CH 11 Multiple Choice 1.

Change in the value of future cash flows due to unexpected changes in exchange rates is called ____ to currency risk. a. economic exposure b. operating exposure c. transaction exposure d. translation exposure e. none of the above

2.

Change in financial accounting statements arising from unexpected changes in currency values is called ____ to currency risk. a. economic exposure b. operating exposure c. transaction exposure d. translation exposure e. none of the above

3.

Change in the value of contractual cash flows due to unexpected changes in currency values is called ____ to currency risk. a. economic exposure b. operating exposure c. transaction exposure d. translation exposure e. none of the above

4.

Change in the value of noncontractual cash flows due to unexpected changes in currency values is called ____ to currency risk. a. economic exposure b. operating exposure c. transaction exposure d. translation exposure e. none of the above

5.

Operating cash flows that are exposed to currency risk are affected primarily by ____. a. changes in domestic inflation b. changes in foreign inflation c. changes in nominal exchange rates d. changes in real exchange rates e. none of the above

6.

Monetary cash flows that are exposed to currency risk are affected primarily by ____. a. changes in domestic unemployment b. changes in foreign unemployment c. changes in nominal exchange rates d. changes in real exchange rates e. none of the above

7.

When goods markets are segmented from other markets, goods prices are determined ____. a. in foreign markets b. in the global market c. in the local market d. all of the above e. none of the above

8.

The classic exporter has ____. a. both revenues and expenses that are determined globally b. both revenues and expenses that are determined locally c. revenues that are determined locally and expenses that are determined globally d. revenues that are determined globally and expenses that are determined locally e. none of the above

9.

The classic importer has ____. a. both revenues and expenses that are determined globally b both revenues and expenses that are determined locally c revenues that are determined locally and expenses that are determined globally d revenues that are determined globally and expenses that are determined locally e none of the above

10. The globally competitive multinational corporation typically has ____. a. both revenues and expenses that are determined globally b. both revenues and expenses that are determined locally c. revenues that determined locally and expenses that are determined globally d. revenues that determined globally and expenses that are determined locally e. none of the above

11. The ____ is positively exposed to the real value of the domestic currency. a. classic exporter b. classic importer c. typical domestic firm d. globally competitive firm

e. none of the above 12. The ____ is negatively exposed to the real value of the domestic currency. a. classic exporter b. classic importer c. typical domestic firm d. globally competitive firm e. none of the above

13. Price elasticity of demand is defined as minus the percentage change in ____. a. interest rates for a given change in money supply b. money supply for a given change in interest rates c. price for a given percentage change in quantity demanded d. quantity demanded for a given percentage change in price e. none of the above

14. Exposure to currency risk ____. a. can be thought of as a regression coefficient b. cannot be measured by conventional methods c. is equal to the price elasticity of demand d. is equal to the variability of currency values e. is equal for all companies

15. Operating exposure to currency risk is most effectively managed by ____. a. hedging with currency forwards or futures b. hedging with currency options c. hedging with real assets d. hedging with virtual assets e. none of the above 16. A disadvantage of real asset hedges is that ____. a. bid-ask spreads can be large b. daily marking to market can cause cash flow mismatches c. option premiums can be large d. they come in only a limited number of currencies and maturities e. they involve substantial sunk costs

17. ____ are relatively insensitive to currency fluctuations. a. Domestic firms b. Exporters c. Importers d. Inbred corporations

e. Multinational corporations 18. Exposure to currency risk is measured as the percentage change in ____. a. currency values given a percentage change in exchange rates b. exchange rates given a percentage change in currency values c. exchange rates given a percentage change in value d. value given a percentage change in exchange rates e. None of the above

19. The domestic currency value of a monetary cash flow denominated in a foreign currency changes ____ with a change in the value of the foreign currency. a. disproportionately b. the currency of denomination c. not at all d. one for one e. none of the above 20. The domestic currency value of an expected future operating cash flow denominated in a foreign currency changes ____ with a change in the value of the foreign currency. a. disproportionately b. the currency of denomination c. not at all d. one for one e. none of the above 21. Shareholders exposure to currency risk is equal to ____. a. assets less liabilities b. credits less debits c. net monetary assets plus real assets d. the sum of transaction exposure and operating exposure e. none of the above 22. An exporters financial market hedging alternatives include each of a) through c) except ____. a. Buy the foreign currency with long-dated forward contracts. b. Use currency swaps to acquire financial liabilities in the foreign currency. c. Use a rolling hedge to repeatedly sell the foreign currency. d. More than one of the above e. None of the above 23. An importers financial market hedging alternatives include each of a) through d) except ____. a. Buy the foreign currency with long-dated forward contracts. b. Invest in long-dated foreign bonds.

c. Use currency swaps to acquire financial assets in the foreign currency. d. Use a rolling hedge to repeatedly sell the foreign currency. e. none of the above

24. Managers should assess the performance of financial market hedges of operating exposures by ____. a. assessing the interaction of operating performance with exchange rate changes b. varying pro forma operating performance within reasonable limits c. varying the exchange rate and assessing the resulting competitive position of the firm d. more than one of the above e. none of the above 25. Operational hedges can create value by ____. a. reducing agency costs. b. reducing expected taxes c. reducing costs of financial distress d. more than one of the above e. none of the above 26. The main advantage of a financial market hedge of operating exposure to currency risk is that ____. a. financial market hedges can completely cancel operating exposures to currency risk b. financial market transactions are zero-NPV transactions c. the costs of buying or selling financial instruments are low compared to the costs of investing or disinvesting in real assets d. the uncertain cash flows of operating exposures to currency risk are exactly offset by the uncertain outcomes of a financial market hedge e. none of the above 27. Dimensions of diversification that can reduce variability in the multinational corporations operating cash flows include ____. a. currency and geographic diversification b. currency and product market diversification c. geographic and product market diversification d. currency and virtual diversification e. none of the above

28. Multinational corporations have an advantage over domestic firms in their ____. a. market selection and promotion strategies b. plant location decisions c. product sourcing decisions d. more than one of the above e. none of the above

29. A Dutch exporter with dollar revenues and euro expenses has a foothold in the U.S. market. The companys competitors are domestic U.S. firms that have revenues and expenses denominated in dollars. Sensible pricing strategies that the Dutch exporter can pursue in response to an appreciation of the dollar include which of a) through c)? a. Maintain the current euro price for their goods, try to sell the same quantity in the U.S. market, and capture a bigger contribution margin per unit. b. Maintain the current dollar price for their goods and try to increase profits by increasing sales volume at the current contribution margin. c. Follow the lead of the price leader in the U.S. market. d. more than one of the above e. none of the above

30. The percent of the variation in asset value that is explained by variation in a currency value is called the ____. a. beta b. price elasticity of demand c r-square d. slope coefficient e. none of the above CH 12 Multiple Choice 1. Translation accounting methods include each of a) through d) except the ____ method. a. current/noncurrent b. temporal c. monetary/nonmonetary d. current rate e. all of the above are translation accounting methods The temporal method of FAS #8 identifies each of a) through c) except ____. a. assets and liabilities are translated at historical exchange rates b. depreciation and cost of goods sold are translated at historical exchange rates c. income statement items are translated at an average exchange rate over the period d. all of the above are elements of FAS #8 e. none of the above are elements of FAS #8

2.

3.

Net exposed assets equal ____. a. assets less liabilities b. exposed assets less exposed liabilities c. shareholders equity d. more than one of the above e. none of the above

4.

FAS #52 specifies each of the following rules except ____. a. all assets and liabilities (including common equity) are translated at the current exchange rate b. dividends paid are translated at the current exchange rate c. income statement items are translated at an exchange rate (or an exchange rate average) from the reporting period d. all of the above are elements of FAS #52 e. none of the above are elements of FAS #52

5.

To maximize shareholder wealth, managers should only hedge translation exposure if it ____. a. affects the total risk of the firm b. involves accounting profits c. involves cash flows d. is convenient e. none of the above FAS #8 assumes that the value of the firms real assets are ____ to currency risk. FAS #52 assumes that the value of the firms real assets are ____ to currency risk. a. fully exposed...partially exposed b. fully exposed...unexposed c. partially exposed...fully exposed d. partially exposed...unexposed e. unexposed...fully exposed

6.

7.

Accountants and financial managers prefer FAS #52 to FAS #8 because FAS #52 ____. a. allows balance sheet gains or losses to be isolated from reported income b. correctly values current assets and liabilities c. values real assets at historical rates that more reliably reflect asset value d. more than one of the above e. none of the above

8.

The relation of stock returns to earnings surprises around the time of corporate earnings announcements is measured with ____. a. a beta coefficient b. an earnings response coefficient c. the price elasticity of demand d. the sensitivity of share price to exchange rates e. none of the above Information-based reasons for hedging translation exposure include each of the following except ____.

9.

a. b. c. d. e.

The quality of accounting information can be improved. Meeting profit forecasts retains managements credibility in the marketplace Information costs can be reduced in a perfect market. Credit ratings are tied to accounting performance rather than cash flow. Loan covenants are tied to accounting income.

10. In the United States, FAS #133 Accounting for Derivative Instruments and Hedging Activities requires each of a) through d) except ____. a. Derivatives are assets and liabilities that should be reported in financial statements. b. Market value is the most relevant measure of value. c. Only assets and liabilities should be reported as such. Income and expenses should be reported on the income statement. d. Hedge transactions should be fully capitalized on the balance sheet. e. FAS #133 requires all of the above 11. In the United States, FAS #133 Accounting for Derivative Instruments and Hedging Activities values financial derivatives at ____. a. book value b. historical cost c. historical exchange rates d. market e. none of the above 12. Which of the following is a reasonable guideline for currency risk management. a. All noncash currency risk exposures should be hedged with currency derivatives. b. Do not hedge unless the purpose is to reduce translation exposure to currency risk. c. Treasury should hold the managers of individual operating units responsible for the consequences of unexpected changes in currency values. d. Treasury should quote market prices for currency hedges to the individual units. e. None of the above

13. Adverse selection costs arise from ____. a. differential taxes b. information asymmetries c. large bid-ask spreads d. the perfect market assumptions e. none of the above 14. Bodnar, Hayt, and Marstons 1998 Wharton Survey of Financial Risk Management by U.S. Non-Financial Firms in Financial Management found that financial officers biggest concern regarding derivatives was ____. a. accounting treatment

b. c. d. e.

credit risk reaction by analysts or investors SEC disclosure requirements secondary market liquidity

15. According to studies cited in the text, increased disclosure about financial price risks and risk management activities results in each of the following except ____. a. higher trading volumes b. increased risks of litigation over accounting disclosure practices c. increased share price sensitivity to underlying financial prices d. lower trading volume sensitivity to changes in underlying financial prices e. lower bid-ask spreads CH 13 Multiple Choice 1. a. b. c. d. e. According to the text, sources of country risk include ____. expropriation risk and default risk expropriation risk and other political risks financial risk and socioeconomic risk political risk and financial risk political risk and socioeconomic risk

2. a. b. c. d.

Political risks arise because of ____.

investment agreements between MNCs and host governments the methods used to identify particular political risks unexpected events in a countrys financial, economic, or business life unexpected changes in the political environment within a host country or in the relationship of a host country to another country e. none of the above 3. a. b. c. d. e. Country risk can affect the value of a multinational corporation through ____. changes in future cash flows changes in investors required return on investment changes in managers actions more than one of the above none of the above

4. a. b. c. d. e. 5. a. b. c. d. e.

Companies that rate country risk ____. produce country risk ratings that are positively correlated with each other produce country risk ratings that are negatively correlated with each other produce country risk ratings that are uncorrelated with each other seldom provide assessments of micro risks use Morgan Stanley Dean Witters rating system to produce their ratings Examples of macro country risks include each of the following except ____. unexpected changes in a host countrys tax rates unexpected changes in a host countrys fiscal policies unexpected changes in a host countrys monetary policies unexpected changes in a host countrys bankruptcy or ownership laws unexpected changes in a host countrys regulations on the use of migrant workers

6.

Political risk includes each of the following except ____. a. expropriation b. potential loss of intellectual property rights c. protectionism d. risks arising from dealing with an unfamiliar culture e. the risk of disruptions in operations

7. a. b. c. d. e.

Political risk is greatest ____. in monarchies in democracies as a result of armed conflict when there is a marginal (or fractional) change in government when an incumbent political party imposes its agenda on foreign-based MNCs

8. a. b. c. d. e.

Blocked funds are a drain on project value when ____. a project suffers early losses they are blocked in the host economy they are generated by real assets they cannot be immediately repatriated to the parent corporation they cannot earn their required return in the host country

9.

Intellectual property rights include each of the following except ____. a. copyrights b. monopoly access to a market c. patents d. proprietary technologies e. secret formulas

10. Macroeconomic factors that affect country risk assessments include each of the following except ____. a. currency risk b. expropriation c. inflation d. interest rate risk 11. Qualitative factors that affect country risk assessments include each of the following except ____. a. cancellations of contracts by a host government b. currency risk c. loan defaults or restructurings d. losses from exchange controls e. payment delays

12. The text describes each of the following strategies for managing country risk except ____. a. disclose material risks in the firms financial statements b. negotiate the environment with the host country. c. obtain political risk insurance. d. plan for disaster recovery. e. structure operations to minimize the MNCs risk exposure and maximize return.

13. Insurable political risks possess each of a) through d) except ____. a. A large number of individuals or businesses are exposed to the risk. b. The expected loss over the life of the contract is estimable. c. The loss is identifiable in time, place, cause, and amount. d. The loss is outside the influence of the insured. e. Insurable political risks possess more than one of the above. 14. Political risk insurance can be obtained on which of a) through c)? a. currency incontrovertibility b. expropriation c. repatriation restrictions d. more than one of the above e. none of the above 15. Much of the 1990s growth in political risk insurance was due to ____. a. increasing political uncertainty in developed countries b. increasing political uncertainty in developing countries c. the collapse of the Iron Curtain d. the withdrawal of private insurers from the market e. the growth in project finance

16. Ways to limit the MNCs exposure to country risk include which of a) through d)? a. enlist local partners b. limit dependence on a single partner c. limit the scope of the technology transfer d. use more stringent investment criteria e. more than one of the above

17. A ____ can be obtained on processes, products, machines, and new chemical compounds. a. copyright b. patent c. trademark d. trade secret e. none of the above

18. A ____ prohibits the unauthorized reproduction of creative works including books, magazines, drawings, paintings, musical compositions, and sound and video recordings. a. copyright b. patent c. trademark d. trade secret e. none of the above 19. A ____ is a distinctive name, word, symbol, or device used to distinguish a companys goods or services from those of its competitors. a. copyright b. patent c. trademark d. trade secret e. none of the above

20. A ____ is a proprietary idea, process, formula, technique, or device that a company uses to its competitive advantage. a. copyright b. patent c. trademark d. trade secret e. none of the above CH 14 Multiple Choice

1.

Expected future cash flows are estimated by ____ only incremental cash flows and ____ all opportunity costs. a. including; including b. including; excluding c. excluding; including d. excluding; excluding e. none of the above

2.

Nominal cash flows in a foreign currency should be discounted ____. a. at a nominal discount rate in the foreign currency b. at a rate reflecting the parents opportunity cost of capital in the domestic currency c. at a weighted average cost of capital d. at the cost of debt e. at the cost of equity

3.

Which of the following is false? a. Cash flows in a particular currency should be discounted in that currency. b. Cash flows should be discounted at the opportunity cost of capital. c. Cash flows to equity should be discounted at the weighted average cost of capital. d. Nominal cash flows should be discounted at nominal discount rates. e. Real cash flows should be discounted at real discount rates.

4.

Which of steps a) through d) is inappropriate when discounting foreign currency cash flows using the parents perspective? a. Estimate expected future cash flows from the project in the foreign currency and put them on a time line. b. Convert expected future cash flows into the domestic currency at the current spot exchange rate. c. Identify the appropriate risk-adjusted discount rate in the domestic currency for the project. d. Calculate the NPV in the domestic currency. e. Each of the above is appropriate. If a project has a positive NPV from both the parents and the projects perspective, then the parent firm should ____. a. accept the project b. reject the project c. accept the project and try to capture the value in the foreign currency today d. reject the project and continue to look for positive-NPV projects in the foreign currency e. none of the above

5.

6.

If a project has a positive NPV from the parents perspective but a negative NPV from the projects perspective, then the parent firm should ____. a. accept the project b. reject the project c. accept the project and try to capture the value in the foreign currency today d. reject the project and continue to look for positive-NPV projects in the foreign currency e. none of the above If a project has a negative NPV from the parents perspective but a positive NPV from the projects perspective, then the parent firm should ____. a. accept the project b. reject the project c. accept the project and try to capture the value in the foreign currency today d. reject the project and continue to look for positive-NPV projects in the foreign country e. none of the above If a project has a positive NPV but the NPV is greater from the projects than from the parents perspective, then the parent firm should ____. a. accept the project b. reject the project c. accept the project and hedge the foreign currency cash flows d. reject the project and continue to look for positive-NPV projects in the foreign country e. none of the above A project has a net present value of NPV = 10,000. In order to invest in the project, the German government requires that you undertake another project with the following cash flow stream: CF0 = -5000, E[CF1] = 1000, E[CF2] = 1000, and E[CF3] = 1000. The appropriate discount rate for this project is i = 10%. What affect does this tie-in project have on your original NPV estimate? a. It increases NPV from 10,000 to 12,513.15. b. It increases NPV from 10,000 to 17,486.85. c. It decreases NPV from 10,000 to 7,486.85. d. It increases NPV from 10,000 to 2,513.15. e. It is a separate project and has no effect on NPV.

7.

8.

9.

10. Suppose the government of Germany offers you a 3-year, non-amortizing 50,000 loan to entice you to undertake a particular project within its borders. In addition, the government offers you an attractive rate of i = 10% when loans of similar risk yield a return of i = 15%. The German tax rate is 50%. What is the present value of the interest subsidy on this loan?

