Host governments sometimes impose special requirements on MNCs that want to acquire local firms. The 1 answer below »

Host governments sometimes impose special requirements on MNCs that want to acquire local firms. These requirements include:

Retention of all employees of the target firm

structure the business to export the products produced

structure the business to avoid direct competition with local businesses

all of the above

none of the above

A host government may offer incentives to MNCs that consider direct foreign investment in its country. Incentives may include all of the following, with the exception of:

reduced regulations

tax breaks on income earned in the host country

tax breaks on income remitted to home country

low-interest loans

none of the above

Letters of credit:

are issued by banks on behalf of the importer promising to pay the exporter.

are issued by the importer promising to pay the exporter

are a substitute for short-term bank loans

provide benefits to the exporter, but not the importer

none of the above

A U.S. firm is considering investment in either Canada or Mexico, but not both. It might select:

Canada, because the U.S. dollar is expected to depreciate against the Canadian dollar

Mexico, because the peso is expected to depreciate against the U.S. dollar

Mexico, because the U.S. dollar is expected to appreciate against the peso

Canada, because the Canadian dollar is expected to depreciate against the U.S. dollar

none of the above

MADCO, a U.S. company, exports to other countries. The company sells its accounts receivable without recourse. Factoring involves

purchase of accounts receivable by a factor

accounts payable financing

working capital financing

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none of the above

A MNC could do which of the following to make it desirable to the host government:

use local employees for managerial positions

purchase supplies in the host country

Reinvest profits in the host country

All of the above

None of the above

A MNC might establish a manufacturing facility in a foreign country because:

labor costs are lower

tax rates are lower

the host government offers incentives

expenses are lower

all of the above

MNCs who want to retain liquidity may invest excess cash in:

international equity markets

international bond markets

international medium-term debt markets

international money markets

all of the above

A method of payment that is an unconditional promise by one party, instructing the buyer to pay the face amount upon presentation is a:

banker’s acceptance

trade acceptance

letter of credit

bill of lading

none of the above

Assume a Canadian firm initiates direct foreign investment in the U.S. The Canadian dollar is expected to depreciate against the U.S. dollar. The C$ dollar value of earnings remitted to the parent Canadian company should:

decrease because the U.S. dollar will buy more Canadian dollars

decrease because the U.S. dollar will buy fewer Canadian dollars

increase because the U.S. dollar will buy more Canadian dollars

increase because the U.S. dollar will buy fewer Canadian dollars

none of the above

A banker’s acceptance:

provides short-term financing for the importer, but is not beneficial to the exporter

can be sold in the money market at a discount

can be sold in the money market at a premium

cannot be sold in the money market

none of the above

A company believes that interest rates will increase in the near future and stay at higher levels. This company should borrow at a:

floating rate, because it will result in lower financing costs

fixed rate, because it will result in lower financing costs

floating rate, because the rate may go down, but not up

fixed rate, because the rate can only increase after 2 years

none of the above

Should tax-related factors be considered in evaluating a foreign target?

yes, different tax rates may increase after-tax earnings

no, corporate tax rates in the home country and the foreign country are the same

no, foreign taxes can be deducted from home country taxes

yes, corporate tax rates in the home country are always higher

none of the above

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is a form of barter

involves two separate transactions

always involves governments and MNCs

is not a form of countertrade

none of the above

MNCs sometimes measure country risk by assigning weights to factors. Which of the following is correct:

weights should be equally allocated among factors

factors will be identical for all MNCs conducting business in the same country

Factors for political and financial risk will be equally weighed in the final analysis

weights should be assigned to factors for political and financial risk according to their perceived importance.

none of the above

The Export-Import Bank of the U.S. offers various programs, including:

medium-term guarantee program

bank insurance programs for exporters

export credit insurance program for exporters

working capital guarantee program

all of the above

U.S. MNC is considering investing in Portuguese securities. The exchange rate is Ac‚¬ = $1.33. If the euro depreciates, the effective yield on the investment will be:

higher, because the euro will convert to fewer dollars

lower, because the euro will convert to fewer dollars

higher, because the dollar will convert to fewer euros

lower, because the dollar will convert to more euros

lower, because the dollar will convert to more euros

Spain and South Africa have very different economic conditions. A MNC would reduce risk by:

operating in both countries

operating in Spain, but not South Africa

operating in South Africa, but not Spain

operating in neither country

none of the above

With consignments:

the exporter ships the goods to the importer along with the title to the goods

The importer pays the exporter as soon as the goods are received

The importer pays the exporter when the goods are sold

The exporter and importer assume equal risk

none of the above

MORIT, Inc., a U.S. corporation undertakes direct foreign investment in Brazil. The Brazilian real is expected to depreciate temporarily against the dollar. As a result, earnings remitted to MORIT will convert to fewer dollars. For this reason, MORIT may request the subsidiary to:

postpone remitting earnings until the dollar strengthens

postpone remitting earnings until the real strengthens

remit earnings right away before the dollar weakens

all of the above

none of the above

Which of the following is probably the most difficult for a MNC to value?

international acquisition

international divestiture

international partial acquisition

newly privatized foreign business

none of the above

Which strategy is suggested when a company wants to to reduce risk by diversifying internationally?

Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based

Establish subsidiaries in markets that have relatively low cost of labor or land

Establish subsidiaries in markets where the local currency is weak but is expected to appreciate over time

Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based

None of the above

The Jackson Corporation, a U.S. firm, establishes a subsidiary in a foreign country where it currently doesn’t do any business. The present value of cash flows from this subsidiary to the parent is more sensitive to exchange rate movements when:

the parent finances most of the investment

the parent finances the entire investment

the subsidiary finances the entire investment by local borrowing

the subsidiary finances most of the investment by local borrowing

none of the above

MNCs may value the same foreign target company in different ways because of:

Differences in tax rates

Differences in estimated exchange rates

Differences in required rates of return

All of the above

None of the above

Financial characteristics that should be considering in evaluating country risk include:

interest rates

exchange rate

inflation

government fiscal policy

all of the above

The annual interest rate on the Canadian dollar is 9%. The forecast of the Canadian dollar’s value for the next year is shown below. Calculate the effective financing rate for a U.S. company. Show how you derive the answer.

Percentage Change

Probability

1.0%

15%

-1.5%

30%

-2.0%

55%

The annual interest rate on the Swiss franc is 4%. It is expected to appreciate 3% over the next year. Calculate the effective financing rate for a U.S. company. Show how you derive the answer.

Tundra, Inc. plans to make an offer for a Chinese company. The Chinese company has 50 million shares outstanding and price per share is 3 yuan. The current spot exchange rate is $1 = 6.27yuan and the estimated spot rate at the end of 6 months is 6.24. (1) Calculate the Chinese company’s value in dollars based on its stock price; and (2) Calculate the value in dollars if the estimated spot rate at the end of 6 months is used? Show how you derive answers.

Boxton, Inc. is considering a project with an estimated return on 10%. Its capital structure consists of 60% debt and 40% equity. Its borrowing rate is 6% and cost of equity is 10%. Its tax rate is 30%. (1) Calculate Boxton’s weighted averaged cost of capital; and (2) should Boxton undertake the project? Why or why not?

Parvis, Inc., a U.S. Company is expecting cash flows in Australian dollars of: A$1 million, AS1.5 million, and AS .5 million in years 1, 2, and 3, respectively. The forecasted exchange rates are US$1.03 year 1, US$1.04 year 2, and US$1.05 year 3. (1) Calculate the US dollar value of the cash flows by year; and (2) the total cash flow for the 3 years. Show how you derive answers.

Company X has a beta of .85, the risk-free rate of return is 1%, and the average return on the market is 9%. (1) Calculate the required rate of return on Company X’s stock. Show how you derive the answer. (2) Does Company X’s stock have greater risk, the same risk, or less risk than the average stock? Explain

The 1-year interest rate is 7% in the U.S. and 3% in Japan. How much would the yen have to appreciate for a U.S. investor to get the same return on both U.S. and Japanese investments? Show you derive the answer.

MLC Audio has decided to issue 3-year bonds denominated in 10 million Singapore dollars. The bonds have a coupon rate of 10%. The Singapore dollar is expected to appreciate from its current level of $.82 to $.80, $.79, and $.78 in years 1, 2, and 3, respectively. Calculate the financing cost (in percent) of these bonds. Show how you derive the answer.

Marcus, Inc., a U.S. company takes out a 1-year loan in Germany. The U.S. 1-year interest rate is 5%, and the German 1-year interest rate is 6%. The spot rate of the euro is $1.33 and the 1-year forward rate is $1.29. Calculate the effective financing rate for Marcus. Show how you derive the answer.

A U.S. company is considering a project in Mexico. Estimated cash flows are 10 million Mexican pesos the first year and 20 million Mexican pesos the second year. The U.S. company would incur a cost of $2 million at the start of the project, and its cost of capital is 12%. The expected spot rate is $0.13 for Year 1 and $0.11 for Year 2. (1)Calculate the net present value of this project . Show how you derive the answer; and (2) Should the U.S. company invest in the project? Why or why not?

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