IBUS 401 FINAL EXAM (EXAMS 1-
3)CORRECT 100%
[1-1]. For the MNC, agency costs are typically:
A. Non existent
B. Larger than agency costs of a small purely domestic firm
C. Smaller than agency costs of a small purely domestic firm
D. The same as agency costs of a small purely domestics firm - ANSWER B. Larger
than agency costs of a small purely domestic firm
[MNC have larger agency costs due to the barriers of communication from the sheer
size of the company, but also due to the involvement of foreign employees who may
have different interpretations of success other than the main goal of maximizing
shareholder wealth/value]
[1-2]. The valuation of an MNC should rise when an event causes the expected cash
flows from foreign entities ____________ and when foreign currencies denominating
these cash flows are expected to _________.
A. decrease; appreciate
B. increase; appreciate
C. decrease; depreciate
D. increase; depreciate - ANSWER B. increase; appreciate
[ Value of an MNC
1. Expected Cash Flow from Foreign sub
Inc. = inc. , dec. = dec.
2. Currency of the Foreign Sub.
appreciate = inc. , depreciate = dec. ]
[1-3] (T/F) L:icensing is the process by which a firm provides its technology (copyrights,
patents, trademarks, or trade names) in exchange for fees or some other specified
benefits. - ANSWER True
[1-4] (T/F) If a US based MNC completely focused on importing, then its valuation would
likely be negatively affected if most currencies were expected to appreciate against the
dollar over time. - ANSWER True
[ for an MNC focused on importing the supplies necessary for production, the weaker
the foreign currency the cheaper the imported supplies are in USD. Therefore
appreciation of a foreign currency relative to the dollar would cause the costs of these
imported supplies to increase in USD, resulting in a negative impact on the valuation of
the MNC]
[1-5]. The Primary component of the current account is the:
,A. Balance of Trade
B. Balance of Money Market Flows
C. Balance of Capital Market Flows
D. Unilateral Transfers - ANSWER A. Balance of Trade
[current account:
1. Broad measure of a country's international trade balance (portfolio investments - DFI
and securities)
2. Payment for goods & services
3. Secondary Income (gifts, aids, etc.) ]
[1-6]. Which of the following is mentioned in the text as a possible means by which the
government may attempt to improve its balance of trade position (increase its exports or
reduce its imports)
A. It could attempt to reduce its home currency value
B. The government could require firms to engage in outsourcing
C. The government could require that its local firms pursue outsourcing
D. All of the above are mentioned - ANSWER A. It could attempt to reduce its home
currency value
[ Reduced home currency value leads to an increase in foreign demand for US exports
and decreases the US demand for foreign imports leading to a positive improvement in
the US trade balance/position.
Increasing home currency value would lead to a decrease in foreign demand for US
exports and increase the US demand for foreign imports leading to a negative impact on
the US trade balance/position.
Outsourcing would have a negative impact on the US trade balance because it would
cause US based MNC's to produce/manufacture items in other countries and import
these products into the US for sale. ]
[1-7]. In recent years, the US has had a relatively _______ balance of trade _______
with China.
A. small; surplus
B. large; surplus
C. small; deficit
D. large; deficit - ANSWER D. large; deficit
[1-8]. Recently, the U.S. experienced an annual balance of trade representing a ____.
A. large surplus (exceeding $100 billion)
B. small surplus
C. level zero
D. deficit - ANSWER D. deficit
,[1-9]. Assume that a banks' bid rate on Swiss Francs is $0.45 and its ask rate is $0.47,
What is the bid-ask spread percentage?
