MIB Master of International Business: Multinational Financial Management 5 — Questions and Answers
Question 1: When evaluating a foreign direct investment project, the 'adjusted present value' (APV) method separates project value into:
- Operating cash flows discounted at WACC plus terminal value
- Base-case NPV assuming all-equity financing plus PV of financing side effects (Correct answer)
- Nominal and real cash flow components
- Pre-tax and post-tax cash flow streams
Correct answer: Base-case NPV assuming all-equity financing plus PV of financing side effects
APV calculates the project's NPV as if entirely equity-financed, then adds the present value of financing benefits such as the tax shield on debt and subsidized loans.
Question 2: A US firm with a euro payable in 90 days buys a euro call option as a hedge. The maximum cost of the hedge is:
- The forward premium on the euro
- The option premium paid upfront (Correct answer)
- The difference between spot and forward rates
- The interest rate differential for 90 days
Correct answer: The option premium paid upfront
With an option hedge, the worst-case cost is the premium paid; if rates move favorably, the firm can let the option expire and buy euros at the better spot rate.
Question 3: Which scenario illustrates 'leading and lagging' as a technique for managing intra-firm currency exposure?
- Accelerating payment of a payable in a currency expected to appreciate (Correct answer)
- Entering a forward contract before the invoice date
- Netting payables against receivables across subsidiaries
- Invoicing exports in the home currency only
Correct answer: Accelerating payment of a payable in a currency expected to appreciate
Leading means accelerating payment of a payable in a strengthening currency to avoid paying more later; lagging means delaying payment of a payable in a weakening currency.
Question 4: The 'eurocurrency market' refers to:
- The foreign exchange market for euro-denominated transactions
- Deposits and loans denominated in currencies held outside their country of origin (Correct answer)
- The European Central Bank's interbank lending facility
- Bond markets within the European Union
Correct answer: Deposits and loans denominated in currencies held outside their country of origin
Eurocurrency markets involve bank deposits and loans in currencies held outside the country that issues them (e.g., USD deposits in London banks), free from domestic banking regulations.
Question 5: A global firm wants to minimize worldwide tax on intercompany royalty payments. Under the arm's length principle, royalty rates should be set based on:
- The rate that minimizes the subsidiary's taxable income in high-tax jurisdictions
- Comparable royalty rates charged between unrelated parties for similar intellectual property (Correct answer)
- A fixed percentage mandated by the OECD Model Tax Convention
- The parent's cost of developing the intellectual property only
Correct answer: Comparable royalty rates charged between unrelated parties for similar intellectual property
The arm's length principle requires that intercompany royalty rates reflect what unrelated parties would negotiate for comparable IP in comparable circumstances.
Question 6: Under the BEPS (Base Erosion and Profit Shifting) framework, Action 13 introduced which requirement for large multinationals?
- Mandatory arbitration for transfer pricing disputes
- Country-by-Country Reporting (CbCR) disclosing revenue, profits, and taxes paid per jurisdiction (Correct answer)
- A global minimum corporate tax rate of 15%
- Automatic exchange of tax rulings between OECD members
Correct answer: Country-by-Country Reporting (CbCR) disclosing revenue, profits, and taxes paid per jurisdiction
BEPS Action 13 requires large MNCs to file Country-by-Country Reports showing key financial data for every tax jurisdiction in which they operate, enhancing tax authority oversight.
Question 7: A multinational's subsidiary generates positive NPV but cash is trapped by capital controls. Which repatriation technique avoids direct dividend restrictions?
- Declaring a special dividend payable in local currency bonds
- Charging management fees, royalties, or interest on intercompany loans to shift funds to the parent (Correct answer)
- Reinvesting all profits in local government securities
- Converting blocked funds to cryptocurrency for transfer
Correct answer: Charging management fees, royalties, or interest on intercompany loans to shift funds to the parent
MNCs often use arm's length management fees, royalty payments, and intercompany loan interest to move cash from subsidiaries in countries with dividend restrictions.
MIB Master of International Business: Multinational Financial Management 5
When evaluating a foreign direct investment project, the 'adjusted present value' (APV) method separates project value into: