Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

The traditional financial analysis applied to foreign or domestic projects,to determine the project's value to the firm is called:

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.

The predictability of the project's revenue stream is essential in securing project financing.Which of the following is NOT a typical contract provisions that are intended to assure adequate cash flow?

For purposes of international capital budgeting,evaluation of a project from the PARENT viewpoint serves some useful purposes,but it should be subordinated to evaluation from the LOCAL's viewpoint.

Currency risk is a concern for any international merger and acquisition activity.For instance,once the bidder has successfully won the acquisition,the exposure evolves from a transaction exposure to a contingent exposure.

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

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.

Which of the following is NOT an advantage of cross-border acquisitions over greenfield investments?

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 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 3) a terminal value.

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 are the annual after-tax cash flows for the Velo Rapid Revolutions project?

Debt is usually a large component of project financing.

Currency risk is a concern for any international merger and acquisition activity.For instance,the initial bid,if denominated in a foreign currency,creates a contingent foreign currency exposure for the bidder.

Which of the following is NOT a reason given for international mergers and acquisitions?

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

The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent.Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

When dealing with international capital budgeting projects,the value of the project is NOT sensitive to the firm's cost of capital.

The level of debt places an enormous burden on cash flow for debt service and requires a number of additional levels of risk reduction.

There are no important differences between domestic and international capital budgeting methods.

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 IRR of the Velo Rapid Revolutions expansion?