(Test Bank) Introduction to Global Business: Understanding the International Environment and Global Business Functions

Gaspar, 1

Business

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© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. Chapter 1 —Multinational Financial Management 1. The commonly accepted goal of the MNC is to: a. maximize short-term earnings. b. maximize shareholder wealth. c. minimize risk. d. A and C. e. maximize international sales. ANS: B PTS: 1 2. With regard to corporate goals, an MNC is mostly conc erned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____ . a. shareholder wealth; short-term earnings b. shareholder wealth; shareholder wealth c. short-term earnings; sales volume d. short-term earnings; shareholder wealth ANS: B PTS: 1 3. For the MNC, agency costs are typically: a. non-existent. b. larger than agency costs of a small purely domestic fir m. c. smaller than agency costs of a small purely domestic fir m. d. the same as agency costs of a small purely domestic firm. ANS: B PTS: 1 4. Which of the following could reduce agency problem s for an MNC? a. stock options as managerial compensation. b. hostile takeover threat. c. investor monitoring. d. all of the above are forms of corporate control that could reduce agency problems for an MNC. ANS: D PTS: 1 5. The valuation of an MNC should rise when an event cau ses the expected cash flows from foreign to ____ and when foreign currencies denominating these c ash flows are expected to ____. a. decrease; appreciate b. increase; appreciate c. decrease; depreciate d. increase; depreciate ANS: B PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 6. Which of the following theories identifies specializa tion as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: A PTS: 1 7. Which of the following theories identifies the non-t ransferability of resources as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: B PTS: 1 8. Which of the following theories suggests that firms seek to penetrate new markets over time? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: C PTS: 1 9. Which of the following industries would most likely t ake advantage of lower costs in some less developed foreign countries? a. assembly line production. b. specialized professional services. c. nuclear missile planning. d. planning for more sophisticated computer technology. ANS: A PTS: 1 10. Due to the risks involved in international business, firms should: a. only consider international business in major countrie s. b. maintain international business to no more than 20% o f total business. c. maintain international business to no more than 35% o f total business. d. none of the above ANS: D PTS: 1 11. A product cycle is the process by which a firm provi des a specialized sales or service strategy, support assistance, and possibly an initial investment in the f ranchise in exchange for periodic fees. a. True b. False ANS: F PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 12. Licensing is the process by which a firm provides its t echnology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specifi ed benefits. a. True b. False ANS: T PTS: 1 13. The agency costs of an MNC are likely to be lower if it: a. scatters its subsidiaries across many foreign countries. b. increases its volume of international business. c. uses a centralized management style. d. A and B. ANS: C PTS: 1 14. An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds b. a widely dispersed set of individual investors c. a few pension funds d. all of the above would prevent agency problems ANS: B PTS: 1 15. The Sarbanes-Oxley Act improves corporate governanc e of MNCs because it: a. makes executives more accountable for verifying finan cial statements b. eliminates stock options as a form of compensation c. ties executive compensation to firm performance d. places a limit on the amount of funds that managers c an spend ANS: A PTS: 1 16. MNCs can improve their internal control process by a ll of the following, except: a. establishing a centralized data base of information b. ensuring that all data are reported consistently among subsidiaries c. ensuring that the MNC always borrows from countries whe re interest rates are lowest d. using a system that checks internal data for unusual disc repancies ANS: C PTS: 1 17. Franchising is the process by which national governme nts sell state owned operations to corporations and other investors. a. True b. False ANS: F PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 18. The parent of MNC can implement compensation plans t hat directly reward the subsidiary managers for enhancing the value of the MNC. a. True b. False ANS: T PTS: 1 19. If a publicly-traded MNC's managers make poor decisio ns that reduce its value, it may encourage other firms to acquire it. a. True b. False ANS: T PTS: 1 20. Institutional investors such as mutual funds or pension funds which have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC. a. True b. False ANS: F PTS: 1 21. In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation c osts than DFI. a. higher; higher b. higher; lower c. lower; lower d. lower; higher ANS: D PTS: 1 22. Which of the following is an example of direct fore ign investment? a. exporting to a country. b. establishing licensing arrangements in a country. c. purchasing existing companies in a country. d. investing directly (without brokers) in foreign stock s. ANS: C PTS: 1 23. According to the text, a disadvantage of licensing i s that: a. it prevents a firm from importing. b. it is difficult to ensure quality control of the prod uction process. c. it prevents a firm from exporting. d. none of the above ANS: B PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 24. ____ are most commonly classified as a direct foreign investment. a. Foreign acquisitions b. Purchases of international stocks c. Licensing agreements d. Exporting transactions ANS: A PTS: 1 25. Imperfect markets represent conditions under which fa ctors of production are immobile. a. True b. False ANS: T PTS: 1 26. The Sarbanes-Oxley Act (SOX) was enacted in 2002 req uired MNCs and other firms to implement an internal reporting process that could be easily monit ored by executives and the board of directors. a. True b. False ANS: T PTS: 1 27. If markets were perfect, then labor and other costs o f production