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4) TrinityApps Corporation (US) has bid a price on a project for a Korean firm, but
the Korean firm has not yet placed an order. This portion of the operating cycle is best
described as the:
A) quotation period.
B) input sourcing period.
C) cash conversion cycle.
D) accounts payable cycle.
5) The period in the cash cycle where the customer places the order, and the firm
determines what materials for manufacture are NOT in inventory is called the
________ period.
A) quotation
B) input sourcing
C) accounts payable
D) accounts receivable
True/False
1) Typically, the inventory period and the accounts payable period at least partially
overlap in the firms operating cycle.
2) Typically, the inventory period and the accounts receivable period at least partially
overlap in the firms operating cycle.
3) The operating cycle begins with the quotation period and ends with the accounts
payable period.
True/False
1) In a country with a relatively high tax rate, it make sense the the MNE to reposition
cash flows TO that country.
2) The MNE would prefer to leave capital with a firm in a country with high growth
prospects over the alternative of leaving capital with a firm in a country with low
growth prospects (other factors equal).
True/False
1) Local liquidity needs sometimes impact a firm's worldwide optimal cash position.
2) The constraints on repositioning of funds that occur when exchanging one currency
for another are considered to be primarily political constraints.
3) Political constraints can block the transfer of funds either overtly or covertly.
OVERT blockage occurs when dividends or other forms of fund remittances are
severely limited, heavily taxed, or excessively delayed by the need for bureaucratic
approval.
True/False
1) If all investment inputs are unbundled, part of what might have been classified as
residual profits may turn out to be tax-deductible expenses related to a specific
purchased benefit.
True/False
1) Political risk may motivate parent firms to require foreign subsidiaries to remit all
locally generated funds above that required to internally finance growth in sales and
planned capital expansions.
TABLE 19.1
Use the information to answer following question(s).
TrinityApps Corporation Balance Sheet December 31, 20xx
5) Refer to Table 19.1. If TrinityApps increases inventory by $10,000 and A/P also by
$10,000, the net change in NWC is:
A) $20,000
B) $10,000
C) $0
D) none of the above
6) Refer to Table 19.1. NWC currently makes up what percentage of total firm value
for TrinityApps?
A) 6.6%
B) 5.1%
C) 11.8%
D) 9.2%
Instruction 19.1:
Use the information to answer the following question(s).
Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic
injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers
financing terms of a 2% discount if the accounts payable are paid in 10 days or less
with the full balance due in 45 days. Short-term financing available to Sunny
Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just
purchased $400,000 of plastic chips from Sun Chemical.
7) Refer to Instruction 19.1. What is the amount of money Sunny Manufacturing will
save on accounts payable if they accept the discount?
A) $400,000
B) $8,000
C) $33,333
D) $20,000
8) Refer to Instruction 19.1. What is the effective annual interest cost of supplier
financing offered by Sun Chemical?
A) 7.3%
B) 9.5%
C) 10.4%
D) 22.9%
9) Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered
by Sun Chemical?
A) Yes, Sunny Manufacturing will get to use their raw materials 35 days earlier than if
they waited to pay at the end of the 45 days.
B) No, Sunny Manufacturing will not have to pay any interest if they just pay in 45
days.
C) Yes, Sunny Manufacturing's short term borrowing rate of 9.6% is less than Sun's
offered cost of carry of 22.9%.
D) No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better
off paying the full amount in 45 days.
11) Amundsen of Norway receives raw materials from their corporate parent in the
U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway
where normal payment terms are net 30 days. This causes a problem for the subsidiary
with working capital management because:
A) accounts receivable are so much longer than accounts payable.
B) accounts payable are so much longer than accounts receivable.
C) accounts receivable and accounts payable are equal.
D) This doesn't really cause a problem; in fact it is to the benefit of the Norwegian
subsidiary.
True/False
2) Other things equal, managers prefer a lower "days working capital" to a higher one.
3) The authors present empirical evidence that shows the days sales basis for working
capital to be 30 days GREATER in the U.S. compared to a similar industry in Europe.
Essay
1) What is a free-trade zone? Identify three techniques and provide examples of how
firms and countries can benefit from having free trade zones.
7) ________ is the process that cancels via offset all, or part, of the debt owed by one
entity to another related entity.
A) Syndicated banking
B) Centralized depositing
C) Multilateral netting
D) Debt cancellation
True/False
1) In an inflationary economy, demand for credit usually exceeds supply.
3) Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does
not.
4) A significant problem with centralized cash depositories is that they are isolated
from the rest of the firm and tend to be at an information disadvantage.
5) A reason for holding all precautionary balances in a central pool is that the total
pool, if centralized, can be reduced in size without any loss in the level of protection.
Essay
1) Central depositories are used for international cash management. What is a central
depository? Identify and provide examples of at least three advantages to MNEs of
having a central depository.
2) An in-house bank:
A) is a separate bank chartered to operate within a business firm.
B) is in fact a set of functions performed by the firm's existing treasury department.
C) assesses the credit standing of the bank's customers.
D) provides banking services for employees.
3) A foreign banking office that is separately incorporated in the host country is:
A) a correspondent bank.
B) a representative office.
C) a bank subsidiary.
D) an Edge Act corporation.
True/False
1) An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S.
and incorporated to engage in international banking and financing operations.
2) Because they are direct payments, dividends are among the most efficient way for
foreign subsidiaries to remit funds back to the parent.
3) Even though dividends are cash payments, firms typically must consider both cash
flow and net income when making dividend distribution decisions.
3) Polaris Corporation has made an agreement to ship goods to a foreign firm with
whom they have not entered into a contract for three years. However, the firms have
communicated regularly since the last sale three years ago. This is an example of an:
A) unaffiliated known party transaction.
B) unaffiliated unknown party transaction.
C) affiliated party transaction.
D) none of the above
True/False
1) Today, international trade is dominated by transactions between unaffiliated parties
(known or unknown).
True/False
1) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a
foreign land.
True/False
1) If a foreign exchange transaction calls for payment in the importer's currency, the
exporter has the foreign exchange risk.
2) If a foreign exchange transaction calls for payment in the exporter's currency, the
importer has the foreign exchange risk.
D) The importer's bank cuts a sales contract based on its assessment of the
creditworthiness of the importer.
3) A/An ________ letter of credit is an obligation only of the issuing bank whereas
other banks honor a/an ________ letter of credit.
A) irrevocable; unconfirmed
B) revocable; confirmed
C) confirmed; irrevocable
D) unconfirmed; confirmed
4) A letter of credit that is confirmed in the ________ country has the additional
advantage of eliminating the problem of ________.
A) exporter's; portfolio risk
B) importer's; blocked foreign exchange
C) exporter's; blocked foreign exchange
D) none of the above
7) The person or company initiating the draft or bill of exchange is known as the:
A) maker.
B) drawer.
C) originator.
D) any of the above
8) The person or company to whom the draft or bill of exchange is addressed is the:
A) drawee.
B) drawer.
C) maker.
D) originator.
10) Which of the following purposes is NOT served by the bill of lading?
A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.
11) The ________ is issued to the exporter by a common carrier transporting the
merchandise.
A) bill of lading
B) draft
C) banker's acceptance
D) line of credit
12) A straight bill of lading is most likely to be used under which of the following
circumstances?
A) when the merchandise has not been paid for in advance
B) when the transaction is being financed by a bank
C) when the shipment is to an affiliate
D) none of the above
True/False
1) A letter of credit is an agreement by the bank to pay against documents rather than
the actual merchandise.
3) The major advantage of a letter of credit to the exporter is that the exporter does not
receive any funds until the documents have arrived at a local port or airfield.
4) To constitute a true letter of credit transaction, the issuing bank must receive a fee
or other valid business consideration for issuing the L/C.
5) To constitute a true letter of credit transaction, the bank's L/C must contain a
specified expiration date or a definite maturity.
8) A sight draft is payable on presentation to the drawee; a time draft allows a delay in
payment.
10) A time draft is payable on presentation to the drawee; the drawee must pay at once
or dishonor the draft. A sight draft, allows a delay in payment.
11) The bill of lading is issued to the exporter by a common carrier transporting the
merchandise. It serves three purposes: a receipt, a contract, and a document of title.
Essay
1) Explain what a letter of credit (L/C) is, who the principle parties are, what the
principle advantage is, and how the L/C facilitates international trade.
True/False
1) Because of the risks involved in international trade, most transactions follow
conventional methods and rarely require flexibility or creativity on the part of
management.
Comment: Few international transactions are typical and often require flexibility or
creativity on the part of management.
Instruction 20.1:
Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing
equipment to Landcaster's of Australia. Because the two companies have never done
business with each other, Cypress requires a banker's acceptance as payment for the
$1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and
payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the
bankers acceptance to its bank, the discount rate is 1.00% per annum.
3) Refer to Instruction 20.1. What is the size of the discount (not including the
commission fee) Cypress must take for receiving the proceeds of the sale today rather
than waiting for six months?
A) $7,000
B) $5,000
C) $12,000
D) $14.000
4) Refer to Instruction 20.1. What is the size of the commission Cypress will pay the
bank for the banker's acceptance?
A) $7,000
B) $5,000
C) $12,000
D) $14,000
5) Refer to Instruction 20.1. What is the total Cypress can expect to receive if the firm
takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000
7) Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270
days. The firm has been approached by a factoring firm that offers to purchase the
receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause.
What is the annualized percentage all-in-cost of this factoring alternative?
A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%
True/False
1) The Foreign Credit Insurance Association is a branch of the U.S. federal
government.
3) Essentially, the Eximbank lends dollars to borrowers inside the United States for
the purchase of U.S. goods and services.
4) Banker's acceptances can be used to finance only international trade receivables but
not domestic trade receivables.
Essay
1) What is a banker's acceptance? How are they initiated? Why are they desirable for
the exporter?
True/False
1) In effect, the forfaiter functions both as a money market firm and a specialist in
packaging financial deals involving country risk.