Deck 14: Multinational Capital Budgeting

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:

A) the taxes are the same as in the U.S.
B) there are no blocked fund restrictions.
C) the currency of the host country is expected to depreci ate consistently.
D) none of the above;a discrepancy is not possible.

Answer 1

C

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.

Answer 2

False

Question 3

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

A) a risk adjusted discount rate.
B) payback period.
C) certainty equivalents.
D) simulation.

Answer 3

D

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:

A) the cost of borrowing funds in the U.K.
B) the cost of borrowing funds in the U.S.
C) the parent's cost of capital.
D) A and B

Question 5

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

A) determining a probability distribution of NPVs.
B) determining the time required to achieve a positive NPV.
C) determining how the required rate of return changes over time.
D) determining how the cost of capital changes over time.
E) A and B

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 _______.

A) appreciate;low
B) appreciate;high
C) depreciate;high
D) depreciate;low

Question 7

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

A) future inflation.
B) blocked funds.
C) exchange rates.
D) all of the above

Question 8

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

A) offset any losses incurred by the subsidiary in a given year.
B) offset any losses incurred by the MNC overall in a given year.
C) make the project have zero profits.
D) make the project's return equal the required rate of return.

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.

A) adversely;adversely
B) favorably;adversely
C) favorably;favorably
D) adversely;favorably

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:

A) the subsidiary finances the entire investment by local borrowing.
B) the subsidiary finances most of the investment by local borrowing.
C) the parent finances most of the investment.
D) the parent finances the entire investment.

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 ________.

A) fixed
B) volatile
C) stable
D) none of the above, as the firm is not exposed

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.

A) very high;limited
B) very low;limited
C) very low;numerous
D) very high;numerous

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 ______.

A) appreciate;low
B) appreciate;high
C) depreciate;high
D) depreciate;low

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.

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

A) the withholding tax rate.
B) the euro's exchange rate.
C) the U.S. tax rate on earnings remitted to the U.S.
D) the German government's tax rate.
E) A and C

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.
A) strengthening euro

A) stable euro
B) weak euro
C) B and C are both ideal.

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

A) about NZ$11 million.
B) about NZ$15 million.
C) about NZ$31 million.
D) about NZ$37 million.
E) about NZ$25 million.

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 _______.

A) appreciates;decreases
B) depreciates;is unaffected
C) appreciates;is unaffected
D) depreciates;decreases
E) B and C

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.

Question 20

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

Question 21

A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5.The NPV for this project will be higher if the foreign currency _________ in year 1 and _________ in years 2 though 5.

A) depreciates;depreciates
B) appreciates;appreciates
C) depreciates;appreciates
D) appreciates;depreciates

Question 22

The __________ is likely the major source of funds to support a particular project.

A) initial investment
B) variable costs
C) fixed costs
D) none of the above

Question 23

When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary,then:

A) the parent's perspective should be used to evaluate a foreign project.
B) the subsidiary's perspective should be used to evaluate a foreign project.
C) the foreign project should enhance the value of both the parent and the subsidiary.
D) none of the above

Question 24

A U.S.-based MNC has just established a subsidiary in Algeria.Shortly after the plant was built,the MNC determines that its exchange rate forecasts,which had previously indicated a slight appreciation in the Algerian dinar were probably false.Instead of a slight appreciation,the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria.This new development would likely cause the MNC to __________ its estimate of the previously computed net present value.

A) lower
B) increase
C) lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D) increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
E) none of the above

Question 25

If the parent's government imposes a _______ tax rate on funds remitted from a foreign subsidiary,a project is less likely to be feasible from the _________ point of view.

A) high;subsidiary's
B) high;parent's
C) low;parent's
D) A and C
E) none of the above

Question 26

Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value.Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value,which is $___________.

A) 510,088.04
B) 1,710,088
C) 1,040,000
D) none of the above

Question 27

The required rate of return of a project is _____________ the MNC's cost of capital.

A) greater than
B) less than
C) the same as
D) any of the above, depending on the specific project

Question 28

What is the net present value of the Norwegian project

A) -$803,848.
B) $5,803,848.
C) $1,048,829.
D) none of the above

Question 29

Which of the following is not a characteristic of a country to be considered within an MNC's international tax assessment

A) corporate income taxes.
B) withholding taxes.
C) provisions for carrybacks and carryforwards.
D) tax treaties.
E) all of the above are characteristics to be considered.

