International Financial Management (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate) 8th Edition Test Bank

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International Financial Management, 8e(Eun)Chapter 1Globalization and the Multinational Firm1)What major dimension sets apart international finance from domestic finance?A) Foreign exchange and political risksB) MarketimperfectionsC) Expanded opportunity setD) all of the optionsAnswer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation2) An example of a political risk isA) expropriation of assets.B) adverse change in tax rules.C) the opposition party being elected.D) both the expropriation of assets and adverse changes in tax rules are correct.Answer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation3)Production of goods and services has become globalized to a large extent as a result ofA) natural resources being depleted in one country after another.B) skilled labor being highly mobile.C) multinational corporations' efforts to source inputs and locate production anywhere where costsare lower and profits higher.D) common tastes worldwide for the same goods and services.Answer:CTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation4) Recently,financial markets have become highly integrated. This developmentA) allows investors to diversify their portfolios internationally.B) allows minority investors to buy and sell stocks.C) has increased the cost of capital for firms.D) none of the optionsAnswer:ATopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation

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5) Japan has experienced large trade surpluses. Japanese investors have responded to this byA) liquidating their positions in stocks to buy dollar-denominated bonds.B) investing heavily in U.S. and other foreign financial markets.C) lobbying the U.S. government to depreciate its currency.D) lobbying the Japanese government to allow the yen to appreciate.Answer:BTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation6) Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25= €1.00. One year later the exchange rate is the same, but the Italian government has expropriatedyour firm's assets paying only €80,000 in compensation. This is an example ofA) exchange rate risk.B) political risk.C) market imperfections.D) none of the options, since $100,000 = €80,000 × $1.25/€1.00.Answer:BTopic:What's Special about "International" Finance?7) Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One yearlater, the stock rises to £60. You are happy with your 20 percent return on the stock, but when yousell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1= $0.75. This loss of value is an example ofA) exchange rate risk.B) political risk.C) market imperfections.D) weakness in the dollar.Answer:ATopic:What's Special about "International" Finance?

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8) Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If theBritish pounddepreciatesagainst the U.S. dollar,A) your firm will be able to charge more in dollar terms while keeping pound prices stable.B) your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constantand your pound prices will rise.C)to protect U.K. market share, your firm may have to cut the dollar price of your goods to keepthe pound price the same.D) your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constantand your pound prices will rise, and to protect U.K. market share, your firm may have to cut thedollar price of your goods to keep the pound price the same.Answer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation9) Suppose Mexico is a major export market for your U.S.-based company and the Mexican pesoappreciates drastically against the U.S. dollar. This meansA) your company's products can be priced out of the Mexican market, as the peso price ofAmerican imports will rise following the peso's fall.B) your firm will be able to charge more in dollar terms while keeping peso prices stable.C) your domestic competitors will enjoy a period of facing lessened price competition fromMexican imports.D) your firm will be able to charge more in dollar terms while keeping peso prices stable and yourdomestic competitors will enjoy a period of facing lessened price competition from Mexicanimports.Answer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation10) Suppose Mexico is a major export market for your U.S.-based company and the Mexican pesodepreciates drastically against the U.S. dollar, as it did in December 1994. This means thatA) your company's products can be priced out of the Mexican market, as the peso price ofAmerican imports will rise following the peso's fall.B) your firm will be able to charge more in dollar terms while keeping peso prices stable.C) your domestic competitors will enjoy a period of facing little price competition from Mexicanimports.D) none of the optionsAnswer:ATopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation

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11) Suppose that you are a U.S. producer of a commodity good competing with foreign producers.Your inputs of production are priced in dollars and you sell your output in dollars. If the U.S.currency depreciates against the currencies of our trading partners,A) your competitive position is likely improved.B) your competitive position is likely worsened.C) yourcompetitive position is unchanged.D) none of the optionsAnswer:ATopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation12) Undoubtedly, we are now living in a world where all the major economicfunctions—consumption, production, and investment—A) are still inherently local.B) are still regional in nature.C) are slowly becoming globalized.D) are highly globalized.Answer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation13) Most governments at least try to make it difficult for people to cross their borders illegally.This barrier to the free movement of labor is an example ofA) information asymmetry.B) excessive transactions costs.C) racial discrimination.D) a market imperfection.Answer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation14) Although the world economy is much more integrated today than was the case 10 or 20 yearsago, a variety of barriers still hamper free movements of people, goods, services, and capital acrossnational boundaries. These barriers includeA) legal restrictions.B) excessive transportation costs.C) information asymmetry.D) all of the optionsAnswer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation15) The Japanese automobile company Honda decided to establish production facilities in Ohio,mainly toA) circumvent trade barriers.

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B) reduce transportation costs.C) reduce transactions costs.D) all of the optionsAnswer:ATopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation16) When individual investors become aware of overseas investment opportunities and are willingto diversify their portfolios internationally,A) they trade one market imperfection, information asymmetry, for another, exchange rate risk.B) they benefit from an expanded opportunity set.C) they should not bother to read or to understand the prospectus, since it's probably written in aforeign language.D) they should invest only in dollars or euros.Answer:BTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation17) The Nestlé Corporation, a well-known SwissMNC, used to issue two different classes ofcommon stock, bearer shares and registered shares, and foreigners were allowed to hold onlyA) registered shares.B) bearer shares.C) voting shares.D) convertible shares.Answer:BTopic:What'sSpecial about "International" Finance?Accessibility:Keyboard Navigation18) Deregulated financial markets and heightened competition in financial services provided anenvironment for financial innovations that resulted in the introduction of various instruments.Examples of these innovative instruments includeA) currency futures and options, foreign stock index futures and options.B) multicurrency bonds.C) international mutual funds, country funds, exchange traded funds.D) all of the optionsAnswer:DTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation19) Nestlé, a well-known Swiss corporation,A) has been a paragon of virtue in its opposition to all forms of political risk.B) at one time placed restrictions on foreign ownership of its stock. When it relaxed theserestrictions, the total market value of the firm fell.C) at one time placed restrictions on foreign ownership of its stock. When it relaxed theserestrictions, there was a major transfer of wealth from foreign shareholders to domestic

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shareholders.D) none of the optionsAnswer:CTopic:What's Special about "International" Finance?Accessibility:Keyboard Navigation20) The goal of shareholder wealth maximizationA) is not appropriate for non-U.S. business firms.B) means that all business decisions and investments that a firm makes are done for the purpose ofmaking the owners of the firm better off financially.C) is a sub-objective the firm should attempt to achieve after theobjective of customer satisfactionis met.D) is in conflict with the privatization process taking place in third-world countries.Answer:BTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation21) As capital markets are becoming more integrated, the goal of shareholder wealth maximizationA) has been altered to include other goals as well.B) has lost out to other goals, even in the U.S.C) has been given increasing importance by managers in Europe.D) has been shown to be a deterrent to raising funds abroad.Answer:CTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation22) Corporate scandals at firms such as Enron, WorldCom and the Italian firm ParmalatA) show thatmanagers might be tempted to pursue their own private interests at the expense ofshareholders.B) show that Italian shareholders are better at monitoring managerial behavior than U.S.shareholders.C) show that white-collar criminals hardly ever get punished.D) show that socialism is a better way to go than capitalism.Answer:ATopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation23) While the corporate governance problem is not confined to the United States,A) it can actually be a much more serious problem in other parts of the world, where the legalprotection of shareholders is weak or nonexistent.B) it has reached its high point in the United States.C) the U.S. legal system, with lawsuits used only as alast resort, ensured that any conflicts ofinterest would soon be a thing of the past.D) none of the options

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Answer:ATopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation24) The owners of a business are theA) taxpayers.B) workers.C) suppliers.D) shareholders.Answer:DTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation25) The massive privatization that is currently taking place in developing and formerly socialistcountriesA) will eventually enhance the standard of living to these countries' citizens.B) depends on private investment.C) increases the opportunity set facing these countries' citizens.D) all of the optionsAnswer:DTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation26) A firm withconcentrated ownershipA)may give rise to conflicts of interest between dominant shareholders and small outsideshareholders.B) may enjoy more accounting transparency than firmswith diffuse ownership structures.C) is a partnership, never a corporation.D) none of the optionsAnswer:ATopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation

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27) Theultimateguardians of shareholder interest in a corporation are theA) rank and file workers.B) senior management.C) boards of directors.D) all of the optionsAnswer:CTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation28) In countries like France and Germany,A) managers have often made business decisions with regard to maximizing market share to theexclusion of other goals.B) managers have often viewed shareholders as one of the "stakeholders" of the firm, others beingemployees, customers, suppliers, banks and so forth.C) managers have often regarded the prosperity and growth of theircombines,or families ofrelated firms, as their most critical goal.D) managers have traditionally embraced the maximization of shareholder wealth as the onlyworthy goal.Answer:BTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation29) When corporate governance breaks downA) shareholders are unlikely to receive fair returns on their investments.B) managers may betempted to enrich themselves at shareholder expense.C) the board of directors is not doing its job.D) all of the optionsAnswer:DTopic:Goals for International Financial ManagementAccessibility:Keyboard Navigation30) Privatization refers tothe process ofA) having government operate businesses for the betterment of the public sector.B) government allowing the operation of privately owned business.C) prohibiting government operated enterprises.D) a country divesting itself of the ownership and operation of a business venture by turning it overto the free market system.Answer:DTopic:Globalization of the World EconomyAccessibility:Keyboard Navigation

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31) Deregulation of world financial marketsA) provided a natural environment for financial innovations, like currency futures and options.B) has promoted competition among market participants.C) has encouraged developing countries such as Chile, Mexico, and Korea to liberalize byallowing foreigners to directly invest in their financial markets.D) all of the optionsAnswer:DTopic:Globalization of the World EconomyAccessibility:Keyboard Navigation32) The emergence of global financial markets is due in no small part toA) advances in computer andtelecommunications technology.B) enforcement of the Soviet system of state ownership of resources of production.C) government regulation and protection of infant industries.D) none of the optionsAnswer:ATopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation33) The common monetary policy for the euro zone is now formulated byA) the Bundesbank in Germany.B) the Federal Reserve Bank.C) the World Bank.D) the European Central Bank.Answer:DTopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation34) Since the end of World War I, the dominant global currency has been theA) British pound.B) Japanese yen.C) Euro.D) U.S. dollar.Answer:DTopic:Emergence of the Euro as aGlobal CurrencyAccessibility:Keyboard Navigation

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35) Prior to World War I ending, the dominant global currency was theA) German mark.B) French franc.C) Japanese yen.D) British pound.Answer:DTopic:Emergence of the Euro as a GlobalCurrencyAccessibility:Keyboard Navigation36) The ascendance of the dollar reflects several key factors, such asA) the size of the U.S. population.B) the mature and open capital markets of the U.S. economy.C) exchange rate stability.D) all of the optionsAnswer:BTopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation37) The euroA) is the common currency of Europe.B) is divisible into 100 cents, just like the U.S. dollar.C) may eventually have a transaction domain larger than the U.S. dollar.D) all of the optionsAnswer:DTopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation38) Since its inception the euro has brought about revolutionary changes in Europeanfinance. Forexample,A) by redenominating corporate bonds and stocks from several different currencies into onecommon currency, the euro has precipitated the emergence of continent-wide capital markets inEurope that are comparable to U.S. markets in depth and liquidity.B) Swiss bank accounts are all denominated in euro.C) the European banking sector has become much more important as a source of financing forEuropean firms.D) there have actually not been any revolutionary changes.Answer:ATopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation

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39) In David Ricardo's theory of comparative advantage,A) international trade is a zero-sum game in which one trading partner's gain comes at the expenseof another's loss.B) liberalization of international trade will enhance the welfare of the world's citizens.C) is a short-run argument, not a long-run argument.D) has been superseded by the now-orthodox view of mercantilism.Answer:BTopic:Emergence of the Euro as a Global CurrencyAccessibility:Keyboard Navigation40) Under the theory of comparative advantage, liberalization of international trade willA) enhance the welfare of the world's citizens.B) create unemployment and displacement of workers permanently.C) result in higher prices in the long run as monopolist are able to charge higher prices aftereliminating their competitors.D) all of the optionsAnswer:ATopic:Emergence of the Euro as a Global CurrencyAccessibility:KeyboardNavigation41) Privatization is often seen as a cure for bureaucratic inefficiency and waste; some economistsestimate that privatization improves efficiency and reduces operating costs by as much asA) 5 percent.B) 10 percent.C) 15 percent.D) 20 percent.Answer:DTopic:PrivatizationAccessibility:Keyboard Navigation42) The World Trade Organization, WTO,A) has the power to enforce the rules of international trade.B) covers agriculture and physical goods, but not services orintellectual property rights.C) recently expelled China for human rights violations.D) ruled that NAFTA is to be the model for world trade integration.Answer:ATopic:Trade Liberalization and Economic IntegrationAccessibility:Keyboard Navigation

