Deck 15: International Capital Budgeting

Question 1

The first step in deriving an ANPV for a project is to

A) add the net present value of financial side effects.
B) add the present value of any growth options.
C) calculate the net present value of the project's cash flows.
D) determine the terminal value of the project.

Answer 1

C

Question 2

When a firm's management chooses not to pay out dividends from its free cash flow,it develops ________ that may lead to high agency costs.

A) negative net present value
B) additional depreciation
C) no more growth options
D) financial slack

Answer 2

D

Question 3

If projects are mutually exclusive,the project with the ________ should be accepted by the firm.

A) lowest ANPV
B) highest ANPV
C) highest return
D) lowest tax burden

Answer 3

B

Question 4

The basic principle of capital budgeting is that

A) all projects with positive adjusted cash flows should be accepted.
B) all projects with adjusted cash flows of zero or greater.
C) only projects with adjusted cash flows should be accepted.
D) only projects financed entirely with equity be accepted.

Question 5

________ is the amount of inventory and cash that the firm must have on hand to run its business.

A) Capital expenditure
B) Free cash flow
C) Net working capital
D) Incremental cash flow

Question 6

What is the term used to refer to the ability of the firm to deduct interest payments to reduce its tax liability?

A) tax credits
B) interest tax shield
C) interest loophole
D) tax forgiveness

Question 7

One of the problems with cash flow computations is that it often ignores ________.

A) real options
B) currency exposure
C) terminal value
D) incremental cash flows

Question 8

When a firm undertakes a project and obtains an option to do another project in the future,it is often referred to as a ________.

A) put
B) call
C) hedge
D) growth option

Question 9

________ refers to the possibility of export revenue when a foreign market is served by direct foreign investment and the former exports to that market are unable to be sold elsewhere.

A) Cannibalization of exports
B) Cannibalization of imports
C) Capital budgeting
D) Adjusted net present value

Question 10

The net present value of financial side effects arise from

A) the costs of issuing securities.
B) actions of the Federal Reserve
C) incorporating the risk premium of the shareholders into the discount rate.
D) measuring cash flows in the same currency.

Question 11

Which one of the following would be an example of a growth option to add when developing the adjusted net present value of a project?

A) the expansion of the nation's money supply
B) the cost of issuing securities
C) the cost of financial distress
D) the award of another project by a satisfied customer from the current project.

Question 12

One fee investment bankers earn is based on the ________ that is the difference between what the banker's corporate client receives from the issue of securities and what the public pays.

A) underwriting discount
B) bid-ask spread
C) free cash flows
D) net present value of the client firm

Question 13

Which one of the following is NOT a financial side effect to account for when developing the adjusted net present value of a project?

A) subsidized financing from governments
B) the Federal Reserve Chair announces an interest rate increase
C) the cost of issuing securities
D) the costs of financial distress

Question 14

When discounting cash flows of the all-equity firm,

A) the revenues and expenses must be measured as they occur rather than on an incremental basis.
B) there is no need to incorporate the risk premium of that the firm's stockholders would demand in the discount rate.
C) all cash flows should be measured in the same currency.
D) revenues and expenses should be measured on a pre-tax cash flow basis.

Question 15

With respect to currency measurement,what is the rule when discounting cash flows?

A) The revenues and expenses must be measured as they occur rather than on an incremental basis.
B) There is no need to incorporate the risk premium of that the firm's stockholders would demand in the discount rate.
C) Revenues and expenses should be measured on a pre-tax cash flow basis.
D) All cash flows should be measured in the same currency.

Question 16

When discounting cash flows,it is important that only the ________,after-tax cash flows be used.

A) monthly
B) annual
C) incremental
D) total

Question 17

Adjusted net present value is developed using the following steps: first,discount the cash flows of the all-equity firm,second,add the value of the financial side effects,and,third,

A) add the salvage value of the project.
B) add the value of any growth options that arise during the project.
C) add financing costs.
D) add cash flows from project financing such as bank loans.

Question 18

The basic principal of capital budgeting is that ________ with a positive adjusted net present value should be accepted by the firm.

A) projects
B) investments
C) all cash flows
D) accounts receivable

Question 19

A firm is in ________ if it is having difficulty meeting its commitments to its creditors such as the bondholders.

A) bankruptcy
B) default
C) financial distress
D) receivership

Question 20

Which of the following does NOT add cash flows to the parent's free cash flows?

A) royalties
B) cannibalization of exports
C) overhead management fees
D) licensing agreements

Question 21

One of the major differences between the WACC analysis and ANPV is the fact that ANPV

A) takes into consideration the interest expense of raising debt capital.
B) allows after-tax interest payments into the cash flows.
C) uses the rate of return on the unlevered assets to get the all-equity value.
D) uses a discount rate that takes into account the after-tax returns on capital.

Question 22

Which one of the following would most likely be caused by the financial side effects of a project?

A) the costs of financial distress
B) subsequent new projects
C) cannibalization of exports
D) an end to licensing revenues to the parent

Question 23

Based on their computation what is the difference between EBIT and NOPLAT?

Question 24

Of the following which cash flow provides pure profit to the parent company: licensing agreements,royalties,and overhead allocation fees?

Question 25

Can an investment project of a foreign subsidiary that has a positive net present value when evaluated as a stand-alone firm ever be rejected by the parent corporation? Assume that the parent accepts all projects with positive adjusted net present values.

Question 26

How does the role of underwriting affect the issuing of securities?

Question 27

What is meant by the cannibalization of an export market?

Question 28

Of what importance are good management practices as they relate to working capital?

Question 29

What is an interest subsidy? How do you calculate the value of an interest subsidy?

Question 30

Issuing equity to raise capital is expensive because in addition to the compensation the financial intermediary requires,there will also be an expense as a result of the

A) government taxes on the equity raise.
B) foreign exchange rate change.
C) fees charged by the Securities and Exchange Commission.
D) underwriting discount.

Question 31

Suppose you are conducting a financial analysis of a potential acquisition target,and you have been asked to identify the firm's engine of growth.Upon which of the following would you focus your analysis?

A) accounts receivable turnover
B) capital expenditures
C) debt to equity ratio
D) the firm's overall capital structure

Question 32

Suppose the parent MNC had a choice of licensing,royalties and overhead allocations to repatriate funds from its subsidiaries,which ones represent pure profit to the parent?

A) licensing and overhead allocations
B) licensing and royalties
C) royalties and overhead allocations
D) a combination of all three