248GitmanPrinciplesofFinance,EleventhEdition

Chapter18
InternationalManagerialFinance

Learning Goals
1. Understandthemajorfactorsthatinfluencethefinancialoperationsofmultinationalcompanies
(MNCs).

2. Describethekeydifferencesbetweenpurelydomesticandinternationalfinancialstatements
consolidation,translationofindividualaccounts,andinternationalprofits.

3. Discussexchangerateriskandpoliticalrisk,andexplainhowMNCsmanagethem.

4. Describeforeigndirectinvestment,investmentcashflowsanddecisions,theMNCscapital
structure,andtheinternationaldebtandequityinstrumentsavailabletoMNCs.

5. DiscusstheroleoftheEurocurrencymarketinshorttermborrowingandinvesting(lending)andthe
basicsofinternationalcash,credit,andinventory.

6. Reviewrecenttrendsininternationalmergersandjointventures.

True/False
1. NAFTAisatreatyestablishingfreetradeandopenmarketsbetweenEuropeandtheUnitedStates.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:NorthAmericanFreeTradeArea

2. TheWorldTradeOrganizationisanewinternationalbodyestablishedtopoliceworldtrading
practicesandtomediatedisputesbetweenmembercountries.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:WorldTradeOrganization

3. OffshoreCentersarecitiesorstatesthathaveachievedprominenceasmajorcentersforEuromarket
business.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:OffshoreCenters
249GitmanPrinciplesofFinance,EleventhEdition
4. NAFTAisaninternationalfinancialmarketthatprovidesforborrowingandlendingcurrencies
outsidetheircountryoforigin.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:NorthAmericanFreeTradeArea

5. Fluctuationsinforeignexchangemarketscanaffectforeignrevenuesandprofitsofamultinational
company,buttheyhavenoimpactonitsoverallvalue.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:ForeignExchangeRisk

6. TheEuromarketistheinternationalfinancialmarketthatprovidesforborrowingandlending
currenciesoutsidetheircountryoforigin.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:TheEuromarket

7. TheexistenceofspecificregulationsandcontrolsondollardepositsintheUnitedStates,including
interestrateceilingimposedbythegovernment,havecontributedtothegrowthoftheEuromarket.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:TheEuromarket

8. Ajointventureisapartnershipunderwhichtheparticipantshavecontractuallyagreedtocontribute
specifiedamountsofmoneyandexpertiseinexchangeforstatedproportionsofownershipand
profit.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:JointVentures

9. FASBNo.52requiresU.S.multinationalsfirsttoconvertthefinancialstatementaccountsofforeign
subsidiariesintotheirfunctionalcurrencyandthentotranslatetheaccountsintotheparentfirms
currencyusingtheallcurrentratemethod.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:FASBNo.52

10. Theallcurrentratemethodisthemethodbywhichthefunctionalcurrencydenominatedfinancial
statementsofanMNCssubsidiaryaretranslatedintotheparentcompanyscurrency.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:FASBNo.52andtheCurrentRateMethod
 Chapter18InternationalManagerialFinance250
11. Thespotexchangerateistherateofexchangebetweentwocurrenciesatsomespecifiedfuturedate.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:3
Topic:FASBNo.52andtheCurrentRateMethod

12. Theforwardexchangerateistherateofexchangebetweentwocurrenciesonanygivenday.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:3
Topic:ForwardExchangeRates

13. Thefunctionalcurrencyisthecurrencyoftheeconomicenvironmentinwhichabusinessentity
primarilygeneratesandexpendscash,andinwhichitsaccountsaremaintained.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
Topic:FunctionalCurrency

14. Accountingexposureistheriskresultingfromtheeffectsofchangesinforeignexchangerateson
thetranslatedvalueofafirmsfinancialstatementaccountsdenominatedinagivenforeign
currency.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:AccountingExposure

15. Economicexposureistheriskresultingfromtheeffectsofchangesinforeignexchangeratesonthe
firmsvalue.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:EconomicExposure

16. Thethreebasictypesofriskassociatedwithinternationalcashflowsare1)businessandfinancial
risks,2)inflationandforeignexchangerisks,and3)politicalrisks.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:TypesofRiskinInternationalCashFlows

17. Countriesthatexperiencehighinflationrateswillseetheircurrenciesdeclineinvaluerelativetothe
currenciesofcountrieswithlowerinflationrates.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:InflationRiskandInternationalCashFlows
251GitmanPrinciplesofFinance,EleventhEdition
18. Whenmoreunitsofaforeigncurrencyarerequiredtobuyonedollar,thecurrencyissaidtohave
appreciatedwithrespecttothedollar.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:ForeignExchangeRiskandInternationalCashFlows

19. Foreignbondisaninternationalbondthatissoldprimarilyincountriesotherthanthecountryofthe
currencyinwhichtheissueisdenominated.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
Topic:ForeignBonds

20. Ingeneral,aninternationalbondisonethatisinitiallysoldinthecountryoftheborrowerand,then,
oftendistributedinseveralcountries.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
Topic:InternationalBonds

21. Becauseoftheiraccesstotheinternationalbondandequitymarkets,MNCsmayhavelowercostsof
varioussourcesoflongtermfinancing,thusresultingindifferencesbetweenthecapitalstructures
ofthesefirmsandthoseofpurelydomesticcompanies.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:4
Topic:CostofCapitalforMNCs

22. Theforeigndirectinvestment(FDI)isamultinationalcorporationstransferofcapital,managerial,
andtechnicalassetsfromahostcountrytoitshomecountry.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:4
Topic:ForeignDirectInvestment

23. Amultinationalcorporation(MNC)cangivesomeprotectiontointernationalcashflowsby
reducingitsliabilitiesifthecurrencyisappreciating,orbyreducingitsfinancialassetsifthe
currencyisdepreciating.
Answer: TRUE
LevelofDifficulty:4
LearningGoal:4
Topic:MNCsandInternationalCashFlows

24. Intheinternationalcontext,thenominalinterestrateisthestatedinterestratechargedonfinancing
whenonlytheMNCparentscurrencyisinvolved.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:5
Topic:MNCsandInterestRates
 Chapter18InternationalManagerialFinance252
25. Inthecaseofshorttermfinancing,theforcesofsupplyanddemandareamongthemainfactors
determiningexchangeratesinEurocurrencymarkets.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:EurocurrencyMarkets

26. Hedgingstrategiesaretechniquesusedtooffsetorprotectagainstrisk;intheinternationalcontext
theseincludeborrowingorlendingindifferentcurrencies,undertakingcontractsintheforward,
futures,and/oroptionsmarkets,andalsoswappingassets/liabilitieswithotherparties.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:
Topic:HedgingForeignExchangeRisk

27. TheinterestratesofferedintheEuromarketontheU.S.dollararegreatlyaffectedbytheprimerate
insidetheUnitedStates.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:5
Topic:EuromarketInterestRates

28. Intheinternationalcontext,theeffectiveinterestrateequalstothenominalrateplus(orminus)any
forecastappreciation(ordepreciation)ofaforeigncurrencyrelativetothecurrencyoftheMNC
parent.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:5
Topic:MNCsandInterestRates

29. TheofficialmeldingofthenationalcurrenciesoftheEuropeanUnionintoonecurrency,theEuro,
createdtheEuropeanMonetaryUnionin2002.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:EuropeanUnion

30. TheMercosurGroupisamajorSouthAmericantradingblocthatincludescountriesthataccountfor
morethanhalfofthetotalofLatinAmericasGDP.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:MercosurGroup

31. TheMercosurGroupisamajorEuropeantradingblocmadeupofformerSovietbloccountriesin
EasternEurope.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:MercosurGroup
253GitmanPrinciplesofFinance,EleventhEdition
32. DisagreementsamongEuropeanUnioncountrymembersoverthedispositionofgarbageand
manufacturingrefusegeneratedprimarilybyEasternEuropeancountrieshavecometobeknownas
theEuroTrashIssue.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:EuropeanUnion

33. In20032004,theUnitedStatessignedaregionaltradepactwiththeDominicanRepublic,Costa
Rica,ElSalvador,Guatemala,Honduras,andNicaraguacalledtheCentralAmericanFreeTrade
AgreementorCAFTA.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:CentralAmericanFreeTradeAgreement

34. In20032004,theUnitedStatessignedaregionaltradepactwithsouthpacificcountriesincluding
thePhilippines,Indonesia,MalaysiacalledtheSouthPacificAmericanTradeAgreementor
SPAMTA.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:FreeTradeAgreements

35. TheWorldTradeOrganizationhasinrecentyearsadmittedcurrentandformercommunistcountries
asmembersincludingtheRussianFederationandthePeoplesRepublicofChina.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:WorldTradeOrganization

36. CurrentU.S.taxlawsrequiretheconsolidationoffinancialstatementsofsubsidiariesaccordingto
thepercentageofownershipbytheparentcompany.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:2
Topic:TaxesIssuesRelatedtoMNCs

37. CurrentU.S.taxlawsrequiretheseparationoffinancialstatementsofsubsidiariesandtheoperating
resultsforsomesubsidiariesareexcludedfromtheparententirelyforsomecountriessuchasChina
andIndia.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:TaxesIssuesRelatedtoMNCs
 Chapter18InternationalManagerialFinance254
38. Afunctionalcurrencyisthecurrencyoftheparentcompanyscountry.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:FunctionalCurrency

39. Afunctionalcurrencyisthecurrencyofthehostcountryinwhichasubsidiaryprimarilygenerates
andexpendscashandinwhichitsaccountsaremaintained.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:
Topic:FunctionalCurrency

