Quiz 13: Multinational Capital Budgeting
Business
Q 1Q 1
Because of different currencies and interest rates in each country, capital budgeting analysis for cross-border investments is radically different from capital budgeting analysis for domestic investments.
Free
True False
False Explanation: Although the opportunities and risks differ, the underlying analysis is the same.
Q 2Q 2
In order to compensate for the effects of inflation, nominal cash flows should be discounted with a real discount rate.
Free
True False
False Explanation: Nominal (real) cash flows must be discounted with a nominal (real) discount rate.
Q 3Q 3
In perfect financial markets in which the international parity conditions hold, discounting may be done either in the domestic or in the foreign currency.
Free
True False
True
Free
True False
Q 5Q 5
If the international parity conditions hold, then nominal required returns in two different currencies are identical on comparable-risk assets.
Free
True False
Q 6Q 6
In capital budgeting, repatriation occurs when expatriate employees return to the parent firm.
Free
True False
Q 7Q 7
Relevant cash flows from the parent's point of view are those that are remitted to the parent in its functional currency.
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True False
Q 8Q 8
The only relevant cash flows from the project's point of view are those that are to be remitted to the parent in the parent's functional currency.
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True False
Q 9Q 9
Blocked funds are cash flows generated by a foreign project that are not immediately repatriated to the parent because the project has better opportunities than the parent corporation.
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True False
Q 10Q 10
Blocked funds in a foreign country should be discounted at the risk-free rate of interest in the foreign currency.
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True False
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True False
Q 12Q 12
According to finance theory, the value of subsidized financing that is separable from a particular project must still be added to the value of the project in calculating project value.
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True False
Q 13Q 13
Developing countries sometimes require that foreign companies investing capital locally take on additional development or infrastructure projects.
Free
True False
Q 14Q 14
Project-specific expropriation risk has no effect on expected future cash flows from a project, but can increase the discount rate.
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True False
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True False
Q 16Q 16
Expected future cash flows are estimated by ______ only incremental cash flows and ______ all opportunity costs.
A) including; including
B) including; excluding
C) excluding; including
D) excluding; excluding
E) None of the above
Free
Multiple Choice
Q 17Q 17
Nominal cash flows in a foreign currency should be discounted ______.
A) at a nominal discount rate in the foreign currency
B) at a rate reflecting the parent's opportunity cost of capital in the domestic currency
C) at a weighted average cost of capital
D) at the cost of debt
E) at the cost of equity
Free
Multiple Choice
Q 18Q 18
Which of the following is FALSE?
A) Cash flows in a particular currency should be discounted in that currency.
B) Cash flows should be discounted at the opportunity cost of capital.
C) Cash flows to equity should be discounted at the weighted average cost of capital.
D) Nominal cash flows should be discounted at nominal discount rates.
E) Real cash flows should be discounted at real discount rates.
Free
Multiple Choice
Q 19Q 19
Which of steps a) through d) is INAPPROPRIATE when discounting foreign currency cash flows using the parent's perspective?
A) Estimate expected future cash flows from the project in the foreign currency and put them on a time line.
B) Convert expected future cash flows into the domestic currency at the current spot exchange rate.
C) Identify the appropriate risk-adjusted discount rate in the domestic currency for the project.
D) Calculate the NPV in the domestic currency.
E) Each of the above is appropriate.
Free
Multiple Choice
Q 20Q 20
If a project has a positive NPV from both the parent's and the project's perspective, then the parent firm should ______.
A) accept the project
B) reject the project
C) accept the project and try to capture the value in the foreign currency today
D) reject the project and continue to look for positive-NPV projects in the foreign currency
E) None of the above
Free
Multiple Choice
Q 21Q 21
If a project has a positive NPV from the parent's perspective but a negative NPV from the project's perspective, then the parent firm should ______.
A) accept the project
B) reject the project
C) accept the project and try to capture the value in the foreign currency today
D) reject the project and continue to look for positive-NPV projects in the foreign currency
E) None of the above
Free
Multiple Choice
Q 22Q 22
If a project has a negative NPV from the parent's perspective but a positive NPV from the project's perspective, then the parent firm should ______.
A) accept the project
B) reject the project
C) accept the project and try to capture the value in the foreign currency today
D) reject the project and continue to look for positive-NPV projects in the foreign country
E) None of the above
Free
Multiple Choice
Q 23Q 23
If a project has a positive NPV but the NPV is greater from the project's than from the parent's perspective, then the parent firm should ______.
A) accept the project
B) reject the project
C) accept the project and hedge the foreign currency cash flows
D) reject the project and continue to look for positive-NPV projects in the foreign country
E) None of the above
Free
Multiple Choice
Q 24Q 24
A project has a net present value of NPV€ = €10,000. In order to invest in the project, the German government requires that you undertake another project with the following cash flow stream: CF0€ = -€5000, E[CF1€] = €1000, E[CF2€] = €1000, and E[CF3€] = €1000. The appropriate discount rate for this project is i€ = 10%. What affect does this tie-in project have on your original NPV€ estimate?
A) It increases NPV€ from €10,000 to €12,513.15.
B) It increases NPV€ from €10,000 to €17,486.85.
C) It decreases NPV€ from €10,000 to €7,486.85.
D) It increases NPV€ from €10,000 to €2,513.15.
E) It is a separate project and has no effect on NPV.
Free
Multiple Choice
Q 25Q 25
Suppose the government of Germany offers you a 3-year, non-amortizing €50,000 loan to entice you to undertake a particular project within its borders. In addition, the government offers you an attractive rate of i€ = 10% when loans of similar risk yield a return of i€ = 15%. The German tax rate is 50%. What is the present value of the interest subsidy on this loan?
a. €2854.03
b. €3108.56
c. €3250.66
d. €4895.60
e. €5708.06
Free
Essay
Q 26Q 26
Refer to Exhibit T13.1. The appropriate discount rate is i€ = 5%. What is the NPV€ in euros?
