Question 1

Assume that an American firm wants to engage in international business without 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 major investment in a foreign country, which is not appropriate for a business that wants to engage in international business without major investment. The other options, international trade, licensing, and franchising, are all appropriate methods for such a business. International trade allows the firm to engage in importing and exporting without investing in a foreign country, licensing involves granting permission to another company to use the firm's intellectual property or technology, and franchising involves giving another party the right to use the firm's business model and brand in exchange for fees and royalties.

Question 2

The valuation of 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 should account for all cash flows received by the parent company, including those retained by foreign subsidiaries, not just those remitted.

Question 3

Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end 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 of Live Co. are $559,500. This is calculated by multiplying the expected cash flows from each operation by the expected exchange rate at the end of the year.$200,000 x 1 = $200,000SF200,000 x 0.83 = $166,000150,000 euros x 1.29 = $193,500$200,000 + $166,000 + $193,500 = $559,500

Question 4

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 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

To calculate the expected dollar cash flows of Livingston Co., we need to convert the Korean subsidiary's cash flows into dollars.

The subsidiary generates 100 million Korean won, which is equivalent to 100,000,000 * 0.0012 = $120,000 in dollars.

The subsidiary reinvests half of its net cash flows into operations, which means it retains $60,000 (half of $120,000) and remits $60,000 to the parent.

Therefore, Livingston Co.'s expected cash flows from the Korean subsidiary are $60,000.

Adding this to the expected domestic cash flows of $100,000, we get $160,000 as the expected dollar cash flows of Livingston Co.

Hence, the best choice is C.

Question 5

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

Accepted Answer

Political risk involves risks associated with government actions, host country environment, and potential changes in regulations. Consumer behavior and changes in their income levels are not directly related to political risk, and hence, option D is not an example of political risk.

Question 6

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

Accepted Answer

Decentralized management style in MNCs involves delegating decision-making powers to local managers in different regions. This increases the potential for agency conflicts as the interests of local managers may not align with the overall objectives of the MNC. As a result, monitoring and controlling these managers can lead to higher agency costs.

Question 7

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

Accepted Answer

The value of an MNC depends on all the factors mentioned in options A, B, and C. The required rate of return influences the valuation of the MNC's cash flows, the cash flows in a particular currency affect the MNC's value, as do the exchange rates used to convert them to dollars. Therefore, all of the given factors are essential in determining the MNC's value.

Question 8

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

Accepted Answer

International trade involves exporting and importing goods and services between countries, which requires investment, carries risk, and is not a conservative approach to foreign market penetration.

Question 9

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

Accepted Answer

In a perfectly competitive market, factors of production such as labor and capital are easily transferable between firms because there are no barriers to entry or exit. This means that if a worker or firm can produce a good or service at a lower cost than their competitors, they will be able to enter the market and gain market share, leading to lower prices for consumers.

Question 10

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

Accepted Answer

An MNC may use a different required rate of return in the valuation of foreign projects, as it may face additional risks such as political risks, currency exchange risks, and legal risks in foreign countries that may not exist in its domestic market. The MNC may need to adjust its required rate of return to account for these additional risks.

Question 11

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 Euro as their currency, this MNC is not subject to the exchange rate risk.

Accepted Answer

Even though the countries where the MNC exports use Euro as their currency, there can still be exchange rate risk if the subsidiary needs to convert the Euro into another currency for its operations or if the exchange rate between Euro and other currencies fluctuates.

Question 12

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

Accepted Answer

The answer of If a U.S.-based MNC focused completely on...

Question 13

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've 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 the valuation of Saller Co. despite no change in expected cash flows suggests that the decline in value may be due to currency fluctuations. If the Mexican peso has depreciated against the currency that Saller Co. uses to report its financials (e.g. US Dollars), then the value of the cash flows from the subsidiary would be worth less in the parent company's home currency, leading to a decline in overall valuation.

Question 14

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

Accepted Answer

The answer of International trade generally results in ____ exposure...

Question 15

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

Accepted Answer

A macroeconomic perspective focuses on broader economic factors such as inflation, exchange rates, and government policies, rather than specific financial management decisions that affect the value of a multinational corporation.

Question 16

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 it establishes the new subsidiary and ____ when the subsidiary starts operations.
A) depreciates; appreciates
B) appreciates; appreciates
C) appreciates; depreciates
D) depreciates; depreciates

Accepted Answer

When Jensen Co. establishes the new subsidiary, a depreciating peso will make the subsidiary's assets cheaper to acquire, and a appreciating peso when the subsidiary starts operations will make the subsidiary's earnings more valuable when remitted back to the U.S. parent.

Question 17

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 factors such as supply and demand, pricing, production costs, and market competition, rather than external forces such as economic conditions that can affect the value of an MNC.

Question 18

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 existing Japanese firm
D) Establishment of Japanese subsidiary

Accepted Answer

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

Question 19

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 weaker euro would decrease the value of the earnings and assets of the European subsidiaries when converted to U.S. dollars, potentially reducing the overall value of the MNC.

Question 20

The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size.

Accepted Answer

Establishing a new subsidiary is generally considered cheaper than acquiring a foreign subsidiary of the same size as it involves fewer costs associated with acquisition such as due diligence, legal fees, etc.

Quiz 1: Multinational Financial Management: An Overview

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

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

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

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

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

International trade: