Question 1

What pre-planning can a firm do in anticipation that the demand for products produced by a project will not meet expectations?

Accepted Answer

A) The firm can wait until the demand is determined before committing to the project. 
B) The firm can arrange for a buyer to buy the project in the event that demand is below expectations. 
C) The firm can arrange to outsource components of the product and can use temporary labor that can be reduced quickly. 
D) The firm can produce as expected despite the demand.

Question 2

One of the potential special problems with an option to abandon is that:

Accepted Answer

A) it can cost the firm more than the original investment. 
B) competitors will try to buy the project at a reduced price. 
C) there may be restrictions in the foreign country where the project is located that prevent or complicate abandonment of the project. 
D) the parent may not want to abandon the project.

Question 3

Differences in NPV of a proposed project between parent and subsidiary can arise from:

Accepted Answer

A) political risk or currency risk. 
B) cash flow or currency asymmetries. 
C) cash flow or cost-of-capital asymmetries. 
D) political risk or economic risk.

Question 4

Modification to projects undertaken by MNCs:

Accepted Answer

A) are often required. 
B) are resisted at all costs. 
C) should never be required. 
D) indicate that the project was flawed from the inception.

Question 5

Relief from multiple taxation of parent and subsidiary income may be found in tax treaties that allow:

Accepted Answer

A) subsidiaries to avoid paying taxes on income that will eventually be passed on to the parent. 
B) the parent to exempt from its gross income any dividends received from foreign subsidiaries. 
C) the parent to exclude from income all dividends received relative to foreign operations. 
D) the parent to take a tax credit against the tax it owes for the taxes paid by the subsidiary in the country where it is located.

Question 6

The option to ___________________ allows a firm to change the scale of a project after committing to the project.

Accepted Answer

A) alter operating scale 
B) abandon 
C) grow 
D) alter inputs

Question 7

What are side effects and how are they related to the value of international projects?

Accepted Answer

The answer of What are side effects and how are...

Question 8

The exercise price of the real option to abandon is:

Accepted Answer

A) payouts necessary to terminate leases and employees and payoffs to local government officials. 
B) payouts necessary to terminate leases and employees and taxes,regulatory or financing penalties. 
C) payouts to terminate leases and employees and the cost of transporting project assets back to the parent's premises. 
D) payouts to terminate leases and employees and damage to the firm's reputation.

Question 9

How might a firm efficiently anticipate that a project might grow in size so that it could adjust easily to such growth?

Accepted Answer

A) The firm could borrow extra funds initially to use in case demand exceeded expectations. 
B) The firm could build,rent or take an option for increased capacity to accommodate demand in excess of the demand originally anticipated. 
C) The firm could wait to commit to the project until the demand was known. 
D) The firm could contract with competitors to produce to meet any demand that the firm could not meet.

Question 10

One of the approaches that can be used in making the decision to expand that involves creating a model of possible decisions and the short and longer term consequences of each decision is the:

Accepted Answer

A) operational decision model. 
B) decision tree method. 
C) truth table approach. 
D) mathematical modeling approach.

Exam 9: Advanced Capital Budgeting