Deck 18: International Capital Budgeting

Question 1

When using the APV methodology,what is the NPV of the depreciation tax shield?

A)$32,051.52
B)$25,777.35
C)$22,794.65
D)$97,152.98
E)None of the above

Answer 1

B

Question 2

Perhaps the most important decisions that confront the financial manager are

A)which capital projects to select.
B)the correct capital structure for the firm.
C)the correct capital structure for projects.
D)none of the above

Answer 2

A

Question 3

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the required return on assets?

A)33.33%
B)10.85%
C)13.12%
D)16.5%
E)None of the above

Answer 3

B

Question 4

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the firm's cost of equity capital?

A)33.33%
B)10.85%
C)13.12%
D)16.5%
E)None of the above

Question 5

Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only 30-year loan at 8.0 percent APR with annual payments.Note that eight percent is less than the 10 percent that they normally borrow at.What is the NPV of the loan?

A)$198,469
B)$53,979.83
C)$102,727.55
D)$1,334,851.09
E)None of the above

Question 6

The required return on assets is 18%.The firm can borrow at 12.5%; firm's target debt to value ratio is 3/5.The corporate tax rate is 34%,and the risk-free rate is 4% and the market risk premium is 9.2 percent.What is the weighted average cost of capital?

A)12.15%
B)13.02%
C)14.33%
D)23.45%
E)None of the above

Question 7

What is the NPV of the project using the WACC methodology?

A)$49,613.03
B)$58,028.68
C)$102,727.55
D)$315,666.16
E)None of the above

Question 8

What is the unlevered after-tax incremental cash flow for year 30?

A)$12,432,300
B)$12,225,390
C)$12,332,300
D)$12,485,000
E)None of the above

Question 9

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8%.What is the APV of this subsidized loan? If you rounded in your intermediate steps,the answer may be slightly different from what you got.Choose the closest.

A)-$3,497,224.43
B)$417,201.05
C)$840,797
D)None of the above

Question 10

What is the NPV of the project using the APV methodology?

A)$49,613.03
B)$198,469
C)$102,727.55
D)$149,580.12
E)None of the above

Question 11

What is the NPV of the project using the WACC methodology?

A)$58,028.68
B)$49,613.03
C)$48,300.47
D)$102,727.55
E)None of the above Using the cash flow menu of a financial calculator: CF0 = -$100,000; C01 = $39,800; F01 = 4; C02 = $43,100; I = rWACC = 11.20; NPV = $48,300.47

Question 12

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)payments over 3 years.The first payment is due December 31,2009 and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8%.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

A)-$3,497,224.43
B)$417,201.05
C)$840,797
D)None of the above

Question 13

What is the levered after-tax incremental cash flow for year 0?

A)-$1,010,000
B)-$1,000,000
C)-$660,000
D)-$2,100,000
E)None of the above

Question 14

What is the unlevered after-tax incremental cash flow for year 2?

A)-$4,610
B)$102,300 $202,300
D)$255,000
E)None of the above

Question 15

Capital budgeting analysis is very important,because it

A)involves, usually expensive, investments in capital assets.
B)has to do with the productive capacity of a firm.
C)will determine how competitive and profitable a firm will be.
D)all of the above
Tiger Towers, Inc.is considering an expansion of their existing business, student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs, excluding depreciation, are $75,000 per year.The project will require a $10,000 investment in net working capital.

Question 16

What is the levered after-tax incremental cash flow for year 30?

A)$9,027,390
B)$9,234,300
C)$9,134,300
D)$9,287,000
E)None of the above

Question 17

What is the levered after-tax incremental cash flow for year 1?

A)$4,300
B)-$202,610
C)-$95,700
D)$57,000
E)None of the above

Question 18

The financial manager's responsibility involves

A)increasing the per share price of the company's stock at any cost and by any means, ways and fashion that is possible.
B)the shareholder wealth maximization.
C)which capital projects to select.
D)both b) and c)

Question 19

When using the APV methodology,what is the NPV of the interest tax shield?

A)$9,666.51
B)$12,019.32
C)$9,377.31
D)$7,000.73
E)None of the above

Question 20

What is the unlevered after-tax incremental cash flow for year 0?

A)-$3,660,000
B)-$5,100,000
C)-$4,000,000
D)-$4,010,000
E)None of the above

Question 21

Using the APV method,what is the value of this project to an all-equity firm?

A)-$46,502,288.10
B)$12,494,643.75
C)$36,580,767.55
D)-$67,163,445.12
E)$59,459,301.03 The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 22

What is the levered after-tax incremental cash flow for year 4?

A)$281,704,000
B)$465,152,000
C)-$194,848,000
D)$460,796,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 23

Using the weighted average cost of capital methodology,what is the NPV? I didn't round my intermediate steps.If you do,you're not going to get the right answer.

A)-$1,406,301.25
B)$12,494,643.75
C)$36,580,767.55
D)$108,994.618.20
E)$59,459,301.03

Question 24

What is the levered after-tax incremental cash flow for year 4?

A)-$281,704,000
B)$465,152,000
C)-$194,848,000
D)$460,796,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 25

In the APV model

A)interest tax shields are discounted at i.
B)operating cash flows are discounted at K_u.
C)depreciation tax shields are discounted at i.
D)all of the above

Question 26

Using the APV method,what is the value of the debt side effects?

A)$239,072,652.70
B)$66,891,713.66
C)$59,459,301.03
D)$660,000,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 27

Your firm is in the 34% tax bracket.The yield to maturity on your existing bonds is 8%.The state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a 5% rate of interest and ANNUAL payments due at the END OF THE YEAR. The interest will be deductible at the time that you pay.What is the APV of this below-market loan to your firm? I did not round any of my intermediate steps.You might be a little bit off.Pick the answer closest to yours.

A)$64,157.38
B)$417,201.05
C)$840,797
D)None of the above

Question 28

The required return on equity for an all-equity firm is 10.0%.They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the beta if this firm changes capital structure.

A)1.12
B)1
C)7.4%
D)None of the above

Question 29

Your firm's existing bonds trade with a yield to maturity of eight percent.The state of Missouri has offered to loan your firm $10,000,000 at zero percent for five years.Repayment will be of the form of $2,000,000 per year for five years,the first payment is due in one year.What is the value of this offer?

A)$4,729,622.75
B)$2,014,579.93
C)$0
D)$196,929.88
E)None of the above

Question 30

The required return on equity for an all-equity firm is 10.0%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the new cost of capital if this firm changes capital structure.

A)14.93%
B)8.67%
C)7.40%
D)None of the above

Question 31

Using the flow to equity methodology,what is the value of the equity claim?

A)-$1,540,000
B)$446,570,866.00
C)$36,580,767.55
D)$470,953,393.70
E)$30,716,236.13 The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 32

Using the APV method,what is the value of the debt side effects?

A)$239,072,652.70
B)$66,891,713.66
C)$59,459,301.03
D)$660,000,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 33

What is the levered after-tax incremental cash flow for year 2?

A)$185,796,000
B)$215,152,000
C)$267,952,000
D)$284,848,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 34

Using the flow to equity methodology,what is the value of the equity claim?

A)-$1,540,000
B)$446,570,866.00
C)$36,580,767.55
D)$470,953,393.70
E)$30,716,236.13 The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 35

What is the levered after-tax incremental cash flow for year 2?

A)$185,796,000
B)$215,152,000
C)$267,952,000
D)$284,848,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 36

The required return on equity for a levered firm is 10.60%.The debt to equity ratio is ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the cost of capital if this firm were financed entirely with equity.

A)10%
B)12%
C)8.67%
D)None of the above

Question 37

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.Calculate the weighted average cost of capital.

A)33.33%
B)8.09%
C)9.02%
D)16.5%
E)None of the above

Question 38

Using the APV method,what is the value of this project to an all-equity firm?

A)-$46,502,288.10
B)$12,494,643.75
C)$36,580,767.55
D)-$67,163,445.12
E)$59,459,301.03 The firm will partially finance the project with an 8% interest-only 4-year loan.

Question 39

Using the weighted average cost of capital methodology,what is the NPV? I didn't round my intermediate steps.If you do,you're not going to get the right answer.

A)-$1,406,301.25
B)$12,494,643.75
C)$36,580,767.55
D)$108,994.618.20
E)$59,459,301.03

Question 40

What proportion of the firm is financed by debt for a firm that expects a 15% return on equity,a 12% return on assets,and a 10% return on debt? The tax rate is 25%.

A)20%
B)1/3
C)60%
D)2/3
E)80%

Question 41

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

A)€1.00 = $1.5147
B)€1.00 = $1.4854
C)€1.00 = $0.6602
D)$1.00 = €0.6602

Question 42

What is CF1 in dollars?

Question 43

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments).

A)$8
B)$18
C)$78
D)$90

Question 44

Which of the following statements is false about "borrowing capacity"?

A)It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans.
B)It creates tax shields for APV analysis regardless of how the project is actually financed.
C)It synonymous to the "project debt".
D)It based on the firm's optimal capital structure.

Question 45

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8%.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

A)$406,023.10
B)$840,797
C)$64,157.38
D)$20,659.77
E)None of the other answers are within $100 of my answer

Question 46

What is the expected return on equity for firm in the 40% tax bracket with a 15% expected return on assets that pays 12% on its debt,which totals 25% of assets?

A)24%
B)15.60%
C)16%
D)20%
E)15.75%

Question 47

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to

A)the cannibalization of existing projects by new projects.
B)the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project.
C)both a) and b)
D)none of the above

Question 48

What is the expected return on equity for a tax-free firm with a 15% expected return on assets that pays 12% on its debt,which totals 25% of assets?

A)24%
B)15.60%
C)16%
D)20%
E)15.75%

Question 49

What is CF0 in dollars?

Question 50

The ABC Company,a U.S.-based MNC,plans to establish a subsidiary in Spain to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Spain is estimated to be €8,500 million,of which €6,500 million is to be financed at a below-market rate of interest arranged by the Spanish government.The proposed project will increase the borrowing capacity by

A)€1,215 million.
B)€2,215 million.
C)€3,215 million.
D)€4,215 million.

Question 51

The "net present value" of a capital project is calculated by using:

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 52

An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K.The business risk will be identical to the firm's existing line of business in the euro zone,the cost of capital in the euro zone is i_€ = 10%.The expected inflation rate over the next two years in the U.K.is 3% per year and 2% per year in the euro zone.The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00. The pound sterling denominated cash flows are as follows: What is the €-denominated NPV of this project? I did not round my intermediate steps,if you did,select the answer closest to yours.

A)€5,563.23
B)€2,270.79
C)€7,223.14
D)€3,554.29
E)There is not enough information (e.g.U.S.inflation) to do this problem.

Question 53

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to

A)analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment.
B)more fully understand the implications of planned capital expenditures.
C)consider in advance actions that can be taken should an investment not develop as anticipated.
D)all of the above

Question 54

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

A)€1.00 = $1.2379
B)€1.00 = $1.2139
C)€1.00 = $0.9903
D)$1.00 = €1.2623

Question 55

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to

A)distinguish between the market value of a levered firm and the market value of an unlevered firm.
B)discern the blocking of certain cash flows by the host country from being legally remitted to the parent.
C)consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances.
D)all of the above

Question 56

Assume that XYZ Corporation is a leveraged company with the following information: Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

A)35%
B)40%
C)45%
D)50%

Question 57

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10%; inflation over the next three years is 3% per year in the U.S.and 2% per year in Japan.Calculate the dollar NPV of this project. I did not round my intermediate steps,if you did,select the answer closest to yours.

A)$267,181.87
B)$14,176.67
C)$2,536.49
D)$2,137.46
E)None of the above

Question 58

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S.is 2% and 3% in the euro zone.What spot exchange rate should prevail three years from now?

A)€1.00 = $1.2379
B)€1.00 = $1.2139
C)€1.00 = $0.9903
D)$1.00 = €1.2623

Question 59

The "incremental" cash flows of a capital project is calculated by using:

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 60

What is CF5 in dollars?

Question 61

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the dollar-denominated IRR of this project?

Question 62

Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Please note that your answer is worth ZERO POINTS if it does not contain currency symbols.

Question 63

Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean up: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

Question 64

Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Your answer is worth ZERO POINTS if it does not contain currency symbols such as $,£,€,¥!

Question 65

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
What is the euro-denominated IRR of this project?

Question 66

Repeat the above project analysis assuming that the Irish firm could replicate the project in Ireland.(i.e.cash flow out the project in Ireland and find break-even price (in €),quantity,NPV,IRR (in euro not dollars).

Question 67

What is the dollar-denominated IRR of this project?

Question 68

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10%
The project costs £1,000 and will return £1,150 at the end of one year.
The current exchange rate is €2.00 = £1.00
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year.
Find the IRR in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S₁(€|£)= €2.20 per £.

Question 69

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

Question 70

What is the euro-denominated IRR of this project?

Question 71

What is the NPV of the U.S.-based project to the Irish firm?

Question 72

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10%
The project costs £1,000 and will return £1,150 at the end of one year.
The current exchange rate is €2.00 = £1.00
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year.
Find the ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate rises to S₁(€|£)= €2.20 per £.

Question 73

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10%
The project costs £1,000 and will return £1,150 at the end of one year.
The current exchange rate is €2.00 = £1.00
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year.
Find the ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate falls to S₁(€|£)= €1.80 per £.

Question 74

Find the break-even price (in dollars)and break-even quantity for the U.S.project.

Question 75

What is the euro-denominated IRR of this project?

Question 76

What is the euro-denominated IRR?

Question 77

What is the dollar-denominated IRR?

Question 78

What is the dollar-denominated IRR of this project?

Question 79

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Question 80

Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean up: The current exchange rate is $1.55 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.