Ch001GlobalizationandtheMultinationalFirm.docx

Ch001GlobalizationandtheMultinationalFirm.docx

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Ch001GlobalizationandtheMultinationalFirm

Eun&Resnick4e

CHAPTER1GlobalizationandtheMultinationalFirm

Questionsinthetestbankfollowtheorderofthechapteroutline:

What’sSpecialaboutInternationalFinance?

ForeignExchangeandPoliticalRisks

MarketImperfections

ExpandedOpportunitySet

GoalsforInternationalFinancial

Management

GlobalizationoftheWorldEconomy:

MajorTrends

EmergenceofGlobalizedFinancialMarkets

EmergenceoftheEuroasaGlobalCurrency

TradeLiberalizationandEconomicIntegration

Privatization

MultinationalCorporations

Summary

MINICASE:

NikeandSweatshopLabor

APPENDIX1A:

GainsfromTrade:

TheTheoryof

ComparativeAdvantage

What’sSpecialabout“International”Finance?

1）Whatmajordimensionsetsapartinternationalfinancefromdomesticfinance?

a）foreignexchangeandpoliticalrisks

b）Marketimperfections

c）Expandedopportunityset

d）alloftheabove

Answer:

d

2）Anexampleofapoliticalriskis

a）Expropriationofassets

b）Adversechangeintaxrules

c）Theoppositionpartybeingelected

d）a）andb）arebothcorrect

Answer:

d-p.5

3）Productionofgoodsandserviceshasbecomeglobalizedtoalargeextentasaresultof

a）Skilledlaborbeinghighlymobile

b）Naturalresourcesbeingdepletedinonecountryafteranother

c）Multinationalcorporations’effortstosourceinputsandlocateproductionanywherewherecostsarelowerandprofitshigher

d）Commontastesworldwideforthesamegoodsandservices

Answer:

c-p.4

4）Recently,financialmarketshavebecomehighlyintegrated.Thisdevelopment

a）Allowsinvestorstodiversifytheirportfoliosinternationally

b）Allowsminorityinvestorstobuyandsellstocks

c）Hasincreasedthecostofcapitalforfirms

d）Answersa）andc）arebothcorrect.

Answer:

a.seepage4

5）Japanhasexperiencedlargetradesurpluses.Japaneseinvestorshaverespondedtothisby

a）Liquidatingtheirpositionsinstockstobuydollardenominatedbonds

b）InvestingheavilyinU.S.andotherforeignfinancialmarkets

c）LobbyingtheU.S.governmenttodepreciateitscurrency

d）LobbyingtheJapanesegovernmenttoallowtheyentoappreciate

Answer:

b-p.4

6）Supposeyourfirminvests$100,000inaprojectinItaly.Atthetimetheexchangerateis$1.25=€1.00.Oneyearlatertheexchangerateisthesame,buttheItaliangovernmenthasexpropriatedyourfirm’sassetspayingonly€80,000incompensation.Thisisanexampleof

a）Exchangeraterisk

b）Politicalrisk

c）Marketimperfections

d）Noneoftheabove,since$100,000=€80,000×$1.25/€1.00

Answer:

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.Thisbarriertothefreemovementoflaborisanexampleof

a）Informationasymmetry

b）Excessivetransactionscosts

c）Racialdiscrimination

d）Amarketimperfection

Answer:

d）seepage6.

9）Whenindividualinvestorsbecomeawareofoverseasinvestmentopportunitiesandarewillingtodiversifytheirportfoliosinternationally,

a）theytradeonemarketimperfection,informationasymmetry,foranother,exchangeraterisk.

b）theybenefitfromanexpandedopportunityset.

c）Theyshouldnotbothertoreadortounderstandtheprospectus,sinceitsprobablywritteninaforeignlanguage

d）Theyshouldinvestonlyindollarsoreuros.

Answer:

bseepage8.

10）Nestlé,awell-knownSwisscorporation,

a）Hasbeenaparagonofvirtueinitsoppositiontoallformsofpoliticalrisk.

b）Atonetimeplacedrestrictionsonforeignownershipofitsstock.Whenitrelaxedtheserestrictions,thetotalmarketvalueofthefirmfell.

c）Atonetimeplacedrestrictionsonforeignownershipofitsstock.Whenitrelaxedtheserestrictions,therewasamajortransferofwealthfromforeignshareholderstoSwissshareholders.

d）Noneoftheabove

Answer:

c）Seepage7.

GoalsforInternationalFinancialManagement

11）Thegoalofshareholderwealthmaximization

a）isnotappropriatefornon-U.S.businessfirms

b）meansthatallbusinessdecisionsandinvestmentsthatafirmmakesaredoneforthepurposeofmakingtheownersofthefirmbetterofffinancially

c）isasub-objectivethefirmshouldattempttoachieveaftertheobjectiveofcustomersatisfactionismet

d）isinconflictwiththeprivatizationprocesstakingplaceinthird-worldcountries

Answer:

b-p.8

12）Ascapitalmarketsarebecomingmoreintegrated,thegoalofshareholderwealthmaximization

a）Hasbeenalteredtoincludeothergoalsaswell.

b）Haslostouttoothergoals,evenintheU.S.

c）HasbeengivenincreasingimportancebymanagersinEurope.

d）Hasbeenshowntobeadeterrenttoraisingfundsabroad.

Answerc）seepage8

13）RecentcorporatescandalsatfirmssuchasEnron,WorldComandtheItalianfirmParmalat

a）Showthatmanagersmightbetemptedtopursuetheirownprivateinterestsattheexpenseofshareholders.

b）ShowthatItalianshareholdersarebetteratmonitoringmanagerialbehaviorthanU.S.shareholders.

c）Showthatwhite-collarcriminalshardlyevergetpunished.

d）Showthatsocialismisabetterwaytogothancapitalism.

Answera）seepage9.

14）WhilethecorporategovernanceproblemisnotconfinedtotheUnitedStates,

a）Itcanbeamuchmoreseriousprobleminmanyotherpartsoftheworld,wherelegalprotectionofshareholdersisweakornonexistent.

b）IthasreacheditshighpointintheUnitedStates.

c）TheU.S.legalsystem,withlawsuitsusedonlyasalastresort,ensuredthatanyconflictsofinterestwillsoonbeathingofthepast.

d）Noneoftheabove

Answer:

a）seepage9.

15）Theownersofabusinessarethe

a）Taxpayers

b）Workers

c）Suppliers

d）Shareholders

Answer:

d）

16）Themassiveprivatizationthatiscurrentlytakingplaceinformerlysocialistcountries,willlikely

a）eventuallyenhancethestandardoflivingtothesecountries’citizens

b）dependonprivateinvestment

c）increasetheopportunitysetfacingthesecountries’citizens

d）alloftheabove

Answer:

d）Seepage10.

17）Afirmwithconcentratedownership

a）Maygiverisetoconflictsofinterestbetweendominantshareholdersandsmalloutsideshareholders.

b）Mayenjoymoreaccountingtransparencythanfirmswithdiffuseownershipstructures.

c）Isapartnership,neveracorporation.

d）TendstoexistoverseasbutnotintheU.S.

Answer:

d）Seepage9.

18）Theultimateguardiansofshareholderinterestinacorporation,arethe

a）Rankandfileworkers

b）Seniormanagement

c）Boardsofdirectors

d）Alloftheabove

Answer:

c）Seepage9.

19）IncountrieslikeFranceandGermany,

a）Managershaveoftenmadebusinessdecisionswithregardmaximizingmarketsharetotheexclusionofothergoals.

b）Managershaveoftenviewedshareholdersasoneofthe“stakeholders”ofthefirm,othersbeingemployees,customers,suppliers,banksandsoforth.

c）Managershaveoftenregardedtheprosperityandgrowthoftheircombines,orfamiliesofrelatedfirms,astheircriticalgoal.

d）Managershavetraditionallyembracedthemaximizationofshareholderwealthastheonlyworthygoal.

Answer:

b）seepage9.

20）Whencorporategovernancebreaksdown

a）Shareholdersareunlikelytoreceivefairreturnsontheirinvestments

b）Managersmaybetemptedtoenrichthemselvesatshareholderexpense

c）Theboardofdirectorsisnotdoingitsjob

d）Alloftheabove

Answer:

d）

GlobalizationoftheWorldEconomy

21）Privatizationreferstoprocessof:

a）Havinggovernmentoperatebusinessesforthebettermentofthepublicsector

b）Governmentallowingtheoperationofprivatelyownedbusiness

c）Prohibitinggovernmentoperatedenterprises

d）Acountrydivestingitselfoftheownershipandoperationofabusinessventurebyturningitovertothefreemarketsystem

Answer:

d-p.14

22）Deregulationofworldfinancialmarkets

a）Providedanaturalenvironmentforfinancialinnovations,likecurrencyfuturesandoptions.

b）Haspromotedcompetitionamongmarketparticipants.

c）HasencourageddevelopingcountriessuchasChile,Mexico,andKoreatoliberalizebyallowingforeignerstodirectlyinvestintheirfinancialmarkets.

d）Alloftheabove

Answer:

dseepage10.

23）Theemergenceofglobalfinancialmarketsisdueinnosmallpartto

a）Advancesincomputerandtelecommunicationstechnology

b）RigorousenforcementoftheSovietsystemofstateownershipofresourcesofproduction.

c）Governmentregulationandprotectionofinfantindustries.

d）Noneoftheabove.

Answer:

a）Seepage11.

24）Theeuro

a）isthecommoncurrencyofEurope

b）isdivisibleinto100cents,justliketheU.S.dollar

c）mayeventuallyhaveatransactiondomainlargerthantheU.S.dollar

d）Alloftheabove.

Answer:

d）seepage11.

25）SinceitsinceptiontheeurohasbroughtaboutrevolutionarychangesinEuropeanfinance.Forexample

a）Byredenominatingcorporatebondsandstocksfrom12differentcurrenciesintoonecommoncurrency,theeurohasprecipitatedtheemergenceofcontinentwidecapitalmarketsinEuropethatarecomparabletoU.S.markets