Deck 10: Financial Management and Accounting in the Global Firm

Question 1

The unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments is called ________.

A) currency hedging
B) commercialization
C) currency arbitrage
D) securitization

Answer 1

D

Question 2

In terms of financial management tasks that are key to MNE success, which of the following comes immediately after the task of raising funds for the firms?

A) assesses the financial attractiveness of major investment projects, such as foreign expansion
B) determines the ideal long-term mix of financing for the firm's international operations
C) learns to operate in a global environment with diverse accounting practices and international tax regimes
D) administers funds passing in and out of the firm's value-adding activities

Answer 2

D

Question 3

The last task in international financial management is to manage the diversity of international accounting and tax practices.

Answer 3

True

Question 4

In terms of financial management tasks that are key to MNE success, which of the following comes after the task of assessing the financial attractiveness of major investment projects?

A) oversees transactions in various foreign currencies and manages risk exposure resulting from exchange-rate fluctuations
B) administers funds passing in and out of the firm's value-adding activities
C) obtains financing for funding value-adding activities and investment projects
D) learns to operate in a global environment with diverse accounting practices and international tax regimes

Question 5

Which of the following statements is TRUE of the global money market?

A) A great advantage for investors in the global money market is the ability to access a wide range of investment opportunities.
B) It refers to the collective financial markets where firms and governments raise long-term financing.
C) The maturity period for the funding obtained from the global money market is over ten years.
D) It refers to the collective financial markets worldwide where firms and governments raise short-term financing.

Question 6

________ refers to shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows.

A) Stock
B) A bond
C) Debt
D) A draft

Question 7

Global equity market refers to ________.

A) the international marketplace in which bonds are bought and sold, primarily through bond brokers
B) collective financial markets where firms can borrow money from banks or other financial intermediaries, or sell corporate bonds to individuals or institutions, to raise capital
C) the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds
D) stock exchanges worldwide where investors and firms meet to buy and sell shares of stock

Question 8

Which of the following financing tactics would most likely help an MNE to avoid bankruptcy?

A) integrating e-commerce opportunities with domestic sales in order to maintain a steady balance of income and expenditures
B) agreeing to forward contracts with customers and hedging purchases and sales on future currency rates
C) organizing the capital structure so that the amount of debt financing is twice the level of equity financing
D) keeping the debt proportion of their capital structure to a level that can be managed even during difficult business conditions

Question 9

Which of the following is a debt instrument that specifies the timing of principal and interest payments?

A) stock
B) bond
C) share
D) equity

Question 10

Which of the following is the first task in international financial management?

A) managing working capital and cash flow
B) managing currency risk
C) choosing a capital structure
D) managing the diversity of international accounting and tax practices

Question 11

Which of the following is the final task in international financial management?

A) managing currency risk
B) managing the diversity of international accounting and tax practices
C) raising funds for the firm
D) managing working capital and cash flow

Question 12

When using equity financing, firms run the risk of ________.

A) diluting the firm's ownership
B) regular monthly payments of principal and interest
C) incurring a high debt ratio
D) severe penalties for late or missed payments of interest

Question 13

Which of the following is a major purpose of the international capital market?

A) to reduce entrepreneurial initiatives
B) to increase the cost of borrowing
C) to reduce risk for lenders
D) to reduce the money supply for borrowers

Question 14

Which of the following is a benefit for firms that participate in the global capital market?

A) availability of short-term financing
B) availability of a large pool of financing sources at a lower, competitive rate
C) access to larger funds exclusively in the domestic market
D) access to unregulated and secured returns on investment

Question 15

Equity financing comes from ________.

A) foreign bonds
B) domestic bonds
C) capital by selling stocks
D) Eurocurrency market

Question 16

How much debt a firm should hold depends partly on the nature of its industry and its target markets. Which of the following firms can sustain a higher debt ratio?

A) an automobile firm in a developing economy
B) a software firm that sells software in an emerging economy
C) an insurance firm with stable sales in an advanced economy
D) a small supplier of construction material in a poor country

Question 17

Describe the six major financial management tasks that are critical to firms active in international business transactions.

Question 18

The sale of corporate bonds to individuals or institutions to raise capital is called ________.

A) debt financing
B) equity financing
C) multilateral netting
D) currency hedging

Question 19

Debt financing can add value to a firm because ________.

A) it enables investors and firms to develop long-term relationships through a joint business endeavor
B) some governments allow firms to deduct interest payments from their taxes
C) it limits the risk of bankruptcy
D) it increases the cash flow toward the company compared to equity financing

Question 20

Debt financing comes from ________.

