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1
FundamentalsofMultinationalFinance,3e(Moffett)
Chapter22WorkingCapitalManagement
22.1MultipleChoiceandTrue/FalseQuestions
1)Workingcapitalmanagementinvolvesthemanagementof
A)currentandlongtermassets.
B)currentassetsandcurrentliabilities.
C)currentliabilitiesandlongtermassets.
D)currentliabilitiesandlongtermdebtandequity.
Answer:B
Topic:WorkingCapitalManagement
Skill:Recognition
2)Thecashconversioncycle
A)isasubsetoftheoperatingcycle.
B)occursinthelatterstagesoftheoperatingcycle.
C)isasubsetoftheaccountsreceivableperiod.
D)alloftheabove.
Answer:D
Topic:CashConversionCycle
Skill:Recognition
3)Theproperorderofeventsfortheoperatingcycleis
A)inputservingperiod,accountsreceivableperiod,inventoryperiod,quotationperiod.
B)quotationperiod,accountsreceivableperiod,inventoryperiod,inputservicingperiod.
C)quotationperiod,inputservicingperiod,inventoryperiod,accountsreceivableperiod.
D)accountsreceivableperiod,inputservicingperiod,quotationperiod,inventoryperiod.
Answer:C
Topic:OperatingCycle
Skill:Recognition
4)PolarisCorporation(US)hasbidapriceonaprojectforaKoreanfirm,buttheKoreanfirmhasnotyetplacedanorder.Thisportionoftheoperatingcycleisbestdescribedasthe
A)quotationperiod.
B)inputsourcingperiod.
C)cashconversioncycle.
D)accountspayablecycle.
Answer:A
Topic:QuotationPeriod
Skill:Conceptual
5)Theperiodinthecashcyclewherethecustomerplacestheorder,andthefirmdetermineswhatmaterialsformanufacturearenotininventoryiscalledthe________period.
A)quotation
B)inputsourcing
C)accountspayable
D)accountsreceivable
Answer:B
Topic:InputSourcingPeriod
Skill:Recognition
2
6)Theaccountspayableperiodoftheoperatingcycle
A)isequaltotheinventoryperiod.
B)mayrunconcurrentlybutshorterthantheinventoryperiod.
C)mayrunconcurrentlybutlongerthantheinventoryperiod.
D)anyoneoftheabovemaybetrue.
Answer:D
Topic:AccountsPayablePeriod
Skill:Recognition
7)AccordingtoGAAP,goodsshippedwithaforeigncurrency-denominatedinvoiceusethe________torecordthevalueofthesaleinthelocalcurrency.
A)beginningoftheyearexchangerate
B)averageyear-to-dateexchangerate
C)spotrateonthedayofthetransaction
D)actualspotrateattimeoffuturepayment
Answer:C
Topic:TransactionExposure
Skill:Conceptual
8)Onepossibledefinitionofnetworkingcapital(NWC)providedbyyourauthorsis
A)NWC=A/R+inventory-A/P.
B)NWC=cash+A/P-inventory.
C)NWC=A/P+A/R-short-termloans.
D)NWC=A/R+inventory-long-termdebt.
Answer:A
Topic:NWC
Skill:Recognition
9)WhichofthefollowingactionswillresultinanincreaseinNWC?
A)anincreaseinA/PthatexceedsanincreaseinA/R
B)areductionininventory
C)areductioninA/PplusasmallerreductioninA/R
D)anincreaseinA/Pandasmallerreductionininventory
Answer:C
Topic:NWC
Skill:Conceptual
10)Whichofthefollowingstatementsistrue?
A)A/Rprovidepartofthefundingforinventory.
B)A/PprovidepartofthefundingforA/Randinventory.
C)InventorypaysforA/RandA/P.
D)Noneoftheaboveistrue.
Answer:B
Topic:NWC
Skill:Conceptual
11)Inprinciple,thefirmtriestominimizeitsNWCbalance.Answer:TRUE
Topic:NWC
Skill:Recognition
TABLE22.1
Usetheinformationtoanswerfollowingquestion(s).
PolarisCorporationBalanceSheetDecember31,20xx
12)RefertoTable22.1.TheNWCforPolarisis________.
