Question 1

If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.

Accepted Answer

General stock market conditions can influence the valuation of a privately held target, as they affect the overall economic environment, investor sentiment, and the cost of capital, which can impact the acquisition price.

Question 2

If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC's required return from acquiring the target will be relatively ____.

Accepted Answer

The risk is relatively low because the target company is already successful in its local market, and the MNC plans to improve efficiency. Consequently, the required return is also relatively low due to the reduced risk.

Question 3

An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.

Accepted Answer

An acquirer based in a low-tax country may have a competitive advantage as they may be able to generate higher after-tax cash flows from the foreign target due to lower tax rates. On the other hand, an acquirer based in a high-tax country may face higher tax liabilities, reducing their cash flows from the acquisition.

Question 4

Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country.

Accepted Answer

If an MNC intends to generate revenues in the host country, then economic conditions in that country become a critical factor. However, if the MNC intends to focus on exporting from the target's home country, then economic conditions in the host country may not be as important since the MNC is not directly operating or generating revenues there.

Question 5

An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.

Accepted Answer

By acquiring an existing international company, the firm can skip the time-consuming process of setting up a new subsidiary, and can instead begin to benefit from the customer relationships and brand recognition that the acquired company already has in place. This can effectively jumpstart the firm's global expansion efforts.

Question 6

Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.

Accepted Answer

When economic conditions are strong, people have more disposable income and are more likely to spend it. This leads to increased demand for products, which in turn generates higher cash flows for companies. Therefore, potential targets in countries with strong economic conditions are more likely to experience strong demand for their products in the future and may generate higher cash flows.

Question 7

An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement.

Accepted Answer

The MNC would prefer to make a bid when local stock market prices are generally low as it would mean that the target's stock price is undervalued, making it a more attractive investment opportunity. This would also make the acquisition cost lower for the MNC, providing an opportunity for potential long-term gains.

Question 8

A target's previous cash flows are typically an accurate indicator of future cash flows, especially when the target's cash flows would have to be converted into the acquirer's home currency as they are remitted to the parent.

Accepted Answer

Past cash flows may not accurately predict future cash flows due to changes in market conditions, exchange rates, and other economic factors.

Question 9

Which of the following would not enhance the value of a target from the acquirer's perspective?

Accepted Answer

If the required rate of return from investing in the target has increased, it means that the acquisition would be less attractive to the acquirer as it would result in a lower return on investment. Therefore, it would not enhance the value of the target from the acquirer's perspective. On the other hand, options A and B would enhance the value of the target as these factors would increase the expected cash flows and reduce the risks associated with the acquisition. Therefore, the correct answer is C.

Question 10

Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated.

Accepted Answer

Errors in cash flow or exchange rate estimates can lead to the underestimation of the estimated net present value of acquiring a foreign target.

Question 11

Downsizing reduces expenses but may also reduce productivity and revenue.

Accepted Answer

Downsizing often involves reducing the workforce, which can lead to decreased productivity and revenue if the remaining employees are overburdened or if key talent is lost in the process.

Question 12

Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.

Accepted Answer

As business and market conditions can change over time, a foreign acquisition that was previously deemed acceptable may become unprofitable or not aligned with the MNC's strategic objectives. Thus, it is important to reassess the acquisition decision periodically to determine whether it is still the best option for the company. In some cases, divestment may be necessary to cut losses or redirect resources to more promising ventures.

Question 13

The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when assessing acquisitions.

Accepted Answer

The Sarbanes-Oxley Act requires more transparency and accountability in financial reporting and business practices, including with regards to mergers and acquisitions. Executives and the board of directors are required to provide more detailed and accurate information about the financial status of the company and any potential risks involved in an acquisition. This is intended to protect investors and prevent fraudulent activities.

Question 14

A foreign target's expected future cash flows generally vary among different MNCs valuing the target.

Accepted Answer

This is because MNCs may have different growth rates and expectations for the target's profitability and future prospects. Additionally, MNCs may have different financing costs and tax rates that can impact the valuation of the target's cash flows.

Question 15

When viewed as a project, the international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay.

Accepted Answer

This statement is true. International acquisition typically involves purchasing an established company with an existing customer base, products, and infrastructure, allowing for quicker cash flows. However, the initial cost of acquiring the company can also be high.

Question 16

When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____.

Accepted Answer

An MNC would prefer a country where the growth potential for its industry is high as it provides opportunities for expansion and revenue growth. However, it will not prefer excessive competition within the industry as it can lead to price wars, lower profit margins, and saturation of the market. Therefore, the ideal scenario for an MNC would be a country with high growth potential for its industry but not excessive competition.

Question 17

If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.

Accepted Answer

If the foreign currency appreciates, the acquirer will need more of their own currency to make the payment, making the acquisition more costly. The cost changes in the same proportion as the change in the exchange rate.

Question 18

The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.

Accepted Answer

Market valuation = €5 million × 12 = €60 million

Question 19

An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a public target.

Accepted Answer

It is common for an acquirer to pay a premium above the current market value for a public target in order to convince shareholders to sell their shares. This premium can range from 30 percent or more, depending on the attractiveness of the target and the competition for the acquisition.

Question 20

When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive.

Accepted Answer

This statement is true as MNCs would prefer countries where the growth potential is high for their respective industry as it provides opportunity for expansion and profitability. Additionally, they would also prefer countries where the competition within the industry is not excessive as it ensures better market share and profitability.

Quiz 15: International Corporate Governance and Control