40. Althoughseveraleconomicandpoliticalfactorscaninfluenceforeignexchangeratemovements,by
farthemostimportantexplanationforlongtermchangesinexchangeratesisadifferinginflation
ratebetweentwocountries.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:ForeignExchangeRates

41. Althoughseveraleconomicandpoliticalfactorscaninfluenceforeignexchangeratemovements,by
farthemostimportantexplanationforlongtermchangesinexchangeratesisfiscalpolicythata
countryadopts.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:ForeignExchangeRates

42. Macropoliticalriskistheriskfacedbyallforeignfirmsinahostcountryrelatedtopoliticalchange,
revolution,andtheadoptionofnewpoliciesofagovernmentthatmayresultinchangesin
ownershipstructure,closureorexpropriation.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:PoliticalRisk

43. Micropoliticalriskistheriskfacedbyallforeignfirmsinahostcountryrelatedtopoliticalchange,
revolution,andtheadoptionofnewpoliciesofagovernmentthatmayresultinchangesin
ownershipstructure,closureorexpropriation.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:PoliticalRisk
255GitmanPrinciplesofFinance,EleventhEdition
44. Nationalentrycontrolsystemsarecomprehensiverules,regulations,andincentivesintroducedby
hostgovernmentstoregulateinflowsofforeigndirectinvestmentfromMNCsandatthesametime
extractmorebenefitsfromtheirpresence.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:NationalEntryControlSystems

45. Nationalentrycontrolsystemsarecomprehensiverules,regulations,andimmigrationpolicies
introducedbyxenophobichostgovernmentstoregulateinflowsofforeignworkers.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:NationalEntryControlSystems

46. BoththeoryandempiricalevidenceindicatethatthecapitalstructuresofMNCsdifferfromthoseof
purelydomesticfirms.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:MNCCapitalStructure

47. BoththeoryandempiricalevidenceindicatethatthecapitalstructuresofMNCsarenodifferent
fromthoseofpurelydomesticfirms.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:MNCCapitalStructure

48. Exchangerateriskhedgingtoolsincludeforwardcontracts,options,interestrateswaps,currency
swaps,andhybridsecurities.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:HedgingExchangeRateRisk

49. ExchangerateriskhedgingtoolsincludeMonteCarloswaps,syntheticinsurancecontracts,and
inventoryswaps.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:HedgingExchangeRateRisk

50. Thecreationofinternationaljointventureshasincreasedsubstantiallyduringthepasttwodecades.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:6
Topic:InternationalJointVentures
 Chapter18InternationalManagerialFinance256

Multiple Choice Questions

1. Apartnershipbetweenamultinationalcompanyandaforeigninvestorinwhichcontractually
specifiedamountsofmoneyandexpertisearecontributedbytheparticipantsforstatedproportions
ofownershipandprofitisa
(a) multinationalcorporation.
(b) floatingrelationship.
(c) jointventure.
(d) consolidation.
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:JointVentures

2. The_________isthetaxationtechniquethatincreasestheU.S.incomeofanMNCbytheamount
offoreignincome(beforeforeigntaxes).TheU.S.taxcalculationisthenbasedonthathigherlevel.
(a) unitarytaxlaw
(b) grossingupprocedure
(c) GmbH
(d) nationalizationprocedure
Answer: B
LevelofDifficulty:1
LearningGoal:1
Topic:GrossingUpProcedure

3. SeveralU.S.stateshaveimposed_________,whichtaxMNCsonapercentageoftheirtotal
worldwideincome.
(a) grossingupprocedures
(b) jointventures
(c) unitarytaxlaws
(d) nationalentrycontrolsystems
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:UnitaryTaxLaws

4. AllofthefollowingareconsideredoffshorecentersEXCEPT
(a) Cuba.
(b) Singapore.
(c) London.
(d) Nassau.
Answer: A
LevelofDifficulty:1
LearningGoal:1
Topic:OffshoreCenters
257GitmanPrinciplesofFinance,EleventhEdition
5. Apartnershipunderwhichtheparticipantshavecontractuallyagreedtocontributespecified
amountsofmoneyandexpertiseinexchangeforstatedproportionsofownershipandprofitiscalled
(a) limitedpartnership.
(b) GmbH.
(c) S.A.R.L.
(d) jointventure.
Answer: D
LevelofDifficulty:1
LearningGoal:1
Topic:JointVentures

6. LawsinsomeU.S.statesthattaxmultinationals(bothAmericanandforeign)onapercentageof
theirtotalworldwideincomeratherthantheusualtaxationoftheMNCsearningsarisingwithin
theirjurisdictionarecalled
(a) multinationaltaxlaws.
(b) statecorporatetaxlaws.
(c) unitarytaxlaws.
(d) universaltaxlaws.
Answer: C
LevelofDifficulty:2
LearningGoal:1
Topic:UnitaryTaxLaws

7. AllofthefollowingarefactorsthatcaninfluencetheoperationsofanMNCEXCEPT
(a) foreignownershipofportionsofequity.
(b) existenceofmultinationalcapitalmarkets.
(c) foreigncurrencyfluctuations.
(d) consolidationoffinancialstatementsbasedononlyonecurrency.
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:InternationalAccountingandMNCs

8. TheEuromarketisdominatedbythe
(a) Frenchfranc.
(b) Japaneseyen.
(c) Deutschemark.
(d) U.S.dollar.
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:Euromarket
 Chapter18InternationalManagerialFinance258
9. Jointventurelawsandrestrictionsmayresultinanyofthefollowingnegativeimplicationsforthe
operationofaforeignbasedsubsidiaryEXCEPT
(a) foreignownershipmayresultindisagreementamongthepartnersregardingthedistribution
ofprofits.
(b) operatinginforeigncountriesmayresultindifficultiesobtainingtheremissionofprofits.
(c) jointventureagreementsmaystemacertaindegreeofriskduetopoliticalhostility.
(d) foreignmanagementpoliciesmaybedetrimentaltotheusualpoliciesoftheMNC.
Answer: C
LevelofDifficulty:3
LearningGoal:1
Topic:JointVentures

10. FASBNo.52isastatementissuedbytheFinancialAccountingStandardsBoardrequiring
AmericanMNCstofirstconvertthefinancialstatementaccountsofforeignsubsidiariesinto
thecountrys_________currencyandthentranslatetheaccountsintotheparentfirmscurrency
usingthe_________method.
(a) spot;historicalrate
(b) functional;allcurrentrate
(c) principal;averagerate
(d) forwardrate;weightedaverage
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:FASBNo.52andtheCurrentRateMethod

11. TheallcurrentratemethoddictatedbytheFASBNo.52statementrequiresthetranslationofall
balancesheetaccountsatthe______rateandallincomestatementitemsatthe_________rates.
(a) closing;average
(b) average;closing
(c) historical;current
(d) average;historical
Answer: A
LevelofDifficulty:3
LearningGoal:2
Topic:FASBNo.52andtheCurrentRateMethod

12. AllofthefollowingareconsideredtobemajororhardcurrenciesEXCEPT
(a) theJapaneseyen.
(b) theBritishpound.
(c) theMexicanpeso.
(d) theU.S.dollar.
Answer: C
LevelofDifficulty:1
LearningGoal:3
Topic:ForeignExchange
259GitmanPrinciplesofFinance,EleventhEdition
13. Whenfewerunitsofaforeigncurrencyarerequiredtobuyonedollar,thecurrencyissaidtohave
_________withrespecttothedollar.
(a) appreciated
(b) depreciated
(c) consolidated
(d) remainedfixed
Answer: A
LevelofDifficulty:2
LearningGoal:3
Topic:ForeignExchange

14. Theriskresultingfromtheeffectsofchangesinforeignexchangeratesonthetranslatedvalueofa
firmsaccountsdenominatedinagivenforeigncurrencyis
(a) economicexposure.
(b) macropoliticalrisk.
(c) accountingexposure.
(d) micropoliticalrisk.
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:AccountingExposure

15. Theriskresultingfromtheeffectsofchangesinforeignexchangeratesonthefirmsvalueis
(a) economicexposure.
(b) macropoliticalrisk.
(c) accountingexposure.
(d) micropoliticalrisk.
Answer: A
LevelofDifficulty:2
LearningGoal:3
Topic:EconomicExposure

16. TheriskattachedtointernationalcashflowsareallofthefollowingEXCEPT
(a) businessandfinancialrisks.
(b) inflationandforeignexchangerisks.
(c) politicalrisks.
(d) riskoflocalmanagement.
Answer: D
LevelofDifficulty:3
LearningGoal:3
Topic:TypesofRiskinInternationalCashFlows
 Chapter18InternationalManagerialFinance260
17. Macropoliticalriskandmicropoliticalriskininternationalbusinessrefertotherisk
(a) thatwillaffectallforeignfirmsandtheriskthatwillaffectanindividualfirmorspecific
industry,respectively.
(b) ofnationalizationoftheoilindustryandtheriskofapoliticalrevolution,respectively.
(c) thatwillaffectanindividualfirmorspecificindustryandtheriskthatwillaffectallforeign
firms,respectively.
(d) ofsuddentaxesonexportingthemanufacturedgoodsofaparticularindustryandtheriskofthe
devaluationofthehostcountryscurrency,respectively.
Answer: A
LevelofDifficulty:3
LearningGoal:3
Topic:PoliticalRisk

18. Apoliticalriskthatmightaffectallforeignfirmsinahostcountryistermeda_________risk;a
politicalriskthatmightaffectonlyanindividualfirmorspecificindustryinahostcountryistermed
a_________risk.
(a) macropolitical;micropolitical
(b) micropolitical;macropolitical
(c) micropolitical;foreignexchange
(d) foreignexchange;micropolitical
Answer: A
LevelofDifficulty:3
LearningGoal:3
Topic:PoliticalRisk

19. AllofthefollowingarepositiveapproachesofcopingwithpoliticalriskEXCEPT
(a) useoflocalsinmanagement.
(b) jointventurewithlocalbanks.
(c) licenseorpatentrestrictionsunderinternationalagreement.
(d) localsourcing.
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:PoliticalRisk

20. For_________currencies,changesinthevalueofforeignexchangeratesarecalled_________.
(a) floating;appreciation
(b) floating;revaluationordevaluation
(c) fixed;revaluationordevaluation
(d) fixed;appreciationordepreciation
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:FixedversusFloatingRateCurrencies
261GitmanPrinciplesofFinance,EleventhEdition
21. Betweentwomajorcurrencies,thespotexchangerateistherate_________andtheforward
exchangerateistherate_________.
(a) onthatdate;today
(b) atsomespecifiedfuturedate;today
(c) today;onthatdate
(d) onthatdate;atsomespecifiedfuturedate
Answer: D
LevelofDifficulty:3
LearningGoal:3
Topic:SpotandForwardExchangeRates

22. Foreignexchangeriskreferstotheriskcreatedby_________
(a) thepotentialseizureofanMNCsoperationsinahostcountry.
(b) thevaryingexchangeratebetweentwocurrencies.
(c) thefixedexchangeratebetweentwocurrencies.
(d) thepotentialnationalizationoftheMNCsoperationsbyahostgovernment.
Answer: B
LevelofDifficulty:3
LearningGoal:3
Topic:ForeignExchangeRisk

23. Comprehensiverules,regulations,andincentivesaimedatregulatingtheinflowofdirectforeign
investmentsinvolvingMNCsandatextractingmorebenefitsfromtheirpresencearetermed
(a) unitarytaxlaws.
(b) foreigndirectinvestments.
(c) Eurocurrencymarkets.
(d) nationalentrycontrolsystems.
Answer: D
LevelofDifficulty:1
LearningGoal:4
Topic:NationalEntryControlSystems

24. Thetransferbyamultinationalfirmofcapital,managerial,andtechnicalassetsfromitshome
countrytoahostcountryistermed
(a) anMNC.
(b) anSDI.
(c) anFDI.
(d) aCAPM.
Answer: C
LevelofDifficulty:1
LearningGoal:4
Topic:ForeignDirectInvestment
 Chapter18InternationalManagerialFinance262
25. Aninternationalbondthatissoldprimarilyincountriesotherthanthecountryofthecurrencyin
whichtheissueisdenominatediscalled
(a) internationalbond.
(b) foreignbond.
(c) Eurobond.
(d) Noneoftheabove.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:Eurobonds

26. Incapitalbudgetingforamultinational,thestartingdiscountratetowhichrisksstemmingfrom
foreignexchangeandpoliticalfactorscanbeadded,andfromwhichbenefitsreflectingtheparents
lowercapitalcostsmaybesubtractedis
(a) thecostofcapitaloftheparent(multinational)company.
(b) theriskfreerateoftheparentcompany,adjustedforriskrelevanttotheforeignsubsidiary.
(c) thelocalcostofequitycapitalapplicabletothelocalbusinessandfinancialenvironmentswithin
whichasubsidiaryoperates.
(d) theweightedaveragecostofcapitalapplicabletoallforeignsubsidiariescombined.
Answer: C
LevelofDifficulty:4
LearningGoal:
Topic:MultinationalCapitalBudgeting

27. Theoryandempiricalevidenceindicatethatthecapitalstructuresofmultinationalcompanies
(a) arebasicallythesameasthoseofdomesticfirms.
(b) differ,butallmultinationalsaresimilarnomatterthedomicilecountry.
(c) notonlydifferfromdomesticfirms,butdifferalsobaseduponthecountryinwhichtheyare
domiciled.
(d) differonlybecauseoftheiroperatingstructure.
Answer: C
LevelofDifficulty:4
LearningGoal:4
Topic:MultinationalCapitalStructures

28. Relativetocashflowsofdomesticfirms,bydiversifyinginternationally,multinationals
(a) canincreasecashflows.
(b) canachievefurtherriskreduction.
(c) areunabletochangetherisk.
(d) arenotattemptingtochangerisk.
Answer: B
LevelofDifficulty:4
LearningGoal:4
Topic:MultinationalsandDiversification
263GitmanPrinciplesofFinance,EleventhEdition
29. ThecenteroftheEuroequitymarket,whichdealsininternationalequityissuesis
(a) NewYork.
(b) Geneva.
(c) Tokyo.
(d) London.
Answer: D
LevelofDifficulty:1
LearningGoal:5
Topic:EuroEquityMarket

