FIN 535 Quiz 1
Chapter 1 Perfect Solution
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FIN
535 Week 2 Quiz 1 Chapter 1 Solution
Chapter
1—Multinational Financial Management: An Overview
1. The
commonly accepted goal of the MNC is to:
a.
|
maximize short-term earnings.
|
b.
|
maximize shareholder wealth.
|
c.
|
minimize risk.
|
d.
|
A and C.
|
e.
|
maximize international sales.
|
ANS: PTS: 1
2. With
regard to corporate goals, an MNC is mostly concerned with maximizing ____, and
a purely domestic firm is mostly concerned with maximizing ____.
a.
|
shareholder wealth; short-term
earnings
|
b.
|
shareholder wealth; shareholder wealth
|
c.
|
short-term earnings; sales volume
|
d.
|
short-term earnings; shareholder
wealth
|
ANS: PTS: 1
3. For
the MNC, agency costs are typically:
a.
|
non-existent.
|
b.
|
larger than agency costs of a small
purely domestic firm.
|
c.
|
smaller than agency costs of a small
purely domestic firm.
|
d.
|
the same as agency costs of a small
purely domestic firm.
|
ANS: PTS: 1
4. Which
of the following could reduce agency problems for an MNC?
a.
|
stock options as managerial
compensation.
|
b.
|
hostile takeover threat.
|
c.
|
investor monitoring.
|
d.
|
all of the above are forms of
corporate control that could reduce agency problems for an MNC.
|
ANS: PTS: 1
5. The
valuation of an MNC should rise when an event causes the expected cash flows
from foreign to ____ and when foreign currencies denominating these cash flows
are expected to ____.
a.
|
decrease; appreciate
|
b.
|
increase; appreciate
|
c.
|
decrease; depreciate
|
d.
|
increase; depreciate
|
ANS: PTS: 1
6. Which
of the following theories identifies specialization as a reason for
international business?
a.
|
theory of comparative advantage.
|
b.
|
imperfect markets theory.
|
c.
|
product cycle theory.
|
d.
|
none of the above
|
ANS: PTS: 1
7. Which
of the following theories identifies the non-transferability of resources as a
reason for international business?
a.
|
theory of comparative advantage.
|
b.
|
imperfect markets theory.
|
c.
|
product cycle theory.
|
d.
|
none of the above
|
ANS: PTS: 1
8. Which
of the following theories suggests that firms seek to penetrate new markets
over time?
a.
|
theory of comparative advantage.
|
b.
|
imperfect markets theory.
|
c.
|
product cycle theory.
|
d.
|
none of the above
|
ANS: PTS: 1
9. Which
of the following industries would most likely take advantage of lower costs in
some less developed foreign countries?
a.
|
assembly line production.
|
b.
|
specialized professional services.
|
c.
|
nuclear missile planning.
|
d.
|
planning for more sophisticated
computer technology.
|
ANS: PTS: 1
10. Due
to the risks involved in international business, firms should:
a.
|
only consider international business
in major countries.
|
b.
|
maintain international business to no
more than 20% of total business.
|
c.
|
maintain international business to no
more than 35% of total business.
|
d.
|
none of the above
|
ANS: PTS: 1
11. A
product cycle is the process by which a firm provides a specialized sales or
service strategy, support assistance, and possibly an initial investment in the
franchise in exchange for periodic fees.
a.
True
b.
False
ANS: PTS: 1
12. Licensing
is the process by which a firm provides its technology (copyrights, patents,
trademarks, or trade names) in exchange for fees or some other specified
benefits.
a.
True
b.
False
ANS: PTS: 1
13. The
agency costs of an MNC are likely to be lower if it:
a.
|
scatters its subsidiaries across many
foreign countries.
|
b.
|
increases its volume of international
business.
|
c.
|
uses a centralized management style.
|
d.
|
A and B.
|
ANS: PTS: 1
14. An
MNC may be more exposed to agency problems if most of its shares are held by:
a.
|
a few mutual funds
|
b.
|
a widely dispersed set of individual
investors
|
c.
|
a few pension funds
|
d.
|
all of the above would prevent agency
problems
|
ANS: PTS: 1
15. The
Sarbanes-Oxley Act improves corporate governance of MNCs because it:
a.
|
makes executives more accountable for
verifying financial statements
|
b.
|
eliminates stock options as a form of
compensation
|
c.
|
ties executive compensation to firm
performance
|
d.
|
places a limit on the amount of funds
that managers can spend
|
ANS: PTS: 1
16. MNCs
can improve their internal control process by all of the following, except:
a.
|
establishing a centralized data base
of information
|
b.
|
ensuring that all data are reported
consistently among subsidiaries
|
c.
|
ensuring that the MNC always borrows
from countries where interest rates are lowest
|
d.
|
using a system that checks internal
data for unusual discrepancies
|
ANS: PTS: 1
17. Franchising
is the process by which national governments sell state owned operations to corporations
and other investors.
a.
