FINC495 Week 8 Final Exam SCORE 97 PERCENT

Quiz

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Note: It is recommended that you save your response as you complete each question.

 

Question 1 (2 points)

 

A representative office

Question 1 options:

	a)  is a way for the parent bank to provide its MNC clients with a level of service greater than that provided through merely a correspondent relationship.
	b)  is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.
	c)  is a step up from a correspondent relationship, but below a foreign branch.
	d)  all of the above

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Question 2 (2 points)

 

Both subsidiary and affiliate banks

Question 2 options:

	a)  operate under the banking laws of the country in which they are incorporated.
	b)  operate under the banking laws of the U.S.
	c)  can underwrite securities, but not accept dollar-denominated deposits.
	d)  both a) and b)

Question 3 (2 points)

 

International banks are different from domestic banks in what way(s)?

Question 3 options:

	a)  International banks can arrange trade financing.
	b)  International banks can arrange for foreign exchange transactions.
	c)  International banks can assist their clients in hedging exchange rate risk.
	d)  All of the above

Question 4 (2 points)

 

Eurocredits feature rollover pricing.

Question 4 options:

	a)  Rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on Eurocurrency time deposits than they earn from the loans.
	b)  Because of the rollover pricing feature, a Eurocredit may be viewed as a series of shorter-term loans, where at the end of each time period (generally three or six months), the loan is rolled over and the base lending rate is repriced to current LIBOR over the next time interval of the loan.
	c)  The lending rate on these Eurocredits is stated as LIBOR + X percent, where X is the lending margin charged depending upon the creditworthiness of the borrower. LIBOR is reset according to a set schedule.
	d)  All of the above are true

Question 5 (2 points)

 

Multinational banks are often not subject to the same regulations as domestic banks.

Question 5 options:

	a)  There may be increased need to publish adequate financial information.
	b)  There may be reduced need to publish adequate financial information.
	c)  Their requirements to publish adequate financial information are the same.
	d)  None of the above

Question 6 (2 points)

 

In reference to capital requirements, value-at-risk analysis

Question 6 options:

	a)  refers to traditional bank loans and deposits.
	b)  refers to a "risk-focused" approach to determining adequate bank capital.
	c)  provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time.
	d)  both b) and c)

Question 7 (2 points)

 

Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called

Question 7 options:

	a)  international service banks.
	b)  investment banks.
	c)  commercial banks.
	d)  merchant banks.

Question 8 (2 points)

 

An affiliate bank is

Question 8 options:

	a)  a locally incorporated bank that is wholly owned by a foreign parent.
	b)  a locally incorporated bank that is majority owned by a foreign parent.
	c)  a locally incorporated bank that is partially owned (but not controlled) by a foreign parent.
	d)  both a) and b)

Question 9 (2 points)

 

The most popular way for a U.S. bank to expand overseas is

Question 9 options:

	a)  branch banks.
	b)  representative offices.
	c)  subsidiary banks.
	d)  affiliate banks.

Question 10 (2 points)

 

Major distinguishing features between domestic banks and international banks are

Question 10 options:

	a)  the types of deposits they accept.
	b)  the types of loans and investments they make.
	c)  membership in loan syndicates.
	d)  all of the above

 

Question 11 (2 points)

 

Securities sold in the United States to public investors must be registered with the SEC, and a prospectus disclosing detailed financial information about the issuer must be provided and made available to prospective investors. This encourages foreign borrowers wishing to raise U.S. dollars to use

Question 11 options:

	a)  the Eurobond market.
	b)  their domestic market.
	c)  bearer bonds.
	d)  none of the above

Question 12 (2 points)

 

Floating-rate notes (FRN)

Question 12 options:

	a)  experience very volatile price changes between reset dates.
	b)  are typically medium-term bonds with coupon payments indexed to some reference rate (e.g. LIBOR).
	c)  appeal to investors with strong need to preserve the principal value of the investment should they need to liquidate prior to the maturity of the bonds.
	d)  both b) and c)

Question 13 (2 points)

 

There are two types of equity related bonds:

Question 13 options:

	a)  convertible bonds and dual currency bonds.
	b)  convertible bonds and kitchen sink bonds.
	c)  convertible bonds and bonds with equity warrants.
	d)  callable bonds and exchangeable bonds.

Question 14 (2 points)

 

One unintended consequence of Sarbanes-Oxley

Question 14 options:

	a)  is that international companies are starting to prefer issuing eurobonds in the private placement market in the U.S. to avoid costly information disclosure required of registered bonds.
	b)  is that international companies are starting to prefer to issue Yankee bonds in the private placement market in the U.S.
	c)  is that international companies are starting to prefer issuing Yankee bonds in the bearer bond market in the U.S. to avoid costly information disclosure required of registered bonds.
	d)  is that international companies have left the bond market in the U.S. to avoid costly information disclosure required of registered bonds.

Question 15 (2 points)

 

U.S. citizens must pay tax on the imputed interest represented by the fact that zero coupon bonds price gets a bit closer to par value as each year goes by. If you have a 25-year zero coupon bond with $1,000 par value, how much imputed interest will you record in the coming year if interest rates stay the same at ten percent?

Question 15 options:

	a)  $92.30
	b)  $9.23
	c)  $0
	d)  none of the above

Question 16 (2 points)

 

The secondary market for Eurobonds

Question 16 options:

	a)  is an over-the-counter market.
	b)  is an organized exchange.
	c)  has never developed—there is only a primary market for Eurobonds.

Question 17 (2 points)

 

In the bond market, there are brokers and market makers. Which of the following are true?

Question 17 options:

	a)  Brokers accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade; they may also trade for their own account.
	b)  Brokers charge a small commission for their services to the market maker that engaged them.
	c)  Brokers do not deal directly with retail clients.
	d)  All of the above

Question 18 (2 points)

 

Find the present value of a 2-year Treasury bond that pays a semi-annual coupon, has a coupon rate of 6%, a yield to maturity of 5%, a par value of $1,000 when the yield to maturity is 5%.

Question 18 options:

	a)  $1,018.81
	b)  $1,231.15
	c)  $699.07
	d)  none of the above

Question 19 (2 points)

 

With regard to clearing procedures for bond transactions

Question 19 options:

	a)  it is a system for transferring ownership of bonds.
	b)  it is a system for ensuring payment from buyers to sellers.
	c)  most Eurobond trades clear through two major clearing systems.
	d)  all of the above

Question 20 (2 points)

 

Suppose your firm issues a €100,000,000 one-year bond with a coupon rate of 8 percent per annum. The underwriting spread is 2 percent. Your actual cost of this debt is

Question 20 options:

	a)  8 percent.
	b)  10 percent.
	c)  10.2 percent.  (Incorrect)
	d)  None of the above

Question 21 (2 points)

 

The four currencies in which the majority of domestic and international bonds are denominated are

Question 21 options:

	a)  U.S. dollar, the euro, the Indian rupee, and the Chinese Yuan.
	b)  U.S. dollar, the euro, the pound sterling, and the Swiss franc.
	c)  U.S. dollar, the euro, the Swiss franc, and the yen.
	d)  U.S. dollar, the euro, the pound sterling, and the yen.

Question 22 (2 points)

 

A "bearer bond" is one that

Question 22 options:

	a)  shows the owner's name on the bond.
	b)  the owner's name is recorded by the issuer.
	c)  possession is evidence of ownership.
	d)  both a) and b)

Question 23 (2 points)

 

Because __________ do not have to meet national security regulations, name recognition of the issuer is an extremely important factor in being able to source funds in the international capital market.

Question 23 options:

	a)  Eurobonds
	b)  Foreign bonds
	c)  Bearer bonds
	d)  Registered bonds

Question 24 (2 points)

 

Proportionately more domestic bonds than international bonds are denominated in the ____________ while more international bonds than domestic bonds are denominated in the _________________

Question 24 options:

	a)  Euro and the yen, the dollar and the pound sterling.
	b)  Dollar and the pound sterling, the euro and the yen.
	c)  Euro and the pound sterling, the dollar and the yen.
	d)  Dollar and the yen, the euro and the pound sterling.

