International Finance – Chapter 1, 2026 – Study Material and
Practice Questions
*Multinational Corporations* (MNCs) - ANS✔✔ Firms that engage in some form of international
business
The commonly accepted goal of an MNC is to maximize ___________ wealth - ANS✔✔
*shareholder*
*Agency problem* - ANS✔✔ A conflict of goals between a firm's managers and shareholders
Ex: A decision to expand a subsidiary may be motivated by a manager's desire to receive more
compensation rather than enhance the value of the MNC
Costs are normally higher for MNCs that for purely domestic firms for several reasons: - ANS✔✔
• Monitoring managers of distant subsidiaries in foreign countries is *more difficult*
• Foreign subsidiary managers raised in *different cultures may not follow uniform goals*
• *Sheer size of larger MNCs* can create large agency problems
• Some non-U.S. managers tend to *downplay the short-term effects* of decisions
What is the major factor contributing to China's rapid economic growth? - ANS✔✔ International
trade (especially the export of manufactured goods)
Finance decisions are influenced by other business discipline functions: - ANS✔✔ • Marketing
• Management and overall business strategy
• Accounting and information systems
, *Agency cost* - ANS✔✔ *Cost of ensuring* that managers maximize shareholder wealth in the
long-run
*Parent control* of agency problems - ANS✔✔ Parent should clearly communicate the goals for
each subsidiary to ensure managers focus on maximizing the value of the subsidiary
*Corporate control* of agency problems - ANS✔✔ Entire management of the MNC must be
focused on maximizing shareholder wealth
*Sarbanes-Oxley Act* (SOX) - ANS✔✔ Ensures a more *transparent* process for managers to
report on the *productivity and financial condition* of their firm
Common methods used by MNCs to improve their internal control process are: - ANS✔✔ •
Establishing a *centralized* database of information
• Ensuring that all data are reported *consistently* among subsidiaries
• Implementing a system that automatically checks for *unusual discrepancies* relative to
norms
• *Speeding up the process* by which all departments and subsidiaries have access to all the
data they need
• Making *executives more accountable* for financial statements
*Centralized* Multinational Financial Management - ANS✔✔ Allows managers of the parent to
control foreign subsidiaries and therefore reduce the power of subsidiary managers
• See Exhibit 1.1a
*Decentralized* Multinational Financial Management - ANS✔✔ Gives more control to
subsidiary managers who are closer to the subsidiary's operations and environment
• See Exhibit 1.1b
Practice Questions
*Multinational Corporations* (MNCs) - ANS✔✔ Firms that engage in some form of international
business
The commonly accepted goal of an MNC is to maximize ___________ wealth - ANS✔✔
*shareholder*
*Agency problem* - ANS✔✔ A conflict of goals between a firm's managers and shareholders
Ex: A decision to expand a subsidiary may be motivated by a manager's desire to receive more
compensation rather than enhance the value of the MNC
Costs are normally higher for MNCs that for purely domestic firms for several reasons: - ANS✔✔
• Monitoring managers of distant subsidiaries in foreign countries is *more difficult*
• Foreign subsidiary managers raised in *different cultures may not follow uniform goals*
• *Sheer size of larger MNCs* can create large agency problems
• Some non-U.S. managers tend to *downplay the short-term effects* of decisions
What is the major factor contributing to China's rapid economic growth? - ANS✔✔ International
trade (especially the export of manufactured goods)
Finance decisions are influenced by other business discipline functions: - ANS✔✔ • Marketing
• Management and overall business strategy
• Accounting and information systems
, *Agency cost* - ANS✔✔ *Cost of ensuring* that managers maximize shareholder wealth in the
long-run
*Parent control* of agency problems - ANS✔✔ Parent should clearly communicate the goals for
each subsidiary to ensure managers focus on maximizing the value of the subsidiary
*Corporate control* of agency problems - ANS✔✔ Entire management of the MNC must be
focused on maximizing shareholder wealth
*Sarbanes-Oxley Act* (SOX) - ANS✔✔ Ensures a more *transparent* process for managers to
report on the *productivity and financial condition* of their firm
Common methods used by MNCs to improve their internal control process are: - ANS✔✔ •
Establishing a *centralized* database of information
• Ensuring that all data are reported *consistently* among subsidiaries
• Implementing a system that automatically checks for *unusual discrepancies* relative to
norms
• *Speeding up the process* by which all departments and subsidiaries have access to all the
data they need
• Making *executives more accountable* for financial statements
*Centralized* Multinational Financial Management - ANS✔✔ Allows managers of the parent to
control foreign subsidiaries and therefore reduce the power of subsidiary managers
• See Exhibit 1.1a
*Decentralized* Multinational Financial Management - ANS✔✔ Gives more control to
subsidiary managers who are closer to the subsidiary's operations and environment
• See Exhibit 1.1b
