Chapter 15—International Corporate Governance and Control
1. International governance is achieved by all of the following except:
a.
poison pills.
b.
board of directors.
c.
institutional investors.
d.
blockholders.
e.
All of the above achieve governance.
2. Which of the following is not an advantage of international acquisitions over the establishment of a
new subsidiary?
a.
The firm can immediately expand its international business.
b.
An international acquisition typically generates quicker cash flows than the establishment
of a new subsidiary.
c.
International acquisitions are generally cheaper than the establishment of a new
subsidiary.
d.
An international acquisition typically generates larger cash flows than the establishment of
a new subsidiary.
e.
All of the above are advantages of international acquisitions.
3. According to your text, U.S. firms pursue more international acquisitions in ____ than in other
countries.
a.
the U.K.
b.
Mexico
c.
Japan
d.
Germany
e.
France
4. Which of the following is not true regarding a target’s previous cash flows?
a.
They may serve as an initial base from which future cash flows may be estimated after
accounting for other factors.
b.
It may be easier to estimate the cash flows to be generated by a target than to estimate the
cash flows to be generated from a new foreign subsidiary.
c.
They are always good indicators of future cash flows.
d.
All of the above are true.
5. As far as the managerial talent of the target is concerned:
a.
the manner in which the acquirer plans to deal with the managerial talent will affect the
estimated cash flows to be generated by the target.
b.
downsizing will reduce expenses and increase productivity and revenues.
c.
governments of some countries are likely to intervene and prevent the acquisition if
downsizing is anticipated.
d.
all of the above
e.
A and C only
6. Based on information in your text, all of the following factors should be considered in an international
acquisition, except:
a.
the target’s willingness to be acquired.
b.
the target’s previous acquisition history.
c.
the target’s previous cash flows.
d.
the target’s local economic conditions.
7. Which of the following tax-related factors need not be considered in assessing a foreign target?
a.
corporate tax rates in the host country.
b.
withholding tax rates in the host country.
c.
withholding tax rates in the home country.
d.
corporate tax rates in the home country.
e.
all of the above must be considered in assessing a foreign target.
Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political
considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this
target and has provided you with the following information:
•
Klimewsky expects to keep the target for three years, at which time it expects to sell the
firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes
paid.
•
Klimewsky expects a strong Malaysian economy. Consequently, the estimates for
revenues for the next year are MYR300 million. Revenues are expected to increase by 9%
over the following two years.
•
Cost of goods sold are expected to be 60% of revenues.
•
Selling and administrative expenses are expected to be MYR40 million in each of the next
three years.
•
The Malaysian tax rate on the target’s earnings is expected to be 30%.
•
Depreciation expenses are expected to be MYR15 million per year for each of the next
three years.
•
The target will need MYR9 million in cash each year to support existing operations.
•
The target’s current stock price is MYR35 per share. The target has 11 million shares
outstanding.
•
Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc.
Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected
exchange rate for the next three years. This exchange rate is currently $.23.
•
Klimewsky’s required rate of return on similar projects is 13%.
8. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the
Malaysian target is $____ million.
a.
155.9
b.
111.5
c.
138.0
d.
143.0
e.
none of the above
Revenue
Cost of Goods Sold
Gross Profit
Selling & Admin. Exp.
Depreciation
Earnings Before Taxes
Tax (30%)
Earnings After Taxes
+Depreciation
Sale of Firm
Cash Flows in MYR
Exchange Rate of MYR
Cash Flows in $
PV (13% disc. rate)
Cumulative PV
9. Refer to Exhibit 15-1. The Malaysian target’s value based on its stock price is $____ million.
a.
1.4
b.
1,673.9
c.
111.5
d.
88.6
e.
none of the above
10. Refer to Exhibit 15-1. The target’s board has indicated that it finds a premium of 30 percent
appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the
maximum percentage premium you should be willing to offer?
a.
30.0%.
b.
25.9%.
c.
you should not offer any premium because the market’s valuation is below Klimewsky’s
valuation.
d.
none of the above
11. Which of the following would probably not cause the stock price of a foreign target to decrease?
a.
Its expected cash flows decline.
b.
General stock market conditions in the foreign country are deteriorating.
c.
Investors anticipate that the target will be acquired.
d.
All of the above will cause the target’s stock price to decrease.
12. Which of the following factors is least likely to cause the required rate of return to vary among MNCs
assessing the same foreign target?
a.
differences in the timing of remittances from the target to the parent.
b.
differences in the desired use of the target.
c.
differences in the local risk-free interest rate.
d.
differences in the ability to use financial leverage.
13. Which of the following types of international corporate control transaction is probably the most
difficult to value by an MNC?
a.
international acquisition.
b.
newly privatized foreign business.
c.
international alliance.
d.
international divestiture.
14. A previously undertaken project in a foreign country may no longer be feasible because:
a.
interest rates have declined.
b.
the MNC’s cost of capital has decreased.
c.
the host government has increased its tax rates substantially.
d.
exchange rate projections changed from a depreciation to an appreciation of the foreign
currency.
