Question 1

The overall variability of a firm's returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.

Accepted Answer

A) True 
 B)False  True

Question 2

Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns.

Accepted Answer

A)   decrease
B)   increase
C)   decrease or increase, depending on the exact size of the returns and standard deviations
D)   none of the above B

Question 3

According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.

Accepted Answer

A)   Paraguay
B)   Morocco
C)   Sweden
D)   China D

Question 4

Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:

Accepted Answer

A)   protective barriers.
B)   "red tape" barriers.
C)   ethical differences.
D)   regulatory barriers.

Question 5

They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

Accepted Answer

A) True 
 B)False

Question 6

In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered.

Accepted Answer

A) True 
 B)False

Question 7

When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.

Accepted Answer

A) True 
 B)False

Question 8

Procedural and documentation requirements imposed by the foreign government are referred to as:

Accepted Answer

A)   regulatory barriers.
B)   industry barriers.
C)   protective barriers.
D)   "Red Tape" barriers.

Question 9

Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____.

Accepted Answer

A)   higher; large.
B)   higher; small
C)   lower; small
D)   higher; large

Question 10

According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:

Accepted Answer

A)   would compete with local firms of the host country.
B)   would produce a good not currently available in the host country.
C)   would produce a good and export it to other countries.
D)   B and C

Question 11

MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.

Accepted Answer

A) True 
 B)False

Question 12

____ is not a cost-related motive for direct foreign investment.

Accepted Answer

A)   Exploiting monopolistic advantages
B)   Fully benefiting from economies of scale
C)   Using foreign factors of production
D)   Using foreign raw materials

Question 13

To enter markets where superior profits are possible, an MNC should:

Accepted Answer

A)   acquire a competitor that has controlled its local market.
B)   establish a subsidiary or acquire a competitor in a new market.
C)   establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
D)   establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 14

A country with high unemployment could best increase its employment by:

Accepted Answer

A)   encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
B)   encouraging foreign firms to establish licensing arrangements for products local firms produce.
C)   encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
D)   none of the above would reduce employment.

Question 15

Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.

Accepted Answer

A)   increase; postpone remitting earnings until the pound strengthens
B)   decrease; postpone remitting earnings until the pound strengthens
C)   decrease; remit earnings immediately before the pound strengthens
D)   increase; remit earnings immediately before the pound strengthens

Question 16

Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.

Accepted Answer

A) True 
 B)False

Question 17

A firm will likely benefit most from diversifying if:

Accepted Answer

A)   the correlations between country economies are high.
B)   the correlations between country economies are low.
C)   the variability of all country economy levels is high.
D)   B and C

Question 18

To fully benefit from economies of scale, an MNC should:

Accepted Answer

A)   establish a subsidiary in a new market that can sell products produced elsewhere.
B)   establish a subsidiary in a market that has relatively low costs of labor or land.
C)   establish a subsidiary in a market where raw materials are cheap and accessible.
D)   participate in a joint venture in order to learn about a production process or other operations.

Question 19

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?

Accepted Answer

A)   Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
B)   British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
C)   American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
D)   B and C

Question 20

Which of the following is not true regarding the efficient frontier considered by MNCs?

Accepted Answer

A)   There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.
B)   The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects.
C)   Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
D)   All of the above are true.
E)   A and C are false.

Exam 13: Direct Foreign Investment

The overall variability of a firm's returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.

According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.

Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:

They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered.

When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.

Procedural and documentation requirements imposed by the foreign government are referred to as:

Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were and the number of foreign countries it sold products to was .

According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:

MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.

____ is not a cost-related motive for direct foreign investment.

To enter markets where superior profits are possible, an MNC should:

A country with high unemployment could best increase its employment by:

Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should . The parent may request that the subsidiary in order to benefit from the expectation about the pound.

Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.

A firm will likely benefit most from diversifying if:

To fully benefit from economies of scale, an MNC should:

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?

Which of the following is not true regarding the efficient frontier considered by MNCs?