30. TheusualcapitalmarketsusedbyU.S.basedMNCsthatdesireinternationalownershipoftheir
equityare
(a) WesternEuropeandJapan.
(b) MexicoandCanada.
(c) SaudiArabiaandSouthAfrica.
(d) LiechtensteinandPanama.
Answer: A
LevelofDifficulty:2
LearningGoal:5
Topic:MNCsandCapitalMarkets

31. AEurobondis
(a) abondsoldprimarilytoEuropeans.
(b) abondsoldprimarilyincountriesotherthanthecountryofthecurrencyinwhichtheissueis
denominated.
(c) adebtinstrumentsoldexclusivelyinEurope.
(d) abondissuedinLiechtenstein.
Answer: B
LevelofDifficulty:2
LearningGoal:5
Topic:Eurobonds

32. Theexistenceof_________allowsmultinationalstotakeadvantageofunregulatedfinancial
marketstoinvestandraiseshorttermfundsinavarietyofcountriesandtoprotectthemselvesfrom
foreignexchangeexposure.
(a) astrongU.S.dollar
(b) theInternationalMonetaryFund
(c) Eurocurrencymarkets
(d) EuropeanEconomicCouncil
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:EurocurrencyMarkets
 Chapter18InternationalManagerialFinance264
33. Intheinternationalcontext,the_________interestrateinvolvesonlytheMNCparentscurrency,
whilethe_________interestrateincludesanyforecastappreciationordepreciationofaforeign
currencyrelativetothatoftheMNCparent.
(a) effective;nominal
(b) macro;nominal
(c) nominal;effective
(d) nominal;micro
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:MNCsandInterestRates

34. AshorttermfinancialdecisionbasedonanMNCmanagementsexpectationthatthelocalforeign
currencywillappreciatemaybe
(a) increasinglocalcustomersaccountsreceivableandincreasinglocalnotespayable.
(b) decreasinglocalnotesreceivableanddecreasingaccruals.
(c) increasinglocalinventoriesandincreasinglocalnotespayable.
(d) increasinglocalaccountsreceivableanddecreasinglocalaccountspayable.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:MNCsandShorttermFinance

35. Asaforeignexchangehedgingtool,optionshaveallofthefollowingcharacteristicsEXCEPT
(a) therighttobuyorsellanamountofforeigncurrency.
(b) specifiesprice.
(c) specifiestimeperiod.
(d) representsanobligationtobuyorsell.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:HedgingForeignExchangeRisk

36. Asaforeignexchangehedge,currencyswapshaveallofthefollowingcharacteristicsEXCEPT
(a) aninitialexchangebytwopartiesoftwoprincipalamountsintwodifferentcurrencies.
(b) principalamountsarereversedatthespotrateatmaturity.
(c) eachpartypaystheothersinterestpayment.
(d) principalamountsarereversedatapreagreedrateatmaturity.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:HedgingForeignExchangeRisk
265GitmanPrinciplesofFinance,EleventhEdition
37. Intermsofinventorymanagementmultinationalfirms
(a) mustdealmainlywithexchangeratefluctuationsandtariffs.
(b) mustdealwithawidenumberoffactors,includingexchangeratefluctuations,tariffs,nontariff
barriers,integrationschemessuchastheEEC,andotherrulesandregulations.
(c) haveonlyeconomicfactorstoconsider,sincethisisacurrentassetandisminimallyaffectedby
politicalfactors.
(d) haveonlypoliticalfactorstoconsider,sinceinventoryisminimallyaffectedbyforeign
economicfactors.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:MNCsandInventoryManagement

38. Foreignbondsaresoldprimarilyin
(a) countriesotherthanthecountryinwhichtheissueisdenominated.
(b) WesternEurope.
(c) Japan.
(d) thecountryofthecurrencyofissue.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:ForeignBonds

39. The_________isasignificanteconomicforcecurrentlymadeupof25nationswithapopulationof
morethan295millionthatpermitsfreetradewithinthecountriesthatmakeupthisgroup.
(a) NorthAmericanFreeTradeAgreement(NAFTA)
(b) MercosurGroup
(c) AsianEconomicAreaNetwork(ASEAN)
(d) EuropeanUnion(EU)
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:EuropeanUnion

40. The_________isamajorSouthAmericantradingblocthatincludescountriesthataccountfor
morethanhalfoftotalLatinAmericanGDP.
(a) NorthAmericanFreeTradeAgreement(NAFTA)
(b) MercosurGroup
(c) LatinandSouthAmericanFreeTradeArea(LASTA)
(d) GroupofSeven
Answer: B
LevelofDifficulty:2
LearningGoal:1
Topic:MercosurGroup
 Chapter18InternationalManagerialFinance266
41. The_________isamajortradeagreementsignedbytheUnitedStatesandfiveCentralAmerican
Countries.
(a) NorthAmericanFreeTradeAgreement(NAFTA)
(b) MercosurGroup
(c) LatinandSouthAmericanFreeTradeArea(LASTA)
(d) CentralAmericanFreeTradeAgreement(CAFTA)
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:CentralAmericanFreeTradeAgreement

42. _________isaninternationalbodythatpolicesworldcommercialtradingpracticesandthat
mediatesdisputesbetweentwoormoremembercountries.
(a) NAFTA
(b) GATT
(c) WTO
(d) CAFTA
Answer: C
LevelofDifficulty:2
LearningGoal:1
Topic:WorldTradeOrganization

43. _________isatreatythathasgovernedworldtradethroughoutmostofthepostWorldWarIIera.
(a) NAFTA
(b) GATT
(c) WTO
(d) CAFTA
Answer: B
LevelofDifficulty:2
LearningGoal:1
Topic:GeneralAgreementonTariffsandTrade

44. NicoMining,aU.S.basedMNChasaforeignsubsidiarythatearns$1,050,000beforelocaltaxes,
withalltheaftertaxfundstobeavailabletotheparentintheformofdividends.Theforeignincome
taxrateis30percent,theforeigndividendwithholdingtaxrateis15percent,andthefirmsU.S.tax
rateis35percent.WhatarethefundsavailabletotheparentMNCifforeigntaxescanbeappliedas
acreditagainsttheMNCsU.S.taxliability?
(a) $624,750.
(b) $425,250.
(c) $257,250.
(d) $735,000.
Answer: A
LevelofDifficulty:4
LearningGoal:2
Topic:TaxCreditsandMNCs
267GitmanPrinciplesofFinance,EleventhEdition
45. NicoMining,aU.S.basedMNChasaforeignsubsidiarythatearns$1,050,000beforelocaltaxes,
withalltheaftertaxfundstobeavailabletotheparentintheformofdividends.Theforeignincome
taxrateis30percent,theforeigndividendwithholdingtaxrateis15percent,andthefirmsU.S.tax
rateis35percent.WhatarethefundsavailabletotheparentMNCifnotaxcreditsareallowed?
(a) $624,750
(b) $425,250
(c) $257,250
(d) $735,000
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:TaxCreditsandMNCs

46. IftheexchangeratebetweentheU.S.dollarandtheEurois$1.20perEuroandtheexchangerate
betweentheU.S.dollarandtheJapaneseyetis120Yenperdollar,thenwhatistheEuroperYen
exchangerate?
(a) 0.0100
(b) 144.00
(c) 0.0069
(d) 100.00
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:ExchangeRates

47. IftheexchangeratebetweentheU.S.dollarandtheEurois$1.20perEuroandtheannualrateof
inflationis5percentintheUnitedStatesand10percentinEurope,whatwillbeU.S.dollarper
Euroexchangerateinoneyear?
(a) 1.145
(b) 0.8730
(c) 1.257
(d) 0.7955
Answer: A
LevelofDifficulty:4
LearningGoal:3
Topic:ExchangeRatesandInflation

48. ThecapitalstructuresofMNCsareinfluencedbyallofthefactorsbelowEXCEPT
(a) internationalcapitalmarkets.
(b) internationaldiversification.
(c) countryfactors.
(d) Alloftheabove.
Answer: D
LevelofDifficulty:2
LearningGoal:4
Topic:CapitalStructureandMNCs
 Chapter18InternationalManagerialFinance268
49. Thefirstinternationalcapitalmarket,amarketwithuniformrulesandregulationsgoverningmajor
stockexchanges,wasfinallyestablishedandbeganoperationsin2002
(a) atTheHague.
(b) inNewYork.
(c) inLondon.
(d) Noneoftheabove.
Answer: D
LevelofDifficulty:2
LearningGoal:4
Topic:InternationalCapitalMarket

50. Abondthatisinitiallysoldprimarilyincountriesotherthanthecountryofthecurrencyinwhichthe
issueisdenominatediscalled
(a) aninternationalbond
(b) aforeignbond
(c) aEurobond
(d) adoubleDutchbond
Answer: C
LevelofDifficulty:2
LearningGoal:5
Topic:Eurobonds

