Question 1

U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.

Accepted Answer

Mutual funds and pension funds often hold stock in MNCs, and therefore monitor their corporate activities and performance.

Question 2

Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.

Accepted Answer

Licensing allows firms to grant permission to foreign firms to use their technology, trademarks, or patents for a fee, without the need for a major investment in foreign countries.

Question 3

Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
A) Establishing a centralized database of information
B) Ensuring that all data are reported consistently among subsidiaries
C) Speeding the process by which all departments and all subsidiaries have access to the data that they need
D) Making executives more accountable for financial statements by personally verifying their accuracy
E) All of the above are common methods used by MNCs to improve their internal control process.

Accepted Answer

All the listed methods are common strategies used by multinational corporations (MNCs) to enhance their internal control processes.

Question 4

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.

Accepted Answer

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a larger amount of the home currency because the foreign currency will have more purchasing power relative to the home currency.

Question 5

The most risky method(s) by which firms conduct international business is (are):
A) Franchising.
B) The acquisitions of existing operations.
C) The establishment of new subsidiaries.
D) All of the above
E) B and C only

Accepted Answer

Acquiring existing operations and establishing new subsidiaries are the most risky methods by which firms conduct international business. These methods involve a high level of investment and commitment to developing new business relationships in foreign markets. Franchising, on the other hand, involves less risk, as the franchisor provides the franchisee with support and brand recognition. However, even franchising can be risky if the franchisee does not operate the business in accordance with the franchisor's standards. Therefore, options B and C are considered to be the riskiest methods of conducting international business, while franchising (option A) is less risky. Therefore, option E, which includes only options B and C, is the best choice.

Question 6

Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.

Accepted Answer

According to the Product Cycle Theory, a company's foreign demand can be initially fulfilled through exporting. In the initial stage of a product's life cycle, a company starts by exporting the product to meet foreign demand before investing in production facilities in foreign markets to meet local demand.

Question 7

The goal of a multinational corporation (MNC) is
A) The minimization of taxes remitted from foreign subsidiaries.
B) The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
C) The maximization of shareholder wealth.
D) The maximization of social benefits resulting from actions such as the employment of foreign managers.

Accepted Answer

The maximization of shareholder wealth is the primary objective of a multinational corporation. While minimizing taxes and expanding to countries with favorable returns may be priorities, ultimately the goal is to increase the financial value of the company for its shareholders. The employment of foreign managers and other social benefits may be considered as secondary objectives, but the main priority is always to maximize shareholder wealth.

Question 8

The least risky method by which firms conduct international business is:
A) Franchising.
B) The acquisitions of existing operations.
C) International Trade.
D) The establishment of new subsidiaries.
E) Licensing

Accepted Answer

International trade is the least risky method of conducting international business because it involves exporting and importing goods or services without investing a significant amount of resources in establishing a new subsidiary or acquiring an existing operation. It also allows firms to test the waters in new markets before making larger investments. Franchising, acquisitions, establishing new subsidiaries, and licensing involve more significant investments, risks, and complexities.

Question 9

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

Accepted Answer

Decentralized management allows for subsidiary managers to have more control over decision making and be more knowledgeable about their specific operations, allowing for more informed and effective decisions.

Question 10

A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.

Accepted Answer

Even if a firm is purely domestic, meaning it only operates in its home country, it can still be affected by exchange rate fluctuations if it faces competition from foreign companies. This is because changes in exchange rates can affect the prices that foreign competitors charge for their products or the cost of the inputs that the domestic firm uses to produce its own products. In this way, exchange rate fluctuations can impact the competitiveness and profitability of purely domestic firms that face foreign competition.

Question 11

One form of an exposure to political risk is terrorism.

Accepted Answer

Terrorism is a form of political risk as it can disrupt political stability and lead to economic losses.

Question 12

The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.

Accepted Answer

The Theory of Comparative Advantage, developed by David Ricardo, is an economic theory that explains how countries can benefit from specializing in producing goods where they have a lower opportunity cost, not about how firms establish themselves or penetrate markets.

Question 13

International trade is the most common form of direct foreign investment (DFI).

Accepted Answer

International trade and direct foreign investment are two separate concepts. International trade involves the exchange of goods and services between countries, while direct foreign investment involves a company or individual investing in and managing operations in a foreign country. While international trade can lead to foreign investment, it is not the most common form of DFI. Other forms of DFI include mergers and acquisitions, joint ventures, and greenfield investments.

Question 14

Which of the following is not mentioned in the text as a theory of international business?
A) Theory of Comparative Advantage
B) Imperfect Markets Theory
C) Product Cycle Theory
D) Globalization of Business Theory
E) All of the above are mentioned in the text as theories of international business

Accepted Answer

The text mentions the Theory of Comparative Advantage, Imperfect Markets Theory, and Product Cycle Theory as theories of international business. However, the Globalization of Business Theory is not mentioned.

Question 15

The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

Accepted Answer

The Sarbanes-Oxley Act, passed in 2002, aimed to improve corporate governance and financial transparency. The act mandates that managers are accountable for the accuracy of their reports and that they disclose relevant financial information to the public. Therefore, the act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

Question 16

Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because
A) Monitoring of managers located in foreign countries is more difficult.
B) Foreign subsidiary managers raised in different cultures may not follow uniform goals.
C) MNCs are relatively large.
D) All of the above
E) A and B only

Accepted Answer

All of the above are true. Monitoring of managers located in foreign countries is more difficult, foreign subsidiary managers raised in different cultures may not follow uniform goals, and MNCs are relatively large. These factors can result in higher agency costs for MNCs compared to purely domestic firms.

Question 17

If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.

Accepted Answer

While individual subsidiary performance is important, managers must also consider the impact of their decisions on the overall corporation. Maximizing the value of a single subsidiary may not necessarily lead to the highest value for the entire corporation.

Question 18

Which of the following does not constitute a form of direct foreign investment?
A) Franchising
B) International trade
C) Joint ventures
D) Acquisitions of existing operations
E) Establishment of new foreign subsidiaries

Accepted Answer

International trade is not a form of direct foreign investment as it involves the exchange of goods and services between countries without establishing a permanent presence in a foreign country, such as establishing a subsidiary or acquiring an existing operation. Direct foreign investment involves a long-term investment in a foreign country that allows for significant control and ownership of operations. Franchising, joint ventures, acquisitions of existing operations, and establishment of new foreign subsidiaries are all forms of direct foreign investment.

Question 19

Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources.

Accepted Answer

The Imperfect Markets Theory assumes that factors of production are not entirely mobile, which creates opportunities for firms to capitalize on differences in resources across countries.

Quiz 1: Multinational Financial Management: An Overview

U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.

Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.

Which of the following is not one of the more common methods used by MNCs to improve their internal control process?

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.

The most risky method(s) by which firms conduct international business is (are) :

Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.

The goal of a multinational corporation (MNC) is

The least risky method by which firms conduct international business is: