Fin 4604 Exam 1 conceptual

According to Multinational Financial Management framework, what is the primary, overarching objective of a multinational corporation's managers, and what type of subsidiary ownership is the specific focus of this text?

To maximize the firm's stock price, focusing primarily on MNCs whose parents fully own their foreign subsidiaries.

Why are agency costs structurally higher for a Multinational Corporation (MNC) than for a purely domestic firm?

Monitoring distant managers is tougher, foreign subsidiary managers raised in different cultures may follow non-uniform goals, and the sheer size of MNCs exacerbates the conflict.

If an MNC's management team continuously fails to maximize shareholder wealth and creates excessive agency costs, how can external market forces enforce corporate control?

Pressure from large outside investors can force board action to remove management, or the poorly run company may become a takeover target by another firm.

The Sarbanes-Oxley Act (SOX) aims to improve the corporate governance and financial reporting transparency of MNCs. Which of the following is a specific method used by SOX to achieve this?

Implementing a system that automatically checks for unusual discrepancies relative to norms and making executives more accountable for financial statements.

An MNC is weighing the trade-offs between a centralized and decentralized management structure. Which statement accurately reflects how these styles impact agency costs and operational efficiency?

Centralized management reduces agency costs by giving parent managers control, while decentralized management increases agency costs but leverages the local expertise of subsidiary managers.

According to the Imperfect Markets Theory, what real-world condition provides the core incentive for firms to seek out international opportunities?

Factors of production are somewhat immobile, meaning costs and restrictions prevent resources like labor from moving freely across borders.

Walk through the correct evolutionary sequence of a firm according to the Product Cycle Theory.

The firm creates a product for home demand, exports to accommodate foreign demand, establishes a foreign subsidiary to reduce costs, and then either differentiates its product line or sees its business decline.

What distinguishes licensing from franchising as a method to conduct international business, and what is a primary disadvantage of licensing?

Licensing involves providing technology (copyrights, patents, etc.) in exchange for fees and suffers from difficult quality control; franchising obligates the firm to provide a specialized sales/service strategy and support.

Which international business methods represent the largest portion of Direct Foreign Investment (DFI), and what is a major operational trade-off when choosing to build a new foreign subsidiary over acquiring an existing one?

Foreign acquisitions and new subsidiaries constitute the bulk of DFI; building a new subsidiary allows tailored operations but requires a longer time horizon, causing the firm to miss out on first-mover advantages.

Look at the mathematical framework for valuing a multi-currency MNC:

$$V = \sum_{t=1}^{n} \frac{\sum_{j=1}^{m} [E(CF_{j,t}) \times E(S_{j,t})]}{(1 + k)^t}$$

Multiply the expected cash flow denominated in each foreign currency j by its expected exchange rate (in dollars per unit of that currency) for period t, and sum those products across all currencies.

According to the valuation model, which of the following combinations of events will unambiguously cause the valuation (V) of a U.S.-based MNC to decrease? (Assume the MNC has net cash inflows in foreign currencies).

A weakening of foreign economies hosting subsidiaries, a weakening of foreign currencies against the U.S. dollar, and an increase in investor uncertainty that raises the required rate of return (k).

What does the Current Account of the Balance of Payments primarily summarize?

Flow of funds due to purchases of goods or services, or the provision of income on financial assets.

If a U.S. investor receives a dividend payment from a French firm, how is this recorded on the U.S. Balance-of-Payments account?

Current Account / Credit

Which component of the Balance of Payments summarizes new investments in financial assets such as stocks or bonds over a given period?

Portfolio Investment within the Financial Account

What types of transactions are explicitly summarized in the Capital Account?

Financial assets transferred across borders by people who move to a different country, or sales of patents and trademarks.

According to the presentation, what is a primary criticism of outsourcing from a domestic perspective?

Outsourcing may reduce jobs in the United States.

How do relative inflation and national income levels affect a country's current account balance?

The current account decreases if inflation or national income increases relative to trading partners.

What is the J-Curve effect in international trade?

A phenomenon where a weak home currency initially worsens the trade balance before improving it, due to a lag in adjusting prearranged transactions.

Why might a weak home currency fail to automatically correct a balance of trade deficit?

Foreign competitors may lower their prices, and a large portion of trade is intracompany trade unaffected by currency fluctuations.

What is the primary reason that a firm's market value may increase in response to privatization?

The anticipated improvement in managerial efficiency.

In terms of international portfolio investment, when are investors most attracted to a foreign country?

When taxes on interest/dividends are low, interest rates are high, and the local currency is expected to strengthen.

According to Exhibit 2.6, what is the net effect of foreign funds entering the U.S. financial market?

It increases the supply of funds, which lowers long-term interest rates and increases the amount of business investment.

Which international agency is sometimes referred to as the “central banks’ central bank” or the “lender of last resort”?

Bank for International Settlements (BIS)

What is the specific objective of the International Development Association (IDA)?

To extend loans at low interest rates to poor nations that cannot qualify for loans from the World Bank.

Which agency provides Structural Adjustment Loans (SALs) intended to enhance a country’s long-term economic growth?

World Bank

What is the main objective of the International Finance Corporation (IFC)?

Promote private enterprise within countries by providing loans to corporations and purchasing stock.

What system allowed widely traded currencies to fluctuate in accordance with market forces from 1973 onward?

Floating exchange rate system

What is the telecommunications network where companies normally exchange one currency for another called?

Over-the-counter market

How do commercial banks calculate the standardized bid/ask spread across different currencies to ensure comparability?

As a percentage of the currency's spot rate

Which currency is the most commonly accepted medium of exchange in the spot market, especially in countries where the home currency is weak?

U.S. dollar

Which of the following functions accurately describes the relationship of factors affecting the bank's bid/ask spread?

Spread is positively related to order costs, inventory costs, and currency risk, but negatively related to competition and volume.

If a direct exchange rate quotation represents the value of a foreign currency in dollars, what does an indirect quotation represent?

The number of units of a foreign currency per dollar

When the direct exchange rate of the euro moves upward (appreciating against the dollar), what happens to its indirect exchange rate?

It declines

What type of contract represents an over-the-counter agreement between a foreign exchange dealer and an MNC to exchange specific currencies at a set rate on a specific future date?

Forward contract

What specific right does a currency put option provide to its holder?

The right to sell a specific currency at a specific price within a specific period of time

What are dollar-denominated deposits in banks located in Europe and other continents commonly called?

Eurodollars

Even if international money market securities are perceived to have negligible default risk, what primary risk are they exposed to if denominated in a foreign currency?

Exchange rate risk

Loans of one year or longer extended by banks to MNCs or government agencies in Europe are known as what?

Eurocredits

To avoid interest rate risk on international credit loans, banks commonly use floating rate structures tied to which rate?

Secured Overnight Financing Rate (SOFR)

Basel III Accord

Basel II Accord

What is the primary definition of a foreign bond?

A bond issued by a borrower foreign to the country where the bond is placed

What type of risk represents the potential for an international bond's value to decline from an investor's perspective because the denominating currency falls against their home currency?

Exchange rate risk

What are American Depository Receipts (ADRs)?

Certificates representing bundles of stock that can be traded just like shares of a stock

Why did many non-U.S. firms choose to place new stock offerings in the United Kingdom instead of the United States?

To avoid complying with the Sarbanes-Oxley Act

According to the market capitalization rankings for 2024, which stock exchange is ranked number one globally?

New York Stock Exchange (NYSE)

Stock market participation and trading activity are structurally higher in countries characterized by which factors?

Strong shareholder rights, strong securities laws, a low level of corporate corruption, and a high level of financial disclosure