Question 1

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

Accepted Answer

A)  20% 
B)  40% 
C)  50% 
D)  75% 
A)  20% 
B)  40% 
C)  50% 
D)  75%

Question 2

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

Accepted Answer

A)  the risk-free rate of return. 
B)  the expected return on the market portfolio. 
C)  the firm's beta. 
D)  all of the above 
A)  the risk-free rate of return. 
B)  the expected return on the market portfolio. 
C)  the firm's beta. 
D)  all of the above

Question 3

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Accepted Answer

A)  Parent cash flows must be distinguished from project cash flows. 
B)  Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms. 
C)  Differing rates of inflation exist between the foreign and domestic economies. 
D)  All of the above add complexity to the international capital budgeting process. 
A)  Parent cash flows must be distinguished from project cash flows. 
B)  Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms. 
C)  Differing rates of inflation exist between the foreign and domestic economies. 
D)  All of the above add complexity to the international capital budgeting process.

Question 4

When evaluating capital budgeting projects,which of the following would NOT necessarily be an indicator of an acceptable project?

Accepted Answer

A)  an NPV > $0 
B)  an IRR > the project's required rate of return 
C)  an IRR > $0 
D)  All of the above are correct indicators. 
A)  an NPV > $0 
B)  an IRR > the project's required rate of return 
C)  an IRR > $0 
D)  All of the above are correct indicators.

Question 5

Debt is usually a large component of project financing.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  Identify the initial capital invested. 
B)  Estimate the cash flows to be derived from the project over time. 
C)  Identify the appropriate interest rate at which to discount future cash flows. 
D)  All of the above are steps in the capital budgeting process. 
A)  Identify the initial capital invested. 
B)  Estimate the cash flows to be derived from the project over time. 
C)  Identify the appropriate interest rate at which to discount future cash flows. 
D)  All of the above are steps in the capital budgeting process.

Question 7

Use the information to answer the following question(s).
The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, 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 18.1.What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

Accepted Answer

A)  $1,520,000 
B)  $1,684,210 
C)  -$75,310 
D)  -$71,544 
A)  $1,520,000 
B)  $1,684,210 
C)  -$75,310 
D)  -$71,544

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A)  the firm's weight of equity financing 
B)  the risk-free rate of return 
C)  the firm's weight of debt financing 
D)  All of the above are necessary to determine a firm's WACC. 
A)  the firm's weight of equity financing 
B)  the risk-free rate of return 
C)  the firm's weight of debt financing 
D)  All of the above are necessary to determine a firm's WACC.

Question 10

For purposes of international capital budgeting,it is NOT important to distinguish between parent and total project cash flows.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

Accepted Answer

A) True 
 B)False

Question 14

A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Accepted Answer

A) True 
 B)False

Question 15

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

Accepted Answer

A) True 
 B)False

Question 16

Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

Accepted Answer

A)  local; be subordinated to; parent's 
B)  local; not be subordinated to; parent's 
C)  parent's; be subordinated to; local 
D)  none of the above 
A)  local; be subordinated to; parent's 
B)  local; not be subordinated to; parent's 
C)  parent's; be subordinated to; local 
D)  none of the above

Question 17

Currency risk is a concern for any international merger and acquisition activity.For instance,the initial bid,if denominated in a foreign currency,creates a contingent foreign currency exposure for the bidder.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A)  Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows. 
B)  Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value. 
C)  An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent. 
D)  All of the above are true statements. 
A)  Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows. 
B)  Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value. 
C)  An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent. 
D)  All of the above are true statements.

Question 19

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

Accepted Answer

A)  less than the cost of capital. 
B)  greater than the cost of capital. 
C)  greater than the cost of the project. 
D)  cannot be determined from this information 
A)  less than the cost of capital. 
B)  greater than the cost of capital. 
C)  greater than the cost of the project. 
D)  cannot be determined from this information

Question 20

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Accepted Answer

Real options is a different way of think

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

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

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

When evaluating capital budgeting projects,which of the following would NOT necessarily be an indicator of an acceptable project?

Debt is usually a large component of project financing.

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

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

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

For purposes of international capital budgeting,it is NOT important to distinguish between parent and total project cash flows.

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.

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.

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

Project evaluation from the viewpoint serves some useful purposes and/but should the viewpoint.

Currency risk is a concern for any international merger and acquisition activity.For instance,the initial bid,if denominated in a foreign currency,creates a contingent foreign currency exposure for the bidder.

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

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

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

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

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

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

When evaluating capital budgeting projects,which of the following would NOT necessarily be an indicator of an acceptable project?

Debt is usually a large component of project financing.

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

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

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

For purposes of international capital budgeting,it is NOT important to distinguish between parent and total project cash flows.

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.

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.

As opposed to greenfield investment,a cross-border acquisition is typically quicker.

A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

Currency risk is a concern for any international merger and acquisition activity.For instance,the initial bid,if denominated in a foreign currency,creates a contingent foreign currency exposure for the bidder.

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

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

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Filters

Project evaluation from the viewpoint serves some useful purposes and/but should the viewpoint.