Exam 19: Multinational Capital Budgeting

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% 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.

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

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

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

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

Which of the following is NOT an example of political risk?

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

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.

Real option analysis allows managers to analyze all of the following EXCEPT:

Use the information to answer 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 19.1. What is the initial investment for the Wheel Deal project?

Project financing is the arrangement of financing for very large individual long-term capital projects.

For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.