Description

FINC 6367 Final Exam – Question and Answers

1. How many methods of foreign currency translation have been used in recent years? (U.S. GAAP.)
2. The underlying principle of the current/noncurrent method is
3. The underlying principle of the monetary/nonmonetary method is
4. The underlying principle of the temporal method is
5. With regard to research on the stock price reaction to mandated accounting changes, such as FASB 52,
6. A highly inflationary economy is defined in FASB 52 as
7. With regard to translation exposure versus operating exposure
8. Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called
9. Banking tends to be
10. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A’s correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.
11. An offshore banking center is
12. Eurocurrency:
13. ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from now. What could they do to hedge?
14. Proceeding the Asian crisis,
15. “Samurai” bonds are
16. Because do not have to meet national security regulations, name recognition of the issuer is an extremely important factor in being able to source funds in the international capital market.
17. S. corporations:
18. Find the present value of a 30-year bond that pays an annual coupon, has a coupon rate of 6 percent, a yield to maturity of 5 percent, a par value of €1,000 when the yield to maturity is 5 percent.
19. A five-year floating-rate note has coupons referenced to six-month dollar LIBOR, and pays coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period’s coupon rate on a $1,000 face value FRN will be:
20. Zero-coupon bonds issued in 2016 are due in 2026. If they were originally sold at 55 percent of face value, the implied yield to maturity at issuance is
21. A potentially significant factor in slowing or preventing a deterioration of sovereign creditworthiness in times of stress is (are)
22. S&P Global Ratings has, for years, provided credit ratings on international bonds.
23. Market makers in the secondary bond market
24. On the NYSE, limit order prices receive preference in establishing the posted bid and ask prices if they are more favorable than the specialist’s. Therefore,
25. The secondary equity markets of the world serve two major purposes. They provide
26. A “primary” stock market is
27. A measure of liquidity for a stock market is the turnover ratio; defined as
28. Global Registered Shares
29. In the Frankfurt market, Aldi stock closed at €5 per share. On the same day, the euro U.S. dollar spot exchange rate was €.625/$1.00. Aldi trades as an ADR in the OTC market in the United States. Five underlying Aldi shares are packaged into one ADR. The no-arbitrage U.S. price of one ADR is
30. Studies examining the influence of industrial structure on foreign equity returns
31. Suppose the quote for a five-year swap with semiannual payments is 8.50–8.60 percent. This means
32. Suppose ABC Investment Banker Ltd., is quoting swap rates as follows: 7.50 − 7.85 annually against six-month dollar LIBOR for dollars, and 11.00 percent−11.30 percent annually against six-month dollar LIBOR for British pound sterling. ABC would enter into a $/£ currency swap in which:
33. Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00 × (1.08)/£1.00 × (1.06) = $2.0377/£1. Their external borrowing opportunities are:
34. Nominal differences in currency swaps
35. In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because
36. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR.
37. Systematic risk is
38. With regard to the OIP,
39. Which of the following is a true statement?
40. Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels
41. The record of investing in U.S.-based MNCs
42. The majority of ADRS
43. James K. Silber, an avid international investor, just sold shares of Nestlé, a Swiss firm, for CHF6455. The shares were bought for CHF4856 a year ago. The USD/CHF rate is 1.023 now and was 0.997 a year ago. Mr. Silber received CHF180 as a cash dividend immediately before the shares were sold. Suppose that Mr. Silber sold CHF4856, his principal investment amount, forward at the forward exchange rate of 1.046. Compute the total return on this investment in terms of U.S. dollars. (X.XX%) (including the gain/loss from the hedge)
44. Suppose we obtain the following data in dollar terms:

The correlation coefficient between the two markets is 0.40. Suppose that you invest equally, i.e., 50% each, in the two markets. Determine the expected return of the resulting international portfolio. (X.XX%)

45. Honda’s decision to build a plant in Ohio
46. Alternatives to firms locating production overseas include
47. Firms that have intangible assets with a public good property tend to invest directly in foreign countries. This is
48. What kind of integration is vertical integration?
49. Whether or not cross-border acquisitions produce synergistic gains and how such gains are divided between acquiring and target firms
50. Once a MNC decides to undertake a foreign project, it can take various measures to minimize its exposure to political risk. These include
51. Solve for the weighted average cost of capital.
52. Suppose that the firm’s cost of capital can be reduced from K l under the local capital structure to K g under an internationalized capital structure. The take-away lesson from the graph is that
53. The pricing-to-market phenomenon
54. With regard to the financial structure of a foreign subsidiary
55. Correlation Coefficients

The above table provides the correlations among Telmex, a telephone/communication company located in Mexico, the Mexico stock market index, and the world market index, together with the standard deviations ( SD ) of returns and the expected returns E(R). The risk-free rate is 4.1%. Compute the domestic country beta of Telmex (X.XX) 

56. Tiger Towers, Inc. is considering an expansion of their existing business, student apartments. The new project will be built on some vacant land that the firm has just contracted to buy. The land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are $75,000 per year. The project will require a $10,000 investment in net working capital. What is the unlevered after-tax incremental cash flow for year 0?
57. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year’s income. The yield to maturity on your firm’s existing debt is 8 percent. What is the €-denominated NPV of this project? I did not round my intermediate steps, if you did, select the answer closest to yours.
58. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK) Year 1 NOK10,000,000 Year 2 NOK15,000,000 Year 3 NOK17,000,000 Year 4 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 What is the net present value of the Norwegian project? Format X,XXX,XXX [a]
59. An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K. The business risk will be identical to the firm’s existing line of business in the euro zone, the cost of capital in the euro zone is i€ = 10%. The expected inflation rate over the next two years in the U.K. is 3% per year and 2% per year in the euro zone. The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00. The pound sterling denominated cash flows are as follows: The pound sterling denominated cash flows are as follows:
60. An investment in China yields these expected after-tax renminbi cash flows (in billions).
61. The required return on equity for an all-equity firm is 10.0 percent. They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40 percent, the pre-tax cost of debt is 8 percent. Find the new cost of capital if this firm changes capital structure.
62. Tiger Towers, Inc. is considering an expansion of their existing business, student apartments. The new project will be built on some vacant land that the firm has just contracted to buy. The land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are $75,000 per year. The project will require a $10,000 investment in net working capital.
63. The Beta Corporation has an optimal debt ratio of 39 percent. Its cost of equity capital is 11.1 percent and its before-tax borrowing rate is 4.4 percent. Given a marginal tax rate of 34 percent, calculate the cost of equity for an equivalent all-equity financed firm. (X.XX%)
64. The current spot USD/HUF exchange rate is 295.57. Long-run inflation in Hungary is estimated at 8.9 percent annually and 3.9 percent in the United States. If PPP is expected to hold between the two countries, what spot exchange should one forecast 6 years into the future? (XXX.XX)