Question 25 (2 points)

 

A ten-year Floating-rate note (FRN) has coupons referenced to 3-month pound LIBOR, and pays coupon interest quarterly. Assume that the current 3-month LIBOR is 3 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on a £1,000 face value FRN will be

Question 25 options:

	a)  £31.25
	b)  £15.625
	c)  £30.625
	d)  £7.8125

 

Question 26 (2 points)

 

The over-the-counter (OTC) market is a dealer market. Almost all OTC stocks trade on the National Association of Security Dealers Automated Quotation System (NASDAQ), which is a computer-linked system that shows

Question 26 options:

	a)  the limit orders of all available counterparties.
	b)  the last price at which a security was sold.
	c)  the bid (buy) and ask (sell) prices of all dealers in a security.
	d)  the bid (sell) and ask (buy) prices of all dealers in a security.

Question 27 (2 points)

 

The sale of new common stock by corporations to initial investors occurs in

Question 27 options:

	a)  the primary market.
	b)  the secondary market.
	c)  the OTC market.
	d)  the dealer market.

Question 28 (2 points)

 

Which factors appear to be fueling the sale of Yankee stocks?

Question 28 options:

	a)  The push for privatization by many Latin American and Eastern European government-owned companies.
	b)  The rapid growth in the economies of the developing countries.
	c)  The large demand for new capital by Mexican companies following approval of the North American Free Trade Agreement.
	d)  All of the above

Question 29 (2 points)

 

A market-value index

Question 29 options:

	a)  is calculated such that the proportion of the index a stock represents is determined by its proportion of the total market capitalization of all stocks in the index.
	b)  is calculated as the average price of all the stocks in the index that trade that day, one example is the NASDAQ.
	c)  is calculated like the DJIA.
	d)  none of the above

Question 30 (2 points)

 

As a measure of "liquidity",

Question 30 options:

	a)  generally, the lower the turnover, the greater the liquidity of a secondary stock market.
	b)  generally, the higher the turnover, the greater the liquidity of a secondary stock market.
	c)  the more a financial asset gurgles when shook the greater the liquidity.
	d)  none of the above

Question 31 (2 points)

 

Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management

Question 31 options:

	a)  by moving to a better county.
	b)  by listing their stocks in countries with strong investor protection.
	c)  by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
	d)  having a press conference and promising to be nice to their investors.

Question 32 (2 points)

 

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order, The advantage of a stop order is

Question 32 options:

	a)  you don't have to monitor how a stock is performing on a daily basis.
	b)  the stop price can be activated by a short-term fluctuation in a stock's price.
	c)  once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly.
	d)  all of the above are advantages

Question 33 (2 points)

 

Decompose the return an American would have if he had bought a German stock at €100 per share and sold it one year later at €120. The spot exchange rate one year ago was $1.50 = €1 and the spot rate prevailing at the end of the year was $1.55 = €1.

Question 33 options:

	a)  24% total return; 20% asset return; 4% attributable to exchange rate changes
	b)  20% total return; 16.77% asset return; 3.23% attributable to exchange rate changes
	c)  24% total return; 20% asset return; 3.33% attributable to exchange rate changes
	d)  None of the above

Question 34 (2 points)

 

In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day, the British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares are packaged into one ADR. The no-arbitrage U.S. price of one ADR is

Question 34 options:

	a)  $4.87
	b)  $5.87
	c)  $6.87
	d)  $7.87

Question 35 (2 points)

 

Studies examining the influence of industrial structure on foreign equity returns

Question 35 options:

	a)  conclusively show a connection.
	b)  have been inconclusive.
	c)  show that industrialized economies outperform lesser developed economies.
	d)  none of the above

 

Question 36 (2 points)

 

Floating for floating currency swaps

Question 36 options:

	a)  the reference rates are different for the different currencies: e.g. dollar LIBOR versus euro LIBOR. (Incorrect)
	b)  the reference rates can be the same but have different frequencies.
	c)  both a) and b)
	d)  none of the above

Question 37 (2 points)

 

Which combination of the following statements is true about a swap bank?

  

Question 37 options:

	a)  (i) and (ii)
	b)  (i), (ii) and (iii)
	c)  (i), (ii), (iii) and (iv)
	d)  (i), (ii), (iii), (iv) and (v)

Question 38 (2 points)

 

A major risk faced by a swap dealer is exchange rate risk. This is

Question 38 options:

	a)  the probability that a foreign counterparty will default in a currency swap.
	b)  the probability that either counterparty defaults in a currency swap.
	c)  the probability exchange rates will move against the dealer.
	d)  none of the above

Question 39 (2 points)

 

The size of the swap market is

Question 39 options:

	a)  measured by notational principal.
	b)  over 7 trillion dollars.
	c)  both a) and b)
	d)  none of the above

Question 40 (2 points)

 

Amortizing currency swaps

Question 40 options:

	a)  the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
	b)  incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged.
	c)  both a) and b)
	d)  none of the above

Question 41 (2 points)

 

A major risk faced by a swap dealer is mismatch risk. This is

Question 41 options:

	a)  the probability floating rates and exchange rates will NOT move together.
	b)  the difficulty in finding a second counterparty for a swap that the bank has agreed to take with another party.
	c)  the probability that both counterparties default.
	d)  none of the above

Question 42 (2 points)

 

In the swap market, which position potentially carries greater risks, broker or dealer?

Question 42 options:

	a)  Broker
	b)  Dealer
	c)  They are the same swaps, therefore the same risks.

Question 43 (2 points)

 

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. This means

Question 43 options:

	a)  the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR.
	b)  the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
	c)  both a) and b)
	d)  none of the above

Question 44 (2 points)

 

An interest-only single currency interest rate swap

Question 44 options:

	a)  is also known as a plain vanilla swap.
	b)  is also known as an interest rate swap.
	c)  is about as simple as swaps can get.
	d)  all of the above

Question 45 (2 points)

 

A major risk faced by a swap dealer is sovereign risk. This is

Question 45 options:

	a)  the probability that a sovereign counterparty will default.
	b)  the probability that a country will impose exchange restrictions on a currency involved in an existing swap.
	c)  the probability governments will intervene to support an exchange rate.
	d)  none of the above

Question 46 (2 points)

 

Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based multinational. Firm A wants to finance a £2 million expansion in Great Britain. Firm B wants to finance a $4 million expansion in the U.S. The spot exchange rate is £1.00 = $2.00. Firm A can borrow dollars at $10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds sterling at 11%. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.

Question 46 options:

	a)  There is no mutually beneficial swap that has neither party facing exchange rate risk.
	b)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 8% in dollars to A.
	c)  Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4 million pounds and pays 8% in dollars to A.
	d)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 10% in dollars to A.

Question 47 (2 points)

 

A swap bank

Question 47 options:

	a)  can act as a broker, bringing together counterparties to a swap.
	b)  can act as a dealer, standing ready to buy and sell swaps.
	c)  both a) and b)
	d)  only sometimes a) but never ever b)

Question 48 (2 points)

 

Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.

Question 48 options:

	a)  LIBOR + ½ percent
	b)  LIBOR
	c)  LIBOR - ½ percent
	d)  None of the above

Question 49 (2 points)

 

When a swap bank serves as a dealer:

Question 49 options:

	a)  The swap bank stands willing to accept either side of a swap.
	b)  The swap bank matches counterparties but does not assume any risk of the swap.
	c)  The swap bank receives a commission for matching buyers and sellers.
	d)  None of the above

Question 50 (2 points)

 

With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to

Question 50 options:

	a)  The risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index.
	b)  The risk that interest rates changing unfavorably before the sap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty.
	c)  The risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction.
	d)  The risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed to take.

