Question 1

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:

Accepted Answer

If the MNC's exchange rate forecasts were false and the dinar is expected to depreciate substantially, then the MNC's subsidiary in Algeria will become less profitable. This means that the previously computed NPV will need to be lowered because the subsidiary is now worth less due to the significant change in exchange rate forecasts.

Question 2

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.​

Accepted Answer

Discriminant analysis is a statistical analysis method used to determine a relationship between a set of variables and a categorical outcome. It is not a method of incorporating an adjustment for risk into capital budgeting analysis. The other three options, risk-adjusted discount rate, sensitivity analysis, and simulation, are all methods of accounting for risk in capital budgeting analysis.

Question 3

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

Accepted Answer

Tax credits help to avoid double taxation and stimulate direct foreign investment by allowing taxpayers to offset what they owe in one jurisdiction with taxes they've paid in another, thus preventing the same income from being taxed twice.

Question 4

Which of the following is not a characteristic of a tax system that an MNC would consider when conducting a tax assessment of a country?

Accepted Answer

All of these characteristics (corporate income taxes, withholding taxes, provisions for carrybacks and carryforwards, and tax treaties) are typically considered by an MNC when conducting a tax assessment of a country.

Question 5

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

Accepted Answer

If the peso depreciates, it means that it requires more pesos to buy one dollar. Therefore, when the subsidiary remits 30 million pesos, it will be equivalent to a smaller dollar amount. Conversely, if the peso appreciates, it means that it requires fewer pesos to buy one dollar. Therefore, the dollar amount of remitted funds will increase in this case. Therefore, option A and C are incorrect, and option B and E are contradictory. Option D is the only correct option as it states that if the peso depreciates, the dollar amount of remitted funds decreases.

Question 6

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 from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

Accepted Answer

Since the parent company plans to finance the British subsidiary with retained earnings from its U.S. operations, there will be no borrowing cost in the United Kingdom. The economic conditions in the United Kingdom may affect the subsidiary's performance but may not affect the discount rate used to evaluate the investment. Therefore, the most significant factor affecting the discount rate would be the parent company's cost of capital.

Question 7

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

Accepted Answer

All of these factors are relevant when evaluating international project cash flows. Future inflation affects the purchasing power of cash flows, blocking of funds can affect the availability of cash flows, and exchange rates can affect the value of cash flows when converted back into the home currency.

Question 8

Which of the following is not a factor that should be considered in multinational capital budgeting?

Accepted Answer

All of these factors should be considered in multinational capital budgeting. Blocked funds can affect the availability of funds and the timing of cash inflows and outflows. Exchange rate fluctuations can affect the value of future cash flows, while inflation can affect the purchasing power of those cash flows. Financing arrangements can affect the cost and availability of funds. Therefore, all of these factors are important to consider in multinational capital budgeting.

Question 9

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:

Accepted Answer

The discrepancy between feasibility perceptions of the U.S. parent and the subsidiary administering a project is likely to be greater for projects in countries where the host country currency is expected to depreciate consistently. This is because a consistent depreciation in the currency would reduce the profitability of the project for the subsidiary, while the U.S. parent may still see the project as financially viable due to exchange rate gains.

Question 10

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

Accepted Answer

The required rate of return of a project can be greater than, less than, or the same as the MNC's cost of capital, depending on the specific project's risk and expected returns.

Question 11

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.

Accepted Answer

If the parent's government imposes a high tax rate on funds remitted from a foreign subsidiary, it will lead to a higher cost of capital for the project. This makes the project less feasible from the parent's point of view. On the other hand, if the tax rate is low, it will decrease the cost of capital, making the project more feasible for the parent. Therefore, high tax rates on remitted funds from a foreign subsidiary are a disadvantage for the parent company, not the subsidiary.

Question 12

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

Accepted Answer

To generate a distribution of possible net present values from international projects, simulation is the best choice. Simulation involves running multiple iterations of a financial model using various inputs to generate a range of possible outcomes. This allows the firm to see the likelihood and possible range of net present values from the project. A risk-adjusted discount rate could be used to calculate the net present value, but it would not generate a distribution of possible outcomes. A payback period and certainty equivalents do not factor in the time value of money or generate a distribution of outcomes.

Question 13

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

Accepted Answer

The use of a cumulative NPV is helpful in determining the time needed to reach a positive NPV. The cumulative NPV is calculated by adding up the NPVs of each period, and it can show when the project breaks even and starts generating positive cash flows. It does not help determine the probability distribution of NPVs, how the required rate of return or cost of capital changes over time.

Question 14

The ____ is (are) likely the major source of funds to support a particular project.

Accepted Answer

The initial investment is typically the primary source of funds to support a project. While fixed and variable costs may be ongoing expenses for the project, they do not represent the initial investment required to get the project off the ground.

Question 15

Holding other factors constant, an international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.​

Accepted Answer

Consumer demand has a direct positive impact on the cash inflows of the project, hence increasing the project's NPV. On the other hand, the salvage value of the project has a positive impact on the cash outflows at the end of the project, hence increasing the project's NPV. Hence, both are positively related to the project's NPV.

Question 16

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 ____.​

Accepted Answer

Firms are more likely to engage in international acquisitions if they expect foreign currencies to appreciate against their home currency because the value of their investment will increase in their home currency terms. Additionally, a lower cost of capital makes financing the acquisition cheaper, encouraging more international acquisitions.

Quiz 14: Multinational Capital Budgeting

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.

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

Which of the following is not a characteristic of a tax system that an MNC would consider when conducting a tax assessment of a country?

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso , the dollar amount of remitted funds .

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 from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

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

Which of the following is not a factor that should be considered in multinational capital budgeting?

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:

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

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.

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

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

The ____ is (are) likely the major source of funds to support a particular project.

Holding other factors constant, an international project's NPV is related to consumer demand and related to the project's salvage value.

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 .

Quiz 14: Multinational Capital Budgeting

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.​

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

Which of the following is not a characteristic of a tax system that an MNC would consider when conducting a tax assessment of a country?

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

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 from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

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

Which of the following is not a factor that should be considered in multinational capital budgeting?

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:

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

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.

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

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

The ____ is (are) likely the major source of funds to support a particular project.

Holding other factors constant, an international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.​

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 ____.​

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.

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

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso , the dollar amount of remitted funds .

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.

Holding other factors constant, an international project's NPV is related to consumer demand and related to the project's salvage value.

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 .