Deck 15: International Corporate Governance and Control

Question 1

Which of the following would probably not cause the stock price of a foreign target to decrease?

A)Its expected cash flows decline.
B)General stock market conditions in the foreign country are deteriorating.C
C)Investors anticipate that the target will be acquired.
D)All of the above will cause the target's stock price to decrease.

Answer 1

C

Question 2

Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target?

A)differences in the timing of remittances from the target to the parent
B)differences in the desired use of the target
C)differences in the local risk-free interest rate
D)differences in the exchange rate between the target's currency and the parent's currency

Answer 2

A

Question 3

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is $____ million.

A)155.9
B)111.5
C)138.0
D)143.0
E)none of the above

Answer 3

B

Question 4

Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?

A)an international acquisition of an existing business
B)an international acquisition of a newly privatized business
C)an international partial acquisition
D)an international divestiture

Question 5

International governance is achieved by all of the following except:

A)poison pills.
B)board of directors.
C)institutional investors.
D)blockholders.
E)All of the above achieve governance.

Question 6

At present, U.S. firms acquire more targets in China than in any other country.

Question 7

Which of the following tax-related factors need not be considered in assessing a foreign target?
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A)corporate tax rates in the host country
B)withholding tax rates in the host country
C)withholding tax rates in the home country
D)corporate tax rates in the home country
E)All of the above must be considered in assessing a foreign target.

Question 8

When a U.S. firm attempts to acquire a target in a country where shareholder rights are weak, it will generally have to pay cash for the shares because the target shareholders will not want to receive stock in the U.S. firm as payment.

Question 9

Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?

A)The firm can immediately expand its international business.
B)An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary.
C)International acquisitions are generally cheaper than the establishment of a new subsidiary.
D)An international acquisition typically generates larger cash flows than the establishment of a new subsidiary.
E)All of the above are advantages of international acquisitions.

Question 10

Since the cash flows generated by a foreign target will eventually be converted to the parent's currency, there is no need to consider the foreign exchange rate in the capital budgeting process.

Question 11

Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.

Question 12

Which of the following is not true regarding a target's previous cash flows?

A)They may serve as an initial base from which future cash flows may be estimated aFter accounting for other factors.
B)It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
C)They are always good indicators of future cash flows.
D)All of the above are true.

Question 13

From an acquirer's perspective, the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent.

Question 14

The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.

Question 15

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
Refer to Exhibit 15-1. The Malaysian target's value based on its stock price is $____ million.

A)1.4
B)1,673.9
C)111.5
D)88.6
E)none of the above

Question 16

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:
• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) aFter deducting any taxes due.
• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.
• Cost of goods sold is expected to be 60 percent of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target's earnings is expected to be 30 percent.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.
• Any cash flows remaining aFter taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.
• Klimewsky's required rate of return on similar projects is 13 percent.
Refer to Exhibit 15-1. The target's board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer?

A)30.0 percent
B)25.9 percent
C)You should not offer any premium because the market's valuation is below Klimewsky's valuation.
D)none of the above

Question 17

Based on information in your text, all of the following factors should be considered in an international acquisition, except:

A)the target's willingness to be acquired.
B)the target's previous acquisition history.
C)the target's previous cash flows.
D)the target's local economic conditions.

Question 18

According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.

A)the United Kingdom
B)Mexico
C)Japan
D)Germany
E)France

Question 19

A previously undertaken project in a foreign country may no longer be feasible because:

A)interest rates have declined.
B)the MNC's cost of capital has decreased.
C)the host government has increased its tax rates substantially.
D)exchange rate projections have changed from a depreciation to an appreciation of the foreign currency.

Question 20

An MNC may have to pay a higher price to acquire a target in countries that do not strictly enforce laws against insider trading.

Question 21

When U.S. firms acquire publically-traded target firms in foreign countries, they would acquire all the shares of the target at a price that is _________ the existing market price per share.

A)equal to
B)slightly below
C)substantially below
D)above

Question 22

An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.

Question 23

Which of the following would not enhance the value of a target from the acquirer's perspective?

A)Expected sales of the target have increased.
B)The subsidiary's currency is expected to strengthen aFter the acquisition.
C)The required rate of return from investing in the target has increased.
D)All of the above would enhance the value of the target.

Question 24

An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place.

Question 25

Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:

A)the Chinese yuan would depreciate in the future.
B)the Chinese yuan would appreciate in the future.
C)the Chinese yuan would remain somewhat stable in the future.
D)none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

Question 26

The valuation of a target (from the parent's perspective) should increase when the potential acquirer's cost of capital increases.

Question 27

The initial outlay for a project in a foreign country may decline if property values in that country decline.

Question 28

An MNC's parent would consider investing in a target only if the estimated present value of the cash flows it would ultimately receive from the target over time ____ the initial outlay necessary to purchase the target.​

A)is less than
B)is the same as
C)is greater than
D)none of the above

Question 29

Regarding the valuation of privatized businesses in less developed countries, ____ can normally be estimated with a high degree of accuracy.

A)future cash flows
B)future exchange rate movements
C)the proper discount rate
D)none of the above

Question 30

Firms based in ____ tend to acquire more U.S. target firms than firms in the other countries listed here.

A)Canada
B)Japan
C)Germany
D)Mexico

Question 31

An MNC should periodically reassess its investments to determine whether to divest them.

Question 32

Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary?

A)the required rate of return on the subsidiary
B)forecasted exchange rates of the subsidiary's currency relative to the dollar
C)the initial outlay on the project
D)the possible selling price of the project

Question 33

The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign target that has operated privately for several years.

Question 34

Privatization involves the sale of previously government-owned businesses by the government.

Question 35

A foreign target's expected future cash flows generally vary among different MNCs valuing the target.

Question 36

Acquirers may have different required rates of return because of differences in the local risk-free interest rate.

Question 37

Premiums required to entice a target's board of directors to approve an acquisition are usually between 1 and 3 percent of the target's market price.

Question 38

An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target's country are generally high.

Question 39

If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.

Question 40

The sale of a subsidiary by an MNC is referred to as a divestiture.

Question 41

The Sarbanes-Oxley Act requires executives and the board of directors to conduct a thorough review when assessing acquisitions.

Question 42

If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.

A)appreciates; by a lesser percentage then
B)depreciates; in the same proportion as
C)appreciates; in the same proportion as
D)appreciates; by a greater percentage than

Question 43

Downsizing reduces expenses but may also reduce productivity and revenue.

Question 44

If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.

Question 45

An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement.

A)low
B)high
C)volatile
D)none of the above

Question 46

The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted funds from the target.

Question 47

When an MNC considers a partial acquisition, the valuation of the target will be conducted the same way whether the MNC acquires control of the target or only a small portion of its shares.

Question 48

Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.

A)strong; lower
B)weak; higher
C)weak; lower
D)strong; higher

Question 49

Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated.

Question 50

When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive.

Question 51

An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.

Question 52

When viewed as a project, an international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay.

Question 53

When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____.

A)low; not excessive
B)high; excessive
C)high; not excessive
D)low; excessive

Question 54

If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC's required return from acquiring the target will be relatively ____.

A)high; high
B)high; low
C)low; high
D)low; low

Question 55

A call option on real assets represents a proposed project that contains an option of pursuing an additional venture.

Question 56

An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a publicly traded target.

Question 57

A target's previous cash flows are typically an accurate indicator of future cash flows, especially when the target's cash flows would have to be converted into the acquirer's home currency as they are remitted to the parent.

Question 58

Even aFter an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.

Question 59

Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country.

Question 60

The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public and issuing one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.

A)2.4
B)60.0
C)41.7
D)12

Question 61

While acquisitions of privatized businesses may be attractive because of the potential for MNCs to increase their efficiency, the valuation of these businesses is generally more difficult than the valuation of existing businesses.

Question 62

Which of the following might cause the board of directors of an MNC to not be effective at governance?

A)The firm's CEO serves as chair of the board.
B)The board consists mainly of outside members who are not managers of the firm.
C)The board consists mainly of inside members who are managers of the firm.
D)A and C

Question 63

When an MNC acquires a target and knows that it will be able to sell the acquisition at any time during the next three years at a specific price, the MNC has acquired a put option on real assets.

Question 64

Which of the following is not an external force that could reduce the present value of a foreign subsidiary's future cash flows?

A)higher taxes imposed by the host government
B)depreciation of the local currency
C)an increase in the parent's cost of capital
D)weakening of the economy of the host country
E)All of the above could reduce the present value of the subsidiary's future cash flows.

Question 65

The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very high and is expected to decrease over time.

Question 66

An institutional investor such as a public pension fund or mutual fund that invests in the stock of a company and plans to hold the shares for a long time is likely to be a shareholder activist.

Question 67

The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly aFter a bid by the acquiring firm.

Question 68

It is always the best course of action to divest a foreign project if the expected cash flows from the project decline substantially.

Question 69

A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the same industry to the private company's earnings.

Question 70

An MNC valuing a foreign target for acquisition purposes must account for all of the following, except:

A)the foreign exchange rate.
B)withholding taxes imposed by the host government.
C)blocked-funds restrictions.
D)income taxes imposed by the U.S. government.
E)An MNC must account for all of the above.

Question 71

The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (aFter taxes) if the project is divested.

Question 72

Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?

A)differences in estimated cash flows to be generated by the foreign target
B)differences in estimated exchange rates
C)differences in required rates of return
D)All of the above are possible reasons why the valuation of a foreign target may vary among MNCs