Chapter 17 Flashcards | Quizlet

Chapter 19 Flashcards | Quizlet

Which of the following is a reason why commercial banks can facilitate

international trade?
a. The exporter may not wish to accept credit risk of the importer.
b. The government may impose exchange contracts that prevent payment by the
importer to the exporter.
c. The exporter may need financing until payment for the goods is received.
d. All of these*

Consider an exporter that sells its accounts receivables off to another firm that
becomes responsible for obtaining cash from the various importers. This
reflects:
a. accounts receivable financing.
b. consignment.
c. factoring.*
d. a letter of credit.

Consider a bank that acknowledges that it will make payments on behalf of a

computer importer after the computers are delivered to the importer. This
reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.*

Consider an importer that issues a promissory note to pay for the imported
capital goods over a period of five years. The notes are extended to an exporter
who sells them at a discount to a bank. This reflects:
a. accounts receivable financing.
b. forfaiting.*
c. factoring.
d. a letter of credit.

Consider an exporter that is willing to send goods to the importer without a

guaranteed payment by the bank. The bank provides a loan to the exporter that
is backed by the value of the exported goods. This reflects:
a. accounts receivable financing.*
b. forfaiting.
c. factoring.
d. a letter of credit.
MNCs can use ____ to sell their existing accounts receivable as a means of
obtaining cash.
a. factoring*
b. a bill of lading
c. a banker's acceptance
d. a letter of credit

The ____ was established in 1934 with the intention to facilitate Soviet-
American trade.
a. Domestic International Sales Corporation (DISC)
b. Private Export Funding Corporation (PEFCO)
c. Export-Import Bank*
d. Foreign Credit Insurance Association (FCIA)

A ____ provides a summary of freight charges and conveys title to the

merchandise.
a. letter of credit
b. banker's acceptance
c. bill of lading*
d. bill of exchange

According to the text, international trade activity has generally ____ over time.
This should cause the popularity of trade finance techniques to ____ over time.
a. increased; increase*
b. increased; decrease
c. decreased; increase
d. decreased; decrease

Which of the following payment terms provides the supplier with the greatest
degree of protection?
a. letters of credit.
b. consignment.
c. prepayment.*
d. drafts (sight/time).

With ____, the exporter ships the goods to the importer while still retaining
actual title to the merchandise.
a. a letter of credit arrangement
b. an open account arrangement
c. a draft arrangement
d. a consignment arrangement
With ____, a bank purchases a receivable without recourse to the exporter.
a. accounts receivable financing
b. factoring
c. a banker's acceptance
d. a letter of credit

In ____, a bank arranges to fund a loan to pay the exporter instead of charging
the importer's account immediately.
a. refinancing of a sight letter of credit
b. a banker's acceptance
c. a short-term bank loan
d. accounts receivable financing

A bill of exchange requesting the bank to pay the face amount upon
presentation of documents is a:
a. banker's acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

A bill of exchange requesting the bank to pay the face amount at a future date is
a:
a. banker's acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

An exchange of goods between two parties under two distinct contracts

expressed in monetary terms is:
a. compensation.
b. counterpurchase.
c. factoring.
d. accounts receivable financing.

Which of the following is not a program of the Export-Import Bank of the U.S.?
a. working capital guarantee program.
b. project finance loan program.
c. direct loan program.
d. the foreign sales corporation program.

Who bears the payment risk in a letter of credit?

a. the exporter.
b. the importer.
c. the issuing bank.
d. both the exporter and importer.

Countertrade represents foreign trade:

a. restrictions imposed by the government on imports from another country.
b. restrictions imposed by the government on exports sent from the country.
c. transactions that force the sales of goods of one country to be linked to the
purchase or exchange of goods from the country.
d. financing provided to an exporter in exchange for goods provided to the
creditor by the exporter.

The Direct Loan Program is administered by the:

a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

The Working Capital Guarantee Program is administered by the:

a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

Which of the following is not a payment method used for international trade?
a. consignment.
b. open account.
c. factoring.
d. draft.
e. letter of credit.

