Multinational Business Finance 13th Edition Test Bank Chapter 18

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 18

Multinational Capital Budgeting and Cross-Border Acquisitions 18.1 Complexities of

Budgeting for a Foreign Project Multiple Choice Question: The traditional financial

analysis applied to foreign or domestic projects, to determine the projects value to the firm

is called: A) cost of capital analysis. B) capital budgeting. C) capital structure analysis. D)

agency theory. Answer:

Question: Which of the following is NOT a basic step in the capital budgeting process? A)

Identify the initial capital invested. B) Estimate the cash flows to be derived from the

project over time. C) Identify the appropriate interest rate at which to discount future cash

flows. D) All of the above are steps in the capital budgeting process. Answer:

Question: Of the following capital budgeting decision criteria, which does NOT use

discounted cash flows? A) net present value B) internal rate of return C) accounting rate of

return D) All of these techniques typically use discounted cash flows. Answer:

Question: Which of the following is NOT a reason why capital budgeting for a foreign

project is more complex than for a domestic project? A) Parent cash flows must be

distinguished from project cash flows. B) Parent firms must specifically recognize

remittance of funds due to differing rules and regulations concerning remittance of cash

flows, taxes, and local norms. C) Differing rates of inflation exist between the foreign and

domestic economies. D) All of the above add complexity to the international capital

budgeting process. Answer:

Question: For purposes of international capital budgeting, which of the following

statements is NOT true? A) Managers must evaluate political risk because political events

can drastically reduce the value or availability of expected cash flows. B) Parent cash

flows must be distinguished from project cash flows. Each of these two types of flows

contributes to a different view of value. C) An array of nonfinancial payments can generate

cash flows from subsidiaries to the parent, including payment of license fees and payments

for imports from the parent. D) All of the above are true statements. Answer:

Question: When engaged in international capital budgeting, the analyst must identify the

initial amount of capital invested or put at risk. Answer:

Question: In international capital budgeting, the appropriate discount rate for determining

the present value of the expected cash flows is always the firms domestic WACC. Answer:

Question: For purposes of international capital budgeting, it is NOT important to

distinguish between parent and total project cash flows. Answer:

Question: For purposes of international capital budgeting, parent cash flows often depend

on the form of financing. Thus, we cannot clearly separate cash flows from financing

decisions, as we can in domestic capital budgeting. Answer:

Question: Project evaluation from the ________ viewpoint serves some useful purposes

and/but should ________ the ________ viewpoint. A) local; be subordinated to; parents B)

local; not be subordinated to; parents C) parents; be subordinated to; local D) none of the

above Answer:

Question: For financial reporting purposes, U.S. firms must consolidate the earnings of any

subsidiary that is over ________ owned. A) 20% B) 40% C) 50% D) 75% Answer:

Question: A foreign firm that is 20% to 49% owned by a parent is called a/an: A)

subsidiary. B) affiliate. C) partner. D) rival. Answer:

Question: Affiliate firms are consolidated on the parents financial statements on a

________ basis. A) pro rated B) 50% C) 75% D) 100% Answer:

Question: There are no important differences between domestic and international capital

budgeting methods. Answer:

Question: It is important that firms adopt a common standard for the capital budgeting

process for choosing among foreign and domestic projects. Answer:

Question: The only proper way to estimate the NPV of a foreign project is to discount the

appropriate cash flows first and then convert them to the domestic currency at the current

spot rate. Answer:

Question: When dealing with international capital budgeting projects, the value of the

project is NOT sensitive to the firms cost of capital. Answer:

Question: For purposes of international capital budgeting, evaluation of a project from the

PARENT viewpoint serves some useful purposes, but it should be subordinated to

evaluation from the LOCALs viewpoint. Answer:

Question: Multinational firms should invest only if they can earn a risk-adjusted return

greater than locally based competitors can earn on the same project. Answer:

Question: The authors highlight a strong theoretical argument in favor of analyzing any

foreign project from the viewpoint of the parent. Provide at least three reasons why the

parents viewpoint is superior to the local viewpoint and give an example of when the local

viewpoint fails to maximize the value of the firm. Answer:

Question: Explain how political risk and exchange rate risk increase the uncertainty of

international projects for the purpose of capital budgeting. Answer:

Question: Which of the following is NOT an example of political risk? A) Expropriation of

cash flows by a foreign government. B) The U.S. government restricts trade with a foreign

country where your firm has investments. C) The foreign government nationalizes all

foreign-owned assets. D) All of the above are examples of political risk. Answer:

Question: 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. Answer:

Question: Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected

inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative

purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87

krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough

information to answer this question. Answer:

Question: When evaluating capital budgeting projects, which of the following would NOT

necessarily be an indicator of an acceptable project? A) an NPV > $0 B) an IRR > the

projects required rate of return C) an IRR > $0 D) All of the above are correct indicators.

Answer:

Question: Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected

inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative

purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87

krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough

information to answer this question. Answer:

Question: When determining a firms weighted average cost of capital (wacc) which of the

following terms is NOT necessary? A) the firms tax rate B) the firms cost of debt C) the

firms cost of equity D) All of the above are necessary. Answer:

Question: When determining a firms weighted average cost of capital (WACC) which of

the following terms is NOT necessary? A) the firms weight of equity financing B) the

risk-free rate of return C) the firms weight of debt financing D) All of the above are

necessary to determine a firms WACC. Answer:

Question: also requires an increase in NWC of euro 100,000 (to be recovered at the sale of

the equipment at the end of five years). The current spot rate is $0.95/euro , and the

expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.

Question: Refer to Instruction 18.1. What is the initial investment for the Velo Rapid

Revolutions project? A) $1,500,000 B) €1,600,000 C) $1,600,000 D) €1,500,000 Answer:

Question: Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo

Rapid Revolutions project? A) €400,000 B) €240,000 C) €120,000 D) €360,000 Answer:

Question: Refer to Instruction 18.1. What is the NPV of the European expansion if Velo

Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars

using the current spot rate? A) $1,520,000 B) $1,684,210 C) -$75,310 D) -$71,544

Answer:

Question: Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid

Revolutions expansion? A) €1,524,690 B) $1,611,317 C) -€75,310 D) -€111,317 Answer:

Question: Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions

expansion? A) 14.4% B) 10.3% C) 12.0% D) 8.6% Answer:

Question: If a firm undertakes a project with ordinary cash flows and estimates that the

firm has a positive NPV, then the IRR will be: A) less than the cost of capital. B) greater

than the cost of capital. C) greater than the cost of the project. D) cannot be determined

from this information Answer:

Question: When estimating a firms 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 firms beta. D) all of the above Answer:

Question: ________ 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 Answer:

Question: 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 Answer:

Question: 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.

Answer:

Question: 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. Answer:

Question: When estimating a capital budget, it is common to separate cash flows into:

Question: the initial investment,

Question: incremental cash flows over the life of the project, and

Question: a terminal value. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: Project financing is the arrangement of financing for very large individual

long-term capital projects. Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: The drivers of international merger and acquisitions are only MACRO in scope.

Answer:

Question: As opposed to greenfield investment, a cross-border acquisition is typically

quicker. Answer: