Deck 8: Extension: Multinational Treasury Management

Question 1

A call option is an option to buy an underlying asset at a predetermined price.

Answer 1

True

Question 2

Underinvestment occurs when debtholders refuse to invest additional capital into the firm during financial distress.

Answer 2

False

Question 3

A decrease in the variability of firm value is good news for debt and bad news for the equity call option, other things held constant.

Answer 3

True

Question 4

Managerial gamesmanship is least prevalent during financial distress.

Question 5

Direct costs of financial distress are far more important to corporate hedging decisions than are indirect costs.

Question 6

If corporate financial policy is to have value, then at least one of the perfect market assumptions cannot hold.

Question 7

If financial markets are informationally efficient, then corporate financial policy is irrelevant.

Question 8

In perfect financial markets, corporate hedging policy has no value.

Question 9

Equal access to perfect financial markets ensures that individual investors can replicate any financial action that the firm can take.

Question 10

Multinationals have a comparative advantage over domestic firms in exploiting cross-border differences in financial markets.

Question 11

In perfect financial markets, corporate investment policy is irrelevant.

Question 12

In the real world, corporate hedging policy can change expected future cash flows but is unlikely to reduce the cost of debt.

Question 13

Corporate hedging of business risk unambiguously increases shareholder wealth when the firm is in financial distress.

Question 14

A call option is an option to "call in" or demand payment on a loan.

Question 15

Perfect financial markets are a necessary condition for corporate risk hedging to have value.

Question 16

If hedging currency risk is to add value to the stakeholders of the firm, then hedging must impact either expected future cash flows or the cost of capital or both.

Question 17

Real-world financial markets are perfect markets.

Question 18

Option values increase with an increase in the volatility of the underlying asset.

Question 19

Indirect financial distress costs are relatively unimportant for firms selling products for which quality and after-sale service are important.

Question 20

In perfect financial markets, corporate financial policy is irrelevant.

Question 21

Hedging can increase firm value by reducing the costs of agency conflicts between managers and shareholders.

Question 22

Which of a) through d) is UNLIKELY to result in a decision to hedge currency risk?

A) bid-ask spreads on foreign exchange
B) costs of financial distress
C) differential taxes on income from different tax jurisdictions
D) stakeholder game-playing
E) All of the above are incentives to hedge

Question 23

In practice, management's objective is to maximize shareholder wealth.

Question 24

Exchange-traded options and futures contracts have a fixed cost per contract so that costs are proportional to the number of contracts traded.

Question 25

Managers have little incentive to hedge company-specific risks.

Question 26

Which of statements a) through c) regarding costs of financial distress is FALSE?

A) Both debt and equity unambiguously benefit from corporate risk hedging.
B) Hedging can increase expected cash flows by reducing the costs of financial distress.
C) Hedging can reduce debtholders' required return and hence the cost of capital to the firm.
D) All of the above are true.
E) None of the above are true.

Question 27

Indirect costs of financial distress impact the firm in each of the following ways EXCEPT

A) higher financial costs
B) higher legal costs in bankruptcy
C) higher operating costs
D) lower revenues
E) stakeholder gamesmanship

Question 28

The costs of hedging through operations are likely to be less burdensome for a large multinational corporation with diversified operations than for a small, less-diversified firm.

Question 29

Managers have an incentive to hedge their unit's transaction exposure to currency risk.

Question 30

In financial distress, equity has an incentive to take on large risks in order to increase the value of the equity call option.