A. about 4.44%
B. about 4.26%
C. about 4.03%
D. about 4.17% - ANSWER B. about 4.26%
((Ask - Bid) / Ask) * 100
[1-10]. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will
need C$200,000 in 90 days to make payment on imports from Canada. It could:
A. Obtain a 90-day forward purchase contract for Canadian dollars
B. Obtain a 90-day forward sales contract for Canadian dollars
C. Purchase Canadian dollars 90 days from now at the spot rate
D. Sell Canadian dollars 90 days from now at the spot rate - ANSWER A. Obtain a 90-
day forward purchase contract for Canadian dollars
[If a US firm has to make a payment of C$200,000 in 90 days this means they will
needs to convert USD to C$, aka Buy/Purchase C$, to make said payment. In order to
hedge against the exchange rate risk they a forward purchase contract should be
obtained]
[1-11].The International Money Market primarily concentrates on:
A. Short term lending one year or less
B. Medium term lending
C. Placing bonds with investors
D. Placing newly issued stock in foreign markets - ANSWER A. short term lending one
years or less
[International Money Market - large banks for deposits and short term loans used by
government and large corporations]
[1-12]. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed with narrow boundaries
B. floating, but subject to central bank intervention
C. floating, but not subject to central bank intervention
D. non-existent; that is, currencies were not exchanged, but gold was used to pay for all
foreign transactions - ANSWER A. fixed with narrow boundaries
[1-13]. Eurobonds:
A. Can only be issued by European firms
B. Can only be sold by European investors
C. A & B
D. None of the above - ANSWER D. None of the Above
[Eurobonds - a bond issued in a foreign market by a government or corporation that is
denominated in a different currency than that of the issuer
, ex: US MNC issue bond denominated in British Pounds]
[1-14]. (T/F) In general, when speculating on exchange rate movements, the speculator
will borrow the currency that is expected to appreciate and invest in the country whose
currency is expected to depreciate. - ANSWER False
[the speculator would borrow in the currency that is expected to depreciate and invest in
the currency that is expected to appreciate because the borrowing would be cheaper
and the investment appreciating is what would generate the return]
[1-15]. Any event that increase the supply of British pounds to be exchanged for US
dollars should result in a(n) _______ in the value of the British pound with respect to
_______, other things being equal.
A. increase; US dollar
B. increase; non-dollar currencies
C. decrease; non-dollar currencies
D. decrease; US dollar - ANSWER D. decrease; US dollar
[More Pounds for 1 USD = Weaker Pound relative to USD]
[1-16]. 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:
A. International trade
B. Licensing
C. Franchising
D. Establish a New Subsidiary - ANSWER D. Establish a New Subsidiary
[Establishing a new subsidiary is the method with the most required investment in the
foreign country]
[1-17]. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be
received in the future from this subsidiary have not changed since last month, but the
valuation of Saller Co. has declined since last month. What could've caused this decline
in value?
A. A weaker Mexican economy
B. Lower Mexican interest rates
C. Depreciation of the Mexican peso
D. Appreciation of the Mexican peso - ANSWER C. Depreciation of the Mexican peso
[ E(CFpesos)last month = E(CFpesos) now
Value USD Decline since last month --> change had to have occurred in the exchange
rate meaning either the pesos got weaker relative to the USD or the USD got stronger
relative to the peso, either way more pesos will be necessary to exchange for 1 USD]
3)CORRECT 100%
[1-1]. For the MNC, agency costs are typically:
A. Non existent
B. Larger than agency costs of a small purely domestic firm
C. Smaller than agency costs of a small purely domestic firm
D. The same as agency costs of a small purely domestics firm - ANSWER B. Larger
than agency costs of a small purely domestic firm
[MNC have larger agency costs due to the barriers of communication from the sheer
size of the company, but also due to the involvement of foreign employees who may
have different interpretations of success other than the main goal of maximizing
shareholder wealth/value]
[1-2]. The valuation of an MNC should rise when an event causes the expected cash
flows from foreign entities ____________ and when foreign currencies denominating
these cash flows are expected to _________.
A. decrease; appreciate
B. increase; appreciate
C. decrease; depreciate
D. increase; depreciate - ANSWER B. increase; appreciate
[ Value of an MNC
1. Expected Cash Flow from Foreign sub
Inc. = inc. , dec. = dec.
2. Currency of the Foreign Sub.
appreciate = inc. , depreciate = dec. ]
[1-3] (T/F) L:icensing is the process by which a firm provides its technology (copyrights,
patents, trademarks, or trade names) in exchange for fees or some other specified
benefits. - ANSWER True
[1-4] (T/F) If a US based MNC completely focused on importing, then its valuation would
likely be negatively affected if most currencies were expected to appreciate against the
dollar over time. - ANSWER True
[ for an MNC focused on importing the supplies necessary for production, the weaker
the foreign currency the cheaper the imported supplies are in USD. Therefore
appreciation of a foreign currency relative to the dollar would cause the costs of these
imported supplies to increase in USD, resulting in a negative impact on the valuation of
the MNC]
[1-5]. The Primary component of the current account is the:
,A. Balance of Trade
B. Balance of Money Market Flows
C. Balance of Capital Market Flows
D. Unilateral Transfers - ANSWER A. Balance of Trade
[current account:
1. Broad measure of a country's international trade balance (portfolio investments - DFI
and securities)
2. Payment for goods & services
3. Secondary Income (gifts, aids, etc.) ]
[1-6]. Which of the following is mentioned in the text as a possible means by which the
government may attempt to improve its balance of trade position (increase its exports or
reduce its imports)
A. It could attempt to reduce its home currency value
B. The government could require firms to engage in outsourcing
C. The government could require that its local firms pursue outsourcing
D. All of the above are mentioned - ANSWER A. It could attempt to reduce its home
currency value
[ Reduced home currency value leads to an increase in foreign demand for US exports
and decreases the US demand for foreign imports leading to a positive improvement in
the US trade balance/position.