Under a letter of credit arrangement, the bank issuing the letter of credit is
known as the ____ bank, the correspondent bank in the beneficiary's country to
which the issuing bank sends the letter of credit is known as the ____ bank, and
the bank that agrees to examine documents under the letter of credit and pay the
beneficiary is called the ____ bank.
a. issuing; negotiating; advising
b. issuing; advising; negotiating
c. advising; issuing; negotiating
d. negotiating; issuing; advising
e. advising; negotiating; issuing

A(n) ____ letter of credit is not a trade-related letter of credit.

a. commercial
b. import/export
c. revocable
d. irrevocable
e. all of these are trade-related letters of credit

Which of the following is not true regarding letters of credit?

a. They are issued by banks on behalf of the importer promising to pay the
exporter.
b. A revocable letter of credit can be cancelled or revoked at any time without
prior notification to the beneficiary.
c. They guarantee that the goods shipped are the goods purchased.
d. All of these are true.

A banker's acceptance is a draft drawn on and accepted by a(n) ____.

a. bank
b. importer
c. exporter
d. none of these

Which of the following is not true regarding a banker's acceptance?

a. It can be beneficial to the exporter, as he does not have to worry about the
credit risk of the importer.
b. It can be beneficial to the importer, as he may have greater access to foreign
markets when purchasing supplies.
c. It can be beneficial to the bank accepting the draft in that it earns a
commission for creating an acceptance.
d. It is a sight draft.
e. All of these are true.

____ is not a type of program offered by Ex-Imbank.

a. Guarantees
b. Loans
c. Currency swap insurance
d. Bank insurance

As part of Ex-Imbank's export credit insurance programs, a(an) ____ policy is

generally issued to an administrator, such as a bank, trading company, insurance
broker, or government agency, who then administers the policy for multiple
exporters.
a. multiple-buyer
b. single-buyer
c. small business
d. umbrella
The ____ is a private corporation owned by a consortium of commercial banks
and industrial companies, but the ____ is a self-sustaining government agency.
a. Overseas Private Investment Corporation (OPIC); Private Export Funding
Corporation (PEFCO)
b. Private Export Funding Corporation (PEFCO); Overseas Private Investment
Corporation (OPIC)
c. Private Export Funding Corporation (PEFCO); Ex-Imbank
d. Overseas Private Investment Corporation (OPIC); Ex-Imbank

The risk to the exporter is highest with the ____ method.

a. prepayment
b. letter of credit
c. consignment
d. open account

A ____ is an unconditional promise drawn by one party, instructing the buyer to

pay the face amount upon presentation.
a. draft
b. bill of lading
c. trade acceptance
d. letter of credit

Under a(n) ____ arrangement, the exporter ships the goods to the importer
while still retaining actual title to the merchandise.
a. draft
b. consignment
c. prepayment
d. open account

In ____, the exporter sells accounts receivable without recourse.

a. accounts receivable financing
b. factoring
c. working capital financing
d. countertrade

____ promises to pay the beneficiary if they buyer fails to pay as agreed.
a. A standby L/C
b. A transferable L/C
c. Assignment of proceeds
d. None of these
____ refers to the purchase of financial obligations, such as bills of exchange or
promissory notes, without recourse to the original holder, usually the exporter.
a. Factoring
b. Accounts receivable financing
c. Forfaiting
d. None of these

The Working Capital Guarantee Program and the Medium-term Guarantee

Program are offered by the:
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of these

The ____ is a self-sustaining federal agency responsible for insuring direct U.S.
investments in foreign countries against the risk of currency inconvertibility,
expropriation, and other political risks.
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of these

Which of the following is not a payment method used for international trade?
a. Supplier credit
b. Bill of exchange
c. Bill of lading
d. Letter of credit
e. All of these are payment methods used.

Under a ____, the exporter is paid once shipment has been made and the draft is
presented to the buyer for payment; under a ____, the exporter provides
instructions to the buyer's bank to release shipping documents against
acceptance, by the buyer, of the draft.
a. sight draft; time draft
b. sight draft; banker's acceptance
c. bill of lading; banker's acceptance
d. time draft; sight draft

Which of the following is not a trade financing method used in international

trade from an exporter's perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account

Of all the payment methods available in international trade, ____ probably

affords the most protection to the exporter, while ____ probably affords the
least protection.
a. prepayment; consignment
b. prepayment; open account
c. open account; prepayment
d. consignment; prepayment
BÀI 2
An argument for MNCs to have a debt-intensive capital structure is:
a. they are well diversified.
b. foreign government tax rules may change over time.
c. exposure to exchange rate fluctuations.
d. exposure to fund blockage.

According to the text, there is evidence that the debt ratios (debt/capital) of
MNCs based in:
a. the U.S. tend to be generally higher than MNCs headquartered in Japan and
Germany.
b. the United Kingdom tend to be generally higher than MNCs headquartered in
other non-U.S. countries.
c. the U.S. tend to be generally lower than MNCs headquartered in Japan and
Germany.
d. A and B

According to the text, the cost of capital for an international project will:
a. always be greater than the firm's cost of capital.
b. always be less than the firm's cost of capital.
c. always be the same as the firm's cost of capital.
d. none of the above

Which of the following factors is not expected to generally have a favorable

impact on the firm's cost of capital according to the text?
a. easy access to international capital markets.
b. high degree of international diversification.
c. volatile exchange rate fluctuations.
d. all of the above

a. only unsystematic variability in cash flows is relevant.

b. only systematic variability in cash flows is relevant.
c. both systematic and unsystematic variability in cash flows are relevant.
d. neither systematic nor unsystematic variability in cash flows is relevant.

According to the text, MNCs:

a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of the above
The term "global" target capital structure for an MNC represents the MNC's
capital structure:
a. in the U.S.
b. relative to competitors across all countries.
c. where it has its largest subsidiary.
d. when consolidating all of its subsidiaries.

According to the text, an MNC's "global" target capital structure is:

a. always debt-intensive.
b. always equity-intensive.
c. sometimes different from an MNC's "local" capital structures (at
subsidiaries).
d. none of the above

One argument for why subsidiaries should be wholly-owned by the parent is

that the potential conflict of interests between the MNC's ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors

One argument for why subsidiaries should be only partly-owned by the parent
is:
a. that the potential conflict of interests between the MNC's managers and
shareholders is avoided.
b. that the potential conflict of interests between the MNC's majority
shareholders and minority shareholders is avoided.
c. that the potential conflict of interests between the MNC's existing creditors is
avoided.
d. to motivate subsidiary managers by allowing them partial ownership.

Other things being equal, countries with relatively ____ populations and ____
inflation are more likely to have a low cost of capital.
a. young; high
b. old; high
c. old; low
d. young; low

Other things being equal, the financial leverage of MNCs will be higher if the
governments of their home countries are ____ likely to rescue them (in the
event of failure), and if their home countries are ____ likely to experience a
recession.
a. more; more
b. less; more
c. less; less
d. more; less

Based on the factors that influence a country's cost of capital, the cost of capital
in less developed countries is likely to be ____ than that of the U.S. and ____
than that of Japan.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

According to the text, the cost of debt:

a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively
correlated.
c. among countries changes over time, and these changes are positively
correlated.
d. among countries changes over time, and are not correlated.

The term "local target capital structure" is used in the text to represent the:
a. average capital structure of local firms where the MNC's subsidiary is based.
b. average capital structure of local firms where the MNC's parent is based.
c. desired capital structure of a subsidiary of a particular MNC.
d. desired capital structure of a particular MNC overall (including all
subsidiaries).

The term "global capital structure" is used in the text to represent the:
a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic firms across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

Assume that the risk-free interest rate in the U.S. is the same as that in Country
M. Assume that the government of Country M is more likely to rescue local
firms that experience financial problems. Other things being equal, Country M's
firms are likely to use a ____ degree of financial leverage than U.S. firms. If a
firm based in Country M had the same degree of financial leverage and the
same operating characteristics as a U.S. firm, its cost of capital would be ____
than that of the U.S. firm.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

When an MNC's firm's cost of capital rises, it would be ____ likely to divest an
existing project, other things held constant.
a. more
b. less
c. neither; there is no effect
d. neither; MNCs do not ever divest projects

Which of the following is not a factor that favorably affects an MNC's cost of
capital, according to your text?
a. exchange rate risk.
b. size.
c. access to international capital markets.
d. international diversification.

According to your text, which of the following is not a factor that affects an
MNC's cost of capital unfavorably?
a. exchange rate risk.
b. country risk.
c. an increase in the risk-free interest rate.
d. size.

The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower
c. smaller; lower
d. A and C

Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the
return on the stock market overall is expected to be 13%. What is the required
rate of return on Zoro stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above

Which of the following is not a reason provided in the text regarding why the
cost of debt can vary across countries?
a. differences in the risk-free rate.
b. a high price-earnings multiple.
c. differences in the risk premium.
d. differences in demographics.

