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.

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:

Accepted Answer

C

Question 3

Which of the following is a correct method of adjusting for inflation when calculating net present value?

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?

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.

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?

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?

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:

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

Accepted Answer

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

Question 10

Following is (are) the method(s) for adjustment of risks

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

Accepted Answer

When selecting projects with limited finance, the goal is to maximize the net present value (NPV) to ensure the best return on investment.

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