Chap 01 15e - Madura
Indicate whether the statement is true or false.
1. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller
amount of the home currency.
a. True
b. False
ANSWER: False
2. MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it
allows them to avoid exchange rate risk.
a. True
b. False
ANSWER: False
3. Under the product cycle theory, foreign demand can be initially satisfied by exporting.
a. True
b. False
ANSWER: True
4. A decentralized management style, where subsidiary managers make the relevant decisions regarding their
subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their
subsidiary's operations.
a. True
b. False
ANSWER: True
5. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign
competition.
a. True
b. False
ANSWER: True
6. If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most
currencies were expected to appreciate against the dollar over time.
a. True
b. False
ANSWER: False
Page 1
,Name: Class: Date:
Chap 01 15e - Madura
7. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold
stock in MNCs.
a. True
b. False
ANSWER: False
8. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.
a. True
b. False
ANSWER: True
9. A centralized management style for an MNC results in relatively high agency costs when compared to a
decentralized management style.
a. True
b. False
ANSWER: False
10. Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can
capitalize on a foreign country's resources.
a. True
b. False
ANSWER: False
11. Imperfect markets reflect conditions under which factors of production are immobile.
a. True
b. False
ANSWER: True
12. Franchising is the process by which national governments sell state-owned operations to corporations and other
investors.
a. True
b. False
ANSWER: False
13. If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most
currencies were expected to appreciate against the dollar over time.
a. True
b. False
ANSWER: False
Page 2
,Name: Class: Date:
Chap 01 15e - Madura
14. If a publicly traded MNC's managers make poor decisions that reduce its value, that may encourage other firms
to acquire the MNC.
a. True
b. False
ANSWER: True
15. In determining the valuation of foreign projects, an MNC will use the same required rate of return as it would for
its domestic projects.
a. True
b. False
ANSWER: True
16. A U.S.-based MNC having many foreign subsidiaries in Europe and not expecting to increase its investment
there should see its value increase if the value of the euro weakens over time.
a. True
b. False
ANSWER: False
17. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across
borders).
a. True
b. False
ANSWER: False
18. The theory of comparative advantage begins by assuming that a given firm first becomes established in its home
country and may subsequently penetrate foreign markets via geographic or product differentiation.
a. True
b. False
ANSWER: False
19. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of
agency problems.
a. True
b. False
ANSWER: True
20. Institutional investors such as mutual funds or pension funds that have large holdings of an MNC's stock do not
normally want to take control of it and therefore have no influence over management of the MNC.
a. True
b. False
ANSWER: False
Page 3
, Name: Class: Date:
Chap 01 15e - Madura
21. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as
exchange rates are stable over time.
a. True
b. False
ANSWER: False
22. If a U.S. firm sets up a plant in Mexico to benefit from low-cost labor, it will likely have a comparative advantage
over other firms in Mexico that sell the same product.
a. True
b. False
ANSWER: False
23. If markets were perfect, then labor and other costs of production would be easily transferable.
a. True
b. False
ANSWER: True
24. A macroeconomic perspective focuses on the investment and financing decisions that affect the value of an
MNC.
a. True
b. False
ANSWER: False
25. The valuation of an MNC is reduced if the required rate of return on its investments in foreign countries is
reduced.
a. True
b. False
ANSWER: False
26. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since
all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.
a. True
b. False
ANSWER: False
27. A decentralized management style results in relatively high agency costs for an MNC.
a. True
b. False
ANSWER: True
Page 4
Indicate whether the statement is true or false.
1. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller
amount of the home currency.
a. True
b. False
ANSWER: False
2. MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it
allows them to avoid exchange rate risk.
a. True
b. False
ANSWER: False
3. Under the product cycle theory, foreign demand can be initially satisfied by exporting.
a. True
b. False
ANSWER: True
4. A decentralized management style, where subsidiary managers make the relevant decisions regarding their
subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their
subsidiary's operations.
a. True
b. False
ANSWER: True
5. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign
competition.
a. True
b. False
ANSWER: True
6. If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most
currencies were expected to appreciate against the dollar over time.
a. True
b. False
ANSWER: False
Page 1
,Name: Class: Date:
Chap 01 15e - Madura
7. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold
stock in MNCs.
a. True
b. False
ANSWER: False
8. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.
a. True
b. False
ANSWER: True
9. A centralized management style for an MNC results in relatively high agency costs when compared to a
decentralized management style.
a. True
b. False
ANSWER: False
10. Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can
capitalize on a foreign country's resources.
a. True
b. False
ANSWER: False
11. Imperfect markets reflect conditions under which factors of production are immobile.
a. True
b. False
ANSWER: True
12. Franchising is the process by which national governments sell state-owned operations to corporations and other
investors.
a. True
b. False
ANSWER: False
13. If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most
currencies were expected to appreciate against the dollar over time.
a. True
b. False
ANSWER: False
Page 2
,Name: Class: Date:
Chap 01 15e - Madura
14. If a publicly traded MNC's managers make poor decisions that reduce its value, that may encourage other firms
to acquire the MNC.
a. True
b. False
ANSWER: True
15. In determining the valuation of foreign projects, an MNC will use the same required rate of return as it would for
its domestic projects.
a. True
b. False
ANSWER: True
16. A U.S.-based MNC having many foreign subsidiaries in Europe and not expecting to increase its investment
there should see its value increase if the value of the euro weakens over time.
a. True
b. False
ANSWER: False
17. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across
borders).
a. True
b. False
ANSWER: False
18. The theory of comparative advantage begins by assuming that a given firm first becomes established in its home
country and may subsequently penetrate foreign markets via geographic or product differentiation.
a. True
b. False
ANSWER: False
19. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of
agency problems.
a. True
b. False
ANSWER: True
20. Institutional investors such as mutual funds or pension funds that have large holdings of an MNC's stock do not
normally want to take control of it and therefore have no influence over management of the MNC.
a. True
b. False
ANSWER: False
Page 3
, Name: Class: Date:
Chap 01 15e - Madura
21. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as
exchange rates are stable over time.
a. True
b. False
ANSWER: False
22. If a U.S. firm sets up a plant in Mexico to benefit from low-cost labor, it will likely have a comparative advantage
over other firms in Mexico that sell the same product.
a. True
b. False
ANSWER: False
23. If markets were perfect, then labor and other costs of production would be easily transferable.
a. True
b. False
ANSWER: True
24. A macroeconomic perspective focuses on the investment and financing decisions that affect the value of an
MNC.
a. True
b. False
ANSWER: False
25. The valuation of an MNC is reduced if the required rate of return on its investments in foreign countries is
reduced.
a. True
b. False
ANSWER: False
26. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since
all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.
a. True
b. False
ANSWER: False
27. A decentralized management style results in relatively high agency costs for an MNC.
a. True
b. False
ANSWER: True
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