15. An international alliance typically requires a ____ initial outlay than an international acquisition, and
the cash flows to be received will typically be ____ than the cash flow resulting from an international
acquisition.
a.
smaller; larger
b.
smaller; smaller
c.
larger; smaller
d.
larger; larger
16. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the
business would generate more value to the MNC if it was restructured.
a. True
b. False
17. At present, U.S. firms acquire more targets in the former Soviet Union than in any other country.
a. True
b. False
18. The U.S. is one of the few countries with agencies that monitor mergers and acquisitions.
a. True
b. False
19. The government of a country may prevent a foreign firm from acquiring local targets and downsizing
the targets.
a. True
b. False
20. Since the cash flows generated by a foreign target will eventually be converted to the parent’s
currency, there is no need to consider the foreign exchange rate in the capital budgeting process.
a. True
b. False
21. From an acquirer’s perspective, the ideal conditions would be a weak foreign currency at the time of
acquisition and a strengthening of the foreign currency over time as funds are remitted back to the
parent.
a. True
b. False
22. Premiums required to entice a target’s board of directors to approve an acquisition are usually between
1 and 3 percent of the target’s market price.
a. True
b. False
23. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False
24. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a
foreign target than an acquirer based in a high-tax country.
a. True
b. False
25. The valuation of a target (from the parent’s perspective) should increase when the potential acquirer’s
cost of capital increases.
a. True
b. False
26. If potential acquirers are based in different countries, their required rates of return when considering a
specific target will only vary if the desired use of the target is different.
a. True
b. False
27. Acquirers may have different required rates of return because of differences in the ability to use
financial leverage.
a. True
b. False
28. An international acquisition is different from the establishment of a new subsidiary in that the MNC
can immediately expand its international business since the target is already in place.
a. True
b. False
29. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock
market prices in the target’s country are generally high.
a. True
b. False
30. Privatization involves the sale of previously government-owned businesses by the government.
a. True
b. False
31. An MNC should periodically reassess its investments to determine whether to divest them.
a. True
b. False
32. The initial outlay for a project in a foreign country may decline if property values in that country
decline.
a. True
b. False
33. The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign
target that has operated privately for several years.
a. True
b. False
34. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S.
parent if new information caused the parent to suddenly anticipate that:
a.
the Chinese yuan would depreciate in the future.
b.
the Chinese yuan would appreciate in the future.
c.
the Chinese yuan would remain somewhat stable in the future.
d.
none of the above; the value of the Chinese yuan has no impact on the feasibility of a
divestiture.
35. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a
subsidiary?
a.
the required rate of return on the subsidiary.
b.
forecasted exchange rates of the subsidiary’s currency relative to the dollar.
c.
the initial outlay on the project.
d.
the possible selling price of the project.
36. Regarding the valuation of privatized businesses in less developed countries, ____ can normally be
estimated with a high degree of accuracy.
a.
future cash flows
b.
future exchange rate movements
c.
the proper discount rate
d.
none of the above
37. U.S. firms acquire more target firms in ____ than in any other country.
a.
Spain
b.
Italy
c.
Belgium
d.
United Kingdom
38. Firms based in ____ tend to acquire more U.S. target firms than the other countries listed here.
a.
Canada
b.
Japan
c.
Germany
d.
Mexico
39. The sale of a subsidiary by an MNC is referred to as a divestiture.
a. True
b. False
40. An MNC’s parent would consider investing in a target only if the estimated present value of the cash
flows it would 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
41. 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.
42. An international acquisition will typically require that the acquirer pay a premium of 30 percent or
more for a public target.
a. True
b. False
43. 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
44. 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
45. 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
46. 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
47. 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
48. 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 in
which it would issue 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
49. 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
50. 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
51. 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
52. 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
53. The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when
assessing acquisitions.
a. True
b. False
54. When viewed as a project, the 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
55. Downsizing reduces expenses but may also reduce productivity and revenue.
a. True
b. False
56. 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
57. 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
58. 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
59. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False
60. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a
foreign target than an acquirer based in a high-tax country.
a. True
b. False
61. The value of an MNC (from the parent’s perspective) is independent of the MNC’s desired scheduling
of remitted funds from the target.
a. True
b. False
62. If potential acquirers are based in different countries, their required rates of return when considering a
specific target will only vary if the desired use of the target is different.
a. True
b. False
63. 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.
a. True
b. False
64. It is always the best course of action to divest of a foreign project if the expected cash flows from the
project decline substantially.
a. True
b. False
65. 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
66. 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
67. 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
68. 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
69. Which of the following is not an advantage of international acquisitions over the establishment of a
new subsidiary?
a.
The firm can immediately expand its international business.
b.
The firm benefits from existing customer relationships.
c.
International acquisitions are generally cheaper than the establishment of a new
subsidiary.
d.
An international acquisition typically generates quicker and larger cash flows than the
establishment of a new subsidiary.
e.
All of the above are advantages of international acquisitions.
70. 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.
71. According to your text, all of the following are factors to be considered in an international acquisition,
except
a.
the target’s willingness to be acquired.
b.
the target’s previous acquisition history.
c.
the target’s previous cash flows.
d.
the target’s local economic conditions.
72. Which of the following would probably not cause the stock price of a foreign target to decrease?
a.
Its expected cash flows decline.
b.
General stock market conditions in the foreign country are deteriorating.
c.
Investors anticipate that the target will be acquired.
d.
All of the above will cause the target’s stock price to decrease.
73. 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
74. The valuation of a newly privatized business is generally more difficult than the valuation of a publicly
traded firm because:
a.
It has previously operated in environments of very high competition.
b.
Interest rates in the countries where privatization takes place are extremely high.
c.
The stock markets in the countries where privatization takes place are overvalued.
d.
Economic conditions in the countries where privatization takes place are very uncertain.
e.
None of the above