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International Financial Management (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)
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Eun & Resnick 4e
CHAPTER 1 Globalization and the Multinational Firm
Questions in the test bank follow the order of the chapter outline:
What’s Special about International Finance?
Foreign Exchange and Political Risks
Market Imperfections
Expanded Opportunity Set
Goals for International Financial
Management
Globalization of the World Economy:
Major Trends
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
Multinational Corporations
Summary
MINI CASE: Nike and Sweatshop Labor
APPENDIX 1A: Gains from Trade: The Theory of
Comparative Advantage
What’s Special about “International” Finance?
1) What major dimension sets apart international finance from domestic finance?
a) foreign exchange and political risks
b) Market imperfections
c) Expanded opportunity set
d) all of the above
Answer: d
2) An example of a political risk is
a) Expropriation of assets
b) Adverse change in tax rules
c) The opposition party being elected
d) a) and b) are both correct
Answer: d - p. 5
3) Production of goods and services has become globalized to a large extent as a result of
a) Skilled labor being highly mobile
b) Natural resources being depleted in one country after another
c) Multinational corporations’ efforts to source inputs and locate production
anywhere where costs are lower and profits higher
d) Common tastes worldwide for the same goods and services
Answer: c - p. 4
4) Recently, financial markets have become highly integrated. This development
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a) Allows investors to diversify their portfolios internationally
b) Allows minority investors to buy and sell stocks
c) Has increased the cost of capital for firms
d) Answers a) and c) are both correct.
Answer: a. see page 4
5) Japan has experienced large trade surpluses. Japanese investors have responded to this
by
a) Liquidating their positions in stocks to buy dollar denominated bonds
b) Investing heavily in U.S. and other foreign financial markets
c) Lobbying the U.S. government to depreciate its currency
d) Lobbying the Japanese government to allow the yen to appreciate
Answer: b - p. 4
6) Suppose your firm invests $100,000 in a project in Italy. At the time the exchange
rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian
government has expropriated your firm’s assets paying only €80,000 in
compensation. This is an example of
a) Exchange rate risk
b) Political risk
c) Market imperfections
d) None of the above, since $100,000 = €80,000×$1.25/€1.00
Answer: b) political risk—the government is only giving you back your initial investment,
if this was a good investment it should have been worth more than $100,000 a year later.
For example if your cost of capital was 8% it should have been worth $108,000.
7) Suppose that Great Britain is a major export market for your firm, a U.S. based MNC.
If the British pound depreciates against the U.S. dollar,
a) Your firm will be able to charge more in dollar terms while keeping pound prices
stable.
b) Your firm may be priced out of the U.K. market, to the extent that your dollar
costs stay constant and your pound prices will rise.
c) To protect U.K. market share, your firm may have to cut the dollar price of your
goods to keep the pound price the same.
d) b) and c) are both correct.
Answer: b) and c) are both correct. See page 5.
8) Most governments at least try to make it difficult for people to cross their borders
illegally. This barrier to the free movement of labor is an example of
a) Information asymmetry
b) Excessive transactions costs
c) Racial discrimination
d) A market imperfection
Answer: d) see page 6.
9) When individual investors become aware of overseas investment opportunities and are
Eun/Resnick 4e 2
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willing to diversify their portfolios internationally,
a) they trade one market imperfection, information asymmetry, for another, exchange
rate risk.
b) they benefit from an expanded opportunity set.
c) They should not bother to read or to understand the prospectus, since its probably
written in a foreign language
d) They should invest only in dollars or euros.
Answer: b see page 8.
10) Nestlé, a well-known Swiss corporation,
a) Has been a paragon of virtue in its opposition to all forms of political risk.
b) At one time placed restrictions on foreign ownership of its stock. When it relaxed
these restrictions, the total market value of the firm fell.
c) At one time placed restrictions on foreign ownership of its stock. When it relaxed
these restrictions, there was a major transfer of wealth from foreign shareholders
to Swiss shareholders.
d) None of the above
Answer: c) See page 7.
Goals for International Financial Management
11) The goal of shareholder wealth maximization
a) is not appropriate for non-U.S. business firms
b) means that all business decisions and investments that a firm makes are done for
the purpose of making the owners of the firm better off financially
c) is a sub-objective the firm should attempt to achieve after the objective of
customer satisfaction is met
d) is in conflict with the privatization process taking place in third-world countries
Answer: b - p. 8
12) As capital markets are becoming more integrated, the goal of shareholder wealth
maximization
a) Has been altered to include other goals as well.
b) Has lost out to other goals, even in the U.S.
c) Has been given increasing importance by managers in Europe.
d) Has been shown to be a deterrent to raising funds abroad.
Answer c) see page 8
13) Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm
Parmalat
Eun/Resnick 4e 3
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Test bank IFM full - This test bank covers answers to al
chapter's multiple-choice questions
International Financial Management (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by An Nguyen Hoang Khanh ()
, lOMoARcPSD|11557589
Eun & Resnick 4e
CHAPTER 1 Globalization and the Multinational Firm
Questions in the test bank follow the order of the chapter outline:
What’s Special about International Finance?
Foreign Exchange and Political Risks
Market Imperfections
Expanded Opportunity Set
Goals for International Financial
Management
Globalization of the World Economy:
Major Trends
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
Multinational Corporations
Summary
MINI CASE: Nike and Sweatshop Labor
APPENDIX 1A: Gains from Trade: The Theory of
Comparative Advantage
What’s Special about “International” Finance?
1) What major dimension sets apart international finance from domestic finance?
a) foreign exchange and political risks
b) Market imperfections
c) Expanded opportunity set
d) all of the above
Answer: d
2) An example of a political risk is
a) Expropriation of assets
b) Adverse change in tax rules
c) The opposition party being elected
d) a) and b) are both correct
Answer: d - p. 5
3) Production of goods and services has become globalized to a large extent as a result of
a) Skilled labor being highly mobile
b) Natural resources being depleted in one country after another
c) Multinational corporations’ efforts to source inputs and locate production
anywhere where costs are lower and profits higher
d) Common tastes worldwide for the same goods and services
Answer: c - p. 4
4) Recently, financial markets have become highly integrated. This development
Eun/Resnick 4e 1
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a) Allows investors to diversify their portfolios internationally
b) Allows minority investors to buy and sell stocks
c) Has increased the cost of capital for firms
d) Answers a) and c) are both correct.
Answer: a. see page 4
5) Japan has experienced large trade surpluses. Japanese investors have responded to this
by
a) Liquidating their positions in stocks to buy dollar denominated bonds
b) Investing heavily in U.S. and other foreign financial markets
c) Lobbying the U.S. government to depreciate its currency
d) Lobbying the Japanese government to allow the yen to appreciate
Answer: b - p. 4
6) Suppose your firm invests $100,000 in a project in Italy. At the time the exchange
rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian
government has expropriated your firm’s assets paying only €80,000 in
compensation. This is an example of
a) Exchange rate risk
b) Political risk
c) Market imperfections
d) None of the above, since $100,000 = €80,000×$1.25/€1.00
Answer: b) political risk—the government is only giving you back your initial investment,
if this was a good investment it should have been worth more than $100,000 a year later.
For example if your cost of capital was 8% it should have been worth $108,000.
7) Suppose that Great Britain is a major export market for your firm, a U.S. based MNC.
If the British pound depreciates against the U.S. dollar,
a) Your firm will be able to charge more in dollar terms while keeping pound prices
stable.
b) Your firm may be priced out of the U.K. market, to the extent that your dollar
costs stay constant and your pound prices will rise.
c) To protect U.K. market share, your firm may have to cut the dollar price of your
goods to keep the pound price the same.
d) b) and c) are both correct.
Answer: b) and c) are both correct. See page 5.
8) Most governments at least try to make it difficult for people to cross their borders
illegally. This barrier to the free movement of labor is an example of
a) Information asymmetry
b) Excessive transactions costs
c) Racial discrimination
d) A market imperfection
Answer: d) see page 6.
9) When individual investors become aware of overseas investment opportunities and are
Eun/Resnick 4e 2
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, lOMoARcPSD|11557589
willing to diversify their portfolios internationally,
a) they trade one market imperfection, information asymmetry, for another, exchange
rate risk.
b) they benefit from an expanded opportunity set.
c) They should not bother to read or to understand the prospectus, since its probably
written in a foreign language
d) They should invest only in dollars or euros.
Answer: b see page 8.
10) Nestlé, a well-known Swiss corporation,
a) Has been a paragon of virtue in its opposition to all forms of political risk.
b) At one time placed restrictions on foreign ownership of its stock. When it relaxed
these restrictions, the total market value of the firm fell.
c) At one time placed restrictions on foreign ownership of its stock. When it relaxed
these restrictions, there was a major transfer of wealth from foreign shareholders
to Swiss shareholders.
d) None of the above
Answer: c) See page 7.
Goals for International Financial Management
11) The goal of shareholder wealth maximization
a) is not appropriate for non-U.S. business firms
b) means that all business decisions and investments that a firm makes are done for
the purpose of making the owners of the firm better off financially
c) is a sub-objective the firm should attempt to achieve after the objective of
customer satisfaction is met
d) is in conflict with the privatization process taking place in third-world countries
Answer: b - p. 8
12) As capital markets are becoming more integrated, the goal of shareholder wealth
maximization
a) Has been altered to include other goals as well.
b) Has lost out to other goals, even in the U.S.
c) Has been given increasing importance by managers in Europe.
d) Has been shown to be a deterrent to raising funds abroad.
Answer c) see page 8
13) Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm
Parmalat
Eun/Resnick 4e 3
Downloaded by An Nguyen Hoang Khanh ()
