Question 1

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S.parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

Accepted Answer

When the currency of the host country is expected to depreciate consistently, it creates a higher risk for the subsidiary administering the project because they will be earning revenue in the depreciating currency whereas the parent company will be converting the revenue back to US dollar at a higher value. This creates a greater discrepancy in the feasibility assessment between the parent and subsidiary. Options A and B do not directly contribute to the discrepancy in feasibility assessment.

Question 2

If the parent charges the subsidiary administrative fees,the earnings from the project will appear low to the parent and high to the subsidiary.

Accepted Answer

When a parent charges the subsidiary administrative fees, it increases the expenses of the subsidiary, thus reducing its earnings. Conversely, these fees are income to the parent, potentially making the project appear more profitable from the parent's perspective.

Question 3

According to the text,in order to develop a distribution of possible net present values from international projects,a firm should use:

Accepted Answer

In order to develop a distribution of possible net present values from international projects, a firm should use simulation. Simulation can help the firm to examine the potential outcomes of a project under different scenarios, considering various sources of risk and uncertainty. By simulating a large number of possible scenarios, the firm can estimate the probability distribution of net present values and use this information to make better investment decisions. The other options, including risk-adjusted discount rates, payback periods, and certainty equivalents, are commonly used techniques for evaluating investments but do not provide a distribution of possible outcomes.

Question 4

Assume the parent of a U.S.based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S.operations.  According to the text,the discount rate used in the capital budgeting analysis on this project should be most affected by:

Accepted Answer

The discount rate used in capital budgeting analysis on this project should be based on the parent's cost of capital since the funds are being provided from the parent's retained earnings. The cost of borrowing funds in either the U.K. or U.S. would not directly affect the discount rate in this scenario.

Question 5

In capital budgeting analysis,the use of a cumulative NPV is useful for:

Accepted Answer

The answer of In capital budgeting analysis,the use of a...

Question 6

Other things being equal,firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _______ against their home currency,and if their cost of capital is relatively _______.

Accepted Answer

Firms are more likely to engage in international acquisitions if they expect foreign currencies to appreciate against their home currency because the value of their foreign investments will increase in their home currency terms. Additionally, a relatively low cost of capital makes financing the acquisition cheaper, further incentivizing international acquisitions.

Question 7

When evaluating international project cash flows,which of the following factors is relevant

Accepted Answer

All of the above factors are relevant when evaluating international project cash flows. Future inflation can impact the value of future cash flows, blocked funds can limit the availability of cash for the project, and exchange rates can affect the value of cash flows denominated in foreign currencies. Therefore, all of these factors need to be considered in order to accurately evaluate the cash flows of an international project.

Question 8

The break-even salvage value of a particular project is the salvage value necessary to:

Accepted Answer

The answer of The break-even salvage value of a particular...

Question 9

If an MNC exports to a country,then establishes a subsidiary to produce and sell the same product in the country,then cash flows from prevailing operations would likely be _______ affected by the project.  If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent,the cash flows from prevailing operations would likely be _______ affected by the project.

Accepted Answer

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in the country, it is likely that the existing exports will shift to the local production, which will reduce the cash flows from prevailing operations. Therefore, the cash flows would be adversely affected by the project. 
In the second scenario, if an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, it will result in increased sales for the parent company and the foreign subsidiary. Hence, the cash flows from prevailing operations would be favorably affected by the project.

Question 10

Assume an MNC establishes a subsidiary where it has no other existing business.  The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

Accepted Answer

The answer of Assume an MNC establishes a subsidiary where...

Question 11

A firm considers an exporting project and will invoice the exports in dollars.The expected cash flows in dollars would be more difficult if the currency of the foreign country is ________.

Accepted Answer

If the foreign country's currency is volatile, it means that its exchange rate with the dollar can fluctuate greatly over time. This makes it challenging for the firm to accurately predict its expected cash flows and profits from the exporting project. On the other hand, if the currency is fixed or stable, the firm can more accurately forecast its cash flows and manage its risks. Therefore, option B is the best choice.

Question 12

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _______ in the host country and there are _______ investment opportunities in the host country.

Accepted Answer

The answer of The impact of blocked funds on the...

Question 13

Other things being equal,a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to _______ over time,and if the interest rate in that country is relatively ______.

Accepted Answer

A blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to depreciate over time. This is because the value of the funds being blocked will decrease over time, resulting in a larger loss in value. Additionally, if the interest rate in that country is relatively low, it will be harder for the project to generate enough returns to offset the loss in value caused by the depreciating currency.

Question 14

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

Accepted Answer

Blocked funds refer to money that is not allowed to be repatriated back to the home country, and must be reinvested in the foreign country. If the return on this forced reinvestment is less than the required rate of return on the project, it can penalize the project by reducing overall profitability.

Question 15

When assessing a German project administered by a German subsidiary of a U.S.based MNC solely from the German subsidiary's perspective,which variable will most likely influence the capital budgeting analysis

Accepted Answer

When assessing a German project solely from the German subsidiary's perspective, the variable that will most likely influence the capital budgeting analysis is the German government's tax rate. This is because the German government's tax rate will directly impact the project's cash flows and profitability in Germany. The other variables listed (withholding tax rate, euro's exchange rate, U.S. tax rate on earnings remitted to the U.S.) may also be important factors to consider, but they would likely have a smaller impact on the capital budgeting analysis compared to the German government's tax rate.

Question 16

If a U.S.parent is setting up a French subsidiary,and funds from the subsidiary will be periodically sent to the parent,the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

Accepted Answer

A strengthening euro would mean that the parent company will receive more dollars for every euro sent from the subsidiary, resulting in higher profits.

Question 17

An MNC is considering establishing a twoyear project in New Zealand with a $30 million initial investment.  The firm's cost of capital is 12%.  The required rate of return on this project is 18%.  The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2,excluding the salvage value.  Assume no taxes,and a stable exchange rate of $.60 per NZ$ over the next two years.  All cash flows are remitted to the parent.  What is the break-even salvage value

Accepted Answer

The answer of An MNC is considering establishing a twoyear...

Question 18

Assume a U.S.based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S.  If the peso _______,the dollar amount of remitted funds _______.

Accepted Answer

If the peso depreciates, it means that it takes more pesos to equal one U.S. dollar. Therefore, when the Chilean subsidiary remits 30 million Chilean pesos, it would be worth less in U.S. dollars compared to before. Therefore, the dollar amount of remitted funds decreases.

Question 19

In general,increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

Accepted Answer

As the investment by the parent in the foreign subsidiary increases, the cash flows remitted to the parent from the subsidiary will also increase. These cash flows are subject to exchange rate fluctuations, meaning that the parent will face more exposure to currency risk over time. Therefore, the statement is true.

Question 20

If a multinational project is assessed from the subsidiary's perspective,withholding taxes are ignored for project assessment.

Accepted Answer

The answer of If a multinational project is assessed from...

Quiz 14: Multinational Capital Budgeting

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S.parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

If the parent charges the subsidiary administrative fees,the earnings from the project will appear low to the parent and high to the subsidiary.

According to the text,in order to develop a distribution of possible net present values from international projects,a firm should use:

Assume the parent of a U.S.based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S.operations. According to the text,the discount rate used in the capital budgeting analysis on this project should be most affected by:

In capital budgeting analysis,the use of a cumulative NPV is useful for:

Other things being equal,firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _ against their home currency,and if their cost of capital is relatively _.

When evaluating international project cash flows,which of the following factors is relevant

The break-even salvage value of a particular project is the salvage value necessary to:

Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

A firm considers an exporting project and will invoice the exports in dollars.The expected cash flows in dollars would be more difficult if the currency of the foreign country is ________.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _ in the host country and there are _ investment opportunities in the host country.

Other things being equal,a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to _ over time,and if the interest rate in that country is relatively .

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

When assessing a German project administered by a German subsidiary of a U.S.based MNC solely from the German subsidiary's perspective,which variable will most likely influence the capital budgeting analysis

If a U.S.parent is setting up a French subsidiary,and funds from the subsidiary will be periodically sent to the parent,the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

Assume a U.S.based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso _,the dollar amount of remitted funds _.

In general,increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

If a multinational project is assessed from the subsidiary's perspective,withholding taxes are ignored for project assessment.