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43) PrivatizationA) has spurred a tremendous increase in cross-border investment.B) has allowed many governments to have the funds to nationalize important industries.C) has guaranteed that new ownership will be limited to the local citizens.D) has generally decreased the efficiency of the enterprise.Answer:ATopic:PrivatizationAccessibility:Keyboard Navigation44) The theory of comparative advantageA) claims that economic well-being is enhanced if each country's citizens produce only asingleproduct.B) claims that economic well-being is enhanced when all countries compare commodity pricesafter adjusting for exchange rate differences in order to standardize the prices charged allcountries.C) claims that economic well-being is enhanced if each country's citizens produce that which theyhave a comparative advantage in producing relative to the citizens of other countries, and thentrade production.D) claims that no country has an absolute advantage over another country in the production of anygood or service.Answer:CTopic:Trade Liberalization and Economic IntegrationAccessibility:Keyboard Navigation45) A multinational firm can be defined as a firm thatA) invests short-term cash inflows in more than one currency.B) has sales affiliates in several countries.C) is incorporated in more than one country.D) incorporated in one country and has production and sales operations in several other countries.Answer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation46) An MNC may gain from its global presence byA) spreading R&D expenditures and advertising costs over their global sales.B) pooling global purchasing power over suppliers.C) utilizing their technological and managerial know-howglobally with minimum additionalcosts.D) all of the optionsAnswer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation47) MNCs can use their global presence toA) take advantage of underpriced labor services available incertain developing countries.

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B) gain access to special R&D capabilities residing in advanced foreign counties.C) boost profit margins and create shareholder value.D) all of the optionsAnswer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation48) Financial managers of MNCs shouldA) learn how to manage foreign exchange and political risks using proper tools and instruments.B) deal with (and take advantage of) market imperfections.C) benefit from expanded investment and financing opportunities.D) all of the optionsAnswer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation49) A purely domestic firm that sources its products, sells its products, and raises its fundsdomesticallyA) can face stiff competition from a multinational corporation that can source its products in onecountry, sell them in several countries, and raise its funds in a third country.B) can be more competitive than an MNC on its home turf due to superior knowledge of the localmarket.C) can still face exchange rate risk, just like an MNC.D) all of the optionsAnswer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation50) MNC stands forA) Multinational Corporation.B) Multi-NationalizedCorporation.C) Military National Cooperation.D) none of the optionsAnswer:ATopic:Multinational CorporationsAccessibility:Keyboard Navigation

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51) Which is growing at a faster rate, foreign direct investment by MNCs orinternational trade?A) FDI by MNCsB) International tradeC) Since they are linked, they grow at the same rate.D) none of the optionsAnswer:ATopic:Multinational CorporationsAccessibility:Keyboard Navigation52) A true MNC, with operations in dozens of different countriesA) must effectively manage foreign exchange risk.B) can ignore foreign exchange risk since it is diversified.C) will pay taxes in only its home county.D) none of the optionsAnswer:ATopic:MultinationalCorporationsAccessibility:Keyboard Navigation53) An MNC canA) be a factor that increases the opportunities of the citizens of less developed countries.B) be a factor that increases the opportunity set of domestic investors.C) increase economic efficiency.D) all of the optionsAnswer:DTopic:Multinational CorporationsAccessibility:Keyboard Navigation54) Today for an MNC to produce merchandise in one country on capital equipment financed byfunds raised in a number of different currencies through issuing securities to investors in manycountries, and then selling the finished product to customers in yet other countries isA) not uncommon.B) extremely common.C) uncommon.D) the norm.Answer:ATopic:Multinational CorporationsAccessibility:Keyboard Navigation

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55) A corporation that can source its products in one country, sell them in another country, andraise the funds in a third countryA) is a multinational corporation.B) is a domestic firm if all of theshareholders are from the same country.C) enjoys a built-in hedge against exchange rate risk.D) enjoys a built-in hedge against political risk.Answer:ATopic:Multinational CorporationsAccessibility:Keyboard Navigation56) Country A canproduce 10 yards of textiles or 6 pounds of food per unit of input. Compute theopportunity cost of producing one additional unit of food instead of textiles.A) 1.67 pounds of food per yard of textilesB) 1.67 yards of textiles per pound of foodC) 0.6 pounds of food per yard of textilesD) 0.6 yards of textiles per pound of foodAnswer:BExplanation:10 yards of textiles / 6 pounds of food = 1.67 yards of textiles per pound of foodTopic:Appendix: The Theory of Comparative AdvantageAccessibility:Keyboard Navigation57) The gains from tradeA) are likely realized in the long run when workers and firms have had the time to adjust to the newcompetitive environment.B) are immediately realized in the short run, when governments drop protectionist policies.C) are smaller than the costs of adjustment.D) none of the optionsAnswer:ATopic:Appendix: The Theory of Comparative AdvantageAccessibility:Keyboard Navigation58) Restrictions or impediments to free trade include such things asA) import quotas.B) import tariffs.C) costly transportation.D) all of the optionsAnswer:DTopic:Appendix: The Theory of Comparative AdvantageAccessibility:Keyboard Navigation

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