Ch001-Globalization-and-the-Multinational-Firm

Eun/Resnick4e1Eun&Resnick4eCHAPTER1GlobalizationandtheMultinationalFirmQuestionsinthetestbankfollowtheorderofthechapteroutline:What’sSpecialaboutInternationalFinance?ForeignExchangeandPoliticalRisksMarketImperfectionsExpandedOpportunitySetGoalsforInternationalFinancialManagementGlobalizationoftheWorldEconomy:MajorTrendsEmergenceofGlobalizedFinancialMarketsEmergenceoftheEuroasaGlobalCurrencyTradeLiberalizationandEconomicIntegrationPrivatizationMultinationalCorporationsSummaryMINICASE:NikeandSweatshopLaborAPPENDIX1A:GainsfromTrade:TheTheoryofComparativeAdvantageWhat’sSpecialabout“International”Finance?1)Whatmajordimensionsetsapartinternationalfinancefromdomesticfinance?a)foreignexchangeandpoliticalrisksb)Marketimperfectionsc)Expandedopportunitysetd)alloftheaboveAnswer:d2)Anexampleofapoliticalriskisa)Expropriationofassetsb)Adversechangeintaxrulesc)Theoppositionpartybeingelectedd)a)andb)arebothcorrectAnswer:d-p.53)Productionofgoodsandserviceshasbecomeglobalizedtoalargeextentasaresultofa)Skilledlaborbeinghighlymobileb)Naturalresourcesbeingdepletedinonecountryafteranotherc)Multinationalcorporations’effortstosourceinputsandlocateproductionanywherewherecostsarelowerandprofitshigherd)CommontastesworldwideforthesamegoodsandservicesAnswer:c-p.4Eun/Resnick4e24)Recently,financialmarketshavebecomehighlyintegrated.Thisdevelopmenta)Allowsinvestorstodiversifytheirportfoliosinternationallyb)Allowsminorityinvestorstobuyandsellstocksc)Hasincreasedthecostofcapitalforfirmsd)Answersa)andc)arebothcorrect.Answer:a.seepage45)Japanhasexperiencedlargetradesurpluses.Japaneseinvestorshaverespondedtothisbya)Liquidatingtheirpositionsinstockstobuydollardenominatedbondsb)InvestingheavilyinU.S.andotherforeignfinancialmarketsc)LobbyingtheU.S.governmenttodepreciateitscurrencyd)LobbyingtheJapanesegovernmenttoallowtheyentoappreciateAnswer:b-p.46)Supposeyourfirminvests$100,000inaprojectinItaly.Atthetimetheexchangerateis$1.25=€1.00.Oneyearlatertheexchangerateisthesame,buttheItaliangovernmenthasexpropriatedyourfirm’sassetspayingonly€80,000incompensation.Thisisanexampleofa)Exchangerateriskb)Politicalriskc)Marketimperfectionsd)Noneoftheabove,since$100,000=€80,000×$1.25/€1.00Answer:b)politicalrisk—thegovernmentisonlygivingyoubackyourinitialinvestment,ifthiswasagoodinvestmentitshouldhavebeenworthmorethan$100,000ayearlater.Forexampleifyourcostofcapitalwas8%itshouldhavebeenworth$108,000.7)SupposethatGreatBritainisamajorexportmarketforyourfirm,aU.S.basedMNC.IftheBritishpounddepreciatesagainsttheU.S.dollar,a)Yourfirmwillbeabletochargemoreindollartermswhilekeepingpoundpricesstable.b)YourfirmmaybepricedoutoftheU.K.market,totheextentthatyourdollarcostsstayconstantandyourpoundpriceswillrise.c)ToprotectU.K.marketshare,yourfirmmayhavetocutthedollarpriceofyourgoodstokeepthepoundpricethesame.d)b)andc)arebothcorrect.Answer:b)andc)arebothcorrect.Seepage5.8)Mostgovernmentsatleasttrytomakeitdifficultforpeopletocrosstheirbordersillegally.Thisbarriertothefreemovementoflaborisanexampleofa)Informationasymmetryb)Excessivetransactionscostsc)Racialdiscriminationd)AmarketimperfectionAnswer:d)seepage6.Eun/Resnick4e39)Whenindividualinvestorsbecomeawareofoverseasinvestmentopportunitiesandarewillingtodiversifytheirportfoliosinternationally,a)theytradeonemarketimperfection,informationasymmetry,foranother,exchangeraterisk.b)theybenefitfromanexpandedopportunityset.c)Theyshouldnotbothertoreadortounderstandtheprospectus,sinceitsprobablywritteninaforeignlanguaged)Theyshouldinvestonlyindollarsoreuros.Answer:bseepage8.10)Nestlé,awell-knownSwisscorporation,a)Hasbeenaparagonofvirtueinitsoppositiontoallformsofpoliticalrisk.b)Atonetimeplacedrestrictionsonforeignownershipofitsstock.Whenitrelaxedtheserestrictions,thetotalmarketvalueofthefirmfell.c)Atonetimeplacedrestrictionsonforeignownershipofitsstock.Whenitrelaxedtheserestrictions,therewasamajortransferofwealthfromforeignshareholderstoSwissshareholders.d)NoneoftheaboveAnswer:c)Seepage7.GoalsforInternationalFinancialManagement11)Thegoalofshareholderwealthmaximizationa)isnotappropriatefornon-U.S.businessfirmsb)meansthatallbusinessdecisionsandinvestmentsthatafirmmakesaredoneforthepurposeofmakingtheownersofthefirmbetterofffinanciallyc)isasub-objectivethefirmshouldattempttoachieveaftertheobjectiveofcustomersatisfactionismetd)isinconflictwiththeprivatizationprocesstakingplaceinthird-worldcountriesAnswer:b-p.812)Ascapitalmarketsarebecomingmoreintegrated,thegoalofshareholderwealthmaximizationa)Hasbeenalteredtoincludeothergoalsaswell.b)Haslostouttoothergoals,evenintheU.S.c)HasbeengivenincreasingimportancebymanagersinEurope.d)Hasbeenshowntobeadeterrenttoraisingfundsabroad.Answerc)seepage813)RecentcorporatescandalsatfirmssuchasEnron,WorldComandtheItalianfirmEun/Resnick4e4Parmalata)Showthatmanagersmightbetemptedtopursuetheirownprivateinterestsattheexpenseofshareholders.b)ShowthatItalianshareholdersarebetteratmonitoringmanagerialbehaviorthanU.S.shareholders.c)Showthatwhite-collarcriminalshardlyevergetpunished.d)Showthatsocialismisabetterwaytogothancapita