a. 2854.03 b. 3108.56 c. 3250.66 d. 4895.60 e. 5708.06 ANS: C

Exhibit T15.1 +10,000 -1,000 t=1 +10,000 t=2 +10,000 t=3

10. Refer to Exhibit T15.1. Assume that the appropriate discount rate for the cash flows in Exhibit T15.1 is i = 5%. What is the NPV in euros? a. 25,598.43 b. 26,232.48 c. 27,232.48 d. 29,000.00 e. 29,432.52 11. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot rate is S0/ = 2/. If i = 7% and i = 5%, what is the expected future spot rate [E(S3/ )] at time t = 3? a. 1.890/ b. 1.963/ c. 2.020/ d. 2.116/ e. 2.250/ 12. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot rate is S0/ = 2/. If i = 7% and i = 5%, what is NPV? a. 48,591.54 b. 50,786.92 c. 52,464.96 d. 54,527.33 e. 55,328.10 13. Refer to Exhibit T15.1. Assume the international parity conditions do not hold . Expected future spot rates are: E(S1/) = 2.060/, E(S2/) = 2.100/, and E(S3/) =2.220/. Calculate NPV by converting euros to pounds at the expected future spot rates and discounting in pounds. Assume S0/ = 2/ and i = 7%. a. NPV = 52,464.96 b. NPV = 52,978.31 c. NPV = 53,015.25

d. NPV = 53,716.36 e. NPV = 54,142.84

14. Refer to Exhibit T15.1. Suppose there is a 10% chance that the host government will seize the assets of the project in year 3. If the assets are not seized, you expect to receive the cash flows as shown. If the assets are seized, you expect to receive repatriated funds in year 1 and year 2 only. Assuming international parity conditions hold, S0/ = 2/, i = 5%, and i = 7%, what is the NPV in pounds? a. 42,431.49 b. 47,018.46 c. 47,368.32 d. 49.652.21 e. 50,737.29 15. Refer to Exhibit T15.1. Suppose that beginning in year 1, there is a 10% chance each year the host government will seize the projects assets. If the assets are not seized, you expect to receive the cash flows as stated above. If the assets are seized in a particular year, you expect to receive no repatriated funds thereafter. Assuming international parity conditions hold, S0/ = 2/, i = 5%, and i = 7%, what is the NPV in pounds? a. 42,431.49 b. 47,018.46 c. 47,368.32 d. 49.652.21 e. 50,737.29 16. Refer to Exhibit T15.1. Assume that 50% of the projects expected cash flows are retained in host country until the project is 3 years old. The opportunity cost of these funds is i = 5%, but blocked funds earn no interest. What is the net present value of the opportunity cost from these blocked funds? a. 569.16 b. 598.24 c. 625.80 d. 658.68 e. 683.22

CH 15 Multiple Choice 1. In their famous articles on the cost of capital, corporation finance and the theory of investment, Modigliani and Miller made each of the following assumptions except ____. a. equal access to bid and ask prices b. homogeneous investor expectations c. homogeneous business risk classes

d. perpetual cash flows e. rational investors

2.

Factors contributing to financial market segmentation include each of the following except ____. a. different investor expectations b. different legal, political, or tax systems c. informational barriers d. rational investors e. transactions costs Foreign political risk includes each of the following except ____. a. unexpected changes in expropriation risk b. unexpected changes in foreign exchange rates c. unexpected changes in local ownership limitations d. unexpected changes in repatriation restrictions e. unexpected changes in taxes Which of a) through d) is true? a. A particular political risk is more likely to be diversifiable by local investors than by international investors. b. A political risk such as an election imposes higher costs of capital on MNCs held by globally diversified investors. c. From the perspective of managers in the multinational corporation, political risk is not diversifiable. d. Global investors are exposed to a multinational corporations total risk, measured by standard deviation of return in the investors functional currencies. e. None of the above A firms debt sells for 10 million and equity for 30 million. The firms before-tax cost of debt is 9%. Its cost of equity is 18%. The corporate tax rate is 33%. The firms weighted average cost of capital is closest to which of the following? a. 6% b. 9% c. 12% d. 15% e. 18%

3.

4.

5.

6.

The cost of capital for a project in Spain should ____. a. be a function of the riskiness of the project b. equal the minimum rate of return necessary to induce investors to buy or hold the firms stock c. equal the nominal required return for a similar U.S. investment

d. equal the parents weighted average cost of capital e. equal the rate used by Spanish investors to capitalize corporate cash flows 7. Which of the following does not fit in a list of potential sources of capital for foreign direct investment? a. funds generated internally by the foreign affiliate b. funds from elsewhere within the corporation c. funds from sources external to the corporation but within the parent country d. funds from sources external to the corporation but within the host country e. each of the above can be a source of funds The firms existing WACC is appropriate as a discount rate on a proposed investment when ____. A. the project is financed with debt from the host country B. the project has the same systematic business risk as the rest of the firm C. the project is not exposed to foreign political risk D. the optimal financial structure of the project is identical to that of the firm Select one of the following: a. A and B b. A and C c. B and C d. B and D e. C and D

8.

9.

The corporate cost of debt can be approximated by ____. a. regressing stock returns on market returns b. the average historical rate of 8.2 percent on corporate debt c. the coupon rate on existing corporate debt d. the riskfree rate of interest on government bonds e. the yield to maturity on existing corporate debt

10. The yield to maturity on a junk bond ____ investors required return. a. equals b. overstates c. preempts d. understates e. none of the above 11. Erb, Harvey, and Viskanta [Political Risk, Financial Risk and Economic Risk, Financial Analysts Journal, Nov./Dec. 1996] found which of a) through c)? a. An increase in country risk tends to be followed by a rise in equity returns. b. Emerging markets with high country risk tend to have less volatile returns than markets with low country risk.

c. Emerging markets with high country risk tend to have lower betas than markets with low country risk. d. More than one of the above. e. None of the above. 12. International sources of funding for foreign investment projects include each of a) through d) except ____. a. cash flow from other international divisions b. interest rate and currency swaps c. international debt and equity d. project finance e. all of the above are sources of funding for international investment projects

13. A targeted registered offering must satisfy which of requirements a) through d)? a. Interest or dividends must be paid directly to individuals in foreign countries. b. The issuer must certify that it has no knowledge that a U.S. taxpayer is the owner of the security. c. The registered owner must be a U.S. financial institution. d. The securities must be issued in registered form. e. More than one of the above 14. Each of a) through d) can be valued as a separate side effect except ____. a. blocked funds b. expropriation risk c. negative-NPV tie-in projects d. subsidized financing e. each of the above can be valued as a side effect

15. Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following except ____. a. Dividend payments on equity b. Higher prices on sales to key suppliers c. Interest payments on debt d. Lease payments on operating and financial lease agreements e. Royalties and management fees 16. Stakeholders prefer internally generated funds to external funds because ____. a. internal funds avoid the discipline of the financial markets b. internal funds avoid the transactions costs of external issues c. they indicate the corporation has free cash flow d. more than one of the above e. none of the above 17. Most countries specify that transfer prices be set at ____.

a. b. c. d. e.

an arms length or market price cost cost plus a profit margin the maximum price that the market will bear none of the above

18. Which of statements a) through d) concerning project finance is false? a. Debt in a project finance arrangement is contractually linked to the cash flow generated by the project. b. Governments participate in project finance in the form of infrastructure support, guarantees, and assurances against political risk. c. In project finance, claims are contractually tied to the cash flows of the project. d. The cash flows of a project are commingled with other corporate cash flows. e. The project is a separate legal entity and relies heavily on debt financing.

19. Which of a) through d) would not be a good candidate for project finance? a. natural resource developments b. power generation projects c. telecommunication d. toll roads and bridges e. All of the above are good candidates for project finance 20. Empirical studies of the capital structure of corporations in the United States have generally agreed that leverage increases with each of the following except ____. a. fixed assets b. advertising and research/development expenditures c. nondebt tax shields d. growth opportunities e. firm size 21. Rajan and Zingales [ What Do We Know about Capital Structure? Some Evidence from International Data, 1995] found that leverage increases with ____. a. the tangibility of the firms assets b. the presence of growth options c. the level of profitability d. all of the above are associated with higher leverage e. none of the above are associated with higher leverage 22. Rajan and Zingales [ What Do We Know about Capital Structure? Some Evidence from International Data, 1995] found that leverage decreases with ____. a. the tangibility of the firms assets b. profitability c. firm size d. all of the above are associated with higher leverage

e. none of the above are associated with higher leverage 23. Empirical studies find that emerging market returns tend to have ____ a. lower volatilities than developed market returns b. lower correlations with the world market portfolio than developed market returns c. less political risk than developed market returns d. more than one of the above e. none of the above

24. Empirical studies find that financial market liberalizations tend to ____ a. increase local firms cost of capital b. increase the correlation of emerging market returns with world market returns c. increase the volatility of emerging market returns d. more than one of the above e. none of the above 25. The ____ method is the most popular approach to project valuation. a. adjusted present value b. Goldman Sachs c. opportunity cost method d. price elasticity of demand e. weighted average cost of capital CH 16 Multiple Choice 1. ____ tax neutrality ensures that incomes arising from foreign and from domestic operations are taxed similarly by the domestic government. a. Domestic b. Foreign c. Global d. two or more of the above e. none of the above

2.

____ tax neutrality ensures that taxes imposed on the foreign operations of domestic companies are similar to those facing local competitors in the host countries. a. Domestic b. Foreign c. Global d. two or more of the above e. none of the above

3.

National tax policies influence each of the following characteristics (a through c) of the multinational corporation except ____. a. the organizational forms in which multinational corporations choose to operate b. the types and locations of assets held c. the way in which the multinational corporation finances its operations d. Each of the above is are influenced by national tax policies e. National tax policy has little effect on any of the above In a(n) ____ tax system, the multinationals worldwide income is taxed by the home country as this income is repatriated to the parent company. a. explicit b. implicit c. global d. territorial e. worldwide

4.

5.

In a(n) ____ tax system, only domestic income is taxed by the domestic government. Foreignsource income is not taxed as long as it is earned in an active business. a. explicit b. implicit c. global d. territorial e. worldwide

6.

Implicit taxes include which of the following? a. asset taxes b. higher pre-tax required returns in countries with high tax rates c. income taxes d. value-added taxes e. none of the above

7.

Which of a) through d) is not a form of explicit tax? a. asset taxes b. tariffs on cross-border trade c. value-added taxes d. withholding taxes e. all of the above are explicit taxes Withholding taxes are most frequently found on which income category? a. assets b. capital gains c. dividends

8.

d. royalties e. value-added

9.

Value-added taxes are a form of ____. a. capital gains tax b. implicit tax c. income tax d. sales tax e. tariff on cross-border trade

10. Implicit taxes arise from ____. a. a failure to hide income from the taxing authorities b. a nations labor laws c. the law of one price d. value additivity e. none of the above

11. Tax rates in countries B and S are tB = 40% and tS = 25%, respectively. Pre-tax required returns in B are iB = 25%. What should be the pre-tax required return in S? a. 5% b. 10% c. 15% d. 20% e. none of the above

12. Active income earned from a foreign branch is taxed by the U.S. government ____. a. after pooling this income with all other income sources b. as funds are repatriated to the U.S. parent corporation c. as it is earned in the foreign country d. at the foreign tax rate e. none of the above

13. Foreign branches of a U.S. corporation are treated as ____. a. a domestic corporation b. a controlled foreign corporation c. a part of the parent rather than as a separate legal entity d. slaves to the master corporation e. none of the above

14. The United States allows a foreign tax credit against U.S. income taxes up to ____.

a. b. c. d. e.

200,000 1,000,000 the amount of consolidated foreign-source income the amount of foreign taxes paid the amount of taxes paid globally

Exhibit T17.1 Switzerland 100% 5% 10% India 100% 20% 65%

a Dividend payout ratio b Foreign dividend withholding tax rate c Foreign corporate income tax rate

15. Consider Exhibit T17.1. A U.S.-based firm has 10,000 in foreign-source income from Switzerland. What is the dividend paid to the U.S. parent? a. 8,500 b. 8,550 c. 9,000 d. 9,500 e. 10,000

16. Consider Exhibit T17.1. A U.S.-based firm has a single foreign subsidiary in Switzerland with 10,000 in foreign-source income. What foreign tax credit is generated by the subsidiary? a. 0 b. 500 c. 1,000 d. 1,450 e. 1,500

17. Consider Exhibit T17.1. A U.S.-based firm earns 10,000 from Switzerland and 10,000 from India. The firm has no other foreign operations. What are total foreign tax credits on a consolidated basis? a. 1,150 b. 7,200 c. 7,500 d. 8,650 e. 10,000

18. A U.S.-based corporation has 8,000 in total foreign tax credits (FTC) on a consolidated basis. The firms overall FTC limitation is 5,000. What is the firms U.S. tax liability or excess FTC? a. 0 b. 3,000 c. 5,000 d. 8,000 e. the firm has 3,000 in excess FTCs that can be carried back or forward

19. If a U.S. parent corporation owns more than 50% of a foreign corporation either in terms of market value or voting power, the foreign subsidiary is called a ____. a. controlled foreign corporation b. foreign affiliate c. foreign sales branch d. wholly-owned subsidiary e. none of the above

20. The intent of the foreign tax credit is to ____. a. avoid double taxation of foreign-source income b. ensure national sovereignty c. ensure that foreign multinationals pay their fair share of the tax burden d. pay for social programs e. none of the above