A)$80,000
B)$680,000
C)$35,000
D)$45,000
Answer:D
Topic:NWC
Skill:Analytical
13)RefertoTable22.1.IfPolarisincreasesinventoryby$10,000andA/Palsoby$10,000,thenetchangeinNWCis________.
A)$20,000
B)$10,000
C)$0
D)noneoftheabove
Answer:C
Topic:NWC
Skill:Analytical
14)RefertoTable22.1.NWCcurrentlymakesupwhatpercentageoftotalfirmvalueforPolaris?
A)6.6%
B)5.1%
C)11.8%
D)9.2%
Answer:A
Topic:NWC
Skill:Analytical
3
4
Instruction22.1:
Usetheinformationtoanswerfollowingquestion(s).
SureDripIrrigationSystemsInc.issuppliedwithplasticchipsfortheirplasticinjectionmoldingmanufacturingprocess.Theirsupplier,SunChemical,Inc.offersfinancingtermsofa2%discountiftheaccountspayablearepaidin10daysorlesswiththefullbalanceduein45days.Short-termfinancingavailabletoSureDripisavailableatanannualrateof9.6%.SureDriphasjustpurchased$400,000ofplasticchipsfromSunChemical.
15)RefertoInstruction22.1.WhatistheamountofmoneySureDripwillsaveonaccountspayableiftheyacceptthediscount?
A)$400,000
B)$8,000
C)$33,333
D)$20,000
Answer:B
Topic:Discounts
Skill:Analytical
16)RefertoInstruction22.1.WhatistheeffectiveannualinterestcostofsupplierfinancingofferedbySunChemical?
A)7.3%
B)9.5%
C)10.4%
D)22.9%
Answer:D
Topic:InterestCostofSupplierFinancing
Skill:Analytical
17)RefertoInstruction22.1.ShouldSureDriptakethediscountofferedbySunChemical?
A)Yes,SureDripwillgettousetheirrawmaterials35daysearlierthaniftheywaitedtopayattheendofthe45days.
B)No,SureDripwillnothavetopayanyinterestiftheyjustpayin45days.
C)Yes,SureDrip'sshorttermborrowingrateof9.6%islessthanSun'sofferedcostofcarryof22.9%.
D)No,itcostsSureDrip22.9%toacceptthediscountandtheyarebetteroffpayingthefullamountin45days.
Answer:C
Topic:InterestCostofSupplierFinancing
Skill:Analytical
18)Daysworkingcapitalisequalto
A)dayspayables+daysreceivables-daysinventory.
B)daysinventory+daysreceivables-dayspayables.
C)dayspayables+daysinventory+daysreceivables.
D)noneoftheabove.
Answer:B
Topic:DaysWorkingCapital
Skill:Analytical
5
19)Otherthingsequal,managerspreferalower"daysworkingcapital"toahigherone.Answer:TRUE
Topic:DaysWorkingCapital
Skill:Conceptual
20)AmundsenofNorwayreceivesrawmaterialsfromtheircorporateparentintheU.S.withpaymenttermsofnet60days.MostoftheirsalesaretofirmsinNorwaywherenormalpaymenttermsarenet30days.Thiscausesaproblemforthesubsidiarywithworkingcapitalmanagementbecause
A)accountsreceivablearesomuchlongerthanaccountspayable.
B)accountspayablearesomuchlongerthanaccountsreceivable.
C)accountsreceivableandaccountspayableareequal.
D)thisdoesn'treallycauseaproblem;infactitistothebenefitoftheNorwegiansubsidiary.
Answer:D
Topic:DaysWorkingCapital
Skill:Conceptual
21)Domesticsalesarealmostalwaysdenominatedinthelocalcurrency,butinternationalsalesmaybedenominatedin
A)theexporter'scurrency.
B)theimporter'scurrency.
C)athirdcountry'scurrency.
D)anyoftheabove.
Answer:D
Topic:CurrencydenominationofSales
Skill:Recognition
22)________maydeterminethecurrencyusedfortransactionsininternationalsales?
A)Custom
B)Competition
C)Bargainingandnegotiation
D)Anyoftheabove
Answer:D
Topic:CurrencydenominationofSales
Skill:Recognition
23)Otherthingsequal,afirmwouldratherhave________inadepreciatingcurrency,and________inanappreciatingcurrency.
