Question 1

Which of the following is NOT an example of political risk?

Accepted Answer

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. 
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.

Question 2

Which of the following changes does NOT create business opportunities for select firms to both enhance and defend their competitive positions in global markets?

Accepted Answer

A)  changes in technology 
B)  changes in regulation 
C)  changes in capital markets 
D)  changes in management 
A)  changes in technology 
B)  changes in regulation 
C)  changes in capital markets 
D)  changes in management

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

Accepted Answer

A) True 
 B)False

Question 5

Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

Accepted Answer

A)  net present value 
B)  internal rate of return 
C)  accounting rate of return 
D)  All of these techniques typically 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.

Question 6

For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT a typical pitfall of cross-border acquisitions?

Accepted Answer

A)  paying too much 
B)  excessive financing costs 
C)  melding corporate cultures 
D)  all of the above are pitfalls 
A)  paying too much 
B)  excessive financing costs 
C)  melding corporate cultures 
D)  all of the above are pitfalls

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

Accepted Answer

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. 
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.

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A)  appreciating; depreciating 
B)  depreciating; depreciating 
C)  appreciating; appreciating 
D)  depreciating; appreciating 
A)  appreciating; depreciating 
B)  depreciating; depreciating 
C)  appreciating; appreciating 
D)  depreciating; appreciating

Question 12

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

Accepted Answer

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. 
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.

Question 13

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Accepted Answer

Real options is a different way of think

Question 14

When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 15

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 initial investment for the Velo Rapid Revolutions project?

Accepted Answer

A)  $1,500,000 
B)  €1,600,000 
C)  $1,600,000 
D)  €1,500,000 
A)  $1,500,000 
B)  €1,600,000 
C)  $1,600,000 
D)  €1,500,000

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Accepted Answer

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. 
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.

Question 18

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 are the annual after-tax cash flows for the Velo Rapid Revolutions project?

Accepted Answer

A)  €400,000 
B)  €240,000 
C)  €120,000 
D)  €360,000 
A)  €400,000 
B)  €240,000 
C)  €120,000 
D)  €360,000

Question 19

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

Accepted Answer

A)  pro rated 
B)  50% 
C)  75% 
D)  100% 
A)  pro rated 
B)  50% 
C)  75% 
D)  100%

Question 20

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.

Accepted Answer

A) True 
 B)False

Which of the following is NOT an example of political risk?

Which of the following changes does NOT create business opportunities for select firms to both enhance and defend their competitive positions in global markets?

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.

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

Which of the following is NOT a typical pitfall of cross-border acquisitions?

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.

The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

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.

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.

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

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital.

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

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

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.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

Which of the following is NOT an example of political risk?

Which of the following changes does NOT create business opportunities for select firms to both enhance and defend their competitive positions in global markets?

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.

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

Which of the following is NOT a typical pitfall of cross-border acquisitions?

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.

The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

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.

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.

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

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital.

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

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

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.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

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.