ECO 410 Week 9 Quiz – Strayer
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Quiz 8 Chapter 15 and 16
Multinational Tax Management
15.1 Tax Principles
Multiple Choice
1) The
issue of ethics in the reporting of income and the payment of taxes is a
considerable one. The authors state that most MNEs operating in foreign
countries tend to follow the general principle of:
A)
"when in Rome, do as the Romans do."
B) full
disclosure to the tax authorities.
C)
maintain a competitive playing field by cheating as much as the local
competition, no more, no less.
D) none
of the above
2) Which
of the following is an unlikely objective of U.S. government policy for the
taxation of foreign MNEs?
A) to
raise revenues
B) to
provide an incentive for U.S. private investment in developing countries
C) to
improve the U.S. balance of payments
D) All
of the above are objectives.
3) A
________ tax policy is one that has no impact on private decision-making, while
a ________ policy is designed to encourage specific behavior.
A) flat;
tax incentive
B)
neutral; flat
C)
neutral; tax incentive
D) none
of the above
4) Which
of the following is NOT an example of a tax incentive policy?
A) The
federal government gives a tax credit to MNEs that make domestic capital
improvements but not foreign capital improvements.
B)
Corporations are allowed to take a direct tax credit for each dollar of
matching donations they make to institutions of higher education.
C) A tax
law is passed that makes interest on property non tax-deductible, but interest
payments on durable goods are.
D) All
are examples of a tax incentive policy.
5)
Toyota Motor Company operates in many different countries and pays taxes at
many different rates. However, they always pay the same rate as their local
competitors. Toyota Motor Company is operating in an environment of ________
tax policy.
A)
domestic neutrality
B)
foreign neutrality
C)
territorial approach
D) none
of the above
6) The
United States taxes the domestic and remitted foreign earnings of U.S. based
MNEs no matter where the earnings occurred. This is an example of a/an ________
approach to levying taxes.
A)
worldwide
B)
territorial
C)
neutral
D)
equitable
7) The
United States taxes all earnings on U.S. soil by both domestic and foreign
firms. This is an example of a ________ approach to levying taxes.
A)
worldwide
B)
neutral
C)
territorial
D) none
of the above
8) Bacon
Signs Inc. is based in a country with a territorial approach to taxation but
generates 100% of its income in a country with a worldwide approach to
taxation. The tax rate in the country of incorporation is 25%, and the tax rate
in the country where they earn their income is 50%. In theory, and barring any
special provisions in the tax codes of either country, Bacon should pay taxes
at a rate of:
A) 75%.
B)
62.5%.
C) 0%.
D) 50%.
9) The
territorial approach to taxation policy is also termed the ________ approach.
A)
source
B) ethical
C)
greedy
D)
location
10) A
tax that is effectively a sales tax at each stage of production is defined as
a/an ________ tax.
A) flat
B)
equitable
C)
value-added tax
D) none
of the above
11) What
is the total value of taxes paid in the following example if the value added
tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company.
The grain company sells to the processor for $2.00 per bushel. The processor
turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel.
The retailer sells the cereal for $4.00 per bushel.
A) $0.15
B) $0.20
C) $0.30
D) $0.40
TABLE
15.1
Use the
information to answer following question(s).
BayArea
Designs Inc., located in Northern California, has two international subsidiaries,
one located in the Ukraine, the other in Korea. Consider the information below
to answer the next several questions.
12)
Refer to Table 15.1. If BayArea pays out 50% of its earnings from each
subsidiary, what are the additional U.S. taxes due on the foreign sourced
income from the Ukraine and Korea respectively.
A)
Ukraine = $0; Korea = ($30,000)
B)
Ukraine = $100,000; Korea = $0
C)
Ukraine = $0; Korea = $66,250
D) none
of the above
13)
Refer to Table 15.1. The additional U.S. taxes due on the repatriation of
income from the Ukraine to the United States, alone, assuming a 50% payout
rate, is:
A)
excess foreign tax credits of $110,000.
B)
additional U.S. taxes due of $97,000.
C)
additional U.S. taxes due of $36,500.
D)
excess foreign tax credits of $18,500.