21. The overall FTC limitation applies to ____. a. consolidated foreign-source income b. consolidated global income c. domestic as well as foreign corporations d. passive investment income e. none of the above

22. The usefulness of U.S. foreign tax credits (FTCs) is limited by each of a) through d) except ____. a. the allocation of income rules b. income baskets c. the overall FTC limitation d. Subpart F income e. all of the above limit the usefulness of foreign tax credits 23. Active income includes each of the following except ____. a. dividends received from active subsidiaries b. dividends received from less-than-10% owned companies

c. income from active foreign branches d. interest received from more-than-50% owned subsidiaries e. management fees received from active subsidiaries

24. Reinvoicing centers should be located in countries with each of the following except ____. a. access to Eurocurrency markets b. low explicit taxes c. low implicit taxes d. sound physical and legal infrastructure e. a volatile currency

25. Korea imposes a 34% tax on corporate income. Turkey imposes a 46% tax rate. Pretax returns in Korea are 15%. If the law of one price holds, pretax returns in Turkey are ____. a. 12.27% b. 15.67% c. 18.33% d. 22.98% e. 26.56%

26. Pretax returns in Singapore are 18%. Pretax returns on comparable assets in Spain are 20.215%. Singapores tax rate is 27%. In equilibrium, Spains tax rate must be ____. a. 20% b. 25% c. 30% d. 35% e. 40%

27. Active management of transfer prices is likely to be the most advantageous when ____. a. assets are tangible rather than intangible b. gross operating margins are low c. intermediate products have no market price d. operations are in a single tax jurisdiction e. transactions are between unrelated parties

28. Foreign operations are more likely to be set up as a foreign branch when ____. a. bribes are a common business practice in the foreign country b. disclosure requirements in the foreign country are high c. earnings are expected to be negative in the early years of operations d. the potential for litigation over foreign operations is high e. none of the above

29. Relative to local (foreign) competition, foreign-source income is most valuable to a U.S.based firm when ____. a. the income is from a low-tax country and the firm has excess foreign tax credits b. the income is from a high-tax country and the firm has excess foreign tax credits c. the income is from a low-tax country and the firm has no excess foreign tax credits d. the income is from a high-tax country and the firm has no excess foreign tax credits e. none of the above

30. Relative to local (foreign) competition, foreign-source income is least valuable to a U.S.based firm when ____. a. the income is from a low-tax country and the firm has excess foreign tax credits b. the income is from a high-tax country and the firm has excess foreign tax credits c. the income is from a low-tax country and the firm has no excess foreign tax credits d. the income is from a high-tax country and the firm has no excess foreign tax credits e. none of the above CH 17 Multiple Choice 1. An option with more than one source of uncertainty is called a(n) ____ option. a. amorphous b. c. d. e. complex compound rainbow switching

2.

Managerial divergence from the NPV decision rule accept all positive NPV projects arises because ____. a. managers objectives can differ from those of shareholders b. c. d. e. of the presence of real options the NPV decision rule is not designed to maximize shareholder wealth three of the above two of the above

3.

Managerial actions can appear to be inconsistent with the NPV rule because ____. a. managers are irrational b. markets are inefficient

c. d. e.

options on real assets are difficult to value with NPV three of the above two of the above

4.

Real options include ____. a. the expansion/contraction options b. c. d. e. the investment/abandonment options the suspension/reactivation options three of the above two of the above

5.

The time value of an option to invest in a real asset reflects ____. a. managerial flexibility in the timing of investment b. c. d. e. the value of the asset as a now or never proposition the value of the option to delay the project three of the above two of the above

6.

The intrinsic value of an option to invest in a real asset reflects ____. a. managerial flexibility in the timing of investment b. c. d. e. the value of the asset as a now or never proposition the value of the option to delay investment three of the above two of the above

7.

The value of an option to invest in a real asset reflects ____. a. managerial flexibility in the timing of investment b. c. d. e. the value of the asset as a now or never proposition the value of the option to delay investment three of the above two of the above

8.

Firms continue to operate in unfavorable environments ____. a. because the time value of the abandonment option is zero b. c. d. e. to avoid the sunk costs of abandoning investment when there is a chance that prospects will improve three of the above two of the above

9.

Which of the following statements applies to hysteresis? a. Hysteresis occurs when there are both high entry and exit costs. b. c. d. e. Hysteresis refers to the hysteria of a currency crisis Hysteresis is a consequence of the intrinsic value of a now or never proposition. Three of the above Two of the above

10. Call option values increase with ____. a. an increase in the exercise price b. c. d. e. an increase in the volatility of the underlying asset value an increase in the systematic risk (beta) of the asset underlying the option more than one of the above none of the above

11. Call option values decrease with ____. a. an increase in the underlying asset value b. c. d. e. an increase in the volatility of the underlying asset value an increase in the systematic risk (beta) of the asset underlying the option more than one of the above none of the above

12. Which of the following is not a reason why the appropriate discount rate for a real option is ambiguous? a. Options are always more volatile than the assets on which they are based. b. Returns on options are inherently non-normal.

c.

Returns on options are asymmetric.

d. The volatility of an option changes with changes in the value of the underlying asset. e. The expected value of cash flows from a real option are difficult to estimate.

13. Financial options are easier to value than real options for each of the following reasons except ____. a. Exercise prices on financial options are contractually written on a single financial price that is readily observable in the financial market. b. c. d. e. Markets for real assets have fewer imperfections than financial markets. Real asset markets typically are less competitive than financial markets. Each of the above is a reason why financial options are easier to value. None of the above is a reason why financial options are easier to value.

14. Uncertainty that is outside the firms control is called ____ uncertainty. a. amorphous b. c. d. e. compound endogenous exogenous foreign

CH 20 Multiple Choice 1. The perfect market assumptions include each of the following except ____. a. equal access to registered brokers b. equal access to market prices c. frictionless markets d. no costs of financial distress e. rational investors

2.

Frictionless financial markets could have which of the following? a. agency costs b. bid-ask spreads c. brokerage fees d. government intervention e. irrational investors Which of the following conditions is sufficient to ensure an operationally efficient market?

3.

a. b. c. d. e.

frictionless markets perfect competition rational investors more than one of the above none of the above

4.

The benefits of international diversification are limited by the lack of ____ in foreign markets. a. adequate information b. free convertibility of currencies c. liquidity d. more than one of the above e. none of the above

5.

