FIN 4110 - International Finance Exam 3
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1.
1 The ________ for a given investment is the minimum a) cost of equity
risk-adjusted return required by the shareholders of capital
the firm for undertaking that investment.
a) cost of equity capital
b) systematic risk
c) all-equity beta
d) weighted average cost of capital
2.
The minimum risk-adjusted return required by share- c) cost of capital
holders of the firm for undertaking the investment is
known as the
a) risk-free rate of return
b) intrinsic value
c) cost of capital
d) market rate of return
3.
3 This may serve as a reasonable proxy for the rea) corporate-wide
quired return on equity of a project when the returns cost of equity capand financial structure of the project are expected
ital
to be similar to those of the firm's typical project. It
would be the
a) corporate-wide cost of equity capital
b) weighted average cost of capital
c) project beta
d) company beta
4.
Since both the project risk and the project's financial a) adjust the costs
structure can vary from the corporate norm, to reflect and weights.
the actual values of the different cost components, it
is necessary to
a) adjust the costs and weights.
b) always refer to the corporate weighted average
cost of capital.
c) adjust the project's beta.
d) adjust the required rate of return of the project.
5.
One function of the cost of capital is to ________ for b) value future
the firm.
cash flows
a) determine the debt to equity ratio
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b) value future cash flows
c) determine the current ratio
d)determine the current lending rate
6.
According to modern capital market theory an equi- b) capital asset
librium relationship exists between an asset's repricing
quired return and its associated risk, which can be
represented by the _______ model.
a) risk-return tradeoff
b) capital asset pricing
c) purchasing parity
d) interest rate parity
7.
What is the outcome when the cost of equity capital c) weighted averis combined with after-tax cost of debt?
age cost of capital
a) all-equity beta
b) cost of capital
c) weighted average cost of capital
d) target capital structure
8.
14.8When computing the weighted average cost of
capital, the weighting should be
proportional based on the ______ rather than the
_____ value of the firm.
a) book, market
b) hypothetical, book
c) market, analyst's
d) market, book
9.
Systematic risk is that portion of return variability
d) cannot be elimthat
inated through dia) can be eliminated through diversification
versification
b) cannot be eliminated unless fixed income securities are added to the portfolio
c) can be reduced through diversification but not
eliminated
d) cannot be eliminated through diversification
d) market, book
10. To avoid the awkward process of transferring the cost b) all-equity disof capital going from the
count
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parent to the subsidiary, it is advisable to use the
_______ rate.
a) prime market interest
b) all-equity discount
c) all-debt discount
d) both the equity and debt discount
11. LDCs have greater ______ risk but offer the higher
probability of diversification benefits.
a) economic
b) translation
c) political
d) operating
c) political
12. One of the key issues in estimating foreign project
betas is to find firms that are publicly traded that
share _____ risk characteristics when compared to
the project.
a) different
b) somewhat different
c) uncorrelated
d) similar
d) similar
13. When identifying proxy firms for a foreign project
analysis, it is desirable to use _____ firms.
a) local
b) home country
c) emerging market
d) developed economy
a) local
14. In an effort to estimate a proxy beta, and, if foreign a) proxy industry
proxy companies are not available, a second alterna- in the local market
tive would be to find a
a) proxy industry in the local market
b) proxy industry in the parent company's market
c) U.S. industry beta for the project
d) similar project that the company has completed
successfully in the past.
15.
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FIN 4110 - International Finance Exam 3
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In general, the dollar cost of borrowing local currency a. the percentage
at an interest rate and currency change is the sum of change in the exthedollar interest cost plus
change rate.
a. the percentage change in the exchange rate.
b. the fees associated with raising capital.
c. the percentage difference between the corporate
beta and the project beta.
d. the percentage change in the forward exchange
rate.
16. The cost of capital for a General Foods Jell-O plant in
Venezuela is likely to be
a) lower than for a comparable plant in the U.S., because its systematic risk is probably lower
b) higher than for a comparable U.S. plant because
of the added risks associated with the unstable economic and political environment
c) about the same because the systematic risk is
likely to be very similar
d) greatly impacted by the change in political parties
in neighboring Colombia
a) lower than for a
comparable plant
in the U.S., because its systematic risk is probably lower
17. The cost of capital for a project in Australia should d) depend on the
theoretically
riskiness of the
a) equal the parent's weighted average cost of capital project itself
b) equal the required return for a similar investment
in the U.S.
c) equal the minimum rate of return necessary to
induce investors to buy or hold the firm's stock
d) depend on the riskiness of the project itself
18. Suppose that a foreign project has a beta of 1.12, the c) 19.04%
riskfree return is 9.3% and the required return on the
market is estimated at 18%. Then the cost of capital
for the project is
a) 17.21%
b) 21.37%
c) 19.04%
d) 20.03%
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19. The cost of capital for a project depends on
a) the correlation between returns on the project and
returns on a domestic market index
b) the correlation between returns on the project and
returns on a globallydiversified portfolio
c) the correlation between returns on the project and
returns on the firm's other activities
d)whether the price of risk is set on a domestic or
worldwide basis
d) whether the
price of risk is set
on a domestic or
worldwide basis
20. The rate(s) at which investors capitalize the returns
on foreign projects depends on all of the following
EXCEPT
a) whether shareholders are internationally diversified
b) the relative costs of international diversification for
the MNC and for individual investors
c) the extent to which domestic systematic risk is
unsystematic from a global standpoint
d) the correlation between equity returns on different
markets
d) the correlation
between equity returns on different
markets
21. Which project is likely to entail the leastsystematic b) a Coca Cola
risk?
plant in Brazil sella) a Ford plant in Brazil producing engines for export ing locally
to the U.S.
b) a Coca Cola plant in Brazil selling locally
c) a machine tool plant in Japan
d) a computer disk drive plant in Germany
22. The cost of capital for a project in Spain should
d) be a function of
a) equal the parent's weighted average cost of capital the riskiness of the
b) equal the required return for a similar investment project itself
in the U.S.
c) equal the minimum rate of return necessary to
induce investors to buy or hold the firm's stock
d) be a function of the riskiness of the project itself
23. Suppose that a foreign project has a beta of 1.12, the c) 18.1%
riskfree return is 8% and the required return on the
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market is estimated at 17%. Then cost of capital for
the project is
a) 24.2%
b) 19.3%
c) 18.1%
d) 15.4%
24. Suppose that a foreign project has a beta of 0.85, the b) 17.95%
riskfree return is 12%, and the required return on the
market is estimated at 19%. Then the cost of capital
for the project is
a) 16.15%
b) 17.95%
c) 19%
d) 21.23%
25. There is a high probability that the cost of capital for
a foreign project will
a) exceed the cost of capital for a comparable domestic project
b) be no greater than the cost of capital for a comparable domestic project
c) be the same as the cost of capital for a comparable
domestic project
d) exceed the investor's required rate of return
b) be no greater
than the cost of
capital for a comparable domestic
project
26. The systematic risk of a project depends on
a) the correlation between returns on the project and
returns on the world market portfolio
b) the correlation between returns on the project and
returns on a domesticallydiversified portfolio
c) whether investors hold a domestically or globallydiversified portfolio
d) the various political and economic risks the project
is subject to
c) whether investors hold
a domestically
or globallydiversified portfolio
27. Suppose that a foreign project has a beta of 1.15, the b) 22.2%
riskfree return is 13% and the required return on the
market is estimated at 21%.Then the cost of capital
for the project is
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a) 24.2%
b) 22.2%
c) 19.3%
d) 15.4%
28. Consider a project that costs $1 million today but
a) 14 years
yields no returns for several years. Once the project
becomes productive, it yields $250,000 annually forever. Suppose two firms are examining this project,
a Japanese firm with a cost of capital of 7% and a
U.S. firm with a cost of capital of 13%. Approximately how many more years than the U.S. firm would
the Japanese firm be willing to wait until the project
starts generating cash?
a) 14 years
b) 5 years
c) 24 years
d) 3 years
29. Assume an average dividend payout rate of 100%
d) 8.39%
for both U.S. and Japanese companies. Suppose the
average P/E ratio for Japanese firms is 38 and 16
for U.S. firms. Based on the dividend growth model,
in order for Japanese and U.S. companies to have
the same average cost of equity capital, how much
higher would the Japanese annual earnings growth
rate have to be?
a) 7.24%
b) 6.31%
c) 5.83%
d) 8.39%
30. Assume an average dividend payout rate of 60% for d) 2.83%
U.S. companies and 35% for Japanese companies.
Suppose the average P/E ratio for Japanese firms is
38 and 16 for U.S. firms. Based on the dividend growth
model, in order for Japanese companies to have the
same 12% average cost of equity capital estimated for
U.S. companies, how much higher would the Japan7 / 46
FIN 4110 - International Finance Exam 3
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ese annual earnings growth rate have to be?
a) 8.74%
b) 3.45%
c) 7.60%
d) 2.83%
31. Suppose the euro is expected to appreciate by 4% a) 5.1%
annually against the dollar. If a company can borrow
dollars at 9.3%, what is the highest interest rate it
should be willing to pay to borrow euro, assuming it
is trying to minimize its expected financing cost?
a) 5.1%
b) 4.3%
c) 7.2%
d) 8.9%
32. Suppose the euro is expected to depreciate against c) 4.47%
the dollar by 2% annually and the 10-year franc interest rate is 11%. What is the after-tax expected dollar
cost of issuing a 10-year franc bond if the French
corporate tax rate is 40%?
a) 5.93%
b) 7.61%
c) 4.47%
d) 6.60%
33. Capital structures of foreign affiliates should
a) conform to the standards set by local companies
b) vary in order to take advantage of opportunities to
reduce overall risk and financing costs
c) be very similar to the parent's capital structure
because this is what determines the firm's risk profile
d) conform to the standards established by other
foreign units
b) vary in order to take advantage of opportunities to reduce
overall risk and financing costs
34. The existence of offshore finance subsidiaries can be
attributed primarily to
a) the past practice of the U.S. IRS to impose withholding taxes on dividends and interest received by
foreign investors
a) the past practice of the U.S. IRS
to impose withholding taxes on
dividends and in-
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b) the desire by MNCs to centralize their financial
decision making
c) capital controls by various foreign countries
d)capital flight from the parent country
terest received by
foreign investors
35. The principal advantage(s) of investing in foreign af- c) both a and b
filiates in the form of debt instead of equity is to
a) reduce taxes
b) reduce the impact of currency controls
c) both a and b
d) there are no advantages
36. A U.S. company that has issued euro bonds could
hedge at least part of the exchange risk associated
with those bonds by
a) invoicing its exports to Germany in euro
b) invoicing its imports from Germany in euro
c) invoicing its exports to Germany in dollars
d) invoicing its imports from Germany in dollars
a) invoicing its exports to Germany
in euro
37. 14.1 The ________ for a given investment is the mini- a
mum risk-adjusted return required by the shareholders of the firm for undertaking that investment.
a) cost of equity capital
b) systematic risk
c) all-equity beta
d) weighted average cost of capital
38. 14.2 The minimum risk-adjusted return required by c
shareholders of the firm for undertaking the investment is known as the
a) risk-free rate of return
b) intrinsic value
c) cost of capital
d) market rate of return
39. 14.3 This may serve as a reasonable proxy for the re- a
quired return on equity of a project when the returns
and financial structure of the project are expected
to be similar to those of the firm's typical project. It
9 / 46
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would be the
a) corporate-wide cost of equity capital
b) weighted average cost of capital
c) project beta
d) company beta
40. 14.4 Since both the project risk and the project's
a
financial structure can vary from the corporate norm,
to reflect the actual values of the different cost components, it is necessary to
a) adjust the costs and weights.
b) always refer to the corporate weighted average
cost of capital.
c) adjust the project's beta.
d) adjust the required rate of return of the project.
