FIN4604 Final Exam

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1). Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

d) 1.52%

2). Assume that the U.S. interest rate is 11% while the interest rate on euros is 7%. If euros are borrowed by a U.S. firm, they would have to ________ against the dollar by _______ in order
to have the same effective financing rate from borrowing dollars.

b) Appreciate; 3.74%

3). When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the _______ if the currency ________.

a) Foreign currency's interest rate; appreciates

4). If a firm repeatedly borrows a portfolio of foreign currencies, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are _______ and the individual variability of each currency is _________.

b) High; high

5). Assume the annual British interest rate is above the annual U.S. interest rate (iuk > ius). Also assume the pound's forward rate of $1.75 equals the pound's current spot rate. Given this information, interest rate parity ________ exist, and the U.S. firm _________ lock in a higher return by
investing in pounds for one year.

d) Does not; could

6). A risk-averse firm would prefer to borrow _______ when the expected financing costs are similar in a foreign country as in the local country.

a) Locally

7). The effective financing rate is obtained by adjusting nominal financing rate for:

b) Spot exchange rate changes over the period of concern.

8). If interest rate parity holds and transaction costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

c) Equal to the domestic interest rate.

9). If interest rate parity holds, transactions costs are zero, and forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency would be:

c) Equal to the domestic interest rate.

10). Assume the U.S. one-year rate is 8%, and the British one-year interest rate is 6%.
The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05.
Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?

e) 11.4%

11). Euro-notes are underwritten by:

b) Commercial banks.

12). Assume U.S. interest rate is 7.5%, New Zealand rate is 6.5%, the spot rate of the NZ$ is $.52, and
the one-year forward rate of NZ$ is $.50. At the end of the year, the spot rate of NZ$ is $.48.
Compute effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?

a) -1.7%.

13). A negative effective financing rate for a U.S. firm implies that the firm:

e) Paid back an amount less than originally borrowed

14). A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is
9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year
interest rate is 10%. The expected effective financing rate on Swiss francs is:

c) Equal to the Swiss interest rate

15). Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian
Ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $________, and $_________ are needed to repay the loan.

a) 375,000; 449,400

16). Morton Company obtains a one-year loan of 2,000,000 Sudanese Dinar (SD) at an interest rate of
6%. At the time the loan is extended, the spot rate of the dinar is $.005. If the spot rate of the dinar at maturity of the loan is $.0035, what is the effective financing rate for borrowing dinar?

c) -25.8%

17). ____________ are free of default risk.

e) None of the above

Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8% for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now is $.00011.

18) What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?

b) -10%

Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8% for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now is $.00011.

19) What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?

c) -1%

20) Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate
is 7% and the Cyprus one-year interest rate is 6%. What is the effective financing rate of a one-year loan denominated in Cyprus pounds assuming that a US MNC covers its exposure by purchasing pounds one year forward?

b) 7%

Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a 6-month period. Cameron would like to determine the expected financing rate and the standard deviation of financing rate for a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:
Mean effective financing rate of Japanese yen or 6 months = 4%
Mean effective financing rate o Sudanese dinar for 6 months = 1%
Standard deviation for Japanese yen's effective financing rate = .10
Standard deviation for Sudanese dinar's effective financing rate = .20
Correlation coefficient of effective financing rates of these 2 currencies = .23

21) What is the expected financing rate for the portfolio contemplated by Cameron Corporation?

b) 1.90%

Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a 6-month period. Cameron would like to determine the expected financing rate and the standard deviation of financing rate for a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:
Mean effective financing rate of Japanese yen or 6 months = 4%
Mean effective financing rate o Sudanese dinar for 6 months = 1%
Standard deviation for Japanese yen's effective financing rate = .10
Standard deviation for Sudanese dinar's effective financing rate = .20
Correlation coefficient of effective financing rates of these 2 currencies = .23

22) What is the expected standard deviation of financing rate for the portfolio contemplated by
Cameron?

b) .1498

23) A firm will likely benefit most from international diversification if:

b) The correlations between country economies are low
e) Economies are segmented
f) Both b and e

24) Which of the following is a motivation for a firm to engage in international business?

a) Exploit economies of scale
b) Exploit monopolistic advantages
c) Diversification
d) Internalization
e) All of the above

25) When evaluating international project cash flows, which of the following factors is relevant?

a) Future inflation
b) Blocked funds
c) Remittance provisions
d) Exchange rate dynamics
e) All of the above

26) In multinational capital budgeting analysis, the following methods are used for adjusting
risk assessment except:

d) Exchange rate forecasting

27) Which of the following is not a characteristic of a country to be considered within a MNC's
international tax assessment?

e) All of the above are characteristics to be considered

28) An argument for MNCs to have a greater debt-intensive capital structure is:

a) They are well diversified

29) Which of the following factors is not expected to generally have a favorable impact on the firm's
cost of capital?

c) Volatile exchange rate changes

30) The capital asset pricing theory is based on the premise that:

b) Only systematic variability in cash flows is relevant

31) Based on the factors that influence a country's cost of capital, the cost of capital in less developed
countries is likely to be ________ than that of the U.S. and _______ than that of Japan.

a) Higher; higher

32) The term "local target capital structure" is frequently used to represent:

c) The desired capital structure of a subsidiary of a particular MNC

33) The term "global capitals structure" is used to represent:

d) The capital structure of a particular MNC (including all subsidiaries)

34) The __________ an MNC, the _________ its cost of capital is likely to be.

b) Larger; lower

35) MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on an
average stock is 13%. What is the required rate of return on MNC stock?

a) 21%

36) Which of the following is not a reason that the cost of debt can vary across countries?

b) A high price/earnings multiple

37) In general, MNCs would probably prefer to use __________ foreign debt when their foreign
subsidiaries are subject to __________ local interest rates.

a) More; low

38) In general, MNCs would probably prefer to use __________ foreign debt when their foreign
subsidiaries are subject to potentially __________ local currencies.

b) More; weak
c) Less; strong
e) Both b and c

39) A macro-assessment of country risk:

b) Excludes all aspects relevant to a particular firm or project

40) A micro-assessment of country risk:

a) Focuses/Adjusts on the particular business of the firm involved

41) The Delphi technique:

c) Involves the collection of independent expert opinions on country risk

42) The most important variable in determining a country's degree of overall country risk:

d) May often vary with the country in question

43) The primary purpose of country risk analysis when applied to capital budgeting is usually to
measure the effect of country risk on:

b) Cash flows

44) A firm may incorporate a country risk rating into the capital budgeting analysis by:

b) Adjusting the discount rate upward as the country risk rating decreases (implying increased risk)

45) Country risk analysis is important because it can be used by a MNC:

a) As a screening device to avoid countries with prohibitive/excessive risk
b) To monitor countries where the MNC is presently engaged in international business
c) To improve the analysis used to make long-term investing or financing decisions
d) To revise investment of financing decisions in the face of new risk profile.
e) All of the above

46) ______________ is (are) not a form of political risk.

a) Exchange rate movements

47) You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:

c) 10.16%

48) Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is 0.7. Based on this information, the standard deviation of this two-currency portfolio is:

a) 5.13%

49) Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is :

b) 13.15%

50) A Japanese Tokyo-based MNC has a German subsidiary that annually remits €50 million to Japan. If the Euro _______ against the yen, the value of remitted funds _______

b) Depreciates; decreases

51. Which of the following U.S. industries would most likely take advantage of lower costs in some
developing foreign countries?

a. Assembly line production.

52. The term "privatization" is typically used to describe:

d. Government enterprises that are purchased by corporations and other investors.

53. In general, products and services are generally becoming ________ standardized across countries, which tends to _________ the globalization of business.

a. More; encourage

54. ________ are most commonly classified as a Foreign Direct Investment (FDI).

a. Foreign acquisitions

55. Which of the following is not an additional risk resulting from international business?

c. Interest rate risk.

56. The __________ a project's variability in cash flows, and the ___________ the correlation between the project's cash flow and MNC's cash flow, the lower the risk of the project to the MNC.

c. Lower; lower

57. Consider Firm "A" and Firm "B" that both produce the same product. Firm "A" would more likely have more stable cash flows if its percentage of foreign sales were ______ and the number of foreign countries it sold products to was _____.

a. Higher; large

58. When economic conditions of two countries are _______, then a firm would _______ its risk by operating in both counties instead of concentrating just in one.

c. Not highly correlated; reduce

59. In capital budgeting analysis, the use of a cumulative NPV is useful for:

b. Determining the time required to achieve a positive NPV.

60. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ________ against their home currency, and if their cost of capital is relatively ________.

a. Appreciate; low

61. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ___________ in the host country and there are _________ investment opportunities in the host country.

b. Very low; limited

62. An international project's APV is ________ related to the size of the initial investment and _________ related to the project's required rate of return.

d. Negatively; negatively

63. An international project's APV is __________ related to consumer demand and__________ related to the project's salvage value.

a. Positively; positively

64. As the financing of a foreign project by the parent _______ relative to the financing provided by the subsidiary, the parent's exchange rate exposure _______

c. Increases; increases

65. One year ago John Doe invested in the stock of Lloyds, a U.K company. During the year, the
stock declined by 20% but the British pound appreciated by 10%. If John Doe sold the stock
today his return would be ______.

c. -12%

66. When determining whether a particular proposed project in a foreign country is feasible:

b. Country risk analysis should be incorporated within the capital budgeting analysis.

67. The best course of action most likely to reduce political risk is for a MNC to:

b. Make the cost of expropriation or confiscation prohibitive to the host country.

68. The following strategies may be employed to reduce exposure to country risk by MNCs except:

e. Joining local political parties.

69. __________ typically have maturities of less than one year.

b. Euro-commercial paper
c. Euronotes
e. Both b and c

70. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has _________ in Algerian dinars, it could borrow ____________, resulting in an offsetting effect.

b. Receivables; dinars

71. A parent's perspective is appropriate in attempting to determine whether a project will enhance _____________.

d. MNC value

72. Which of the following is not an input required for a multinational capital budgeting analysis, given that it is conducted from the parent's viewpoint?

d. Subsidiary's management philosophy

73. Which of the following is not a form of financial risk?

c. Blockage of fund transfers

74. _________ typically have maturities of one to six months; _________ typically have maturities of one to six months but can be tailored to the issuer's preferences.

c. Euronotes; euro-commercial paper

75. A _________ effective financing rate implies that as U.S. firm borrowing the foreign currency paid
_________ in total loan repayment than the amount borrowed.

a. Negative; fewer
b. Positive; more
e. Both a and b

76. The following are cost-related motives for Foreign Direct Investment except:

a. Exploiting monopolistic advantages

77. _______ is not a revenue-related motive for Foreign Direct Investment

b. Fully benefiting from economies of scale

78. The primary provider of political risk insurance to U.S. MNCs is the:

d. Overseas Private Investment corporation

79. Expropriation is most likely in the ______ sector of an economy.

c. Extractive

80. Assume that the euro is expected to appreciate by 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros?

d. 5.1%

81. Assume that the euro is expected to depreciate 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros?

c. 13.85%

82. A US investor purchased Canadian stocks at the beginning of the year in which the Canadian stock increased in valued by 18%. Assume that the exchange rate C$/US was 1.1255 at the beginning of the year and 1.2575 at the end of the year. What was the investor's effective return?

a. 5.61%

83. Obtain the effective return to a US investor who invests in the Indian SENSEX stock index during the year when the index gained 17.5 % but the rupee depreciated by 12% against the dollar.

d. 3.4%

84. Compute the effective return to a US investor who purchased the FTSE Index during the year when the index gained 18 % and given the dollar price of the pound was $1.4565 at the beginning of the year and $1.4875 at the end of the year.

a. 20.51%

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