Chapter 14—Multinational Capital Budgeting
1. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically
sent to the parent, the ideal situation from the parent’s perspective is a ____ after the subsidiary is
established.
a.
strengthening euro
b.
stable euro
c.
weak euro
d.
B and C are both ideal.
2. According to the text, in order to develop a distribution of possible net present values from
international projects, a firm should use:
a.
a risk-adjusted discount rate.
b.
a payback period.
c.
certainty equivalents.
d.
simulation.
3. When evaluating international project cash flows, which of the following factors is relevant?
a.
future inflation.
b.
blocked funds.
c.
exchange rates.
d.
all of the above
4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate
exposure to the parent over time because the cash flows remitted to the parent will be larger.
a. True
b. False
5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is
less than the required rate of return on the project.
a. True
b. False
6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely
from the German subsidiary’s perspective, which variable will most likely influence the capital
budgeting analysis?
a.
the withholding tax rate.
b.
the euro’s exchange rate.
c.
the U.S. tax rate on earnings remitted to the U.S.
d.
the German government’s tax rate.
e.
A and C
7. In capital budgeting analysis, the use of a cumulative NPV is useful for:
a.
determining a probability distribution of NPVs.
b.
determining the time required to achieve a positive NPV.
c.
determining how the required rate of return changes over time.
d.
determining how the cost of capital changes over time.
e.
A and B
8. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British
subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the
discount rate used in the capital budgeting analysis on this project should be most affected by:
a.
the cost of borrowing funds in the U.K.
b.
the economic conditions in the U.K.
c.
the parent’s cost of capital.
d.
A and B
9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to
the U.S. If the peso ____, the dollar amount of remitted funds ____.
a.
appreciates; decreases
b.
depreciates; is unaffected
c.
appreciates; is unaffected
d.
depreciates; decreases
e.
B and C
10. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of
parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
a.
the subsidiary finances the entire investment by local borrowing.
b.
the subsidiary finances most of the investment by local borrowing.
c.
the parent finances most of the investment.
d.
the parent finances the entire investment.
11. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in
the country, then cash flows from prevailing operations would likely be ____ affected by the project. If
an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the
cash flows from prevailing operations would likely be ____ affected by the project.
a.
adversely; adversely
b.
favorably; adversely
c.
favorably; favorably
d.
adversely; favorably
12. An MNC is considering establishing a two-year project in New Zealand with a $30 million initial
investment. The firm’s cost of capital is 12%. The required rate of return on this project is 18%. The
project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2,
excluding the salvage value. Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the
next two years. All cash flows are remitted to the parent. What is the break-even salvage value?
a.
about NZ$11 million.
b.
about NZ$15 million.
c.
about NZ$31 million.
d.
about NZ$37 million.
e.
about NZ$25 million.
13. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows
in dollars would be more difficult if the currency of the foreign country is ____.
a.
fixed
b.
volatile
c.
stable
d.
none of the above, as the firm is not exposed
14. If the parent charges the subsidiary administrative fees, the earnings from the project will appear low
to the parent and high to the subsidiary.
a. True
b. False
15. Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect
on a project if the currency of that country is expected to ____ over time, and if the interest rate in that
country is relatively ____.
a.
appreciate; low
b.
appreciate; high
c.
depreciate; high
d.
depreciate; low
16. If a multinational project is assessed from the subsidiary’s perspective, withholding taxes are ignored
for project assessment.
a. True
b. False
17. Other things being equal, firms from a particular home country will engage in more international
acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of
capital is relatively ____.
a.
appreciate; low
b.
appreciate; high
c.
depreciate; high
d.
depreciate; low
18. The discrepancy between the feasibility of a project in a host country from the perspective of the U.S.
parent versus the subsidiary administering the project is likely to be greater for projects in countries
where:
a.
the taxes are the same as in the U.S.
b.
there are no blocked fund restrictions.
c.
the currency of the host country is expected to depreciate consistently.
d.
none of the above; a discrepancy is not possible.
19. The break-even salvage value of a particular project is the salvage value necessary to:
a.
offset any losses incurred by the subsidiary in a given year.
b.
offset any losses incurred by the MNC overall in a given year.
c.
make the project have zero profits.
d.
make the project’s return equal the required rate of return.
20. The impact of blocked funds on the net present value of a foreign project will be greater if interest
rates are ____ in the host country and there are ____ investment opportunities in the host country.
a.
very high; limited
b.
very low; limited
c.
very low; numerous
d.
very high; numerous
21. One foreign project in Hungary and another in Japan had the same perceived value from the U.S.
parent’s perspective. Then, the exchange rate expectations were revised, upward for the value of the
Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in
Japan would now be ____ from the parent’s perspective.
a.
negative
b.
higher than that for the Hungarian project
c.
lower than that for the Hungarian project
d.
the same as that for the Hungarian project
e.
A and C
22. Exchange rates for purposes of multinational capital budgeting:
a.
are very difficult to forecast.
b.
can be easily hedged with currency swaps.
c.
are unimportant, as they do not affect the cash flows of the multinational project.
d.
all of the above
23. A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the
MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation
in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that
the dinar will depreciate substantially due to political turmoil in Algeria. This new development would
likely cause the MNC to ____ its estimate of the previously computed net present value.
a.
lower
b.
increase
c.
lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in
NPV
d.
increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting
amount
e.
none of the above
Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial
investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the
project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’
existing projects. All cash flows generated from the project will be remitted to the parent at the end of
each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the
project’s lifetime in Norwegian kroner (NOK):
Year 1
Year 2
Year 3
Year 4
NOK10,000,000
NOK15,000,000
NOK17,000,000
NOK20,000,000
The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the
Norwegian kroner over the project’s lifetime is listed below:
Year 1
Year 2
Year 3
Year 4
$.13
$.14
$.12
$.15
24. Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a.
−$803,848.
b.
$5,803,848.
c.
$1,048,829.
d.
none of the above
25. Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage
value. Baps is not completely certain that the salvage value will be this amount and wishes to
determine the break-even salvage value, which is $____.
a.
510,088.04
b.
1,710,088
c.
1,040,000
d.
none of the above
26. Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has been
involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of
capital is used instead of 13%?
a.
−$17,602.62.
b.
$8,000,000.
c.
$1,048,829.
d.
$645,147.
27. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is
expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian
dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that
the cost of capital for similar projects is 14%. What is the net present value of this project if the spot
rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
a.
$2,905,817.
b.
−$94,183.
c.
$916,128.
d.
none of the above
28. Which of the following is not a characteristic of a country to be considered within an MNC‘s
international tax assessment?
a.
corporate income taxes.
b.
withholding taxes.
c.
provisions for carrybacks and carryforwards.
d.
tax treaties.
e.
all of the above are characteristics to be considered.
29. Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.
a.
withholding taxes
b.
excise taxes
c.
tax credits
d.
carryforwards
30. If the parent’s government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a
project is less likely to be feasible from the ____ point of view.
a.
high; subsidiary’s
b.
high; parent’s
c.
low; parent’s
d.
A and C
e.
none of the above
31. If a subsidiary project is assessed from the subsidiary’s perspective, then an expected appreciation in
the foreign currency will affect the feasibility of the project ____.
a.
positively
b.
negatively
c.
either positively or negatively, depending on the percentage appreciation
d.
none of the above
32. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed
with retained earnings of the parent and of the subsidiary, then:
a.
the parent’s perspective should be used to evaluate a foreign project.
b.
the subsidiary’s perspective should be used to evaluate a foreign project.
c.
the foreign project should enhance the value of both the parent and the subsidiary.
d.
none of the above
33. The ____ is (are) likely the major source of funds to support a particular project.
a.
initial investment
b.
variable costs
c.
fixed costs
d.
none of the above
34. Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international
tax effects need not be determined on a proposed foreign project.
a. True
b. False
35. The required rate of return of a project is ____ the MNC’s cost of capital.
a.
greater than
b.
less than
c.
the same as
d.
any of the above, depending on the specific project
36. An international project’s NPV is ____ related to the size of the initial investment and ____ related to
the project’s required rate of return.
a.
positively; positively
b.
positively; negatively
c.
negatively; positively
d.
negatively; negatively
37. An international project’s NPV is ____ related to consumer demand and ____ related to the project’s
salvage value.
a.
positively; positively
b.
positively; negatively
c.
negatively; positively
d.
negatively; negatively
38. Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign
project’s NPV will be.
a.
higher; lower
b.
higher; higher
c.
lower; higher
d.
none of the above
39. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5.
The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2
through 5.
a.
depreciates; depreciates
b.
appreciates; appreciates
c.
depreciates; appreciates
d.
appreciates; depreciates
40. If an MNC sells a product in a foreign country and imports partially manufactured components needed
for production to that country from the U.S., then the local economy’s inflation will have:
a.
a more pronounced impact on revenues than on costs.
b.
a less pronounced impact on revenues than on costs.
c.
the same impact on revenues as on costs.
d.
none of the above
41. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate
movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt
payments by the subsidiary ____ included explicitly in the cash flow analysis.
a.
should be; should be
b.
should definitely not be; should definitely not be
c.
should definitely not be; should be
d.
should be; should definitely not be
42. As the financing of a foreign project by the parent ____ relative to the financing provided by the
subsidiary, the parent’s exchange rate exposure ____.
a.
increases; decreases
b.
decreases; increases
c.
increases; increases
d.
none of the above
43. In conducting a multinational capital budgeting analysis, the subsidiary’s perspective should always be
used.
a. True
b. False
44. The feasibility of a multinational project from the parent’s perspective is dependent not on the
subsidiary cash flows but on the cash flows that it ultimately receives.
a. True
b. False
45. The required rate of return used to discount the relevant cash flows from a foreign project may differ
from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False
46. In multinational capital budgeting, depreciation is treated as a cash outflow.
a. True
b. False
47. No matter what the probability distribution of future exchange rates is, as long as one out of several
scenarios results in a negative net present value (NPV), a project should not be accepted.
a. True
b. False
48. If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary’s investment could
be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in
the foreign project.
a. True
b. False
49. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the
subsidiary obtain partial financing for the project.
a. True
b. False
50. When managers use NPV analysis, agency costs are eliminated, and governance is not needed to
monitor MNC decisions regarding projects.
a. True
b. False
51. Sometimes, a multinational project may appear feasible from the subsidiary’s perspective but not from
the parent’s perspective and vice versa.
a. True
b. False
52. The feasibility of a multinational project from the parent’s perspective is dependent not on the
subsidiary cash flows but on the cash flows that it ultimately receives.
a. True
b. False
53. Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate in attempting to
determine whether a project will enhance the firm’s value.
a. True
b. False
54. The required rate of return used to discount the relevant cash flows from a foreign project may differ
from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False
55. If a parent’s perspective is used in analyzing a multinational project, the relevant cash flows are the
dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the
investment by the parent.
a. True
b. False
56. If partial financing is provided by the foreign subsidiary, including foreign interest payments in the
cash flow analysis may avoid overstatement of the estimated foreign cash flows.
a. True
b. False
57. Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are
the use of risk-adjusted discount rates, sensitivity analysis, and simulation.
a. True
b. False
58. The greater the uncertainty about a project’s forecasted cash flows, the larger should be the discount
rate applied to cash flows, other things being equal.
a. True
b. False
59. The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to
alternative values of the input variables.
a. True
b. False
60. ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s after-tax cash flows.
a.
The number of units sold by the subsidiary
b.
The subsidiary’s earnings before income and taxes (EBIT)
c.
The tax rate the subsidiary is subject to in the host country
d.
Withholding taxes imposed by the host government
61. ____ is an input required for a multinational capital budgeting analysis, given that it is conducted from
the parent’s viewpoint.
a.
Salvage value
b.
Price per unit sold
c.
Initial investment
d.
Consumer demand
e.
All of the above are inputs required for capital budgeting analysis.
62. ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
a.
Discriminant analysis
b.
Risk-adjusted discount rate
c.
Sensitivity analysis
d.
Simulation
63. Which of the following is not true regarding simulation?
a.
It can be used to generate a probability distribution of NPVs.
b.
It generates a probability distribution of NPVs by randomly drawing values for the input
variable(s).
c.
It can only be used for one variable at a time.
d.
It can be used to develop probability distributions of all variables with uncertain future
values.
64. Which of the following is not a factor that should be considered in multinational capital budgeting?
a.
Blocked funds
b.
Exchange rate fluctuations
c.
Inflation
d.
Financing arrangements
e.
All of the above should be considered.