41. 14.5 One function of the cost of capital is to ________ b
for the firm.
a) determine the debt to equity ratio
b) value future cash flows
c) determine the current ratio
d) determine the current lending rate
42. 14.6 According to modern capital market theory an b
equilibrium relationship exists between an asset's
required return and its associated risk, which can be
represented by the _______ model.
a) risk-return tradeoff
b) capital asset pricing
c) purchasing parity
d) interest rate parity
43. 14.7 What is the outcome when the cost of equity
capital is combined with after-tax cost of debt?
a) all-equity beta
b) cost of capital
c) weighted average cost of capital
d) target capital structure
c
44.
d
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14.8 When computing the weighted average cost of
capital, the weighting should be
proportional based on the ______ rather than the
_____ value of the firm.
a) book, market
b) hypothetical, book
c) market, analyst's
d) market, book
45. 14.9 Systematic risk is that portion of return variabil- d
ity that
a) can be eliminated through diversification
b) cannot be eliminated unless fixed income securities are added to the portfolio
c) can be reduced through diversification but not
eliminated
d) cannot be eliminated through diversification
46. 14.10 To avoid the awkward process of transferring
the cost of capital going from the
parent to the subsidiary, it is advisable to use the
_______ rate.
a) prime market interest
b) all-equity discount
c) all-debt discount
d) both the equity and debt discount
b
47. 14.10 LDCs have greater ______ risk but offer the
higher probability of diversification benefits.
a) economic
b) translation
c) political
d) operating
c
48. 14.10 One of the key issues in estimating foreign
d
project betas is to find firms that are publicly traded
that share _____ risk characteristics when compared
to the project.
a) different
b) somewhat different
11 / 46
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c) uncorrelated
d) similar
49. 14.10 When identifying proxy firms for a foreign pro- a
ject analysis, it is desirable to use _____ firms.
a) local
b) home country
c) emerging market
d) developed economy
50. 14.14 In an effort to estimate a proxy beta, and, if
a
foreign proxy companies are not available, a second
alternative would be to find a
a) proxy industry in the local market
b) proxy industry in the parent company's market
c) U.S. industry beta for the project
d) similar project that the company has completed
successfully in the past.
51. 14.15 In general, the dollar cost of borrowing local a
currency at an interest rate and currency change is
the sum of the dollar interest cost plus
a. the percentage change in the exchange rate.
b. the fees associated with raising capital.
c. the percentage difference between the corporate
beta and the project beta.
d. the percentage change in the forward exchange
rate.
52. 14.16 The cost of capital for a General Foods Jell-O a
plant in Venezuela is likely to be
a) lower than for a comparable plant in the U.S., because its systematic risk is probably lower
b) higher than for a comparable U.S. plant because
of the added risks associated with the unstable economic and political environment
c) about the same because the systematic risk is
likely to be very similar
d) greatly impacted by the change in political parties
in neighboring Colombia
12 / 46
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53. 14.17 The cost of capital for a project in Australia
d
should theoretically
a) equal the parent's weighted average cost of capital
b) equal the required return for a similar investment
in the U.S.
c) equal the minimum rate of return necessary to
induce investors to buy or hold the firm's stock
d) depend on the riskiness of the project itself
54. 14.19 The cost of capital for a project depends on
d
a) the correlation between returns on the project and
returns on a domestic market index
b) the correlation between returns on the project and
returns on a globallydiversified portfolio
c) the correlation between returns on the project and
returns on the firm's other activities
d) whether the price of risk is set on a domestic or
worldwide basis
55. 14.20 The rate(s) at which investors capitalize the
d
returns on foreign projects depends on all of the
following EXCEPT
a) whether shareholders are internationally diversified
b) the relative costs of international diversification for
the MNC and for individual investors
c) the extent to which domestic systematic risk is
unsystematic from a global standpoint
d) the correlation between equity returns on different
markets
56. 14.21 Which project is likely to entail the least sys- b
tematic risk?
a) a Ford plant in Brazil producing engines for export
to the U.S.
b) a Coca Cola plant in Brazil selling locally
c) a machine tool plant in Japan
d) a computer disk drive plant in Germany
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57. 14.22 The cost of capital for a project in Spain should d
a) equal the parent's weighted average cost of capital
b) equal the required return for a similar investment
in the U.S.
c) equal the minimum rate of return necessary to
induce investors to buy or hold the firm's stock
d) be a function of the riskiness of the project itself
58. 14.25 There is a high probability that the cost of cap- b
ital for a foreign project will
a) exceed the cost of capital for a comparable domestic project
b) be no greater than the cost of capital for a comparable domestic project
c) be the same as the cost of capital for a comparable
domestic project
d) exceed the investor's required rate of return
59. 14.26 The systematic risk of a project depends on
c
a) the correlation between returns on the project and
returns on the world market portfolio
b) the correlation between returns on the project and
returns on a domesticallydiversified portfolio
c) whether investors hold a domestically or globallydiversified portfolio
d) the various political and economic risks the project
is subject to
60. 14.33 Capital structures of foreign affiliates should b
a) conform to the standards set by local companies
b) vary in order to take advantage of opportunities to
reduce overall risk and financing costs
c) be very similar to the parent's capital structure
because this is what determines the firm's risk profile
d) conform to the standards established by other
foreign units
61. 14.34 The existence of offshore finance subsidiaries a
can be attributed primarily to
a) the past practice of the U.S. IRS to impose with14 / 46
FIN 4110 - International Finance Exam 3
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holding taxes on dividends and interest received by
foreign investors
b) the desire by MNCs to centralize their financial
decision making
c) capital controls by various foreign countries
d) capital flight from the parent country
62. 14.35 The principal advantage(s) of investing in for- c
eign affiliates in the form of debt instead of equity is
to
a) reduce taxes
b) reduce the impact of currency controls
c) both a and b
d) there are no advantages
63. 14.36 A U.S. company that has issued euro bonds
a
could hedge at least part of the exchange risk associated with those bonds by
a) invoicing its exports to Germany in euro
b) invoicing its imports from Germany in euro
c) invoicing its exports to Germany in dollars
d) invoicing its imports from Germany in dollars
64. Which one of the following is an advantage of inter- you can invest
national investing?
in industries that
Question 1 options:
don't exist in the
United States
1) you can invest in industries that don't exist in the
United States
2) you can invest in companies that have lower priceratios
3) you can invest in companies that are, on average,
more profitable than similar U.S. firms
4) you can invest in companies with lower marketvalue ratios
65.
non-systematic
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While there is systematic risk within a nation, it may
be ______ and diversifiable
outside the country after constructing a global portfolio.
