Deck 31: International Corporate Finance

Question 1

Use the following information to answer the question(s) below.
Rearden Metal, a U.S. manufacturer, has made a purchase from d'Anconia Copper and is expecting a cash
outflow of 2 million ARS (Argentine Pesos) in six months. The currency spot rate is $0.2500/ARS and the
six-month forward rate is F6months = $0.2470/ARS. The appropriate annual discount rate for the
Argentine Peso is 6.5% and the annual discount rate for the U.S. dollar is 4%.
The present value of Rearden Metal's cash outflow computed by first discounting the cash flow at the appropriate Argentine Peso rate and then converting to dollars is closest to:

A)$469,500.
B)$475,000.
C)$481,000.
D)$484,500.

Answer 1

$484,500.

Question 2

Consider the following equation: = (1 + )- 1 the term r¥ in this equation refers to:

A)the cost of capital for the firm in terms of yen.
B)the risk-free rate of interest on the dollar.
C)the cost of capital in terms of dollars.
D)the risk-free rate of interest on the yen.

Answer 2

the risk-free rate of interest on the yen.

Question 3

Use the following information to answer the question(s)below.
Hammond Motors is considering an investment in the Euro area.The expected free cash flows,in euros,are uncorrelated with the spot exchange rate and are as follows: The new project,which Hammond is considering,has similar dollar risk to Hammond's other projects.Hammond knows that its overall dollar WACC is 10%,so it feels comfortable using this WACC for the project.The risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 6%.Hammond is willing to assume that capital markets in the United States and the Euro area are internationally integrated.
The NPV of this project in euros is closest to:

A)€54 million.
B)€57 million.
C)€62 million.
D)€65 million.

Answer 3

€57 million.

Question 4

Use the information for the question(s)below.
The current spot exchange rate,S,is $1.8862/£.Suppose that the yield curve in both countries is flat.The risk-free rate on dollars,r$,is 5.35% and the risk-free interest rate on pounds,r£,is 4.80%.
Using the covered interest parity condition,the calculated three-year forward rate F3 is closest to:

A)$1.8568/£.
B)$1.9161/£.
C)$1.8961/£.
D)$1.8764/£.

Question 5

Consider the following equation: = (1 + )- 1 the term in this equation refers to:

A)the cost of capital in terms of dollars.
B)the risk-free rate of interest on the yen.
C)the risk-free rate of interest on the dollar.
D)the cost of capital for the firm in terms of yen.

Question 6

Consider the following equation: = (1 + )- 1 the term in this equation refers to:

A)the risk-free rate of interest on the dollar.
B)the risk-free rate of interest on the yen.
C)the cost of capital for the firm in terms of yen.
D)the cost of capital in terms of dollars.

Question 7

Which of the following statements regarding international projects is FALSE?

A)Interest rates and costs of capital will likely be different in the foreign country as a result of the macroeconomic environment.
B)The project will most likely generate foreign currency cash flows,and the firm cares only about the foreign currency value of the project.
C)Under internationally integrated capital markets,the value of an investment does not depend on the currency we use in the analysis.
D)The firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes.

Question 8

Consider the following equation: S × = The term F in this equation is:

A)the future spot exchange rate.
B)the current spot exchange rate.
C)the amount of foreign currency.
D)the forward exchange rate.

Question 9

Use the information for the question(s)below.
You are a U.S.investor who is trying to calculate the present value of £5 million cash inflow that will occur one year in the future.The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£.The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
The present value of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

A)$8,950,495.
B)$8,954,615.
C)$8,943,695.
D)$8,961,420.

Question 10

Use the following information to answer the question(s) below.
Rearden Metal, a U.S. manufacturer, has made a purchase from d'Anconia Copper and is expecting a cash
outflow of 2 million ARS (Argentine Pesos) in six months. The currency spot rate is $0.2500/ARS and the
six-month forward rate is F6months = $0.2470/ARS. The appropriate annual discount rate for the
Argentine Peso is 6.5% and the annual discount rate for the U.S. dollar is 4%.
The present value of Rearden Metal's cash outflow computed by first converting to dollars and then discounting the cash flow at the appropriate U.S.Dollar rate is closest to:

A)$469,500.
B)$475,000.
C)$481,000.
D)$484,500.

Question 11

Use the information for the question(s)below.
You are a U.S.investor who is trying to calculate the present value of £5 million cash inflow that will occur one year in the future.The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£.The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
The present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

A)$8,961,420.
B)$8,950,495.
C)$8,954,615.
D)$8,943,695.

Question 12

Consider the following equation: S × = The term in this equation is:

A)the risk-free rate for a foreign investor.
B)the risk-free rate for a U.S.investor.
C)the appropriate cost of capital from the standpoint of a foreign investor.
D)the appropriate cost of capital from the standpoint of a U.S.investor.

Question 13

Consider the following equation: S × = The term in this equation is:

A)the appropriate cost of capital from the standpoint of a U.S.investor.
B)the risk-free rate for a foreign investor.
C)the risk-free rate for a U.S.investor.
D)the appropriate cost of capital from the standpoint of a foreign investor.

Question 14

Consider the following equation: = (1 + )- 1 the term r$ in this equation refers to:

A)the cost of capital for the firm in terms of yen.
B)the cost of capital in terms of dollars.
C)the risk-free rate of interest on the dollar.
D)the risk-free rate of interest on the yen.

Question 15

Consider the following equation: S × = The term S in this equation is:

A)the forward exchange rate.
B)the amount of foreign currency.
C)the future spot exchange rate.
D)the current spot exchange rate.

Question 16

What conclusions can you make about the degree of international integration between the U.S.and Argentine markets?

A)The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly less than converting into Pesos today and investing those Pesos for six months.
B)The markets are integrated since the PV of investing dollars today and converting them with a forward contract is significantly greater than converting into Pesos today and investing those Pesos for six months.
C)The markets are integrated since the PV of investing dollars today and converting them with a forward contract is approximately equal to converting into Pesos today and investing those Pesos for six months.
D)The markets are not integrated since the PV of investing dollars today and converting them with a forward contract is greater than converting into Pesos today and investing those Pesos for six months.

Question 17

The dollar cost of debt for John Galt Industries is 8.0%.The firm faces a tax rate of 21% on all income,no matter where it is earned.Galt needs to know its Yen cost of debt.The risk-free interest rates on dollars and yen are r% = 6% and r¥ = 2%,respectively.Galt is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate.Galt's after-tax cost of debt in yen is closest to:

A)0.9%.
B)2.3%.
C)3.9%.
D)4.8%.

Question 18

Which of the following statements is FALSE?

A)If the foreign project is owned by a domestic corporation,managers and shareholders need to determine the home currency value of the foreign currency cash flows.
B)The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency.
C)The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole),because the foreign project contains residual exchange rate risk that the domestic projects often do not contain.
D)In an internationally integrated capital market,two equivalent methods are available for calculating the NPV of a foreign project: Either we can calculate the NPV in the foreign country and convert it to the local currency at the forward rate,or we can convert the cash flows of the foreign project into the local currency and then calculate the NPV of these cash flows.

Question 19

Use the information for the question(s)below.
The current spot exchange rate,S,is $1.8862/£.Suppose that the yield curve in both countries is flat.The risk-free rate on dollars,r$,is 5.35% and the risk-free interest rate on pounds,r£,is 4.80%.
Using the covered interest parity condition,the calculated one-year forward rate F1 is closest to:

A)$1.8568/£.
B)$1.8764/£.
C)$1.9161/£.
D)$1.8961/£.

Question 20

Use the following information to answer the question(s)below.
Hammond Motors is considering an investment in the Euro area.The expected free cash flows,in euros,are uncorrelated with the spot exchange rate and are as follows: The new project,which Hammond is considering,has similar dollar risk to Hammond's other projects.Hammond knows that its overall dollar WACC is 10%,so it feels comfortable using this WACC for the project.The risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 6%.Hammond is willing to assume that capital markets in the United States and the Euro area are internationally integrated.
Hammond's Euro WACC is closest to:

A)7.9%.
B)8.7%.
C)10.2%.
D)12.1%.

Question 21

Use the information for the question(s)below.
Luther Industries,a U.S.Corporation,is considering a new project located in Great Britain.The expected free cash flows from the project are detailed below: You know that the spot exchange rate is S = 1.8862/£.In addition,the risk-free interest rate on dollars and pounds is 5.4% and 4.6% respectively.Assume that these markets are internationally integrated and the uncertainty in the free cash flow is not correlated with uncertainty in the exchange rate.You have determined that the dollar WACC for these cash flows is 10.2%.
Calculate the pound denominated cost of capital for Luther's project.

Question 22

The provision of the Tax Cuts and Jobs Act of 2017 which allows U.S.firms to exclude foreign profits from their taxable income is called the:

A)taxation exemption.
B)foreign exemption.
C)participation exemption.
D)domestic exemption.

Question 23

Use the information for the question(s)below.
KT Enterprises,a U.S.import-export trading company,is considering its international tax situation.KT's U.S.tax rate is 21%.KT has significant operations in both Japan and Ireland.In Japan the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%.In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%.KT's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are shown here (in millions):
The amount of the taxes paid in dollars for the Irish operations is closest to:

A)$20.5 million.
B)$5.1 million.
C)$29.5 million.
D)$50.0 million.

Question 24

Use the following information to answer the question(s)below.
Incorporated Tool,a U.S.firm,is considering its international tax situation.The corporate tax rate in the United States is currently 21%.Incorporated Tool has major operations in Ireland,where the tax rate is 12.5%,Japan where the tax rate is 40.7%,and Mexico,where the tax rate is 30.0%.Incorporated Tool's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are as follows:
Assuming that the Japanese and Mexican subsidiaries did not exist,the U.S.tax liability on the Irish subsidiary would be closest to:

A)$34 million.
B)$103 million.
C)$106 million.
D)$156 million.

Question 25

Use the information for the question(s)below.
Luther Industries,a U.S.Corporation,is considering a new project located in Great Britain.The expected free cash flows from the project are detailed below: You know that the spot exchange rate is S = 1.8862/£.In addition,the risk-free interest rate on dollars and pounds is 5.4% and 4.6% respectively.Assume that these markets are internationally integrated and the uncertainty in the free cash flow is not correlated with uncertainty in the exchange rate.You have determined that the dollar WACC for these cash flows is 10.2%.
What is the dollar present value of the project?

Question 26

Use the following information to answer the question(s)below.
Incorporated Tool,a U.S.firm,is considering its international tax situation.The corporate tax rate in the United States is currently 21%.Incorporated Tool has major operations in Ireland,where the tax rate is 12.5%,Japan where the tax rate is 40.7%,and Mexico,where the tax rate is 30.0%.Incorporated Tool's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are as follows:
Assuming that the Irish and Japanese subsidiaries did not exist,the U.S.tax liability on the Mexican subsidiary would be closest to:

A)$0.
B)$9 million.
C)$39 million.
D)$106 million.

Question 27

Which of the following statements regarding the taxation of international corporate profits is FALSE?

A)Prior to the Tax Cuts & Jobs Act of 2017,U.S.tax policy required U.S.corporations to pay taxes on their foreign income at the same rate as profits earned in the United States.
B)The home government gets an opportunity to tax the income from a foreign project to the domestic firm.
C)The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income.
D)The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income.

Question 28

Use the information for the question(s)below.
KT Enterprises,a U.S.import-export trading company,is considering its international tax situation.KT's U.S.tax rate is 21%.KT has significant operations in both Japan and Ireland.In Japan the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%.In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%.KT's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are shown here (in millions):
After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:

A)$5.1 million.
B)$20.5 million.
C)$35.6 million.
D)$29.5 million.

Question 29

Luther Industries,a U.S.firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are r$ = 5.5% and r¥ = 1.5% respectively.Luther industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:

A)14.0%.
B)12.3%.
C)7.8%.
D)18.5%.

Question 30

Use the information for the question(s)below.
KT Enterprises,a U.S.import-export trading company,is considering its international tax situation.KT's U.S.tax rate is 21%.KT has significant operations in both Japan and Ireland.In Japan the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%.In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%.KT's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are shown here (in millions):
The amount of the taxes paid in dollars for the Japanese operations is closest to:

A)$29.5 million.
B)$5.1 million.
C)$50.0 million.
D)$20.5 million.

Question 31

Luther Industries,a U.S.firm,has foreign assets valued at $120 million and foreign earnings before interest and taxes of $50 million.It pays a foreign tax at the rate of 5%.What is Luther's global intangible low tax income (GILTI)?

A)$20.5 million
B)$30.0 million
C)$37.4 million
D)$50.0 million

Question 32

The Tax Cut and Jobs Act of 2017 was designed to address all of the following concerns,EXCEPT:

A)when firms produce output for foreign markets,they might lower their tax burden by shifting the portion of profits associated with intangible assets (such as patents and brand names)into foreign subsidiaries.
B)some firms might use a foreign subsidiary to produce output for the U.S.market.
C)low tax rates in the United States created an incentive to not repatriate profits to the United States.
D)some U.S.companies shifted production to foreign countries to avoid high U.S.tax rates.

Question 33

Which of the following statements regarding the tax environment prior to the TCJA of 2017 is FALSE?

A)Tax rates in the United States were among the lowest in the world.
B)Because of high U.S.tax rates,companies were encouraged to keep their foreign profits overseas rather than repatriate them
C)U.S.companies often moved their most valuable assets,and even their legal headquarters,outside the United States.
D)Tax on foreign profits were deferred until the foreign profits were repatriated to the United States.

Question 34

What is the purpose of the base erosion and anti-abuse tax (BEAT)minimum tax provision introduced by the Tax Cut and Jobs Act of 2017?

Question 35

Use the information for the question(s)below.
Luther Industries,a U.S.Corporation,is considering a new project located in Great Britain.The expected free cash flows from the project are detailed below: You know that the spot exchange rate is S = 1.8862/£.In addition,the risk-free interest rate on dollars and pounds is 5.4% and 4.6% respectively.Assume that these markets are internationally integrated and the uncertainty in the free cash flow is not correlated with uncertainty in the exchange rate.You have determined that the dollar WACC for these cash flows is 10.2%.
What is the pound present value of the project?

Question 36

Use the information for the question(s)below.
KT Enterprises,a U.S.import-export trading company,is considering its international tax situation.KT's U.S.tax rate is 21%.KT has significant operations in both Japan and Ireland.In Japan the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%.In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%.KT's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are shown here (in millions):
After the Japanese taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to:

A)$20.5 million.
B)$29.5 million.
C)$5.1 million.
D)$50.0 million.

Question 37

Luther Industries,a U.S.firm.has a subsidiary in the United Kingdom.This year,the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of £45 million.The current exchange rate is $1.86/£.The tax rate in the United Kingdom for this activity is 28%.Under U.S.tax codes,Luther is facing a 21% corporate tax rate on their earnings.What is Luther's U.S.tax liability on its U.K.subsidiary?

Question 38

Which of the following statements regarding the tax climate prior to the TCJA of 2017 is FALSE?

A)The United States taxed the worldwide earnings of U.S.companies at the same rate as profits earned in the United States.
B)U.S.tax policy allowed companies to apply the part of the tax credit that was not used to offset domestic taxes owed,so this extra tax credit was not wasted.
C)If the foreign tax rate was less than the U.S.tax rate,the company paid additional taxes equal to difference between the U.S.tax rate and the foreign tax paid on its foreign earnings.
D)A full tax credit was given for foreign taxes paid up to the amount of the U.S.tax liability.

Question 39

How do the global intangible low tax income (GILTI)and foreign derived intangible income (FDII)provisions of the Tax Cut and Jobs Act of 2017 reduce the incentive for U.S.firms to shift overseas the profits due to intangible assets used to produce foreign goods?

Question 40

Use the following information to answer the question(s)below.
Incorporated Tool,a U.S.firm,is considering its international tax situation.The corporate tax rate in the United States is currently 21%.Incorporated Tool has major operations in Ireland,where the tax rate is 12.5%,Japan where the tax rate is 40.7%,and Mexico,where the tax rate is 30.0%.Incorporated Tool's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are as follows:
Assuming that the Irish and Mexican subsidiaries did not exist,the U.S.tax liability on the Japanese subsidiary would be closest to:

A)$0.
B)$81 million.
C)$103 million.
D)$106 million.

Question 41

What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?

Question 42

Use the following information to answer the question(s)below.
Incorporated Tool,a U.S.firm,is considering its international tax situation.The corporate tax rate in the United States is currently 21%.Incorporated Tool has major operations in Ireland,where the tax rate is 12.5%,Japan where the tax rate is 40.7%,and Mexico,where the tax rate is 30.0%.Incorporated Tool's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are as follows:
Incorporated Tools' total U.S.tax liability on its foreign earnings is closest to:

A)$0.
B)$81 million.
C)$106 million.
D)$112 million.

Question 43

Suppose the interest rate on Russian government bonds is 7.8%,and the current exchange rate is 26.8 rubles per dollar.If the forward exchange rate is 27.2 rubles per dollar,and the current U.S.risk-free interest rate is 4.6%,what is the implied credit spread for the Russian government bonds?

Question 44

Which of the following statements is FALSE?

A)In some countries,especially in the developing world,not all investors have equal access to financial securities.
B)Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them.
C)In some cases,a country's risk-free securities are internationally integrated but markets for a specific firm's securities are not.
D)When countries' capital markets are not integrated we call them disintegrated capital markets.

Question 45

Which of the following statements is FALSE?

A)Many countries regulate or limit capital inflows or outflows,and many do not allow their currencies to be freely converted into dollars,thereby creating capital market segmentation.
B)The existence of internationally integrated capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation.
C)Political,legal,social,and cultural characteristics that differ across countries may require compensation in the form of a country risk premium.
D)Swaps allow firms to mitigate their exchange rate risk exposure between assets and liabilities,while still making investments and raising funds in the most attractive locales.

Question 46

Which of the following statements is FALSE?

A)Differential access to national capital markets is common enough that it provides the best explanation for the existence of currency swaps,which are like interest rate swap contracts,but with the holder receiving coupons in one currency and paying coupons denominated in a different currency.
B)Currency swaps generally also have final face value payments,also in different currencies.
C)Using a currency swap,a firm can borrow in the market where it has the best access to capital,and then "swap" the coupon and principal payments to whichever currency it would prefer to make payments in.
D)With differential access to national markets,to maximize shareholder value,the firm should raise capital in the foreign market;the method of valuing the foreign project as if it were a domestic project would then provide the correct NPV.

Question 47

How do we make adjustments when a project has inputs and outputs in different currencies?

Question 48

Which of the following statements is FALSE?

A)The rate of interest paid on government bonds or other securities in a country with a tradition of weak enforcement of property rights is likely not really a risk-free rate.Instead,interest rates in the country will reflect a risk premium for the possibility of default,so relations such as covered interest rate parity will likely not hold exactly.
B)If the return difference in a segmented financial market results from a market friction such as capital controls,corporations can exploit this friction by setting up projects and raising capital in the high-return country/currency.
C)Important macroeconomic reasons for segmented capital markets include capital controls and foreign exchange controls that create barriers to international capital flows and thus segment national markets.
D)A segmented financial market has an important implication for international corporate finance: One country or currency has a higher rate of return than another country or currency,when the two rates are compared in the same currency.