Question 1

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.

Accepted Answer

The answer of The authors highlight a strong theoretical argument...

Question 2

Hydrotech Manufacturing of Houston Texas expects to receive dividends each year from a foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate of 7% per year. If the euro appreciates in value against the dollar at a rate of 2% per year over the life of the dividends,then the present value of the euro dividends to Hydrotech will be ________ if there had been no change in the relative values of the euro and dollar.

Accepted Answer

The appreciation of the euro against the dollar increases the dollar value of the dividends received in euros, making the present value of the euro dividends greater than if there had been no change in the exchange rate.

Question 3

Which of the following would NOT be a potential reason for firms to pursue a cross-border merger or acquisition?

Accepted Answer

All of the above (gaining access to strategic proprietary assets, gaining market power and dominance, diversification and the spreading of risk) are potential reasons for firms to pursue a cross-border merger or acquisition.

Question 4

What is project financing and what are the factors critical to its success?

Accepted Answer

The answer of What is project financing and what are...

Question 5

Generally speaking,currency risk decreases as time prior to acquisition of a foreign firm decreases.

Accepted Answer

Currency risk, which is the risk of fluctuations in exchange rates, can be minimized by reducing the time between the decision to acquire a foreign firm and the actual acquisition. This is because a shorter time frame allows less exposure to exchange rate fluctuations. As a result, the statement is true.

Question 6

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

Accepted Answer

All of the factors listed (separability of the project from its investors, long-lived and capital intensive singular projects, and cash flow predictability from third party commitments) are critical to the success of project financing.

Question 7

What is real option analysis? How does it differ from the discounted cash flow approach to project evaluation? Why do some decision-makers prefer the real option approach over the DCF approach?

Accepted Answer

The answer of What is real option analysis? How does...

Question 8

Compared to a greenfield investment,list advantages and disadvantages of a cross-border merger or acquisition.

Accepted Answer

The answer of Compared to a greenfield investment,list advantages and...

Question 9

Real option analysis is a particularly powerful device when addressing potential investment projects ________.

Accepted Answer

Real option analysis is best suited for investment projects that do not commence until future dates (option to defer), and have extremely long life spans (option to abandon, expand or contract). Therefore, both options A and B are correct.

Question 10

The process of acquiring an enterprise anywhere in the world has the following common elements EXCEPT ________.

Accepted Answer

All of the options (A, B, and C) are common elements in the process of acquiring an enterprise anywhere in the world.

Question 11

At its core,real option analysis is a cross between decision-tree analysis and pure option-based valuation.

Accepted Answer

Real option analysis involves assessing the potential value of investment opportunities by taking into account the flexibility to make future decisions based on uncertain outcomes. This approach combines elements of decision-tree analysis, which examines the various possible outcomes of a decision, with option-based valuation, which considers the value of the right to make choices in the future.

Question 12

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

Accepted Answer

Project financing is specifically structured to finance large, long-term infrastructure and industrial projects such as highways, airports, power plants, and pipelines.

Question 13

Capital budgeting typically requires some type of sensitivity analysis.In the case of international capital budgeting from the project perspective,analysts consider political risk,foreign exchange risk and foreign exchange risk.Identify and discuss the important aspects of these two types of risk considerations.

Accepted Answer

The answer of Capital budgeting typically requires some type of...

Question 14

Real option analysis treats cash flows in terms of future value in a negative sense,whereas DCF treats future cash flows positively.

Accepted Answer

Real option analysis and DCF both consider future cash flows positively, but real option analysis incorporates flexibility and strategic value in decision-making, unlike traditional DCF.

Question 15

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

Accepted Answer

Real option analysis can be used to analyze all of the options listed, including the option to defer, the option to abandon, and the option to alter capacity. Therefore, choice D is correct.

Question 16

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

Accepted Answer

The answer of Explain how political risk and exchange rate...

Quiz 16: Multinational Capital Budgeting and Cross-Border Acquisitions