Question 2 options:
1) temporary
2) somewhat temporary
3) non-systematic
4) permanent
66. The efficient frontier is the set of portfolios that has smallest possible
the ________ standard deviation for its level of expected return.
Question 3 options:
1) smallest possible
2) greatest possible
3) most feasible
4) least correlated
67. The lack of ________ , the ability to buy and sell
securities efficiently, is a major obstacle on some
overseas exchanges.
Question 4 options:
1) diversification
2) foreign ownership
3) liquidity
4) solvency
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68. The total dollar return on a foreign security can be
decomposed into
Question 5 options:
all of the above
1) dividend/interest income
2) capital gains (losses).
3) currency gains (losses).
4) all of the above
69. ________ are certificates of ownership by a U.S. bank American deposias a convenience to investors in lieu of the underlying tory receipts
shares it holds in custody.
Question 6 options:
1) Emerging market indexes
2) Regional funds
3) American depository receipts
4) American derivative claims
70. Instead of buying foreign stocks overseas, investors American Deposiwishing to diversify internationally can buy foreign tory Receipts
equities traded in the United States in the form of
Question 7 options:
1) currency futures contracts
2) foreign stock options
3) interest rate swaps
4) American Depository Receipts
71.
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In the past investing in emerging markets offered
_______ risk and _________ returns.
Question 8 options:
the highest, the
highest
1) the highest, the highest
2) the lowest, the highest
3) the highest, the lowest
4) the lowest, the lowest
72. One of the barriers to international diversification is accessible, comthe lack of information that is not readily __________ parable
nor ___________ for global investors.
Question 9 options:
1) provided, comparable
2) accessible, comparable
3) comparable, free
4) provided, free
73. Recent global market behavior indicates that markets correlated
tend to be most ________ when volatility is greatest.
Question 10 options:
1) uncorrelated
2) stable
3) correlated
4) unstable
74. The difference between a global fund and an interna- invests anywhere
tional fund is the global fund
in the world in18 / 46
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Question 11 options:
cluding the United
States
1) invests anywhere in the world excluding the United
States
2) invests anywhere in the world including the United
States
3) invests only outside the United States
4) invests in individual countries
75. Suppose the initial price of a French bond is FF 850, 18.33%
the coupon income is FF 70, the endbond price is FF
1,000, and the franc devalues by 6% against the dollar
during the period. What was the bond's total dollar
return during the period?
Question 12 options:
1) 8.24%
2) 18.33%
3) 25.88%
4) 27.44%
76. Suppose an investor buys a Taiwanese bond with a 14.67%
face value of NT20,000, which is priced at NT$19,500
and bears a coupon of NT$1,700. At the end of
the year, the investor sells the bond at a price of
NT$18,030. During the year, the exchange rate goes
from NT$1 = U.S.$0.0375 to NT$1 = U.S.$0.0425. What
was the investor's U.S. dollar return on this bond?
Question 13 options:
1) 33%
2) 4.23%
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3) 14.67%
77. A Thai baht bond with a coupon of 9.5% is initially
Bt 1 = $0.0384
priced at its face value of Bt 1,000. At the end of one
year, the bond is selling for Bt 1,050. If the initial spot
rate was Bt 25 = $1, at what endofexchange rate will
the dollar return on the bond just equal 10%?
Question 14 options:
1) Bt 1 = $0.0384
2) Bt 1 = $0.0416
3) Bt 1 = $0.0482
4) Bt 1 = $0.0324
78. A Canadian bond is initially priced at its face value of 27.1%
C$1,000. At the end of the
year, the bond is selling for C$1,100. If the Canadian
dollar appreciates by 10%, with a 5.5% coupon, what
will the U.S. dollar return on the bond equal at the end
of the year?
Question 15 options:
1) 1.05%
2) 27.1%
3) 15%
4) 20%
79. A Hong Kong bond with a coupon of 10% is initially 23.5%
priced at HK$1,000. At the end of the year, the bond is
selling for HK$1,200. If the Hong Kong dollar depreciates by 5%, what will the U.S. dollar return on the
bond equal at the end of the year?
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Question 16 options:
1) 10%
2) 13%
3) 23.5%
4) 31%
80. Suppose an investor buys a Japanese bond with a -5.91%
coupon rate of 10% at its price of ´1,100. The bond's
face value is ´1,000. At the end of the year, the bond
is selling at ´1,050 and the ´ has depreciated by 10%.
What is the dollar return on the bond at the end of the
year?
Question 17 options:
1) -15.6%
2) -5.91%
3) 10.3%
4) 15.8%
81. A Euro bond with a coupon rate of 10% is initially
31.04%
priced at its face value of Û1000. At the end of the
year, the bond is selling at Û1,070. If the Û appreciates
by 12% during the year, what is the end ofdollar return
on the bond?
Question 18 options:
1) 130%
2) 105%
3) 31.04%
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4) 95%
82. A Brazilian bond with a coupon rate of 20% is initially -68.75%
priced at its face value of R$1,000. At the end of
the year, the bond is selling at R$1,050. If the real
depreciates by 75%, what is the dollar return at the
end of the year?
Question 19 options:
1) -155%
2) -68.75%
3) 9.5%
4) 8.5%
83. A Brazilian bond with a coupon rate of 15% at is
22.67%
initially priced at its face value of R$1,000. At the end
of the year, the bond is selling at R$950. During the
year, the exchange rate goes from R$1 = U.S.$0.75 to
R$1 = U.S.$0.85. What is the bond's total dollar return
during the period?
Question 20 options:
1) 15%
2) 10%
3) 22.67%
4) 31.25%
84. What country's depreciation in 1994 led the stock
market tumble by other Latin American stock markets?