You live in New York and buy a share of Phillips at a price of 166 euros. At the end of the year, you receive a dividend of 4 euros and the stock price is 160 euros. If the euro appreciates by 8% during the year, what was your percentage return in dollars for the year? a. -10% b. -1% c. +7% d. +9% e. +11%

6.

You live in London and have invested in shares of Societe Gererale de Belgique at a price of 52.00. By the end of the year you have received dividends of 1.00, share price has risen to 54.50, and the pound has fallen 20% against the euro. Which of the following is closest to your pound sterling return for the year? a. -15% b. 0% c. +7% d. +28% e. +33%

7.

A stock in India rises 20% in local terms. The Indian rupee rises 25% against the U.K. pound sterling. What is the return in pound sterling? a. -5% b. 0% c. 5% d. 45% e. 50%

8.

A stock in India rises 20% in local terms. Pound sterling rises 25% against the Indian rupee. What is the return in pound sterling? a. -4% b. 0% c. 4% d. 45% e. 50% What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(rRp) = 0.105, Var(sC/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee? a. -0.017 b. 0.017 c. 0.193 d. cannot be determined from the given information e. none of the above

9.

10. The standard deviation of return to the Indian stock market is 24.8% in local currency. The standard deviation of the Indian rupee against the Canadian dollar is 30.2%. Ignoring interactions between the Indian stock market and the value of the Indian rupee, what is the standard deviation of return of the Indian market to a Canadian investor? a. 0.550 b. 0.153 c. 0.391 d. cannot be determined from the given information e. none of the above

11. Which of a) through c) is false? a. The risk of an individual asset when held in a portfolio with a large number of assets depends on its covariance with other assets in the portfolio. b. As the number of assets held in a portfolio increases, the covariance terms begin to dominate the portfolio variance calculation. c. The extent to which risk is reduced by portfolio diversification depends on how highly the individual assets in the portfolio are correlated. d. All of the above are ANS: True. e. All of the above are ANS: False. 12. Suppose E[rA] = 14.8%, A = 17.9%, E[rB] = 17.1%, and B = 31.9%. Assuming a meanvariance framework, which of the following statements is true? a. A is preferred to B. b. B is preferred to A. c. A and B are equally desirable. d. Whether A or B is preferred depends on the correlation between the two assets.

e. Which asset is preferred depends on individual preferences.

Exhibit T20.1 Return statistics (%) 10.4 14.0 12.5 15.4 14.2 14.6 11.8 7.2 (%) 18.8 29.1 30.0 36.5 25.5 29.4 17.8 3.3 Correlation Coefficients FR JP SW UK

CN 0.472 0.388 0.320 0.464 0.513 0.727 -0.055

US

Canada France Germany Japan Switzerland U.K. U.S. US 30-day

0.645 0.399 0.618 0.559 0.482 -0.071

0.364 0.670 0.451 0.443 -0.041

0.430 0.369 0.569 0.304 0.504 0.522 -0.059 -0.119 -0.061 -0.042

13. Based on Exhibit T20.1, what is the standard deviation of an equal-weighted portfolio of Canadian and French equities? a. 4.5% b. 17.4% c. 20.7% d. 24.1% e. 30.7%

14. Based on Exhibit T20.1, what is the Sharpe index of an equal-weighted portfolio of Canadian and French equities? a. 0.138 b. 0.209 c. 0.236 d. 0.241 e. 0.288

15. Based on Exhibit T20.1, what is the standard deviation of an equal-weighted portfolio of Japanese and Swiss equities? a. 16.6% b. 17.4% c. 19.3% d. 26.4% e. 35.9%

16. Based on Exhibit T20.1, what is the Sharpe index of an equal-weighted portfolio of Japanese and Swiss equities?

a. 0.138 b. 0.209 c. 0.236 d. 0.241 e. 0.288 ANS: E 17. Which of a) through d) is false? a. If an assets returns are distributed as normal, then its return distribution can be completely described by its mean and variance of return. b. Returns on foreign stocks are leptokurtic. c. Correlation and covariance measure how closely two assets move together. d. The correlation coefficient between two assets is the covariance scaled by the standard deviations of the two assets. e. All of the above are ANS: True.

18. Which of a) through d) is false? a. The systematic risk of a portfolio is measured by the standard deviation (or variance) of return on the portfolio. b. If two assets are perfectly correlated, then the standard deviation of a portfolio of these two assets is a simple weighted average of the standard deviations of the assets. c. The variance of a portfolio with N securities is calculated as a weighted average of the N2 cells in the variance-covariance matrix. d. The standard deviation of a portfolio of assets is a simple weighted average of the expected returns of the assets. e. All of the above (a-c) are False.

19. Which of a) through c) is false? a. That portion of an individual assets risk that cannot be diversified away by holding the asset in a large portfolio is called systematic risk. b. That portion of an individual assets risk that cannot be diversified away by holding the asset in a large portfolio is called market risk. c. That portion of an individual assets risk that cannot be diversified away by holding a portfolio with many securities is called nondiversifiable risk. d. More than one of a) through c) is ANS: False. e. All of a) through c) are ANS: True.

20. Which of a) through c) is true? a. Both domestic and foreign nominal cash flows are exposed to purchasing power risk. b. The real value of a future foreign currency cash flow in the domestic currency depends on domestic inflation. c. Hedging foreign currency risk substitutes exposure to domestic purchasing power risk for exposure to currency risk.

d. All of the above are True. e. Two of the above are True.

21. ____ are not an impediment to the free flow of capital across national borders. a. Foreign exchange controls b. Capital inflow and outflow controls c. Stamp taxes d. Transactions costs e. All of the above are impediments to the flow of capital 22. Which of the following could account for investors tendency to favor local assets? A the additional information costs of international diversification B the ability of a domestic stock portfolio to hedge domestic inflation risk C the higher returns typically earned on foreign investments a. A and B b. B and C c. A and C d. all three of the above e. only one of the above

CH 21 Multiple Choice 1. The traditional capital asset pricing model requires several assumptions in addition to an assumption of perfect markets. Which of the following is not one of these assumptions? a. asset returns are certain b. everyone can borrow and lend at the riskfree rate of interest c. investors have homogeneous expectations d. investors want more nominal return and less risk in their functional currency e. nominal returns are normally distributed Which of the following statements about market model beta is ANS: False. a. Market model beta is estimated by regressing an assets returns on market returns. b. Market model beta captures that part of the variation in an individual asset that is linearly related to the market return. c. Market model beta measures an assets total risk. d. Market model beta is a correlation coefficient scaled by two standard deviations. e. The beta of the riskfree asset is zero. Which of statements a) through c) regarding Rolls critique is true? a. If a mean-variance efficient market index is used as a performance benchmark, then the algebra of the CAPM requires that beta and only beta explains mean return.

