Question 1

Assets and liabilities are exposed to currency risk when their values can change with unexpected changes in currency values.

Accepted Answer

Assets and liabilities denominated in a foreign currency are exposed to currency risk, which means their values can be affected by unexpected changes in currency exchange rates.

Question 2

Economies of scope are efficiencies that arise across product lines, such as when joint production results in lower per-unit costs.

Accepted Answer

Economies of scope refer to the cost advantage that arises from producing multiple products or services together, resulting in lower per-unit costs. This is different from economies of scale, which refer to the cost advantage that arises from producing more of a single product or service.

Question 3

Allocational efficiency refers to whether a market allocates capital to those investments deemed most worthy by a host government.

Accepted Answer

Allocational efficiency refers to how efficiently a market channels capital toward its most productive uses in an economic, rather than a political, sense.

Question 4

The MNC faces greater constraints than the domestic corporation in the timing and location of its investments.

Accepted Answer

Multinationals typically have more flexibility in timing and location of their investments, as well as in their operation.

Question 5

Corporate stakeholders include each of a) through d) EXCEPT
A) creditors
B) customers
C) managers
D) shareholders
E) Each of the above is a stakeholder in the firm

Accepted Answer

Corporate stakeholders include a wide range of individuals and groups who have an interest in the activities and performance of a company. This includes creditors who lend money to the company, customers who buy its products or services, managers who run the company on a day-to-day basis, and shareholders who own a part of the company. Therefore, each of the options listed (creditors, customers, managers, and shareholders) is considered a stakeholder in the firm.

Question 6

The domestic financial manager must be knowledgeable in several areas within finance, whereas the multinational financial manager usually specializes in a single area, such as corporate finance, investments, or financial markets.

Accepted Answer

The multinational financial manager is likely to require knowledge of several fields within finance.

Question 7

Allocational efficiency refers to how efficiently a market channels capital toward its most productive uses.

Accepted Answer

Allocational efficiency is a measure of how well a market allocates resources towards their most productive uses. Therefore, the statement is true.

Question 8

Operational efficiency refers to how large an influence transactions costs and other market frictions have on the operation of a market.

Accepted Answer

This is the correct definition of operational efficiency.

Question 9

The three types of market efficiency used in the text to describe the performance of financial markets are allocational efficiency, operational efficiency, and transactional efficiency.

Accepted Answer

Three types of market efficiency are allocational, operational, and informational efficiency.

Question 10

MNCs have investment or financial operations in more than one country.

Accepted Answer

MNCs, or Multinational Corporations, are by definition companies that have operations or investments in multiple countries.

Question 11

An informationally efficient market is one with abundant information.

Accepted Answer

It is a market in which prices fully reflect available information.

Question 12

Risk exists whenever actual outcomes can differ from expected outcomes.

Accepted Answer

Risk is defined as the possibility of actual outcomes differing from expected outcomes. Therefore, the statement is true.

Question 13

Loss in value from conflicts of interest between managers and other stakeholders are called ________.
A) adverse selection costs
B) agency costs
C) costs of financial distress
D) sunk costs
E) transactions costs

Accepted Answer

Agency costs are the loss in value from conflicts of interest between managers and other stakeholders, such as shareholders or creditors. Adverse selection costs result from a lack of information before making a decision, costs of financial distress arise from the possibility of bankruptcy, sunk costs are costs that have already been incurred and cannot be recovered, and transactions costs are costs of making a transaction or conducting business.

Question 14

Because of globalization in the world's markets, a multinational financial manager is more likely than a domestic manager to be highly specialized in finance to the exclusion of other disciplines.

Accepted Answer

The multinational financial manager must be well versed in each of the business disciplines in which the MNC is involved.

Question 15

Economies of scale arise as fixed development or production costs are spread over a larger output.

Accepted Answer

Economies of scale occur when the per-unit cost of production declines as output increases due to the spreading of fixed costs over a larger quantity of goods produced.

Question 16

Economies of scale are efficiencies that arise across product lines, such as when joint production results in lower per-unit costs.

Accepted Answer

These are economies of scope. Economies of scale arise when size itself results in lower average or per-unit production costs.

Question 17

"Currency risk" and "currency risk exposure" refer to the same thing -the possibility that currency values will differ from their expectations.

Accepted Answer

A firm has a currency risk exposure when its assets or liabilities can change in value with unexpected changes in currency values.

Question 18

The investment opportunity set is the set of investments available to the corporation; that is, the set from which the company must select.

Accepted Answer

The investment opportunity set is indeed the set of investments available to the corporation from which they must make their selection.

Question 19

The terms "stakeholder" and "shareholder" are synonymous.

Accepted Answer

Stakeholders include all those with a stake in the firm. A broad definition of stakeholders includes the firm's equity shareholders, as well as creditors, customers, suppliers, and employees.

Question 20

Political risk is the risk that the business environment in a host country will change unexpectedly due to political events.

Accepted Answer

Political risk refers to the potential risks that arise from changes in a country's political environment, such as changes in government, policies, regulations, or civil unrest. These risks can impact a business's operations, investments, and profitability.

Quiz 1: An Introduction to Multinational Finance