Question 1

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 2

You firm needs to pay its British supplier £1,000,000. If the exchange rate is $1.61/ £, how many dollars will you need to pay the British supplier?

Accepted Answer

A)  $1,610,000 
B)  $621,118 
C)  $385,787 
D)  $1,000,000 
A)  $1,610,000 
B)  $621,118 
C)  $385,787 
D)  $1,000,000

Question 3

A ________ strategy replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.

Accepted Answer

A)  cash-and-carry 
B)  futures 
C)  forward 
D)  none of the above 
A)  cash-and-carry 
B)  futures 
C)  forward 
D)  none of the above

Question 4

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

Accepted Answer

A)  fixes, depreciates 
B)  fixes, appreciates 
C)  caps, depreciates 
D)  caps, appreciates 
A)  fixes, depreciates 
B)  fixes, appreciates 
C)  caps, depreciates 
D)  caps, appreciates

Question 5

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 6

A(n) ________ capital market is one where all investors do not have access to all the financial securities in the various markets.

Accepted Answer

A)  integrated 
B)  divested 
C)  managed 
D)  segmented 
A)  integrated 
B)  divested 
C)  managed 
D)  segmented

Question 7

Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) 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 (PV) 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 8

Which of the following statements is FALSE?

Accepted Answer

A)  If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on foreign earnings. 
B)  U.S. 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 U.S. tax rate, the company pays total taxes equal to the U.S. tax rate on its foreign earnings. 
D)  A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability. 
A)  If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on foreign earnings. 
B)  U.S. 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 U.S. tax rate, the company pays total taxes equal to the U.S. tax rate on its foreign earnings. 
D)  A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability.

Question 9

A U.S. firm acquires a British firm that will generate cash flows of 20,000 pounds next year and these cash flows will grow at 4% a year. If the British WACC is 9% and the spot exchange rate is $1.8/pound, what is the present value (PV) of the cash flows from this acquisition to domestic shareholders?

Accepted Answer

A)  $633,333 
B)  $654,876 
C)  $691,543 
D)  $720,000 
A)  $633,333 
B)  $654,876 
C)  $691,543 
D)  $720,000

Question 10

The one-year forward exchange rate is Rupees 50/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?

Accepted Answer

A)  Rupees 47.23/$ 
B)  Rupees 48.61/$ 
C)  Rupees 48.99/$ 
D)  Rupees 49.32/$ 
A)  Rupees 47.23/$ 
B)  Rupees 48.61/$ 
C)  Rupees 48.99/$ 
D)  Rupees 49.32/$

Question 11

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 12

The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?

Accepted Answer

A)  8.56% 
B)  9.24% 
C)  9.77% 
D)  10.24% 
A)  8.56% 
B)  9.24% 
C)  9.77% 
D)  10.24%

Question 13

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 managers and shareholders care 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 managers and shareholders care 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 14

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place. In this case it is better to hedge potential risks using ________.

Accepted Answer

A)  options 
B)  forwards 
C)  futures 
D)  none of the above 
A)  options 
B)  forwards 
C)  futures 
D)  none of the above

Question 15

Multinational firms often use currency forward contracts and currency options to hedge foreign exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 16

Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) 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%.
-You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

Accepted Answer

A)  $23,275,505 
B)  $23,186,792 
C)  $23,367,640 
D)  $23,278,575 
A)  $23,275,505 
B)  $23,186,792 
C)  $23,367,640 
D)  $23,278,575

Question 17

Even though a project may generate foreign currency cash flows, the firm cares about the home currency value of the project.

Accepted Answer

A) True 
 B)False

Question 18

Under U.S. tax law, a multinational corporation may use any excess tax credits generated in high-tax foreign countries to offset its net U.S. tax liabilities on earnings in low-tax foreign countries.

Accepted Answer

A) True 
 B)False

Question 19

The supply and demand for a currency is driven by ________.

Accepted Answer

A)  firms trading goods 
B)  investors trading securities 
C)  actions of central banks in each country 
D)  all of the above 
A)  firms trading goods 
B)  investors trading securities 
C)  actions of central banks in each country 
D)  all of the above

Question 20

________ give a firm a right, but not an obligation, to exchange currency at a given rate.

Accepted Answer

A)  Currency forwards 
B)  Currency options 
C)  Currency futures 
D)  Currency exchanges 
A)  Currency forwards 
B)  Currency options 
C)  Currency futures 
D)  Currency exchanges

Exam 23: International Corporate Finance

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

You firm needs to pay its British supplier £1,000,000. If the exchange rate is $1.61/ £, how many dollars will you need to pay the British supplier?

A ________ strategy replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

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

A(n) ________ capital market is one where all investors do not have access to all the financial securities in the various markets.

Which of the following statements is FALSE?

The one-year forward exchange rate is Rupees 50/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?

Which of the following statements is FALSE?

The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?

Which of the following statements regarding international projects is FALSE?

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place. In this case it is better to hedge potential risks using ________.

Multinational firms often use currency forward contracts and currency options to hedge foreign exchange rate risk.

Even though a project may generate foreign currency cash flows, the firm cares about the home currency value of the project.

Under U.S. tax law, a multinational corporation may use any excess tax credits generated in high-tax foreign countries to offset its net U.S. tax liabilities on earnings in low-tax foreign countries.

The supply and demand for a currency is driven by ________.

________ give a firm a right, but not an obligation, to exchange currency at a given rate.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

Leasing

Insurance and Risk Management

Corporate Governance

Filters

If a firm hedges a future purchase of euros by purchasing a call option, the firm the potential cost but will benefit if the euro .

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