Essay Questions
1. AU.S.basedMNChasthreesubsidiaries:S1(40percentownedbytheMNC);S2(33percent
ownedbyS1),andS3(20percentownedbyS2).Thetaxableincomeforeachfirmis$100million.
Thelocaltaxesforeachfirmare$15million,$20million,and$10million,respectively.The
MNCstaxrateis40percent.
(a) CantheMNCapplyallofitslocaltaxesasacreditagainstitsU.S.taxes?
(b) Basedonthegrossingupconcept,calculatealltaxcreditsapplicabletotheMNC.
Answers:
(a) Determinethedegreeofownershipofeachsubsidiary:
S1:40%directlyownedbytheMNC.
S2:(40%33%)13.2%ownedbytheMNC.
S3:(40%33%20%)2.6%ownedbytheMNC.
Basedontheseresults,S1andS2canbeincludedbutS3cannot.
(b) ThemaximumcreditagainstU.S.taxes40%($100million$100million)
$80million.ThelocaltaxespaidbyS1andS2,or$35million,canbeusedasaU.S.
taxcreditbytheMNC.
LevelofDifficulty:4
LearningGoal:2
Topic:MNCsandTaxes
269GitmanPrinciplesofFinance,EleventhEdition
2. Amultinationalcompanyhastwosubsidiaries,oneinIreland(localcurrency,Irishpound)andthe
otherinWestGermany(localcurrency,Deutschemark).Proformastatementsofoperations
indicatethefollowingshorttermfinancialneedsforeachsubsidiary(inequivalentU.S.dollars):
Ireland:$25millionexcesscashtobeinvested(lent);WestGermany:$10millionfundstoberaised
(borrowed)
Thefollowingfinancialdataisalsoavailable:

Currency
Item U.S.Dollars IrishPound DeutscheMark
Spotexchangerates 0.7418/U.S.$ 2.0138/U.S.$
Forecast% 1% 1.5%
Interestrates
NominalEuromarket 7.5% 6% 5%
Domestic 6.5 6.25 5.5
Effective
Euromarket 7.5%
Domestic 6.5

(a) DeterminetheeffectiveratesofinterestforIrishpoundandDeutschemarkinboththe
Euromarketandthedomesticmarket.
(b) Whereshouldthefundsbeinvested?
(c) Whereshouldthefundsberaised?
Answers:
(a)

EffectiveRates U.S.Dollar Irishpound DeutscheMark

Euromarket 7.5% 7% 3.5%
Domestic 6.5 7.25% 4.0

(b) $25millionshouldbeinvestedinU.S.dollarsintheEuromarket.
(c) $10millionshouldberaisedinDeutschemarksintheEuromarket.
LevelofDifficulty:4
LearningGoal:4
Topic:MNCsandFinancingDecisions
 Chapter18InternationalManagerialFinance270
3. AU.SbasedMNChasasubsidiaryinChinawherethelocalcurrencyistheRenminbi(RMB).The
balancesheetsandincomestatementsofthesubsidiaryarepresentedinthetablebelow.On
December31,2005,theexchangeratewas8.27RMB/US$.Assumethelocalcurrencyfiguresinthe
statementbelowremainthesameonDecember31,2006.CalculatetheU.S.dollartranslatedfigures
forthetwoendingtimeperiodsassumingthatbetweenDecember31,2005andDecember31,2006,
theChinesegovernmentrevalues(appreciates)theRMBby20percent.

TranslationofIncomeStatement
December31,2005 December31,2006
RMB US$ US$
Sales 1,800,000
CostofGoodsSold 1,650,000
OperatingProfits 150,000

TranslationofBalanceSheet
December31,2005 December31,2006
Assets RMB US$ US$
Cash 24,000
Inventory 180,000
PlantandEquipment 96,000
Total 300,000

LiabilitiesandStockholdersEquity
Debt 144,000
PaidinCapital 120,000
RetainedEarnings 36,000
Total 300,000
271GitmanPrinciplesofFinance,EleventhEdition
Answer: Thisshowsthatanappreciationoftheforeigncurrencyagainstthedollarforasubsidiary
inthatcountrywillresultinhighervaluesonboththebalancesheetandincome
statementoncethosevaluesaretranslatedintodollarsevenifthelocalcurrencyvalues
didntchangeatall.Theoppositewouldbethecaseiftheforeigncurrencydepreciates
againstthedollar.

TranslationofIncomeStatement
December31,2005 December31,2006
US$ US$
RMB (8.27RMBUS$1) (6.89RMBUS$1)
Sales 1,800,000 217,654 261,248
CostofGoodsSold 1,650,000 199,516 239,478
OperatingProfits 150,000 18,138 21,770

TranslationofBalanceSheet
December31,2005 December31,2006
US$ US$
Assets RMB (8.27RMBUS$1) (6.89RMBUS$1)
Cash 24,000 2,02 3,483
Inventory 180,000 21,766 26,125
PlantandEquipment 96,000 11,608 13,933
Total 300,000 36,276 43,541

LiabilitiesandStockholdersEquity
Debt 144,000 17,412 20,900
PaidinCapital 120,000 14,510 17,417
RetainedEarnings 36,000 4,353 5,225
Total 300,000 36,276 43,541

LevelofDifficulty:4
LearningGoal:2
Topic:TranslationofFinancialStatements