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business
principles of finance

Questions and Answers of Principles Of Finance

4 What is a foreign bond?
3 What is an American Depository Receipt?
2 What is a Euroequity?
1 What do integrated capital markets imply for the decision of where to raise capital?
10 Do you think the standard of living overseas has been raised by the direct investments of multinationals? Does this provide a reason for offering MNCs concessionary loans?
9 In what ways might country risk be influenced by a country’s political and economic associations and its geography?
8 Why might country risk depend on the diversity of exports as well as on the value of exports versus debt-service payments?
7 Why are risk premiums on bonds a useful way of ranking risks for direct investments, but not very useful for making bond purchasing decisions?
6 How can conflicts exist when a firm sets transfer prices for maximizing overall profits?Could these conflicts arise from differential tax rates, import tariffs, imminent changes in exchange rates,
5 Under what circumstances are market prices appropriate to use as transfer prices?
4 What are the pros and cons of setting transfer prices equal to marginal costs?
3 Which explanation(s) of the growth of MNCs is/are supported by the evidence that MNCs are relatively capital intensive?
2 Which of the reasons for the growth of MNCs do you think are the primary reasons for the development of multinationals in the following industries?a Pharmaceutical development and manufacturing b
1 What examples can you list of foreign multinationals operating in the United States?
12 What is a transnational alliance?
11 Is country risk the same for all industries and firms?
10 Why does local debt or equity help reduce country risk?
9 How does expropriation differ from confiscation?
8 How does country risk differ from sovereign risk?
7 What is meant by ‘‘country risk,’’ and how does this risk differ from political risk?
6 Can a company set any transfer prices that it wishes?
5 What is a transfer price?
4 What role do market imperfections play in FDI?
3 Why are some accounting firms multinationals?
2 What are the limitations of licences as an alternative to FDI?
1 Why might a producer want to own resources located in another country, rather than buy them in the open market?
6 How would you include depreciation allowances in the calculation of adjusted present value when the effective corporate income tax is that of the foreign country in which an investment is located?
5 How would you allow for lost income due to displaced sales from a subsidiary located in another foreign country, rather than from domestic, parent operations? Consider both exchange rate and tax
4 Compare the treatments of tax shields from debt in using the NPV and APV approaches to foreign investments.
3 Which items in the previous question are contractual and which are noncontractual?Could you discount the cash flows with a real rate of interest?
2 A US automobile manufacturer, National Motors, is considering building a new plant in Britain to produce its sports car, the Sting. The estimated construction cost of the plant is £50,000,000, and
1 Will withholding taxes that are at rates below domestic corporate tax rates affect direct investment when full withholding tax credit is available? How will withholding tax rates affect the
12 What discount rate should be used for calculating the current value of interest payments on a concessionary loan, where the payments are in terms of the foreign currency?
11 In what way is the handling of contractual foreign-currency cash flows different from the handling of noncontractual foreign-currency cash flows?
10 What is a ‘‘contractual’’ cash flow?
9 If cash flows are converted into the investor’s domestic currency, and are adjusted for inflation so they are real, what discount rate should be used?
8 What is the nature of the discount rate that is used for cash flows in the APV approach?
7 What amount of risk, total or only systematic, should be included in the all-equity discount rate used in the APV calculation?
6 How do the levels of corporate tax rates influence whether an investor’s home-country rate or the rate in the country of investment is used for calculating after-tax cash flows?
5 What is meant by ‘‘borrowing capacity’’ or ‘‘debt capacity,’’ and how is the tax shield from this incorporated into a project’s APV?
4 If blocked, or not fully repatriable, funds can be liberated by a new foreign project, how can the value of these funds to the investor be factored into a project’s APV?
3 What does concessionary lending imply for the cost of capital of a corporation enjoying the favorable terms, versus the opportunity cost of capital to shareholders?
2 Which of the two perspectives in Question 1 is the correct perspective for judging foreign direct investments?
1 It what ways can the view of a foreign investment project differ according to whether it is viewed from the perspective of the investor, or from the perspective of a project manager in the country
10 What impact might global custodians have on capital markets if they do their job cheaply and effectively?
9 How is the expected equilibrium return on bonds likely to vary with the covariance between the local-currency market value of bonds and the exchange rate?
8 Could multinationals provide a vehicle for overcoming market segmentation?
7 How might we calculate the importance of currency risk to the total risk on a an individual foreign stock?b a portfolio of foreign stocks?
6 Why might an investor who is able to diversify globally benefit if, for most other investors, capital markets are segmented?
5 What possible reasons exist for the segmentation of capital markets?
4 Why does the calculation of the risk-free rate for the ICAPM involve the use of forward contracts? Could we use any one country’s risk-free rate if covered interest-parity holds?
3 Could we judge whether markets are segmented or integrated by examining rules governing the international flow of capital?
2 Why are there gains from international diversification without hedging exchange-rate risk even though exchange rates contribute a substantial proportion of overall risk?
1 Why are the benefits from international diversification overstated if efficient portfolios are constructed on the basis of past investment returns?
12 What does a global custodian do?
11 How might multinational firms offer a vehicle for overcoming segmented capital markets?
10 How would you interpret the conclusion that returns are more closely related to systematic risk in the domestic market than to systematic risk in the international market?
9 How can the level of information cause international capital market segmentation?
8 What is meant by ‘‘home-equity bias?’’
7 How would you characterize the gains from international portfolio diversification?
6 What assumptions must be made to apply the international capital asset pricing model to an explanation of the pricing of securities?
5 What do we mean by ‘‘integrated capital markets?’’
4 What are the different components of volatility from investment in stocks of an individual foreign country?
3 How could different compositions of stock-market indexes reduce the correlation between returns on different countries’ markets?
2 Why are the correlation coefficients between different countries’ stock markets and stocks relevant for the potential benefit from international portfolio diversification?
1 What types of investments are included in ‘‘international portfolio investment?’’
10 Why do many governments restrict the maximum length of time over which firms can practise leading and lagging of accounts receivable and payable?
9 Why do multinational firms tend to use multinational banks, rather than local banks in their local markets?
8 Why might we be suspicious that any apparent covered interest arbitrage opportunity must be due to not considering transaction costs, political risk, taxes, or liquidity?
7 Will allowance for co-movement between currencies allow a firm to eliminate foreign exchange risk or foreign exchange exposure?
6 What are the differences and similarities between the gain from centralization of cash management via pooling, and the gain via diversification of different currencies?
5 Which of the gains from centralization of cash management are related to foreign exchange transaction costs?
4 What is the connection between the size of the gain from netting and the nature of long and short positions of the different divisions of a multinational firm?
3 Suppose that you face the situation in Question 2, except that the effective tax rate on interest income is 50 percent, and the effective tax rate on capital gains is 30 percent.In which
2 Suppose that as the money manager of a US firm you face the following situation:r$ rC$ S(C$/ask$) S(C$/bid$) F1/2(C$/ask$) F1/2(C$/bid$)4.20% 6.80% 1.3850 1.3830 1.4000 1.3960 rB$9.0%rI$8.0%rB C$
1 Assume that you face the following money-market and exchange-rate quotations:a Ifr$ and rC$ are respectively the per annum 6-month US dollar and Canadian dollar borrowing rates facing a US firm
8 How does liquidity preference affect international cash management decisions?
7 How can ‘‘pooling’’ provide benefits for international cash management?
6 What are the advantages of centralized cash management?
5 What is meant by ‘‘leading’’ and ‘‘lagging?’’
4 What is meant by ‘‘netting?’’
3 Why do transaction costs on spot and forward exchange reduce the incentive to borrow in a foreign-currency?
2 Why do transaction costs on spot and forward exchange reduce the incentive to invest in foreign-currency securities?
1 What are the objectives of international cash management?
10 Do huge profits by an individual speculator such as George Soros necessarily imply markets are inefficient?
9 What different interpretations can be given to the shifting of the probability distribution of beliefs about a policy regime?
8 How might low correlations of individual variables with exchange rates hide a strong relationship of many variables when included together?
7 Why can we test for market efficiency without including any variables which might influence exchange rates in our test?
6 How might you speculate on the exchange rate being less volatile than the market as a whole believes?
5 Why does forward bias depend on risk aversion?
4 Why might foreign exchange markets be efficient even if it is possible to make a positive return from using forecasting techniques?
3 If foreign exchange markets were very efficient, what would this imply about the profits from foreign exchange cash management?
2 What is the advantage of speculating with options?
1 Why might a speculator prefer speculating on the futures market to speculating with forward exchange contracts?
20 What might you deduce about what has happened to different peoples’ opinions on exchange rates from an increase in the volume of foreign exchange transactions?
19 What type of information is used in ‘‘technical’’ forecasting?
18 What problem is presented by ‘‘changing regimes’’ in a study of market efficiency?
17 What is an ‘‘event study’’ and how could it be applied to learning about what influences exchange rates?
16 Why might anticipated changes in variables appear statistically insignificant when related to exchange rates?
15 Is the correlation coefficient between the ratio of US to Japanese prices and the exchange rate of the Japanese yen per dollar, likely to be positive or negative?

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