Question 1

Parent-subsidiary asymmetry can arise from forecasting difference between the parent and the subsidiary that can arise because:

Accepted Answer

A) subsidiaries may be estimating cash flow in one currency and the parent may be estimating cash flow in another currency. 
B) parents often do not inform subsidiaries of all of the information that the parent uses in its forecasts. 
C) subsidiaries can have a positive bias that causes them to overestimate positive cash flow in order to make projects they want to pursue more attractive. 
D) parents often encourage subsidiaries to be aggressive in their estimations of positive future cash flow. 
A) subsidiaries may be estimating cash flow in one currency and the parent may be estimating cash flow in another currency. 
B) parents often do not inform subsidiaries of all of the information that the parent uses in its forecasts. 
C) subsidiaries can have a positive bias that causes them to overestimate positive cash flow in order to make projects they want to pursue more attractive. 
D) parents often encourage subsidiaries to be aggressive in their estimations of positive future cash flow. C

Question 2

After-tax cash flow of a subsidiary may differ from the after-tax cash flow of the parent because:

Accepted Answer

A) the after-tax cash flow of a subsidiary is expressed in one currency and the after-tax cash flow of the parent is expressed in another currency. 
B) cash flow is calculated differently in different countries,so the cash flow of a subsidiary is likely to be calculated differently than the cash flow of the parent. 
C) the after-tax cash flow of the subsidiary may be subject to additional taxes before it can be considered after-tax cash flow of the parent. 
D) tax treaties result in differences in after-tax cash flow form country to country. 
A) the after-tax cash flow of a subsidiary is expressed in one currency and the after-tax cash flow of the parent is expressed in another currency. 
B) cash flow is calculated differently in different countries,so the cash flow of a subsidiary is likely to be calculated differently than the cash flow of the parent. 
C) the after-tax cash flow of the subsidiary may be subject to additional taxes before it can be considered after-tax cash flow of the parent. 
D) tax treaties result in differences in after-tax cash flow form country to country. C

Question 3

In general,in capital budgeting,cash flows resulting from financing are:

Accepted Answer

A) the most important source of cash flow since significant projects usually require a firm to borrow funds. 
B) not considered because the discount rate used in valuing cash flows takes into consideration cash flows resulting from financing. 
C) not considered because financing does not produce usable cash flows for a firm. 
D) one of the cash flows considered and are equal to cash flows related to operations and investing. 
A) the most important source of cash flow since significant projects usually require a firm to borrow funds. 
B) not considered because the discount rate used in valuing cash flows takes into consideration cash flows resulting from financing. 
C) not considered because financing does not produce usable cash flows for a firm. 
D) one of the cash flows considered and are equal to cash flows related to operations and investing. B

Question 4

What are real options and how do they affect the estimated value of projects?

Accepted Answer

Real options are decisions that a firm h

Question 5

When a subsidiary is restricted from remitting its profits to the parent,the parent:

Accepted Answer

A) incurs opportunity costs in the sense that it cannot use those funds for other projects. 
B) incurs real costs in the nature of lost profits that could have been earned with the funds. 
C) is not affected since the restricted funds will eventually be paid to the parent. 
D) can avoid the negative effects of being deprived of the funds by borrowing and using the restricted funds as collateral for the loans. 
A) incurs opportunity costs in the sense that it cannot use those funds for other projects. 
B) incurs real costs in the nature of lost profits that could have been earned with the funds. 
C) is not affected since the restricted funds will eventually be paid to the parent. 
D) can avoid the negative effects of being deprived of the funds by borrowing and using the restricted funds as collateral for the loans.

Question 6

An example of operational side effects is:

Accepted Answer

A) the use of firm personnel in competing projects. 
B) the additional cost resulting from a new project. 
C) the additional managerial oversight required by a new project. 
D) the effect of a project on the sales of related products sold by the parent. 
A) the use of firm personnel in competing projects. 
B) the additional cost resulting from a new project. 
C) the additional managerial oversight required by a new project. 
D) the effect of a project on the sales of related products sold by the parent.

Question 7

_______________________ is a well-known problem in capital budgeting and occurs when supporters of a proposed project present the best scenario for the project so that it will have a better chance of being approved.

Accepted Answer

A) Parent-subsidiary asymmetry 
B) Requester bias 
C) The invalid estimate 
D) The exaggerated estimate 
A) Parent-subsidiary asymmetry 
B) Requester bias 
C) The invalid estimate 
D) The exaggerated estimate

Question 8

If the NPV estimates for a project are the same for the parent and for the subsidy,then ___________ exists.

Accepted Answer

A) asymmetry 
B) symmetry 
C) parity 
D) equality 
A) asymmetry 
B) symmetry 
C) parity 
D) equality

Question 9

What are the causes of parent-subsidiary asymmetry?

Accepted Answer

In considering whether to undertake a pr

Question 10

_______________________ is defined as the ability to fine-tune a project after pursuit of the project has begun.

Accepted Answer

A) Project flexibility 
B) Sunk cost 
C) The option to alter 
D) The option to abandon 
A) Project flexibility 
B) Sunk cost 
C) The option to alter 
D) The option to abandon

Question 11

When an MNC forms a foreign subsidiary and that subsidiary is eligible for subsidies in the country where it will operate,how is the capital budgeting process for that subsidiary and its project affected?

Accepted Answer

A) Local subsidies are compensated for in NPV calculations,so no additional consideration needs to be given in the capital budgeting process. 
B) Since local subsidies are subject to political risk and can be taken away as easily as they are granted,local subsidies are not considered in the capital budgeting process. 
C) When local subsidies are available,the capital budgeting process is often altered to include consideration of the cash flows that will be generated by those subsidies. 
D) Local subsidies are generally not available to subsidiaries that will send their profits to the MNC parent,so local subsidies are not considered in the capital budgeting process by MNCs. 
A) Local subsidies are compensated for in NPV calculations,so no additional consideration needs to be given in the capital budgeting process. 
B) Since local subsidies are subject to political risk and can be taken away as easily as they are granted,local subsidies are not considered in the capital budgeting process. 
C) When local subsidies are available,the capital budgeting process is often altered to include consideration of the cash flows that will be generated by those subsidies. 
D) Local subsidies are generally not available to subsidiaries that will send their profits to the MNC parent,so local subsidies are not considered in the capital budgeting process by MNCs.

Question 12

In considering the value of a project,the NPV estimates for the subsidiary equals the:

Accepted Answer

A) foreign cash flow from the project discounted at the parent's discount rate. 
B) foreign cash flow from the project discounted at the appropriate foreign discount rate. 
C) domestic cash flow discounted at the foreign discount rate. 
D) domestic cash flow discounted at the domestic discount rate. 
A) foreign cash flow from the project discounted at the parent's discount rate. 
B) foreign cash flow from the project discounted at the appropriate foreign discount rate. 
C) domestic cash flow discounted at the foreign discount rate. 
D) domestic cash flow discounted at the domestic discount rate.

Question 13

Valuing an option to expand includes

Accepted Answer

A) the added value that will be received from the expended production that will result in the expansion. 
B) the net cost of the expansion. 
C) treating the expansion as a separate project and determining a NPV for the new project. 
D) only the additional profit that the firm will receive as a result of increased production. 
A) the added value that will be received from the expended production that will result in the expansion. 
B) the net cost of the expansion. 
C) treating the expansion as a separate project and determining a NPV for the new project. 
D) only the additional profit that the firm will receive as a result of increased production.

Question 14

The value of the real option to abandon depends heavily on:

Accepted Answer

A) the laws of the country where the project is located. 
B) the salvage value of the equipment acquired for the project. 
C) the discount rate that was used in determining the NPV of the project. 
D) the subsidiary's WACC. 
A) the laws of the country where the project is located. 
B) the salvage value of the equipment acquired for the project. 
C) the discount rate that was used in determining the NPV of the project. 
D) the subsidiary's WACC.

Question 15

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

Accepted Answer

A) does not affect the subsidiary's estimate of NPV from a proposed project. 
B) lowers the subsidiary's estimate of NPV from a proposed project. 
C) increases the subsidiary's estimate of NPV from a proposed project. 
D) may or may not affect the subsidiary's estimate of NPV for a proposed project,depending on the discount rate used. 
A) does not affect the subsidiary's estimate of NPV from a proposed project. 
B) lowers the subsidiary's estimate of NPV from a proposed project. 
C) increases the subsidiary's estimate of NPV from a proposed project. 
D) may or may not affect the subsidiary's estimate of NPV for a proposed project,depending on the discount rate used.

Question 16

International projects are often undervalued when traditional capital budgeting approaches are used because traditional capital budgeting approaches:

Accepted Answer

A) use too many estimates of value. 
B) use unrealistic discount rates. 
C) are inadequate with regard to international projects. 
D) do not consider the value of real options. 
A) use too many estimates of value. 
B) use unrealistic discount rates. 
C) are inadequate with regard to international projects. 
D) do not consider the value of real options.

Question 17

How do remittance restrictions impact the cash flow to the parent from a project?

Accepted Answer

Often,especially in developing countries

Question 18

What factors should those responsible for deciding whether to pursue a project consider if there are value differences when the project is considered from the parent's viewpoint and the subsidiary's viewpoint?

