Question 1

The real option to alter inputs not only means changing the types of materials used for production,it can also involve:

Accepted Answer

A) shifting between various suppliers of the same material. 
B) buying required materials at attractive prices and stockpiling them for later use. 
C) changing the type of product that is produced. 
D) entering a new market for the products produced.

Question 2

In an industry that requires high levels of human capital,the option to abandon:

Accepted Answer

A) has relatively little value. 
B) is of the utmost importance. 
C) has diminished value but the option is still very valuable. 
D) has not value whatsoever.

Question 3

How can currency valuation issues provide firms with the real option of altering inputs?

Accepted Answer

A) Firms can buy currencies with lower values and use those currencies to buy necessary inputs for production. 
B) A firm can speculate in currencies in an effort to offset production losses. 
C) Firms with multiple locations can transfer inputs from location to location. 
D) A firm can establish production facilities in several countries and shift production to countries with weak currencies to reduce production costs.

Question 4

In the international context,barriers to entry into certain markets include:

Accepted Answer

A) costs and difficulty of creating new products. 
B) lax environmental regulations and consumer protection laws. 
C) complex regulations and diversity of consumer demands. 
D) lack of understanding of local customs and competition.

Question 5

The restrictions on the ability of a foreign subsidiary to remit its profits to its parent result in:

Accepted Answer

A) restricted accounts. 
B) sinking funds. 
C) blocked funds. 
D) political risk.

Question 6

What affect do below market interest rates in the foreign country where a subsidiary will operate have on the NPV calculations for a proposed project by the subsidiary?

Accepted Answer

A) The below market interest rate in the foreign country will result in a higher NPV to the subsidiary than the NPV to the parent. 
B) The below market interest rate will quickly attract firms seeking loans,and the below market rates will rise quickly,negating any benefit to the parent or the subsidiary. 
C) The below market interest rates in the foreign country will result in a higher NPV to the parent than the NPV to the subsidiary. 
D) Financing cash flows are not considered in NPV calculations,so interest rates will not affect the NPV calculations.

Question 7

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

Accepted Answer

A) does not affect the parent's estimate of NPV from the proposed project. 
B) makes the parent's real cost of capital in its home market lower and increases the parent's estimate of NPV from the proposed project. 
C) makes the parent's real cost of capital in its home market higher and decreases the parent's estimate of NPV from the proposed project. 
D) makes the parent's real cost of capital in its home market higher and increases the parent's estimate of NPV from the proposed project.

Question 8

In some situations,the profits earned by a subsidiary cannot be immediately paid to the parent because of:

Accepted Answer

A) restrictions on how much of the profit of a foreign subsidiary can be remitted to the parent imposed by the country where the parent is located. 
B) international trade restrictions that limit the amount of capital flow from country to country. 
C) restrictions on remittances from the subsidiary to the parent imposed by the country where the subsidiary is located. 
D) the lack of liquidity in the assets of the subsidiary that would allow the subsidiary to send cash to the parent.

Question 9

While the ability to modify a project as it develops may be viewed as a positive attribute of the project,it also means that:

Accepted Answer

A) the project is not very well planned. 
B) more decisions will potentially have to be made about the project. 
C) the project will always be in danger of failing. 
D) the project will cost more than originally projected.

Question 10

If a firm plans a project so that it can,if necessary,not pursue the project,it has a real option to:

Accepted Answer

A) alter scale. 
B) reject. 
C) abandon. 
D) alter inputs.

Question 11

If the NPV estimates for a project are different as to the subsidiary and aas to the parent,then _________________ exists.

Accepted Answer

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

Question 12

The additional burden imposed when the host-country of a subsidiary taxes the subsidiary's income and then that income is taxed again when it is paid to the MNC parent can be relieved by tax treaty provisions that provide for:

Accepted Answer

A) not including the subsidiary's profit in the parent's income. 
B) not requiring the subsidiary to pay taxes in the host-country. 
C) the MNC to elect whether it wants the subsidiary's profits taxed in the host-country or the home-country. 
D) tax credits that allow the MNC to reduce the taxes it owes to the home-country by the taxes paid by the subsidiary to the host-country.

Question 13

If a firm has an option to alter operating scale and decides that the operating scale should be altered,either positively or negatively,that decision may be thought of as the:

Accepted Answer

A) first step toward the eventual abandonment of the project. 
B) investment of additional funds to increase or decrease production. 
C) decision that must be made at the highest level of the firm. 
D) exercise of the option to alter operating scale.

Question 14

The option to alter operating scale generally requires pre-planning so that project output can be changed quickly to meet demand,but that pre-planning involves:

Accepted Answer

A) a waste of assets since the plans that are made for the future alteration of operating scale may never be used. 
B) an option premium in the nature of the extra investment that is required in case the operating scale needs to be altered. 
C) abandoning other projects that the firm might profitably pursue. 
D) seeking projects that have an estimated NPV in excess of 1.

Question 15

In valuing real options for international projects,one of the key factors is:

Accepted Answer

A) political risk. 
B) economic risk. 
C) currency volatility. 
D) the discount rate.

Question 16

If a firm expects that if it undertakes a specific project,the experience gained from that project will lead it to other related opportunities,that project includes the:

Accepted Answer

A) possibility of the need for additional funding. 
B) real option to grow. 
C) real option to alter inputs. 
D) opportunity for additional profits.

Question 17

The cash flow realized by a parent is equal to:

Accepted Answer

A) the cash flow received from its subsidiary plus the taxes that the parent owes on that cash flow in the home-country. 
B) the cash flow received from its subsidiary. 
C) the cash flow received from its subsidiary minus the taxes that the parent owes on that cash flow in the home-country. 
D) the cash flow received from its subsidiary minus the taxes that the subsidiary owes in the host-country.

Question 18

The most common option in international projects is the option to:

Accepted Answer

A) abandon. 
B) grow. 
C) expand. 
D) alter inputs.

Question 19

If a firm decides,after it has begun a project that the project will not produce value for the firm,how can the firm get the most value out of the project?

Accepted Answer

A) Continue the project and hope for more value than anticipated. 
B) Change the inputs for the project to increase value. 
C) Transfer the project to a subsidiary in a low-cost country. 
D) Sell the assets purchased for the project for salvage value.

Question 20

The simplest way to exercise the real option to abandon is to:

Accepted Answer

A) stop production before any more money is lost. 
B) turn project assets over to local government. 
C) invest enough money so that the project does not have to be abandoned. 
D) fulfill existing contracts and then sell remaining assets.

Exam 9: Advanced Capital Budgeting