Question 1

When estimating a capital budget, it is common to separate cash flows into: 1)the initial investment, 2)incremental cash flows over the life of the project, and 3)a terminal value.

Accepted Answer

This is a common method used in capital budgeting to analyze and evaluate potential investments by examining the initial investment, incremental cash flows, and terminal value.

Question 2

Which of the following is NOT an example of political risk?

Accepted Answer

All of the options listed are examples of political risk, therefore none of them are not an example of political risk.

Question 3

________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.

Accepted Answer

This scenario describes political risk, which refers to the risk of a foreign government taking actions that negatively affect the operations or profits of a multinational company. This can include restrictions on financial activities or even seizing assets. Exchange risk refers to fluctuations in currency values, while foreign risk and unnecessary risk are not applicable in this context.

Question 4

When estimating a firm's cost of equity capital using the CAPM, you need to estimate:

Accepted Answer

All three components - the risk-free rate, the market portfolio return, and the firm's beta - are required to estimate the firm's cost of equity using the CAPM model. The risk-free rate represents the return an investor would earn from a risk-free investment, the expected return on the market portfolio represents the return investors expect to earn from the overall market, and the firm's beta represents its sensitivity to market movements.

Question 5

When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:

Accepted Answer

Adjusting for risk when investing abroad can involve modifying the cash flows to reflect potential risks such as currency fluctuations or political instability, altering the discount rates to account for the additional risk of investing in a foreign market, or a combination of both. Therefore, all of the options provided are valid methods for accounting for additional risk.

Question 6

If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be:

Accepted Answer

If the firm estimates a positive NPV, it means that the present value of cash inflows is greater than the present value of cash outflows. The IRR is the discount rate that makes the net present value equal to zero. Since the net present value is already positive, the IRR must be higher than the cost of capital, which is the minimum required rate of return for the firm. Therefore, the answer is B.

Question 7

When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?

Accepted Answer

All three terms (tax rate, cost of debt, and cost of equity) are necessary to calculate a firm's weighted average cost of capital (WACC). The WACC is calculated using the formula: WACC = (E/V x Re) + (D/V x Rd x (1-T)), where E is the market value of the firm's equity, D is the market value of the firm's debt, V is the total value of the firm (E + D), Re is the cost of equity, Rd is the cost of debt, and T is the tax rate. Therefore, all three terms are needed to accurately calculate the WACC.

Question 8

Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?

Accepted Answer

The annual after-tax cash flows for the Velo Rapid Revolutions project can be calculated by deducting the operating expenses and taxes from the revenues.

Annual revenues = €600,000 
Operating expenses = €200,000 
Depreciation = €40,000 (including the €20,000 from the initial investment) 
Tax rate = 30%

Profit before taxes = €600,000 - €200,000 - €40,000 = €360,000 
Taxes = 30% * €360,000 = €108,000 
Profit after taxes = €360,000 - €108,000 = €252,000

Therefore, the annual after-tax cash flows for the Velo Rapid Revolutions project are €252,000.

The correct answer is D, €360,000 represents the annual before-tax profit (revenues minus operating expenses and depreciation), and €252,000 represents the annual after-tax cash flow (before-tax profit minus taxes).

Question 9

Real option analysis allows managers to analyze all of the following EXCEPT:

Accepted Answer

Real option analysis can be used to analyze all of the options mentioned- the option to defer, the option to abandon, and the option to alter capacity. Therefore, choice D is the correct answer.

Question 10

Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.

Accepted Answer

A firm wants to receive cash flows in a currency that is appreciating relative to their own currency as it will provide them with a higher return when they convert it back to their home currency. Similarly, they would like to pay out in currencies that are depreciating relative to their home currency as it will lower their costs.

Question 11

When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project?

Accepted Answer

An IRR greater than $0 is not necessarily an indicator of an acceptable project as it only indicates that the project's cash inflows exceed its initial investment. However, it does not consider the time value of money and the project's cost of capital. Therefore, the project may not be profitable enough to meet the company's required rate of return. The NPV and IRR greater than the project's required rate of return, on the other hand, considers the project's cost of capital and the time value of money to determine the project's profitability and acceptability.

Question 12

Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?

Accepted Answer

The answer of Refer to Instruction 18.1. What is the...

Question 13

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

Accepted Answer

The relative purchasing power parity (PPP) formula is S1 = S0 * (1 + i domestic) / (1 + i foreign), where S1 is the future spot rate, S0 is the current spot rate, i domestic is the inflation rate in the domestic country (Norway), and i foreign is the inflation rate in the foreign country (U.S.). Plugging in the given values: S1 = 8.10 * (1 + 0.06) / (1 + 0.03) = 8.10 * 1.06 / 1.03 ≈ 8.34 krone per dollar.

Question 14

Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

Accepted Answer

The answer of Refer to Instruction 18.1. What is the...

Question 15

When determining a firm's weighted average cost of capital (WACC)which of the following terms is NOT necessary?

Accepted Answer

The risk-free rate of return is not necessary to determine a firm's WACC. However, the firm's weight of equity financing and weight of debt financing are necessary components.

Question 16

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

Accepted Answer

Relative purchasing power parity formula: 
Expected spot rate in one year = Current spot rate × (1 + domestic inflation rate) / (1 + foreign inflation rate)

Expected spot rate in one year = 8.10 krone per dollar × (1 + 0.03) / (1 + 0.06) = 7.87 krone per dollar. Hence, the answer is A.

Question 17

Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

Accepted Answer

The NPV of the Velo Rapid Revolutions expansion is -€75,310 in euros, as calculated in Instruction 18.1.

Question 18

Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?

Accepted Answer

The answer of Refer to Instruction 18.1. What is the...

Question 19

When a multinational firm invests abroad, it is common to develop two capital budgets: one from the project viewpoint, and one from the parent viewpoint.

Accepted Answer

Developing two capital budgets, one from the project viewpoint and one from the parent viewpoint, is a common practice for multinational firms when they invest abroad. The project budget focuses on the specific investment project, while the parent budget considers its impact on the company's overall financial situation.

Question 20

Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

Accepted Answer

The answer of Explain how political risk and exchange rate...

Quiz 18: Multinational Capital Budgeting and Cross-Border Acquisitions

When estimating a capital budget, it is common to separate cash flows into: 1)the initial investment, 2)incremental cash flows over the life of the project, and 3)a terminal value.

Which of the following is NOT an example of political risk?

________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.

When estimating a firm's cost of equity capital using the CAPM, you need to estimate:

When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:

If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be:

When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary?

Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?

Real option analysis allows managers to analyze all of the following EXCEPT:

Generally speaking, a firm wants to receive cash flows from a currency that is relative to their own, and pay out in currencies that are relative to their home currency.

When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project?

Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

When determining a firm's weighted average cost of capital (WACC) which of the following terms is NOT necessary?

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?

When a multinational firm invests abroad, it is common to develop two capital budgets: one from the project viewpoint, and one from the parent viewpoint.

Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.