Exam 16: Multinational Capital Budgeting and Cross-Border Acquisitions

When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?

Use the information for the following question(s). The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.)The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0)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. -Refer to Instruction 16.1.The European expansion would have a greater NPV in dollar terms if the euro appreciated in value over the five-year life of the project and the project had a positive NPV,other things equal.

Which of the following considerations is NOT important for a parent firm when considering foreign investment?

Use the information for the following question(s). The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.)The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0)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. -Refer to Instruction 16.1.In euros,what is the NPV of the Wheel Deal expansion?

Project financing is the arrangement of financing for very large individual long-term capital projects.

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.

Of the following,which would NOT be considered an initial outlay at time 0 (today)?

Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%.If Benson is in a 30% tax bracket,and finances 40% of assets with debt,what is the firm's wacc?

If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV,then the IRR will be ________.

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.

Which of the following is NOT a basic step in the capital budgeting process?

It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.

What is project financing and what are the factors critical to its success?

When evaluating capital budgeting projects,which of the following would NOT necessarily be an indicator of an acceptable project?

When a foreign project is analyzed from the parent's point of view,the additional risk that stems from it's "foreign" location is typically measured by ________ or ________.

Which is NOT considered a shortcoming of the parent simply adjusting discount rates to account for the additional risk that stems from a project's foreign location?

Capital budgeting typically requires some type of sensitivity analysis.In the case of international capital budgeting from the project perspective,analysts consider political risk,foreign exchange risk and foreign exchange risk.Identify and discuss the important aspects of these two types of risk considerations.

TABLE 16.1 Use the information to answer the following question(s). Jensen Aquatics Inc., which manufactures and sells scuba gear worldwide, is considering an investment in either Europe or Great Britain. Consider the following cash flows for each project, assume a 12% wacc, and consider these to be average risk projects for the firm. Answer the questions that follow. -Refer to Table 16.1.The NPV for the British investment is estimated at ________.

Hydrotech Manufacturing of Houston Texas expects to receive dividends each year from a foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate of 7% per year. If the euro appreciates in value against the dollar at a rate of 2% per year over the life of the dividends,then the present value of the euro dividends to Hydrotech will be ________ if there had been no change in the relative values of the euro and dollar.

When determining a firm's weighted average cost of capital (wacc)which of the following terms is NOT necessary?