Exam 18: International Capital Budgeting

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

What is the NPV of the project using the APV methodology?

Your banker quotes the euro-zone risk-free rate at i_€ = 6% and the British risk free rate at i_£ = 6%. Find the value of the option and thereby the project.

Capital budgeting analysis is very important, because it

The required return on equity for an all-equity firm is 10.0%. They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%. They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%, the pre-tax cost of debt is 8%. Find the beta if this firm changes capital structure.

An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K. The business risk will be identical to the firm's existing line of business in the euro zone, the cost of capital in the euro zone is i_€ = 10%. The expected inflation rate over the next two years in the U.K. is 3% per year and 2% per year in the euro zone. The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00 The pound sterling denominated cash flows are as follows:

Using your results to the last question, make a recommendation vis-à-vis when to undertake the project.

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

Using your results to the last question, make a recommendation vis-à-vis when to buy the bond.

Your firm is in the 34% tax bracket. The yield to maturity on your existing bonds is 8%. The state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a 5% rate of interest and ANNUAL payments due at the END OF THE YEAR. The interest will be deductible at the time that you pay. What is the APV of this below-market loan to your firm? I did not round any of my intermediate steps. You might be a little bit off. Pick the answer closest to yours.

Find the IRR in dollars for the American firm if they wait one year to buy the bond after the exchange rate falls to S₁($|€) = $1.40 per €. Assume that i_€ doesn't change.

When using the APV methodology, what is the NPV of the interest tax shield?

What is the levered after-tax incremental cash flow for year 0?

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S. is 2% and 3% in the euro zone. What spot exchange rate should prevail three years from now?

Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.

What is the dollar-denominated IRR of this project?

Find the dollar cash flows to compute the dollar-denominated NPV of this project. Your answer is worth ZERO POINTS if it does not contain currency symbols such as $, £, €, ¥!

Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8%. What is the APV of this subsidized loan? Note that I did not round my intermediate steps. If you did, your answer may be off by a bit. Select the answer closest to yours.

Given the following information for a levered and unlevered firm, calculate the difference in the cash flow available to investors. Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments).

Find the dollar cash flows to compute the dollar-denominated NPV of this project.