14)
Refer to Table 15.1. How much in additional U.S. taxes would be due if BayArea
averaged the tax credits and liabilities of the two foreign units, assuming a
50% payout rate from each?
A)
$3,750
B)
$13,750
C)
$2,500
D) $0
15)
Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary
at 25%, how should BayArea set the payout rate of the Korean subsidiary
(approximately) to more efficiently manage its total foreign tax bill?
A) 28.5%
B) 24.5%
C) 42.6%
D) 82.3%
16)
Refer to Table 15.1. What is the minimum effective tax rate that BayArea can
achieve on its foreign-sourced income?
A) 26%
B) 35%
C) 40%
D) 0%
17)
Tax-haven subsidiaries are typically established in a country that can meet the
following requirements:
A) a low
tax on foreign investment or sales income earned by resident corporations and a
low dividend withholding tax on dividends paid to the parent firm.
B) the
facilities to support financial services, for example, good communications,
professional qualified office workers, and reputable banking services.
C) a
stable government that encourages the establishment of foreign-owned financial
and service facilities within its borders.
D) all
of the above
18) A
tax that is a form of social redistribution of income is defined as a/an
________ tax.
A)
un-American
B)
transfer
C) flat
D) none
of the above
19) A
________ is a direct reduction of taxes whereas a ________ reduces the taxable
income before taxes.
A)
foreign tax credit; domestic tax credit
B) tax
deduction; tax credit
C) tax
credit; tax deduction
D) none
of the above
Instruction
15.1:
Use the
information to answer the following question(s).
Green
Valley Exporters USA has $100,000 of before tax foreign income. The host
country has a corporate income tax rate of 25% and the U.S. has a corporate
income tax rate of 35%.
20)
Refer to Instruction 15.1. If the U.S. has no bilateral trade agreement with
the host country, what is the total amount of income taxes Green Valley
Exporters will pay?
A)
$25,000
B)
$35,000
C)
$51,250
D)
$60,000
21)
Refer to Instruction 15.1. If the U.S. has a bilateral trade agreement with the
host country that calls for the total tax paid to be equal to the maximum
amount that could be paid in the highest taxing country, what is the total
amount of income taxes Green Valley Exporters will pay to the host country, and
how much will they pay in U.S income taxes on the foreign earned income?
A)
$25,000; $10,000
B)
$25,000; $26,250
C)
$35,000; $0
D) none
of the above
22)
Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned
in the host country as a tax-deductible expense, then Green Valley's total U.S.
corporate tax on the foreign earnings would be:
A)
$10,000.
B) $26,250.
C)
$35,000.
D)
$51,250.
23)
Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned
in the host country as a tax-credit, then Green Valley's total U.S. corporate
tax on the foreign earnings would be:
A)
$51,250.
B) $35,000.
C)
$26,250.
D)
$10,000.
24) Tax
treaties typically result in ________ between the two countries in question.
A) lower
property taxes for U.S. citizens overseas
B)
elimination of differential tax rates
C)
increased double taxation
D)
reduced withholding tax rates
25)
Transfer pricing is a strategy that may be used by MNEs to:
A)
reduce consolidated corporate income taxes.
B)
partially finance a subsidiary in another country.
C)
transfer funds from a subsidiary to the parent corporation.
D) all of
the above
26)
________ is the pricing of goods, services, and technology between related
companies.
A) Among
pricing
B)
Retail pricing
C)
Transfer pricing
D)
Wholesale pricing
True/False
1) The
primary objective of multinational tax planning is to minimize the firm's
worldwide tax burden.
2) A
country CANNOT have both a territorial and a worldwide approach as a national
tax policy.
3) Tax
treaties generally have the effect of increasing the withholding taxes between
the countries that are negotiating the treaties.
4) A
value-added tax has gained widespread usage in Western Europe, Canada, and
parts of Latin America.
5) All
indications are that the value-added tax will soon be the dominant form of
taxation in the U.S.
6) Among
the G7 nations, the U.S. has a below average corporate income tax rate that
makes it attractive for other countries to invest in the U.S.
7) In
the mid 1980s the U.S. led the way to higher corporate income tax rates
worldwide. Today, most of the G7 nations have surpassed the U.S. and have
higher corporate income tax rates than the U.S.
8) The
ideal tax should not only raise revenue efficiently but also have as few
negative effects on economic behavior as possible.
9) The
worldwide approach, also referred to as the residential or national approach to
tax policy, levies taxes on the income earned by firms that are incorporated in
the host country, regardless of where the income was earned (domestically or
abroad).
10) The
territorial approach, also referred to as the source approach to tax policy,
levies taxes on the income earned by firms that are incorporated in the host
country, regardless of where the income was earned (domestically or abroad).
11) Of
the OECD 30 countries, most employ a worldwide approach to tax policy, but a
few, including the United States, use the worldwide approach.
12) FEW
governments rely on income taxes, both personal and corporate, for their
primary revenue source.
13)
Between 2006 - 2012, global corporate tax rates have trended upward.
14) Tax
credits are LESS valuable on a dollar-for-dollar basis than are deductible
expenses.
15) Tax
treaties typically result in reduced withholding tax rates between the two
signatory countries.
16) Tax
credits are less valuable on a dollar-for-dollar basis than are tax-deductible
expenses.
17) The
U.S. Internal Revenue Service can reallocate revenues and expenses between
parent corporations and their subsidiaries to more clearly reflect a proper
allocation of income. In such instances it is the responsibility of the
corporation to prove that the IRS has been arbitrary in its decision-making,
thus establishing a "guilty until proved innocent" tax approach.
18) Tax
haven subsidiaries of MNEs are categorically referred to as international
offshore financial centers.
Essay
1)
Explain the worldwide and territorial approaches of national taxation. The
authors state that the United States uses both approaches. How can this be?
Give an example of each taxation approach.
2) What
is a value-added tax? Where is this type of tax in wide usage? Why do you
suppose this form of taxation has NOT been widely accepted in the United
States?
Chapter 16 International Portfolio Theory and
Diversification
16.1 International Diversification and Risk
Multiple Choice
1) Beta
may be defined as:
A) the
measure of systematic risk.
B) a
risk measure of a portfolio.
C) the
ratio of the variance of the portfolio to the variance of the market.
D) all
of the above
2)
________ risk is measured with beta.
A)
Systematic
B)
Unsystematic
C)
International
D)
Domestic
3) A
fully diversified domestic portfolio has a beta of:
A) 0.0
B) 1.0
C) -1.0
D) There
is not enough information to answer this question.
4)
Unsystematic risk:
A) is
the remaining risk in a well-diversified portfolio.
B) is
measured with beta.
C) can
be diversified away.
D) all
of the above
5) A
well-diversified portfolio has about ________ of the risk of the typical
individual stock.
A) 8%
B) 19%
C) 27%
D) 52%
6) An
internationally diversified portfolio:
A)
should result in a portfolio with a lower beta than a purely domestic
portfolio.
B) has
the same overall risk shape as a purely domestic portfolio.
C) is
only about 12% as risky as the typical individual stock.
D) all
of the above
7) In
some respects, internationally diversified portfolios are the same in principle
as a domestic portfolio because:
A) the
investor is attempting to combine assets that are perfectly correlated.
B)
investors are trying to reduce systematic risk.
C)
investors are trying to reduce the total risk of the portfolio.
D) all of
the above
8) In
some respects, internationally diversified portfolios are different from a
domestic portfolio because:
A)
investors may also acquire foreign exchange risk.
B)
international portfolio diversification increases expected return but does not
decrease risk.
C)
investors must leave the country to acquire foreign securities.
D) all
of the above
Instruction
16.1:
Use the
information to answer the following question(s).
In
September 2009 a U.S. investor chooses to invest $500,000 in German equity
securities at a then current spot rate of $1.30/euro. At the end of one year
the spot rate is $1.35/euro.
9) Refer
to Instruction 16.1. How many euros will the U.S. investor acquire with his
initial $500,000 investment?
A)
€650,000
B)
€370,370
C)
€500,000
D)
€384,615
10)
Refer to Instruction 16.1. At an average price of €60/share, how many shares of
stock will the investor be able to purchase?
