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4) Suppose the domestic cost of capital for a U.S.-based company is 9%. Also, the U.S.
interest rate is 5% and the European interest rate is 5%. What is the foreign denominated
cost of capital for the company?
A) 7%
B) 8%
C) 9%
D) 10%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) Suppose the domestic cost of capital for a U.S.-based company is 10%. Also, the U.S.
interest rate is 6% and the European interest rate is 7%. What is the foreign denominated
cost of capital for the company?
A) 11.04%
B) 11.26%
C) 11.51%
D) 11.98%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
21
6) Which of the following statements is FALSE?
A) If the foreign project is owned by a domestic corporation, managers and shareholders
need to determine the home currency value of the foreign currency cash lows.
B) The most obvious diference between a domestic project and a foreign project is that the
foreign project will most likely generate cash lows in a foreign currency.
C) The risk of the foreign project is unlikely to be exactly the same as the risk of domestic
projects (or the irm as a whole), because the foreign project contains residual exchange
rate risk that the domestic projects often do not contain.
D) In an internationally integrated capital market, two equivalent methods are available for
calculating the net present value (NPV) of a foreign project: Either we can calculate the net
present value (NPV) in the foreign country and convert it to the local currency at the
forward rate, or we can convert the cash lows of the foreign project into the local currency
and then calculate the net present value (NPV) of these cash lows.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
7) Consider the following equation:
= (1 + ) - 1
The term r¥ in this equation refers to ________.
A) the cost of capital for the irm in terms of yen
B) the risk-free rate of interest on the dollar
C) the cost of capital in terms of dollars
D) the risk-free rate of interest on the yen
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
22
8) Consider the following equation:
= (1 + ) - 1
The term in this equation refers to ________.
A) the cost of capital in terms of dollars
B) the risk-free rate of interest on the yen
C) the risk-free rate of interest on the dollar
D) the cost of capital for the irm in terms of yen
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
9) Consider the following equation:
= (1 + ) - 1
The term in this equation refers to ________.
A) the risk-free rate of interest on the dollar
B) the risk-free rate of interest on the yen
C) the cost of capital for the irm in terms of yen
D) the cost of capital in terms of dollars
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
23
10) Consider the following equation:
= (1 + ) - 1
The term r$ in this equation refers to ________.
A) the cost of capital for the irm in terms of yen
B) the cost of capital in terms of dollars
C) the risk-free rate of interest on the dollar
D) the risk-free rate of interest on the yen
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
Use the information for the question(s) below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both
countries is lat. The risk-free rate on dollars, r$, is 5.35% and the risk-free interest rate on
pounds, r£, is 4.80%.
11) Using the covered interest parity condition, the calculated one-year forward rate F1 is
closest to ________.
A) $1.8568/£
B) $1.8764/£
C) $1.9161/£
D) $1.8961/£
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
24
12) Using the covered interest parity condition, the calculated three-year forward rate F3
is closest to ________.
A) $1.8568/£
B) $1.9161/£
C) $1.8961/£
D) $1.8764/£
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) Luther Industries, a U.S. irm, is considering an investment in Japan. The dollar cost of
equity for Luther is 12%. The risk-free interest rates on dollars and yen are r$ = 5.5% and
r¥ = 1.5%, respectively. Luther industries is willing to assume that capital markets are
internationally integrated. Luther Industries needs to know the comparable cost of equity
in Japanese yen for a project with free cash lows that are uncorrelated with spot exchange
rates. The yen cost of equity for Luther Industries is closest to ________.
A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
23.5 Valuation and International Taxation
1) The amount of taxes paid by a foreign subsidiary does not depend on the amount
repatriated back to the home country.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
25
2) Under U.S. tax law, a multinational corporation may use any excess tax credits generated
in high-tax foreign countries to ofset its net U.S. tax liabilities on earnings in low-tax
foreign countries.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
3) ________ is a term used to describe the transfer of proits from a foreign subsidiary to the
home country.
A) Repatriation
B) Depreciation
C) Privatization
D) Reversion
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Pooling of all foreign tax liabilities on earnings allows corporations to ________.
A) reduce income
B) repatriate income
C) reduce their overall taxes
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) U.S. tax liabilities are ________ until the foreign subsidiary proits are repatriated to the
United States.
A) not incurred
B) incurred no matter
C) accrued
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
26
6) Which of the following statements is FALSE?
A) U.S. tax policy requires U.S. corporations to pay taxes on their foreign income at the
same rate as proits earned in the United States.
B) The home government gets an opportunity to tax the income from a foreign project to
the domestic irm.
C) The general international arrangement prevailing with respect to taxation of corporate
proits is that the home country gets the irst opportunity to tax income.
D) The home government must establish a tax policy specifying its treatment of foreign
income and foreign taxes paid on that income.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
7) Which of the following statements is FALSE?
A) If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on
foreign earnings.
B) U.S. tax policy allows companies to apply the part of the tax credit that is not used to
ofset domestic taxes owed, so this extra tax credit is not wasted.
C) If the foreign tax rate is less than the U.S. tax rate, the company pays total taxes equal
to the U.S. tax rate on its foreign earnings.
D) A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
27
8) Which of the following statements is FALSE?
A) If the U.S. tax rate exceeds the combined tax rate on all foreign income, it is valid to
assume that the irm pays the same tax rate on all income no matter where it is earned.
B) Firms can lower their taxes by pooling multiple foreign projects and accelerating the
repatriation of earnings.
C) Under U.S. tax law, multinational corporations may use any excess tax credits generated
in high-tax foreign countries to ofset their net U.S. tax liabilities on earnings in low-tax
foreign countries.
D) If the foreign tax rate exceeds the U.S. tax rate, because the U.S. tax credit exceeds the
amount of U.S. taxes owed, no tax is owed in the United States.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
9) Which of the following statements is FALSE?
A) When the foreign tax rate is less than the U.S. tax rate, deferral can provide signiicant
beneits.
B) The U.S. tax liability is not incurred until the proits are brought back home if the
foreign operation is set up as a foreign branch rather than as a separately incorporated
subsidiary.
C) If a company chooses not to repatriate £12.5 million in pretax earnings, for example, it
efectively reinvests those earnings abroad and defers its U.S. tax liability.
D) When the foreign tax rates exceed the U.S. tax rates, there are no beneits to deferral
because in such a case there is no additional U.S. tax liability.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28
10) Which of the following statements is FALSE?
A) Other beneits from deferral arise because the irm efectively gains a real option to
repatriate income at times when repatriation might be cheaper.
B) By pooling foreign income, the irm efectively pays the combined tax rate on all foreign
income.
C) In years in which the U.S. tax rate exceeds the combined tax rate on all foreign income,
the repatriation of additional income does not incur an additional U.S. tax liability, so the
earnings can be repatriated tax free.
D) Deferring repatriation of earnings lowers the overall tax burden in much the same way
as deferring capital gains lowers the tax burden imposed by the capital gains tax.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
Use the information for the question(s) below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation.
Currently KT's U.S. tax rate is 35%. KT has signiicant operations in both Japan and
Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at
41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at
12.5%. KT's proits, which are fully and immediately repatriated, and foreign taxes paid for
the current year are shown here (in millions):
Japan Ireland
Earnings before interest and taxes
(EBIT) ¥5920 €32
Host country taxes paid ¥2427 €4
Earnings before interest after taxes ¥3493 €28
11) After the Japanese taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Japanese operations is closest to ________.
A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
29
