Test Three

Question 1

____ is (are) a limitation of hedging translation exposure.

Answer 1

All of the above

Question 2

If a firm does not have foreign subsidiaries, it is not subject to ____.

Answer 2

​translation exposure

Question 3

​When a foreign currency is perceived by an MNC to be undervalued, the MNC may consider direct foreign investment in that country, as the initial outlay should be relatively low.

Answer 3

True

Question 4

MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.

Answer 4

True.

Question 5

​MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.

Answer 5

True

Question 6

​In assessing the risk of an individual project, the expected correlation of the new project’s returns with those of the prevailing business should be considered.

Answer 6

True

Question 7

​To diversify internationally for the purpose of reducing risk, which strategy is appropriate?

Answer 7

​Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 8

​According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.

Answer 8

China

Question 9

​Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.

Answer 9

True

Question 10

​All MNCs are subject to transaction exposure.

Answer 10

False

Question 11

​The management of economic exposure is normally focused completely on transactions that will occur in the next three months.

Answer 11

False

Question 12

​All MNCs are subject to translation exposure.

Answer 12

False

Question 13

​Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.

Answer 13

True

Question 14

​____ is not a revenue-related motive for direct foreign investment.

Answer 14

​Fully benefiting from economies of scale

Question 15

​The best way to accomplish the revenue-related motive of attracting new sources of demand is to:

Answer 15

establish a subsidiary or acquire a competitor in a new market.

Question 16

​Translation exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.

Answer 16

True

Question 17

​____ is not a disadvantage of direct foreign investment.

Answer 17

All of the above

Question 18

​Which of the following is a reason to consider international business?

Answer 18

All of the Above

Question 19

​Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies.

Answer 19

True

Question 20

​If countries’ economies are highly integrated, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries whose economies are less integrated.

Answer 20

high and positive; less

Question 21

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

Answer 21

False

Question 22

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.

Answer 22

True

Question 23

If a multinational project is assessed from the subsidiary’s perspective, withholding taxes are ignored for project assessment.​

Answer 23

True

Question 24

The ____ for a given country represents the annualized yield offered on debt for various maturities.

Answer 24

Yield Curve

Question 25

____ are commonly used to hedge interest rate risk.

Answer 25

Interest Rate Swap

Question 26

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.

Answer 26

High; parents

Question 27

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.​

Answer 27

True

Question 28

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 ____.

Answer 28

Appreciate; low

Question 29

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.​

Answer 29

False

Question 30

A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.​

Answer 30

True

Question 31

​In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____.

Answer 31

Floating; decline

Question 32

The required rate of return of a project is ____ the MNC's cost of capital.​

Answer 32

any of the above

Question 33

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.​

Answer 33

​Discriminant analysis

Question 34

​MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future.

Answer 34

Parallel loans

Question 35

Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.​

Answer 35

True

Question 36

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.​

Answer 36

Should be; should be

Question 37

The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.​

Answer 37

True

Question 38

Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.

Answer 38

False

Question 39

The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.

Answer 39

True

Question 40

A(n) ____ swap is entered into today, but the swap payments start at a specific future point in time.

Answer 40

Forward

Question 41

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows

Answer 41

Withholding taxes imposed by the host government

Question 42

In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ swap, two parties agree to periodically exchange foreign currencies.

Answer 42

interest rate; currency

Question 43

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

Answer 43

False

Question 44

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:

Answer 44

the foreign project should enhance the value of both the parent and the subsidiary.

Question 45

When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.

Answer 45

interest rate

Question 46

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.

Answer 46

strengthening euro

Question 47

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

Answer 47

True

Question 48

In multinational capital budgeting, depreciation is treated as a cash outflow.

Answer 48

False

Question 49

In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.

Answer 49

False