Multiple Choice Identify the
choice that best completes the statement or answers the question.
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1.
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Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based
multinational firm's reported earnings (from the consolidated income statement) to _______. If a
firm desired to protect against this possibility, it could stabilize its reported earnings by _______
euros forward in the foreign exchange market.
a. | be reduced; purchasing | c. | increase; selling | b. | be reduced; selling | d. | increase;
purchasing |
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2.
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Whitewater ltd. is a UK company with sales to Canada amounting to C$8 million.
Its cost of goods sold attributable to the purchase of Canadian goods is C$6 million. Its interest
expense on Canadian loans is C$4 million. Given these exact figures above, the pound value of
Whitewater's "earnings before interest and taxes" would _______ if the Canadian dollar
appreciates; the pound value of Whitewater's "earnings before taxes" would _______ if
the Canadian dollar appreciates.
a. | increase; increase | b. | decrease; increase | c. | decrease;
decrease | d. | increase; decrease | e. | increase; be
unaffected |
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3.
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Rockington ltd. is a UK manufacturing firm that produces goods in the UK and
sells all products to retail stores in the US; the goods are denominated in dollars. It finances a
small portion of its business with dollar-denominated loans from US banks. Which of the following is
true? (Assume that the amount of products to be sold is guaranteed by contracts.)
a. | The pound value of sales is higher if the dollar depreciates against the
pound. | b. | The pound value of sales is unaffected by the dollar's exchange
rate. | c. | A and B | d. | None of the
above |
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4.
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With regard to hedging translation exposure, translation losses _______; and
gains on forward contracts used to hedge translation exposure _______.
a. | are not tax deductible; are taxed | c. | are not tax deductible; are not
taxed | b. | are tax deductible; are taxed | d. | are tax deductible; are not
taxed |
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5.
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Assume a UK firm uses a forward contract to hedge all of its translation
exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that
the foreign currency depreciated over the year. The firm would generate a translation _______, which
would be _______ than the gain generated by the forward contract.
a. | loss; smaller | c. | gain; larger | b. | loss; larger | d. | gain; smaller |
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6.
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Wisbeech ltd conducts business in Zambia. Years ago, Wisbeech established a
subsidiary in Zambia that has consistently generated very large profits denominated in Zambian
kwacha. Wisbeech wishes to restructure its operations to reduce economic exposure. Which of the
following is not a feasible way of accomplishing this?
a. | increase Zambian supply orders. | b. | increase Zambian sales. | c. | restructure debt to
increase debt payments in Zambia. | d. | reduce Zambian
sales. |
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7.
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An effective way for an MNC to assess its economic exposure is to look at the
firm's:
a. | income statement. | c. | retained earnings. | b. | liquidity. | d. | level of stockholder's
equity. |
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8.
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As opposed to transaction exposure, managing economic exposure involves
developing a ________ solution.
a. | short-term | c. | immediate | b. | long-term | d. | none of the
above |
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9.
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Long-term forward contracts are a possible way to hedge the distant sale of
fixed assets in foreign countries, but they may not be available for many emerging market
currencies.
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10.
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A foreign subsidiary with more susceptible expenses than revenue to exchange
rate movements will be favorably affected by an appreciation of the foreign currency.
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11.
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A limitation of hedging translation exposure is that translation losses are not
tax deductible, whereas gains on forward contracts used to hedge translation exposure are
taxed.
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12.
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UK based MNCs invoicing in Asian currencies and incurring expenses in Asian
currencies were probably less affected by weakness of Asian currencies than UK-based MNCs that
invoice in Asian currencies but do not incur expenses in those currencies.
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