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Chapter 15: International Corporate Governance and Control
36. When U.S. firms acquire publically-traded target firms in foreign countries, they would acquire all the shares of the
target at a price that is _________ the existing market price per share.
a.
equal to
b.
slightly below
c.
substantially below
d.
above
37. Firms based in ____ tend to acquire more U.S. target firms than firms in the other countries listed here.
a.
Canada
b.
Japan
c.
Germany
d.
Mexico
38. The sale of a subsidiary by an MNC is referred to as a divestiture.
a.
True
b.
False
39. An MNC's parent would consider investing in a target only if the estimated present value of the cash flows it would
Chapter 15: International Corporate Governance and Control
ultimately receive from the target over time ____ the initial outlay necessary to purchase the target.
a.
is less than
b.
is the same as
c.
is greater than
d.
none of the above
40. Which of the following would not enhance the value of a target from the acquirer's perspective?
a.
Expected sales of the target have increased.
b.
The subsidiary's currency is expected to strengthen after the acquisition.
c.
The required rate of return from investing in the target has increased.
d.
All of the above would enhance the value of the target.
41. An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a publicly
traded target.
a.
True
b.
False
42. A target's previous cash flows are typically an accurate indicator of future cash flows, especially when the target's cash
flows would have to be converted into the acquirer's home currency as they are remitted to the parent.
a.
True
b.
False
43. Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for
their products in the future and may generate ____ cash flows.
a.
strong; lower
b.
weak; higher
c.
weak; lower
d.
strong; higher
44. When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry
is ____ and the competition within the industry is ____.
a.
low; not excessive
b.
high; excessive
c.
high; not excessive
d.
low; excessive
45. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are
generally ____. Assume that economic conditions are held constant when completing this statement.
a.
low
b.
high
c.
volatile
d.
none of the above
46. If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a
foreign target.
a.
True
b.
False
47. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in
the same industry is 12. This firm is considering the possibility of going public and issuing one million shares. If the
private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its
value can be estimated as ____ million euros.
a.
2.4
b.
60.0
c.
41.7
d.
12
48. If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost
of the acquisition changes ____ the change in the exchange rate.
a.
appreciates; by a lesser percentage then
b.
depreciates; in the same proportion as
c.
appreciates; in the same proportion as
d.
appreciates; by a greater percentage than
49. If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient
manner, the risk of the business will be relatively ____, and therefore the MNC's required return from acquiring the target
will be relatively ____.
a.
high; high
b.
high; low
c.
low; high
d.
low; low
50. Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various
times. In fact, this analysis may indicate that a previously accepted project should be divested.
a.
True
b.
False
51. An international acquisition may be preferable to the establishment of a new subsidiary because the firm can
immediately expand its international business and benefit from existing customer relationships.
a.
True
b.
False
52. The Sarbanes-Oxley Act requires executives and the board of directors to conduct a thorough review when assessing
acquisitions.
a.
True
b.
False
53. When viewed as a project, an international acquisition usually generates quicker and larger cash flows than the
establishment of a new subsidiary, but it also requires a larger initial outlay.
a.
True
b.
False
54. Downsizing reduces expenses but may also reduce productivity and revenue.
a.
True
b.
False
55. Economic conditions in the host country are probably more important for an MNC that intends to use the target to
generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country.
a.
True
b.
False
56. When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its
respective industry is high and the competition within the industry is not excessive.
a.
True
b.
False
Chapter 15: International Corporate Governance and Control
57. Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target
could be underestimated.
a.
True
b.
False
58. A call option on real assets represents a proposed project that contains an option of pursuing an additional venture.
a.
True
b.
False
59. When an MNC considers a partial acquisition, the valuation of the target will be conducted the same way whether the
MNC acquires control of the target or only a small portion of its shares.
a.
True
b.
False
60. The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted
funds from the target.
Chapter 15: International Corporate Governance and Control
a.
True
b.
False
61. When an MNC acquires a target and knows that it will be able to sell the acquisition at any time during the next three
years at a specific price, the MNC has acquired a put option on real assets.
a.
True
b.
False
62. While acquisitions of privatized businesses may be attractive because of the potential for MNCs to increase their
efficiency, the valuation of these businesses is generally more difficult than the valuation of existing businesses.
a.
True
b.
False
63. It is always the best course of action to divest a foreign project if the expected cash flows from the project decline
substantially.
a.
True
b.
False
64. The valuation of a proposed international divestiture can be determined by comparing the present value of the cash
flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
a.
True
b.
False
65. The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware
that stock prices of targets fall abruptly after a bid by the acquiring firm.
a.
True
b.
False
66. A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the
same industry to the private company's earnings.
a.
True
b.
False
67. The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very
high and is expected to decrease over time.
a.
True
b.
False
68. Which of the following is not an external force that could reduce the present value of a foreign subsidiary’s future
cash flows?
a.
higher taxes imposed by the host government
b.
depreciation of the local currency
c.
an increase in the parent’s cost of capital
d.
weakening of the economy of the host country
e.
All of the above could reduce the present value of the subsidiary’s future cash flows.
69. An MNC valuing a foreign target for acquisition purposes must account for all of the following, except:
a.
the foreign exchange rate.
b.
withholding taxes imposed by the host government.
c.
blocked-funds restrictions.
d.
income taxes imposed by the U.S. government.
e.
An MNC must account for all of the above.
70. Which of the following might cause the board of directors of an MNC to not be effective at governance?
a.
The firm’s CEO serves as chair of the board.
b.
The board consists mainly of outside members who are not managers of the firm.
c.
The board consists mainly of inside members who are managers of the firm.
d.
A and C
71. An institutional investor such as a public pension fund or mutual fund that invests in the stock of a company and plans
to hold the shares for a long time is likely to be a shareholder activist.
a.
True
b.
False
72. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?
a.
differences in estimated cash flows to be generated by the foreign target
b.
differences in estimated exchange rates
c.
differences in required rates of return
d.
All of the above are possible reasons why the valuation of a foreign target may vary among MNCs
