31. Mercury Co. has a subsidiary based in Italy and is exposed to translation ex
ID: 2666844 • Letter: 3
Question
31. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely
32. According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:
a. would compete with local firms of the host country.
b. would produce a good not currently available in the host country.
c. would produce a good and export it to other countries.
d. B and C
33. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
e. B and C
34. An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively
35. _____________________ is not a revenue-related motive for direct foreign investment (DFI).
a. Attracting new sources of demand
b. Fully benefiting from economies of scale
c. Exploiting monopolistic advantages
d. Reacting to trade restrictions
e. Diversifying internationally
36. Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
a. $238,584.
b. $240,000.
c. $234,000.
d. $236,127.
Hint: Steps are: Borrow, Convert, Invest
37. The primary purpose of country risk analysis when applied to capital budgeting is usually to:
a. measure the effect of country risk on sales.
b. measure the effect of country risk on cash flows.
c. measure the effect of country risk on the consolidated balance sheet.
d. measure the effect of country risk on the consolidated income statement.
38. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?
a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
d. B and C
Explanation / Answer
31. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely
the currency appreciated, so Mercury had more in terms of its own currency
32. According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:
a. would compete with local firms of the host country.
b. would produce a good not currently available in the host country.
c. would produce a good and export it to other countries.
d. B and C
the bottom line is that it does not want the firm to compete with its own producers; otherwise, if it's profitable, why not?
33. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
e. B and C
if one goes up, the other goes down - currencies have inverse relationships
34. An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively
invest more = get more :)
35. _____________________ is not a revenue-related motive for direct foreign investment (DFI).
a. Attracting new sources of demand
b. Fully benefiting from economies of scale
c. Exploiting monopolistic advantages
d. Reacting to trade restrictions
e. Diversifying internationally
all of the other options are related directly to revenue
36. Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
a. $238,584.
b. $240,000.
c. $234,000.
d. $236,127.
Hint: Steps are: Borrow, Convert, Invest
37. The primary purpose of country risk analysis when applied to capital budgeting is usually to:
a. measure the effect of country risk on sales.
b. measure the effect of country risk on cash flows.
c. measure the effect of country risk on the consolidated balance sheet.
d. measure the effect of country risk on the consolidated income statement.
balance sheet calculates - among other things - capital
38. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?
a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
d. B and C
Japanese currency is now worth less than American, but they can't buy as much. The British are better off selling to the Americans, who can buy more than the Japanese because their currency is worth more.
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