In general, MNCs probably prefer to use ____ foreign debt when their foreign
subsidiaries are subject to ____ local interest rates.
a. more; low
b. more; high
c. less; low
d. B and C
e. none of the above

In general, MNCs probably prefer to use ____ foreign debt when their foreign
subsidiaries are subject to potentially ____ local currencies.
a. more; strong
b. more; weak
c. less; strong
d. less; weak
e. B and D

A firm's cost of ____ reflects an opportunity cost: what the existing

shareholders could have earned if they had received the earnings as dividends
and invested the funds themselves.
a. debt
b. retained earnings
c. new common equity
d. none of the above

The ____ the cost of capital, the ____ will be a project's net present value for a
project with a given set of expected cash flows.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the above

To the extent that individual economies are ____ each other, net cash flows
from a portfolio of subsidiaries should exhibit ____ variability, which may
reduce the probability of bankruptcy.
a. dependent on; less
b. dependent on; more
c. independent of; less
d. independent of; more
In general, a firm ____ exposed to exchange rate fluctuations will usually have
a ____ distribution of possible cash flows in future periods.
a. more; narrower
b. less; wider
c. more; wider
d. none of the above

According to the CAPM, the required rate of return on stock is a positive

function of all of the following, except:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock's beta.
d. the company's earnings.

The lower a project's beta, the ____ is the project's ____ risk.
a. lower; systematic
b. lower; unsystematic
c. higher; systematic
d. higher; unsystematic

Capital asset pricing theory suggests that ____ risk of projects can be ignored
and that ____ is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematic

Capital asset pricing theory would most likely suggest that the cost of capital is
generally ____ for ____.
a. higher; MNCs
b. lower; domestic firms
c. lower; MNCs
d. none of the above

Exhibit 17-1
Assume the following information for Pexi Co., a U.S.-based MNC that is
considering obtaining funding for a project in Germany:

U.S. risk-free rate = 4%

German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

Refer to Exhibit 17-1. What is Pexi's cost of dollar-denominated debt?

a. 7.0%.
b. 8.0%.
c. 6.3%.
d. 4.9%.

Exhibit 17-1
Assume the following information for Pexi Co., a U.S.-based MNC that is
considering obtaining funding for a project in Germany:

U.S. risk-free rate = 4%

German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

Refer to Exhibit 17-1. What is Pexi's cost of dollar-denominated equity?

a. 12.0%.
b. 11.2%.
c. 10.0%.
d. 7.2%.

When an MNC is considering financing a portion of a foreign project within the

foreign country, the best method to account for a foreign project's risk is to:
a. derive net present values based on the WACC.
b. adjust the weighted average cost of capital for the risk differential.
c. derive the net present value of the equity investment.
d. none of the above

In general, the ____ the cost of capital, the ____ the NPV of a project that is
evaluated with this cost of capital.
a. higher; higher
b. lower; lower
c. higher; lower
d. A and B
e. none of the above
The capital asset pricing model suggests that the required return on a firm's
stock is a positive function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock's beta.
d. all of the above

The capital asset pricing model suggests that the required return on a firm's
stock is a negative function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock's beta.
d. none of the above

The cost of capital can vary among countries because:

a. MNCs based in some countries do not have a competitive advantage over
others.
b. MNCs may be able to adjust their international operations and sources of
funds to capitalize on differences in the cost of capital among countries.
c. of country differences in tax laws or monetary supply.
d. none of the above.

Werner Corporation has a target capital structure that consists of 40% debt and
60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has
determined its cost of equity to be 14%. Werner's tax rate is 40%. What is
Werner's weighted average cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above

The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%.
Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of
dollar-denominated equity?
a. 8.4%
b. 11.4%
c. 10%
d. None of the above

Which of the following is least likely to influence an MNC's capital structure?

a. The stability of MNC's cash flows
b. The MNC's credit risk
c. The MNC's access to earnings
d. The MNC's decision to invest excess cash in a Treasury bill rather than in a
bank
e. None of the above

Which of the following is not a host country characteristic than can affect an
MNC's capital structure decision?
a. The strength of host country currencies
b. The country risk in host countries
c. Political decisions to increase penalties for criminals
d. Tax laws in host countries

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity
might be ____.
a. does not back; increased
b. backs; decreased
c. does not back; decreased
d. backs; increased
e. C and D