would be perfectly stable (no movement across borders). a. True b. False ANS: F PTS: 1 28. The valuation of an MNC is reduced if the required r eturn on its investments in foreign countries is reduced. a. True b. False ANS: F PTS: 1 29. Which of the following is not mentioned in the text as an additional risk resulting from international business? a. exchange rate fluctuations. b. political risk. c. interest rate risk. d. exposure to foreign economies. ANS: C PTS: 1 30. Licensing obligates a firm to provide ____, while fr anchising obligates a firm to provide ____. a. a specialized sales or service strategy; its technology b. its technology; a specialized sales or service strategy © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. c. its technology; its technology d. a specialized sales or service strategy; a specialized sal es or service strategy e. its technology; an initial investment ANS: B PTS: 1 31. Which of the following is not a way in which agency problems can be reduced through corporate control? a. executive compensation. b. threat of hostile takeover. c. acquisition of a foreign subsidiary. d. monitoring by large shareholders. ANS: C PTS: 1 32. The goal of a multinational corporation (MNC) is the maximization of shareholder wealth. a. True b. False ANS: T PTS: 1 33. A centralized management style, where major decision s about a foreign subsidiary are made by the parent company, results in an increase in agency costs. a. True b. False ANS: F PTS: 1 34. If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparati ve advantage over other firms in Mexico that sell the sam e product. a. True b. False ANS: F PTS: 1 35. Although MNCs may need to convert currencies occasion ally, they do not face any exchange rate risk, as exchange rates are stable over time. a. True b. False ANS: F PTS: 1 36. One of the most prevalent factors conflicting with t he realization of the goal of an MNC is the existence of agency problems. a. True b. False ANS: T PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 37. A centralized management style for an MNC results in relatively high agency costs. a. True b. False ANS: F PTS: 1 38. The imperfect markets theory states that factors of pro duction are somewhat immobile, allowing firms to capitalize on a foreign country's resources. a. True b. False ANS: T PTS: 1 39. If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to apprecia te against the dollar over time. a. True b. False ANS: T PTS: 1 40. The acquisition of a foreign subsidiary is commonly con sidered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size. a. True b. False ANS: F PTS: 1 41. If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to apprecia te against the dollar over time. a. True b. False ANS: F PTS: 1 42. If markets were perfect, then labor and other costs o f production would be easily transferabl e. a. True b. False ANS: T PTS: 1 43. International trade: a. is a relatively conservative approach to foreign mark et penetration. b. entails minimal risk. c. does not require large amount of investment. d. all of the above. ANS: D PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 44. Assume that an American firm wants to engage in inte rnational business without major investment in the foreign country. Which method is least appropriat e in this situation? a. International Trade b. Licensing c. Franchising d. Direct foreign investment ANS: D PTS: 1 45. The valuation of MNC accounts for all the cash flows r eceived by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries. a. True b. False ANS: F PTS: 1 46. The MNC's value depends on all of the following, exce pt: a. MNC's required rate of return b. Amount of MNC's cash flows in particular currency c. The exchange rate at which cash flows are converted t o dollars d. The value of MNC depends on all of the above factors ANS: D PTS: 1 47. Which of the following is not an example of politic al risk? a. Government may impose taxes on subsidiary b. Government may impose barriers on subsidiary c. Consumers may boycott the MNC d. Consumers' income levels will decrease, thus decreasing c onsumption. ANS: D PTS: 1 48. A microeconomic perspective focuses on external forc es such as economic conditions that can affect the value of an MNC. a. True b. False ANS: F PTS: 1 49. Assume that an MNC has a subsidiary in Italy, which ex ports its products to various countries in Europe. Since all of the countries where it exports u se Euro as their currency, this MNC is not subject to the exchange rate risk. a. True b. False ANS: F PTS: 1 50. International trade generally results in ____ exposu re to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business. a. higher; lower b. higher; higher © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. c. lower; higher d. lower; lower ANS: D PTS: 1 51. Assume that Boca Co. wants to expand its business to Jap an, and wants complete control over the operations in Japan. Which method of international bu siness is most appropriate for Boca Co? a. Joint venture b. Licensing c. Partial acquisition of existing Japanese firm d. Establishment of Japanese subsidiary ANS: B PTS: 1 52. A decentralized management style of MNC results in re latively high agency costs. a. True b. False ANS: T PTS: 1 53. The establishment of a new subsidiary is commonly consid ered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size. a. True b. False ANS: T PTS: 1 54. Assume that Live Co. has expected cash flows of $200, 000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian oper ations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $ 1.29 respectively, at the end this year. What are th e expected dollar cash flows of Live Co? a. $200,000 b. $559,500 c. $582,500 d. $393,500 ANS: B PTS: 1 55. Saller Co. has a subsidiary in Mexico. The expected c ash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value? a. A weaker Mexican economy b. Lower Mexican interest rates c. Depreciation of the Mexican peso d. Appreciation of the Mexican peso. ANS: C PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it estab lishes the new subsidiary and ____ when the subsidiary starts operations. a. depreciates; appreciates b. appreciates; appreciates c. appreciates; depreciates d. depreciates; depreciates ANS: A PTS: 1 57. A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC. a. True b. False ANS: F PTS: 1 58. An MNC will always use the same required rate of retu rn in the valuation of foreign projects, as it would for its domestic projects. a. True b. False ANS: F PTS: 1 59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to gene rate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are t he expected dollar cash flows of Livingston Co.? a. $100,000 b. $200,000 c. $160,000 d. $60,000 ANS: C PTS: 1 60. A U.S.