Business Finance Final Exam

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 Business Finance
Final Exam
Cou
Business Finance is a foundational course that explores the principles and practices of

managing the financial resources of a business organization. Students will learn about

key financial concepts such as time value of money, risk and return analysis, capital

budgeting, financial statement analysis, and the management of working capital. The

course also covers sources of financing, the cost of capital, and dividend policies,

equipping students with the analytical tools necessary for effective financial

decision-making in a corporate environment. Through case studies and

problem-solving exercises, students will develop practical skills to evaluate investment

opportunities and optimize the financial performance of businesses.

Recommended Textbook
Multinational Business Finance 15th Edition by David K. Eiteman

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18 Chapters
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Page 2
 Chapter 1: Multinational Financial Management:

Opportunities and Challenges

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Sample Questions
Q1) A well-established, large, Brazil-based MNE will probably be most adversely affected
by which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
Answer: C

Q2) In determining why a firm becomes multinational there are many reasons. One
reason is that the firm is a market seeker. Which of the following is NOT a reason why
market-seeking firms produce in foreign countries?
A) satisfaction of local demand in the foreign country
B) to export to foreign markets
C) political safety and small likelihood of government expropriation of assets
D) All of the above are market-seeking activities.
Answer: C

Q3) Relative to MNEs, purely domestic firms tend to have GREATER political risk.
A)True
B)False
Answer: False

Page 3
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 Chapter 2: The International Monetary System
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Sample Questions
Q1) Since March 1973, when exchange rates become more volatile and less predictable
than during the "fixed" exchange rate period, the nominal exchange rate index of the U.S.
dollar peaked in 2011.
A)True
B)False
Answer: False

Q2) Under the terms of Bretton Woods, countries tried to maintain the value of their
currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and
Japanese yen.
A)True
B)False
Answer: False

Q3) All exchange rate regimes must deal with the trade-off between rules and discretion
as well as between cooperation and independence.
A)True
B)False
Answer: True

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Page 4
 Chapter 3: The Balance of Payments
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Sample Questions
Q1) Which of the following international transactions would NOT be counted as a balance
of payments (BOP) transaction?
A) An American tourist purchases cheese in Milwaukee, Wisconsin.
B) The U.S. subsidiary of a British firm pays profits (dividends) back to its parent firm in
London.
C) A Canadian lumber baron purchases a U.S. corporate bond through an investment
broker in Seattle.
D) All of the above are considered BOP transactions.
Answer: A

Q2) The authors identify four distinct periods of capital mobility since 1860. Which do
they term as a "period of global economic destruction"?
A) 1860 - 1914
B) 1914 - 1945
C) 1945 - 1971
D) 1971 - 2007
Answer: B

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Page 5
 Chapter 4: Financial Goals and Corporate Governance
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Sample Questions
Q1) In finance, an efficient market is one in which:
A) prices are assumed to be correct.
B) prices adjust quickly and accurately to new information.
C) prices are the best allocators of capital in the macro economy.
D) all of the above

Q2) In the stakeholder capitalism model (SCM) the assumption of market efficiency is
absolutely critical.
A)True
B)False

Q3) Although there are many different cultural and legal approaches used in corporate
governance worldwide, there is a growing consensus on what constitutes good
corporate governance. List and explain at least three standardized common principles of
good corporate governance.

Q4) The relatively low cost of compliance with the Sarbanes-Oxley Act (SOX) has been a
surprising benefit of the act.
A)True
B)False

Q5) Define patient and impatient capitalism and discuss how each may lead to different
decision-making in the shareholder wealth maximization model.

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 Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) The U.S. dollar suddenly changes in value against the euro moving from an exchange
rate of 0.8909/€ to $0.8709/€. Thus, the dollar has ________ by ________.
A) appreciated; 2.30%
B) depreciated; 2.30%
C) appreciated; 2.24%
D) depreciated; 2.24%

Q2) The United Kingdom and United States together make up nearly ________ of daily
currency trading.
A) 30%
B) 40%
C) 50%
D) 60%

Q3) ________ seek to profit from trading in the market itself rather than having the
foreign exchange transaction being incidental to the execution of a commercial or
investment transaction.
A) Speculators and arbitrageurs
B) Foreign exchange brokers
C) Central banks
D) Treasuries

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Page 7
 Chapter 6: International Parity Conditions
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Sample Questions
Q1) The Economist publishes annually the "Big Mac Index" by which they compare the
prices of the McDonald's Corporation's Big Mac hamburger around the world. The index
estimates the exchange rates for currencies based on the assumption that the burgers
in question are the same across the world and therefore, the price should be the same. If
a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated
exchange rate of yen per dollar as hypothesized by the Hamburger index?
A) $0.0086/¥
B) ¥124/$
C) $0.0081/¥
D) ¥115.75/$

Q2) All that is required for a covered interest arbitrage profit is for interest rate parity to
not hold.
A)True
B)False

Q3) If exchange markets were not efficient, it would pay for a firm to spend resources on
forecasting exchange rates.
A)True
B)False

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Page 8
 Chapter 7: Foreign Currency Derivatives: Futures and

Options
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Sample Questions
Q1) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is
the break-even price for the option?
A) $2.03/£
B) $2.07/£
C) $2.05/£
D) The answer depends upon if this is a long or a short call option.

