Multinational Business Finance 13th Edition Test Bank Chapter 18

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subject Authors Arthur I. Stonehill, David K. Eiteman, Michael H. Moffett

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 18
Multinational Capital Budgeting and Cross-Border Acquisitions 18.1 Complexities of
Budgeting for a Foreign Project Multiple Choice Question: The traditional financial
analysis applied to foreign or domestic projects, to determine the projects value to the firm
is called: A) cost of capital analysis. B) capital budgeting. C) capital structure analysis. D)
agency theory. Answer:
Question: 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. Answer:
Question: 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. Answer:
Question: 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:
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Question: 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. Answer:
Question: When engaged in international capital budgeting, the analyst must identify the
initial amount of capital invested or put at risk. Answer:
Question: In international capital budgeting, the appropriate discount rate for determining
the present value of the expected cash flows is always the firms domestic WACC. Answer:
Question: For purposes of international capital budgeting, it is NOT important to
distinguish between parent and total project cash flows. Answer:
Question: 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. Answer:
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Question: Project evaluation from the ________ viewpoint serves some useful purposes
and/but should ________ the ________ viewpoint. A) local; be subordinated to; parents B)
local; not be subordinated to; parents C) parents; be subordinated to; local D) none of the
above Answer:
Question: 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:
Question: A foreign firm that is 20% to 49% owned by a parent is called a/an: A)
subsidiary. B) affiliate. C) partner. D) rival. Answer:
Question: Affiliate firms are consolidated on the parents financial statements on a
________ basis. A) pro rated B) 50% C) 75% D) 100% Answer:
Question: There are no important differences between domestic and international capital
budgeting methods. Answer:
Question: It is important that firms adopt a common standard for the capital budgeting
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process for choosing among foreign and domestic projects. Answer:
Question: 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. Answer:
Question: When dealing with international capital budgeting projects, the value of the
project is NOT sensitive to the firms cost of capital. Answer:
Question: 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 LOCALs viewpoint. Answer:
Question: Multinational firms should invest only if they can earn a risk-adjusted return
greater than locally based competitors can earn on the same project. Answer:
Question: 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
parents viewpoint is superior to the local viewpoint and give an example of when the local
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viewpoint fails to maximize the value of the firm. Answer:
Question: Explain how political risk and exchange rate risk increase the uncertainty of
international projects for the purpose of capital budgeting. Answer:
Question: 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. Answer:
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Question: 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. Answer:
Question: 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. Answer:
Question: 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
projects required rate of return C) an IRR > $0 D) All of the above are correct indicators.
Answer:
Question: 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. Answer:
Question: When determining a firms weighted average cost of capital (wacc) which of the
following terms is NOT necessary? A) the firms tax rate B) the firms cost of debt C) the
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firms cost of equity D) All of the above are necessary. Answer:
Question: When determining a firms weighted average cost of capital (WACC) which of
the following terms is NOT necessary? A) the firms weight of equity financing B) the
risk-free rate of return C) the firms weight of debt financing D) All of the above are
necessary to determine a firms WACC. Answer:
Question: 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.
Question: 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 Answer:
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Question: 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 Answer:
Question: 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
Answer:
Question: 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 Answer:
Question: 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% Answer:
Question: 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 Answer:
Question: When estimating a firms 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 firms beta. D) all of the above Answer:
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Question: ________ 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 Answer:
Question: 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 Answer:
Question: 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.
Answer:
Question: 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. Answer:
Question: When estimating a capital budget, it is common to separate cash flows into:
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Question: the initial investment,
Question: incremental cash flows over the life of the project, and
Question: a terminal value. Answer:
Question: 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. Answer:
Question: 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. Answer:
Question: 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. Answer:
Question: 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. Answer:
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Question: 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. Answer:
Question: 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. Answer:
Question: Project financing is the arrangement of financing for very large individual
long-term capital projects. Answer:
Question: 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. Answer:
Question: 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. Answer:
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Question: The drivers of international merger and acquisitions are only MACRO in scope.
Answer:
Question: As opposed to greenfield investment, a cross-border acquisition is typically
quicker. Answer:

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