-based MNC has many foreign subsidiaries in Europ e and does not expect to increase its investment there. Its value should increase if the val ue of the euro weakens over time. a. True b. False ANS: F PTS: 1 61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. a. True b. False ANS: F PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 62. A decentralized management style, where subsidiary ma nagers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations. a. True b. False ANS: T PTS: 1 63. U.S.-based MNCs are typically not monitored by mutua l funds and pension funds, as these institutions rarely hold stock in MNCs. a. True b. False ANS: F PTS: 1 64. The Sarbanes-Oxley Act ensures a more transparent proc ess for managers to report on the productivity and financial condition of their firm. a. True b. False ANS: T PTS: 1 65. The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate for eign markets via geographic or product differentiation. a. True b. False ANS: F PTS: 1 66. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resou rces. a. True b. False ANS: F PTS: 1 67. Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting. a. True b. False ANS: T PTS: 1 68. Licensing allows firms to use their technology in fore ign markets without a major investment in foreign countries. a. True b. False ANS: T PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. 69. International trade is the most common form of direc t foreign investment (DFI). a. True b. False ANS: F PTS: 1 70. When the parent's home currency is weak, remitted fu nds from foreign subsidiaries will convert to a smaller amount of the home currency. a. True b. False ANS: F PTS: 1 71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. a. True b. False ANS: T PTS: 1 72. One form of an exposure to political risk is terrori sm. a. True b. False ANS: T PTS: 1 73. The goal of a multinational corporation (MNC) is a. The minimization of taxes remitted from foreign subsidi aries. b. The establishment of subsidiaries in any country where o perations would provide a return over and above the cost of capital, even if better p rojects are available domestically. c. The maximization of shareholder wealth. d. The maximization of social benefits resulting from act ions such as the employment of foreign managers. ANS: C PTS: 1 74. Agency costs faced by multinational corporations (MNC s) may be larger than those faced by purely domestic firms because a. Monitoring of managers located in foreign countries i s more difficult. b. Foreign subsidiary managers raised in different cultur es may not follow uniform goals. c. MNCs are relatively large. d. All of the above e. A and B only ANS: D PTS: 1 75. Which of the following is not one of the more commo n methods used by MNCs to improve their internal control process? a. Establishing a centralized database of information b. Ensuring that all data are reported consistently among subsidiaries c. Speeding the process by which all departments and all subsidiaries have access to the data © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. that they need d. Making executives more accountable for financial stat ements by personally verifying their accuracy e. All of the above are common methods used by MNCs to im prove their internal control process. ANS: E PTS: 1 76. Which of the following is not mentioned in the text as a theory of international business? a. Theory of Comparative Advantage b. Imperfect Markets Theory c. Product Cycle Theory d. Globalization of Business Theory e. All of the above are mentioned in the text as theori es of international business ANS: D PTS: 1 77. The most risky method(s) by which firms conduct inter national business is (are): a. Franchising. b. The acquisitions of existing operations. c. The establishment of new subsidiaries. d. All of the above e. B and C only ANS: E PTS: 1 78. The least risky method by which firms conduct internat ional business is: a. Franchising. b. The acquisitions of existing operations. c. International Trade. d. The establishment of new subsidiaries. e. Licensing ANS: C PTS: 1 79. Which of the following does not constitute a form of direct foreign investment? a. Franchising b. International trade c. Joint ventures d. Acquisitions of existing operations e. Establishment of new foreign subsidiaries ANS: B PTS: 1 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. onl y, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible webs ite, in whole or in part. Chapter 2 —International Flow of Funds 1. Recently, the U.S. experienced an annual balance o f trade representing a ____. a. large surplus (exceeding $100 billion) b. small surplus c. level of zero d. deficit ANS: D PTS: 1 2. A high home inflation rate relative to other count ries would ____ the home country's current account balance, other things equal. A high growth in the ho me income level relative to other countries would ____ the home country's current account balance, oth er things equal. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANS: C PTS: 1 3. If a country's government imposes a tariff on importe d goods, that country's current account balance will likely ____ (assuming no retaliation by other g overnments). a. decrease b. increase c. remain unaffected d. either A or C are possible ANS: B PTS: 1 4. ____ purchases more U.S. exports than the other count ries listed here. a. Italy b. Spain c. Mexico d. Canada ANS: D PTS: 1 5. An increase in the current account deficit will pla ce ____ pressure on the home currency value, other things equal. a. upward b. downward c. no d. upward or downward (depending on the size of the def icit) ANS: B PTS: 1 6. If the home currency begins to appreciate against ot her currencies, this should ____ the current account balance, other things equal (assume that substi tutes are readily available in the countries, and that the prices charged by firms remain the same). a. increase b. have no impact on