Question 1

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:

Accepted Answer

C

Question 2

The "net present value" of a capital project is calculated by using:

Accepted Answer

The net present value of a capital project is calculated by using the following factors:
(i) Initial investment
(ii) Discount rate
(iii) Estimated cash flows
(iv) Salvage or residual value
(v) Tax consequences
(vi) Inflation rate
(vii) Opportunity cost of funds

Option C includes all the necessary factors to calculate the net present value, making it the best choice.

Question 3

The financial manager's responsibilities involve:

Accepted Answer

The financial manager's primary responsibility is to make decisions that maximize shareholder wealth, which involves selecting the most profitable capital projects. Therefore, options B and C are the most accurate statements regarding the responsibilities of a financial manager. Option A is incorrect as a financial manager must operate within ethical and legal boundaries, and increasing the per share price of the company's stock may not always be the best way to maximize shareholder wealth.

Question 4

Which of the following is not an example of a real option?

Accepted Answer

Exercise option is not a type of real option. Real options are the options embedded in investment projects that allow flexibility and the ability to change course or make decisions based on new information. Timing options, abandonment options, and growth options are all examples of real options.

Question 5

The discount rates to use for the APV calculations are:

Accepted Answer

The correct approach for Adjusted Present Value (APV) calculations involves using the cost of unlevered equity for the present value of net operating cash flows (I), as these cash flows are not affected by financing decisions. For the present value of the depreciation tax shield (II), the benefit for the concessionary loan (III), the interest tax shield (IV), and the initial cost of the project (V), the cost of debt is used because these components are directly related to the financing decisions and the benefits or costs associated with debt financing.

Question 6

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to:

Accepted Answer

Sensitivity analysis in APV calculation allows the financial manager to analyze all risks, understand the implications of capital expenditures, and consider actions to take in case the investment does not develop as anticipated. Therefore, all the choices are correct.

Question 7

The "incremental" cash flows of a capital project are calculated by using:

Accepted Answer

The answer of The "incremental" cash flows of a capital...

Question 8

Company Y,a Canadian manufacturer of boats,is currently exporting $100,000 worth of boats to the United States.The firm is considering opening a production facility in the United States because without a presence in the United States,the entire US market would be lost to a competitor.The new facility would produce boats for about $800,000 and the firm anticipates total sales in the United States to be $900,000.When analyzing this project,Company X should:

Accepted Answer

The exports of $100,000 are not an incremental cash flow from the project being analyzed, as they are already occurring. The purpose of analyzing the project is to determine whether the investment in the US production facility will be profitable, and the $100,000 of exports is not relevant to this analysis. Therefore, Company Y should ignore the exports of $100,000 since they are not incremental cash flows or part of the project.

Question 9

Which of the following statements is false about "borrowing capacity"?

Accepted Answer

Borrowing capacity is not synonymous with project debt. Borrowing capacity refers to the maximum amount of debt a firm can take on, while project debt refers to the debt specifically used to finance a project.

Question 10

When using the adjusted present value (APV)to evaluate a capital budgeting problem,the appropriate discount rate for foreign loans is

Accepted Answer

The answer of When using the adjusted present value (APV)to...

Question 11

The option to quit a foreign project early is called:

Accepted Answer

The option to quit a foreign project early is called an abandonment option. This option allows a company to exit a foreign investment if it is not meeting expectations or if the costs outweigh the benefits. The abandonment option provides flexibility and protects the company from potential losses.

Question 12

Capital budgeting analysis is very important,because it:

Accepted Answer

All of the given options are true. Capital budgeting involves investments in expensive capital assets that have a direct impact on the productive capacity of a firm. The decision on capital budgeting can determine the competitiveness and profitability of a firm in the long run. Hence, all options are correct.

Question 13

The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Accepted Answer

Purchasing power parity (PPP) suggests that the exchange rate should change to reflect changes in inflation rates between two countries. 
Using PPP, the predicted exchange rate in 10 years can be calculated as follows: 
(C$1.6000/euro) * [(1+0.02)^10 / (1+0.04)^10] 
= C$1.3176/euro 
Therefore, the best choice is A, C$1.3176/euro.

Question 14

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.  Assume the corporate tax rate is 40%. (Hint:
Calculate the tax savings arising form the tax deductibility of interest payments).

Accepted Answer

The answer of Given the following information for a levered...

Question 15

The ABC Company,a U.S.based MNC,plans to establish a subsidiary in Ecuador to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Ecuador is estimated to be ECS8,500 million,of which ECS6,500 million is to be financed at a below-market rate of interest arranged by the Ecuador's government.The proposed project will increase the borrowing capacity by:

Accepted Answer

ECS 8,500M × ($60M/$80M) = ECS 6,375MECS 8,500M - ECS 6,375M = ECS 2,125M

Question 16

The discount rates to use for the APV calculations are:

Accepted Answer

The answer of The discount rates to use for the...

Question 17

Company X,a Canadian manufacturer of chairs,is currently exporting $100,000 worth of chairs to the United States.The firm is considering opening a production facility in the United States that would produce enough chairs for the entire US market and is predicting total sales in the United States to be $500,000.When analyzing this project,Company X should:

Accepted Answer

The $100,000 in exports should be considered as lost sales because opening a production facility in the US would replace these exports, making it an opportunity cost and an incremental cash flow relevant to the project analysis.

Question 18

The APV is calculated using the following formula:

Accepted Answer

The answer of The APV is calculated using the following...

Question 19

When making a capital budgeting decision the ultimate decision depends on

Accepted Answer

The answer of When making a capital budgeting decision the...

Question 20

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to:

Accepted Answer

The APV model for an MNC is an expanded version of the basic NPV model that takes into account the specific challenges and opportunities faced by multinational corporations. These challenges include distinguishing between the market value of a levered firm and the market value of an unlevered firm, discerning the blocking of certain cash flows by the host country from being legally remitted to the parent, and considering foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances. Therefore, all the options (A, B, and C) are correct, making D the best choice.

Quiz 17: International Capital Structure and the Cost of Capital

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:

The "net present value" of a capital project is calculated by using:

The financial manager's responsibilities involve:

Which of the following is not an example of a real option?

The discount rates to use for the APV calculations are:

Sensitivity analysis in the calculation of the adjusted present value (APV) allows the financial manager to:

The "incremental" cash flows of a capital project are calculated by using:

Which of the following statements is false about "borrowing capacity"?

When using the adjusted present value (APV) to evaluate a capital budgeting problem,the appropriate discount rate for foreign loans is

The option to quit a foreign project early is called:

Capital budgeting analysis is very important,because it:

The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors. Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments) .

The discount rates to use for the APV calculations are:

The APV is calculated using the following formula:

When making a capital budgeting decision the ultimate decision depends on

The adjusted present value (APV) model that is suitable for an MNC is the basic net present value (NPV) model expanded to: