13) When estimating a firm’s 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 firm’s beta.
D) all of the above
14) ________ 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
15) 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
16) 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.
17) 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.
18) When estimating a capital budget, it is common to separate cash flows into: 1) the initial
investment, 2) incremental cash flows over the life of the project, and 3) a terminal value.
19) 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.
20) 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.
21) When dealing with international capital budgeting projects, the value of the project is NOT
sensitive to the firm’s cost of capital.
22) Explain how political risk and exchange rate risk increase the uncertainty of international
projects for the purpose of capital budgeting.
Answer: The evaluation of foreign projects must consider several risks that are either
1) 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.
2) Real option analysis treats cash flows in terms of future value in a positive sense, whereas
DCF treats future cash flows negatively.
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3) Real option analysis is a particularly powerful device when addressing potential investment
projects with extremely long life spans or investments that do not commence until future dates.
4) What is real option analysis? How is it a better method of making investment decisions than
using traditional capital budgeting analysis?
Answer: Real options is a different way of thinking about investment values. At its core, it is a
cross between decision-tree analysis and pure option-based valuation. It is particularly useful
when analyzing investment projects that will follow very different value paths at decision points
18.4 Project Financing
1) 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.
2) 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.
3) The predictability of the project’s revenue stream is essential in securing project financing.
Which of the following is NOT a typical contract provisions that are intended to assure adequate
cash flow?
A) quantity and quality of the project’s output
B) a pricing formula
C) circumstances that permit changes in the contract
D) fronting loan
4) Project financing is the arrangement of financing for very large individual long-term capital
projects.
5) Debt is usually a large component of project financing.
6) The level of debt places an enormous burden on cash flow for debt service and requires a
number of additional levels of risk reduction.
7) In project finance, retained earnings and the reinvestment of earnings are the most important
decisions to guarantee the long term growth of the project’s value.
1) 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.
2) Which of the following changes does NOT create business opportunities for select firms to
both enhance and defend their competitive positions in global markets?
A) Changes in technology
B) Changes in regulation
C) Changes in capital markets
D) Changes in management
3) 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.
4) Which of the following is NOT an advantage of cross-border acquisitions over greenfield
investments?
A) quicker
B) cost-effective
C) target firms to be undervalued
D) melding corporate cultures
5) Which of the following is NOT a typical pitfall of cross-border acquisitions?
A) paying too much
B) excessive financing costs
C) melding corporate cultures
D) all of the above are pitfalls
6) 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.
7) 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.
8) The drivers of international merger and acquisitions are only MACRO in scope.
9) As opposed to greenfield investment, a cross-border acquisition is typically quicker.