Question 1

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

Accepted Answer

The evaluation of foreign projects must

Question 2

A foreign firm that is 20% to 49% owned by a parent is called a/an ________.

Accepted Answer

A)  subsidiary 
B)  affiliate 
C)  partner 
D)  rival 
A)  subsidiary 
B)  affiliate 
C)  partner 
D)  rival

Question 3

TABLE 19.1
Use the information to answer 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 19.1. Which of the following best summarizes the preliminary results of the investment analysis for the two prospective investments.

Accepted Answer

A)  The British investment should be accepted, the European investment rejected. 
B)  The British investment is superior to the European investment. 
C)  Both investments are acceptable. 
D)  None of the above is true. 
A)  The British investment should be accepted, the European investment rejected. 
B)  The British investment is superior to the European investment. 
C)  Both investments are acceptable. 
D)  None of the above is true.

Question 4

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

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

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

Accepted Answer

A)  the firm's weight of equity financing 
B)  the risk-free rate of return 
C)  the firm's weight of debt financing 
D)  All of the above are necessary to determine a firm's wacc. 
A)  the firm's weight of equity financing 
B)  the risk-free rate of return 
C)  the firm's weight of debt financing 
D)  All of the above are necessary to determine a firm's wacc.

Question 7

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.

Accepted Answer

A)  7.87 krone per dollar 
B)  8.10 krone per dollar 
C)  8.34 krone per dollar 
D)  There is not enough information to answer this question. 
A)  7.87 krone per dollar 
B)  8.10 krone per dollar 
C)  8.34 krone per dollar 
D)  There is not enough information to answer this question.

Question 8

TABLE 19.1
Use the information to answer 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 19.1. The NPV for the British investment is estimated at ________.

Accepted Answer

A)  $3,092 
B)  $6,420 
C)  £3,092 
D)  $0 
A)  $3,092 
B)  $6,420 
C)  £3,092 
D)  $0

Question 9

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

Accepted Answer

A)  cost of capital analysis 
B)  capital budgeting 
C)  capital structure analysis 
D)  agency theory 
A)  cost of capital analysis 
B)  capital budgeting 
C)  capital structure analysis 
D)  agency theory

Question 10

Capital budgeting analysis for a foreign project is more complex than for the domestic case for all of the following reasons EXCEPT:

Accepted Answer

A)  differences in national inflation rates. 
B)  parent cash flows must be distinguished from project cash flows. 
C)  the possibility of unanticipated foreign exchange rate changes. 
D)  All of the above are correct. 
A)  differences in national inflation rates. 
B)  parent cash flows must be distinguished from project cash flows. 
C)  the possibility of unanticipated foreign exchange rate changes. 
D)  All of the above are correct.

Question 11

As in domestic capital budgeting, a potential international project or capital budget will be considered a net benefit to the firms if

Accepted Answer

A)  the project has a net present value greater than zero. 
B)  the IRR on the project is less than the wacc. 
C)  the IRR exceed the project's NPV. 
D)  All of the above are true. 
A)  the project has a net present value greater than zero. 
B)  the IRR on the project is less than the wacc. 
C)  the IRR exceed the project's NPV. 
D)  All of the above are true.

Question 12

Which of the following is NOT a method for considering additional risk with international projects?

Accepted Answer

A)  adding an additional risk premium to the discount factor used 
B)  decreasing expected cash flows 
C)  conducting detailed sensitively and scenario analysis 
D)  All of the above are legitimate methods for considering additional risk. 
A)  adding an additional risk premium to the discount factor used 
B)  decreasing expected cash flows 
C)  conducting detailed sensitively and scenario analysis 
D)  All of the above are legitimate methods for considering additional risk.

Question 13

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 14

Projects that have ________ are often rejected by traditional discounted cash flow models of capital budgeting.

Accepted Answer

A)  long lives 
B)  cash flow returns in later years 
C)  high risk levels 
D)  all of the above 
A)  long lives 
B)  cash flow returns in later years 
C)  high risk levels 
D)  all of the above

Question 15

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 ________.

Accepted Answer

A)  adjusting the discount rates; adjusting the timing 
B)  adjusting the timing; adjusting the cash flows 
C)  adjusting the discount rates; adjusting the cash flows 
D)  none of the above 
A)  adjusting the discount rates; adjusting the timing 
B)  adjusting the timing; adjusting the cash flows 
C)  adjusting the discount rates; adjusting the cash flows 
D)  none of the above

Question 16

TABLE 19.1
Use the information to answer 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 19.1. The NPV for the European investment is estimated at ________.

Accepted Answer

A)  euro 4,945 
B)  $4,945 
C)  $6,420 
D)  euro 6,420 
A)  euro 4,945 
B)  $4,945 
C)  $6,420 
D)  euro 6,420

Question 17

For international investments, relative to project cash flows, parent cash flows are often dependent on the form of financing.

Accepted Answer

A) True 
 B)False

Question 18

Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%, the firm has a beta of 1.1, and the expected return on the market is 12%.

Accepted Answer

A)  12.8% 
B)  12.6% 
C)  13.2% 
D)  6.6% 
A)  12.8% 
B)  12.6% 
C)  13.2% 
D)  6.6%

Question 19

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 20

When estimating a firm's cost of equity capital using the CAPM, you need to estimate

Accepted Answer

A)  the risk-free rate of return. 
B)  the expected return on the market portfolio. 
C)  the firm's beta. 
D)  all of the above. 
A)  the risk-free rate of return. 
B)  the expected return on the market portfolio. 
C)  the firm's beta. 
D)  all of the above.

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

A foreign firm that is 20% to 49% owned by a parent is called a/an ________.

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

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

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.

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

Capital budgeting analysis for a foreign project is more complex than for the domestic case for all of the following reasons EXCEPT:

As in domestic capital budgeting, a potential international project or capital budget will be considered a net benefit to the firms if

Which of the following is NOT a method for considering additional risk with international projects?

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

Projects that have ________ are often rejected by traditional discounted cash flow models of capital budgeting.

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 .

For international investments, relative to project cash flows, parent cash flows are often dependent on the form of financing.

Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%, the firm has a beta of 1.1, and the expected return on the market is 12%.

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

When estimating a firm's cost of equity capital using the CAPM, you need to estimate

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

Exam 19: Multinational Capital Budgeting

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

A foreign firm that is 20% to 49% owned by a parent is called a/an ________.

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

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

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.

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

Capital budgeting analysis for a foreign project is more complex than for the domestic case for all of the following reasons EXCEPT:

As in domestic capital budgeting, a potential international project or capital budget will be considered a net benefit to the firms if

Which of the following is NOT a method for considering additional risk with international projects?

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

Projects that have ________ are often rejected by traditional discounted cash flow models of capital budgeting.

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 ________.

For international investments, relative to project cash flows, parent cash flows are often dependent on the form of financing.

Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%, the firm has a beta of 1.1, and the expected return on the market is 12%.

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

When estimating a firm's cost of equity capital using the CAPM, you need to estimate

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

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 .