Question 1

A decentralized management style results in relatively high agency costs for an MNC.

Accepted Answer

A decentralized management style delegates decision-making authority to lower-level managers, which can result in a lack of centralized control and increased agency costs (the costs associated with monitoring and controlling managers to ensure they act in the best interest of the firm). Therefore, a decentralized management style will likely result in relatively high agency costs for an MNC.

Question 2

International trade:​
A)is a relatively conservative approach to foreign market penetration.
B)entails minimal risk.
C)does not require a large amount of investment.
D)all of the above.

Accepted Answer

International trade involves the exchange of goods and services between countries. This approach is relatively conservative as it does not necessitate a large investment, and it entails minimal risk. Therefore, choice D is the correct answer.

Question 3

A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC.

Accepted Answer

A macroeconomic perspective focuses on the economy-wide phenomena, such as inflation, growth, and unemployment, rather than on the specific financial management decisions of multinational corporations (MNCs).

Question 4

Compared to other methods of international business, international trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions.
A)higher; lower
B)higher; higher
C)lower; higher
D)lower; lower

Accepted Answer

The answer of Compared to other methods of international business,...

Question 5

Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?​
A)joint venture
B)licensing
C)partial acquisition of an existing Japanese firm
D)establishment of a Japanese subsidiary

Accepted Answer

The answer of Assume that Boca Co. wants to expand...

Question 6

A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.

Accepted Answer

A weakening euro means that when the earnings of the subsidiaries are converted back to dollars, they will be worth less, potentially decreasing the value of the MNC.

Question 7

Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.

Accepted Answer

Even though the subsidiary exports to countries using the same currency (euro), the MNC can still face exchange rate risk due to potential fluctuations between the euro and the parent company's home currency.

Question 8

Which of the following is not an example of political risk?​
A)Government may impose taxes on a subsidiary.
B)Government may impose barriers on a subsidiary.
C)Consumers may boycott the MNC.
D)Consumers' income levels may decrease, thus decreasing consumption.

Accepted Answer

Consumer income levels decreasing and subsequently reducing consumption is an example of economic risk, not political risk. Political risk specifically pertains to actions taken by governments that negatively impact an MNC's operations.

Question 9

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

Accepted Answer

Establishing a new foreign subsidiary actually increases exchange rate risk as the subsidiary's operations and profits will be denominated in the foreign currency. However, it can provide other benefits such as local market knowledge and access, reduced transportation and tariff costs, and potential tax advantages.

Question 10

Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are the expected dollar cash flows of Livingston Co.?​
A)$100,000
B)$200,000
C)$160,000
D)$60,000

Accepted Answer

First, we need to convert the expected cash flow from the Korean subsidiary into dollars. 
100 million Korean won * $.0012/won = $120,000 
However, we know that the subsidiary only remits half of its net cash flows to the parent, so Livingston Co. will only receive $60,000 from the Korean subsidiary. 
Therefore, the total expected cash flows for Livingston Co. is: 
$100,000 (from domestic business) + $60,000 (from Korean subsidiary) = $160,000 
So, the correct answer is (C).

Question 11

If markets were perfect, then labor and other costs of production would be easily transferable.

Accepted Answer

In a perfect market, factors of production including labor and other costs can move easily without obstruction, resulting in more efficient allocation of resources.

Question 12

In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects.

Accepted Answer

An MNC may use a different required rate of return for foreign projects due to factors such as exchange rate risk, country risk, and differences in market conditions.

Question 13

An MNC's value depends on all of the following, except:​
A)the MNC's required rate of return.
B)the amount of the MNC's cash flows in a particular currency.
C)the exchange rate at which cash flows are converted to dollars.
D)all of the above factors

Accepted Answer

All of the factors mentioned - the MNC's required rate of return, the amount of cash flows in a particular currency, and the exchange rate at which cash flows are converted to dollars - are important determinants of an MNC's value. Therefore, the correct answer is D, none of the factors can be excluded from consideration.

Question 14

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?​
A)international trade
B)licensing
C)franchising
D)direct foreign investment

Accepted Answer

Direct foreign investment involves a major investment in a foreign country, which is not appropriate if the firm wants to engage in international business without making a major investment. International trade, licensing, and franchising are all methods that involve lower levels of investment or risk.

Question 15

Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while Jensen establishes the new subsidiary and ____ when the subsidiary starts operations.
A)depreciates; appreciates
B)appreciates; appreciates
C)appreciates; depreciates
D)depreciates; depreciates

Accepted Answer

If the peso depreciates while Jensen establishes the new subsidiary, it will allow them to acquire assets and hire workers at a lower cost. On the other hand, if the peso appreciates when the subsidiary starts operations, the profits earned in pesos will convert to more dollars for remittance to the U.S. parent.

Question 16

Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and the euro's value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of Live Co?​
A)$200,000
B)$559,500
C)$582,500
D)$393,500

Accepted Answer

The expected dollar cash flows from each operation are calculated as follows: Domestic operations: $200,000 (already in dollars) Swiss operations: 200,000 Swiss francs * $0.83 = $166,000 Italian operations: 150,000 euros * $1.29 = $193,500 Total expected dollar cash flows = $200,000 + $166,000 + $193,500 = $559,500.

Question 17

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?​
A)a weaker Mexican economy
B)lower Mexican interest rates
C)depreciation of the Mexican peso
D)appreciation of the Mexican peso.

Accepted Answer

The decline in valuation could be due to the depreciation of the Mexican peso, which would make the expected cash flows from the subsidiary in pesos worth less in terms of U.S. dollars. A weaker Mexican economy or lower Mexican interest rates could also potentially affect the value of the subsidiary, but without further information, it is unclear how relevant these factors are to the decline in valuation. Appreciation of the Mexican peso would increase the value of the subsidiary in U.S. dollars, so it is not a likely explanation for the decline in valuation.

Question 18

The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.

Accepted Answer

The valuation of an MNC accounts for all the cash flows generated from the foreign subsidiaries but only considers the cash flows remitted by the subsidiaries that are available for use by the parent company after taxes and other expenses are considered.

Question 19

A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC​

Accepted Answer

A microeconomic perspective focuses on internal forces such as pricing strategies, production efficiency, and resource allocation within the MNC, whereas external forces such as economic conditions are part of the macroeconomic perspective.

Question 20

If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

Accepted Answer

If most currencies are expected to appreciate against the dollar, a U.S.-based MNC focused on exporting would likely benefit because its products would become cheaper in foreign markets, potentially increasing sales and profits when converted back to dollars.

Quiz 1: Multinational Financial Management: An Overview

A decentralized management style results in relatively high agency costs for an MNC.

International trade:

A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC.

Compared to other methods of international business, international trade generally results in exposure to international political risk and exposure to international economic conditions.

Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?

A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.

Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.

Which of the following is not an example of political risk?

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

If markets were perfect, then labor and other costs of production would be easily transferable.

In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects.

An MNC's value depends on all of the following, except:

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?

The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.

A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC

If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

Quiz 1: Multinational Financial Management: An Overview

A decentralized management style results in relatively high agency costs for an MNC.

International trade:​

A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC.

Compared to other methods of international business, international trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions.

Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?​

A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.

Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.

Which of the following is not an example of political risk?​

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.

If markets were perfect, then labor and other costs of production would be easily transferable.

In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects.

An MNC's value depends on all of the following, except:​

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?​

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?​

The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.

A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC​

If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

International trade:

Compared to other methods of international business, international trade generally results in exposure to international political risk and exposure to international economic conditions.

Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?

Which of the following is not an example of political risk?

An MNC's value depends on all of the following, except:

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?

A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC