Deck 18: Multinational Capital Budgeting and Cross-Border Acquisitions

Question 1

Which of the following is NOT a basic step in the capital budgeting process?

A)Identify the initial capital invested.
B)Estimate the cash flows to be derived from the project over time.
C)Identify the appropriate interest rate at which to discount future cash flows.
D)All of the above are steps in the capital budgeting process.

Answer 1

All of the above are steps in the capital budgeting process.

Question 2

When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital.

Answer 2

False

Question 3

For purposes of international capital budgeting, parent cash flows often depend on the form of financing. Thus, we cannot clearly separate cash flows from financing decisions, as we can in domestic capital budgeting.

Answer 3

True

Question 4

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

Question 5

For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.

A)20%
B)40%
C)50%
D)75%

Question 6

For purposes of international capital budgeting, which of the following statements is NOT true?

A)Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows.
B)Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value.
C)An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent.
D)All of the above are true statements.

Question 7

Multinational firms should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project.

Question 8

For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

Question 9

Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

A)net present value
B)internal rate of return
C)accounting rate of return
D)All of these techniques typically use discounted cash flows.

Question 10

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

A)Parent cash flows must be distinguished from project cash flows.
B)Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms.
C)Differing rates of inflation exist between the foreign and domestic economies.
D)All of the above add complexity to the international capital budgeting process.

Question 11

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

A)pro rated
B)50%
C)75%
D)100%

Question 12

For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL's viewpoint.

Question 13

It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.

Question 14

A foreign firm that is 20% to 49% owned by a parent is called a/an:

A)subsidiary.
B)affiliate.
C)partner.
D)rival.

Question 15

The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

Question 16

There are no important differences between domestic and international capital budgeting methods.

Question 17

The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

Question 18

The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called:

A)cost of capital analysis.
B)capital budgeting.
C)capital structure analysis.
D)agency theory.

Question 19

Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

A)local; be subordinated to; parent's
B)local; not be subordinated to; parent's
C)parent's; be subordinated to; local
D)none of the above

Question 20

In international capital budgeting, the appropriate discount rate for determining the present value of the
expected cash flows is always the firm's domestic WACC.

Question 21

When estimating a capital budget, it is common to separate cash flows into: 1)the initial investment, 2)incremental cash flows over the life of the project, and 3)a terminal value.

Question 22

Which of the following is NOT an example of political risk?

A)Expropriation of cash flows by a foreign government.
B)The U.S. government restricts trade with a foreign country where your firm has investments.
C)The foreign government nationalizes all foreign-owned assets.
D)All of the above are examples of political risk.

Question 23

________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.

A)Exchange risk
B)Foreign risk
C)Political risk
D)Unnecessary risk

Question 24

When estimating a firm's cost of equity capital using the CAPM, you need to estimate:

A)the risk-free rate of return.
B)the expected return on the market portfolio.
C)the firm's beta.
D)all of the above

Question 25

When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:

A)adjusting the cash flows.
B)adjusting the discount rates.
C)adjusting both cash flows and discount rates.
D)adjusting all of the above.

Question 26

If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be:

A)less than the cost of capital.
B)greater than the cost of capital.
C)greater than the cost of the project.
D)cannot be determined from this information

Question 27

When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?

A)the firm's tax rate
B)the firm's cost of debt
C)the firm's cost of equity
D)All of the above are necessary.

Question 28

Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?

A)€400,000
B)€240,000
C)€120,000
D)€360,000

Question 29

Real option analysis allows managers to analyze all of the following EXCEPT:

A)the option to defer.
B)the option to abandon.
C)the option to alter capacity.
D)All of the above may be analyzed using real option analysis.

Question 30

Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.

A)appreciating; depreciating
B)depreciating; depreciating
C)appreciating; appreciating
D)depreciating; appreciating

Question 31

When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project?

A)an NPV > $0
B)an IRR > the project's required rate of return
C)an IRR > $0
D)All of the above are correct indicators.

Question 32

Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?

A)14.4%
B)10.3%
C)12.0%
D)8.6%

Question 33

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.

Question 34

Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

A)$1,520,000
B)$1,684,210
C)-$75,310
D)-$71,544

Question 35

When determining a firm's weighted average cost of capital (WACC)which of the following terms is NOT necessary?

A)the firm's weight of equity financing
B)the risk-free rate of return
C)the firm's weight of debt financing
D)All of the above are necessary to determine a firm's WACC.

Question 36

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.

Question 37

Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

A)€1,524,690
B)$1,611,317
C)-€75,310
D)-€111,317

Question 38

Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?

A)$1,500,000
B)€1,600,000
C)$1,600,000
D)€1,500,000

Question 39

When a multinational firm invests abroad, it is common to develop two capital budgets: one from the project viewpoint, and one from the parent viewpoint.

Question 40

Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

Question 41

Which of the following is NOT a factor critical to the success of project financing?

A)separability of the project from its investors
B)long-lived and capital intensive singular projects
C)cash flow predictability from third part commitments
D)All of the above are critical factors for project financing.

Question 42

Which of the following is NOT a reason given for international mergers and acquisitions?

A)gaining access to strategic proprietary assets
B)gaining market power and dominance
C)diversifying and spreading their risks wider
D)All of the above are commonly cited reasons for international mergers and acquisitions.

Question 43

Currency risk is a concern for any international merger and acquisition activity. For instance, the initial bid, if denominated in a foreign currency, creates a contingent foreign currency exposure for the bidder.

Question 44

Because international capital budgeting is so difficult, time consuming, expensive, and uncertain, firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

Question 45

The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

A)identification and valuation of the target.
B)execution of the acquisition offer and purchase-the tender.
C)management of the post-acquisition transition.
D)All of the above are common elements in acquiring an enterprise anywhere in the world.

Question 46

A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Question 47

Project financing is the arrangement of financing for very large individual long-term capital projects.

Question 48

The drivers of international merger and acquisitions are only MACRO in scope.

Question 49

Which of the following is NOT a characteristic of international long-term capital project financing?

A)The projects are large in scale.
B)The projects are long in life.
C)The projects are generally high in risk.
D)The projects may be all of the above.

Question 50

As opposed to greenfield investment, a cross-border acquisition is typically quicker.

Question 51

Currency risk is a concern for any international merger and acquisition activity. For instance, once the bidder has successfully won the acquisition, the exposure evolves from a transaction exposure to a contingent exposure.