Question 1

Assuming that the Irish and Japanese subsidiaries did not exist,the U.S.tax liability on the Mexican subsidiary would be closest to:

Accepted Answer

A) $0 
B) $9 million 
C) $39 million 
D) $106 million 
A) $0 
B) $9 million 
C) $39 million 
D) $106 million

Question 2

Consider the following equation:  
=  
(1 +  
)- 1
The term  
In this equation refers to:

Accepted Answer

A) the risk-free rate of interest on the dollar. 
B) the risk-free rate of interest on the yen. 
C) the cost of capital for the firm in terms of yen. 
D) the cost of capital in terms of dollars. 
A) the risk-free rate of interest on the dollar. 
B) the risk-free rate of interest on the yen. 
C) the cost of capital for the firm in terms of yen. 
D) the cost of capital in terms of dollars.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Differential access to national capital markets is common enough that it provides the best explanation for the existence of currency swaps,which are like the interest rate swap contracts,but with the holder receiving coupons in one currency and paying coupons denominated in a different currency. 
B) Currency swaps generally also have final face value payments,also in different currencies. 
C) Using a currency swap,a firm can borrow in the market where it has the best access to capital,and then "swap" the coupon and principal payments to whichever currency it would prefer to make payments in. 
D) With differential access to national markets,to maximize shareholder value,the firm should raise capital in the foreign market;the method of valuing the foreign project as if it were a domestic project would then provide the correct NPV. 
A) Differential access to national capital markets is common enough that it provides the best explanation for the existence of currency swaps,which are like the interest rate swap contracts,but with the holder receiving coupons in one currency and paying coupons denominated in a different currency. 
B) Currency swaps generally also have final face value payments,also in different currencies. 
C) Using a currency swap,a firm can borrow in the market where it has the best access to capital,and then "swap" the coupon and principal payments to whichever currency it would prefer to make payments in. 
D) With differential access to national markets,to maximize shareholder value,the firm should raise capital in the foreign market;the method of valuing the foreign project as if it were a domestic project would then provide the correct NPV.

Question 4

Luther Industries,a U.S.firm.has a subsidiary in the United Kingdom.This year,the subsidiary reported and repatriated earnings before interest and taxes (EBIT)of £45 million.The current exchange rate is $1.86/£.The tax rate in the U.K.for this activity is 28%.Under U.S.tax codes,Luther is facing a 35% corporate tax rate on their earnings.What is Luther's U.S.tax liability on its U.K.subsidiary?

Accepted Answer

When the foreign tax rate is below the U

Question 5

The dollar cost of debt for John Galt Industries is 8.0%.The firm faces a tax rate of 40% on all income,no matter where it is earned.Galt needs to know its Yen cost of debt.The risk-free interest rates on dollars and yen are r% = 6% and r¥ = 2%,respectively.Galt is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate.Galt's after-tax cost of debt in yen is closest to:

Accepted Answer

A) 0.9% 
B) 2.0% 
C) 3.9% 
D) 4.8% 
A) 0.9% 
B) 2.0% 
C) 3.9% 
D) 4.8%

Question 6

What conclusions can you make about the degree of international integration between the U.S.and Argentine markets?

Accepted Answer

A) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly less than converting into Pesos today and investing those Pesos for six months. 
B) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly greater than converting into Pesos today and investing those Pesos for six months. 
C) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is approximately equal to converting into Pesos today and investing those Pesos for six months. 
D) The markets are not integrated since the PV of investing dollars today and converting them with a forward contract is greater than converting into Pesos today and investing those Pesos for six months. 
A) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly less than converting into Pesos today and investing those Pesos for six months. 
B) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly greater than converting into Pesos today and investing those Pesos for six months. 
C) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is approximately equal to converting into Pesos today and investing those Pesos for six months. 
D) The markets are not integrated since the PV of investing dollars today and converting them with a forward contract is greater than converting into Pesos today and investing those Pesos for six months.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) If the U.S.tax rate exceeds the combined tax rate on all foreign income,it is valid to assume that the firm pays the same tax rate on all income no matter where it is earned. 
B) Firms can lower their taxes by pooling multiple foreign projects and accelerating the repatriation of earnings. 
C) Under U.S.tax law,multinational corporations may use any excess tax credits generated in high-tax foreign countries to offset their net U.S.tax liabilities on earnings in low-tax foreign countries. 
D) If the foreign tax rate exceeds the U.S.tax rate,because the U.S.tax credit exceeds the amount of U.S.taxes owed,no tax is owed in the United States. 
A) If the U.S.tax rate exceeds the combined tax rate on all foreign income,it is valid to assume that the firm pays the same tax rate on all income no matter where it is earned. 
B) Firms can lower their taxes by pooling multiple foreign projects and accelerating the repatriation of earnings. 
C) Under U.S.tax law,multinational corporations may use any excess tax credits generated in high-tax foreign countries to offset their net U.S.tax liabilities on earnings in low-tax foreign countries. 
D) If the foreign tax rate exceeds the U.S.tax rate,because the U.S.tax credit exceeds the amount of U.S.taxes owed,no tax is owed in the United States.

Question 8

What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?

Accepted Answer

The working assumptions are that the pro

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) Many countries regulate or limit capital inflows or outflows,and many do not allow their currencies to be freely converted into dollars,thereby creating capital market segmentation. 
B) The existence of internationally integrated capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation. 
C) Political,legal,social,and cultural characteristics that differ across countries may require compensation in the form of a country risk premium. 
D) Swaps allow firms to mitigate their exchange rate risk exposure between assets and liabilities,while still making investments and raising funds in the most attractive locales. 
A) Many countries regulate or limit capital inflows or outflows,and many do not allow their currencies to be freely converted into dollars,thereby creating capital market segmentation. 
B) The existence of internationally integrated capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation. 
C) Political,legal,social,and cultural characteristics that differ across countries may require compensation in the form of a country risk premium. 
D) Swaps allow firms to mitigate their exchange rate risk exposure between assets and liabilities,while still making investments and raising funds in the most attractive locales.

Question 10

After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:

Accepted Answer

A) $5.1 million 
B) $20.5 million 
C) $35.6 million 
D) $29.5 million 
A) $5.1 million 
B) $20.5 million 
C) $35.6 million 
D) $29.5 million

Question 11

Consider the following equation:
S ×  
=  
The term S in this equation is:

Accepted Answer

A) the forward exchange rate. 
B) the amount of foreign currency. 
C) the future spot exchange rate. 
D) the current spot exchange rate. 
A) the forward exchange rate. 
B) the amount of foreign currency. 
C) the future spot exchange rate. 
D) the current spot exchange rate.

Question 12

Incorporated Tools total U.S.tax liability on its foreign earnings is closest to:

Accepted Answer

A) $0 
B) $81 million 
C) $106 million 
D) $112 million 
A) $0 
B) $81 million 
C) $106 million 
D) $112 million

Question 13

Use the information for the question(s)below.
You are a U.S.investor who is trying to calculate the present value of £5 million cash inflow that will occur one year in the future.The spot exchange rate is S = $1.8839/£ and the forward rate is FS1U1B11S1U1B0 = $1.8862/£.The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-The present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

Accepted Answer

A) $8,961,420 
B) $8,950,495 
C) $8,954,615 
D) $8,943,695 
A) $8,961,420 
B) $8,950,495 
C) $8,954,615 
D) $8,943,695

Question 14

Consider the following equation:  
=  
(1 +  
)- 1
The term r$ in this equation refers to:

Accepted Answer

A) the cost of capital for the firm in terms of yen. 
B) the cost of capital in terms of dollars. 
C) the risk-free rate of interest on the dollar. 
D) the risk-free rate of interest on the yen. 
A) the cost of capital for the firm in terms of yen. 
B) the cost of capital in terms of dollars. 
C) the risk-free rate of interest on the dollar. 
D) the risk-free rate of interest on the yen.

Question 15

Use the information for the question(s)below.
The current spot exchange rate,S,is $1.8862/£.Suppose that the yield curve in both countries is flat.The risk-free rate on dollars,rS1U1B1$S1U1B0,is 5.35% and the risk-free interest rate on pounds,rS1U1B1£S1U1B0,is 4.80%.
-Using the covered interest parity condition,the calculated one-year forward rate F1 is closest to:

Accepted Answer

A) $1.8568/£ 
B) $1.8764/£ 
C) $1.9161/£ 
D) $1.8961/£ 
A) $1.8568/£ 
B) $1.8764/£ 
C) $1.9161/£ 
D) $1.8961/£

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) When the foreign tax rate is less than the U.S.tax rate,deferral can provide significant benefits. 
B) The U.S.tax liability is not incurred until the profits are brought back home if the foreign operation is set up as a foreign branch rather than as a separately incorporated subsidiary. 
C) If a company chooses not to repatriate £12.5 million in pre-tax earnings,for example,it effectively reinvests those earnings abroad and defers its U.S.tax liability. 
D) When the foreign tax rates exceed the U.S.tax rates,there are no benefits to deferral because in such a case there is no additional U.S.tax liability. 
A) When the foreign tax rate is less than the U.S.tax rate,deferral can provide significant benefits. 
B) The U.S.tax liability is not incurred until the profits are brought back home if the foreign operation is set up as a foreign branch rather than as a separately incorporated subsidiary. 
C) If a company chooses not to repatriate £12.5 million in pre-tax earnings,for example,it effectively reinvests those earnings abroad and defers its U.S.tax liability. 
D) When the foreign tax rates exceed the U.S.tax rates,there are no benefits to deferral because in such a case there is no additional U.S.tax liability.

Question 17

Use the information for the question(s)below.
KT Enterprises,a U.S.import-export trading company,is considering its international tax situation.Currently KT's U.S.tax rate is 35%.KT has significant operations in both Japan and Ireland.In Japan the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%.In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%.KT's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are shown here (in millions):  
-After the Japanese taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to:

Accepted Answer

A) $20.5 million 
B) $29.5 million 
C) $5.1 million 
D) $50.0 million 
A) $20.5 million 
B) $29.5 million 
C) $5.1 million 
D) $50.0 million

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) If the foreign project is owned by a domestic corporation,managers and shareholders need to determine the home currency value of the foreign currency cash flows. 
B) The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency. 
C) The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole),because the foreign project contains residual exchange rate risk that the domestic projects often do not contain. 
D) In an internationally integrated capital market,two equivalent methods are available for calculating the NPV of a foreign project: Either we can calculate the NPV in the foreign country and convert it to the local currency at the forward rate,or we can convert the cash flows of the foreign project into the local currency and then calculate the NPV of these cash flows. 
A) If the foreign project is owned by a domestic corporation,managers and shareholders need to determine the home currency value of the foreign currency cash flows. 
B) The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency. 
C) The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole),because the foreign project contains residual exchange rate risk that the domestic projects often do not contain. 
D) In an internationally integrated capital market,two equivalent methods are available for calculating the NPV of a foreign project: Either we can calculate the NPV in the foreign country and convert it to the local currency at the forward rate,or we can convert the cash flows of the foreign project into the local currency and then calculate the NPV of these cash flows.

Question 19

The present value of Rearden Metal's cash outflow computed by first converting to dollars and then discounting the cash flow at the appropriate Argentine Peso rate is closest to:

Accepted Answer

A) $469,500 
B) $475,000 
C) $481,000 
D) $484,500 
A) $469,500 
B) $475,000 
C) $481,000 
D) $484,500

Question 20

Which of the following statements regarding international projects is FALSE?

Accepted Answer

A) Interest rates and costs of capital will likely be different in the foreign country as a result of the macroeconomic environment. 
B) The project will most likely generate foreign currency cash flows,although the firm cares about the foreign currency value of the project. 
C) Under internationally integrated capital markets,the value of an investment does not depend on the currency we use in the analysis. 
D) The firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes. 
A) Interest rates and costs of capital will likely be different in the foreign country as a result of the macroeconomic environment. 
B) The project will most likely generate foreign currency cash flows,although the firm cares about the foreign currency value of the project. 
C) Under internationally integrated capital markets,the value of an investment does not depend on the currency we use in the analysis. 
D) The firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes.

Exam 31: International Corporate Finance

Assuming that the Irish and Japanese subsidiaries did not exist,the U.S.tax liability on the Mexican subsidiary would be closest to:

Consider the following equation: = (1 + )- 1 The term In this equation refers to:

Which of the following statements is FALSE?

What conclusions can you make about the degree of international integration between the U.S.and Argentine markets?

Which of the following statements is FALSE?

What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?

Which of the following statements is FALSE?

After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:

Consider the following equation: S × = The term S in this equation is:

Incorporated Tools total U.S.tax liability on its foreign earnings is closest to:

Consider the following equation: = (1 + )- 1 The term r$ in this equation refers to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The present value of Rearden Metal's cash outflow computed by first converting to dollars and then discounting the cash flow at the appropriate Argentine Peso rate is closest to:

Which of the following statements regarding international projects is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

Filters

Consider the following equation: = (1 + )- 1 The term r_$ in this equation refers to: