IBUS 401 EXAM 3 QUESTIONS &
SOLUTIONS(RATED A+)
According to the text, the most appropriate method of incorporating country risk into
capital budgeting analysis is to: - ANSWER estimate the effect of each form of country
risk on cash flows
When quantifying country risk - ANSWER weights should be assigned to the political
and financial factors according to their perceived importance
Country risk assessment should be used when:
(a) determining whether to establish a subsidiary in a foreign country
(b) determining whether to continue business in a foreign country
(c) A and B
(d) none of the above - ANSWER (c) A and B
According to the text, a firm may be able to achieve a "more efficient" project portfolio,
moving the available project frontier out, if it :
(a) focuses solely on one product
(b) focuses solely on one location to market what it produces
(c) A and B
(d) none of the above - ANSWER (d) none of the above
According to the information in the text, a host gov't would be least likely to provide
incentives for direct foreign investment (DFI) into its country if the firm planning DFI: -
ANSWER would compete with local firms of the host country
Which of the following is a reason to consider international business?(a) economies of
scale
(b) exploit monopolistic advantages
(c) diversification
(d) all of the above - ANSWER (d) all of the above
If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be
periodically sent to the parent, the ideal situation from the parent's perspective is a
_____ after the subsidiary is established - ANSWER strengthening euro
Assume an MNC establishes a subsidiary where it has no other existing business. The
present value of parent cash flows from this subsidiary is more sensitive to exchange
rate movements when: - ANSWER the parent finances the entire investment
, Other things being equal, firms from a particular home country will engage in more
international acquisitions if they expect a foreign currencies to _____ against their home
currency, and if their costs of capital is relatively ______ - ANSWER appreciate; low
A firms' cost of _____ reflects an opportunity cost: what the existing shareholders could
have earned if they had received the earnings as dividends and invested the funds
themselves - ANSWER retained earnings
According to the CAPM< the required rate of return on stock is a positive function of all
the following except:
(a) the risk-free rate of interest
(b) the market rate of return
(c) the stock's beta
(d) the company's earnings - ANSWER (d) the company's earnings
Who bears the payment risk in a letter of credit?
(a) the exporter
(b) the importer
(c) the issuing bank
(d) both the exporter and importer - ANSWER (c) the issuing bank
What are bills of lading, and how do they facilitate international trade transactions? -
ANSWER Bills of lading provide a receipt for shipment, a summary of freight charges,
and convey title to the merchandise.
Consider Firm A and Firm B that both produce the same product. Firm A would more
likely have more stable cash flows if its percentage of foreign sales were ______ and
the number of foreign countries it sold products to was _______ - ANSWER higher;
large
T/F:When a foreign currency is perceived by a firm to be undervalued, the firm may
consider direct foreign investment in that country, as the initial outlay should be
relatively low - ANSWER True
Other things being equal, a blocked funds restriction is more likely to have a significant
adverse effect on a project if the currency is expected to ____ over time, and if the
interest rate in that country is relatively ______ - ANSWER depreciate; low
A U.S. based MNC has just established a subsidiary in Algeria. Shortly after the plant
was built, the MNC determines that its exchange rate forecasts, which had previously
indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a
slight appreciation, the MNC now expects that the dinar will depreciate substantially due
to political turmoil in Algeria. This new development would likely cause the MNC to
_____ its estimate of the previously computed net prevent value - ANSWER lower
SOLUTIONS(RATED A+)
According to the text, the most appropriate method of incorporating country risk into
capital budgeting analysis is to: - ANSWER estimate the effect of each form of country
risk on cash flows
When quantifying country risk - ANSWER weights should be assigned to the political
and financial factors according to their perceived importance
Country risk assessment should be used when:
(a) determining whether to establish a subsidiary in a foreign country
(b) determining whether to continue business in a foreign country
(c) A and B
(d) none of the above - ANSWER (c) A and B
According to the text, a firm may be able to achieve a "more efficient" project portfolio,
moving the available project frontier out, if it :
(a) focuses solely on one product
(b) focuses solely on one location to market what it produces
(c) A and B
(d) none of the above - ANSWER (d) none of the above
According to the information in the text, a host gov't would be least likely to provide
incentives for direct foreign investment (DFI) into its country if the firm planning DFI: -
ANSWER would compete with local firms of the host country
Which of the following is a reason to consider international business?(a) economies of
scale
(b) exploit monopolistic advantages
(c) diversification
(d) all of the above - ANSWER (d) all of the above
If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be
periodically sent to the parent, the ideal situation from the parent's perspective is a
_____ after the subsidiary is established - ANSWER strengthening euro
Assume an MNC establishes a subsidiary where it has no other existing business. The
present value of parent cash flows from this subsidiary is more sensitive to exchange
rate movements when: - ANSWER the parent finances the entire investment
, Other things being equal, firms from a particular home country will engage in more
international acquisitions if they expect a foreign currencies to _____ against their home
currency, and if their costs of capital is relatively ______ - ANSWER appreciate; low
A firms' cost of _____ reflects an opportunity cost: what the existing shareholders could
have earned if they had received the earnings as dividends and invested the funds
themselves - ANSWER retained earnings
According to the CAPM< the required rate of return on stock is a positive function of all
the following except:
(a) the risk-free rate of interest
(b) the market rate of return
(c) the stock's beta
(d) the company's earnings - ANSWER (d) the company's earnings
Who bears the payment risk in a letter of credit?
(a) the exporter
(b) the importer
(c) the issuing bank
(d) both the exporter and importer - ANSWER (c) the issuing bank
What are bills of lading, and how do they facilitate international trade transactions? -
ANSWER Bills of lading provide a receipt for shipment, a summary of freight charges,
and convey title to the merchandise.
Consider Firm A and Firm B that both produce the same product. Firm A would more
likely have more stable cash flows if its percentage of foreign sales were ______ and
the number of foreign countries it sold products to was _______ - ANSWER higher;
large
T/F:When a foreign currency is perceived by a firm to be undervalued, the firm may
consider direct foreign investment in that country, as the initial outlay should be
relatively low - ANSWER True
Other things being equal, a blocked funds restriction is more likely to have a significant
adverse effect on a project if the currency is expected to ____ over time, and if the
interest rate in that country is relatively ______ - ANSWER depreciate; low
A U.S. based MNC has just established a subsidiary in Algeria. Shortly after the plant
was built, the MNC determines that its exchange rate forecasts, which had previously
indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a
slight appreciation, the MNC now expects that the dinar will depreciate substantially due
to political turmoil in Algeria. This new development would likely cause the MNC to
_____ its estimate of the previously computed net prevent value - ANSWER lower