A) €25,598.43
B) €26,232.48
C) €27,232.48
D) €29,000.00
E) €29,432.52
Free
Multiple Choice
Q 27Q 27
Refer to Exhibit T13.1. Assume the international parity conditions hold. The current spot rate is S0£/€ = £2/€. If i£ = 7% and i€ = 5%, what is the expected future spot rate [E(S3£/€ )] at time t = 3?
A) £1.890/€
B) £1.963/€
C) £2.020/€
D) £2.116/€
E) £2.250/€
Free
Multiple Choice
Q 28Q 28
Refer to Exhibit T13.1. Assume the international parity conditions hold. The current spot rate is S0£/€ = £2/€. If i£ = 7% and i€ = 5%, what is NPV£?
A) £48,591.54
B) £50,786.92
C) £52,464.96
D) £54,527.33
E) £55,328.10
Free
Multiple Choice
Q 29Q 29
Refer to Exhibit T13.1. Assume the international parity conditions DO NOT hold . Expected future spot rates are: E(S1£/€) = £2.060/€, E(S2£/€) = £2.100/€, and E(S3£/€) =£2.220/€. Calculate NPV£ by converting euros to pounds at the expected future spot rates and discounting in pounds. Assume S0£/€ = £2/€ and i£ = 7%.
A) NPV£ = £52,464.96
B) NPV£ = £52,978.31
C) NPV£ = £53,015.25
D) NPV£ = £53,716.36
E) NPV£ = £54,142.84
Free
Multiple Choice
Q 30Q 30
Refer to Exhibit T13.1. Suppose there is a 10% chance that the host government will seize the assets of the project in year 3. If the assets are not seized, you expect to receive the cash flows as shown. If the assets are seized, you expect to receive repatriated funds in year 1 and year 2 only. Assuming international parity conditions hold, S0£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?
A) £42,431.49
B) £47,018.46
C) £47,368.32
D) £49.652.21
E) £50,737.29
Free
Multiple Choice
Q 31Q 31
Refer to Exhibit T13.1. Suppose that beginning in year 1, there is a 10% chance each year the host government will seize the project's assets. If the assets are not seized, you expect to receive the cash flows as stated above. If the assets are seized in a particular year, you expect to receive no repatriated funds thereafter. Assuming international parity conditions hold, S0£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?
A) £42,431.49
B) £47,018.46
C) £47,368.32
D) £49.652.21
E) £50,737.29
Free
Multiple Choice
Q 32Q 32
Refer to Exhibit T13.1. Assume 50% of the project's expected cash flows are retained in the host country until the project is 3 years old. The opportunity cost of these funds is i€ = 5%, but these blocked funds earn no interest. What is the NPV of the opportunity cost from these blocked funds?
A) €569.16
B) €598.24
C) €625.80
D) €658.68
E) €683.22
Free
Multiple Choice
Q 33Q 33
You invest BRL 1 million in land on the coast of Brazil. You expect the land to retain its BRL 1 million real value for the foreseeable future. The annual risk-free rate of interest in BRL is 10 percent. The market risk premium on the local Brazilian stock market is 5 percent per year. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. What is the expected nominal value of the land in two years before taxes?
A) BRL 1,000,000
B) BRL 1,102,500
C) BRL 1,166,400
D) BRL 1,210,000
E) BRL 1,322,500
Free
Multiple Choice
Q 34Q 34
You invest BRL 1 million in land on the coast of Brazil. You expect the land to retain its BRL 1 million real value for the foreseeable future. The annual risk-free rate of interest in BRL is 10 percent. The market risk premium on the local Brazilian stock market is 5 percent per year. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. If you plan on selling the land in two years, what is your expected tax payment on the sale?
A) BRL 0
B) BRL 41,000
C) BRL 66,560
D) BRL 84,000
E) BRL 129,000
Free
Multiple Choice
Q 35Q 35
You invest BRL 100 million in a factory in Brazil. The factory will be depreciated at the rate of BRL 5 million per year for 20 years to a zero salvage value. You expect the factory will be worth BRL 90 million in nominal terms after four years. You plan on selling the factory in four years. The Brazilian corporate income tax rate is 40 percent. What is your expected tax liability on the sale?
A) BRL 0 million
B) BRL 4 million
C) BRL 10 million
D) BRL 36 million
E) BRL 80 million
Free
Multiple Choice
Q 36Q 36
You invest BRL 10 million in inventory for your Brazilian factory. You expect to make no further investment or disinvestment in inventory over the 5-year life of your project. You expect the inventory will retain its real value. Inventory costing is done on a LIFO (last in/first out) basis. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. What is the expected nominal value of the inventory in five years before taxes (approximately)?
A) BRL 4.0 million
B) BRL 6.8 million
C) BRL10.0 million
D) BRL10.8 million
E) BRL14.7 million
Free
Multiple Choice
Q 37Q 37
You invest BRL 10 million in inventory for your Brazilian factory. You expect to make no further investment or disinvestment in inventory over the 5-year life of your project. You expect the inventory will retain its real value. Inventory costing is done on a LIFO (last in/first out) basis. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. If you plan on selling the inventory in five years, your expected tax liability on the sale is about ______.
A) BRL 0.0 million
B) BRL 0.3 million
C) BRL 1.6 million
D) BRL1.9 million
E) BRL4.0 million
Free
Multiple Choice