 

Question 51 (2 points)

 

The record of investing in U.S.-based international mutual funds

Question 51 options:

	a)  shows that most funds have a beta much less than one.
	b)  shows them to be a raging arbitrage opportunity.
	c)  shows that they offer less diversification benefits than just investing in U.S.-based MNCs.
	d)  none of the above

Question 52 (2 points)

 

Bema Gold is an exploration and production company that trades on the Toronto stock exchange. Assume that when purchased by an international investor the stock's price and the exchange rate were CAD5 and CAD1.0/USD0.72 respectively. At selling time, one year after the purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the investor's annual percentage rate of return in terms of the U.S. dollars.

Question 52 options:

	a)  -13.60%
	b)  66.67%
	c)  38.89%
	d)  28.00%

Question 53 (2 points)

 

A zero-coupon French bond promises to pay €100,000 in five years. The current exchange rate is $1.50 = €1.00 and inflation is forecast at 3% in the U.S. and 2% in the euro zone per year for the next five years. The appropriate discount rate for a bond of this risk would be 10% if it paid in dollars. What is the appropriate price of the bond?

Question 53 options:

	a)  £65,196.13 = $97,794.20
	b)  £62,092.13 = $93,138.20
	c)  none of the above

Question 54 (2 points)

 

WEBS are

Question 54 options:

	a)  World Equity Benchmark Shares.
	b)  exchange-traded open-end country funds designed to closely track foreign stock market indexes.
	c)  both a) and b)
	d)  none of the above

Question 55 (2 points)

 

The less correlated the securities in a portfolio,

Question 55 options:

	a)  the lower the portfolio risk.
	b)  the higher the portfolio risk.
	c)  the lower the unsystematic risk.
	d)  the higher the diversifiable risk.

Question 56 (2 points)

 

Advantages of investing in mutual funds known as country funds include:

Question 56 options:

	a)  Speculation in a single foreign market at minimum cost.
	b)  Using them as building blocks of a personal international portfolio.
	c)  Diversification into emerging markets that are otherwise practically inaccessible.
	d)  All of the above

Question 57 (2 points)

 

For those investors who desire international equity exposure, WEBS

Question 57 options:

	a)  may well serve as a major alternative to such traditional tools as international mutual funds, ADRs and closed-end country funds.
	b)  are probably overpriced relative to international mutual funds, ADRs and closed-end country funds.
	c)  would provide no international equity exposure since they are pools of bonds.
	d)  none of the above

Question 58 (2 points)

 

Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested €10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro. Compute the rate of return on your investment in euro terms.

Question 58 options:

	a)  12.50%
	b)  16.25%
	c)  28.00%
	d)  -9.09%

Question 59 (2 points)

 

Regarding the mechanics of international portfolio diversification, which statement is true?

Question 59 options:

	a)  Security returns are much less correlated across countries than within a county.
	b)  Security returns are more correlated across countries than within a county.
	c)  Security returns are about as equally correlated across countries as they are within a county.
	d)  None of the above

Question 60 (2 points)

 

Recent studies show that when investors control exchange risk by using currency forward contracts to hedge

Question 60 options:

	a)  international bond portfolios outperform domestic bond portfolios.
	b)  international bond portfolios dominate domestic stock portfolios in terms of risk-return efficiency.
	c)  both a) and b)
	d)  none of the above

 

Question 61 (2 points)

 

Alternatives to firms locating production overseas include

Question 61 options:

	a)  exporting from the home country.
	b)  licensing production to a local firm in the host country.
	c)  ignoring the foreign market.
	d)  all of the above

Question 62 (2 points)

 

FDI stocks

Question 62 options:

	a)  are the common shares of multinational companies that invest abroad.
	b)  are mutual funds that invest in FDI.
	c)  represent the accumulation of previous years' FDI flows.
	d)  at the sum total of current year FDI flows.

Question 63 (2 points)

 

Why do firms locate production overseas rather than exporting finished goods?

Question 63 options:

	a)  Shipping costs
	b)  Firms seek to extend corporate control overseas
	c)  Imperfect factor markets
	d)  All of the above

Question 64 (2 points)

 

The communist victory in China in 1949 is an example of

Question 64 options:

	a)  micro risk.
	b)  macro risk.
	c)  both a) and b)
	d)  none of the above

Question 65 (2 points)

 

Examples of transfer risk include

Question 65 options:

	a)  the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
	b)  unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
	c)  restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
	d)  none of the above

Question 66 (2 points)

 

Since shareholders of MNCs may indirectly benefit from corporate international diversification,

Question 66 options:

	a)  therefore firms are motivated to undertake FDI for the purpose of providing shareholders with diversification services.
	b)  therefore firms are motivated to undertake FDI for the purpose of being part of the global minimum variance portfolio.
	c)  therefore firms are motivated to undertake FDI for the purpose of staying on the efficient frontier.
	d)  none of the above

Question 67 (2 points)

 

Transfer risk refers to the risk which arises from the uncertainty about

Question 67 options:

	a)  the host country's policies affecting the local operations of an MNC.
	b)  the host country's policy regarding ownership and control of local operations.
	c)  cross-border flows of capital, payment, know-how, and the like.
	d)  none of the above

Question 68 (2 points)

 

Under a 1981 Voluntary Trade Agreement Japanese automobile manufacturers were not allowed to increase their exports to the U.S. market. As a result

Question 68 options:

	a)  they exited the market.
	b)  Honda was motivated to circumvent the trade barriers.
	c)  Honda's FDI may have been part of an overall corporate strategy designed to bolster their competitive position vis-à-vis their domestic rivals such as Toyota.
	d)  both b) and c)

Question 69 (2 points)

 

In a study of the effect of international acquisitions on the stock prices of U.S. firms. U.S. acquiring firms with information-based intangible assets experience a significantly positive stock price reaction upon foreign acquisition.

Question 69 options:

	a)  This is consistent with the finding that the market value of the firm is positively related to its multinationality because of the firm's intangible assets, such as R&D capabilities, with public good nature.
	b)  It is not the multinationality per se that contributes to the firm's value.
	c)  Their empirical findings support the (forward-) internalization theory of FDI.
	d)  All of the above

Question 70 (2 points)

 

Trade barriers can arise naturally. Which of the following are natural barriers to trade?

Question 70 options:

	a)  Transportation costs
	b)  Quotas
	c)  Tariffs
	d)  Transactions costs

Question 71 (2 points)

 

Coca-Cola has invested in bottling plants all over the world rather than licensing local firms

Question 71 options:

	a)  because the foreigners can't be trusted to follow the secret recipe.
	b)  because Coca-Cola wanted to protect the formula for its famous soft drink.
	c)  because of the internalization theory of FDI.
	d)  both b) and c)

Question 72 (2 points)

 

FDI can take the form of

Question 72 options:

	a)  Greenfield investment.
	b)  cross-border M&A.
	c)  establishing new production facilities in a foreign country.
	d)  all of the above

Question 73 (2 points)

 

Which of the following statements is true about product life cycle theory?

Question 73 options:

	a)  In the early stages of the product life cycle, the demand for the new product is relatively insensitive to the price and thus a pioneering firm can charge a relatively high price.
	b)  It predicts that over time the U.S. switches from an exporting country of new products to an importing country.
	c)  It has an "S" shaped curve when plotting "quantity sold" versus "time".
	d)  All of the above

Question 74 (2 points)

 

Unlike the theory of international trade or the theory of international portfolio investment,

Question 74 options:

	a)  we do not have a well-developed, comprehensive theory of FDI.
	b)  the comprehensive theory of FDI focuses on mean-variance efficiency.
	c)  the comprehensive theory of FDI is an arbitrage argument, like interest rate parity.
	d)  none of the above

Question 75 (2 points)

 

What kind of integration is vertical integration?

Question 75 options:

	a)  When the government outlaws discrimination against both short and tall people.
	b)  When two firms join together in a conglomerate merger.
	c)  When two firms related in the production process are owned by the same firm, as in a plywood manufacturer owning a logging company.
	d)  All of the above

 

Question 76 (2 points)

 

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks:

(i)- the company can expand its potential investor base
(ii)- issues involving the disclosure and listing requirements
(iii)- creates a secondary market for the company's shares
(iv)- volatility spillover from the overseas markets
(v)- liquidity
(vi)- control of the company by foreigners
(vii)- enhances the visibility of the company's name and its products in foreign marketplaces

Which of the following represent all the potential benefits of the cross-border listings of stocks?

Question 76 options:

	a)  (i), (ii), and (iii)
	b)  (ii), (iv), and (vi)
	c)  (i), (iii), (v), and (vii)
	d)  (iv), (v), (vi), and (vii)

Question 77 (2 points)

 

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4.

Question 77 options:

	a)  3/4
	b)  7/9
	c)  4/5
	d)  9/11
	e)  5/6

Question 78 (2 points)

 

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2½.

Question 78 options:

	a)  ⅓
	b)  ½
	c)  3/5
	d)  ⅔
	e)  5/7

Question 79 (2 points)

 

In the real world, many firms that have cross-listed their shares on the U.S. markets have experienced a reduction in the cost of capital. This effect was greater for

Question 79 options:

	a)  Australian firms than for Canadian firms.
	b)  United States firms than for Mexican firms.
	c)  bonds than for stocks.
	d)  None of the above

Question 80 (2 points)

 

Studies suggest that international capital markets are not segmented anymore

Question 80 options:

	a)  and are therefore fully integrated.
	b)  but are not as yet fully integrated.
	c)  so cross-listing of shares will not lower a firm's cost of capital.
	d)  none of the above

Question 81 (2 points)

 

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.

Question 81 options:

	a)  3/4
	b)  7/9
	c)  4/5
	d)  9/11
	e)  5/6

Question 82 (2 points)

 

A value-maximizing firms would

Question 82 options:

	a)  undertake an investment project as long as the IRR exceeds the NPV.
	b)  undertake an investment project as long as the IRR is less than the cost of capital.
	c)  undertake an investment project as long as the IRR exceeds the cost of capital.
	d)  none of the above

Question 83 (2 points)

 

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½, a tax rate of 34%, a levered cost of equity of 12% and an after-tax cost of debt of 8%.

Question 83 options:

	a)  9.6%
	b)  7.968%
	c)  14%
	d)  none of the above

Question 84 (2 points)

 

In the notation of the book, K = (1 - λ)K_l + λ (1 - τ)i
Which of the following are correct?

Question 84 options:

	a)  The weighted average cost of capital for a levered firm is K
	b)  The tax rate is τ  (Incorrect)
	c)  The after-tax cost of debt capital is i
	d)  All of the above  (This should be correct)

Question 85 (2 points)

 

Systematic risk refers to

Question 85 options:

	a)  the diversifiable (company specific) risk of an asset.
	b)  the nondiversifiable (market) risk of an asset.
	c)  economic and political risk.
	d)  the risk that can be hedged.

 

Question 86 (2 points)

 

Capital budgeting analysis is very important, because it

Question 86 options:

	a)  involves, usually expensive, investments in capital assets.
	b)  has to do with the productive capacity of a firm.
	c)  will determine how competitive and profitable a firm will be.
	d)  all of the above

Question 87 (2 points)

 

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?

Question 87 options:

	a)  €1.00 = $1.2379
	b)  €1.00 = $1.2139
	c)  €1.00 = $0.9903
	d)  $1.00 = €1.2623

Question 88 (2 points)

 

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S. is 2% and 3% in the euro zone. What spot exchange rate should prevail three years from now?

Question 88 options:

	a)  €1.00 = $1.2379
	b)  €1.00 = $1.2139
	c)  €1.00 = $0.9903
	d)  $1.00 = €1.2623

Question 89 (2 points)

 

Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing) payments over 3 years. The first payment is due December 31, 2009 and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8%. What is the APV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit. Select the answer closest to yours.

Question 89 options:

	a)  -$3,497,224.43
	b)  $417,201.05
	c)  $840,797
	d)  None of the above

Question 90 (2 points)

 

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
 
What is the levered after-tax incremental cash flow for year 30?

Question 90 options:

	a)  $9,027,390
	b)  $9,234,300
	c)  $9,134,300
	d)  $9,287,000
	e)  None of the above

Question 91 (2 points)

 

As of today, the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?

Question 91 options:

	a)  €1.00 = $1.5147
	b)  €1.00 = $1.4854
	c)  €1.00 = $0.6602
	d)  $1.00 = €0.6602

Question 92 (2 points)

 

Which of the following statements is false about "borrowing capacity"?

Question 92 options:

	a)  It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans.
	b)  It creates tax shields for APV analysis regardless of how the project is actually financed.
	c)  It synonymous to the "project debt".
	d)  It based on the firm's optimal capital structure.

Question 93 (2 points)

 

Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only 30-year loan at 8.0 percent APR with annual payments. Note that eight percent is less than the 10 percent that they normally borrow at. What is the NPV of the loan?

Question 93 options:

	a)  $198,469
	b)  $53,979.83
	c)  $102,727.55
	d)  $1,334,851.09
	e)  None of the above

Question 94 (2 points)

 

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors, "lost sales" refers to

Question 94 options:

	a)  the cannibalization of existing projects by new projects.
	b)  the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project.
	c)  both a) and b)
	d)  none of the above

Question 95 (2 points)

 

Some of the factors (with selected explanations) used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are:

(i)- expected after-tax terminal value, including recapture of working capital
(ii)- net income, which belongs to the equity holders of the firm
(iii)- initial investment at inception
(iv)- depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed from the calculation of net income, for tax purposes, but added back because it did not actually flow out of the firm)
(v)- weighted-average cost of capital
(vi)- the firm's after-tax payment of interest to debtholders
(vii)- economic life of the capital project in years
 
The "net present value" of a capital project is calculated by using:

Question 95 options:

	a)  (i), (ii), and (iii)
	b)  (ii), (iv), and (vi)
	c)  (i), (iii), (v), and (vii)
	d)  (iv), (v), (vi), and (vii)

Question 96 (2 points)

 

The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. What is the firm's cost of equity capital?

Question 96 options:

	a)  33.33%
	b)  10.85%
	c)  13.12%
	d)  16.5%
	e)  None of the above

Question 97 (2 points)

 

The required return on assets is 18%. The firm can borrow at 12.5%; firm's target debt to value ratio is 3/5. The corporate tax rate is 34%, and the risk-free rate is 4% and the market risk premium is 9.2 percent. What is the weighted average cost of capital?

Question 97 options:

	a)  12.15%
	b)  13.02%
	c)  14.33%
	d)  23.45%
	e)  None of the above

Question 98 (2 points)

 

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
 
What is the levered after-tax incremental cash flow for year 0?

Question 98 options:

	a)  -$1,010,000
	b)  -$1,000,000
	c)  -$660,000
	d)  -$2,100,000
	e)  None of the above

Question 99 (2 points)

 

Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8%. What is the APV of this subsidized loan? If you rounded in your intermediate steps, the answer may be slightly different from what you got. Choose the closest.

Question 99 options:

	a)  -$3,497,224.43
	b)  $417,201.05
	c)  $840,797
	d)  None of the above

Question 100 (2 points)

 

Sensitivity analysis in the calculation of the adjusted present value (APV) allows the financial manager to

Question 100 options:

	a)  analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment.
	b)  more fully understand the implications of planned capital expenditures.
	c)  consider in advance actions that can be taken should an investment not develop as anticipated.
	d)  all of the above