Question 21 options:
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Mexico
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1) Mexico
2) Argentina
3) Brazil
4) Columbia
85. Suppose an investor buys a share of Sony at a price 10.82%
of ´38,720 at the start of the year. During the year, the
investor receives a dividend of ´500. At the end of the
year, the price of Sony is ´49,560. During the year, the
exchange rate goes from ´150 = $1 to ´175 = $1. What
was the investor's dollar return on Sony?
Question 22 options:
1) 29.29%
2) 10.82%
86. Suppose you buy a share of Siemens at a price of DM 6.70%
83. During the year, you receive a dividend of DM 2
and the DM rises by 8%. If the stock price at yearend is
DM 80, what was your total dollar return for the year?
Question 23 options:
1) 10.60%
2) 6.70%
3) 9.83%
4) 8.43%
87. Suppose an investor buys a share of British Petrole- 1.59%
um at a price of £32 at the start of the year. During the
year, the investor receives a dividend of £1.5. At the
end of the year, the price of BP is £34. During the year,
the exchange rate goes from £1 = $1.78 to £1 = $1.63.
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What was the investor's dollar return on BP?
Question 24 options:
1) 1.59%
2) 10.94%
Hide Check my answer
The correct answer is:
1.59%
88. International diversification provides a better risktradethan does investing solely in U.S. securities primarily because
Question 25 options:
the economic cycles of nations
may not be perfectly in phase
1) many foreign industries don't exist in the U.S.
2) there are many more securities to choose from
overseas
3) the economic cycles of nations may not be perfectly in phase
4) the foreign securities may follow U.S. markets in
their price movements
89. Assume the standard deviation of the U.S. market
15.1%
portfolio is 18.2%, the standard deviation of the
nonU.S. portion of the world portfolio is 17.1%, and
the correlation between the U.S. and nonmarket portfolios is .47. Suppose you invest 40% of your money
in the U.S. stock market and the other 60% in the
nonportfolio. What is the standard deviation of your
portfolio?
Question 26 options:
1) 17.7%
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2) 9.4%
3) 15.1%
4) 18.3%
90. Assume the standard deviation of the U.S. market
15.5%
portfolio is 18.2%, the standard deviation of the nonportion of the world portfolio is 17.1%, and the correlation between the U.S. and nonmarket portfolios is
.47. Suppose you invest 25% of your money in the U.S.
stock market and the other 75% in the nonportfolio.
What is the standard deviation of your portfolio?
Question 27 options:
1) 16.7%
2) 15.5%
3) 17.1%
4) 18.6%
91. Which one of the following are NOT a barrier to inter- easy convertibility
national diversification.
of many currenQuestion 28 options:
cies
1) lack of foreign market liquidity
2) easy convertibility of many currencies
3) inadequate information
4) lack of international accounting standards
92. Which of the following statements is most CORRECT the gains from diwith respect to international diversification?
versification may
Question 29 options:
be diminished due
to combined cor25 / 46
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1) the gains from diversification may be diminrelations accomished due to combined correlations accompanied by panied by volatility
volatility in world markets
in world markets
2) world markets always seem to be most uncorrelated when volatility is present
3) world markets have displayed relatively low and
fixed correlations over the last five years
4) global diversification produces gain even when
world markets have correlations value near one.
93. Suppose an investor buys a UK bond with a coupon 1062
rate of 8% at its price of £990. The bond's face value is
£1,000. If the British pound depreciates by 5%, at what
endofselling price of this bond will the dollar return
on the bond just equal 10%?
Question 30 options:
1) 1062
2) 1100
3) 1000
4) 1300
94. The dominant currency of the Eurocurrency markets A
is the
a) U.S. dollar
b) Euro
c) Yen
d) Pound
95. A dollar or other freely convertible currency deposit- A
ed in a bank outside its country of origin is known as
a) a Eurocurrency
b) fiat money
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c) a dragon bond
d) a drawdown
96. What is the relationship between the euro currency of A
the European Union and Eurocurrency?
a) The two have nothing to do with each other
b) the euro is the underlying currency of the Eurocurrency markets
c) the euro is the dominant and most common currency in the Eurocurrency markets
d) the Eurocurrencies were first established using the
European Union's euro
97. Eurodollar deposits represent the liabilities of
C
a) European non-financial corporations
b) the Organization of Petroleum Exporting Countries
(OPEC)
c) European banks and U.S. bank branches abroad
d) European banks exclusively
98. Which one of the following was NOT a cause for the D
creation of the Eurodollar market?
a) reserve requirements that lower a bank's profits
b) special charges and taxes levied on domestic
banking transactions
c) interest rate ceilings on deposits and loans
d) the lack of a requirement to hold a fractional reserve at the Federal Reserve of all deposits
99. The supply of Eurodollar deposits is the result of
D
a) Federal Reserve Board policy
b) World Bank policy
c) a resolution of the member governments of the
Organization of Economic Cooperation and Development (OECD)
d) depositors holding dollars in non-US banks
100. In recent years, the Eurocurrency market has grown A
___ the Eurobond market.
a) more slowly than
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b) at about the same rate as
c) much more rapidly than
d) with no clear pattern emerges relative to
101. The period over which the borrower may take down a C
Eurocurrency loan is known as the ______.
a) maturity of the loan
b) LIBOR rate
c) Drawdown
d) Margin
102. Another name for the spread in a Eurocurrency loan D
is the _______.
a) drawdown
b) term
c) LIBOR rate
d) Margin
103. The period over which the borrower may take down A
the loan is known as the
a) drawdown
b) all-in-costs
c) inverse floater
d) swap
104. 13.11 Eurocurrency spreads are __________ the do- B
mestic money market spreads.
a) wider than
b) narrower than
c) very similar to
d) exactly the same as
105. 13.11 One reason Eurocurrency deposit rates are
B
higher than domestic rates is due to the fact that
a) they have no relationship to domestic rates
b) they must be higher to attract domestic depositors
c) most borrowers are well-known
d) a smaller percentage of deposits can be lent out
106.
D
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13.11 The rate of interest paid at which high-quality
borrowers can borrow at lower rates in the eurocurency markets is known as the ____ rate.
a) LIBOR
b) prime
c) LIBIL
d) LIBID
107. 13.11 Historically, most Eurobonds have been
________ denominated.
a) U.S. dollar
b) yen
c) euro
d) pound
A
108. The ________ , which resembles the U.S. commercial C
paper market, allows borrowers to issue their own
short-term euronotes.
a) Eurobond market
b) eurobank
c) note issuance facility
d) revolving underwriter facility
109. One advantage of the Euro-commercial paper market A
over its American counterpart is
a) flexibility that allows borrowers a range of currencies
b) larger size of transactions
c) greater liquidity
d) greater transparency
110. Debt denominated in a foreign currency that is
D
launched, priced and traded in Asia is referred to as
a _________ bond.
a) shogun
b) samurai
c) Asian-tiger
d) dragon
111.
B
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Which one of the following is the MOST obvious example of the globalization of financial markets?
a) the creation of the European Union
b) the rise of the Euromarkets
c) the end of the Soviet Union
d) the Asian currency crisis of 1997
112. Suppose the French government imposes an interest A
rate ceiling on French bank deposits. What is the
likely effect of this regulation?
a) reduce Eurofranc interest rates
b) raise Eurofranc interest rates
c) reduce the U.S. prime rate of interest
d) raise the U.S. prime rate of interest
113. If the current 180day inter-bank Eurodollar rate is
C
15% (all rates are stated on an annualized basis) and
next period's LIBOR is 13%, then a Eurocurrency loan
priced at LIBOR plus 1% will cost
a) 16% this period and 16% next period
b) 15% this period and 14% next period
c) 16% this period and 14% next period
d) 15% this period and 15% next period
114. Suppose that the current 90day London interbank
offer rate is 11% (all rates are stated on an annualized basis). If next period's LIBOR is 10.5%, then a
Eurodollar rate priced at LIBOR plus 1% will cost
a) 12% this period and 11.5% next period
b) 11% this period and 10.5% next period
c) 12% this period and 12% next period
d) 11% this period and 11% next period
A
115. One reason for the multicurrency clause in the euro C
markets is to avoid
a) government actions to block funds
b) local traders from arbitraging away profits
c) exchange rate risk
d) political instability
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116. Suppose the U.S. government imposes added taxes B
on interest paid on American bank deposits. What is
the likely effect of this regulation?
a) raise Eurodollar interest rates
b) reduce Eurodollar interest rates
c) have no effect
d) capital flight
117. Which one of the following have NOT led to a closer D
relationship between interest rates in national and
Eurocurrency money markets?
a) tax treaties that reduce the incidence of double
taxation on foreignsource income
b) elimination of currency controls
c) reduced cost of transatlantic telecommunications
d) increased government regulation of U.S. interest
rates
118. Which one of the following does NOT cause eurocur- D
rency spreads to be narrower than in domestic money
markets?
a) Eurobanks don't have to maintain reserves on Eurodollar deposits
b) Eurobanks face lower regulatory expenses
c) national banks are often required to lend money to
certain borrowers at concessionary rates
d) U.S. Federal Reserve bank regulations to cap interest rates charged on loans in the U.S.
119. The degree of political risk faced by a firm operating depends on how
in a foreign country
the firm has structured its operations
120. One good indicator of political risk is
the seriousness of
capital flight
121. Capital flight occurs for several reasons, most of
which have to do with
inappropriate economic policies
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122. Expropriation or creeping expropriation is most likely extractive
in the ------ sector of an economy
123. The great economic lesson of the ill-fated, post-World centralized ecoWar II experiment in Communism is that _________ nomic controls
work and command economies do not
124. A large government deficit relative to GDP, a high
country
rate of money expansion accompanied by fixed exchange rates, along with substantial government expenditures are some of the common characteristics
of _________ risk.
125. A structure of incentives that rewards risk taking
in productive ventures is an indicator of long-run
_____________ health for a country
economic
126. The state's best strategy is to provide basic
_________ in order to promote economic growth.
economic and political stability
127. What ultimately determines a nation's ability to repay hard currencies
foreign loans is its ability to generate ___________
128. The economic experiences of Mexico, Chile, and Ar- a head of state
gentina in the recent past show that they all poswho demonstrates
sessed a_________.
strong will and
leadership
129. When investing in a natural resource project, a for- ignoring safety
eign mining firm can add value to the project by doing conditions in the
all of the following EXCEPT
local plant
130. During the 1980s many Latin American countries be- capital flight
lieved in a policy that economic growth was best
promoted by extensive state ownership which led to
131. Which one of the following is a tough-minded economic policy that may halt capital flight?
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removing barriers
to investment by
foreigners
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132. An oil company can manage its political risk in Nige- siding with the
ria by all of the following EXCEPT
political establishment regardless of
public opinion
133. Political risk is primarily a function of the following
but NOT
the degree of centralization practiced by the MNC
in country
134. Which one of the following is NOT a form of political privatization of
risk to the multinational corporation?
public utilities
135. Which one of the following is NOT a measure of polit- the number of poical instability?
litical parties
136. Which of the following foreign investments would be an assembly plant
least subject to expropriation?
for automobiles located in an LDC
137. A U.S. company whose foreign property has been
expropriated is most likely to receive legal aid and
indemnification from
none of the
above will generally prove adequate
138. To halt capital flight, which one of the following would impose compreNOT be a measure governments may take?
hensive capital
controls
139. The most preferred form of securities by U.S. firms for debt
funding is
140. Financial deregulation began in ____ in 1981 and in the U.S., Japan
_____ in 1986.
141. The cost of the heavy reliance on banks by Japanese less freedom of
and German companies is
action
142. Which one of the following is a consequence of a
well-functioning financial market?
33 / 46
all of the above
a. greater capital
accumulation
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b. better projects
get financed
c. lower cost of
capital
143. ______ is repllaciing bank lloans wiitth securiitt iies Securitization
iissued iin publliic marketts
144. The difference between countries in terms of compa- bank-centered
ny controls can be categorized into market-oriented
and ____________ systems.
145. Brazil is planning to develop a major hydroelectric the World Bank
project in order to replace oil imports and conserve
scarce foreign exchange. Which of the following international lending agencies is most likely to provide
financing for this project?
146. The most important source of funds used by compa- internally generatnies around the world is
ed cash
147. The most important change in Japanese corporate
finance in recent years has been
the shift from external funds to internal funds
148. Argentina is seeking balance-of-payments financing the International
from an international lending institution. Which of the Monetary Fund
following is most likely to provide such funding?
149. Selling stock overseas is attractive to corporations
because it
a and b
a. may raise the
price of the company's stock
b. improves the
company's visibility in local markets
150. Which of the following banking practice would be
universal banking
found more often under the CEJ model of corporate
governance?
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151. Project finance is distinctive from other financings
because the providers of the funding
look primarily to
the cash flow from
the project as the
source of funds
152. The dominant currency of the Eurocurrency markets U.S. dollar
is the
153. Eurodollar deposits represent the liabilities of
European banks
and U.S. bank
branches abroad
154. The supply of Eurodollar deposits is the result of
none of the above
155. In recent years, the Eurocurrency market has grown more slowly than
___ the Eurobond market
156. The period over which the borrower may take down a Drawdown
Eurocurrency loan is known as the ______.
157. Another name for the spread in a Eurocurrency loan Margin
is the _______.
158. Eurocurrency spreads are __________ the domestic narrower than
money market spreads.
159. One reason Eurocurrency deposit rates are higher
than domestic rates is due to the fact that
they must be higher to attract domestic depositors
160. The rate of interest paid at which high-quality bor- LIBID
rowers can borrow at lower rates in the eurocurency
markets is known as the ____ rate.
161. Historically, most Eurobonds have been ________ de- U.S. dollar
nominated
162.
note issuance facility
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The ________ , which resembles the U.S. commercial
paper market, allows borrowers to issue their own
short-term euronotes
163. Debt denominated in a foreign currency that is
dragon
launched, priced and traded in Asia is referred to as
a _________ bond
164. Which one of the following factors does NOT promote high tariffs
well-functioning financial markets?
165. The process of securitization reflects
all of the above
a. new technology
that has lowered
the costs of compiling, accessing,
and manipulating
data
b. financial deregulation that raised
the cost of funds to
banks
c. lower costs of
accessing public
markets directly
166. The globalization of financial markets reflects
all of the above
a. financial deregulation, which
spurs competition
among markets
b. reductions in
currency controls
and other government restrictions
on cfree flow of
capital internationally
c. new technology
that has lowered
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the cost of information
167. Why are privately placed bonds more difficult to sell the presence
than publicly issued bonds?
of customized
covenants
168. Global growth in the financial markets is driven by
each of the following EXCEPT
government capital controls
169. When the overwhelming majority of investors would capital productivibe willing to pay more for the shares of a well-gov- ty
erned company, ___________ is improved.
170. Which one of the following securities in the foreign
bond markets has the least amount of risk to the
investor?
convertible bond
171. Which one of the following new issues of stock has Apple stock on the
the greatest probability of lowering its cost of equity London exchange
capital?
172. Which one of the following banks is considered the World Bank
most important in the development bank industry?
173. The globalization of financial markets reflects
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all of the above
a. financial deregulation, which
spurs competition
among markets
c. reductions in
currency controls
and other government restrictions
on cfree flow of
capital internationally
c. new technology
that has lowered
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the cost of information
174. Which one of the following is the MOST obvious ex- the rise of the Euample of the globalization of financial markets?
romarkets
175. Suppose the French government imposes an interest reduce Eurofranc
rate ceiling on French bank deposits. What is the
interest rates
likely effect of this regulation?
176. One reason for the multicurrency clause in the euro exchange rate risk
markets is to avoid
177. As the cost of gathering information on foreign firms international secucontinues to come down, ___ should become an
ritization
increasingly more cost- effective means of raising
funds internationally
178. A U.S. company has the following choices of financial foreign bond
markets in which to raise capital. Which one will it
most often prefer?
179. A multinational corporation attempting to secure an World Bank
airport construction project involving billions of dollars in cost would be best advised to apply to the
_________ for funding.
180. Which of the following bonds would NOT be found on municipal
the foreign bond markets?
181. Which one of the following economic policies would reduced governthe international financial markets tend to reward? ment ownership of
private firms
182. Suppose the Belgian government imposes added tax- reduce Eurofranc
es on interest paid on Belgian bank deposits. What is interest rates
the likely effect of this regulation?
183.
all of the above
a. tax treaties that
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Which of the following have led to a closer relation- reduce the inciship between interest rates in national and Eurocur- dence of dourency money markets?
ble taxation on
foreign-source income
b. elimination of
currency controls
c. reduced
cost of transatlantic telecommunications
184. Eurocurrency spreads are narrower than in domestic d. all of the above
money markets because
a. Eurobanks don't
have to maintain
reserves on Eurodollar deposits
b. Eurobanks face
lower regulatory
expenses
c. national banks
are often required
to lend money to
certain borrowers
at concessionary
rates
185. Which of the following payment methods provides
the exporter with the strongest protection against
risk?
Cash in advance
186. Which of the following payment methods provides
both parties with a strong measure of protection
against commercial and political risks?
Letter of credit
187. Most L/Cs issued in connection with commercial
transactions are
documentary
188. An exporter shipping goods to a nation that may
impose currency controls will seek an L/C that is
confirmed by a domestic bank
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189. The party to a draft who signs and sends the draft to drawer
the second party is called the
190. RJR Nabisco sells its export receivables to a firm that factoring
takes responsibility for collecting payment from the
importers. RJR has used
191. The only U.S. agency dedicated solely to financing
and facilitating U.S. exports is the
Ex Im Bank
192. Fluor is seeking to bid on a construction project in preliminary comTurkey. Which Ex Im Bank program will likely be most mitment
useful to Fluor?
193. Which one of the following is NOT a condition of the Concerning the
Ex Im Bank before it will issue a commercial and
export more than
political risk insurance policy to an exporter?
25% must be U.S.made content
194. Which of the following organizations was created by Private Export
the Bankers' Association for Foreign Trade to mobi- Funding Corporalize private capital for financing the export of big-tick- tion
et items by U.S. firms?
195. When factoring is done on a nonrecourse basis, the factor, factor
---- has title to the receivables and the ---- is responsible for credit checking and collecting the receivables.
196. Countertrade arrangements may take the form of
both a and b
a. barter
b. buyback
197. The other name for a draft is a
bill of exchange
198. Which one of the following is NOT a disadvantage to no customer resisopen account financing?
tance
199. Why is Ex Im Bank financing often referred to as
financing of "last resort?"
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it will not provide financing un-
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less private capital
is unavailable
200. Which one of the following conditions is NOT required for a draft to be negotiable under the U.S.
Uniform Commercial Code?
an open amount of
money
201. Which of the following is NOT an advantage to the
importer of L/C financing?
L/C financing is
always cheaper
than the alternative financing
methods
202. Which of the following L/Cs is safest for the exporter? irrevocable, confirmed L/C
203. An exporter manufacturing a specialized piece of
letter of credit
equipment can hedge the risk that its customer will
cancel the contract before shipment by obtaining a
204. Which of the following is NOT a function of a draft ? to insure the exporter is paid on a
non-recourse basis
205. A documentary draft is typically accompanied by a
commercial invoice
206. Which one of the following is NOT an important attribute of a bankers' acceptance?
it allows the bank
to hold them on
their books as an
asset
207. Which of the following is not an advantage to the
exporter of L/C financing?
payment is only
in compliance with
the L/C's stipulated conditions
208. Microsoft sells software to a French firm. In return,
the French firm's bank, Credit Agricole, acknowl-
letter of credit
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edges it will pay Microsoft after the software is delivered to its client. Microsoft has most probably used
209. Caterpillar Tractor sells heavy construction equipforfaiting
ment to a Polish firm. In return, the Polish firm issues
a promissory note to Caterpillar promising to pay
for the equipment over a five-year period. Caterpillar
sells the note to Deutsche Bank at a discount. Caterpillar has used
210. By shipping goods under documentary time drafts
for acceptance
a and b only
a. the exporter is
extending credit to
the importer
b. the exporter is
relinquishing control of the goods in
return for a signature on the acceptance to assure it
of payment
211. Which of the following attributes of a bankers' accep- a and b only
tance greatly enhances its marketability?
a. the authenticity of an accepted draft is separated from the underlying commercial transaction
b. the accepted draft may not
be dishonored for
reason of a dispute between the
exporter and importer
212. Which of the following is the LEAST important eco- the goods taknomic rationales for countertrade?
en in countertrade
are often unattrac42 / 46
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tive and difficult to
market
213. Precor sells exercise equipment to thousands of
health clubs and sporting goods stores around the
world. Its average order size is about $3,500. Which
of the following techniques would you recommend to
Precor to deal with its credit risk?
use a factor, who
will charge a 1.3%
export factoring
fee
214. Which of the following firms would find a factor most RC Cola, which
useful?
periodically ships
a small order of
soft drinks overseas
215. The value of the multinational financial system is
based on the ability to take advantage of
d. all of the above
a. tax arbitrage
b. financial market
arbitrage
c. regulatory system arbitrage
216. Tax arbitrage
occurs when firms
move funds to lower tax jurisdictions
217. MNCs may use _______ arbitrage to resist government price controls or union wage pressures.
regulatory
218. Subsidiaries A and B buy from and sell to each other. d. a and b only
Suppose that A has excess cash, whereas B is short a. A can lead payof cash. How can A funnel money to B?
ments owed to B
b. B can lag payments owed to A
219. ______ is the pricing of internally traded goods for Transfer pricing
the purpose of moving profits to a more tax-friendly
nation.
220. Using transfer prices may lead to _____.
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reduced ad valorem tariffs
221. Reinvoicing centers are usually set up in __________ low-tax
jurisdictions
222. One disadvantage of a reinvoicing center is _______ more communica.
tions costs
223. One advantage of the use of fees or royalties to man- less suspicion by
age the MNC's cash flow is ____.
the host government
224. Intercompany loans are useful during periods of
______ in the financial markets.
credit rationing
225. ______ from the subsidiary to the parent are still the Dividends
most important method of transferring funds in the
MNC.
226. Which one of the following is a real rather than a
financial flow?
capital goods
227. Which one of the following is an example of a market ceilings on interest
imperfection in the domestic capital market?
rates
228. Which one of the following would government taxing the marketing deauthorities NOT use to establish arm's length pric- partment's best
ing?
estimate
229. Leading and lagging is primarily of value because of tax regulations
230. The best way(s) to increase the present value of after-tax remittances from overseas is (are) to
invest parent
funds as debt
rather than equity
231. The extensive system of foreign tax credits allows
MNCs to avoid
double taxation on
foreign-source income
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FIN 4110 - International Finance Exam 3
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232. Which one of the following cash flow mechanisms leading and lagarouses the least suspicion from a host government ging
concerning a multinationals attempts to avoid additional taxes?
233. Leading and lagging strategies have several advan- interest must be
tages EXCEPT
charged on all
intercompany accounts
234. Which of the following is NOT characteristic of a
back-to-back loan?
it is a method to
reduce exchange
rate risk
235. Which one of the following is NOT a factor in devel- global investment
oping a global remittance policy?
yields
236. The most preferred form of securities for funding by debt
firms in the U.S. has been
237. ______ is the process of replacing bank loans with
securities issued in public markets.
securitization
238. Which of the following foreign equity securities are
sold by foreign companies to U.S. investors?
Yankee stock issues
239. The globalization of financial markets does NOT re- a greater depenflect
dence on government subsidies for
exports
240. Global growth in the financial markets is driven by
each of the following EXCEPT:
government capital controls
241. Which one of the following banks is considered the world bank
most important in the development bank industry?
242. Which of the following has been MOST helped by the smaller and less
decline in the cost of accessing the public financial well known commarkets?
panies
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FIN 4110 - International Finance Exam 3
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