Deck 18: Multinational Capital Budgeting and Cross-Border Acquisitions

Question 1

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

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

Answer 1

pro rated

Question 2

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

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

Answer 2

50%

Question 3

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

A)Parent cash flows must be distinguished from project cash flows.
B)Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows,taxes,and local norms.
C)Differing rates of inflation exist between the foreign and domestic economies.
D)All of the above add complexity to the international capital budgeting process.

Answer 3

All of the above add complexity to the international capital budgeting process.

Question 4

Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

A)local;be subordinated to;parent's
B)local;not be subordinated to;parent's
C)parent's;be subordinated to;local
D)none of the above

Question 5

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.

Question 6

Which of the following is NOT a basic step 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 7

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.

Question 8

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

Question 9

Multinational firms should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project.

Question 10

For purposes of international capital budgeting,parent cash flows often depend on the form of financing.Thus,we cannot clearly separate cash flows from financing decisions,as we can in domestic capital budgeting.

Question 11

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

A)cost of capital analysis.
B)capital budgeting.
C)capital structure analysis.
D)agency theory.

Question 12

In international capital budgeting,the appropriate discount rate for determining the present value of the expected cash flows is always the firm's domestic WACC.

Question 13

It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.

Question 14

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

A)Expropriation of cash flows by a foreign government.
B)The U.S.government restricts trade with a foreign country where your firm has investments.
C)The foreign government nationalizes all foreign-owned assets.
D)All of the above are examples of political risk.

Question 15

Of the following capital budgeting decision criteria,which does NOT use discounted cash flows?

A)net present value
B)internal rate of return
C)accounting rate of return
D)All of these techniques typically use discounted cash flows.

Question 16

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

Question 17

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

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.

Question 18

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.

Question 19

For purposes of international capital budgeting,it is NOT important to distinguish between parent and total project cash flows.

Question 20

A foreign firm that is 20% to 49% owned by a parent is called a/an:

A)subsidiary.
B)affiliate.
C)partner.
D)rival.

Question 21

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?

A)€400,000
B)€240,000
C)€120,000
D)€360,000

Question 22

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

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 23

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

A)the firm's weight of equity financing
B)the risk-free rate of return
C)the firm's weight of debt financing
D)All of the above are necessary to determine a firm's WACC.

Question 24

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?

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

Question 25

A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Question 26

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 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?

A)$1,520,000
B)$1,684,210
C)-$75,310
D)-$71,544

Question 27

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

Question 28

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.

Question 29

________ 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.

A)Exchange risk
B)Foreign risk
C)Political risk
D)Unnecessary risk

Question 30

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.

Question 31

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.

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

Question 32

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.

A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.

Question 33

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

A)less than the cost of capital.
B)greater than the cost of capital.
C)greater than the cost of the project.
D)cannot be determined from this information

Question 34

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?

A)14.4%
B)10.3%
C)12.0%
D)8.6%

Question 35

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.

Question 36

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?

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

Question 37

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

A)an NPV > $0
B)an IRR > the project's required rate of return
C)an IRR > $0
D)All of the above are correct indicators.

Question 38

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

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 39

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

Question 40

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.

A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.

Question 41

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

Question 42

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?

A)quantity and quality of the project's output
B)a pricing formula
C)circumstances that permit changes in the contract
D)fronting loan

Question 43

Which of the following is NOT a factor critical to the success of project financing?

A)separability of the project from its investors
B)long-lived and capital intensive singular projects
C)cash flow predictability from third part commitments
D)All of the above are critical factors for project financing.

Question 44

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

Question 45

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.

Question 46

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

A)the option to defer
B)the option to abandon
C)the option to alter capacity
D)All of the above may be analyzed using real option analysis.

Question 47

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

Question 48

In project finance,retained earnings and the reinvestment of earnings are the most important decisions to guarantee the long term growth of the project's value.

Question 49

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

Question 50

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

A)gaining access to strategic proprietary assets
B)gaining market power and dominance
C)diversifying and spreading their risks wider
D)All of the above are commonly cited reasons for international mergers and acquisitions.

Question 51

Debt is usually a large component of project financing.

Question 52

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.

Question 53

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

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

Question 54

The drivers of international merger and acquisitions are only MACRO in scope.

Question 55

The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

A)identification and valuation of the target
B)execution of the acquisition offer and purchase-the tender
C)management of the post-acquisition transition
D)All of the above are common elements in acquiring an enterprise anywhere in the world.

Question 56

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

A)quicker
B)cost-effective
C)target firms to be undervalued
D)melding corporate cultures

Question 57

Project financing is the arrangement of financing for very large individual long-term capital projects.

Question 58

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.

Question 59

Which of the following changes does NOT create business opportunities for select firms to both enhance and defend their competitive positions in global markets?

A)Changes in technology
B)Changes in regulation
C)Changes in capital markets
D)Changes in management

Question 60

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

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 61

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