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mc test bank ch11 to 17 and ch 2021docx

CH 11
Multiple Choice
1.

Change in the value of future cash flows due to unexpected changes in exchange rates is
called ____ to currency risk.
a. economic exposure
b. operating exposure
c. transaction exposure
d. translation exposure
e. none of the above

2.

Change in financial accounting statements arising from unexpected changes in currency
values is called ____ to currency risk.
a. economic exposure
b. operating exposure
c. transaction exposure
d. translation exposure
e. none of the above


3.

Change in the value of contractual cash flows due to unexpected changes in currency values
is called ____ to currency risk.
a. economic exposure
b. operating exposure
c. transaction exposure
d. translation exposure
e. none of the above

4.

Change in the value of noncontractual cash flows due to unexpected changes in currency
values is called ____ to currency risk.
a. economic exposure
b. operating exposure
c. transaction exposure
d. translation exposure
e. none of the above

5.

Operating cash flows that are exposed to currency risk are affected primarily by ____.
a. changes in domestic inflation
b. changes in foreign inflation
c. changes in nominal exchange rates
d. changes in real exchange rates
e. none of the above


6.

Monetary cash flows that are exposed to currency risk are affected primarily by ____.
a. changes in domestic unemployment
b. changes in foreign unemployment
c. changes in nominal exchange rates
d. changes in real exchange rates
e. none of the above


7.

When goods markets are segmented from other markets, goods prices are determined ____.
a. in foreign markets
b. in the global market
c. in the local market
d. all of the above
e. none of the above

8.

The classic exporter has ____.
a. both revenues and expenses that are determined globally
b. both revenues and expenses that are determined locally
c. revenues that are determined locally and expenses that are determined globally
d. revenues that are determined globally and expenses that are determined locally
e. none of the above

9.

The classic importer has ____.
a. both revenues and expenses that are determined globally
b both revenues and expenses that are determined locally
c revenues that are determined locally and expenses that are determined globally
d revenues that are determined globally and expenses that are determined locally
e none of the above

10. The globally competitive multinational corporation typically has ____.
a. both revenues and expenses that are determined globally
b. both revenues and expenses that are determined locally
c. revenues that determined locally and expenses that are determined globally
d. revenues that determined globally and expenses that are determined locally
e. none of the above

11. The ____ is positively exposed to the real value of the domestic currency.
a. classic exporter
b. classic importer
c. typical domestic firm
d. globally competitive firm


e. none of the above
12. The ____ is negatively exposed to the real value of the domestic currency.
a. classic exporter
b. classic importer
c. typical domestic firm
d. globally competitive firm
e. none of the above

13. Price elasticity of demand is defined as minus the percentage change in ____.
a. interest rates for a given change in money supply
b. money supply for a given change in interest rates
c. price for a given percentage change in quantity demanded
d. quantity demanded for a given percentage change in price
e. none of the above

14. Exposure to currency risk ____.
a. can be thought of as a regression coefficient
b. cannot be measured by conventional methods
c. is equal to the price elasticity of demand
d. is equal to the variability of currency values
e. is equal for all companies

15. Operating exposure to currency risk is most effectively managed by ____.
a. hedging with currency forwards or futures
b. hedging with currency options
c. hedging with real assets
d. hedging with virtual assets
e. none of the above
16. A disadvantage of real asset hedges is that ____.
a. bid-ask spreads can be large
b. daily marking to market can cause cash flow mismatches
c. option premiums can be large
d. they come in only a limited number of currencies and maturities
e. they involve substantial sunk costs

17. ____ are relatively insensitive to currency fluctuations.
a. Domestic firms
b. Exporters
c. Importers
d. Inbred corporations


e. Multinational corporations
18. Exposure to currency risk is measured as the percentage change in ____.
a. currency values given a percentage change in exchange rates
b. exchange rates given a percentage change in currency values
c. exchange rates given a percentage change in value
d. value given a percentage change in exchange rates
e. None of the above

19. The domestic currency value of a monetary cash flow denominated in a foreign currency
changes ____ with a change in the value of the foreign currency.
a. disproportionately
b. the currency of denomination
c. not at all
d. one for one
e. none of the above
20. The domestic currency value of an expected future operating cash flow denominated in a
foreign currency changes ____ with a change in the value of the foreign currency.
a. disproportionately
b. the currency of denomination
c. not at all
d. one for one
e. none of the above
21. Shareholders exposure to currency risk is equal to ____.
a. assets less liabilities
b. credits less debits
c. net monetary assets plus real assets
d. the sum of transaction exposure and operating exposure
e. none of the above
22. An exporter’s financial market hedging alternatives include each of a) through c) except
____.
a. Buy the foreign currency with long-dated forward contracts.
b. Use currency swaps to acquire financial liabilities in the foreign currency.
c. Use a rolling hedge to repeatedly sell the foreign currency.
d. More than one of the above
e. None of the above
23. An importer’s financial market hedging alternatives include each of a) through d) except
____.
a. Buy the foreign currency with long-dated forward contracts.
b. Invest in long-dated foreign bonds.


c. Use currency swaps to acquire financial assets in the foreign currency.
d. Use a rolling hedge to repeatedly sell the foreign currency.
e. none of the above

24. Managers should assess the performance of financial market hedges of operating exposures
by ____.
a. assessing the interaction of operating performance with exchange rate changes
b. varying pro forma operating performance within reasonable limits
c. varying the exchange rate and assessing the resulting competitive position of the firm
d. more than one of the above
e. none of the above
25. Operational hedges can create value by ____.
a. reducing agency costs.
b. reducing expected taxes
c. reducing costs of financial distress
d. more than one of the above
e. none of the above
26. The main advantage of a financial market hedge of operating exposure to currency risk is
that ____.
a. financial market hedges can completely cancel operating exposures to currency risk
b. financial market transactions are zero-NPV transactions
c. the costs of buying or selling financial instruments are low compared to the costs of
investing or disinvesting in real assets
d. the uncertain cash flows of operating exposures to currency risk are exactly offset by the
uncertain outcomes of a financial market hedge
e. none of the above
27. Dimensions of diversification that can reduce variability in the multinational corporation’s
operating cash flows include ____.
a. currency and geographic diversification
b. currency and product market diversification
c. geographic and product market diversification
d. currency and virtual diversification
e. none of the above

28. Multinational corporations have an advantage over domestic firms in their ____.
a. market selection and promotion strategies
b. plant location decisions
c. product sourcing decisions
d. more than one of the above
e. none of the above


29. A Dutch exporter with dollar revenues and euro expenses has a foothold in the U.S. market.
The company’s competitors are domestic U.S. firms that have revenues and expenses
denominated in dollars. Sensible pricing strategies that the Dutch exporter can pursue in
response to an appreciation of the dollar include which of a) through c)?
a. Maintain the current euro price for their goods, try to sell the same quantity in the U.S.
market, and capture a bigger contribution margin per unit.
b. Maintain the current dollar price for their goods and try to increase profits by increasing
sales volume at the current contribution margin.
c. Follow the lead of the price leader in the U.S. market.
d. more than one of the above
e. none of the above

30. The percent of the variation in asset value that is explained by variation in a currency value
is called the ____.
a. beta
b. price elasticity of demand
c r-square
d. slope coefficient
e. none of the above
CH 12
Multiple Choice
1.

Translation accounting methods include each of a) through d) except the ____ method.
a. current/noncurrent
b. temporal
c. monetary/nonmonetary
d. current rate
e. all of the above are translation accounting methods

2.

The temporal method of FAS #8 identifies each of a) through c) except ____.
a. assets and liabilities are translated at historical exchange rates
b. depreciation and cost of goods sold are translated at historical exchange rates
c. income statement items are translated at an average exchange rate over the period
d. all of the above are elements of FAS #8
e. none of the above are elements of FAS #8

3.

Net exposed assets equal ____.
a. assets less liabilities
b. exposed assets less exposed liabilities
c. shareholders’ equity
d. more than one of the above
e. none of the above


4.

FAS #52 specifies each of the following rules except ____.
a. all assets and liabilities (including common equity) are translated at the current
exchange rate
b. dividends paid are translated at the current exchange rate
c. income statement items are translated at an exchange rate (or an exchange rate average)
from the reporting period
d. all of the above are elements of FAS #52
e. none of the above are elements of FAS #52

5.

To maximize shareholder wealth, managers should only hedge translation exposure if it ____.
a. affects the total risk of the firm
b. involves accounting profits
c. involves cash flows
d. is convenient
e. none of the above

6.

FAS #8 assumes that the value of the firm’s real assets are ____ to currency risk. FAS #52
assumes that the value of the firm’s real assets are ____ to currency risk.
a. fully exposed...partially exposed
b. fully exposed...unexposed
c. partially exposed...fully exposed
d. partially exposed...unexposed
e. unexposed...fully exposed

7.

Accountants and financial managers prefer FAS #52 to FAS #8 because FAS #52 ____.
a. allows balance sheet gains or losses to be isolated from reported income
b. correctly values current assets and liabilities
c. values real assets at historical rates that more reliably reflect asset value
d. more than one of the above
e. none of the above

8.

The relation of stock returns to earnings surprises around the time of corporate earnings
announcements is measured with ____.
a. a beta coefficient
b. an earnings response coefficient
c. the price elasticity of demand
d. the sensitivity of share price to exchange rates
e. none of the above

9.

Information-based reasons for hedging translation exposure include each of the following
except ____.


a.
b.
c.
d.
e.

The quality of accounting information can be improved.
Meeting profit forecasts retains management’s credibility in the marketplace
Information costs can be reduced in a perfect market.
Credit ratings are tied to accounting performance rather than cash flow.
Loan covenants are tied to accounting income.

10. In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging
Activities” requires each of a) through d) except ____.
a. Derivatives are assets and liabilities that should be reported in financial statements.
b. Market value is the most relevant measure of value.
c. Only assets and liabilities should be reported as such. Income and expenses should be
reported on the income statement.
d. Hedge transactions should be fully capitalized on the balance sheet.
e. FAS #133 requires all of the above
11. In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging
Activities” values financial derivatives at ____.
a. book value
b. historical cost
c. historical exchange rates
d. market
e. none of the above
12. Which of the following is a reasonable guideline for currency risk management.
a. All noncash currency risk exposures should be hedged with currency derivatives.
b. Do not hedge unless the purpose is to reduce translation exposure to currency risk.
c. Treasury should hold the managers of individual operating units responsible for the
consequences of unexpected changes in currency values.
d. Treasury should quote market prices for currency hedges to the individual units.
e. None of the above

13. Adverse selection costs arise from ____.
a. differential taxes
b. information asymmetries
c. large bid-ask spreads
d. the perfect market assumptions
e. none of the above
14. Bodnar, Hayt, and Marston’s “1998 Wharton Survey of Financial Risk Management by U.S.
Non-Financial Firms” in Financial Management found that financial officers’ biggest
concern regarding derivatives was ____.
a. accounting treatment


b.
c.
d.
e.

credit risk
reaction by analysts or investors
SEC disclosure requirements
secondary market liquidity

15. According to studies cited in the text, increased disclosure about financial price risks and
risk management activities results in each of the following except ____.
a. higher trading volumes
b. increased risks of litigation over accounting disclosure practices
c. increased share price sensitivity to underlying financial prices
d. lower trading volume sensitivity to changes in underlying financial prices
e. lower bid-ask spreads
CH 13
Multiple Choice
1.
a.
b.
c.
d.
e.

2.

According to the text, sources of country risk include ____.
expropriation risk and default risk
expropriation risk and other political risks
financial risk and socioeconomic risk
political risk and financial risk
political risk and socioeconomic risk

Political risks arise because of ____.

a.
b.
c.
d.

investment agreements between MNCs and host governments
the methods used to identify particular political risks
unexpected events in a country’s financial, economic, or business life
unexpected changes in the political environment within a host country or in the
relationship of a host country to another country
e. none of the above
3.
a.
b.
c.
d.
e.

Country risk can affect the value of a multinational corporation through ____.
changes in future cash flows
changes in investors’ required return on investment
changes in managers’ actions
more than one of the above
none of the above


4.
a.
b.
c.
d.
e.
5.
a.
b.
c.
d.
e.

6.

produce country risk ratings that are positively correlated with each other
produce country risk ratings that are negatively correlated with each other
produce country risk ratings that are uncorrelated with each other
seldom provide assessments of micro risks
use Morgan Stanley Dean Witter’s rating system to produce their ratings
Examples of macro country risks include each of the following except ____.
unexpected changes in a host country’s tax rates
unexpected changes in a host country’s fiscal policies
unexpected changes in a host country’s monetary policies
unexpected changes in a host country’s bankruptcy or ownership laws
unexpected changes in a host country’s regulations on the use of migrant workers

Political risk includes each of the following except ____.
a. expropriation
b. potential loss of intellectual property rights
c. protectionism
d. risks arising from dealing with an unfamiliar culture
e. the risk of disruptions in operations

7.
a.
b.
c.
d.
e.

8.
a.
b.
c.
d.
e.

9.

Companies that rate country risk ____.

Political risk is greatest ____.
in monarchies
in democracies
as a result of armed conflict
when there is a marginal (or fractional) change in government
when an incumbent political party imposes its agenda on foreign-based MNCs

Blocked funds are a drain on project value when ____.
a project suffers early losses
they are blocked in the host economy
they are generated by real assets
they cannot be immediately repatriated to the parent corporation
they cannot earn their required return in the host country

Intellectual property rights include each of the following except ____.
a. copyrights
b. monopoly access to a market
c. patents
d. proprietary technologies
e. secret formulas


10. Macroeconomic factors that affect country risk assessments include each of the following
except ____.
a. currency risk
b. expropriation
c. inflation
d. interest rate risk
11. Qualitative factors that affect country risk assessments include each of the following except
____.
a. cancellations of contracts by a host government
b. currency risk
c. loan defaults or restructurings
d. losses from exchange controls
e. payment delays

12. The text describes each of the following strategies for managing country risk except ____.
a. disclose material risks in the firm’s financial statements
b. negotiate the environment with the host country.
c. obtain political risk insurance.
d. plan for disaster recovery.
e. structure operations to minimize the MNC’s risk exposure and maximize return.

13. Insurable political risks possess each of a) through d) except ____.
a. A large number of individuals or businesses are exposed to the risk.
b. The expected loss over the life of the contract is estimable.
c. The loss is identifiable in time, place, cause, and amount.
d. The loss is outside the influence of the insured.
e. Insurable political risks possess more than one of the above.
14. Political risk insurance can be obtained on which of a) through c)?
a. currency incontrovertibility
b. expropriation
c. repatriation restrictions
d. more than one of the above
e. none of the above
15. Much of the 1990’s growth in political risk insurance was due to ____.
a. increasing political uncertainty in developed countries
b. increasing political uncertainty in developing countries
c. the collapse of the Iron Curtain
d. the withdrawal of private insurers from the market
e. the growth in project finance


16. Ways to limit the MNC’s exposure to country risk include which of a) through d)?
a. enlist local partners
b. limit dependence on a single partner
c. limit the scope of the technology transfer
d. use more stringent investment criteria
e. more than one of the above

17. A ____ can be obtained on processes, products, machines, and new chemical compounds.
a. copyright
b. patent
c. trademark
d. trade secret
e. none of the above

18. A ____ prohibits the unauthorized reproduction of creative works including books, magazines,
drawings, paintings, musical compositions, and sound and video recordings.
a. copyright
b. patent
c. trademark
d. trade secret
e. none of the above
19. A ____ is a distinctive name, word, symbol, or device used to distinguish a company’s goods
or services from those of its competitors.
a. copyright
b. patent
c. trademark
d. trade secret
e. none of the above

20. A ____ is a proprietary idea, process, formula, technique, or device that a company uses to its
competitive advantage.
a. copyright
b. patent
c. trademark
d. trade secret
e. none of the above
CH 14
Multiple Choice


1.

Expected future cash flows are estimated by ____ only incremental cash flows and ____ all
opportunity costs.
a. including; including
b. including; excluding
c. excluding; including
d. excluding; excluding
e. none of the above

2.

Nominal cash flows in a foreign currency should be discounted ____.
a. at a nominal discount rate in the foreign currency
b. at a rate reflecting the parent’s opportunity cost of capital in the domestic currency
c. at a weighted average cost of capital
d. at the cost of debt
e. at the cost of equity

3.

Which of the following is false?
a. Cash flows in a particular currency should be discounted in that currency.
b. Cash flows should be discounted at the opportunity cost of capital.
c. Cash flows to equity should be discounted at the weighted average cost of capital.
d. Nominal cash flows should be discounted at nominal discount rates.
e. Real cash flows should be discounted at real discount rates.

4.

Which of steps a) through d) is inappropriate when discounting foreign currency cash flows
using the parent’s perspective?
a. Estimate expected future cash flows from the project in the foreign currency and put
them on a time line.
b. Convert expected future cash flows into the domestic currency at the current spot
exchange rate.
c. Identify the appropriate risk-adjusted discount rate in the domestic currency for the
project.
d. Calculate the NPV in the domestic currency.
e. Each of the above is appropriate.

