Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

When assessing the additional risk that can occur from investing abroad, firms may choose to account for risk via:

Use the information to answer the following question(s). The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, 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 €1,200,000 and additional installation of €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 €600,000 per year over current levels for the next 5 years, however; expenses will also increase by €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 €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 €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 18.1. What is the IRR of the Velo Rapid Revolutions expansion?

The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called:

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.

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

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

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

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.

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

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.

Which of the following is NOT a factor critical to the success of project financing?

Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

There are no important differences between domestic and international capital budgeting methods.

Debt is usually a large component of project financing.

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 parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.

Use the information to answer the following question(s). The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, 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 €1,200,000 and additional installation of €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 €600,000 per year over current levels for the next 5 years, however; expenses will also increase by €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 €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 €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 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?

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

Which of the following is NOT a characteristic of international long-term capital project financing?