978-0133507676 Chapter 23 Part 3

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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

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

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

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

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

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

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

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

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