Question 1

Which cash flows are relevant for the international capital budgeting analysis?

Accepted Answer

The only relevant cash flows in capital budgeting are the incremental cash flows,those that are attributable to the capital expenditure.This implies that sunk costs must be ignored.In the international context it is especially important to consider additional sales by the parent or other subsidiaries that may be generated due to the new facility.However,the new facility may also result in lower sales of other subsidiaries or the parent if a market is no longer served with exports.These lost sales or this cannibalization must also be considered in the capital budget.

Question 2

Company Y,a Canadian manufacturer of boats,is currently exporting $100,000 worth of boats to the United States.The firm is considering opening a production facility in the United States because without a presence in the United States,the entire US market would be lost to a competitor.The new facility would produce boats for about $800,000 and the firm anticipates total sales in the United States to be $900,000.When analyzing this project,Company Y should:

Accepted Answer

A)  ignore the exports of $100,000 since they are not an incremental cash flow from the project. 
B)  ignore the exports of $100,000 since they are not part of the project. 
C)  include $100,000 as lost export sales in the capital budget. 
D)  None of these. 
A)  ignore the exports of $100,000 since they are not an incremental cash flow from the project. 
B)  ignore the exports of $100,000 since they are not part of the project. 
C)  include $100,000 as lost export sales in the capital budget. 
D)  None of these. A

Question 3

When making a capital budgeting decision the ultimate decision depends on:

Accepted Answer

A)  the APV from the parent's perspective. 
B)  the APV from the subsidiary's perspective. 
C)  the APV from the competitor's perspective. 
D)  None of these. 
A)  the APV from the parent's perspective. 
B)  the APV from the subsidiary's perspective. 
C)  the APV from the competitor's perspective. 
D)  None of these. A

Question 4

If a given project is less risky than the firm's overall risk level,the following adjustment must be made to the APV formula:

Accepted Answer

A)  Cost of capital should be increased. 
B)  Cost of capital should be decreased. 
C)  OCF should be increased. 
D)  OCF should be decreased. 
A)  Cost of capital should be increased. 
B)  Cost of capital should be decreased. 
C)  OCF should be increased. 
D)  OCF should be decreased.

Question 5

The option to quit a foreign project early is called:

Accepted Answer

A)  timing option. 
B)  abandonment option. 
C)  growth option. 
D)  exercise option. 
A)  timing option. 
B)  abandonment option. 
C)  growth option. 
D)  exercise option.

Question 6

Capital budgeting analysis is very important,because it:

Accepted Answer

A)  involves, usually expensive investments in capital assets. 
B)  has to do with the productive capacity of a firm. 
C)  will determine how competitive and profitable a firm will be. 
D)  All of these. 
A)  involves, usually expensive investments in capital assets. 
B)  has to do with the productive capacity of a firm. 
C)  will determine how competitive and profitable a firm will be. 
D)  All of these.

Question 7

The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Accepted Answer

A)  C$1.3176/euro. 
B)  C$1.5692/euro. 
C)  C$1.6000/euro. 
D)  C$1.6923/euro. 
A)  C$1.3176/euro. 
B)  C$1.5692/euro. 
C)  C$1.6000/euro. 
D)  C$1.6923/euro.

Question 8

Desert Inc.is a Spanish producer of barrels and is considering the establishment of a subsidiary in China.The projected time horizon for the project is 2 years.Management wants to set up the production facilities,get them running and then sell the facilities after 2 years.The current exchange rate is renminbi 11/euro.The renminbi is pegged to the US dollar at an exchange rate of renminbi 8.28/$ and the peg is expected to stay unchanged over the next two years.The expected inflation rates for the next two years are given below:
 $\begin{array}{lll}
&\text { Year } 1&\text { Year } 2\
\text { Expected Inflation in US: } & 2 \% & 3 \% \
\text { Expected Inflation in China: } & 10 \% & 12 \% \
\text { Expected Inflation in Spain: } & 2 \% & 3 \%
\end{array}$ Forecast the exchanges rates between the renminbi and the euro for the next two years.Justify your forecast.

Accepted Answer

Forecast:
Year 1 and 2: renminbi 11/euro

Question 9

Which of the following statements is false about "borrowing capacity"?

Accepted Answer

A)  It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans. 
B)  It creates tax shields for APV analysis regardless of how the project is actually financed. 
C)  It is synonymous to the "project debt". 
D)  It is based on the firm's optimal capital structure. 
A)  It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans. 
B)  It creates tax shields for APV analysis regardless of how the project is actually financed. 
C)  It is synonymous to the "project debt". 
D)  It is based on the firm's optimal capital structure.

Question 10

White Rock Inc.located in British Columbia makes moccasins marketed mostly to tourists.The firm would like to take advantage of lower labour costs in Turkey and is considering the establishment of a foreign operation in Turkey.The current exchange rate is Lira 1,000,000/C$.Management predicts the following for the next two years for the Turkish subsidiary: $$\begin{array} { l c l } 
& \text { Year 1 } & \text { Year 2 } \
& & \
\text { Revenues (billions of lira) } & 7,000 & 8,000 \
\text { Inflation in Canada: } & 0 \% & 3 \% \
\text { Inflation in Turkey: } & 15 \% & 20 \%
\end{array}$$ All cash flows are in current liras.Determine the Canadian dollar revenues for the next two years.

Accepted Answer

Exchange rates:
Year 1: 1,000,000*(1.15/

Question 11

(I) PV of Net Operating Cash Flows
(II) PV of Depreciation Tax Shield
(III) PV of the Benefit for the Concessionary Loan
(IV) PV of the Interest Tax Shield
(V) Initial cost of the project
-The APV is calculated using the following formula:

Accepted Answer

A)  (I) + (II) + (III) + (IV) - (V) 
B)  (I) + (II) + (III) + (IV) + (V) 
C)  - (I) + (II) + (III) + (IV) + (V) 
D)  (I) - (II) + (III) + (IV) - (V) 
A)  (I) + (II) + (III) + (IV) - (V) 
B)  (I) + (II) + (III) + (IV) + (V) 
C)  - (I) + (II) + (III) + (IV) + (V) 
D)  (I) - (II) + (III) + (IV) - (V)

Question 12

A real option is:

Accepted Answer

A)  a commodity option. 
B)  an option that has 90% probability or higher to be in the money at the time of maturity. 
C)  an ability to close the production line. 
D)  None of these. 
A)  a commodity option. 
B)  an option that has 90% probability or higher to be in the money at the time of maturity. 
C)  an ability to close the production line. 
D)  None of these.

Question 13

What is concessionary loan?

Accepted Answer

A)  A loan from the parent company to its rival companies' subsidiary. 
B)  A loan from a subsidiary to its parent company. 
C)  A low interest loan to a company for a capital expenditure made in the foreign land. 
D)  None of these. 
A)  A loan from the parent company to its rival companies' subsidiary. 
B)  A loan from a subsidiary to its parent company. 
C)  A low interest loan to a company for a capital expenditure made in the foreign land. 
D)  None of these.

Question 14

When using the adjusted present value (APV)to evaluate a capital budgeting problem,the appropriate discount rate for foreign loans is:

Accepted Answer

A)  the cost of equity for a leveraged firm. 
B)  the cost of equity for an unleveraged firm. 
C)  the firm's domestic cost of debt. 
D)  the firm's foreign cost of debt. 
A)  the cost of equity for a leveraged firm. 
B)  the cost of equity for an unleveraged firm. 
C)  the firm's domestic cost of debt. 
D)  the firm's foreign cost of debt.

Question 15

Some of the factors (with selected explanations) used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are:
(i)- expected after-tax terminal value, including recapture of working capital.
(ii)- net income, which belongs to the equity holders of the firm.
(iii)- initial investment at inception.
(iv)- depreciation, and the fact that depreciation is a noncash expense. (i.e. it is removed from the calculation of net income, for tax purposes, but added back because it did not actually flow out of the firm)
(v)- weighted-average cost of capital.
(vi)- the firm's after-tax payment of interest to debt holders.
(vii)- economic life of the capital project in years.
-The "incremental" cash flows of a capital project are calculated by using:

Accepted Answer

A)  (i), (ii), and (iii). 
B)  (ii), (iv), and (vi). 
C)  (i), (iii), (v), and (vii). 
D)  (iv), (v), (vi), and (vii). 
A)  (i), (ii), and (iii). 
B)  (ii), (iv), and (vi). 
C)  (i), (iii), (v), and (vii). 
D)  (iv), (v), (vi), and (vii).

Question 16

Some of the factors (with selected explanations) used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are:
(i)- expected after-tax terminal value, including recapture of working capital.
(ii)- net income, which belongs to the equity holders of the firm.
(iii)- initial investment at inception.
(iv)- depreciation, and the fact that depreciation is a noncash expense. (i.e. it is removed from the calculation of net income, for tax purposes, but added back because it did not actually flow out of the firm)
(v)- weighted-average cost of capital.
(vi)- the firm's after-tax payment of interest to debt holders.
(vii)- economic life of the capital project in years.
-The "net present value" of a capital project is calculated by using:

Accepted Answer

A)  (i), (ii), and (iii). 
B)  (ii), (iv), and (vi). 
C)  (i), (iii), (v), and (vii). 
D)  (iv), (v), (vi), and (vii). 
A)  (i), (ii), and (iii). 
B)  (ii), (iv), and (vi). 
C)  (i), (iii), (v), and (vii). 
D)  (iv), (v), (vi), and (vii).

Question 17

ABC Inc.,located in Halifax,produces towels and is considering the establishment of a foreign operation in Indonesia ABC wants to know its weighted average cost of capital and the cost of capital of an equivalent all-equity financed firm.The interest rate on Indonesian government securities is 18% and on Canadian government securities it is 5%.The Indonesian income tax rate is 40% and the Canadian income rate is 35%.ABC Inc.debt-to-equity ratio is 1:3 and its cost of equity financing is 12%.

Accepted Answer

Weighted Average cost of capit

Question 18

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:

Accepted Answer

A)  the cannibalization of new projects by existing projects. 
B)  the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of an old project. 
C)  the end of existing projects when the company takes over new projects. 
D)  None of these. 
A)  the cannibalization of new projects by existing projects. 
B)  the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of an old project. 
C)  the end of existing projects when the company takes over new projects. 
D)  None of these.

Question 19

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to:

Accepted Answer

A)  distinguish between the market value of a levered firm and the market value of an unlevered firm. 
B)  discern the blocking of certain cash flows by the host country from being legally remitted to the parent. 
C)  consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances. 
D)  All of these. 
A)  distinguish between the market value of a levered firm and the market value of an unlevered firm. 
B)  discern the blocking of certain cash flows by the host country from being legally remitted to the parent. 
C)  consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances. 
D)  All of these.

Question 20

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to:

Accepted Answer

A)  analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment. 
B)  more fully understand the implications of planned capital expenditures. 
C)  consider in advance actions that can be taken should an investment not develop as anticipated. 
D)  All of these. 
A)  analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment. 
B)  more fully understand the implications of planned capital expenditures. 
C)  consider in advance actions that can be taken should an investment not develop as anticipated. 
D)  All of these.

Which cash flows are relevant for the international capital budgeting analysis?

When making a capital budgeting decision the ultimate decision depends on:

If a given project is less risky than the firm's overall risk level,the following adjustment must be made to the APV formula:

The option to quit a foreign project early is called:

Capital budgeting analysis is very important,because it:

The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Which of the following statements is false about "borrowing capacity"?

(I) PV of Net Operating Cash Flows (II) PV of Depreciation Tax Shield (III) PV of the Benefit for the Concessionary Loan (IV) PV of the Interest Tax Shield (V) Initial cost of the project -The APV is calculated using the following formula:

A real option is:

What is concessionary loan?

When using the adjusted present value (APV)to evaluate a capital budgeting problem,the appropriate discount rate for foreign loans is:

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to:

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters

Exam 17: International Capital Budgeting

Which cash flows are relevant for the international capital budgeting analysis?

When making a capital budgeting decision the ultimate decision depends on:

If a given project is less risky than the firm's overall risk level,the following adjustment must be made to the APV formula:

The option to quit a foreign project early is called:

Capital budgeting analysis is very important,because it:

The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Which of the following statements is false about "borrowing capacity"?

(I) PV of Net Operating Cash Flows (II) PV of Depreciation Tax Shield (III) PV of the Benefit for the Concessionary Loan (IV) PV of the Interest Tax Shield (V) Initial cost of the project -The APV is calculated using the following formula:

A real option is:

What is concessionary loan?

When using the adjusted present value (APV)to evaluate a capital budgeting problem,the appropriate discount rate for foreign loans is:

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to:

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters