel located and operated in the

Answer 73

Home Country

Question 74

Export Agent, Export House, Resident Foreign Buyer and Export Association are all forms of what type of (place) distribution channel?

Answer 74

Internal Channel

Question 75

External Channel operates in the

Answer 75

Target Country

Question 76

Import Agent, Foreign Distributor, Branch and Subsidiary are all what type of place channel?

Answer 76

External Channel

Question 77

This management style should be formal with close and tough supervision and authoritative leadership is favored.

Answer 77

Theory X

Question 78

This management style should follow broad guidelines and maintain financial supervision with democratic leadership.

Answer 78

Theory Y

Question 79

This organizational structure can ensure local flexibility and responsiveness but can impede coordination and uniformity among regions.

Answer 79

Worldwide area Structure

Question 80

This organizational structure can ensure a better framework for pursing global optimality in implementing strategies, but it is weak in local flexibility and responsiveness.

Answer 80

WorldWide Product Division

Question 81

This organizational structure is designed based on two dimensions: Product Division and Geographic Regions

Answer 81

Global Matrix Structure

Question 82

Many manufacturing firms begin their global expansion as

Answer 82

Exporters

Question 83

Entry mode advantages: avoid costly FDI, and centralize manufacturing to achieve economies of scale and a learning curve?

Answer 83

Export

Question 84

Entry mode disadvantages: may not use cheap labor, not in the best position to monitor consumer feedback, high transportation costs, and various forms of tarrif, non-tariff trade barriers?

Answer 84

Export

Question 85

Under this mode, considered to be ongoing barter, both parties establish open accounts and continue to exchange the goods with each other within the range of the originally stipulated amount.

Answer 85

Clearing Arrangement (Counter-Trade)

Question 86

Under this mode, both parties involved in signing two parallel buy/sell contracts that stipulates the amount of goods and services to be exchanged in different time frames. Ex: Agricultural products in the future

Answer 86

Counter Purchase

Question 87

Under this mode, requires a lengthy amount of time for final settlement because payment will be made gradually as the other party produces goods in the future. EX: country builds a fertilizer plant and the developing country pays back in terms of the fertilizer produced.

Answer 87

Buy-Back, or Compensation Arrangement

Question 88

Under this mode, is by providing any commensurate return or business right by one party for the goods and services rendered by another party to compensate for the value originally provided. Ex: exclusive rights, natural resources extracting rights.

Answer 88

Off set

Question 89

Under this mode, grants the right to use intangible property for a specific period in return of a royalty fees.

Answer 89

Licensing

Question 90

One of the most important tools for outsourcing?

Answer 90

Contract Manufacturing

Question 91

Where a company makes a contract with a foreign firm to buy their products and then sells them under its own brand name and through its own marketing channels?

Answer 91

OEM (Original Equipment Manufacturer)

Question 92

The contractor agrees to build a large facility such as a utility plant or infrastructure for a foreign client, including training of operating personnel. ex: chemical pharmaceutical, petroleum.

Answer 92

Turnkey Projects

Question 93

Where a firm builds plants or facilities such as a utility plant or fertilizer plan in other countries at its own expense and in return they will have the right to operate and do business for a certain period of time.

Answer 93

BOT (Buy, Operate, Transfer)

Question 94

Under this mode, one party provides another party with managerial expertise for a specific period of time in return of a lump-sum amount or a fee in proportion to sales volume

Answer 94

Management Contract

Question 95

One of the oldest forms of international business under which foreign firms agree to explore and develop natural resources at their own risk and expenses. Prevalent in oil, mining and other natural resource extracting industries. Share the output with the host govt.

Answer 95

Extract Agreement

Question 96

This mode of business has been one of the most popular forms of strategic alliance.

Answer 96

International Joint Venture