Deck 16: Additional Topics in International Capital Budgeting

Question 1

During periods of financial distress,a firm's managers are ________ to invest in risky projects.

A) less likely
B) least likely
C) more likely
D) most likely

Answer 1

C

Question 2

What is the name of the approach that discounts the after-tax free cash flows to stockholders at the required rate of return on the equity to derive the value of a project?

A) weighted average cost of capital
B) flow-to-equity
C) adjusted net present value
D) unlevered cash flow

Answer 2

B

Question 3

The ________ is the change in a firm's future operating profit divided by its investment.

A) return on investment
B) plowback ratio
C) payout ratio
D) discount rate

Answer 3

A

Question 4

What is the name given to the ratio of investment to gross cash flows?

A) payout ratio
B) retention ratio
C) plowback ratio
D) debt to equity ratio

Question 5

Another name for the reinvestment ratio is the ________ ratio.

A) acid test
B) retention
C) payout
D) plowback

Question 6

According to Modigliani and Miller,in the absence of taxes,the presence of ________ cannot change the value of the firm.

A) financial distress
B) labor strife
C) new equity raises
D) debt

Question 7

When using the WACC for international projects,the weights should be specific to the ________ and not the overall firm.

A) cash flows
B) tax rate
C) international project
D) terminal value

Question 8

The two alternative approaches to capital budgeting are the

A) weighted average cost of capital and flow-to-equity.
B) discounted cash flow and the flow-to-equity.
C) weighted average cost of capital and net income.
D) discounted cash flow and net income.

Question 9

Because the cash flows from an international project may be denominated in different currencies from the headquarters,one of the very first decisions is to

A) do the valuation using forecasts of the foreign or home currency.
B) determine the salvage value at the terminal stage of the project.
C) calculate the stream of free cash flows.
D) arrange the financing in the foreign or domestic currency.

Question 10

________ occurs when managers refuse to take on low-risk projects because too much of the value from the project would accrue to the creditors.

A) Financial distress
B) A lack of plowback
C) Cannabilization of exports
D) Underinvestment

Question 11

Growth does lead to increases in the firm's value,but only if the ________ exceeds the WACC does the firm's value increase by more than the amount of the investment.

A) return on investment
B) discount rate
C) plowback ratio
D) retention ratio

Question 12

Assuming an upward-sloping term structure of spot interest rates,if the expected profits from a foreign project are discounted by a higher discount rate found in later years,the ________ of the project is penalized needlessly.

A) future value
B) future market value
C) total risk
D) present value

Question 13

When determining the tax shields associated with borrowing foreign currency,the ________ is an important factor.

A) plowback ratio
B) expected change in foreign exchange rates leading to capital gains or losses
C) appropriate foreign currency discount rate
D) riskiness of the cash flows

Question 14

Another name for the plowback ratio is the ________ ratio.

A) acid test
B) retention
C) payout
D) reinvestment

Question 15

In the flow-to-equity approach to capital budgeting,it is the after-tax cash flows that are available ________ that are discounted at the levered equity required rate of return.

A) to be paid to bondholders
B) to be paid to stockholders
C) to be used in the project
D) to be paid to government agencies that authorized the project

Question 16

Which of the following statements is true concerning a firm's financial distress?

A) During periods of financial distress, the firm's managers are more likely to invest in risky projects.
B) During periods of financial distress, the firm's managers are less likely to invest in risky projects.
C) During periods of financial distress, the firm's managers are more likely to invest in corporate acquisitions.
D) During periods of financial distress, the firm's managers are more likely to seek firms to merge with.

Question 17

________ is the capital budgeting approach that finds the value of the leveraged firm by discounting forecasts of all-equity free cash flows with a weighted average of the required rates of return to the firm's debt and equity.

A) Flow-to-equity
B) Weighted average cost of capital
C) Weighted average cost of capital and net income
D) Discounted cash flow and net income

Question 18

One way cash flows from foreign projects can be forecast is to forecast the future foreign currency cash flows,discount them to the present using an appropriate foreign currency discount rate,and then multiply the present value denominated in the foreign currency by the current ________ between the two currencies.

A) home currency spot exchange rate
B) foreign currency spot exchange rate
C) home currency forward exchange rate
D) foreign currency forward exchange rate

Question 19

One problem with the approach used in question 16.8 is ________.

A) it is difficult to determine the foreign cash flows in the foreign currency
B) it is difficult to determine the appropriate foreign currency spot rate to the domestic currency
C) it is difficult to determine the appropriate foreign currency discount rate to the domestic currency
D) it is difficult to determine the domestic currency cash flows

Question 20

The change in a firm's future operating profit is another way to state its increase in ________.

A) terminal value
B) gross cash flow
C) net working capital
D) WACC

Question 21

The Capital Asset Company has accepted a project for investment.It can be assumed that the firm is earning its WACC and the rate of return on the project ________.

A) should equal the plowback ratio
B) would be irrelevant
C) is the same or greater
D) is the same or less

Question 22

The managers of Apex International accepted a high-variance,low-value project rather than a low-variance,high-value project.When this occurs,mangers are said to have engaged in ________.

A) shifting value from shareholders to bondholders
B) asset substitution
C) export cannibalization
D) underinvestment

Question 23

What is the most important reason to consider real currency appreciation and depreciation forecasts when doing an international capital budgeting analysis?

Question 24

Which one of the following would be the most important to take into account when doing international capital budgeting?

A) the country's political risk
B) the business risk of selling the firm's product into a foreign market
C) the prevailing global cost of capital
D) differences in accounting conventions across countries

Question 25

Explain how to calculate the rate of return on invested capital?

Question 26

Explain how equity is a residual claimant in the flow-to-equity approach to capital budgeting?

Question 27

Explain what is meant by the weighted average cost of capital?

Question 28

With respect to project value,what is meant by the underinvestment problem?

Question 29

RB International is considering an international project in which to invest.One fundamental principle of capital budgeting concerning the discount rate that it should follow is

A) it should reflect the currency of denomination of the exported cash flows that are being discounted.
B) it should reflect the currency of denomination of the imported cash flows that are being discounted.
C) it should only be stated in the foreign currency rate.
D) it should reflect the WACC as a general rule.

Question 30

As an international financial analyst,you inform your superiors that the domestic currency discount rate can be used to do capital budgeting for a foreign project? Explain why.

Question 31

What is the U.S.tax treatment of interest paid on a foreign currency loan?

Question 32

Which of the following statements about the required rate of return represents the best advice for a firm's management when considering investment in a foreign project?

A) The required rate of return should be project specific.
B) The required rate of return need not represent the market return.
C) If the project were to pay cash directly to the firm's shareholders, the risk associated with the project would be less important to the firm.
D) The required rate of return should be the same rate for all of the firm's projects.