Question 1

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

Accepted Answer

A) pro rated 
B) 50% 
C) 75% 
D) 100% 
A) pro rated 
B) 50% 
C) 75% 
D) 100% A

Question 2

For purposes of international capital budgeting,which of the following statements is NOT true?

Accepted Answer

A) Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows. 
B) Parent cash flows must be distinguished from project cash flows.Each of these two types of flows contributes to a different view of value. 
C) An array of nonfinancial payments can generate cash flows from subsidiaries to the parent,including payment of license fees and payments for imports from the parent. 
D) All of the above are true statements. 
A) Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows. 
B) Parent cash flows must be distinguished from project cash flows.Each of these two types of flows contributes to a different view of value. 
C) An array of nonfinancial payments can generate cash flows from subsidiaries to the parent,including payment of license fees and payments for imports from the parent. 
D) All of the above are true statements. D

Question 3

Instruction 18.1:
Use the information to answer the following question(s).
The Velo Rapid Revolutions Inc. ,a company that produces bicycles,elliptical trainers,scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe.The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed,but rather,must be depreciated over the life of the asset).Because this would be a new product,they will not be replacing existing equipment.The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years,however;expenses will also increase by euro 200,000 per year.(Note: Assume the after-tax operating cash flows in years 1-5 are equal,and that the terminal value of the project in year 5 may change total after-tax cash flows for that year. )The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000.The firm's required rate of return is 12% and they are in the 40% tax bracket.Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment,and the initial investment (at year 0)also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years).The current spot rate is $0.95/euro ,and the expected inflation rate in the U.S.is 4% per year and 3% per year in Europe.
-Refer to Instruction 18.1.What is the initial investment for the Velo Rapid Revolutions project?

Accepted Answer

A) $1,500,000 
B) €1,600,000 
C) $1,600,000 
D) €1,500,000 
A) $1,500,000 
B) €1,600,000 
C) $1,600,000 
D) €1,500,000 A

Question 4

Because international capital budgeting is so difficult,time consuming,expensive,and uncertain,firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

Accepted Answer

A) True 
 B)False

Question 5

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) appreciating;depreciating 
B) depreciating;depreciating 
C) appreciating;appreciating 
D) depreciating;appreciating 
A) appreciating;depreciating 
B) depreciating;depreciating 
C) appreciating;appreciating 
D) depreciating;appreciating

Question 6

Which of the following is NOT a characteristic of international long-term capital project financing?

Accepted Answer

A) The projects are large in scale. 
B) The projects are long in life. 
C) The projects are generally high in risk. 
D) The projects may be all of the above. 
A) The projects are large in scale. 
B) The projects are long in life. 
C) The projects are generally high in risk. 
D) The projects may be all of the above.

Question 7

The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) adjusting the cash flows. 
B) adjusting the discount rates. 
C) adjusting both cash flows and discount rates. 
D) adjusting all of the above. 
A) adjusting the cash flows. 
B) adjusting the discount rates. 
C) adjusting both cash flows and discount rates. 
D) adjusting all of the above.

Question 9

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

Accepted Answer

A) the risk-free rate of return. 
B) the expected return on the market portfolio. 
C) the firm's beta. 
D) all of the above 
A) the risk-free rate of return. 
B) the expected return on the market portfolio. 
C) the firm's beta. 
D) all of the above

Question 10

Real option analysis treats cash flows in terms of future value in a positive sense,whereas DCF treats future cash flows negatively.

Accepted Answer

A) True 
 B)False

Question 11

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

Accepted Answer

A) True 
 B)False

Question 12

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is NOT a typical pitfall of cross-border acquisitions?

Accepted Answer

A) paying too much 
B) excessive financing costs 
C) melding corporate cultures 
D) all of the above are pitfalls 
A) paying too much 
B) excessive financing costs 
C) melding corporate cultures 
D) all of the above are pitfalls

Question 14

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

A) True 
 B)False

Question 15

For financial reporting purposes,U.S.firms must consolidate the earnings of any subsidiary that is over ________ owned.

Accepted Answer

A) 20% 
B) 40% 
C) 50% 
D) 75% 
A) 20% 
B) 40% 
C) 50% 
D) 75%

Question 16

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Accepted Answer

Real options is a different way of think

Question 17

When engaged in international capital budgeting,the analyst must identify the initial amount of capital invested or put at risk.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a basic step in the capital budgeting process?

Accepted Answer

A) Identify the initial capital invested. 
B) Estimate the cash flows to be derived from the project over time. 
C) Identify the appropriate interest rate at which to discount future cash flows. 
D) All of the above are steps in the capital budgeting process. 
A) Identify the initial capital invested. 
B) Estimate the cash flows to be derived from the project over time. 
C) Identify the appropriate interest rate at which to discount future cash flows. 
D) All of the above are steps in the capital budgeting process.

Question 19

Instruction 18.1:
Use the information to answer the following question(s).
The Velo Rapid Revolutions Inc. ,a company that produces bicycles,elliptical trainers,scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe.The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed,but rather,must be depreciated over the life of the asset).Because this would be a new product,they will not be replacing existing equipment.The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years,however;expenses will also increase by euro 200,000 per year.(Note: Assume the after-tax operating cash flows in years 1-5 are equal,and that the terminal value of the project in year 5 may change total after-tax cash flows for that year. )The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000.The firm's required rate of return is 12% and they are in the 40% tax bracket.Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment,and the initial investment (at year 0)also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years).The current spot rate is $0.95/euro ,and the expected inflation rate in the U.S.is 4% per year and 3% per year in Europe.
-Refer to Instruction 18.1.In euros,what is the NPV of the Velo Rapid Revolutions expansion?

Accepted Answer

A) €1,524,690 
B) $1,611,317 
C) -€75,310 
D) -€111,317 
A) €1,524,690 
B) $1,611,317 
C) -€75,310 
D) -€111,317

Question 20

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

Accepted Answer

A) the firm's tax rate 
B) the firm's cost of debt 
C) the firm's cost of equity 
D) All of the above are necessary. 
A) the firm's tax rate 
B) the firm's cost of debt 
C) the firm's cost of equity 
D) All of the above are necessary.

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

For purposes of international capital budgeting,which of the following statements is NOT true?

Because international capital budgeting is so difficult,time consuming,expensive,and uncertain,firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

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.

Which of the following is NOT a characteristic of international long-term capital project financing?

The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

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

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

Real option analysis treats cash flows in terms of future value in a positive sense,whereas DCF treats future cash flows negatively.

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

Which of the following is NOT a typical pitfall of cross-border acquisitions?

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.

For financial reporting purposes,U.S.firms must consolidate the earnings of any subsidiary that is over ________ owned.

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

When engaged in international capital budgeting,the analyst must identify the initial amount of capital invested or put at risk.

Which of the following is NOT a basic step in the capital budgeting process?

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

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

For purposes of international capital budgeting,which of the following statements is NOT true?

Because international capital budgeting is so difficult,time consuming,expensive,and uncertain,firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

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.

Which of the following is NOT a characteristic of international long-term capital project financing?

The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

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

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

Real option analysis treats cash flows in terms of future value in a positive sense,whereas DCF treats future cash flows negatively.

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

Which of the following is NOT a typical pitfall of cross-border acquisitions?

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.

For financial reporting purposes,U.S.firms must consolidate the earnings of any subsidiary that is over ________ owned.

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

When engaged in international capital budgeting,the analyst must identify the initial amount of capital invested or put at risk.

Which of the following is NOT a basic step in the capital budgeting process?

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

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

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.