Question 1

Under the condition of internationally integrated capital markets,the value of an investment ________ we use in the analysis because of ________.

Accepted Answer

A)  depends on the currency; the Law of One Price 
B)  depends on the currency; the exchange rate between two currencies 
C)  does not depend on the currency; the Law of One Price 
D)  does not depend on the currency; the exchange rate between two currencies 
A)  depends on the currency; the Law of One Price 
B)  depends on the currency; the exchange rate between two currencies 
C)  does not depend on the currency; the Law of One Price 
D)  does not depend on the currency; the exchange rate between two currencies C

Question 2

If the foreign tax rate ________ the Canadian tax rate,companies must pay ________ on foreign earnings.

Accepted Answer

A)  exceeds; this higher rate 
B)  exceeds; an extra rate 
C)  exceeds; the same as the Canadian tax rate 
D)  exceeds; a lower rate in Canada 
A)  exceeds; this higher rate 
B)  exceeds; an extra rate 
C)  exceeds; the same as the Canadian tax rate 
D)  exceeds; a lower rate in Canada A

Question 3

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/£ D

Question 4

Which of the following statements is false?

Accepted Answer

A)  When the foreign tax rate is less than the Canadian tax rate, deferral can provide significant benefits. 
B)  The Canadian 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 Canadian tax liability. 
D)  When the foreign tax rates exceed the Canadian tax rates, there are no benefits to deferral because in such a case there is no additional Canadian tax liability. 
A)  When the foreign tax rate is less than the Canadian tax rate, deferral can provide significant benefits. 
B)  The Canadian 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 Canadian tax liability. 
D)  When the foreign tax rates exceed the Canadian tax rates, there are no benefits to deferral because in such a case there is no additional Canadian tax liability.

Question 5

Luther Industries,a Canadian firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are r$ = 5.5% and r¥ = 1.5% respectively.Luther Industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:

Accepted Answer

A)  14.0% 
B)  12.3% 
C)  7.8% 
D)  18.5% 
A)  14.0% 
B)  12.3% 
C)  7.8% 
D)  18.5%

Question 6

Luther Industries,a Canadian 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 Canadian tax codes,Luther is facing a 35% corporate tax rate on their earnings.What is Luther's Canadian tax liability on its U.K.subsidiary?

Accepted Answer

When the foreign tax rate is below the C

Question 7

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

Question 8

Which of the following statements is false?

Accepted Answer

A)  In some countries, especially in the developing world, all investors do not have equal access to financial securities. 
B)  Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them. 
C)  In some cases, a country's risk-free securities are internationally integrated but markets for a specific firm's securities are not. 
D)  When countries' capital markets are not integrated we call them disintegrated capital markets. 
A)  In some countries, especially in the developing world, all investors do not have equal access to financial securities. 
B)  Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them. 
C)  In some cases, a country's risk-free securities are internationally integrated but markets for a specific firm's securities are not. 
D)  When countries' capital markets are not integrated we call them disintegrated capital markets.

Question 9

Use the information for the question(s) below.
KT Enterprises, a Canadian import-export trading company, is considering its international tax situation. Currently KT's Canadian 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 10

Canadian tax policy ________ companies to apply the part of the tax credit that is not used to offset domestic taxes owed.

Accepted Answer

A)  does not allow 
B)  allows 
C)  encourages 
D)  discourages 
A)  does not allow 
B)  allows 
C)  encourages 
D)  discourages

Question 11

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

Accepted Answer

A)  the risk-free rate for a foreign investor. 
B)  the risk-free rate for a Canadian investor. 
C)  the appropriate cost of capital from the standpoint of a foreign investor. 
D)  the appropriate cost of capital from the standpoint of a Canadian investor. 
A)  the risk-free rate for a foreign investor. 
B)  the risk-free rate for a Canadian investor. 
C)  the appropriate cost of capital from the standpoint of a foreign investor. 
D)  the appropriate cost of capital from the standpoint of a Canadian investor.

Question 12

Which of the following statements is false?

Accepted Answer

A)  The rate of interest paid on government bonds or other securities in a country with a tradition of weak enforcement of property rights is likely not really a risk-free rate. Instead, interest rates in the country will reflect a risk premium for the possibility of default, so relations such as covered interest rate parity will likely not hold exactly. 
B)  If the return difference in a segmented financial market results from a market friction such as capital controls, corporations can exploit this friction by setting up projects and raising capital in the high-return country/currency. 
C)  Important macroeconomic reasons for segmented capital markets include capital controls and foreign exchange controls that create barriers to international capital flows and thus segment national markets. 
D)  A segmented financial market has an important implication for international corporate finance: one country or currency has a higher rate of return than another country or currency, when the two rates are compared in the same currency. 
A)  The rate of interest paid on government bonds or other securities in a country with a tradition of weak enforcement of property rights is likely not really a risk-free rate. Instead, interest rates in the country will reflect a risk premium for the possibility of default, so relations such as covered interest rate parity will likely not hold exactly. 
B)  If the return difference in a segmented financial market results from a market friction such as capital controls, corporations can exploit this friction by setting up projects and raising capital in the high-return country/currency. 
C)  Important macroeconomic reasons for segmented capital markets include capital controls and foreign exchange controls that create barriers to international capital flows and thus segment national markets. 
D)  A segmented financial market has an important implication for international corporate finance: one country or currency has a higher rate of return than another country or currency, when the two rates are compared in the same currency.

Question 13

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

Accepted Answer

The working assumptions made thus far ar

Question 14

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

Accepted Answer

A)  the appropriate cost of capital from the standpoint of a Canadian investor. 
B)  the risk-free rate for a foreign investor. 
C)  the risk-free rate for a Canadian investor. 
D)  the appropriate cost of capital from the standpoint of a foreign investor. 
A)  the appropriate cost of capital from the standpoint of a Canadian investor. 
B)  the risk-free rate for a foreign investor. 
C)  the risk-free rate for a Canadian investor. 
D)  the appropriate cost of capital from the standpoint of a foreign investor.

Question 15

Use the information for the question(s) below.
You are a Canadian 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 converting into dollars and then discounting is closest to:

Accepted Answer

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

Question 16

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 17

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, and 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, and 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.

Question 18

The amount of the taxes paid in dollars for the Irish operations is closest to:

Accepted Answer

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

Question 19

If the foreign tax rate is ________ the Canadian tax rate,the company pays total taxes ________ the Canadian tax rate on its foreign earnings.

Accepted Answer

A)  greater than; equal to 
B)  greater than; more than 
C)  less than; equal to 
D)  less than; less than 
A)  greater than; equal to 
B)  greater than; more than 
C)  less than; equal to 
D)  less than; less than

Question 20

Which of the following statements is false?

Accepted Answer

A)  If the foreign tax rate exceeds the Canadian tax rate, companies must pay this higher rate on foreign earnings. 
B)  Canadian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted. 
C)  If the foreign tax rate is less than the Canadian tax rate, the company pays total taxes equal to the Canadian tax rate on its foreign earnings. 
D)  A full tax credit is given for foreign taxes paid up to the amount of the Canadian tax liability. 
A)  If the foreign tax rate exceeds the Canadian tax rate, companies must pay this higher rate on foreign earnings. 
B)  Canadian tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted. 
C)  If the foreign tax rate is less than the Canadian tax rate, the company pays total taxes equal to the Canadian tax rate on its foreign earnings. 
D)  A full tax credit is given for foreign taxes paid up to the amount of the Canadian tax liability.

Exam 31: International Corporate Finance

Under the condition of internationally integrated capital markets,the value of an investment ________ we use in the analysis because of ________.

If the foreign tax rate ________ the Canadian tax rate,companies must pay ________ on foreign earnings.

Which of the following statements is false?

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

Which of the following statements is false?

Canadian tax policy ________ companies to apply the part of the tax credit that is not used to offset domestic taxes owed.

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

Which of the following statements is false?

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

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

Which of the following statements is false?

Which of the following statements regarding international projects is false?

The amount of the taxes paid in dollars for the Irish operations is closest to:

If the foreign tax rate is ________ the Canadian tax rate,the company pays total taxes ________ the Canadian tax rate on its foreign earnings.

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

Filters

Under the condition of internationally integrated capital markets,the value of an investment we use in the analysis because of .

If the foreign tax rate the Canadian tax rate,companies must pay on foreign earnings.

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

If the foreign tax rate is the Canadian tax rate,the company pays total taxes the Canadian tax rate on its foreign earnings.