Question 1

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is not a factor that should be considered in multinational capital budgeting?

Accepted Answer

A)  blocked funds 
B)  exchange rate fluctuations 
C)  inflation 
D)  financing arrangements 
E)  All of these should be considered.

Question 3

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is:

Accepted Answer

A)  fixed 
B)  volatile 
C)  stable 
D)  None of these are correct, as the firm is not exposed.

Question 4

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

Accepted Answer

A) True 
 B)False

Question 5

Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.

Accepted Answer

A) True 
 B)False

Question 6

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

Accepted Answer

A)  a risk-adjusted discount rate. 
B)  a payback period. 
C)  certainty equivalents. 
D)  simulation.

Question 7

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Accepted Answer

A) True 
 B)False

Question 8

In multinational capital budgeting, depreciation is treated as a cash outflow.

Accepted Answer

A) True 
 B)False

Question 9

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.​

Accepted Answer

A)  ​The number of units sold by the subsidiary 
B)  ​The subsidiary's earnings before income and taxes (EBIT) 
C)  ​The tax rate the subsidiary is subject to in the host country 
D)  ​Withholding taxes imposed by the host government

Question 10

Petrus Co. has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and A$2,000,000 in the second year. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14 percent. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?

Accepted Answer

A)  $2,905,817 
B)  -$94,183 
C)  $916,128. 
D)  None of these are correct.

Question 11

Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.

Accepted Answer

A)  higher; lower 
B)  higher; higher 
C)  lower; higher 
D)  None of these are correct.

Question 12

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

Accepted Answer

A)  strengthening euro 
B)  stable euro 
C)  weak euro 
D)  stable euro AND weak euro

Question 13

The required rate of return of a project is ____ the MNC's cost of capital.

Accepted Answer

A)  greater than 
B)  less than 
C)  the same as 
D)  Any of the these, depending on the specific project.

Question 14

The ____ is (are) likely the major source of funds to support a particular project.

Accepted Answer

A)  initial investment 
B)  variable costs 
C)  fixed costs 
D)  None of these are correct.
Answer Key

Question 15

If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.

Accepted Answer

A) True 
 B)False

Question 16

If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.

Accepted Answer

A)  high; subsidiary's 
B)  high; parent's 
C)  low; parent's 
D)  high; subsidiary's AND low; parent's 
E)  None of these are correct.

Question 17

An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

Accepted Answer

A)  about NZ$11 million 
B)  about NZ$15 million 
C)  about NZ$31 million 
D)  about NZ$37 million 
E)  about NZ$25 million

Question 18

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.​

Accepted Answer

A)  ​very high; limited 
B)  ​very low; limited 
C)  ​very low; numerous 
D)  ​very high; numerous

Question 19

Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

Accepted Answer

A) True 
 B)False

Question 20

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

Accepted Answer

A)  the cost of borrowing funds in the United Kingdom. 
B)  the economic conditions in the United Kingdom. 
C)  the parent's cost of capital. 
D)  the cost of borrowing funds in the United Kingdom AND the economic conditions in the United Kingdom.

Exam 14: Multinational Capital Budgeting

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

Which of the following is not a factor that should be considered in multinational capital budgeting?

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is:

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

In multinational capital budgeting, depreciation is treated as a cash outflow.

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.

Everything else being equal, the the depreciation expense is in a given year, the a foreign project's NPV will be.

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

The required rate of return of a project is ____ the MNC's cost of capital.

The ____ is (are) likely the major source of funds to support a particular project.

If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.

If the parent's government imposes a tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the point of view.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are in the host country and there are investment opportunities in the host country.

Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

Exam 14: Multinational Capital Budgeting

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

Which of the following is not a factor that should be considered in multinational capital budgeting?

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is:

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

In multinational capital budgeting, depreciation is treated as a cash outflow.

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.​

Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

The required rate of return of a project is ____ the MNC's cost of capital.

The ____ is (are) likely the major source of funds to support a particular project.

If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.

If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.​

Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.

Everything else being equal, the the depreciation expense is in a given year, the a foreign project's NPV will be.

If the parent's government imposes a tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the point of view.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are in the host country and there are investment opportunities in the host country.