International Finance – Exam 1, 2026 – Study Material and
Practice Questions
Do you think that either the acquisition of a foreign firm or licensing will result in greater growth
for an MNC? Which alternative is likely to have more risk? - ANS✔✔ An acquisition will typically
result in greater growth, but it is riskier because it normally requires a larger investment and the
decision cannot be easily reversed once the acquisition is made.
Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain
how appreciation of the euro (the currency used in many European countries) would affect
Plak's valuation. - ANS✔✔ Plak's valuation should increase because the appreciation of the euro
will increase the dollar value of the cash flows remitted by the European subsidiaries.
As an overall review of this chapter, identify possible reasons for growth in international
business. Then, list the various disadvantages that may discourage international business. -
ANS✔✔ Growth in international business can be stimulated by (1) access to foreign resources
which can reduce costs, or (2) access to foreign markets which boost revenues. Yet,
international business is subject to risks of exchange rate fluctuations, and political risk (such as
a possible host government takeover, tax regulations, etc.).
Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased.
Hudson's best guess of its future peso cash flows to be received has not changed. However, its
valuation has declined as a result of the increase in political risk. Explain. - ANS✔✔ The
valuation of the MNC is the present value of expected cash flows. The increase in risk results in
a higher expected return, which reduces the present value of the expected future cash flows.
Birm Co., based in Alabama, is considering several international opportunities in Europe that
could affect the value of its firm. The valuation of its firm is dependent on four factors: (1)
expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted
into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm's weighted average
cost of capital. For each opportunity, identify the factors that would be affected.
,a) Birm plans a licensing deal in which it will sell technology to a firm in Germany for
$3,000,000; the payment is invoiced in dollars, and this project has the same risk level as its
existing businesses.
b) Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
c) Birm plans to discontinue its relationship with a U.S. supplier so that can import a small
amount of supplies (denominated in euros) at a lower cost fro - ANS✔✔ Joint Venture: Dollar CF
Acquisition: Euro CF and Birm's weighted average cost of capital
Imported Supplies: Euro CF
Exports to Ireland: Euro CF
Yahoo! has expanded its business by establishing portals in numerous
countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the U.K. It has
cash outflows associated with the creation and administration of each portal. It also generates
cash inflows from selling advertising space on its website. Each portal results in cash flows in a
different currency. Thus, the valuation of Yahoo! is based on its expected future net cash flows
in Argentine pesos after converting them into U.S. dollars, its expected net cash flows in
Australian dollars after converting them into U.S. dollars, and so on. Explain how and why the
valuation of Yahoo! would change if most investors suddenly expected that the dollar would
weaken against most currencies over time. - ANS✔✔ The valuation of Yahoo! should increase
because the present value of expected dollar cash flows to be received would increase.
Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland for $20
million. This company produces furniture and sells it locally (in Switzerland), and it is expected
to earn large profits every year. The company will become a subsidiary of Carlisle and will
periodically remit the excess cash flows from to its profits to Carlisle Co. Assume that Carlisle
Co. has no other international business. Carlisle has $10 million that it will use to pay for part of
, the Swiss company and will finance the rest of its purchase with borrowed dollars. Carlisle Co.
can obtain supplies from either a U.S. supplier or a Swiss supplier (in which case the payment
would be made in Swiss francs). Both suppliers are reputable and there would be no exposure
to country risk when using one supplier. Is the valuation of the total cash flows of Carlisle Co.
more uncertain if it obtains its supplies from a U.S. firm or a S - ANS✔✔ The valuation of Carlisle
Co. is more uncertain if it uses a U.S. supplier because it will have a larger amount of cash flows
that will be remitted from Switzerland and converted into dollars. If it obtains supplies from
Switzerland, it can use a portion of its Swiss franc cash flows to cover the cost, and will convert a
smaller amount of francs into dollars on a periodic basis. Thus, it is less exposed when sourcing
from Switzerland.
Minneapolis Co. is a major exporter of products to Canada. Today, an event occurred that has
increased the uncertainty surrounding the Canadian dollar's future value over the long term.
Explain how this event can affect the valuation of Minneapolis Co. - ANS✔✔ The future dollar
cash flows of Minneapolis Co. are now more uncertain, which can increase its cost of capital
(the denominator of the MNC valuation equation), and reduce its valuation.
Much of the attention to the credit crisis was focused on its adverse effects on financial
institutions, but many other types of firms were also affected. Explain why the numerator of the
MNC valuation equation was affected during the period of October 6-10. Explain how the
denominator of the MNC valuation equation was affected during that period. - ANS✔✔ The
numerator of the MNC valuation equation represents cash flows. In October, 2008, the credit
crisis intensified. Investors were concerned that the economic conditions in the U.S. and in
many other countries would deteriorate, which resulted in expectations of a reduced demand
for exports produced by U.S. firms. In addition, it resulted in expectations of reduced earnings
of foreign subsidiaries, and therefore a reduction in remitted earnings to the MNC's parent.
These revised expectations reflected a reduction in cash flows to be received by the parent, and
therefore caused reduced valuations of MNCs.
The denominator of the MNC valuation equation reflects the cost of capital. The crisis increased
the uncertainty surrounding the future cash flows, meaning that that there was greater
downside risk (that the cash flows could be much worse than expected). MNCs experienced a
higher cost of capital, and therefore a higher required rate of return. Consequently, expected
cash flows were discounted at a higher rate, which reduced the valuations of the MNCs.
Practice Questions
Do you think that either the acquisition of a foreign firm or licensing will result in greater growth
for an MNC? Which alternative is likely to have more risk? - ANS✔✔ An acquisition will typically
result in greater growth, but it is riskier because it normally requires a larger investment and the
decision cannot be easily reversed once the acquisition is made.
Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain
how appreciation of the euro (the currency used in many European countries) would affect
Plak's valuation. - ANS✔✔ Plak's valuation should increase because the appreciation of the euro
will increase the dollar value of the cash flows remitted by the European subsidiaries.
As an overall review of this chapter, identify possible reasons for growth in international
business. Then, list the various disadvantages that may discourage international business. -
ANS✔✔ Growth in international business can be stimulated by (1) access to foreign resources
which can reduce costs, or (2) access to foreign markets which boost revenues. Yet,
international business is subject to risks of exchange rate fluctuations, and political risk (such as
a possible host government takeover, tax regulations, etc.).
Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased.
Hudson's best guess of its future peso cash flows to be received has not changed. However, its
valuation has declined as a result of the increase in political risk. Explain. - ANS✔✔ The
valuation of the MNC is the present value of expected cash flows. The increase in risk results in
a higher expected return, which reduces the present value of the expected future cash flows.
Birm Co., based in Alabama, is considering several international opportunities in Europe that
could affect the value of its firm. The valuation of its firm is dependent on four factors: (1)
expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted
into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm's weighted average
cost of capital. For each opportunity, identify the factors that would be affected.
,a) Birm plans a licensing deal in which it will sell technology to a firm in Germany for
$3,000,000; the payment is invoiced in dollars, and this project has the same risk level as its
existing businesses.
b) Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
c) Birm plans to discontinue its relationship with a U.S. supplier so that can import a small
amount of supplies (denominated in euros) at a lower cost fro - ANS✔✔ Joint Venture: Dollar CF
Acquisition: Euro CF and Birm's weighted average cost of capital
Imported Supplies: Euro CF
Exports to Ireland: Euro CF
Yahoo! has expanded its business by establishing portals in numerous
countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the U.K. It has
cash outflows associated with the creation and administration of each portal. It also generates
cash inflows from selling advertising space on its website. Each portal results in cash flows in a
different currency. Thus, the valuation of Yahoo! is based on its expected future net cash flows
in Argentine pesos after converting them into U.S. dollars, its expected net cash flows in
Australian dollars after converting them into U.S. dollars, and so on. Explain how and why the
valuation of Yahoo! would change if most investors suddenly expected that the dollar would
weaken against most currencies over time. - ANS✔✔ The valuation of Yahoo! should increase
because the present value of expected dollar cash flows to be received would increase.
Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland for $20
million. This company produces furniture and sells it locally (in Switzerland), and it is expected
to earn large profits every year. The company will become a subsidiary of Carlisle and will
periodically remit the excess cash flows from to its profits to Carlisle Co. Assume that Carlisle
Co. has no other international business. Carlisle has $10 million that it will use to pay for part of
, the Swiss company and will finance the rest of its purchase with borrowed dollars. Carlisle Co.
can obtain supplies from either a U.S. supplier or a Swiss supplier (in which case the payment
would be made in Swiss francs). Both suppliers are reputable and there would be no exposure
to country risk when using one supplier. Is the valuation of the total cash flows of Carlisle Co.
more uncertain if it obtains its supplies from a U.S. firm or a S - ANS✔✔ The valuation of Carlisle
Co. is more uncertain if it uses a U.S. supplier because it will have a larger amount of cash flows
that will be remitted from Switzerland and converted into dollars. If it obtains supplies from
Switzerland, it can use a portion of its Swiss franc cash flows to cover the cost, and will convert a
smaller amount of francs into dollars on a periodic basis. Thus, it is less exposed when sourcing
from Switzerland.
Minneapolis Co. is a major exporter of products to Canada. Today, an event occurred that has
increased the uncertainty surrounding the Canadian dollar's future value over the long term.
Explain how this event can affect the valuation of Minneapolis Co. - ANS✔✔ The future dollar
cash flows of Minneapolis Co. are now more uncertain, which can increase its cost of capital
(the denominator of the MNC valuation equation), and reduce its valuation.
Much of the attention to the credit crisis was focused on its adverse effects on financial
institutions, but many other types of firms were also affected. Explain why the numerator of the
MNC valuation equation was affected during the period of October 6-10. Explain how the
denominator of the MNC valuation equation was affected during that period. - ANS✔✔ The
numerator of the MNC valuation equation represents cash flows. In October, 2008, the credit
crisis intensified. Investors were concerned that the economic conditions in the U.S. and in
many other countries would deteriorate, which resulted in expectations of a reduced demand
for exports produced by U.S. firms. In addition, it resulted in expectations of reduced earnings
of foreign subsidiaries, and therefore a reduction in remitted earnings to the MNC's parent.
These revised expectations reflected a reduction in cash flows to be received by the parent, and
therefore caused reduced valuations of MNCs.
The denominator of the MNC valuation equation reflects the cost of capital. The crisis increased
the uncertainty surrounding the future cash flows, meaning that that there was greater
downside risk (that the cash flows could be much worse than expected). MNCs experienced a
higher cost of capital, and therefore a higher required rate of return. Consequently, expected
cash flows were discounted at a higher rate, which reduced the valuations of the MNCs.
