Exam 15: International Corporate Governance and Control

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

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.

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.​

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

When evaluating international project cash flows, which of the following factors is relevant?

Petrus Co. 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 A$2,000,000 in the second year. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14 percent. 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?

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.

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.

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.

In multinational capital budgeting, depreciation is treated as a cash outflow.

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 from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

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.​

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 ____.​

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is:

If the 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.

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.

Some capital budgeting projects contain real options in that they provide opportunities to obtain or eliminate specified real assets such as machinery or a manufacturing plant.

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.​