A)accountsreceivable;accountspayable
B)accountsreceivable;accountsreceivable
C)accountspayable;accountsreceivable
D)noneoftheabove
Answer:C
Topic:CashManagementStrategies
Skill:Conceptual
24)Inaninflationaryeconomy,demandforcreditusuallyexceedssupply.Answer:TRUE
Topic:Inflation
Skill:Conceptual
6
25)TheEuropeanshaveapopularliquiddiscountablebilloriginatingwiththeCodeNapoleonandbackedbyaccountsreceivablecalled
A)banker'sacceptances.
B)selfliquidatingbills.
C)commercialpaper.
D)negotiablecertificatesofdeposit.
Answer:B
Topic:SelfliquidatingBills
Skill:Recognition
26)Japanesemarketsarenotedfortheirshortmaturitypaymentterms(lessthan20days),andthegeneralreluctanceofthemanufacturertosupplyanytypeofcredittocustomers.Answer:FALSE
Topic:JapaneseCreditTerms
Skill:Recognition
27)Firmsmightbetemptedtoorder________inventoryfromforeignsourcesiftheythoughttheircurrencywasabouttobe________.
A)less;devalued
B)extra;revalued
C)extra;devalued
D)noneoftheabove
Answer:C
Topic:HomeCurrencyDevaluation
Skill:Conceptual
28)Firmswhosecurrencyisprimefordevaluationmaychoosetopurchaseextrainventoryfromforeignsourcesbeforethedevaluationoccurs.WhichofthefollowingisNOTapotentialproblemassociatedwithsuchapractice?
A)Asaresultofholdingextrainventory,thefirmnowhasextrasales.
B)Asaresultofdevaluation,thelocalgovernmentmayfreezethepriceatwhichthefirmcansellitsinventory.
C)Thedevaluationdoesn'toccurandthefirmnowexperiencesadditionalstoragecosts.
D)Alloftheabovearepotentialproblems.
Answer:A
Topic:HomeCurrencyDevaluation
Skill:Conceptual
29)Freetradezonesmaytaketheformof
A)warehousesforimportedgoods.
B)assemblyplantsforimportedparts.
C)manufacturingplantsforreexport.
D)alloftheabove.
Answer:D
Topic:FreetradeZone
Skill:Recognition
7
30)WhichofthefollowingisNOTaprecautionarymotiveforholdingcash?
A)AnticipatedfundstoberemittedfromseveralMiddleEastcountriesareinquestionduetounrestintheregion.
B)Thefirmhasseveralshorttermobligationsinunhedgedforeigncurrencydenominatedcontracts.
C)Thefirmmustpayordinarywagesintwodays.
D)Allareprecautionarymotives.
Answer:C
Topic:CashManagement
Skill:Conceptual
31)Increasestocashflowscanbeanticipatedifwhichofthefollowingoccurs?
A)Areceivablescontractisdenominatedinanappreciatingforeigncurrency.
B)Salesarelessthananticipated.
C)Daysinaccountsreceivableincreaseby15days.
D)Noneoftheabove.
Answer:A
Topic:CashManagement
Skill:Recognition
32)Fordisbursementpurposes,itistothebenefitofthefirmtominimizefloat.Answer:FALSE
Topic:CashManagement
Skill:Recognition
33)WhichofthefollowingisNOTafunctioncoveredbyinternationalcashmanagement?
A)maximizinginterestearnedonidleinternationalcashbalances
B)manipulatingtransferprices
C)repositioningoffundswithinthemultinationalfirm
D)investingsurpluscashheldwithinthesystem
Answer:B
Topic:CashManagement
Skill:Conceptual
34)Acentralizeddepositorybenefitsthefirmprimarilyby
A)reducingthecostofrepatriatingfunds.
B)positioningprofitswheretaxesarelowest.
C)reducingthetotalamountofcapitalemployedwithinthetotalfirm.
D)earningahigherrateofreturnthanindomesticbankingdeposits.