5.

If a project has a positive NPV from both the parent’s and the project’s perspective, then the
parent firm should ____.
a. accept the project
b. reject the project
c. accept the project and try to capture the value in the foreign currency today
d. reject the project and continue to look for positive-NPV projects in the foreign currency
e. none of the above


6.

If a project has a positive NPV from the parent’s perspective but a negative NPV from the
project’s perspective, then the parent firm should ____.
a. accept the project
b. reject the project
c. accept the project and try to capture the value in the foreign currency today
d. reject the project and continue to look for positive-NPV projects in the foreign
currency
e. none of the above

7.

If a project has a negative NPV from the parent’s perspective but a positive NPV from the
project’s perspective, then the parent firm should ____.
a. accept the project
b. reject the project
c. accept the project and try to capture the value in the foreign currency today
d. reject the project and continue to look for positive-NPV projects in the foreign country
e. none of the above

8.

If a project has a positive NPV but the NPV is greater from the project’s than from the parent’s
perspective, then the parent firm should ____.
a. accept the project
b. reject the project
c. accept the project and hedge the foreign currency cash flows
d. reject the project and continue to look for positive-NPV projects in the foreign country
e. none of the above

9.

A project has a net present value of NPV€ = €10,000. In order to invest in the project, the
German government requires that you undertake another project with the following cash
flow stream: CF0€ = -€5000, E[CF1€] = €1000, E[CF2€] = €1000, and E[CF3€] = €1000. The
appropriate discount rate for this project is i€ = 10%. What affect does this tie-in project
have on your original NPV€ estimate?
a. It increases NPV€ from €10,000 to €12,513.15.
b. It increases NPV€ from €10,000 to €17,486.85.
c. It decreases NPV€ from €10,000 to €7,486.85.
d. It increases NPV€ from €10,000 to €2,513.15.
e. It is a separate project and has no effect on NPV.

10. Suppose the government of Germany offers you a 3-year, non-amortizing €50,000 loan to
entice you to undertake a particular project within its borders. In addition, the government
offers you an attractive rate of i€ = 10% when loans of similar risk yield a return of i€ =
15%. The German tax rate is 50%. What is the present value of the interest subsidy on this
loan?


a. €2854.03
b. €3108.56
c. €3250.66
d. €4895.60
e. €5708.06
ANS: C

Exhibit T15.1
+€10,000
-€1,000

t=1

+€10,000

+€10,000

t=2

t=3

10. Refer to Exhibit T15.1. Assume that the appropriate discount rate for the cash flows in
Exhibit T15.1 is i€ = 5%. What is the NPV€ in euros?
a. €25,598.43
b. €26,232.48
c. €27,232.48
d. €29,000.00
e. €29,432.52
11. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot
rate is S0£/€ = £2/€. If i£ = 7% and i€ = 5%, what is the expected future spot rate [E(S3£/€ )] at
time t = 3?
a. £1.890/€
b. £1.963/€
c. £2.020/€
d. £2.116/€
e. £2.250/€
12. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot
rate is S0£/€ = £2/€. If i£ = 7% and i€ = 5%, what is NPV£?
a. £48,591.54
b. £50,786.92
c. £52,464.96
d. £54,527.33
e. £55,328.10
13. Refer to Exhibit T15.1. Assume the international parity conditions do not hold . Expected
future spot rates are: E(S1£/€) = £2.060/€, E(S2£/€) = £2.100/€, and E(S3£/€) =£2.220/€.
Calculate NPV£ by converting euros to pounds at the expected future spot rates and
discounting in pounds. Assume S0£/€ = £2/€ and i£ = 7%.
a. NPV£ = £52,464.96
b. NPV£ = £52,978.31
c. NPV£ = £53,015.25