A) 8333
shares
B) 6410
shares
C) 6173
shares
D)
10,833 shares
11)
Refer to Instruction 16.1. At the end of the year the investor sells his stock
that now has an average price per share of €57. What is the investor's average
rate of return before converting the stock back into dollars?
A) 5.0%
B) -3.0%
C) -5.0%
D) 3.0%
12)
Refer to Instruction 16.1. At the end of the year the investor sells his stock
that now has an average price per share of €57. What is the investor's average
rate of return after converting the stock back into dollars?
A)
-1.35%
B) 5.0%
C) -5.0%
D)
-7.24%
13) A
U.S. investor makes an investment in Britain and earns 14% on the investment
while the British pound appreciates against the U.S. dollar by 8%. What is the
investor's total return?
A)
22.00%
B)
23.12%
C) 6.00%
D) 4.88%
14)
Which of the following statements is NOT true?
A)
International diversification benefits induce investors to demand foreign
securities.
B) An
international security adds value to a portfolio if it reduces risk without
reducing return.
C)
Investors will demand a security that adds value.
D) All
of the above are true.
True/False
1)
Portfolio diversification can eliminate 100% of risk.
2)
Increasing the number of securities in a portfolio reduces the unsystematic
risk but not the systematic risk.
3)
International diversification benefits may induce investors to demand foreign
securities.
4) If
the addition of a foreign security to the portfolio of the investor aids in the
reduction of risk for a given level of return, then the security adds value to
the portfolio.
5) If
the addition of a foreign security to the portfolio of the investor decreases
the expected return for a given level of risk, then the security adds value to
the portfolio.
16.2 Internationalizing the Domestic Portfolio
Multiple Choice
1)
Portfolio theory assumes that investors are risk-averse. This means that
investors:
A)
cannot be induced to make risky investments.
B)
prefer more risk to less for a given return.
C) will
accept some risk, but not unnecessary risk.
D) All
of the above are true.
2) The
efficient frontier of the domestic portfolio opportunity set:
A) runs
along the extreme left edge of the opportunity set.
B)
represents optimal portfolios of securities that represent minimum risk for a
given level of expected portfolio return.
C)
contains the portfolio of risky securities that the logical investor would
choose to hold.
D) all
of the above
3) The
addition of foreign securities to the domestic portfolio opportunity set shifts
the efficient frontier:
A) down
and to the left.
B) up
and to the right.
C) up
and to the left.
D) down
and to the right.
4)
Relative to the efficient frontier of risky portfolios, it is impossible to
hold a portfolio that is located ________ the efficient frontier.
A) to
the left of
B) to
the right of
C) on
D) to
the right or left of
5) The
________ connects the risk-free security with the optimal domestic portfolio.
A)
security market line
B)
capital asset pricing model
C)
capital market line
D) none
of the above
Instruction
16.2:
Use the
information to answer the following question(s).
A U.S.
investor is considering a portfolio consisting of 60% invested in the U.S.
equity index fund and 40% invested in the British equity index fund. The
expected returns for the funds are 10% for the U.S. and 8% for the British,
standard deviations of 20% for the U.S. and 18% for the British, and a
correlation coefficient of 0.15 between the U.S. and British equity funds.
6) Refer
to Instruction 16.2. What is the expected return of the proposed portfolio?
A) 9.2%
B) 9.0%
C) 19.2%
D) 19%
7) Refer
to Instruction 16.2. What is the standard deviation of the proposed portfolio?
A) 38.00
B) 19.20
C) 19.00
D) 14.45
True/False
1) The
graph for the efficient frontier has beta on the vertical axis and standard
deviation of the horizontal axis.
2) The
portfolio with the least risk among all those possible in the domestic
portfolio opportunity set is called the minimum risk domestic portfolio.
3) The
optimal domestic portfolio of risky securities is always the portfolio of
minimum risk.
4) The
standard deviation of a portfolio is the sum of the weighted average standard
deviations of the individual assets.
5) The
optimal domestic portfolio combines the risk-free asset and a portfolio of
domestic securities found on the efficient frontier.
6) The
internationally diversified portfolio opportunity set shifts TO THE RIGHT of
the purely domestic opportunity set.
Essay
1) Draw
the curve representing the Optimal Domestic Efficient Frontier. Be sure to draw
and label the following: The vertical axis and the horizontal axis, the
risk-free security, the minimum risk portfolio, the domestic portfolio
opportunity set, the optimal domestic portfolio, and the capital market line.
Choose a point along the domestic portfolio opportunity set between the optimal
domestic portfolio and the minimum risk domestic portfolio and explain why that
point is not the optimal risky domestic portfolio for investors to hold.
16.3 National Markets and Asset Performance
Multiple Choice
1) The
authors present a comparison of correlation coefficients between major global
equity markets over a variety of different periods. The comparison yields a
number of conclusions listed here EXCEPT:
A) the
correlation between equity markets for the full twentieth century shows quite
low levels of correlation between some of the largest markets (close to 0.50 in
some cases).
B) that
same century of data, however, yields a high correlation between the U.S. and
Canada (0.80).
C) the
correlation coefficients between those same equity markets for selected sub
periods over the last quarter of the twentieth century, however, show
significantly different correlation coefficients.
D) None
of the answers listed are inaccurate conclusions.
True/False
1)
Capital markets around the world are on average less integrated today than they
were 20 years ago.
2) In an
empirical study on national market returns in the 20th century, Dimson, Marsh,
and Staunton (2002) determined that the equity returns in the United States
out-performed the other 15 countries in the study.
3) In an
empirical study on national market returns in the 20th century, Dimson, Marsh,
and Staunton (2002) found that just under one-half of the 16 countries in the
study had negative average returns in their equity markets.
4) In an
empirical study on national market returns in the 20th century, Dimson, Marsh,
and Staunton (2002) determined that due to high levels of correlation or
returns between countries, there is almost NO BENEFIT to international
portfolio diversification.
5) Of
the major trading partners with the United States, Canada has among the LOWEST
correlation of returns with the U.S.
Essay
1) If an
investor is able to determine a global beta for his portfolio and holds a
portfolio that is well-diversified with international investments, which
performance measure is more appropriate, the Sharpe Measure or the Treynor
Measure? Why? Explain each performance measure.
16.4 Market Performance Adjusted for Risk: The
Sharpe and Treynor Performance Measures
Multiple Choice
1) The
Sharpe measure uses ________ as the measure of risk and the Treynor measure
uses ________ as the measure of risk.
A)
standard deviation; variance
B) beta;
variance
C)
standard deviation; beta
D) beta;
standard deviation
TABLE
16.1
Use the
information to answer following question(s).
2) Refer
to Table 16.1. What is the value of the Sharpe Measure for France?
A) 0.113
B) 0.0071
C)
either A or B
D)
neither A nor B
3) Refer
to Table 16.1. What is the value of the Treynor Measure for the Netherlands?
A) 0.197
B)
0.0109
C)
either A or B
D)
neither A nor B
4) Refer
to Table 16.1. ________ appears to have the greatest amount of risk as measured
by monthly standard deviation, but ________ has the best return per unit of
risk according to the Sharpe Measure.
A)
United States; Austria
B)
France; Austria
C)
United States; Netherlands
D)
France; Netherlands
5) The Sharpe
and Treynor Measures tend to be consistent in their ranking of portfolios when
the portfolios:
A) are
poorly diversified.
B) are
properly diversified.
C)
contain only U.S. equity investments.
D) none
of the above
True/False
1) The
Sharpe and Treynor measures are each measures of return per unit of risk.
2) Good
financial advice would suggest that investors should examine returns by the
amount of return per unit of risk accepted, rather than in isolation.
3) The
denominator of the Treynor measure is portfolio risk as measured by the
standard deviation of the portfolio.
4) The
denominator of the Sharpe measure is portfolio risk as measured by the standard
deviation of the portfolio.
5) The
denominator of the Sharpe measure is the portfolio's beta, the systematic risk
of the portfolio, as measured against the world market portfolio.
6) The
denominator of the Treynor measure is the portfolio's beta, the systematic risk
of the portfolio, as measured against the world market portfolio.
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