Question 1

The Sarbanes-Oxley Act requires executives and the board of directors to conduct a thorough review when assessing acquisitions.

Accepted Answer

The Sarbanes-Oxley Act requires executives and the board of directors to conduct a thorough review of their financial statements and accounting practices when assessing acquisitions to ensure accuracy and transparency.

Question 2

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 by the time the acquirer makes payment, the acquisition will indeed be more costly because the acquirer will have to spend more of their own currency to purchase the same amount of foreign currency. The cost of the acquisition changes in the same proportion as the change in the exchange rate because the direct relationship between the value of the foreign currency and the cost in the acquirer's currency.

Question 3

Downsizing reduces expenses but may also reduce productivity and revenue.

Accepted Answer

Downsizing reduces the number of employees, which may result in lower productivity and revenue as the workload increases on remaining employees and there may be a loss of expertise and experience.

Question 4

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 indirectly affect the valuation of privately held companies, including foreign targets, as they influence overall economic sentiment, investor behavior, and the availability of financing, which can in turn impact the amount an acquirer has to pay.

Question 5

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

An MNC would prefer to make a bid at a time when local stock market prices are generally low. This would make the target company's stocks more affordable, reducing the overall cost of acquiring the firm. In addition, lower stock prices may indicate that the target company is undervalued, providing the MNC with a greater potential for return on investment in the long term.

Question 6

The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted funds from the target.

Accepted Answer

The value of an MNC to the parent company can be affected by the timing and amount of funds remitted from the subsidiaries, as this can impact the parent's cash flow and ability to invest in other projects. Therefore, the scheduling of remitted funds is not independent of the parent's perspective on the value of the MNC.

Question 7

When an MNC considers a partial acquisition, the valuation of the target will be conducted the same way whether the MNC acquires control of the target or only a small portion of its shares.

Accepted Answer

The valuation of a target in a partial acquisition can differ significantly depending on whether the MNC acquires control of the target or only a small portion of its shares. Acquiring control often involves a control premium, and the valuation may incorporate synergies and strategic benefits that would not apply to a non-controlling, minority interest.

Question 8

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

Countries with strong economic conditions typically have a higher demand for products, leading to higher cash flows. This is because the population has more disposable income and is more willing to spend money on goods and services. Therefore, potential targets in these countries are more likely to generate higher cash flows.

Question 9

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 result in an underestimation of the net present value of acquiring a foreign target. This can lead to potential financial risks and negative impacts on the overall success of the acquisition.

Question 10

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 aim to enter or expand their operations in countries where the growth potential for their industry is high, and the level of competition is manageable, allowing them to achieve a sustainable competitive advantage.

Question 11

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

Yes, an international acquisition provides a company with an established customer base and existing business operations, which reduces the time and resources required for market entry compared to establishing a new subsidiary. Thus, it can immediately expand its international business and benefit from the acquired company's assets and expertise.

Question 12

When viewed as a project, an 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

An international acquisition typically generates quicker and larger cash flows than establishing a new subsidiary, but it requires a larger initial investment.

Question 13

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 because it would mean more opportunities to increase sales and profits. At the same time, it would prefer a country where the competition within the industry is not excessive because excessive competition can lead to lower profit margins and market share. Therefore, the best choice is (C) high growth potential and not excessive competition.

Question 14

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

When an MNC targets a successful foreign company with plans to continue its local business more efficiently, the risk associated with the business is considered low because the business model is already proven to be successful. Consequently, the MNC's required return from acquiring the target would be relatively low, reflecting the lower risk.

Question 15

A call option on real assets represents a proposed project that contains an option of pursuing an additional venture.

Accepted Answer

A call option on real assets gives the holder the right, but not the obligation, to pursue an additional venture related to the underlying assets. This additional venture is often contingent on the success of the initial project, and allows the holder to capture additional value if the project performs well.

Question 16

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

Accepted Answer

This is generally true as international acquisitions often involve paying a premium to convince shareholders to sell their ownership stake. Additionally, there may be additional costs associated with cross-border transactions such as regulatory fees or navigating different legal systems.

Question 17

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 various factors such as changes in the business environment, competition, and currency exchange rate fluctuations, especially when converting to the acquirer's home currency.

Question 18

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

It is important for MNCs to regularly reassess their foreign acquisitions even after the initial accept/reject decision. This analysis may reveal that an accepted project should be divested due to changes in market conditions, political and regulatory environment, or financial performance.

Question 19

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

Economic conditions in the host country will directly impact the sales and revenue generation of an MNC that plans to operate and sell in the host country. On the contrary, if an MNC plans to solely focus on exporting from the target's home country, it may be less affected by the economic conditions of the host country.

Question 20

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 and issuing 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

The value of the private firm can be estimated by multiplying its earnings by the average P/E ratio of publicly traded firms in the same industry.

Value = Earnings x P/E ratio

Value = 5 million euros x 12

Value = 60 million euros

If the private firm issues one million shares, its value per share will be 60 million euros divided by one million shares, which is 60 euros per share.

Therefore, the value of the private firm if it goes public is 60 million euros (or 60 euros per share).

Quiz 15: International Corporate Governance and Control