International Financial Management
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1. Bilateral netting can reduce the number of foreign exchange transactions
among an MNC with N affiliates to: N × (N − 1)/2
2. Benefits of a multilateral netting system include
- the decrease in the expense associated with funds transfer, which in some
cases can be over $1,000 for a large international transfer of foreign exchange.
- the benefits that accrue from the establishment of a formal information
system, which serves as the foundation for centrally managing transaction
exposure and the investment of excess funds.
- all of the options
- the reduction in intra-company float, which is frequently as high as five days
even for wire transfers.
- the reduction in the number of foreign exchange transactions and the asso-
ciated cost of making fewer but larger transactions.: all of the options
3. Which one of the following is a false statement when engaged in bilateral
netting?: Total interaffiliate receipts need not always equal total interaffiliate disbursements.
4. True or False: A netting center necessarily implies that the MNC has a central
cash manager.: false
5. Which of the following statements about multilateral netting system are
correct?
(i) Each affiliate nets all its interaffiliate receipts against all its disbursements.
(ii) Each affiliate transfers or receives a balance, depending on whether it is a
net payer or receiver.
(iii) The net funds to be received by the affiliates will equal the net disburse-
ments to be made by the affiliates.
(iv) Only two foreign exchange transactions are necessary since the affiliates'
net receipts will always be equal to zero.
(v) Only two foreign exchange transactions are necessary since the affiliates'
net disbursements will always be equal to zero.: I, II, and III
6. True or False: A central cash manager has a global view of the most favorable
borrowing rates and most advantageous investment rates.: True
, International Financial Management
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7. Good cash management encompasses: investing excess funds at the most favorable interest rate
and borrowing at the lowest rate when there is a temporary cash shortage.
8. Your firm's interaffiliate cash receipts and disbursements matrix is shown
here ($000):
Disbursements ReceiptsU.S.CanadaGermanyU.K.Total ReceiptsU.S.
10151540Canada10 101030Germany55 515U.K.202020 60Total Disburse-
ments35354530
Find the net cash flow in (out of) the U.S. affiliate.: $5,000 in
9. A firm keeps a precautionary cash balance to cover unexpected transactions
during the budget period. The size of this balance depends on how safe the firm
desires to be in its ability to meet unexpected transactions.: The larger the precautionary
cash balance, the greater the potential opportunity cost.
The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing.
The larger the precautionary cash balance, the greater is the firm's ability to meet unexpected expenses.
10. As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation
expected to prevail for the next year in the U.S. is 2 percent and 3 percent in the
euro zone. What is the one-year forward rate that should prevail?: €1.00 = $1.2379
11. The firm's tax rate is 34 percent. The firm's pre-tax cost of debt is 8 percent;
the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the
firm's common stock is 1.5; the market risk premium is 9 percent. Calculate the
weighted average cost of capital.: 8.09 percent
12. In the context of the capital budgeting analysis of an MNC that has strong
foreign competitors, "lost sales" refers to: the entire sales revenue of a new foreign manufacturing
facility representing the incremental sales revenue of the new project, the cannibalization of existing projects by new
projects.
13. The required return on assets is 18 percent. The firm can borrow at 12.5
percent; firm's target debt to value ratio is 3/5. The corporate tax rate is 34
percent, and the risk-free rate is 4 percent and the market risk premium is 9.2
percent. What is the weighted average cost of capital? The firm has a beta of
2.11.: 14.33 percent
, International Financial Management
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14. The adjusted present value (APV) model that is suitable for an MNC is the
basic net present value (NPV) model expanded to:: discern the blocking of certain cash flows
by the host country from being legally remitted to the parent, distinguish between the market value of a levered firm
and the market value of an unlevered firm, consider foreign currency fluctuations or extra taxes imposed by the host
country on foreign exchange remittances.
15. Given the following information for a levered and unlevered firm, calculate
the difference in the cash flow available to investors. Assume the corporate tax
rate is 40 percent.
Levered Unlevered
Revenue$250 $250
Operating cost−$100 −$100
Interest expense−$20 $0: $8
16. Capital budgeting analysis is very important, because it:: involves, usually expensive,
investments in capital assets, will determine how competitive and profitable a firm will be, has to do with the productive
capacity of a firm.
17. Studies suggest that international capital markets are not segmented any-
more: but are not as yet fully integrated.
18. In the Capital Asset Pricing Model (CAPM), the term Beta, β, is: a measure of
systematic risk inherent in a security, calculated as the "covariance of future returns between a specific security and
the market portfolio" divided by the "variance of returns of the market portfolio."
19. The cost of equity capital is: generally considered to be a linear function of the systematic risk inherent
in the security, frequently estimated by using the Capital Asset Pricing Model (CAPM), the expected return on the firm's
stock that investors require.
20. Solve for the weighted average cost of capital.
15.40%=K1=cost of equity capital for a leveraged firm
9/11 =λ=debt-to-total-market-value ratio8.0%=i=before-tax borrowing cost
40.0%=τ=marginal corporate income tax rate: 6.73 percent
21. The cost of capital is:: the minimum rate of return an investment project must generate in order to pay
its financing costs.
Study online at https://quizlet.com/_ixkdpl
1. Bilateral netting can reduce the number of foreign exchange transactions
among an MNC with N affiliates to: N × (N − 1)/2
2. Benefits of a multilateral netting system include
- the decrease in the expense associated with funds transfer, which in some
cases can be over $1,000 for a large international transfer of foreign exchange.
- the benefits that accrue from the establishment of a formal information
system, which serves as the foundation for centrally managing transaction
exposure and the investment of excess funds.
- all of the options
- the reduction in intra-company float, which is frequently as high as five days
even for wire transfers.
- the reduction in the number of foreign exchange transactions and the asso-
ciated cost of making fewer but larger transactions.: all of the options
3. Which one of the following is a false statement when engaged in bilateral
netting?: Total interaffiliate receipts need not always equal total interaffiliate disbursements.
4. True or False: A netting center necessarily implies that the MNC has a central
cash manager.: false
5. Which of the following statements about multilateral netting system are
correct?
(i) Each affiliate nets all its interaffiliate receipts against all its disbursements.
(ii) Each affiliate transfers or receives a balance, depending on whether it is a
net payer or receiver.
(iii) The net funds to be received by the affiliates will equal the net disburse-
ments to be made by the affiliates.
(iv) Only two foreign exchange transactions are necessary since the affiliates'
net receipts will always be equal to zero.
(v) Only two foreign exchange transactions are necessary since the affiliates'
net disbursements will always be equal to zero.: I, II, and III
6. True or False: A central cash manager has a global view of the most favorable
borrowing rates and most advantageous investment rates.: True
, International Financial Management
Study online at https://quizlet.com/_ixkdpl
7. Good cash management encompasses: investing excess funds at the most favorable interest rate
and borrowing at the lowest rate when there is a temporary cash shortage.
8. Your firm's interaffiliate cash receipts and disbursements matrix is shown
here ($000):
Disbursements ReceiptsU.S.CanadaGermanyU.K.Total ReceiptsU.S.
10151540Canada10 101030Germany55 515U.K.202020 60Total Disburse-
ments35354530
Find the net cash flow in (out of) the U.S. affiliate.: $5,000 in
9. A firm keeps a precautionary cash balance to cover unexpected transactions
during the budget period. The size of this balance depends on how safe the firm
desires to be in its ability to meet unexpected transactions.: The larger the precautionary
cash balance, the greater the potential opportunity cost.
The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing.
The larger the precautionary cash balance, the greater is the firm's ability to meet unexpected expenses.
10. As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation
expected to prevail for the next year in the U.S. is 2 percent and 3 percent in the
euro zone. What is the one-year forward rate that should prevail?: €1.00 = $1.2379
11. The firm's tax rate is 34 percent. The firm's pre-tax cost of debt is 8 percent;
the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the
firm's common stock is 1.5; the market risk premium is 9 percent. Calculate the
weighted average cost of capital.: 8.09 percent
12. In the context of the capital budgeting analysis of an MNC that has strong
foreign competitors, "lost sales" refers to: the entire sales revenue of a new foreign manufacturing
facility representing the incremental sales revenue of the new project, the cannibalization of existing projects by new
projects.
13. The required return on assets is 18 percent. The firm can borrow at 12.5
percent; firm's target debt to value ratio is 3/5. The corporate tax rate is 34
percent, and the risk-free rate is 4 percent and the market risk premium is 9.2
percent. What is the weighted average cost of capital? The firm has a beta of
2.11.: 14.33 percent
, International Financial Management
Study online at https://quizlet.com/_ixkdpl
14. The adjusted present value (APV) model that is suitable for an MNC is the
basic net present value (NPV) model expanded to:: discern the blocking of certain cash flows
by the host country from being legally remitted to the parent, distinguish between the market value of a levered firm
and the market value of an unlevered firm, consider foreign currency fluctuations or extra taxes imposed by the host
country on foreign exchange remittances.
15. Given the following information for a levered and unlevered firm, calculate
the difference in the cash flow available to investors. Assume the corporate tax
rate is 40 percent.
Levered Unlevered
Revenue$250 $250
Operating cost−$100 −$100
Interest expense−$20 $0: $8
16. Capital budgeting analysis is very important, because it:: involves, usually expensive,
investments in capital assets, will determine how competitive and profitable a firm will be, has to do with the productive
capacity of a firm.
17. Studies suggest that international capital markets are not segmented any-
more: but are not as yet fully integrated.
18. In the Capital Asset Pricing Model (CAPM), the term Beta, β, is: a measure of
systematic risk inherent in a security, calculated as the "covariance of future returns between a specific security and
the market portfolio" divided by the "variance of returns of the market portfolio."
19. The cost of equity capital is: generally considered to be a linear function of the systematic risk inherent
in the security, frequently estimated by using the Capital Asset Pricing Model (CAPM), the expected return on the firm's
stock that investors require.
20. Solve for the weighted average cost of capital.
15.40%=K1=cost of equity capital for a leveraged firm
9/11 =λ=debt-to-total-market-value ratio8.0%=i=before-tax borrowing cost
40.0%=τ=marginal corporate income tax rate: 6.73 percent
21. The cost of capital is:: the minimum rate of return an investment project must generate in order to pay
its financing costs.
