Practice Questions-International Financial Management Jeff Madura- Ch1-6
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Global Finance
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Far Eastern University
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International Financial Management
This file includes practice questions for International Financial Management Jeff Madura- Ch1-6 inclusive of True or False and Multiple Choice Questions.
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Chapter 1—Multinational Financial Management: An Overview
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
2. With regard to corporate goals, an MNC is mostly concerned 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
3. For the MNC, agency costs are typically:
a. non-existent.
b. larger than agency costs of a small purely domestic firm.
c. smaller than agency costs of a small purely domestic firm.
d. the same as agency costs of a small purely domestic firm.
ANS: B
4. Which of the following could reduce agency problems 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
5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to
____ and when foreign currencies denominating these cash flows are expected to ____.
a. decrease; appreciate
b. increase; appreciate
c. decrease; depreciate
d. increase; depreciate
ANS: B
6. Which of the following theories identifies specialization 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
7. Which of the following theories identifies the non-transferability 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
,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
9. Which of the following industries would most likely take 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
10. Due to the risks involved in international business, firms should:
a. only consider international business in major countries.
b. maintain international business to no more than 20% of total business.
c. maintain international business to no more than 35% of total business.
d. none of the above
ANS: D
11. A product cycle is the process by which a firm provides a specialized sales or service strategy, support
assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
a. True
b. False
ANS: B
12. Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or
trade names) in exchange for fees or some other specified benefits.
a. True
b. False
ANS: A
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
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
15. The Sarbanes-Oxley Act improves corporate governance of MNCs because it:
a. makes executives more accountable for verifying financial 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 can spend
ANS: A
,16. MNCs can improve their internal control process by all 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 where interest rates are lowest
d. using a system that checks internal data for unusual discrepancies
ANS: C
17. Franchising is the process by which national governments sell state owned operations to corporations
and other investors.
a. True
b. False
ANS: B
18. The parent of MNC can implement compensation plans that directly reward the subsidiary managers
for enhancing the value of the MNC.
a. True
b. False
ANS: A
19. If a publicly-traded MNC's managers make poor decisions that reduce its value, it may encourage
other firms to acquire it.
a. True
b. False
ANS: A
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: B
21. In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur
____ fixed production costs and ____ transportation costs than DFI.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher
ANS: D
22. Which of the following is an example of direct foreign 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 stocks.
ANS: C
23. According to the text, a disadvantage of licensing is that:
a. it prevents a firm from importing.
b. it is difficult to ensure quality control of the production process.
c. it prevents a firm from exporting.
d. none of the above
ANS: B
, 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
25. Imperfect markets represent conditions under which factors of production are immobile.
a. True
b. False
ANS: A
26. The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an
internal reporting process that could be easily monitored by executives and the board of directors.
a. True
b. False
ANS: A
27. If markets were perfect, then labor and other costs of production would be perfectly stable (no
movement across borders).
a. True
b. False
ANS: B
28. The valuation of an MNC is reduced if the required return on its investments in foreign countries is
reduced.
a. True
b. False
ANS: B
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
30. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____.
a. a specialized sales or service strategy; its technology
b. its technology; a specialized sales or service strategy
c. its technology; its technology
d. a specialized sales or service strategy; a specialized sales or service strategy
e. its technology; an initial investment
ANS: B
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
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