Deck 1: An Introduction to International Financial Management

Question 1

Which of the following best characterizes globalization?

A) Increases competition and global economic efficiency, thereby having the potential to increase the standard of living in both developing nations and highly industrialized countries.
B) Can threaten the economic independence of nations and their cultural traditions.
C) Is largely regulated by treaties and other multilateral agreements under the direction of the United Nations' project on transnational corporations.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Answer 1

Only statements a and b are correct.

Question 2

Which of the following definitions best describes a multinational enterprise?

A) A corporation owned by a few individuals who are typically associated with the firm's management.
B) Collaborative arrangements that involve independent companies in related or supporting fields that band together to solidify a collaboration contract and make it harder to break.
C) A firm that operates in an integrated fashion in a number of countries.
D) A foreign company that raises most of its subsidiary's capital in the local market.
E) A specialized financial firm that facilitates the transfer of funds from savers to demanders of capital.

Answer 2

A firm that operates in an integrated fashion in a number of countries.

Question 3

Which of the following statements is most correct?

A) Many companies decide to go abroad in order to increase their sales, to acquire raw materials for their production processes, or to find cheap labor.
B) Because foreign markets may not be in the same stage of the product life cycle as the home market, and because the economies of other countries may be in different phases of the business cycle, companies that operate in several different countries may be able to reduce their risk through diversification of their operations globally.
C) Companies that experience barriers to exporting their goods to countries with large attractive internal markets often decide to invest directly in local production in those markets.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Answer 3

All of the statements above are correct.

Question 4

Profitable domestic companies that have a competitive advantage within home markets are often advised to consider international expansion in order to

A) Increase their overall profitability.
B) Reduce their overall risk.
C) Lessen the potential impact of future trade barriers.
D) Strengthen their competitive position versus MNEs.
E) All of the statements above are legitimate reasons to consider international expansion.

Question 5

The basic overriding goal of any firm, domestic or multinational, should be to

A) Create value for all stakeholders by maximizing expected total corporate profit.
B) Create value for stockholders by maximizing the firm's stock price.
C) Create value for stockholders by maximizing expected earnings per share.
D) Minimize the firm's chances of losses.
E) Create value for all stakeholders by maximizing the firm's revenues.

Question 6

Which of the following individuals benefit from firms pursuing stock price maximization?

A) A firm's employees.
B) Consumers.
C) Members of society-even those who have no direct or indirect ownership interest in the stock market.
D) All of the above benefit from management concentrating on maximizing their firm's stock price.
E) None of the above benefit from management concentrating on maximizing their firm's stock price.

Question 7

Which of the following is not a stakeholder?

A) A firm's employees.
B) A firm's stockholders.
C) A firm's customers.
D) The community in which the firm is headquartered.
E) All of the above are stakeholders of the firm.

Question 8

Which of the following best describes an agency problem?

A) Occurs when foreign exchange brokers buy and sell currencies at two different rates.
B) A potential conflict of interest between managers and (1) outside stockholders, (2) creditors, and (3) stockholders and debtholders in times of financial distress.
C) Arises when the other party to a contractual arrangement will not be able to carry out its obligations as specified in the contract.
D) Arises when a firm has to pay a higher interest rate when renewing maturing credit.
E) Occurs when there are more exposed liabilities than exposed assets.

Question 9

Which of the following definitions best describes the term business ethics?

A) A company's attitude and conduct toward its employees, customers, community, and stockholders.
B) A company's conduct toward its employees.
C) A company's attitude toward its customers.
D) The gain from specialization and trade, which results in a positive-sum game.
E) A country's social, political, and economic environment.

Question 10

Which of the following is not an effect of globalization?

A) Globalization may threaten local control of the country's economic destiny.
B) Globalization provides the potential to raise the standard of living.
C) Globalization challenges long-held cultural values about the role of business in society and the regulation of company practices.
D) Globalization provides little competition from around the world with little or no impact on local jobs and company profits.
E) Globalization allows individuals greater access to a wider range of products and services at more competitive prices.

Question 11

The modern economic phenomenon called globalization in the textbook and in the popular press

A) Is very important for global MNEs but does not affect smaller companies with a purely domestic focus.
B) Affects domestic companies if they outsource elements of their production or back-office operations, or if they sell significant amounts of goods or services abroad; however, if they do not engage in these activities they are largely immune from the effects of globalization.
C) Has the potential to affect domestic companies with no international involvement through competition with other firms that are involved in the global marketplace.
D) Only statements a and b are correct.
E) All of the statements above are correct.

Question 12

Which of the following developments was not mentioned in the textbook as a driving force behind recent changes in the international financial environment?

A) Deregulation of many types of capital flows among nations.
B) Creation of an inexpensive and efficient global financial trading system under the direction of the Bank for International Settlements.
C) Creation of new markets for international commerce.
D) Development of new technologies for increasing the speed, security, and efficiency of international financial transactions.
E) Development of regional trading blocs with large internal markets and fewer restrictions on trade.

Question 13

Which of the following differentiates financial management in the U.S. from that practiced in many other countries?

A) The need to work with multiple currencies.
B) Different views about the appropriate objective of management.
C) The existence of different legal philosophies and systems (civil law instead of common law).
D) All of the above factors fundamentally affect the practice of finance in different countries.
E) Only statements a and b are correct.

Question 14

Stockholder wealth maximization, as the primary objective of the firm,

A) Ignores the impact of corporate decisions on groups such as employees, consumers, and society in general because decisions that increase profits almost always reduce the benefits going to these other groups.
B) Is considered to be appropriate in the U.S., U.K., and Japan, but not in other European countries.
C) Ensures that shareholders get nothing unless all other direct stakeholders receive their full and fair contracted compensation.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Question 15

Which of the following mechanisms are used in the United States to motivate managers to act in shareholders' best interests?

A) Managerial compensation plans.
B) Promoting good ethical behavior in the firm.
C) Direct shareholder intervention.
D) Statements a and c are used to motivate managers to act in shareholders' best interests.
E) Statements a, b, and c are used to motivate managers to act in shareholders' best interests.

Question 16

The system of corporate governance employed by companies in a given country

A) Defines the financial and legal framework for regulating the relationship between a company's management and its shareholders.
B) Can be either "outsider" or bank-based as in Japan and Europe, or "insider" or stockholder-based as in the U.S.
C) Defines the financial and legal framework for regulating the relationship between a company's management and its creditors.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Question 17

The so-called "stakeholder" point of view advocated by non Anglo-American countries as the basis for corporate governance

A) In the long run, often leads to problems with competitiveness.
B) Results in a more balanced consideration of the needs of society and, thus, to stronger, more competitive companies.
C) Is beginning to be accepted as a more socially just system of management and even companies in the Anglo-American countries are starting to adopt it.
D) All of the statements above are correct.
E) All of the statements above are incorrect.

Question 18

Which of the following statements is most correct?

A) Globalization affects domestic companies if they outsource elements of their production or back-office operations, or if they sell significant amounts of goods or services abroad; however, if they do not engage in these activities they are largely immune from the effects of globalization.
B) Because foreign markets may not be in the same stage of the product life cycle as the home market, and because the economies of other countries may be in different phases of the business cycle, companies that operate in several different countries may be able to reduce their risk through diversification of their operations globally.
C) Stockholder wealth maximization as the primary objective of the firm ignores the impact of corporate decisions on groups such as employees, consumers, and society in general because decisions that increase profits almost always reduce the benefits going to the other groups.
D) The system of corporate governance employed by companies in a given country defines the financial and legal framework for regulating the relationship between a company's management and its creditors.
E) Globalization is largely regulated by treaties and other multilateral agreements under the direction of the United Nations' project on transnational corporations.

Question 19

Identify five major reasons that explain why U.S. and foreign firms go global.

Question 20

What is an agency relationship and, within a financial management context, what are the primary agency relationships?

Question 21

Give three reasons domestic firms are not immune to the complexities of globalization.

Question 22

Identify five major factors that distinguish domestic financial management from multinational financial management.

Question 23

It is often argued that stock price maximization results in short-sighted decisions that are bad for employees, bad for consumers, and ultimately bad for society. State whether this statement is true or false, and support your argument.

Question 24

Stockholder wealth maximization is generally accepted as the ultimate goal of financial management in countries such as Australia, Canada, the United Kingdom, and the United States. However, French and German firms focus on maximizing the welfare of a firm's stakeholders. Explain the problems with stakeholder welfare maximization and their unintended result on the goals of firms operating abroad today.

Question 25

What are some mechanisms used in the United States to ease agency problems?

Question 26

Why is it important that firms have a strong corporate governance system in place, particularly for multinational firms?