Exam II Name
INTERNATIONAL FINANCE
Fall 2006
Multiple Choice -- Circle the letter of the BEST answer (3 points each)
1. The greatest diversification gains can be achieved by
a. adding more domestic stocks to a portfolio
b. substituting foreign stocks for domestic stocks
c. substituting foreign stocks and bonds for domestic stocks
d. substituting foreign bonds for domestic stocks
e. none of the above will provide diversification gains
2. A U.S. company that has issued deutsche mark bonds could hedge at least part of the exchange risk associated with those bonds by
a. invoicing its exports to Germany in deutsche marks
b. invoicing its imports from Germany in deutsche marks
c. invoicing its exports to Germany in dollars
d. invoicing its imports from Germany in dollars
e. none of the above -- the exchange risk cannot be hedged
3. The Export-Import Bank
a. guarantees U.S. importers will pay for imported goods
b. provides loans to U.S. exporters
c. lends to domestic importers
d. borrows money from foreign financial institutions to finance imports of foreign goods
e. holds imports and exports as collateral for loans
4. The growing presence of U.S.-owned maquiladoras, or manufacturing subsidiaries, in México is an example of
a. market seekers
b. production efficiency seekers
c. knowledge seekers
d. raw materials seekers
e. none of the above
5. Which of the following is NOT a reason that project and parent cash flows from a capital investment in a foreign country can differ?
a. taxes differ in the two countries
b. currency exchange controls may exist
c. sales cannibalization
d. sales creation
e. all of the above are reasons that project and parent cash flows can differ
6. LIBOR is
a. the interest rate commonly charged for loans between Eurobanks
b. the average inflation rate in European countries
c. the maximum loan rate ceiling on Eurocurrency loans
d. the maximum interest rate offered on bonds that are issued in London
e. none of the above
7. You want to diversify your portfolio and are considering investing in foreign securities. Below are the foreign stock markets you are considering as well as the correlation of the foreign country's market with the U.S. market. Which country would provide the best diversification?
a. Great Britain, +0.9
b. Canada, +0.85
c. Mexico, +0.6
d. Japan, +0.5
e. West Germany, +0.45
8. Who bears the payment risk in a letter of credit?
a. the exporter
b. the importer
c. the issuing bank
d. all of the above
e. none of the above
9. Komatsu sells its five-year notes receivable on large equipment sales to a firm that takes the responsibility for collecting payment from the importers. Komatsu has used
a. accounts receivable financing
b. factoring
c. forfaiting
d. letter of credit
e. none of the above
10. An important attribute of a banker's acceptance is that the bank
a. makes an unconditional promise to pay the holder of the draft a stated amount on a specified day
b. effectively substitutes its own credit for that of a borrower
c. creates a negotiable instrument that can be freely traded
d. all of the above
e. none of the above
11. A bond issued by a British firm in the United States denominated in U.S. dollars is a
a. foreign bond
b. U.S. domestic bond
c. Eurobond
d. British pound bond
e. none of the above
12. The local capital structure of a multinational corporation's foreign subsidiary is
a. always debt-intensive
b. always equity-intensive
c. always the same as the global capital structure of the parent firm
d. often different from the global capital structure of the parent firm
e. none of the above
13. The cost of capital for a multinational corporation
a. will probably be higher than the cost of capital for a domestic firm with due to its exposure to foreign exchange risk
b. will probably be the same as that of a domestic firm since foreign exchange risk is unsystematic and can be diversified away
c. will probably be lower than a domestic firm's cost of capital since it has access to financial markets not available to the domestic firm
d. is independent of the investments that the firm makes
e. none of the above
14. Relevant cash flows from the parent's standpoint when valuing a foreign project equal
a. project cash flows received by the subsidiary
b. project cash flows received by the parent
c. project cash flows that can be repatriated to the parent
d. all of the above
e. cannot be determined without knowing all the interactions between the project and the firm's other units
15. Which of the following is NOT a reason to consider internationalizing operations?
a. take advantage of economies of scale
b. exploit monopolistic advantages
c. achieve international diversification
d. expand markets for product lines
e. all of the above are reasons to internationalize operations
16. The current U.S. one-year interest rate is 6% while the British one-year interest rate is 8%. The one-year forward rate of the pound is $1.53/£ and the current spot rate is $1.56/£. What is the effective rate of interest for a U.S. firm needing dollars that takes out a one-year uncovered loan (today) in pounds if the actual spot rate in one year turns out to be $1.58/£? (15 points)
Assume that you borrow £1,000.
Loan Amount Today: £ 1,000
Current Spot Rate: $ 1.56/£
Dollar Amount of Loan: $ 1,560
Due in 1 Year: £1,000 * 1.08 = £1,080
Spot Rate in 1 Year: $ 1.58/£
Dollar Amount Due in 1 Year: $ 1,706
$1,560 * (1+int) = $1,706
1+int = 1.0936
int = 0.0936 or 9.36%
17. Foreign Mutuals, Inc., of San Antonio bought shares of Matahari stock on the Tokyo Exchange for ¥5,500 per share one year ago when the exchange rate was ¥105 per U.S. dollar. Matahari just paid a dividend of ¥176 following which Foreign Mutuals sold the stock for ¥5,830 per share when the exchange rate was ¥109.2 per U.S. dollar. What was the total return on the investment? Breakdown the total return into its i) dividend yield, ii) capital gain yield, and iii) currency appreciation/depreciation. (15 points)
Total Dollar Yield:
Cost: ¥5,500
Spot Rate: ¥105/$
Dollar Cost: $52.38
Dividend: ¥ 176
Sale Price: ¥5,830
Total Yen Return: ¥6,006
Spot Rate: ¥109.2/$
Total Dollar Return: $55.00
Cost * (1+yield) = Return
$52.38 * (1+yield) = $55.00
(1+yield) = 1.05
yield = 0.05 or 5%