True
b.
False
ANS: PTS: 1
18. The
parent of MNC can implement compensation plans that directly reward the
subsidiary managers for enhancing the value of the MNC.
a.
True
b.
False
ANS: PTS: 1
19. If
a publicly-traded MNC's managers make poor decisions that reduce its value, it
may encourage other firms to acquire it.
a.
True
b.
False
ANS: PTS: 1
20. Institutional
investors such as mutual funds or pension funds which have large holdings of an
MNC's stock do not normally want to take control of it and therefore have no
influence over management of the MNC.
a.
True
b.
False
ANS: PTS: 1
21. In
comparing exporting to direct foreign investment (DFI), an exporting operation
will likely incur ____ fixed production costs and ____ transportation costs
than DFI.
a.
|
higher; higher
|
b.
|
higher; lower
|
c.
|
lower; lower
|
d.
|
lower; higher
|
ANS: PTS: 1
22. Which
of the following is an example of direct foreign investment?
a.
|
exporting to a country.
|
b.
|
establishing licensing arrangements in
a country.
|
c.
|
purchasing existing companies in a
country.
|
d.
|
investing directly (without brokers)
in foreign stocks.
|
ANS: PTS: 1
23. According
to the text, a disadvantage of licensing is that:
a.
|
it prevents a firm from importing.
|
b.
|
it is difficult to ensure quality
control of the production process.
|
c.
|
it prevents a firm from exporting.
|
d.
|
none of the above
|
ANS: PTS: 1
24. ____
are most commonly classified as a direct foreign investment.
a.
|
Foreign acquisitions
|
b.
|
Purchases of international stocks
|
c.
|
Licensing agreements
|
d.
|
Exporting transactions
|
ANS: PTS: 1
25. Imperfect
markets represent conditions under which factors of production are immobile.
a.
True
b.
False
ANS: PTS: 1
26. The
Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to
implement an internal reporting process that could be easily monitored by
executives and the board of directors.
a.
True
b.
False
ANS: PTS: 1
27. If
markets were perfect, then labor and other costs of production would be
perfectly stable (no movement across borders).
a.
True
b.
False
ANS: PTS: 1
28. The
valuation of an MNC is reduced if the required return on its investments in
foreign countries is reduced.
a.
True
b.
False
ANS: PTS: 1
29. Which
of the following is not mentioned in the text as an additional risk resulting
from international business?
a.
|
exchange rate fluctuations.
|
b.
|
political risk.
|
c.
|
interest rate risk.
|
d.
|
exposure to foreign economies.
|
ANS: PTS: 1
30. Licensing
obligates a firm to provide ____, while franchising obligates a firm to provide
____.
a.
|
a specialized sales or service
strategy; its technology
|
b.
|
its technology; a specialized sales or
service strategy
|
c.
|
its technology; its technology
|
d.
|
a specialized sales or service
strategy; a specialized sales or service strategy
|
e.
|
its technology; an initial investment
|
ANS: PTS: 1
31. Which
of the following is not a way in which agency problems can be reduced through
corporate control?
a.
|
executive compensation.
|
b.
|
threat of hostile takeover.
|
c.
|
acquisition of a foreign subsidiary.
|
d.
|
monitoring by large shareholders.
|
ANS: PTS: 1
32. The
goal of a multinational corporation (MNC) is the maximization of shareholder
wealth.
a.
True
b.
False
ANS: PTS: 1
33. A
centralized management style, where major decisions about a foreign subsidiary
are made by the parent company, results in an increase in agency costs.
a.
True
b.
False
ANS: PTS: 1
34. If
a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will
likely have a comparative advantage over other firms in Mexico that sell the
same product.
a.
True
b.
False
ANS: PTS: 1
35. Although
MNCs may need to convert currencies occasionally, they do not face any exchange
rate risk, as exchange rates are stable over time.
a.
True
b.
False
ANS: PTS: 1
36. One
of the most prevalent factors conflicting with the realization of the goal of
an MNC is the existence of agency problems.
a.
True
b.
False
ANS: PTS: 1
37. A
centralized management style for an MNC results in relatively high agency
costs.
a.
True
b.
False
ANS: PTS: 1
38. The
imperfect markets theory states that factors of production are somewhat
immobile, allowing firms to capitalize on a foreign country's resources.
a.
True
b.
False
ANS: PTS: 1
39. If
a U.S.-based MNC focused completely on importing, then its valuation would
likely be adversely affected if most currencies were expected to appreciate
against the dollar over time.
a.
True
b.
False
ANS: PTS: 1
40. The
acquisition of a foreign subsidiary is commonly considered by MNCs because the
cost is less expensive than establishing a new subsidiary of the same size.
a.
True
b.
False
ANS: PTS: 1
41. 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.
a.
True
b.
False
ANS: PTS: 1
42. If
markets were perfect, then labor and other costs of production would be easily
transferable.
a.
True
b.
False
ANS: PTS: 1
43. 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.
|
ANS: PTS: 1
44. 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
|
ANS: PTS: 1
45. 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.
True
b.
False
ANS: PTS: 1
46. 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
|
ANS: PTS: 1
47. 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.
|
ANS: PTS: 1
48. A
microeconomic perspective focuses on external forces such as economic
conditions that can affect the value of an MNC.
a.
True
b.
False
ANS: PTS: 1
49. 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.
a.
True
b.
False
ANS: PTS: 1
50. 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
|
ANS: PTS: 1
51. 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
|
ANS: PTS: 1
52. A
decentralized management style of MNC results in relatively high agency costs.
a.
True
b.
False
ANS: PTS: 1
53. 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.
a.
True
b.
False
ANS: PTS: 1
54. 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
|
ANS: PTS: 1
55. 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.
|
ANS: PTS: 1
56. 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
|
ANS: PTS: 1
57. A
macroeconomic perspective focuses on the financial management decisions that
affect the value of MNC.
a.
True
b.
False
ANS: PTS: 1
58. An
MNC will always use the same required rate of return in the valuation of
foreign projects, as it would for its domestic projects.
a.
True
b.
False
ANS: PTS: 1
59. 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
|
ANS: PTS: 1
60. 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.
a.
True
b.
False
ANS: PTS: 1
61. If
managers of foreign subsidiaries make decisions that maximize the values of
their respective subsidiaries, they automatically maximize the value of the
entire corporation.
a.
True
b.
False
ANS: PTS: 1
62. 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.
a.
True
b.
False
ANS: PTS: 1
63. U.S.-based
MNCs are typically not monitored by mutual funds and pension funds, as these
institutions rarely hold stock in MNCs.
a.
True
b.
False
ANS: PTS: 1
64. The
Sarbanes-Oxley Act ensures a more transparent process for managers to report on
the productivity and financial condition of their firm.
a.
True
b.
False
ANS: PTS: 1
65. 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.
a.
True
b.
False
ANS: PTS: 1
66. 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.
a.
True
b.
False
ANS: PTS: 1
67. Under
the Product Cycle Theory, foreign demand can be initially satisfied by
exporting.
a.
True
b.
False
ANS: PTS: 1
68. Licensing
allows firms to use their technology in foreign markets without a major
investment in foreign countries.
a.
True
b.
False
ANS: PTS: 1
69. International
trade is the most common form of direct foreign investment (DFI).
a.
True
b.
False
ANS: PTS: 1
70. When
the parent's home currency is weak, remitted funds from foreign subsidiaries
will convert to a smaller amount of the home currency.
a.
True
b.
False
ANS: PTS: 1
71. A
purely domestic firm may be affected by exchange rate fluctuations if it faces
at least some foreign competition.
a.
True
b.
False
ANS: PTS: 1
72. One
form of an exposure to political risk is terrorism.
a.
True
b.
False
ANS: PTS: 1
73. 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.
|
ANS: PTS: 1
74. 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
|
ANS: PTS: 1
75. 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.
|
ANS: PTS: 1
76. 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
|
ANS: PTS: 1
77. 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
|
ANS: PTS: 1
78. 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
|
ANS: PTS: 1
79. 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
|
ANS: PTS: 1
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