A) personal savings of founders
B) loans from financial intermediaries
C) capital contributed by founders
D) selling shares of stock to investors

Question 21

Debt financing comes from either of two sources: (1) loans from banks and other financial intermediaries, or (2) the sale of corporate bonds to individuals or institutions.

Question 22

Financing Corporate Expansion (Scenario)
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia, where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand its Chinese facility to accommodate the increasing demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.
Which of the following, if TRUE, supports Intensity raising funds through intracorporate financing to expand its Chinese facility?

A) Intensity would save money on transaction fees and tax deductible interest payments.
B) Intensity's subsidiaries are struggling due to price wars with video game competitors.
C) The Chinese government has offered Intensity a low-interest loan for the expansion.
D) Eurobonds have been a popular choice among MNEs with facilities in China.

Question 23

When Mexican cement giant Cemex sells dollar-denominated bonds in the United States, it is issuing foreign bonds.

Question 24

The NYSE and the NASDAQ Stock Market are the largest in terms of volumes of shares traded.

Question 25

Explain the differences between equity financing and debt financing, and discuss the ways international firms obtain equity financing or debt financing.

Question 26

Funding obtained from sources inside a firm is known as ________.

A) structural financing
B) grid loan financing
C) internal network financing
D) intracorporate financing

Question 27

Describe four factors responsible for the fast-paced growth of the global capital market.

Question 28

When Toyota sells yen-denominated bonds in the United States, it is issuing Eurobonds.

Question 29

Discuss two reasons why a nation might NOT consider a firm's high debt ratio a risky approach to international business.

Question 30

Financing Corporate Expansion (Scenario)
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia, where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand its Chinese facility to accommodate the increasing demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.
Which of the following is most likely a disadvantage of Intensity raising funds through equity financing?

A) Intensity management could lose a controlling interest in the firm.
B) Intensity would not be able to repay shareholders at any time.
C) Intensity management would end up in bankruptcy.
D) Intensity could lose money from currency fluctuations in emerging markets.

Question 31

Which of the following statements is TRUE of the Export Import (Ex-IM) Bank in the United States?

A) It is an international agency run by the WTO that provides capital to firms from emerging and developing economies.
B) It is a federal agency for loans and loan guarantees. Governments in the developing world often provide loans to promote inward direct investment projects such as the construction of dams, power plants, and airports.
C) It is a branch of the EU that provides working capital loans to SMEs that are based in the economic bloc.
D) It is a privately owned bank that offers high interest loans to international firms with poor credit ratings.

Question 32

Freedom Energy Group (Scenario)
Freedom Energy Group (FEG) is a major American energy services group based in Oklahoma. FEG manufactures products to facilitate oil and gas exploration and is involved in the construction of oil refineries and gas pipelines around the world. FEG managers are considering the purchase of a Canadian energy firm, Maple Leaf Energy, which manufactures pipeline stabilization products. The financial management division of FEG is considering the risks and benefits of purchasing Maple Leaf.
Which of the following questions would be more important for FEG financial managers to evaluate before the firm purchases Maple Leaf?

A) What is the anticipated impact of hybrid technology and alternative fuel sources on the gas and oil industry?
B) Should FEG continue to employ Maple Leaf personnel after the acquisition, or should they be given severance packages?
C) What type of global marketing package should be created to inform potential customers about FEG's purchase of Maple Leaf?
D) What mix of debt and equity financing should FEG employ in the purchase and ownership of Maple Leaf?

Question 33

Firms obtain debt financing by selling stock bonds to investors.

Question 34

A firm in need of long-term financing will most likely turn to the global money market instead of the global capital market.

Question 35

The market consisting of all the world's currencies that are banked outside their countries of origin is called the ________.

A) foreign exchange market
B) interbank market
C) Eurocurrency market
D) offshore financial center

Question 36

Which of the following has contributed to the emergence of a large Eurocurrency market?

A) lower interest rates on Eurocurrency loans
B) regulations of home-country banking systems
C) loans repaid interest-free at face value
D) low interest rates on Eurocurrency deposits

Question 37

The global capital market has grown rapidly due to increased government regulation, which has made international movement of capital easier.

Question 38

Financing Corporate Expansion (Scenario)
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia, where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand its Chinese facility to accommodate the increasing demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.
Which of the following questions would be more important for Intensity financial managers to evaluate when deciding the best method for the firm to raise funds?

A) What percentage of stock is owned by the CEO of Intensity Games?
B) How will the dividend be paid to shareholders if the firm expands its Chinese facility?
C) What type of debt financing would be most economical for Intensity?
D) At which bank does Intensity do the majority of its business transactions?

Question 39

The average debt ratio in Germany, Italy, Japan, and numerous developing economies typically exceeds 50 percent. High reliance on debt financing can arise if a country lacks a well-developed stock market or other systems for obtaining capital from equity sources.

Question 40

Financing Corporate Expansion (Scenario)
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia, where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand its Chinese facility to accommodate the increasing demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.
Which of the following is most likely an advantage of Intensity accessing funds through the global capital market instead of domestic sources?

A) The maturity period of instruments is restricted to less than 365 days.
B) access to a vast number of competitive funding sources
C) access to short-term financing exclusively
D) reduced exposure to currency risk and rate fluctuation

Question 41

________ is the strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.

A) Herding
B) Multilateral netting
C) Hedging
D) Currency swap

Question 42

Net present value is defined as the ________.

A) combined value of the capital assets of a project and the sales projections
B) difference between the present value of a firm's assets and the future project liabilities
C) difference between the present value of a project's incremental cash flow and the initial investment
D) combined value of a project's initial investment and its incremental cash flow

Question 43

Net working capital is ________.

A) the combined total of a firm's equity capital and net losses
B) the difference between a firm's current assets and current liabilities
C) the difference between a firm's expected profits and current debts
D) any currency deposited in a bank outside its country of origin

Question 44

Intracorporate fund transfers enable MNEs to access cash from subsidiaries through royalty payments, transfer pricing, and multilateral netting.

Question 45

A centralized depository lets managers reduce the size of highly liquid accounts and invest the funds, generally at the higher interest rates offered for large deposits, to generate maximal returns.

Question 46

Through a ________ the parent company deposits a large sum in a foreign bank, which transfers it to a subsidiary as a loan.

A) trade credit
B) dividend remittance
C) fronting loan
D) royalty payment

Question 47

The volume and complexity of a firm's intracorporate transfers depends on ________.

A) the amount of cash available from loans
B) the value of the shareholders' stock
C) the country from which the firm originates
D) the number of subsidiaries and alliances the firm maintains worldwide

Question 48

Multilateral netting would enable an MNE with numerous subsidiaries to ________.

A) consolidate intracorporate cash transfers and reduce transaction fees
B) charge its subsidiaries as they exchange goods and services with the parent company
C) transfer goods and services within the firm without paying host-country taxes
D) channel funds from small subsidiaries to large ones without paying interest

Question 49

Multilateral netting is the means by which subsidiaries and affiliates charge each other as they exchange goods and services.

Question 50

Which of the following terms is used to refer to compensation paid to the owner of intellectual property?

A) commission fee
B) trade credit
C) royalty payment
D) dividend remittance

Question 51

Which of the following is characteristic of the parent's perspective in capital budgeting?

A) It estimates future cash flows from the project in the functional currency.
B) It adds the subsidiary's after-tax operating cash flows with the project's cost of capital.
C) It seldom uses the currency of the primary economic environment in which it operates.
D) It estimates the incremental after-tax operating cash flows in the subsidiary's local currency.

Question 52

Why have global capital markets grown so rapidly in the past decade? Why has the growth of international business pressured multinational firms and international organizations to harmonize world accounting systems?

Question 53

Describe three methods used to transfer funds within an MNE.

Question 54

All of the following are characteristic of the parent's perspective approach in capital budgeting EXCEPT that it ________.

A) estimates future cash flows from the project
B) uses the subsidiary's local currency
C) forecasts forward rates
D) uses the functional currency of the parent

Question 55

Transfer pricing is defined as ________.

A) methods for transferring funds exclusively from foreign subsidiaries to parent corporations
B) compensation paid to owners of intellectual property
C) the means by which subsidiaries and affiliates charge each other as they exchange goods and services
D) the process through which a parent deposits a large sum in a foreign bank, which transfers it to a subsidiary as a loan

Question 56

What are four advantages to large firms lending funds to their foreign subsidiaries?

Question 57

________ estimates future cash flows from the project in the functional currency of the parent-that is, the currency of the primary economic environment in which it operates.

A) Project's perspective
B) Parent's perspective
C) Passive hedging
D) Active hedging

Question 58

Capital budgeting is intended to ________.

A) assist in the means by which subsidiaries and affiliates charge each other as they exchange goods and services
B) help managers decide which international projects provide the best financial return
C) defer payment for goods and services received from the parent firm
D) eliminate the need for international accounting experts

Question 59

Through ________, a subsidiary can defer payment for goods and services received from its parent firm.

A) trade credits
B) royalty payments
C) fronting loans
D) dividend remittances

Question 60

Explain the difference between working capital and net working capital, and discuss why managers employ net present value (NPV) analysis to evaluate domestic and international capital investment projects.

Question 61

________ is the currency risk that results from exchange-rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

A) Translation exposure
B) Economic or operating exposure
C) Transaction exposure
D) Interoceptive exposure

Question 62

________ is the currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

A) Translation exposure
B) Transaction exposure
C) Spot exchange rate
D) Multilateral netting

Question 63

Freedom Energy Group (Scenario)
Freedom Energy Group (FEG) is a major American energy services group based in Oklahoma. FEG manufactures products to facilitate oil and gas exploration and is involved in the construction of oil refineries and gas pipelines around the world. FEG managers are considering the purchase of a Canadian energy firm, Maple Leaf Energy, which manufactures pipeline stabilization products. The financial management division of FEG is considering the risks and benefits of purchasing Maple Leaf.
Which of the following should most likely be considered by financial managers before FEG purchases Maple Leaf?

A) How will environmentalists react to the purchase of Maple Leaf by FEG?
B) Should FEG integrate the Maple Leaf logo into the FEG marketing campaign?
C) What is the best way for FEG to manage currency fluctuation between U.S. dollars and Canadian dollars?
D) How will NAFTA affect the legal negotiations between FEG and Maple Leaf?

Question 64

With a futures contract, the purchaser agrees to buy or sell a currency ________.

A) within a certain amount of time, at the rate applicable on that day
B) when the exchange rate reaches a set amount
C) at any rate after a specified period of time has elapsed
D) at a predetermined price on a specific date

Question 65

Which of the following is applied when an American tourist exchanges dollars for the immediate receipt of Japanese yen at a Tokyo bank?

A) the forward rate
B) the spot rate
C) the discount rate
D) the prime rate

Question 66

Economic exposure results from exchange-rate fluctuations that affect ________.

A) marketing strategies
B) tariffs and duties
C) brand personality
D) product pricing and inputs and the value of foreign investments

Question 67

If one U.S. dollar equaled one euro last year, and then the exchange rate shifted so that today one dollar equals two euros, which of the following will most likely occur?

A) Americans will export more U.S. products.
B) Americans will have a lower standard of living.
C) Americans will cancel vacations to Europe.
D) Europeans will import fewer U.S. products.

Question 68

Transaction exposure occurs when ________ are denominated in foreign currencies.

A) accounts receivables
B) financial reports
C) bank loans
D) wages and salaries

Question 69

Which of the following is a factor that complicates capital budgeting in the MNE?

A) project cash flows in the reporting currency of the parent firm
B) government intervention in the project
C) similar tax rules in the project location and the parent's country
D) government permit to exclusively transfer funds from the project to the parent firm

Question 70

________ is the process of combining and integrating the financial results of foreign subsidiaries into the financial statements of the parent firm.

A) Hedging
B) Dumping
C) Consolidation
D) Trade credit

Question 71

Transaction exposure is currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

Question 72

Capital budgeting in MNEs is protected from country risks or government intervention.

Question 73

The purpose of capital budgeting is to help managers decide which international projects provide the best financial return.

Question 74

Which of the following is the purpose of a forward contract?

A) reduce corporate exposure to tax audits
B) maximize intracorporate finance
C) minimize the risk of exchange rate fluctuations
D) earn profits from outsourcing activities

Question 75

What is the rate of exchange quoted by a financial institution for delivery of a currency within 48 hours?

A) spot rate
B) prime rate
C) direct quote
D) repo rate

Question 76

A parent's perspective approach in capital budgeting can be employed by managers interested in initially screening the appropriateness of an international capital investment project.

Question 77

Estimating project cash flows is complex and requires forecasting a range of variables that contribute to anticipated revenues and costs over several years.

Question 78

Unlike exporters and licensors, who both face currency risk, managers of foreign investment portfolios can also be impacted by the fluctuation in exchange rates.

Question 79

________ are currency traders who seek to minimize their risk of exchange-rate fluctuations, often by entering into forward contracts or similar financial instruments.

A) Venture capitalists
B) Arbitragers
C) Hedgers
D) Speculators

Question 80

International firms operating within the Eurozone are less concerned about currency risk than international firms operating outside the Eurozone mainly because of the ________.

A) tax haven privileges in the bloc
B) consistently favorable exchange rates for the bloc
C) use of a single currency within the bloc
D) economic bloc restrictions that are applicable to all the firms