Question 1

When an MNC forms a foreign subsidiary and that subsidiary is eligible for subsidies in the country where it will operate,how is the capital budgeting process for that subsidiary and its project affected?

Accepted Answer

When local subsidies are available, it would be beneficial to consider their impact on the cash flows of the subsidiary's project. This may result in altering the capital budgeting process to include consideration of the additional cash flows generated by these subsidies. However, it is important to carefully assess the risks and potential changes in the availability of these subsidies in the future.

Question 2

Relief from multiple taxation of parent and subsidiary income may be found in tax treaties that allow:

Accepted Answer

Tax treaties typically provide for a tax credit mechanism that allows the parent company to reduce its tax liability in its home country by the amount of tax paid by its foreign subsidiary in the subsidiary's home country. This prevents double taxation of the same income by both the home country and the subsidiary's country. Option A is incorrect because subsidiaries are generally subject to taxation in the country they are located in. Option B is incorrect because tax treaties generally do not allow for a complete exemption on dividends received. Option C is also incorrect as tax treaties do not allow for a complete exclusion of foreign dividends from a parent's income.

Question 3

If the NPV estimates for a project are the same for the parent and for the subsidy,then ___________ exists.

Accepted Answer

Symmetry exists when the NPV estimates for a project are the same for the parent and for the subsidy.

Question 4

When a subsidiary is restricted from remitting its profits to the parent,the parent:

Accepted Answer

The parent incurs opportunity costs because it cannot use the restricted funds for other projects that could have generated a higher return.

Question 5

An example of operational side effects is:

Accepted Answer

Operational side effects refer to the impact a project has on other areas of a business, such as the effect on sales of related products.

Question 6

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

Accepted Answer

Prohibitively high cost of capital for a subsidiary operating in a developing country lowers its estimate of NPV from a proposed project. This is because a high cost of capital increases the discount rate used to evaluate the project's future cash flows, thereby reducing the present value of these cash flows and lowering the estimated NPV.

Question 7

Differences in NPV of a proposed project between parent and subsidiary can arise from:

Accepted Answer

Differences in NPV of a proposed project between parent and subsidiary can arise from cash flow or cost-of-capital asymmetries. These arise because the parent and subsidiary may have different operating costs, tax rates, and access to capital. The differences in cost of capital can also arise due to differences in creditworthiness, market risk perceptions, and other factors. Political risk, currency risk, and economic risk may also affect the NPV, but they are not necessarily specific to parent-subsidiary relationships. Cash flow and currency asymmetries are not the most appropriate options as they do not fully capture the potential sources of difference in NPV between parent and subsidiary.

Question 8

If the NPV estimates for a project are different as to the subsidiary and aas to the parent,then _________________ exists.

Accepted Answer

Asymmetry exists if there are different NPV estimates for a project as per the subsidiary and parent. Asymmetry refers to a lack of symmetry or balance between two sides. In this case, the estimates from the parent and subsidiary are not balanced or symmetrical.

Question 9

In general,in capital budgeting,cash flows resulting from financing are:

Accepted Answer

Cash flows resulting from financing are not considered in capital budgeting because the discount rate used in valuing cash flows already takes into consideration these cash flows. Therefore, considering them separately would result in double-counting and inaccurate valuation.

Question 10

Parent-subsidiary asymmetry can arise from forecasting difference between the parent and the subsidiary that can arise because:

Accepted Answer

The answer of Parent-subsidiary asymmetry can arise from forecasting difference...

Question 11

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

Accepted Answer

The answer of Typically,a subsidiary operating in a developing country...

Question 12

The restrictions on the ability of a foreign subsidiary to remit its profits to its parent result in:

Accepted Answer

The term "blocked funds" refers to the restrictions on a foreign subsidiary's ability to remit its profits to its parent company. These restrictions are often put in place by the host country's government or central bank, and can be used as a form of control over foreign investment. Therefore, choice C is the correct answer.

Question 13

What affect do below market interest rates in the foreign country where a subsidiary will operate have on the NPV calculations for a proposed project by the subsidiary?

Accepted Answer

The answer of What affect do below market interest rates...

Question 14

The cash flow realized by a parent is equal to:

Accepted Answer

The cash flow realized by a parent is the amount of cash that it receives from its subsidiary, minus any taxes that it must pay in its home-country on that cash flow. Therefore, answer choice C is the correct option.

Question 15

After-tax cash flow of a subsidiary may differ from the after-tax cash flow of the parent because:

Accepted Answer

The subsidiary's cash flows may be subject to additional taxes in the local country before they can be considered after-tax cash flows of the parent, resulting in differences between the two. This could be due to differences in tax laws or regulations between the two countries, which may lead to additional taxes or withholdings at the subsidiary level before the cash flows can be remitted to the parent company. The other choices, while potentially valid explanations for differences in financial statements between subsidiaries and parent companies, are not directly related to after-tax cash flows.

Question 16

The additional burden imposed when the host-country of a subsidiary taxes the subsidiary's income and then that income is taxed again when it is paid to the MNC parent can be relieved by tax treaty provisions that provide for:

Accepted Answer

Tax credits provided in tax treaties allow the MNC to reduce the taxes it owes to the home-country by the taxes paid by the subsidiary to the host-country. This relieves the burden of double taxation on the MNC and ensures fair taxation. The other options such as not including the subsidiary's profit in the parent's income or not requiring the subsidiary to pay taxes in the host-country may not be feasible or desirable options for the host-country or the MNC. Similarly, allowing the MNC to choose where the subsidiary's profits are taxed may lead to tax avoidance or unfair taxation.

Question 17

_______________________ is a well-known problem in capital budgeting and occurs when supporters of a proposed project present the best scenario for the project so that it will have a better chance of being approved.

Accepted Answer

Requester bias occurs when individuals or groups advocating for a project present it in the most favorable light to increase its chances of approval, often by overstating benefits or understating costs.

Question 18

In considering the value of a project,the NPV estimates for the subsidiary equals the:

Accepted Answer

The NPV estimates for the subsidiary must be based on foreign cash flow from the project, as the subsidiary operates in a foreign country. To determine the appropriate discount rate, the foreign discount rate should be used as it reflects the risk and opportunity cost of capital in that particular country. Therefore, foreign cash flow from the project should be discounted at the appropriate foreign discount rate. Option B is the only choice that reflects this approach.

Question 19

Effective tax rate is reflected by the difference:

Accepted Answer

Effective tax rate is the rate at which a company's pre-tax profits are reduced to post-tax profits. It is reflected by the difference between pre-tax cash flow and after-tax cash flow. Option B is incorrect because it refers to the tax rates of countries, not the effective tax rate of a company. Option C is incorrect because it presents a comparison between the subsidiary's tax rate and the MNC's tax rate, which is unrelated to effective tax rate. Option D is incorrect because it refers to a company's cost of capital and the discount rate it uses in computing NPV of projects, which is also unrelated to effective tax rate.

Question 20

In some situations,the profits earned by a subsidiary cannot be immediately paid to the parent because of:

Accepted Answer

Restrictions on remittances from the subsidiary to the parent imposed by the country where the subsidiary is located can prevent profits from being immediately paid to the parent company.

Quiz 9: Advanced Capital Budgeting

When an MNC forms a foreign subsidiary and that subsidiary is eligible for subsidies in the country where it will operate,how is the capital budgeting process for that subsidiary and its project affected?

Relief from multiple taxation of parent and subsidiary income may be found in tax treaties that allow:

If the NPV estimates for a project are the same for the parent and for the subsidy,then ___________ exists.

When a subsidiary is restricted from remitting its profits to the parent,the parent:

An example of operational side effects is:

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

Differences in NPV of a proposed project between parent and subsidiary can arise from:

If the NPV estimates for a project are different as to the subsidiary and aas to the parent,then _________________ exists.

In general,in capital budgeting,cash flows resulting from financing are:

Parent-subsidiary asymmetry can arise from forecasting difference between the parent and the subsidiary that can arise because:

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

The restrictions on the ability of a foreign subsidiary to remit its profits to its parent result in:

What affect do below market interest rates in the foreign country where a subsidiary will operate have on the NPV calculations for a proposed project by the subsidiary?

The cash flow realized by a parent is equal to:

After-tax cash flow of a subsidiary may differ from the after-tax cash flow of the parent because:

The additional burden imposed when the host-country of a subsidiary taxes the subsidiary's income and then that income is taxed again when it is paid to the MNC parent can be relieved by tax treaty provisions that provide for:

_______________________ is a well-known problem in capital budgeting and occurs when supporters of a proposed project present the best scenario for the project so that it will have a better chance of being approved.

In considering the value of a project,the NPV estimates for the subsidiary equals the:

Effective tax rate is reflected by the difference:

In some situations,the profits earned by a subsidiary cannot be immediately paid to the parent because of: