Exam 17: Multinational Capital Budgeting and Cross-Border Acquisitions

Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 5%, the corporate tax rate is 40%, the rate on Treasury Bills is 3.5%, the firm has a beta of 0.8, and the expected return on the market is 12%.

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 17.1. The NPV for the European investment is estimated at

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

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

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.

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 17.1. The NPV for the British investment is estimated at

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

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

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.

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 17.1. Which of the following best summarizes the preliminary results of the investment analysis for the two prospective investments?

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

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

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 17.1. If the euro was forecast to remain constant at $1.00/euro throughout the investment period, how would the investment decision now be characterized?

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

When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm repatriating dividends to its parent.

Compared to a greenfield investment, list advantages and disadvantages of a cross-border merger or acquisition.

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 17.1. In euros, what is the NPV of the Wheel Deal expansion?

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

Generally speaking a firm's cost of ________ capital is greater than the firm's ________.