International Finance – Exam 1, 2026 – Study Material and Practice
Questions
Multinational Corporations (MNC's) - ANS✔✔ firms that engage in some form of international
business
- Goal: Maximize shareholder wealth
Agency Problems - ANS✔✔ conflict of goals between a firm's managers and its shareholders
Agency Costs - ANS✔✔ costs of ensuring that managers maximize shareholder wealth (larger
for multinational corporations due to difficulty of monitoring over long distances)
International Business Theories - ANS✔✔ 1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory
Theory of Comparative Advantage - ANS✔✔ countries specialize in certain products and rely on
trade for others that they can't produce as efficiently (due to climate or other restrictions)
Imperfect Markets Theory - ANS✔✔ factors of production are somewhat immobile (costs and
restrictions related to transfer of labor and other resources used for production)
- provides incentive to seek out foreign opportunity
Product Cycle Theory - ANS✔✔ - firms first become established in their home market as a result
of some perceived advantage
- foreign demand accommodated by exporting and potentially moving production to foreign
countries to reduce transportation costs
, International Trade - ANS✔✔ - exporting to penetrate foreign markets
- importing to obtain material from low cost suppliers
Licensing - ANS✔✔ obligates a firm to provide its technology in exchange for fees or other
benefits (Ex. Starbucks technology in trains)
Franchising - ANS✔✔ obligates a firm to provide a sales/service strategy, support assistance,
and an initial investment in return for periodic fees
Acquisitions - ANS✔✔ acquiring other firms as a means of penetrating foreign markets (quickly
obtain a large portion of foreign market share; subject to risk of substantial losses)
Establish Subsidiaries - ANS✔✔ establishing new operations in foreign countries to produce and
sell their products (preferred to acquisitions because it is more tailored to firm's needs)
Direct Foreign Investment (DFI) - ANS✔✔ any method of increasing international business
operations that requires a direct investment in foreign markets (DOES NOT include international
trade and licensing)
Factors of International Risk/Uncertainty - ANS✔✔ 1. International economic conditions
2. International political risk
3. Exchange rate risk
Effect of International Economic Conditions - ANS✔✔ weakened economic conditions causes
income earned by consumers of foreign country to drop, which decreases sales and causes a
reduction of firms cash flows in that country
Effect of International Political Risk - ANS✔✔ foreign government may increase taxes or impose
trade barriers on imported goods, which would have a negative impact on a firm's cash flows
Questions
Multinational Corporations (MNC's) - ANS✔✔ firms that engage in some form of international
business
- Goal: Maximize shareholder wealth
Agency Problems - ANS✔✔ conflict of goals between a firm's managers and its shareholders
Agency Costs - ANS✔✔ costs of ensuring that managers maximize shareholder wealth (larger
for multinational corporations due to difficulty of monitoring over long distances)
International Business Theories - ANS✔✔ 1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory
Theory of Comparative Advantage - ANS✔✔ countries specialize in certain products and rely on
trade for others that they can't produce as efficiently (due to climate or other restrictions)
Imperfect Markets Theory - ANS✔✔ factors of production are somewhat immobile (costs and
restrictions related to transfer of labor and other resources used for production)
- provides incentive to seek out foreign opportunity
Product Cycle Theory - ANS✔✔ - firms first become established in their home market as a result
of some perceived advantage
- foreign demand accommodated by exporting and potentially moving production to foreign
countries to reduce transportation costs
, International Trade - ANS✔✔ - exporting to penetrate foreign markets
- importing to obtain material from low cost suppliers
Licensing - ANS✔✔ obligates a firm to provide its technology in exchange for fees or other
benefits (Ex. Starbucks technology in trains)
Franchising - ANS✔✔ obligates a firm to provide a sales/service strategy, support assistance,
and an initial investment in return for periodic fees
Acquisitions - ANS✔✔ acquiring other firms as a means of penetrating foreign markets (quickly
obtain a large portion of foreign market share; subject to risk of substantial losses)
Establish Subsidiaries - ANS✔✔ establishing new operations in foreign countries to produce and
sell their products (preferred to acquisitions because it is more tailored to firm's needs)
Direct Foreign Investment (DFI) - ANS✔✔ any method of increasing international business
operations that requires a direct investment in foreign markets (DOES NOT include international
trade and licensing)
Factors of International Risk/Uncertainty - ANS✔✔ 1. International economic conditions
2. International political risk
3. Exchange rate risk
Effect of International Economic Conditions - ANS✔✔ weakened economic conditions causes
income earned by consumers of foreign country to drop, which decreases sales and causes a
reduction of firms cash flows in that country
Effect of International Political Risk - ANS✔✔ foreign government may increase taxes or impose
trade barriers on imported goods, which would have a negative impact on a firm's cash flows
