SUGGESTED ANSWERS TO MULTINATIONAL MANUFACTURING, INC.: PART I
1. Should MMI lower the hurdle rate in order to encourage the submission of more proposals, or should it drop
the hurdle rate concept completely?
ANSWER. The basic problem facing MMI is that its investment evaluation criterion is inconsistent with
2. Should MMI invest in lower-return projects that are less risky and/or in high-risk projects that appear
promising? What is the relevant measure of risk?
ANSWER. According to the CAPM, the required return for a project is
3. How should MMI factor in the additional political and economic risks it faces overseas in conducting these
project analyses?
ANSWER. Because most of the additional political and economic risks MMI faces overseas are unlikely to be
4. Why are projects at the extremes of risk and return not reaching top management for review?
ANSWER. The asymmetrical reward structure facing management explains why MMI doesn’t get to see projects at
management review.
5. What actions, if any, should Mr. Black take to correct the situation?
ANSWER. The most appropriate action would be to vary the required returns by project according to each project’s
INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 7TH ED.
2
SUGGESTED ANSWERS TO MULTINATIONAL MANUFACTURING, INC.: PART II
1. What are the pros and cons of using the following sources of funds to finance the operations of the foreign
affiliates: equity funds versus loans from MMI, retained earnings of the affiliates, and outside borrowings?
ANSWER. By investing parent funds as debt rather than equity, MMI can avoid U.S. tax on the repayment of
2. Given these considerations, under what circumstances, if any, should the capital structure of foreign affiliates
include more or less debt than the 35% considered desirable for the firm as a whole?
ANSWER. The affiliate’s capital structure is an accounting fiction that does not reflect economic reality, which is
3. How will the resultant capital structures affect the required rates of return on affiliate projects? the actual rates
of return?
4. How should MMI’s dividend policy be implemented at the affiliate level?