Increasing home currency value would lead to a decrease in foreign demand for US
exports and increase the US demand for foreign imports leading to a negative impact on
the US trade balance/position.
Outsourcing would have a negative impact on the US trade balance because it would
cause US based MNC's to produce/manufacture items in other countries and import
these products into the US for sale. ]
[1-7]. In recent years, the US has had a relatively _______ balance of trade _______
with China.
A. small; surplus
B. large; surplus
C. small; deficit
D. large; deficit - ANSWER D. large; deficit
[1-8]. Recently, the U.S. experienced an annual balance of trade representing a ____.
A. large surplus (exceeding $100 billion)
B. small surplus
C. level zero
D. deficit - ANSWER D. deficit
,[1-9]. Assume that a banks' bid rate on Swiss Francs is $0.45 and its ask rate is $0.47,
What is the bid-ask spread percentage?
A. about 4.44%
B. about 4.26%
C. about 4.03%
D. about 4.17% - ANSWER B. about 4.26%
((Ask - Bid) / Ask) * 100
[1-10]. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will
need C$200,000 in 90 days to make payment on imports from Canada. It could:
A. Obtain a 90-day forward purchase contract for Canadian dollars
B. Obtain a 90-day forward sales contract for Canadian dollars
C. Purchase Canadian dollars 90 days from now at the spot rate
D. Sell Canadian dollars 90 days from now at the spot rate - ANSWER A. Obtain a 90-
day forward purchase contract for Canadian dollars
[If a US firm has to make a payment of C$200,000 in 90 days this means they will
needs to convert USD to C$, aka Buy/Purchase C$, to make said payment. In order to
hedge against the exchange rate risk they a forward purchase contract should be
obtained]
[1-11].The International Money Market primarily concentrates on:
A. Short term lending one year or less
B. Medium term lending
C. Placing bonds with investors
D. Placing newly issued stock in foreign markets - ANSWER A. short term lending one
years or less
[International Money Market - large banks for deposits and short term loans used by
government and large corporations]
[1-12]. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed with narrow boundaries
B. floating, but subject to central bank intervention
C. floating, but not subject to central bank intervention
D. non-existent; that is, currencies were not exchanged, but gold was used to pay for all
foreign transactions - ANSWER A. fixed with narrow boundaries
[1-13]. Eurobonds:
A. Can only be issued by European firms
B. Can only be sold by European investors
C. A & B
D. None of the above - ANSWER D. None of the Above
[Eurobonds - a bond issued in a foreign market by a government or corporation that is
denominated in a different currency than that of the issuer
, ex: US MNC issue bond denominated in British Pounds]
[1-14]. (T/F) In general, when speculating on exchange rate movements, the speculator
will borrow the currency that is expected to appreciate and invest in the country whose
currency is expected to depreciate. - ANSWER False
[the speculator would borrow in the currency that is expected to depreciate and invest in
the currency that is expected to appreciate because the borrowing would be cheaper
and the investment appreciating is what would generate the return]
[1-15]. Any event that increase the supply of British pounds to be exchanged for US
dollars should result in a(n) _______ in the value of the British pound with respect to
_______, other things being equal.
A. increase; US dollar
B. increase; non-dollar currencies
C. decrease; non-dollar currencies
D. decrease; US dollar - ANSWER D. decrease; US dollar
[More Pounds for 1 USD = Weaker Pound relative to USD]
[1-16]. 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:
A. International trade
B. Licensing
C. Franchising
D. Establish a New Subsidiary - ANSWER D. Establish a New Subsidiary
[Establishing a new subsidiary is the method with the most required investment in the
foreign country]
[1-17]. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be
received in the future from this subsidiary have not changed since last month, but the
valuation of Saller Co. has declined since last month. What could've caused this decline
in value?
A. A weaker Mexican economy
B. Lower Mexican interest rates
C. Depreciation of the Mexican peso
D. Appreciation of the Mexican peso - ANSWER C. Depreciation of the Mexican peso
[ E(CFpesos)last month = E(CFpesos) now
Value USD Decline since last month --> change had to have occurred in the exchange
rate meaning either the pesos got weaker relative to the USD or the USD got stronger
relative to the peso, either way more pesos will be necessary to exchange for 1 USD]
