Question 1

A French-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

lower

Accepted Answer

A depreciation of the Algerian dinar against the currency in which the MNC measures its profits would likely decrease the value of the subsidiary's earnings when converted back to the parent company's currency, thus lowering the estimated net present value (NPV) of the investment.

Question 2

The profitability index is:&#10;A)Net present value/Initial outlay.&#10;B)Initial outlay/Gross present value.&#10;C)Gross present volume/Initial outlay.&#10;D)Gross present value/Net present value.

Accepted Answer

Gross present volume/Initial outlay.&#10;

Question 3

Which of the following is a correct method of adjusting for inflation when calculating net present value?&#10;A)Estimate the future cash flows by multiplying by the specific inflation of each cash inflow and outflow item, and then discount using the real rate of return.&#10;B)Estimate the cash flows in real terms and use a real discount rate.&#10;C)Estimate the cash flows in money terms and use a real discount rate.&#10;D)Estimate the cash flows in real terms and use a money discount rate.

Accepted Answer

Estimating cash flows in real terms and using a real discount rate is a correct method for adjusting for inflation when calculating net present value. This approach ensures that both the cash flows and the discount rate are adjusted for inflation, providing a consistent and accurate valuation.

Question 4

The relationship between the money rate of return, m, the real rate of return, h, and the inflation rate, i, is expressed in which of the following formulae?&#10;A)h = 1 + i / 1 + m&#10;B)m = h + i&#10;C)(1 + m) = (1 + h)i&#10;D)1 + h = (1 + m) / (1 + i)

Accepted Answer

The correct relationship between the money rate of return (m), the real rate of return (h), and the inflation rate (i) is given by the formula $1 + h = \frac{1 + m}{1 + i}$. This formula adjusts the nominal or money rate of return (m) for inflation (i) to find the real rate of return (h), which reflects the actual increase in purchasing power.

Question 5

Which of the following is true? A. Risk is the probability of an outturn being less than anticipated. B. An objective probability is one which can be established mathematically or from historical data. C. The discount rate may be raised or lowered to allow for the risk of a project, the extent of the risk premium being based on indisputable theory.

A)B
B)C
C)A
D)none

Accepted Answer

Objective probability is indeed one that can be established through mathematical means or from historical data, reflecting a quantifiable likelihood of a particular outcome based on observed trends or calculations.

Question 6

Which of the following statements about sensitivity analysis is false?&#10;A)Sensitivity analysis allows the decision maker to direct search effort by highlighting variables which, when they change by a small percentage, have a large impact on NPV.&#10;B)Sensitivity analysis can be used to highlight variables of greatest significance to NPV, which then allows monitoring in the implementation phase and the drawing up of contingency plans.&#10;C)Sensitivity analysis allows decision makers to be more informed about project sensitivities, to know what room they have for judgemental error and decide whether they are prepared to accept the risks.&#10;D)Sensitivity analysis permits the decision maker to change all the variables simultaneously and thereby examine a project in various different circumstance

Accepted Answer

Sensitivity analysis typically involves changing one variable at a time to see the effect on the outcome (e.g., NPV), rather than changing all variables simultaneously. This helps in understanding the impact of each variable individually.

Question 7

Which of the following does not obey the mean-variance rule?&#10;A)Project X will be preferred to project Y if the standard deviation on X and Y is the same, but the expected return on Y is lower.&#10;B)Project X will be preferred to project Y if the expected return on X exceeds that of Y and the variance is equal to or less than that of Y.&#10;C)Project X will be preferred to project Y if the expected return on X and Y is the same, but Y has a higher standard deviation.&#10;D)Project X will be preferred to project Y if the variance of X is higher than Y and the expected return is lower than Y.

Accepted Answer

The mean-variance rule suggests that an investment is only preferable if it offers a higher expected return for the same or lower level of risk (variance/standard deviation), or if it offers the same expected return for a lower level of risk. Option D describes a scenario where Project X has both a higher variance and a lower expected return than Project Y, which contradicts the mean-variance rule.

Question 8

Capital structure weights are based on the:&#10;A)market values of a firm's debt and equity.&#10;B)market value of a firm's equity and the face value of its debt.&#10;C)initial issue values of a firm's debt and equity.&#10;D)book value of a firm's debt and equity.

Accepted Answer

Capital structure weights should be based on the market values of a firm's debt and equity, as these values reflect the current cost of financing from the perspective of investors and the market.

Question 9

A project may be regarded as high risk project when&#10;A)It has smaller variance of outcome but a high initial investment&#10;B)It has larger variance of outcome and high initial investment&#10;C)It has smaller variance of outcome and a low initial investment&#10;D)It has larger variance of outcome and low initial investment

Accepted Answer

The answer of A project may be regarded as high...

Question 10

Following is (are) the method(s) for adjustment of risks&#10;A)Risk-adjusted Discounting Rate&#10;B)Risk Equivalence Coefficient Method&#10;C)Both (A) and (B)&#10;D)None of the above

Accepted Answer

Both Risk-adjusted Discounting Rate and Risk Equivalence Coefficient Method are methods used for adjusting risks in financial analysis and project evaluation, making option C correct.

Question 11

With limited finance and a number of project proposals at hand, select that package of projects which has&#10;A)The maximum net present value&#10;B)Internal rate of return is greater than cost of capital&#10;C)Profitability index is greater than unity&#10;D)Any of the above

Accepted Answer

The answer of With limited finance and a number of...

Deck 4: International Finance: Financial Analysis and Risk Management in Project Evaluation