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18/01/2019 03:27:42 PM

Sample Questions for Exam-International Finance-ADP

Economics and Finance International Finance
Sample Questions for Final Exam
Disclaimer:
This practice exam covers a selection of the types of questions that may be asked in the final
exam. It should not be taken as being exhaustive as to the topics that could be included in the
exam.
Part A (This section is worth 60% of credit of final exam and is equal to 30% of credit for the course.
There are 20 questions in this section. Each question in this section is worth 1.5% of grade).
Answer all questions:
1. Which of the following is NOT a contributing factor to the segmentation of capital markets?
(a) Excessive regulatory control.
(b) Perceived political risk.
(c) Anticipated foreign exchange risk.
(d) All of the above are contributing factors.
2. Portland Forest Products Inc. has a cost of debt of 8%, the risk-free interest rate is 3.5% and the
expected return on the market portfolio is 8.5%. Portland’s effective tax rate is 30% and its
optimal capital structure is 40% debt and 60% equity. If Portland has a beta of 1.2, what is the
firm’s weighted average cost of capital?
(a) 7.34% (b) 10.46%
(c) 7.94% (d) 8.90%
3. Brachman Builders is a large international construction firm that wants to raise up to $60 million
to finance expansion. Brachman desires to maintain a capital structure that is 50% debt and 50%
equity. Brachman can finance in the domestic and international markets at the rates listed in the
following table. Both debt and equity would have to be sold in multiples of $15 million, and these
cost figures show the component costs, each, of debt and equity if raised half by equity and half by
debt.
Cost of Domestic
Equity
Cost of Domestic Debt Cost of
European
Equity
Cost of European
Debt
Up to $30 million of
new capital
10% 8% 12% 6%
$31 million to $60 million
of new capital
16% 10% 14% 8%
What is the lowest possible average cost of capital for Brachman if the firm raises $30 million,
maintains their desired capital structure and they are in a 30% tax bracket?
(a) 4.90% (b) 7.00%
(c) 8.10% (d) 7.10%
4. A firm whose equity has a beta of 1.0
(a) has greater systematic risk than the market portfolio.
(b) stands little chance of surviving in the international financial market place.
(c) has less systematic risk than the market portfolio.
(d) None of the above is true.
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5. The following data apply to KL after raising equity abroad: International risk free return is 4%,
International beta for KL is 0.7, and international market return is 8.0%. What is KL’s cost of
equity?
(a) 5.6% (b) 6.8%
(c) 6.0% (d) 10.8%
6. Assume the following information:
Current spot rate of New Zealand dollar US$.41
Forecasted spot rate of New Zealand dollar 1 year from now US$.43
One-year forward rate of the New Zealand dollar US$.42
Annual interest rate on New Zealand dollars 8%
Annual interest rate on U.S. dollars 9%
Given the information in this question, the return from covered interest arbitrage by U.S. investors
with $500,000 to invest is _______%.
(a) about 10.63
(b) about 9.63
(c) about 11.12
(d) about 11.97
7. Which of the following is NOT an item to be considered in BOP calculations?
(a) Purchase of a U.S. Treasury Bill by a foreigner.
(b) A U.S.-based firm manages the development of an oil field in Kazakhstan.
(c) A domestic resident has a haircut.
(d) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case of LaBatt’s
Canadian beer.
8. If most major economies are operating under a regime of fixed exchange rates, then a
___________ in a country’s balance of payments suggests that the country should ____________
its currency.
(a) surplus; revalue (b) surplus; devalue
(c) deficit; revalue (d) All of the above
9. A Canadian-based investor purchases a Standard & Poors 500 index (SPY) on the American Stock
Exchange, in U.S. dollars. Over the course of the year the U. S. dollar appreciates 8% against
the Canadian dollar, and the S&P Index rises 22%. The total return to the Canadian investor in
Canadian dollar terms is approximately ________.
(a) 8% (b) 14%
(c) 22% (d) 30%
10. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50)
for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the
purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration
date. The highest net profit possible for the speculator based on the information above is:
(a) $1,562.50
(b) -$1,562.50
(c) -$1,250.00
(d) -$625.00
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11. TropiKana Inc. has just borrowed €1,000,000 to make improvements to an Italian fruit plantation
and processing plant. If the interest rate is 7.00% per year and the Euro appreciates against the
dollar from $1.15/€ at the time the loan was made to $1.20/€ at the end of the first year, how
much interest will TropiKana pay at the end of the first year (rounded)?
(a) $70,000 (b) $84,000
(c) $58,333 (d) $80,500
12. Blocked funds are cash flows that
(a) come in regular intervals in standardized amounts or blocks.
(b) have been restricted in transfer out of a local country.
(c) come from a certain sector or region of the world.
(d) None of the above
13. Government authorities are more likely to allow subsidiary repayment of a loan to a large
international bank than to a parent firm because:
(a) Stopping payment to an international bank would have a negative impact on the credit image
of the country.
(b) The government is also borrowing money from that bank and wants a larger loan before they
choose to default.
(c) Corrupt government officials have accounts at the bank and they have made an under-the-table
agreement not to withhold funds from that bank.
(d) None of the above is true.
14. Which of the following statements is true?
(a) International diversification benefits induce investors to demand foreign securities.
(b) An international security adds value to a portfolio if it reduces risk without reducing return.
(c) Investors will demand a security that adds value.
(d) All of the above are true.
15. Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is
located ________________ the efficient frontier.
(a) to the left of (b) to the right of
(c) on (d) to the right or left of
16. The owner-specific advantages of OLI must be
(a) firm-specific.
(b) not easily copied.
(c) transferable to foreign subsidiaries.
(d) All of the above
17. A ______________ is establishing a production or service facility from the ground up.
(a) joint venture (b) licensing agreement
(c) greenfield investment (d) wholly-owned facility
18. Which of the following combinations of cost and control reflect the choice of a greenfield foreign
direct investment?
(a) high cost, high control (b) medium cost, high control
(c) low cost, high control (d) high cost, low control
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19. Based on this table of correlation coefficients of real dollar returns from 1900–2000, which two
countries appear to provide the greatest amount of benefit from diversification?
U.S. U.K. Japan Germany
U.S.
U.K. 0.55
Japan 0.21 0.33
Germany 0.12 –0.01 0.06
(a) The U.S. and U.K.
(b) Japan and Germany
(c) The U.K. and Germany
(d) Because all of the numbers are less than 1.0 there are no benefits to diversification.
20. A/n __________would be an example of an internalization advantage for an MNE.
(a) patent
(b) economy of scale
(c) unique source of raw materials
(d) possession of proprietary information