2.

3.

b. If performance is measured relative to an index that is ex post inefficient, then any ranking of portfolio performance is possible. c. Rolls critique does not apply to the international asset pricing model. d. All of the above are True. e. Only two of statements a) through c) are True. 4. Why do Roll and Ross [On the cross-sectional relation between expected returns and betas, Journal of Finance 1994] call the CAPM ...a shaky base for modern finance? a. the almost pathological knife-edged nature of the expected return-beta OLS crosssectional relation b. the CAPM neglects nonlinear elements of return c. the CAPM requires the presence of a riskfree asset d. more than of the above e. none of the above

5.

In addition to the assumptions of the traditional capital asset pricing model, which of the following conditions are necessary for the international asset pricing model to hold? a. investors have identical consumption baskets b. investors only care above dollar returns c. purchasing power parity holds d. more than of the above e. none of the above

6.

Which of the following statements regarding the hedge portfolio in the international asset pricing model is false? a. If inflation is a constant in each currency, then the hedge portfolio reduces to the investors home-currency riskfree asset. b. The hedge portfolio consists of domestic and foreign bonds. c. The hedge portfolio serves as a store of value. d. The hedge portfolio serves to hedge domestic inflation risk. e. The hedge portfolio serves to hedge the currency risk of foreign assets.

7.

Which of statements a) through d) is false? a. Home asset bias is an indication of a segmented national market. b. In completely segmented national markets, the systematic risk of an asset depends on its sensitivity to local market factors. c. Purchasing power parity holds in segmented financial markets. d. more than of the above is false e. none of the above are false

8.

Which of the following statements concerning arbitrage pricing theory (APT) is false? a. APT assumes a linear relation between required return and systematic risk. b. APT does not identify what factors are priced in the market.

c. APT identifies market risk as a factor that is priced by the market. d. Rolls critique does not apply to the APT. e. The systematic risk factor in the one-factor market model is the difference between actual market index returns and the mean market return. 9. Which of statements a) through c) regarding Chen, Roll and Ross [Economic forces and the stock market, Journal of Business 1986] application of APT is false? a. By itself, the market factor is statistically significant because all stocks are exposed to systematic macroeconomic risks that underlie returns to the market portfolio. b. The coefficients on the macroeconomic factors were not statistically significant. c. When market portfolio indices were included along with Chen, et. al.s macroeconomic factors, the market factor had an insignificant coefficient. d. All three of the above (a-c) are ANS: False. e. Two of the above (a-c) are ANS: False.

10. Which of the following statements concerning the one-factor market model is false? a. A high correlation means that points lie relatively closely around a regression line. b. The one-factor market model captures the exposure of an individual security to fluctuations in the market factor. c. The slope of a market model regression is equal to one. d. The one-factor market model estimates betas for use in the security market line. e. The market portfolio is often proxied by a domestic stock portfolio.

11. Macroeconomic factors that are sources of systematic risk include each of the following except ____. a. analysts earnings estimates b. industrial production c. inflation expectations d. unexpected inflation e. all of the above are sources of systematic risk 12. Empirical studies find that ____ factors dominate ____ factors in explaining individual security returns. a. global industry and national b. global and industry national c. global and national industry d. national global and industry e. national and industry global 13. Fama and Frenchs [The Cross-Section of Expected Stock Returns, Journal of Finance 1992] model of stock returns includes factors for ____. A the market index B firm size

a. b. c. d. e.

C relative financial distress relative financial distress, and the domestic and global market indices relative financial distress, the market index, and analysts earnings forecasts relative financial distress, the market index, and currency risk relative financial distress, the market index, and firm size relative financial distress, the market index, and industrial production

14. Fama and Frenchs [The Cross-Section of Expected Stock Returns, Journal of Finance 1992] model the relative financial distress factor as ____. a. the book value of equity b. the market value of equity c. the difference in mean return between the smallest 10 percent of firms and the largest 10 percent of firms d. the difference in mean return between value and growth stock portfolios e. none of the above

15. Empirical studies typically find which of the following? a. Large stocks tend to have higher mean returns than small stocks in international markets. b. Growth stocks tend to have higher mean returns than value stocks in international markets. c. Stocks with high market model betas tend to have higher mean returns than stocks with low betas in international markets. d. more than one of the above e. none of the above

16. Strategies that selectively buy or sell individual securities based on their recent return performance are called ____ strategies. a. fundamental b. market timing c. momentum d. trendline e. none of the above

17. ____ are difficult to reconcile with informationally efficient markets. a. Market factors b. Momentum effects c. The size effect d. The value premium e. None of the above are difficult to reconcile with an efficient market

18. Which of statements a) through c) regarding the currency risk exposure of large multinational corporations is false?

a. Multinational corporations are likely to be exposed to currency risk. b. Investors will prefer that managers hedge currency risk if the firms expected future cash flows can be increased through hedging. c. Managers have little need to hedge exposures to currency risks that are diversifiable from the shareholders perspective. d. Two of the above are ANS: False. e. Each of the statements is ANS: True. 19. Which of the following statements concerning De Santis and Grards How Big is the Premium for Currency Risk [Journal of Financial Economics 1998] conditional asset pricing model is false? a. Their model constrained risks and required returns to be constant over time. b. Currency risk is a small fraction of total risk in the United States stock market. c. Market risk is priced in international stock markets. d. Currency risk is priced in international stock markets. e. All of the above are true 20. Which of statements a) through d) concerning Jorions The pricing of exchange rate risk in the stock market [Journal of Financial and Quantitative Analysis 1991] multi-factor analysis of currency risk is false? a. Exchange rate risk is diversifiable and is not priced in the stock market. b. The exchange rate factor is subsumed into Chen, Roll and Rosss [Economic forces and the stock market, Journal of Business 1986] five macroeconomic factors. c. The exchange rate factor is subsumed into the market index when the market index is added to the exchange rate factor. d. There is little cross-sectional variation in the exchange rate exposure of individual firms and industries. e. All of the above are True.