Answer:C
Topic:CentralDepository
Skill:Recognition
35)TheClearingHouseInterbankPaymentSystem(CHIPS)is
A)thelargestpubliclyoperatedpaymentssystemintheworld.
B)ownedandoperatedbytheworldssevenlargestcentralbanks.
C)acomputerizednetworkthatconnectsbanksglobally.
D)noneoftheabove.
Answer:C
Topic:CHIPS
Skill:Recognition
8
36)TheSocietyforWorldwideFinancialTelecommunications(SWIFT)isaninterbankcommunicationssystemthatcarriesover1.0billionmessagesperyear.
Answer:TRUE
Topic:SWIFT
Skill:Recognition
37)________isNOTanadvantageprovidedtoMNEsbyacentraldepository.
A)Obtaininginformation
B)Holdingprecautionarycashbalances
C)Reducinginterestratecosts
D)Allareadvantages
Answer:D
Topic:CentralDepository
Skill:Recognition
38)AnorganizationalstructureemployedbyanMNEtoreduceitsuseofbanklendingforthesupportofoperationsis
A)acentralizeddepository.
B)areinvoicingcenter.
C)acostcenter.
D)asyndicatedbank.
Answer:A
Topic:CentralDepository
Skill:Recognition
39)Afreetradezoneallowstheuserto
A)avoidpayingimportduties.
B)reducenetcashflowexposedduetonettingoffundsbetweenaffiliates.
C)reducetaxandtariffbillsbecauseofreinvoicing.
D)postponeimportduties.
Answer:D
Topic:FreetradeZone
Skill:Conceptual
40)________istheprocessthatcancelsviaoffsetall,orpart,ofthedebtowedbyoneentitytoanotherrelatedentity.
A)Syndicatedbanking
B)Centralizeddepositing
C)Multilateralnetting
D)Debtcancellation
Answer:C
Topic:MultilateralNetting
Skill:Recognition
9
41)WhichofthefollowingisNOTacorrespondentbankingservice?
A)acceptingbankdrafts
B)honoringlettersofcredit
C)furnishingcreditinformational
D)Alloftheabovearecorrespondentbankactivities.
Answer:D
Topic:CorrespondentBanking
Skill:Recognition
42)Inatwocountry,twocurrencyinternationaloperation,anaffiliateincountry"A"needingmoreofitsowncurrencycan
A)borrowlocally.
B)exporttoanaffiliateandreceivefundsfromthataffiliate.
C)obtainfundsfromacentralpool,whichinturnmightborrowanyofseveralcurrenciesandexchangethemforcurrency"A."
D)alloftheabove.
Answer:D
Topic:SourcesofCurrency
Skill:Conceptual
43)Aprecautionarycashbalance
A)isusedtoreplacespoiledordamagedinventory.
B)isheldtofacilitatecashdisbursementswhenreceiptsslowdown.
C)isusedfornormaldaytodayoperations.
D)isheldforthebenefitofasisteraffiliate.
Answer:B
Topic:PrecautionaryCashBalance
Skill:Conceptual
44)Acashpoolis
A)excesscashheldcentrallyforasetofaffiliates,inordertobeinvestedonmorefavorableterms.
B)cashheldinapoolingofinterestbankaccount.
C)thecurrencyusedforfunctionalreporting.
D)cashroutedthroughtwoormoreaffiliatestoavoidtaxes.
Answer:A
Topic:CashPool
Skill:Recognition
45)A/An________isalocallyincorporatedbankownedinpartbutnotnecessarilycontrolledbyaforeignparent.
A)bankingaffiliate
B)EdgeActCorporation
C)internationalbranchbank
D)banksubsidiary
Answer:A
Topic:BankingAffiliate
Skill:Recognition
10
46)AnEdgeActcorporationisasubsidiaryofaU.S.banklocatedoutsideoftheU.S.andincorporatedtoengageininternationalbankingandfinancingoperations.
Answer:FALSE
Topic:EdgeActCorporation
Skill:Recognition
47)Aninhousebank
A)isaseparatebankcharteredtooperatewithinabusinessfirm.
B)isinfactasetoffunctionsperformedbythefirm'sexistingtreasurydepartment.
C)assessesthecreditstandingofthebank'scustomers.
D)providesbankingservicesforemployees.
