Question 1

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. can be attributed to the depreciation of the Mexican peso. If the expected cash flows in pesos have not changed, then a decline in the value of the peso means that those cash flows are now worth less in terms of US dollars (or other currency). This would lead to a lower valuation of the subsidiary and, potentially, of Saller Co. as a whole. The other options (weaker Mexican economy, lower interest rates, and appreciation of the peso) may also have an impact on the value of the subsidiary, but are not necessarily related to the information provided in the question.

Question 2

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

Accepted Answer

A macroeconomic perspective focuses on broader economic issues such as inflation, interest rates, and economic growth, rather than the specific financial management decisions of individual companies such as MNCs.

Question 3

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 from the European subsidiaries are converted back to dollars, they will be worth less, potentially decreasing the overall value of the MNC.

Question 4

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 5

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 all the countries where the subsidiary exports use Euro, exchange rate risk can still occur due to fluctuations in exchange rates between Euro and other currencies such as US Dollars or Japanese Yen. If the MNC has to convert Euro back to its home currency, exchange rate fluctuations can lead to gains or losses.

Question 6

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 7

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 necessarily a conservative approach to foreign market penetration.

Question 8

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 a multinational corporation (MNC) depends on all of the factors mentioned in options A, B, and C. The required rate of return reflects the risk associated with investing in the MNC, while the amount of cash flows in a particular currency affects the company's earnings and profitability. The exchange rate at which cash flows are converted to dollars also impacts the MNC's financial performance. Thus, all three factors are essential to determine the value of an MNC.

Question 9

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 answer of The valuation of MNC accounts for all...

Question 10

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 the internal factors of a company, such as pricing strategies, production costs, and consumer behavior. External factors such as economic conditions fall under the macroeconomic perspective.

Question 11

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 12

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

Decrease in consumers' income levels and consumption is an economic risk, not a political risk. Political risk refers to the risk of change in political policies or regulations that can adversely affect the MNC's operations and profitability in a host country. Options A, B, and C refer to examples of political risk.

Question 13

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

Accepted Answer

When a multinational corporation (MNC) adopts a decentralized management style, it gives more autonomy to its subsidiaries in different countries. This can result in higher agency costs as each subsidiary may have its own objectives and may not always act in the best interest of the overall MNC. The headquarters may have difficulty monitoring and controlling the actions of each subsidiary, which can result in higher costs to ensure alignment with the MNC's strategy and goals.

Question 14

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 15

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 often considered a more cost-effective option because it allows the MNC to have greater control over its operations and avoid paying a premium for an already established subsidiary with existing assets and operations.

Question 16

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's required rate of return for foreign projects may differ from that for domestic projects due to factors such as differences in risk levels, exchange rate fluctuations, and political and economic conditions in the foreign country. Therefore, an MNC may use a different required rate of return in the valuation of its foreign projects.

Question 17

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 a significant investment in a foreign country, which is contradictory to the given scenario. Therefore, it is the least appropriate method. The other three methods, i.e., international trade, licensing, and franchising, are suitable for businesses that want to expand their operations in a foreign market without significant investment.

Question 18

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

If the peso depreciates while the subsidiary is being established, Jensen Co. will be able to purchase assets and goods (such as land, buildings, and equipment) in Mexico at a lower cost. This will reduce the initial investment required to establish the subsidiary, which will increase the project's value. On the other hand, if the peso appreciates after the subsidiary starts operations, Jensen Co. will be able to convert the earnings from pesos back to U.S. dollars at a higher rate. This will increase the value of the subsidiary's earnings when they are remitted to the U.S. parent.

Question 19

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

Accepted Answer

In perfect markets, labor and other costs of production would be easily transferable because there would be no barriers to entry or exit for firms. This means that firms could easily hire and fire workers, and shift production to locations with lower costs if needed. As a result, labor and other costs of production would be more homogeneous across firms and industries.

Question 20

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

First, we need to convert the cash flows from the Korean subsidiary into US dollars:

100,000,000 KRW * 0.0012 USD/KRW = 120,000 USD

The subsidiary reinvests half, so Livingston Co. receives:

120,000 / 2 = 60,000 USD

Adding this to the expected domestic cash flows:

100,000 + 60,000 = 160,000

Therefore, the expected dollar cash flows of Livingston Co. are $160,000.

Quiz 1: Multinational Financial Management: an Overview

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

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.

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

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.

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.

International trade:

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

The valuation of 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.

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?

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

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.

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

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?

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