Deck 19: Managing Net Working Capital

Question 1

A firm would increase its investment in net working capital in order to produce ________.

A) dividends in the future
B) cash in the future
C) more marketable securities
D) larger inventories

Answer 1

B

Question 2

When the IRS determines an appropriate transfer price that a multinational's affiliate may use,the guideline is known as ________.

A) reasonable man principle
B) the book value
C) arm's length price
D) resale price

Answer 2

C

Question 3

When an affiliate is located in a high tax jurisdiction,the general rule is to set the transfer price that another affiliate would charge as ________ as possible.

A) high
B) low
C) neutral
D) proportional

Answer 3

A

Question 4

What is the name of the condition that arises when the government of a foreign country makes the nation's currency inconvertible?

A) controlled exchange rates
B) managed currency
C) blocked funds
D) expropriation

Question 5

When a multinational engages in a process where it intentionally minimizes the firm's taxes when it repatriates funds,it is known as ________.

A) bilateral netting
B) lagging accounts payable
C) leading accounts receivable
D) tax planning

Question 6

When using the cash management methods of lagging or leading payments,the basic idea is to move funds from

A) a high tax jurisdiction to a lower one.
B) a low tax jurisdiction to a higher one.
C) a high tax jurisdiction to a tax neutral one.
D) the affiliate to the parent headquarters.

Question 7

The prices a multinational affiliate may charge another affiliate when selling inputs or services to them are known as ________.

A) royalties
B) transfer prices
C) fees
D) dividends

Question 8

What is the name of the type of demand for money that arises because a firm realizes that is has some expenditures that will be incurred in the near future?

A) transactions
B) precautionary
C) short-term
D) long-term

Question 9

One technique a multinational may use to avoid the blocked fund strategy of a foreign nation is for the parent to lend funds to the affiliate.The loan is known as a ________ loan.

A) parallel
B) back-to-back
C) fronting
D) transfer pricing

Question 10

What is the name of the type of demand for money that arises because a firm may need to purchase something due to an unanticipated change in its environment?

A) transactions
B) precautionary
C) short-term
D) long-term

Question 11

Which one of the following methods would the U.S.Internal Revenue Service accept to establish an arm's length price?

A) the comparable controlled price method
B) the wholesale price method
C) in-house price method
D) the comparable profits method

Question 12

To avoid paying the higher corporate tax to a foreign government,the rule states that a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible to lower tariff payments.

A) low
B) high
C) neutral
D) proportional

Question 13

If the cash a firm invests in net working capital does not earn the weighted average cost of capital,it should be ________.

A) paid instead in returns to the firm's investors
B) held in retained earnings
C) placed in marketable securities
D) held as cash

Question 14

Cash management can be enhanced using a process where payments and receipts between affiliates are recorded but the actual transfer of funds involves net amounts only for amounts owed between affiliates.The system is known as

A) centralized cash management.
B) multilateral netting.
C) lagging accounts payables.
D) leading accounts receivables.

Question 15

Using a centralized cash management system results in a decreased ________ cash demand.

A) transactions
B) long-term
C) precautionary
D) short-term

Question 16

For a multinational corporation with many affiliates throughout the world,________ the management of the short-term cash balances of the affiliates provides significant savings to the firm.

A) outsourcing offshore
B) arranging regionally
C) dispersing
D) centralizing

Question 17

When the value of a firm's current liabilities are subtracted from its stock of working capital,the resulting value is known as

A) total working capital.
B) gross working capital.
C) net working capital.
D) free working capital.

Question 18

________ refers to the stock of current assets held by a firm at any point in time.

A) Working capital
B) Cash
C) Marketable securities
D) Accounts receivable

Question 19

What is the term that refers to a firm's stock of cash,marketable securities,accounts receivable,and inventories?

A) working capital
B) cash
C) marketable securities
D) accounts receivable

Question 20

One goal of management is to operate the corporation efficiently in order to ________ the need for net working capital.

A) maximize
B) maintain
C) eliminate
D) minimize

Question 21

Which one of the following represents the most serious risk that arises when the government of a foreign country makes the nation's currency inconvertible?

A) controlled exchange rates
B) managed currency
C) blocked funds
D) expropriation

Question 22

What is the most important purpose for a foreign affiliate to have a well-defined dividend policy ?

Question 23

Suppose ABC International Company's Canadian subsidiary sells 1,300 trucks monthly to the French affiliate at a transfer price of $27,000 per truck.The Canadian and French marginal tax rates on corporate income are 45% and 50%,respectively.Assume the transfer price of the trucks can be set at any level between $25,000 and $30,000.Explain the transfer price you will set in order to minimize the total taxes paid by the Company.

Question 24

To avoid paying the higher corporate tax to a foreign government,a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible.

A) low
B) high
C) neutral
D) proportional

Question 25

Why is stockpiling inventories when faced with the threat of devaluation an insufficient reason to operate the firm?

Question 26

To avoid paying the higher ad valorem tariff to a foreign government,a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible.

A) high
B) low
C) neutral
D) proportional

Question 27

What are the guidelines to use transfer pricing to shift income around the world?

Question 28

What are the constraints facing international cash management from purely domestic cash management?

Question 29

What is the impact on the firm with if it always invoices their customers in hard currencies?

Question 30

Ajax International always invoices its customers in hard currencies.What has the firm done to the currency risk that may prevent future sales?

A) It has shifted the exchange rate risk entirely to the customer who may seek other suppliers with less rigid terms.
B) It has shared the exchange rate risk with its customers who may object.
C) It has done nothing to shift or share exchange rate risk with its customers.
D) It has avoided the possibility of exchange rate controls imposed by the governments of its customers.

Question 31

What are the determinants of leading payments between related international affiliates?

Question 32

When the parent lends to an affiliate in order to circumvent blocked fund policies of governments in affiliate countries,a financial intermediary is often used such as a(n)________.

A) eurobank
B) investment bank
C) netting center
D) international bank