Answer:B
Topic:InhouseBank
Skill:Conceptual
48)Aforeignbankingofficethatisseparatelyincorporatedinthehostcountryis
A)acorrespondentbank.
B)arepresentativeoffice.
C)abanksubsidiary.
D)anEdgeActcorporation.
Answer:C
Topic:BankSubsidiary
Skill:Recognition
49)TheadvantagestounbundlingofcashflowsfromasubsidiarytoaparentincludeallofthefollowingEXCEPT:
A)itemsthatmayhavebeenclassifiedasresidualprofitsareviewedastaxdeductibleexpenses.
B)thefacilitationofallocatingsharedservices(i.e.,overhead).
C)thefacilitationoflocalcapitalintojointventureprojects.
D)Alloftheabovearelegitimatereasonsforunbundlingcashflowsbetweenaparentandsubsidiary.
Answer:D
Topic:SubsidiaryCashFlows
Skill:Recognition
50)WhichofthefollowingwouldmostlikelyNOTbeconsideredanaftertaxcostinthehostcountrywhenunbundlingcashflowsfromasubsidiarytoaforeignparent?
A)paymentsofinteresttoaparentforintrafirmdebt
B)paymentstoparentforgoodsorservices
C)paymentsofdividendstotheparent
D)paymentsforcopyrightsortrademarks
Answer:C
Topic:SubsidiaryCashFlows
Skill:Conceptual
51)Becausetheyaredirectpayments,dividendsareamongthemostefficientwayforforeignsubsidiariestoremitfundsbacktotheparent.
Answer:FALSE
Topic:SubsidiaryDividends
Skill:Conceptual
11
52)Eventhoughdividendsarecashpayments,firmstypicallymustconsiderbothcashflowandnetincomewhenmakingdividenddistributiondecisions.
Answer:TRUE
Topic:SubsidiaryDividends
Skill:Conceptual
53)Dividendsarethemosttaxefficientwaytorepatriatefundsbecausetheyaredistributedonanaftertaxbasis.
Answer:FALSE
Topic:TaxPolicy
Skill:Recognition
54)FortheMNEarepositioningofprofitshelpsthefirmrealizegreateraftertaxprofitsfromthesameamountofsales.
Answer:TRUE
Topic:TaxPolicy
Skill:Recognition
55)________arecompensationfortheuseofintellectualpropertybelongingtosomeotherparty.
A)Royaltyfees
B)Licensefees
C)Remittancefees
D)Repositioningfees
Answer:A
Topic:Royaltyfees
Skill:Recognition
56)WhichofthefollowingareNOTtechniquesusedtomanagethecrossbordercashsettlementprocesses?
A)wiretransfers
B)cashpooling
C)paymentnetting
D)Alloftheabovearetechniquesusedinthesettlementprocess
Answer:D
Topic:Crossbordercashsettlement
Skill:Recognition
57)OnereasonNOTtoincludeaccountspayable(A/P)whencalculatingNWCisbecauseA/Pdonotincreasespontaneouslywithoperations.
Answer:TRUE
Topic:NetWorkingCapital
Skill:Recognition
12
22.2EssayQuestions
1)Whatisafreetradezone?Identifythreetechniquesandprovideexamplesofhowfirmsandcountriescanbenefitfromhavingfreetradezones.
Answer:Freetradezonesarelocationswithinacountrywhereforeignfirmscanstore,assemble,ormanufacturegoodswithoutpayinganimportdutyuntilthegoodsareactuallydistributed.TheauthorsprovidetheexampleofToyotaMotorCorporationexportingcarstotheUnitedStatesandstoringthematafacilityinLosAngeles.ThisallowsToyotatocollectaninventoryofcarsinthestatesandtobemorereadilyabletomeetconsumerdemandforspecificmodels.However,theydonotpayanyimportdutyuntilthecarsaremovedfromthefreetradezone.
AsecondexampleprovidedbytheauthorsisthatofMercedesassemblingautomobilesinAlabama.Again,thepartsareshippedtoAlabamawithoutbeingassessedanimportdutyuntiltheassembledcarsaredistributed.Andthen,eventhoughthecarsareafinishedproducts,thedutyisassessedata
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