Accepted Answer

If there is parent-subsidiary asymmetry

Question 19

Effective tax rate is reflected by the difference:

Accepted Answer

A) between pre-tax cash flow and after-tax cash flow. 
B) in the tax rates in the host-country and home-country. 
C) in the subsidiary's tax rate and the MNC's tax rate. 
D) a firm's cost of capital and the discount rate it uses in computing NPV of projects. 
A) between pre-tax cash flow and after-tax cash flow. 
B) in the tax rates in the host-country and home-country. 
C) in the subsidiary's tax rate and the MNC's tax rate. 
D) a firm's cost of capital and the discount rate it uses in computing NPV of projects.

Question 20

A firm can make an option to abandon more realistic by:

Accepted Answer

A) leasing the production facility rather than buying it. 
B) acquiring insurance that will protect it in the event of abandonment. 
C) not discussing with local government an intention to abandon a project. 
D) investing as little as possible in the project initially. 
A) leasing the production facility rather than buying it. 
B) acquiring insurance that will protect it in the event of abandonment. 
C) not discussing with local government an intention to abandon a project. 
D) investing as little as possible in the project initially.

Parent-subsidiary asymmetry can arise from forecasting difference between the parent and the subsidiary that can arise because:

After-tax cash flow of a subsidiary may differ from the after-tax cash flow of the parent because:

In general,in capital budgeting,cash flows resulting from financing are:

What are real options and how do they affect the estimated value of projects?

When a subsidiary is restricted from remitting its profits to the parent,the parent:

An example of operational side effects is:

_______________________ is a well-known problem in capital budgeting and occurs when supporters of a proposed project present the best scenario for the project so that it will have a better chance of being approved.

If the NPV estimates for a project are the same for the parent and for the subsidy,then ___________ exists.

What are the causes of parent-subsidiary asymmetry?

_______________________ is defined as the ability to fine-tune a project after pursuit of the project has begun.

When an MNC forms a foreign subsidiary and that subsidiary is eligible for subsidies in the country where it will operate,how is the capital budgeting process for that subsidiary and its project affected?

In considering the value of a project,the NPV estimates for the subsidiary equals the:

Valuing an option to expand includes

The value of the real option to abandon depends heavily on:

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

International projects are often undervalued when traditional capital budgeting approaches are used because traditional capital budgeting approaches:

How do remittance restrictions impact the cash flow to the parent from a project?

What factors should those responsible for deciding whether to pursue a project consider if there are value differences when the project is considered from the parent's viewpoint and the subsidiary's viewpoint?

Effective tax rate is reflected by the difference:

A firm can make an option to abandon more realistic by:

Introduction

International Financial Markets: Structure and Innovation

Currency and Eurocurrency Derivatives

Currency Systems and Valuation

Currency Parity Conditions

Currency Risk Exposure Measurement

Currency Exposure Management

Capital Budgeting

Long-Term Financing

Optimizing and Financing Working Capital

International Alliances and Acquisitions

International Trade

International Taxation and Accounting

International Portfolio Investments

Filters

Exam 9: Advanced Capital Budgeting

Parent-subsidiary asymmetry can arise from forecasting difference between the parent and the subsidiary that can arise because:

After-tax cash flow of a subsidiary may differ from the after-tax cash flow of the parent because:

In general,in capital budgeting,cash flows resulting from financing are:

What are real options and how do they affect the estimated value of projects?

When a subsidiary is restricted from remitting its profits to the parent,the parent:

An example of operational side effects is:

_______________________ is a well-known problem in capital budgeting and occurs when supporters of a proposed project present the best scenario for the project so that it will have a better chance of being approved.

If the NPV estimates for a project are the same for the parent and for the subsidy,then ___________ exists.

What are the causes of parent-subsidiary asymmetry?

_______________________ is defined as the ability to fine-tune a project after pursuit of the project has begun.

When an MNC forms a foreign subsidiary and that subsidiary is eligible for subsidies in the country where it will operate,how is the capital budgeting process for that subsidiary and its project affected?

In considering the value of a project,the NPV estimates for the subsidiary equals the:

Valuing an option to expand includes

The value of the real option to abandon depends heavily on:

Typically,a subsidiary operating in a developing country faces prohibitively high cost of capital which:

International projects are often undervalued when traditional capital budgeting approaches are used because traditional capital budgeting approaches:

How do remittance restrictions impact the cash flow to the parent from a project?

What factors should those responsible for deciding whether to pursue a project consider if there are value differences when the project is considered from the parent's viewpoint and the subsidiary's viewpoint?

Effective tax rate is reflected by the difference:

A firm can make an option to abandon more realistic by:

Introduction

International Financial Markets: Structure and Innovation

Currency and Eurocurrency Derivatives

Currency Systems and Valuation

Currency Parity Conditions

Currency Risk Exposure Measurement

Currency Exposure Management

Capital Budgeting

Long-Term Financing

Optimizing and Financing Working Capital

International Alliances and Acquisitions

International Trade

International Taxation and Accounting

International Portfolio Investments

Filters