Question 1

Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

Accepted Answer

A central depository for cash management allows the parent firm to manage cash in a manner that maximizes the benefit to the entire firm rather than specific affiliates. Typically, a firm will order each affiliate to maintain only those cash balances necessary for its own transactions and to forward the balance to a centralized location.
The central depository is typically located in a world money center where it has ready and inexpensive access to information. Central depositories can reduce the size of total precautionary funds for the MNE. If the need for precautionary funds by the affiliates is not perfectly correlated, a central pool of funds will be smaller than if each of the affiliates independently held their desired precautionary balances.
Managers of a central pool of funds can seek out the lowest costs for borrowing required funds, and the highest rates for parking excess cash more efficiently than can affiliate managers who may be limited by local laws as to where they can put their funds. Finally, location is important for either cost purposes, such as low taxes or a physically central presence, or for access to information.

Question 2

An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations.

Accepted Answer

A) True 
 B)False  False

Question 3

In an inflationary economy, demand for credit usually exceeds supply.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following is NOT a precautionary motive for holding cash?

Accepted Answer

A)  Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region.
B)  The firm has several short-term obligations in unhedged foreign currency-denominated contracts.
C)  The firm must pay ordinary wages in two days.
D)  All are precautionary motives.

Question 5

Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

Accepted Answer

A) True 
 B)False

Question 6

For disbursement purposes, it is to the benefit of the firm to minimize float.

Accepted Answer

A) True 
 B)False

Question 7

The cash conversion cycle:

Accepted Answer

A)  is a subset of the operating cycle.
B)  occurs in the latter stages of the operating cycle.
C)  is a subset of the accounts receivable period.
D)  all of the above.

Question 8

The Clearing House Interbank Payment System (CHIPS)is:

Accepted Answer

A)  the largest publicly operated payments system in the world.
B)  owned and operated by the world's seven largest central banks.
C)  a computerized network that connects banks globally.
D)  none of the above

Question 9

Increases to cash flows can be anticipated if which of the following occurs?

Accepted Answer

A)  A receivables contract is denominated in an appreciating foreign currency.
B)  Sales are less than anticipated.
C)  Days in accounts receivable increase by 15 days.
D)  none of the above

Question 10

Which of the following statements is true?

Accepted Answer

A)  A/R provide part of the funding for inventory.
B)  A/P provide part of the funding for A/R and inventory.
C)  Inventory pays for A/R and A/P.
D)  None of the above is true.

Question 11

Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:

Accepted Answer

A)  accounts receivable are so much longer than accounts payable.
B)  accounts payable are so much longer than accounts receivable.
C)  accounts receivable and accounts payable are equal.
D)  This doesn't really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.

Question 12

The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period.

Accepted Answer

A)  quotation
B)  input sourcing
C)  accounts payable
D)  accounts receivable

Question 13

The operating cycle begins with the quotation period and ends with the accounts payable period.

Accepted Answer

A) True 
 B)False

Question 14

If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

Accepted Answer

A) True 
 B)False

Question 15

In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:

Accepted Answer

A)  interest rate differences between the two countries.
B)  the negative impact on host country relations.
C)  defection on the part of executives in the home headquarters.
D)  MNEs must be concerned with all of the above.

Question 16

A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

Accepted Answer

A) True 
 B)False

Question 17

The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

Accepted Answer

A) True 
 B)False

Question 18

TABLE 19.1
Use the information to answer following question(s).
TrinityApps Corporation Balance Sheet December 31, 20xx 
-Refer to Table 19.1. The NWC for TrinityApps is:

Accepted Answer

A)  $80,000
B)  $680,000
C)  $35,000
D)  $45,000

Question 19

A foreign banking office that is separately incorporated in the host country is:

Accepted Answer

A)  a correspondent bank.
B)  a representative office.
C)  a bank subsidiary.
D)  an Edge Act corporation.

Question 20

________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.

Accepted Answer

A)  Unbundling funds
B)  Bundling funds
C)  Coordinating funds
D)  none of the above

Exam 19: Working Capital Management

Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations.

In an inflationary economy, demand for credit usually exceeds supply.

Which of the following is NOT a precautionary motive for holding cash?

Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

For disbursement purposes, it is to the benefit of the firm to minimize float.

The cash conversion cycle:

The Clearing House Interbank Payment System (CHIPS) is:

Increases to cash flows can be anticipated if which of the following occurs?

Which of the following statements is true?

Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:

The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period.

The operating cycle begins with the quotation period and ends with the accounts payable period.

If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:

A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

TABLE 19.1 Use the information to answer following question(s) . TrinityApps Corporation Balance Sheet December 31, 20xx -Refer to Table 19.1. The NWC for TrinityApps is:

A foreign banking office that is separately incorporated in the host country is:

________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.