International Finance – Exam 1 Review (Chapters 1–4), 2026 – Study
Material and Practice Questions
The MNC's value depends on: - ANS✔✔ 1. MNC's required rate of return.
2. Amount of MNC's cash flows in particular currency.
3. The exchange rate at which cash flows are converted to dollars
For the MNC, agency costs are typically - ANS✔✔ larger than agency costs of a small purely
domestic firm.
Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000
from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The
Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end
this year. What are the expected dollar cash flows of Live Co? - ANS✔✔ 1. Dollar Cash Flow=
$200,000
2. SF Cash Flow= SF 200,000 ---> in Dollars= SF 200,000*0.83 = 166,000 ($)
3. Euro Cash Flow= Euro 150,000 ----> In dollar terms= Euro 150,000*1.29 = 193,500 ($)
Total Dollar Cash Flow = 200,000 + 166,000 + 193500 = 559,500
The valuation of an MNC should rise when an event causes the expected cash flows from
foreign to __________ and when foreign currencies denominating these cash flows are
expected to _______________. - ANS✔✔ Increase ; Appreciate
, Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican
customers and remit earnings back to the U.S. parent. The value of this project will be favorably
affected if the value of the peso ____________ while it establishes the new subsidiary and
___________when the subsidiary starts operations. - ANS✔✔ Depreciates; Appreciates
The least risky method by which firms conduct international business is: - ANS✔✔ International
Trade
Which theory identifies specialization as a reason for international business? - ANS✔✔ Theory
of comparative advantage
What is an example of direct foreign investment? - ANS✔✔ Purchasing existing companies in a
country
The commonly accepted goal of the MNC is to - ANS✔✔ Maximize Shareholder Wealth
Assume that an American firm wants to engage in international business without major
investment in the foreign country. Which method is least appropriate in this situation? -
ANS✔✔ Direct Foreign Investment
A high home inflation rate relative to other countries would ____ the home country's current
account balance, other things equal. A high growth in the home income level relative to other
countries would ____ the home country's current account balance, other things equal. -
ANS✔✔ Decrease ; Decrease
A weak home currency may not be a perfect solution to correct a balance of trade deficit
because: - ANS✔✔ Foreign companies may reduce the prices of their products to stay
competitive
Material and Practice Questions
The MNC's value depends on: - ANS✔✔ 1. MNC's required rate of return.
2. Amount of MNC's cash flows in particular currency.
3. The exchange rate at which cash flows are converted to dollars
For the MNC, agency costs are typically - ANS✔✔ larger than agency costs of a small purely
domestic firm.
Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000
from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The
Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end
this year. What are the expected dollar cash flows of Live Co? - ANS✔✔ 1. Dollar Cash Flow=
$200,000
2. SF Cash Flow= SF 200,000 ---> in Dollars= SF 200,000*0.83 = 166,000 ($)
3. Euro Cash Flow= Euro 150,000 ----> In dollar terms= Euro 150,000*1.29 = 193,500 ($)
Total Dollar Cash Flow = 200,000 + 166,000 + 193500 = 559,500
The valuation of an MNC should rise when an event causes the expected cash flows from
foreign to __________ and when foreign currencies denominating these cash flows are
expected to _______________. - ANS✔✔ Increase ; Appreciate
, Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican
customers and remit earnings back to the U.S. parent. The value of this project will be favorably
affected if the value of the peso ____________ while it establishes the new subsidiary and
___________when the subsidiary starts operations. - ANS✔✔ Depreciates; Appreciates
The least risky method by which firms conduct international business is: - ANS✔✔ International
Trade
Which theory identifies specialization as a reason for international business? - ANS✔✔ Theory
of comparative advantage
What is an example of direct foreign investment? - ANS✔✔ Purchasing existing companies in a
country
The commonly accepted goal of the MNC is to - ANS✔✔ Maximize Shareholder Wealth
Assume that an American firm wants to engage in international business without major
investment in the foreign country. Which method is least appropriate in this situation? -
ANS✔✔ Direct Foreign Investment
A high home inflation rate relative to other countries would ____ the home country's current
account balance, other things equal. A high growth in the home income level relative to other
countries would ____ the home country's current account balance, other things equal. -
ANS✔✔ Decrease ; Decrease
A weak home currency may not be a perfect solution to correct a balance of trade deficit
because: - ANS✔✔ Foreign companies may reduce the prices of their products to stay
competitive
