Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

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

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Question 1

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

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Question 2

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The evaluation of foreign projects must consider several risks that are either nonexistent or much less important in domestic capital budgeting. First, if revenues and expenses are in a foreign currency, then the parent firm must estimate the exchange rate at which the foreign currency will be converted into the domestic currency. To estimate future exchange rates, the parent firm must estimate expected rates of inflation and interest rates in both countries, economic growth in each country, as well as consumer preferences and tastes in more than one country. Then, aspects of political risk must be considered. What is the likelihood that all or part of the cash flows accruing to the parent firm will be restricted through some political act? The firm must now consider the possibility of changing tax rates, new taxes, and additional restrictions on the flow of funds. Furthermore, local norms may differ from usual firm practice in terms of financing or dividend policy. Domestic capital budgeting may seem quite easy in comparison.

For purposes of international capital budgeting, parent cash flows often depend on the form of financing. Thus, we cannot clearly separate cash flows from financing decisions, as we can in domestic capital budgeting.

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Question 3

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For purposes of international capital budgeting, which of the following statements is NOT true?

(Multiple Choice)

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Question 4

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

(True/False)

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Question 5

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.

(True/False)

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Question 6

Because international capital budgeting is so difficult, time consuming, expensive, and uncertain, firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

(True/False)

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Question 7

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

(Multiple Choice)

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Question 8

Which of the following is NOT a characteristic of international long-term capital project financing?

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Question 9

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

(Multiple Choice)

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Question 10

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

(Multiple Choice)

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Question 11

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

(Multiple Choice)

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Question 12

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

(True/False)

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Question 13

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

(Multiple Choice)

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Question 14

Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

(Multiple Choice)

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Question 15

For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL's viewpoint.

(True/False)

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Question 16

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

(True/False)

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Question 17

The drivers of international merger and acquisitions are only MACRO in scope.

(True/False)

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Question 18

Currency risk is a concern for any international merger and acquisition activity. For instance, once the bidder has successfully won the acquisition, the exposure evolves from a transaction exposure to a contingent exposure.

(True/False)

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Question 19

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.

(Multiple Choice)

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Question 20

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

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

For purposes of international capital budgeting, parent cash flows often depend on the form of financing. Thus, we cannot clearly separate cash flows from financing decisions, as we can in domestic capital budgeting.

For purposes of international capital budgeting, which of the following statements is NOT true?

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

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.

Because international capital budgeting is so difficult, time consuming, expensive, and uncertain, firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

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

Which of the following is NOT a characteristic of international long-term capital project financing?

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

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

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

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

Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL's viewpoint.

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

The drivers of international merger and acquisitions are only MACRO in scope.

Currency risk is a concern for any international merger and acquisition activity. For instance, once the bidder has successfully won the acquisition, the exposure evolves from a transaction exposure to a contingent exposure.

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.

Current Multinational Challenges and the Global Economy

Corporate Ownership, Goals, and Governance

The International Monetary System

The Balance of Payments

The Continuing Global Financial Crisis

The Foreign Exchange Theory and Markets

International Parity Conditions

Foreign Currency Derivatives and Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Portfolio Theory and Diversification

Foreign Direct Investment and Political Risk

Working Capital Management

International Trade Finance

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