Question 30

If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S.,then the local economy's inflation will have:

A) a more pronounced impact on revenues than on costs.
B) a less pronounced impact on revenues than on costs.
C) the same impact on revenues as on costs.
D) none of the above

Question 31

Baps is also uncertain regarding the cost of capital.Recently,Norway has been involved in some political turmoil.What is the net present value (NPV)of this project if a 16% cost of capital is used instead of 13%

A) -$17,602.62.
B) $8,000,000.
C) $1,048,829.
D) $645,147.

Question 32

One foreign project in Hungary and another in Japan had the same perceived value from the U.S.parent's perspective.  Then,the exchange rate expectations were revised,upward for the value of the Hungarian forint and downward for the Japanese yen.  The break-even salvage value for the project in Japan would now be _______ from the parent's perspective.

A) negative
B) higher than that for the Hungarian project
C) lower than that for the Hungarian project
D) the same as that for the Hungarian project
E) A and C

Question 33

If a subsidiary project is assessed from the subsidiary's perspective,then an expected appreciation in the foreign currency will affect the feasibility of the project ________.

A) positively
B) negatively
C) either positively or negatively, depending on the percentage appreciation
D) none of the above

Question 34

Everything else being equal,the _________ the depreciation expense is in a given year,the ________ a foreign project's NPV will be.

A) higher;lower
B) higher;higher
C) lower;higher
D) none of the above

Question 35

Petrus Company has a unique opportunity to invest in a two-year project in Australia.The project is expected to generate 1,000,000 Australian dollars (A$)in the first year and 2,000,000 Australian dollars in the second.Petrus would have to invest $1,500,000 in the project.Petrus has determined that the cost of capital for similar projects is 14%.What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60,respectively

A) $2,905,817.
B) -$94,183.
C) $916,128.
D) none of the above

Question 36

Because before-tax cash flows are necessary for an adequate capital budgeting analysis,international tax effects need not be determined on a proposed foreign project.

Question 37

An international project's NPV is _________ related to consumer demand and _________ related to the project's salvage value.

A) positively;positively
B) positive;negatively
C) negatively;positively
D) negatively;negatively

Question 38

Exchange rates for purposes of multinational capital budgeting:

A) are very difficult to forecast.
B) can be easily hedged with currency swaps.
C) are unimportant, as they do not affect the cash flows of the multinational project.
D) all of the above

Question 39

An international project's NPV is _________ related to the size of the initial investment and _________ related to the project's required rate of return.

A) positively;positively
B) positive;negatively
C) negatively;positively
D) negatively;negatively

Question 40

Like income tax treaties,____________ help to avoid double taxation and stimulate direct foreign investment.

A) withholding taxes
B) excise taxes
C) tax credits
D) carryforwards

Question 41

If a host government restricts the remittances from a foreign subsidiary,a possible solution is to let the subsidiary obtain partial financing for the project.

Question 42

In conducting a multinational capital budgeting analysis,the subsidiary's perspective should always be used.

Question 43

The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.

Question 44

The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.

Question 45

No matter what the probability distribution of future exchange rates is,as long as one out of several scenarios results in a negative net present value (NPV),a project should not be accepted.

Question 46

If a foreign project is financed with a subsidiary's retained earnings,the subsidiary's investment could be viewed as an opportunity cost,since the funds could be remitted to the parent rather than invested in the foreign project.

Question 47

In multinational capital budgeting,depreciation is treated as a cash outflow.

Question 48

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project,inflation __________ included explicitly in the cash flow analysis,and debt payments by the subsidiary _________ included explicitly in the cash flow analysis.

A) should be;should be
B) should definitely not be;should definitely not be
C) should definitely not be;should be
D) should be;should definitely not be

Question 49

As the financing of a foreign project by the parent _______ relative to the financing provided by the subsidiary,the parent's exchange rate exposure _________.

A) increases;decreases
B) decreases;increases
C) increases;increases
D) none of the above