International Finance Chapter 18

1 Efficient cash management techniques cana) reduce the investment in cash balances and foreign exchange transaction expenses.b) provide for maximum return from the investment of excess cash.c) result in borrowing at lowest rate when a temporary cash shortage exists.d) all of the above D
2 Cash management refers toa) the decision to grant credit to customers or to remain “cash and carry”.b) the investment the firm has in transaction balances and precautionary balances.c) a domestic firm’s investment in foreign currency.d) none of the above B
3 Precautionary cash balancesa) are necessary in case the firm has underestimated the amount of cash need to cover transactions.b) are necessary to cover scheduled outflows of funds during a cash budgeting period.c) both a) and b)d) none of the above A
4 Precautionary cash balances a) represent an increasingly-important source of interest income for many MNCs.b) are necessary in case the firm has underestimated the amount needed to cover transactions. c) are synonymous with speculative cash balances.d) bone of the above B
5 Multinational cash managementa) is really no different for a MNC than for a purely domestic firm in a closed economy.b) concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC’s affiliates.c) concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC’s affiliates, since intra-affiliate default risk is not an issue.d) none of the above B
6 Good cash management boils down toa) investing excess funds at the most favorable interest rate and borrowing at the lowest rate when there is a temporary cash shortage.b) investing excess funds at the lowest rate and borrowing at the highest rate when there is a temporary cash shortage.c) hedging currency exposure with judicious use of futures, forwards, and currency option contracts.d) none of the above A
7 True or false: Many of the skills necessary for effective cash management are the same regardless of whether the firm has only domestic operations or if it operates internationally.a) Falseb) True B
8 Benefits of a multilateral netting system include:a) The decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.b) The reduction in the number of foreign exchange transactions and the associated cost of making fewer but larger transactions.c) The reduction in intracompany float, which is frequently as high as five days even for wire transfers.d) The benefits that accrue from the establishment of a formal information system, which serves as the foundation for centrally managing transaction exposure and the investment of excess funds.e) All of the above E
9 With a CENTRALIZED CASH DEPOSITORY a) There is less chance for an MNC’s funds to be denominated in the wrong currency.b) The central cash manager has a global view of the MNC’s overall cash position.c) There is less chance of mislocated fundsd) All of the above D
10 With a CENTRALIZED CASH DEPOSITORY a) a MNC can facilitate fund mobilization.b) system-wide excess cash are invested at the most advantageous rates. c) system-wide cash shortages are borrowed at the most advantageous rates. d) all of the above D
11 Not all countries allow MNCs the freedom to net payments,a) by limiting netting, more needless foreign exchange transactions flow through the local banking system.b) MNCs can avoid these restrictions by using a Centralized Cash Depository.c) MNCs can avoid these restrictions by using wire transfers.d) both b) and c) A
12 With regard to cash management systems in practice, studies suggest that the benefits of a multilateral netting system includea) the decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.b) the savings in administrative time.c) the reduction in intra company float, which is frequently as high as five days, even for wire transfers.d) all of the above D
13 Several international banks offer multilateral netting software packages. These packagesa) calculate the net currency positions of each affiliate.b) can integrate the netting function with foreign exchange exposure management.c) only work on the Mac platform.d) both a) and b) D
14 MNCs can reduce their exchange rate expensea) by using bilateral netting.b) by using a centralized cash management system.c) by using multilateral netting.d) all of the above D
16 The U.S. IRS allows transfer prices to be set using Comparable uncontrolled price method. This method requiresa) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. A
17 The U.S. IRS allows transfer prices to be set using the resale price methoda) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. B
18 The U.S. IRS allows transfer prices to be set using the cost plus approacha) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. C
19 Which will reduce the number of foreign exchange transaction the most for a MNC?a) Multilateral nettingb) Bilateral nettingc) Fish nettingd) None of the above A
20 Under multilateral nettinga) each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is the net payer or receiver.b) each pair of affiliates determines the net amount due between them, and only the net amount is transferred. c) no inter-affiliate payments are made or even computed, since no real cash flows are involved.d) all of the above A
21 One benefit of a centralized cash depository is a) the MNC’s investment in precautionary cash balances can be substantially reduced without a reduction in its ability to cover unforeseen expenses.b) each affiliate will have greater autonomy in managing its own cash balances.c) exchange rate restrictions can be easily circumvented.d) none of the above A
22 The lower the transfer pricea) the higher the net profit reported by the MNC.b) the lower the gross profit of the transferring division relative to the receiving division.c) the higher the gross profit of the receiving division relative to the transferring division.d) none of the above B
23 Multinational cash managementa) is really no different for a MNC than for a purely domestic firm in a closed economy.b) concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC’s affiliates.c) concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC’s affiliates, since intra-affiliate default risk is not an issue.d) none of the above B
24 Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency, limiting conversion to other currencies, a MNC’s frustrated remittance of profits from a subsidiary would bea) blocked funds.b) stopped funds.c) constipated funds.d) money down the toilet. A
25 On blocked funds strategy isa) transferring personnel from corporate headquarters to the subsidiary offices .b) using the national airlines of the host country when possible for the international travel of all MNC executives.c) holding business conferences of the MNC in the host country, where all expenses are paid by the local subsidiary.d) all of the above D
26 Reasons for a country to impose exchange restrictions on its own currency, limiting conversion to other currencies includea) enticing more foreign investment from MNCs.b) for a variety of reasons, the country may find itself short of foreign currency reserves.c) creating a home-grown business climate.d) all of the above B
27 Why can blocked funds can be detrimental to all concerned?a) Host countries want to attract foreign industries that benefit their economic development; blocked funds make MNCs less willing to invest.b) MNCs should not be expected to make beneficial investment where they may not be able to receive an appropriate return.c) Local competitors may be able to reap monopoly profits.d) Both a) and b) D
28 A firm keeps a precautionary cash balance to cover unexpected transactions during the budget period. The size of this balance depends on how safe the firm desires to be in its ability to meet unexpected transactions. a) The larger the precautionary cash balance, the greater is the firm’s ability to meet unexpected expenses.b) The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing. c) The larger the precautionary cash balance, the greater the potential opportunity cost.d) All of the above D
29 Some countries allow interaffiliate transactions to be settled only on a gross basis. That is, a) all receipts for a settlement period must be grouped into a single large receipt and all disbursements must be grouped into a single large payment.b) all receipts and disbursements for a settlement period must be handled individually.c) all receipts and disbursements for a settlement period must be netted against each other and then a single large payment is made.d) each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver. A
30 True or False: A central cash manager has a global view of the most favorable borrowing rates and most advantageous investment rates.a) Trueb) False A
31 True or False: A centralized cash management system with a cash pool can reduce the investment the MNC has in precautionary cash balances, saving the firm money.a) Trueb) False A

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