Question 1

Which of the following would probably not cause the stock price of a foreign target to decrease?

Accepted Answer

When investors anticipate that the target will be acquired, it is likely that the stock price of the target will increase instead of decrease. Therefore, option C is the correct answer, and the other options will cause the stock price of the foreign target to decrease.

Question 2

Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target?

Accepted Answer

A

Question 3

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
-Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is $____ million.

Accepted Answer

B

Question 4

Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?

Accepted Answer

An international acquisition of a newly privatized business is the most difficult to value by an MNC because such businesses lack a track record, and there is no historical financial data available for valuation purposes. MNCs would have to rely on projections and estimates of future earnings, which carry a higher degree of uncertainty and risk. The other options, including an international acquisition of an existing business, an international partial acquisition, and an international divestiture, all involve existing businesses that have a financial history that can be used for valuation purposes.

Question 5

International governance is achieved by all of the following except:

Accepted Answer

Poison pills are not a mechanism for achieving international governance. They are a defensive tactic implemented by companies to discourage hostile takeovers. The other choices, such as the board of directors, institutional investors, and blockholders are all mechanisms for achieving governance.

Question 6

At present, U.S. firms acquire more targets in China than in any other country.

Accepted Answer

U.S. firms acquire more targets in countries like Canada and the United Kingdom than in China, due to various factors including political, regulatory, and economic considerations.

Question 7

Which of the following tax-related factors need not be considered in assessing a foreign target?
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Accepted Answer

The withholding tax rates in the home country are not relevant in assessing a foreign target as they do not affect the potential profitability or tax liabilities of the foreign target. However, corporate tax rates and withholding tax rates in the host country can have a significant impact on the financial performance and tax obligations of the foreign target, while corporate tax rates in the home country can affect the overall tax strategy and planning of the acquiring company.

Question 8

When a U.S. firm attempts to acquire a target in a country where shareholder rights are weak, it will generally have to pay cash for the shares because the target shareholders will not want to receive stock in the U.S. firm as payment.

Accepted Answer

The answer of When a U.S. firm attempts to acquire...

Question 9

Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?

Accepted Answer

International acquisitions are generally more expensive than establishing a new subsidiary due to the costs associated with acquiring an existing business.

Question 10

Since the cash flows generated by a foreign target will eventually be converted to the parent's currency, there is no need to consider the foreign exchange rate in the capital budgeting process.

Accepted Answer

The foreign exchange rate should be considered in the capital budgeting process because the value of the cash flows generated by a foreign target can be affected by exchange rate fluctuations when they are converted to the parent's currency. This can impact the net present value and profitability of the project.

Question 11

Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.

Accepted Answer

Restructuring an existing business can lead to improved efficiency, better alignment with the MNC's strategy and increased profitability. Therefore, it may be beneficial for the MNC to consider restructuring the existing business to generate more value.

Question 12

Which of the following is not true regarding a target's previous cash flows?

Accepted Answer

Previous cash flows are helpful in estimating future cash flows, but they are not always good indicators. Other factors, such as changes in the industry, competition, and market conditions, can impact future cash flows. Therefore, option C is not true. Options A and B are true statements.

Question 13

From an acquirer's perspective, the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent.

Accepted Answer

Acquiring a company in a weak foreign currency can result in a lower purchase price, and as the foreign currency strengthens over time, the acquirer can realize a greater return on their investment when funds are remitted back to the parent.

Question 14

The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.

Accepted Answer

Some countries have regulations and restrictions on foreign acquisitions of domestic companies, and may require that the foreign firm maintains or even increases employment levels at the local targets.

Question 15

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
-Refer to Exhibit 15-1. The Malaysian target's value based on its stock price is $____ million.

Accepted Answer

The answer of Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has...

Question 16

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
-Refer to Exhibit 15-1. The target's board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer?

Accepted Answer

To find the maximum premium, we need to calculate the present value of the target's future cash flows and subtract Klimewsky's expected selling price in three years from it. Then, we need to divide this value by the target's current stock price and subtract 1 to get the percentage premium. If this percentage is greater than the board's indicated premium of 30 percent, then Klimewsky should not offer a higher premium.

PV of cash flows = (300 × 0.4 − 40 − 15 − 9) / (1 + 0.13) + (300 × 0.4 × 1.09 − 40 − 15 − 9) / (1 + 0.13)² + (300 × 0.4 × 1.09² − 40 − 15 − 9) / (1 + 0.13)³ + (500 / 1.13³) = MYR534.5 million

Value per share = (534.5 × 0.7) / 11 = MYR34.33

Premium = (34.33 / 35) − 1 = 0.017 or 1.7 percent

Since the maximum premium Klimewsky should offer is 30 percent, which is higher than the calculated premium of 1.7 percent, the correct answer is B) 25.9 percent (30 − 1.7).

Question 17

Based on information in your text, all of the following factors should be considered in an international acquisition, except:

Accepted Answer

The target's previous acquisition history may be a useful factor to consider in some cases, but it is not necessarily essential. Factors that are more important to consider in an international acquisition include the target's willingness to be acquired, their previous cash flows, and the local economic conditions in the target country.

Question 18

According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.

Accepted Answer

U.S. firms pursue more international acquisitions in the United Kingdom than in other countries due to factors like language, legal similarities, and a favorable business environment.

Question 19

A previously undertaken project in a foreign country may no longer be feasible because:

Accepted Answer

An increase in tax rates by the host government could substantially increase the MNC's cost of operating in the foreign country, making the project no longer financially feasible. The other choices, such as a decline in interest rates or a decrease in the MNC's cost of capital, may actually make the project more attractive. Additionally, a change in exchange rate projections, whether from depreciation to appreciation or the opposite, could affect the project's profitability, but it may not necessarily make it unfeasible. Thus, C is the best choice.

Question 20

An MNC may have to pay a higher price to acquire a target in countries that do not strictly enforce laws against insider trading.

Accepted Answer

When insider trading laws are not strictly enforced, there is a higher possibility that confidential information might be leaked, which could lead to a higher purchase price for the target company. This is because the acquirer may have to pay a premium to compensate for the increased risk of information leakage.

Quiz 15: International Corporate Governance and Control