Q2) Which of the following is NOT a difference between a currency futures contract and
a forward contract?
A) The futures contract is marked to market daily, whereas the forward contract is only
due to be settled at maturity.
B) The counterparty to the futures participant is unknown with the clearinghouse
stepping into each transaction, whereas the forward contract participants are in direct
contact setting the forward specifications.
C) A single sales commission covers both the purchase and sale of a futures contract,
whereas there is no specific sales commission with a forward contract because banks
earn a profit through the bid-ask spread.
D) All of the above are true.

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Page 9
 Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or
that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is
borrowing money.)
A) that interest rates might go down or that your credit rating might improve.
B) that interest rates might go up or that your credit rating might improve.
C) that interest rates might go up or that your credit rating might get worse.
D) none of the above

Q2) One of the reasons companies use interest rate swaps is because they pursue a
target debt structure that combines maturity, currency of composition, and
fixed/floating pricing.
A)True
B)False

Q3) An agreement to swap the currencies of a debt service obligation would be termed
a/an:
A) currency swap.
B) forward swap.
C) interest rate swap.
D) none of the above

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Page 10
 Chapter 9: Foreign Exchange Rate Determination and

Intervention
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Sample Questions
Q1) ________, traditionally referred to as chartists, focus on price and volume data to
determine past trends that are expected to continue into the future.
A) Mappists
B) Trappist monks
C) Filibusters
D) Technical analysts

Q2) Leading up to the Russian currency collapse of 1998, Russia followed a currency
policy of managed float that allowed their currency to slide daily at a 1.5% per month
rate.
A)True
B)False

Q3) As economic conditions continued to deteriorate in Argentina by the end of 2001,

banks suffered increasing runs. The government, fearing that the increasing financial
drain on banks would cause their collapse, closed the banks for weeks.
A)True
B)False

Q4) Describe the asset market approach to exchange rate determination. How is this
consistent with economic theory of (say, security) prices in general?

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 Chapter 10: Transaction Exposure
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Sample Questions
Q1) A firm's risk tolerance is a combination of management's philosophy toward
transaction exposure and the specific goals of treasury activities.
A)True
B)False

Q2) MNE cash flows may be sensitive to changes in which of the following?
A) exchange rates
B) interest rates
C) commodity prices
D) all of the above

Q3) ________ exposure deals with cash flows that result from existing contractual
obligations.
A) Operating
B) Transaction
C) Translation
D) Economic

Q4) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False

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Page 12
 Chapter 11: Translation Exposure
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Sample Questions
Q1) The value contribution of a subsidiary of a multinational firm to the firm can be
reported in the income statement or balance sheet of the consolidated firm. Explain the
reporting of the changes in the value of a subsidiary as a result of the change in an
exchange rate - changes to the income and the assets of the subsidiary - in the
consolidated financial statements of the parent company.

Q2) The ________ determines accounting policy for U.S. firms.

A) Securities and Exchange Commission (SEC)
B) Federal Reserve System (Fed)
C) Financial Accounting Standards Board (FASB)
D) General Agreement on Tariffs and Trade (GATT)

Q3) The current rate method and the temporal method are two basic methods for
translation that are employed worldwide.
A)True
B)False

Q4) If management expects a foreign currency to depreciate, it could minimize

translation exposure by increasing net exposed assets.
A)True
B)False

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Page 13
 Chapter 12: Operating Exposure
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Sample Questions
Q1) Purely domestic firms will be at a disadvantage to MNEs in the event of market
disequilibria because:
A) domestic firms lack comparative data from its own sources.
B) international firms are already so large.
C) all of the domestic firm's raw materials are imported.
D) None of the above; domestic firms are not at a disadvantage.

Q2) Which of the following is probably NOT an advantage of foreign exchange risk
management?
A) the reduction of the variability of cash flows due to domestic business cycles
B) increased availability of capital
C) reduced cost of capital
D) All of the above are potential advantages of foreign exchange risk management.

Q3) Which of the following is NOT an example of diversification in financing?

A) raising funds in more than one market
B) raising funds in more than one country
C) diversifying sales
D) All of the above qualify.

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Page 14
 Chapter 13: Global Cost and Availability of Capital
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Sample Questions
Q1) International CAPM (ICAPM) assumes that there is a global market in which the firm's
equity trades, and estimates of the firm's beta, and the market risk premium, must then
reflect this global portfolio.
A)True
B)False

Q2) Which of the following statements is NOT true?

A) International diversification benefits induce investors to demand foreign securities.
B) An international security adds value to a portfolio if it reduces risk without reducing
return.
C) Investors will demand a security that adds value.
D) All of the above are true.

Q3) In some respects, internationally diversified portfolios are the same in principle as a
domestic portfolio because:
A) the investor is attempting to combine assets that are perfectly correlated.
B) investors are trying to reduce systematic risk.
C) investors are trying to reduce the total risk of the portfolio.
D) all of the above

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Page 15
 Chapter 14: Funding the Multinational Firm
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Sample Questions
Q1) MNEs situated in countries with small illiquid and segmented markets are most like:
A) small domestic U.S. firms in that they must rely on internally generated funds and
bank borrowing.
B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of
financing.
C) small domestic U.S. firms in that they have a strong niche market in the U.S.
D) None of the above is true.

Q2) Which of the following is NOT a factor offsetting the tax advantage of debt as a
source of financing?
A) increased agency costs
B) increased probability of financial distress (bankruptcy) due to fixed interest payments
C) alternative tax shields to those supplied by interest payments
D) All of the above offset the tax advantage of debt as a source of financing.

Q3) The ultimate step sourcing capital abroad would be to place a directed equity issue
in a prestigious target market or a euroequity issue in global equity markets.
A)True
B)False

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Page 16
 Chapter 15: Multinational Tax Management
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Sample Questions
Q1) The territorial approach, also referred to as the source approach to tax policy, levies
taxes on the income earned by firms that are incorporated in the host country,
regardless of where the income was earned (domestically or abroad).
A)True
B)False

Q2) Between 2006-2012, global corporate tax rates have trended upward.
A)True
B)False

Q3) The changing global tax environment for multinational firms has been attributed to
all of the following EXCEPT:
A) rapid expansion of the global digital economy.
B) aggressiveness of governments to increase their individual tax competitiveness.
C) increase cost of capital.
D) all of the above

Q4) What is a value-added tax? Where is this type of tax in wide usage? Why do you
suppose this form of taxation has NOT been widely accepted in the United States?

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Page 17
 Chapter 16: International Trade Finance
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Sample Questions
Q1) The combination of a letter of credit, a sight draft, and an order bill of lading protect
both parties in international transactions from which of the following?
A) the risk of noncompletion
B) the risk of foreign exchange risk (when combined with a various hedging techniques)
C) the risk that financing will not be available due to foreign exchange risk
D) All of these risks are reduced when using these trade implements.

Q2) To become a negotiable instrument, a draft must conform to the following

requirements EXCEPT:
A) it must be in writing and signed by the maker or drawer.
B) it must be payable to order or to bearer.
C) it must be written in English.
D) it must be payable on demand or at a fixed or determinable future date.

Q3) A letter of credit is an agreement by the bank to pay against documents rather than
the actual merchandise.
A)True
B)False

Q4) What is a banker's acceptance? How are they initiated? Why are they desirable for
the exporter?

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Page 18
 Chapter 17: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) What does the OLI Paradigm propose to explain? Define each component and
provide an example of each.

Q2) Which of the following is NOT an advantage to exporting goods to reach

international markets rather than entering into some form of FDI?
A) fewer political risks
B) greater agency costs
C) lower front-end investment
D) All of the above are advantages.

Q3) The OLI paradigm is an attempt to create a framework to explain why MNEs choose
________ rather than some other form of international venture.
A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances

Q4) Economists have observed that firms tend to invest first in countries that are too far
distant in psychic distance (similar cultural, legal, and institutional environment).
A)True
B)False

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Page 19
 Chapter 18: Multinational Capital Budgeting and

Cross-Border Acquisitions
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Sample Questions
Q1) Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions
project?
A) $1,500,000
B) €1,600,000
C) $1,600,000
D) €1,500,000

Q2) If a firm undertakes a project with ordinary cash flows and estimates that the firm
has a positive NPV, then the IRR will be:
A) less than the cost of capital.
B) greater than the cost of capital.
C) greater than the cost of the project.
D) cannot be determined from this information

Q3) Generally speaking, a firm wants to receive cash flows from a currency that is
________ relative to their own, and pay out in currencies that are ________ relative
to their home currency.
A) appreciating; depreciating
B) depreciating; depreciating
C) appreciating; appreciating
D) depreciating; appreciating

Page 20
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