d. NPV£ = £53,716.36
e. NPV£ = £54,142.84

14. Refer to Exhibit T15.1. Suppose there is a 10% chance that the host government will seize
the assets of the project in year 3. If the assets are not seized, you expect to receive the cash
flows as shown. If the assets are seized, you expect to receive repatriated funds in year 1 and
year 2 only. Assuming international parity conditions hold, S0£/€ = £2/€, i€ = 5%, and i£ =
7%, what is the NPV in pounds?
a. £42,431.49
b. £47,018.46
c. £47,368.32
d. £49.652.21
e. £50,737.29
15. Refer to Exhibit T15.1. Suppose that beginning in year 1, there is a 10% chance each year
the host government will seize the project’s assets. If the assets are not seized, you expect to
receive the cash flows as stated above. If the assets are seized in a particular year, you
expect to receive no repatriated funds thereafter. Assuming international parity conditions
hold, S0£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?
a. £42,431.49
b. £47,018.46
c. £47,368.32
d. £49.652.21
e. £50,737.29
16. Refer to Exhibit T15.1. Assume that 50% of the project’s expected cash flows are retained
in host country until the project is 3 years old. The opportunity cost of these funds is i€ =
5%, but blocked funds earn no interest. What is the net present value of the opportunity cost
from these blocked funds?
a. €569.16
b. €598.24
c. €625.80
d. €658.68
e. €683.22

CH 15
Multiple Choice
1.

In their famous articles on the cost of capital, corporation finance and the theory of
investment, Modigliani and Miller made each of the following assumptions except ____.
a. equal access to bid and ask prices
b. homogeneous investor expectations
c. homogeneous business risk classes


d. perpetual cash flows
e. rational investors

2.

Factors contributing to financial market segmentation include each of the following except
____.
a. different investor expectations
b. different legal, political, or tax systems
c. informational barriers
d. rational investors
e. transactions costs

3.

Foreign political risk includes each of the following except ____.
a. unexpected changes in expropriation risk
b. unexpected changes in foreign exchange rates
c. unexpected changes in local ownership limitations
d. unexpected changes in repatriation restrictions
e. unexpected changes in taxes

4.

Which of a) through d) is true?
a. A particular political risk is more likely to be diversifiable by local investors than by
international investors.
b. A political risk such as an election imposes higher costs of capital on MNCs held by
globally diversified investors.
c. From the perspective of managers in the multinational corporation, political
risk is not diversifiable.
d. Global investors are exposed to a multinational corporation’s total risk, measured by
standard deviation of return in the investors’ functional currencies.
e. None of the above

5.

A firm’s debt sells for £10 million and equity for £30 million. The firm’s before-tax cost
of debt is 9%. Its cost of equity is 18%. The corporate tax rate is 33%. The firm’s
weighted average cost of capital is closest to which of the following?
a. 6%
b. 9%
c. 12%
d. 15%
e. 18%

6.

The cost of capital for a project in Spain should ____.
a. be a function of the riskiness of the project
b. equal the minimum rate of return necessary to induce investors to buy or hold the
firm’s stock
c. equal the nominal required return for a similar U.S. investment


d. equal the parent’s weighted average cost of capital
e. equal the rate used by Spanish investors to capitalize corporate cash flows
7.

Which of the following does not fit in a list of potential sources of capital for foreign direct
investment?
a. funds generated internally by the foreign affiliate
b. funds from elsewhere within the corporation
c. funds from sources external to the corporation but within the parent country
d. funds from sources external to the corporation but within the host country
e. each of the above can be a source of funds

8.

The firm’s existing WACC is appropriate as a discount rate on a proposed investment when
____.
A. the project is financed with debt from the host country
B. the project has the same systematic business risk as the rest of the firm
C. the project is not exposed to foreign political risk
D. the optimal financial structure of the project is identical to that of the firm
Select one of the following:
a. A and B
b. A and C
c. B and C
d. B and D
e. C and D

9.

The corporate cost of debt can be approximated by ____.
a. regressing stock returns on market returns
b. the average historical rate of 8.2 percent on corporate debt
c. the coupon rate on existing corporate debt
d. the riskfree rate of interest on government bonds
e. the yield to maturity on existing corporate debt

10. The yield to maturity on a junk bond ____ investors’ required return.
a. equals
b. overstates
c. preempts
d. understates
e. none of the above
11. Erb, Harvey, and Viskanta [“Political Risk, Financial Risk and Economic Risk,” Financial
Analysts Journal, Nov./Dec. 1996] found which of a) through c)?
a. An increase in country risk tends to be followed by a rise in equity returns.
b. Emerging markets with high country risk tend to have less volatile returns than
markets with low country risk.


c. Emerging markets with high country risk tend to have lower betas than
markets with low country risk.
d. More than one of the above.
e. None of the above.
12. International sources of funding for foreign investment projects include each of a) through
d) except ____.
a. cash flow from other international divisions
b. interest rate and currency swaps
c. international debt and equity
d. project finance
e. all of the above are sources of funding for international investment projects

13. A targeted registered offering must satisfy which of requirements a) through d)?
a. Interest or dividends must be paid directly to individuals in foreign countries.
b. The issuer must certify that it has no knowledge that a U.S. taxpayer is the
owner of the security.
c. The registered owner must be a U.S. financial institution.
d. The securities must be issued in registered form.
e. More than one of the above
14. Each of a) through d) can be valued as a separate side effect except ____.
a. blocked funds
b. expropriation risk
c. negative-NPV tie-in projects
d. subsidized financing
e. each of the above can be valued as a side effect

15. Vehicles for repatriating funds from a foreign affiliate to the parent include each of the
following except ____.
a. Dividend payments on equity
b. Higher prices on sales to key suppliers
c. Interest payments on debt
d. Lease payments on operating and financial lease agreements
e. Royalties and management fees
16. Stakeholders prefer internally generated funds to external funds because ____.
a. internal funds avoid the discipline of the financial markets
b. internal funds avoid the transactions costs of external issues
c. they indicate the corporation has free cash flow
d. more than one of the above
e. none of the above
17. Most countries specify that transfer prices be set at ____.


a.
b.
c.
d.
e.

an arm’s length or market price
cost
cost plus a profit margin
the maximum price that the market will bear
none of the above

18. Which of statements a) through d) concerning project finance is false?
a. Debt in a project finance arrangement is contractually linked to the cash flow
generated by the project.
b. Governments participate in project finance in the form of infrastructure support,
guarantees, and assurances against political risk.
c. In project finance, claims are contractually tied to the cash flows of the project.
d. The cash flows of a project are commingled with other corporate cash flows.
e. The project is a separate legal entity and relies heavily on debt financing.

19. Which of a) through d) would not be a good candidate for project finance?
a. natural resource developments
b. power generation projects
c. telecommunication
d. toll roads and bridges
e. All of the above are good candidates for project finance
20. Empirical studies of the capital structure of corporations in the United States have generally
agreed that leverage increases with each of the following except ____.
a. fixed assets
b. advertising and research/development expenditures
c. nondebt tax shields
d. growth opportunities
e. firm size
21. Rajan and Zingales [ “What Do We Know about Capital Structure? Some Evidence from
International Data,” 1995] found that leverage increases with ____.
a. the tangibility of the firm’s assets
b. the presence of growth options
c. the level of profitability
d. all of the above are associated with higher leverage
e. none of the above are associated with higher leverage
22. Rajan and Zingales [ “What Do We Know about Capital Structure? Some Evidence from
International Data,” 1995] found that leverage decreases with ____.
a. the tangibility of the firm’s assets
b. profitability
c. firm size
d. all of the above are associated with higher leverage


e. none of the above are associated with higher leverage
23. Empirical studies find that emerging market returns tend to have ____
a. lower volatilities than developed market returns
b. lower correlations with the world market portfolio than developed market
returns
c. less political risk than developed market returns
d. more than one of the above
e. none of the above

24. Empirical studies find that financial market liberalizations tend to ____
a. increase local firms’ cost of capital
b. increase the correlation of emerging market returns with world market returns
c. increase the volatility of emerging market returns
d. more than one of the above
e. none of the above
25. The ____ method is the most popular approach to project valuation.
a. adjusted present value
b. Goldman Sachs
c. opportunity cost method
d. price elasticity of demand
e. weighted average cost of capital
CH 16
Multiple Choice
1.

____ tax neutrality ensures that incomes arising from foreign and from domestic operations are
taxed similarly by the domestic government.
a. Domestic
b. Foreign
c. Global
d. two or more of the above
e. none of the above

2.

____ tax neutrality ensures that taxes imposed on the foreign operations of domestic companies
are similar to those facing local competitors in the host countries.
a. Domestic
b. Foreign
c. Global
d. two or more of the above
e. none of the above


3.

National tax policies influence each of the following characteristics (a through c) of the
multinational corporation except ____.
a. the organizational forms in which multinational corporations choose to operate
b. the types and locations of assets held
c. the way in which the multinational corporation finances its operations
d. Each of the above is are influenced by national tax policies
e. National tax policy has little effect on any of the above

4.

In a(n) ____ tax system, the multinational’s worldwide income is taxed by the home country as
this income is repatriated to the parent company.
a. explicit
b. implicit
c. global
d. territorial
e. worldwide

5.

In a(n) ____ tax system, only domestic income is taxed by the domestic government. Foreignsource income is not taxed as long as it is earned in an active business.
a. explicit
b. implicit
c. global
d. territorial
e. worldwide

6.

Implicit taxes include which of the following?
a. asset taxes
b. higher pre-tax required returns in countries with high tax rates
c. income taxes
d. value-added taxes
e. none of the above

7.

Which of a) through d) is not a form of explicit tax?
a. asset taxes
b. tariffs on cross-border trade
c. value-added taxes
d. withholding taxes
e. all of the above are explicit taxes

8.

Withholding taxes are most frequently found on which income category?
a. assets
b. capital gains
c. dividends


d. royalties
e. value-added

9.

Value-added taxes are a form of ____.
a. capital gains tax
b. implicit tax
c. income tax
d. sales tax
e. tariff on cross-border trade

10. Implicit taxes arise from ____.
a. a failure to hide income from the taxing authorities
b. a nation’s labor laws
c. the law of one price
d. value additivity
e. none of the above

11. Tax rates in countries B and S are tB = 40% and tS = 25%, respectively. Pre-tax required returns
in B are iB = 25%. What should be the pre-tax required return in S?
a. 5%
b. 10%
c. 15%
d. 20%
e. none of the above

12. Active income earned from a foreign branch is taxed by the U.S. government ____.
a. after pooling this income with all other income sources
b. as funds are repatriated to the U.S. parent corporation
c. as it is earned in the foreign country
d. at the foreign tax rate
e. none of the above

13. Foreign branches of a U.S. corporation are treated as ____.
a. a domestic corporation
b. a controlled foreign corporation
c. a part of the parent rather than as a separate legal entity
d. slaves to the master corporation
e. none of the above

14. The United States allows a foreign tax credit against U.S. income taxes up to ____.


a.
b.
c.
d.
e.

£200,000
£1,000,000
the amount of consolidated foreign-source income
the amount of foreign taxes paid
the amount of taxes paid globally

Exhibit T17.1

a Dividend payout ratio
b Foreign dividend withholding tax rate
c Foreign corporate income tax rate

Switzerland
100%
5%
10%

India
100%
20%
65%

15. Consider Exhibit T17.1. A U.S.-based firm has £10,000 in foreign-source income from
Switzerland. What is the dividend paid to the U.S. parent?
a. £8,500
b. £8,550
c. £9,000
d. £9,500
e. £10,000

16. Consider Exhibit T17.1. A U.S.-based firm has a single foreign subsidiary in Switzerland with
£10,000 in foreign-source income. What foreign tax credit is generated by the subsidiary?
a. £0
b. £500
c. £1,000
d. £1,450
e. £1,500

17. Consider Exhibit T17.1. A U.S.-based firm earns £10,000 from Switzerland and £10,000 from
India. The firm has no other foreign operations. What are total foreign tax credits on a
consolidated basis?
a. £1,150
b. £7,200
c. £7,500
d. £8,650
e. £10,000


18. A U.S.-based corporation has £8,000 in total foreign tax credits (FTC) on a consolidated basis.
The firm’s overall FTC limitation is £5,000. What is the firm’s U.S. tax liability or excess
FTC?
a. £0
b. £3,000
c. £5,000
d. £8,000
e. the firm has £3,000 in excess FTCs that can be carried back or forward

19. If a U.S. parent corporation owns more than 50% of a foreign corporation either in terms of
market value or voting power, the foreign subsidiary is called a ____.
a. controlled foreign corporation
b. foreign affiliate
c. foreign sales branch
d. wholly-owned subsidiary
e. none of the above

20. The intent of the foreign tax credit is to ____.
a. avoid double taxation of foreign-source income
b. ensure national sovereignty
c. ensure that foreign multinationals pay their fair share of the tax burden
d. pay for social programs
e. none of the above

21. The overall FTC limitation applies to ____.
a. consolidated foreign-source income
b. consolidated global income
c. domestic as well as foreign corporations
d. passive investment income
e. none of the above

22. The usefulness of U.S. foreign tax credits (FTCs) is limited by each of a) through d) except
____.
a. the allocation of income rules
b. income baskets
c. the overall FTC limitation
d. Subpart F income
e. all of the above limit the usefulness of foreign tax credits
23. Active income includes each of the following except ____.
a. dividends received from active subsidiaries
b. dividends received from less-than-10% owned companies


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