978-0133423822 Chapter 19 Part 4

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19.3 Capital Budgeting for Direct Foreign Investment

1) Which of the following international business activities constitutes a foreign direct

investment? All irms mentioned are U.S. based.

A) Yanqui Spirits imports a 1000 cases of rum from the Dominican Republic.

B) WMT Inc. opens a big-box retail facility in Nicaragua.

C) Condor University runs training sessions for Indonesian civil servants on its California

Campus.

D) Merkizer Pharmaceuticals licenses an Indian company to manufacture a drug under its

patents.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

2) One reason for international investment is that

A) the economies of many countries are growing faster than that of the U.S.

B) price-earnings (P/E) ratios are higher in foreign countries.

C) doing business in foreign countries is simpler than in the U.S.

D) raw materials are typically cheaper in other countries than in the U.S.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

3) In 2012, the U.S. comprised approximately ________ of the world’s stock market

capitalization.

A) 20%

B) 53%

C) 75%

D) 90%

Question Status: Revised

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

4) The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The 1 year forward

rate is 34.175. Ramo Corp. has undertaken a capital project in Bangkok that is expected to

produce a cash low of 17,087,500 bhat at the end of the irst year. The company will

discount cash lows at a rate of 14%. What is the present value of the irst year cash low in

U.S. dollars.

A) $14,989,035

B) $500,000

C) $438,596

D) $452,363

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

5) The spot exchange rate for the Thai bhat is 30.000 bhat to the dollar or .00333 dollar to

the bhat. For capital budgeting purposes, Ramo Corp needs to estimate the exchange rate

5 years from now. The U.S. interest rate is 2%; the interest rate in Thailand is 6%. The

estimated 5 year forward rate is

A) 24.75 bhat to the dollar.

B) 36.36 bhat to the dollar.

C) 40.15 bhat to the dollar.

D) 27.17 bhat to the dollar.

Question Status: Revised

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

6) RAH Inc., a U.S. corporation is evaluating a proposal to construct and lease an oice

building in Kiev. RAH’s weighted average cost of capital is 11%. The risk free rate in the

U.S. is 3.75%. RAH believes that conditions in Kiev warrant a required rate of return that is

12% above the risk-free rate. Cash lows from the hotel project should be discounted at

A) 23%.

B) 14.75%.

C) 15.75%.

D) 12%.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

7) Some complexities of conducting international business include

A) multiple currencies.

B) difering legal requirements.

C) restrictions on repatriating earnings.

D) all of the above.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

8) When multinational companies evaluate capital investments in foreign countries, they

discount

A) pre-tax earnings of the foreign subsidiary.

B) foreign earnings at home country discount rates.

C) only earnings that are expected to be transferred back to the parent company.

D) all cash lows in the foreign currency at the host country discount rates.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

9) Exchange rate risk

A) arises from the fact that the spot exchange rate on a future date is a random variable.

B) applies only to certain types of international businesses.

C) has been phased out due to recent international legislation.

D) is not a signiicant factor in foreign investment decisions.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

10) Exchange rate risk

A) exists when the contract is written in terms of the foreign currency.

B) exists also in direct foreign investments and foreign portfolio investments.

C) does not exist if the international trade contract is written in terms of the domestic

currency.

D) all of the above.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

11) Risks of foreign direct investment potentially include

A) exchange rate luctuations.

B) political instability.

C) competition from foreign competitors.

D) all of the above.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

12) An important motive for direct foreign investment is to

A) gain entry to markets with economies growing faster than the U.S.

B) insulate the irm from luctuations in the value of the dollar.

C) diversify political risks.

D) increase a project’s NPV by using lower foreign discount rates.

Question Status: New question

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

13) If the net present value of a direct foreign investment is negative, the multinational

irm should

A) reject any proposals.

B) consider establishing a sales oice.

C) consider licensing.

D) both A and C.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

14) The most serious type of political risk involves

A) restrictive labor concerning hiring, wages and layofs.

B) major changes in tax rates.

C) price and wage controls.

D) expropriation of assets with limited compensation.

Question Status: New question

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

15) Capital markets in foreign countries

A) ofer lower returns than those obtainable in the domestic capital markets.

B) provide international diversiication.

C) in general are becoming less integrated due to the widespread availability of interest

rate and currency swaps.

D) increase portfolio betas.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

16) Expropriation of plant and equipment without compensation is an example of inancial

risk from direct foreign investments.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

17) Economic exposure refers to the overall impact of exchange rate changes on the value

of the irm.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

18) The cost of debt used in the international investment decision is the lesser of the

parent’s or the subsidiary’s cost of debt.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

19) Because a large part of a subsidiary’s equity funds comes from the parent, the

subsidiary should use the same cost of equity as the parent.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

20) Millheim Electronics is an American irm operating in India, whose government refuses

to allow Millheim to send its earnings out of the country. This is an example of repatriation

of proits.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

21) Multinational corporations can have lower cost of capital and more continuous access

to external inance compared to a domestic irm.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

22) The relevant sources of risk for direct foreign investment capital budgeting decisions

are the same as those faced when making domestic capital budgeting decisions.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

23) The interest rate in the U.S. is 4%, in Switzerland it is 3%. The spot rate is 1.0232 USD

to the Swiss franc. A U.S. based hotel chain needs to project forward exchange rates for the

next ive years. Complete the table below.

Year Spot

Rate

x rate

diferential Forward Rate

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

24) The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The Host Hotel

Company will be able to repatriate proits from its luxury resort hotel in Phuket in 5 years.

It has estimated the 5 year forward rate at 38 bhat to the dollar. The risk-free rate in the

U.S. is 4% and Host uses an 11 % risk premium for investments of this type. If the expected

accumulated proits after 5 years are 100 million bhat, what is their present value in U.S.

dollars.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

25) What are some of the potential risks, other than exchange rate risk, that need to be

considered in foreign direct investment decisions.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value

26) Briely discuss the factors that multinational irms consider in arriving at capital

structure decisions.

Question Status: Previous edition

Objective: 19.3 Discuss the risks that are unique to the capital budgeting analysis of direct foreign

investments.

Keywords: capital budgeting

Principles: Principle 3: Cash Flows Are the Source of Value