Question 1

If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC's required return from acquiring the target will be relatively ____.

Accepted Answer

When an MNC targets a successful foreign company with plans to continue its local business more efficiently, the risk associated with the business is considered low because the business model is already proven to be successful. Consequently, the MNC's required return from acquiring the target would be relatively low, reflecting the lower risk.

Question 2

The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when assessing acquisitions.

Accepted Answer

The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when assessing acquisitions, as well as in other areas such as financial reporting and internal controls.

Question 3

Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.

Accepted Answer

When economic conditions are strong, people have more purchasing power and are more willing to spend on products, leading to a higher demand for those products. As a result, the potential targets are more likely to experience strong demand for their products in the future, leading to higher cash flows.

Question 4

If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.

Accepted Answer

General stock market conditions can indirectly affect the valuation of privately held companies, including foreign targets, as they influence overall economic sentiment, investor behavior, and the availability of financing, which can in turn impact the amount an acquirer has to pay.

Question 5

When viewed as a project, the international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay.

Accepted Answer

This statement is true. An international acquisition typically generates quicker and larger cash flows because it involves purchasing an established company with an existing customer base, products/services, and infrastructure. However, this also requires a larger initial investment compared to establishing a new subsidiary from scratch.

Question 6

The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.

Accepted Answer

The estimated value of the firm can be calculated by multiplying its earnings by the average P/E ratio of similar publicly traded firms: €5 million * 12 = €60 million.

Question 7

Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.

Accepted Answer

It is important for MNCs to continuously assess their foreign acquisitions and investments, as changes in market and political conditions can impact the success of the project. This could lead to a decision to divest from a previously accepted acquisition if it is no longer financially feasible or aligned with the company's strategic goals.

Question 8

An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement.

Accepted Answer

The MNC would prefer to make a bid at a time when the local stock market prices are generally low because it would mean that the target company is undervalued and the MNC could acquire it at a lower price. Additionally, if the MNC acquires the target company when the stock market prices are low, they would have the potential to benefit from any future increase in the stock market prices.

Question 9

If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.

Accepted Answer

If the foreign currency appreciates by the time the acquirer makes payment, the acquisition will indeed be more costly because the acquirer will have to spend more of their own currency to purchase the same amount of foreign currency. The cost of the acquisition changes in the same proportion as the change in the exchange rate because the direct relationship between the value of the foreign currency and the cost in the acquirer's currency.

Question 10

A foreign target's expected future cash flows generally vary among different MNCs valuing the target.

Accepted Answer

Different MNCs may have different projections and assumptions about the target's future cash flows, which can impact their valuation of the target.

Question 11

An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.

Accepted Answer

An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target as they can take advantage of lower tax rates and increase their tax efficiency. This can result in more profits and cash flows for the acquirer. In contrast, an acquirer based in a high-tax country may face higher tax liabilities and lower tax efficiency, resulting in lower cash flows from an acquisition.

Question 12

When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive.

Accepted Answer

This statement is true. MNCs tend to look for countries where they can maximize their growth potential while facing less competition within their industry.

Question 13

When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____.

Accepted Answer

MNCs prefer a country where the growth potential for their industry is high, indicating a large and growing market. However, they would prefer the competition within the industry to not be excessive, as they do not want to engage in cutthroat competition that eats into their profit margins. Therefore, choice C, high growth potential with not excessive competition, would be the most preferred option for MNCs.

Question 14

Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country.

Accepted Answer

An MNC that intends to generate revenues in the host country will be more heavily influenced by the economic conditions in that country. However, an MNC that focuses on exporting from the target's home country may be less impacted by local economic conditions, as their primary market is in other countries.

Question 15

Downsizing reduces expenses but may also reduce productivity and revenue.

Accepted Answer

Downsizing typically involves reducing the size of a company's workforce, which can lead to increased workload and decreased morale among remaining employees. This, in turn, can lead to lower productivity and potentially decreased revenue.

Question 16

Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated.

Accepted Answer

Errors in cash flow or exchange rate estimates could lead to an underestimation of the net present value of acquiring a foreign target.

Question 17

A target's previous cash flows are typically an accurate indicator of future cash flows, especially when the target's cash flows would have to be converted into the acquirer's home currency as they are remitted to the parent.

Accepted Answer

Past cash flows may not accurately predict future cash flows due to various factors such as changes in the business environment, competition, and currency exchange rate fluctuations, especially when converting to the acquirer's home currency.

Question 18

An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.

Accepted Answer

An international acquisition allows a firm to acquire an established customer base and existing relationships, while establishing a new subsidiary would require significant time and resources to build up these relationships.

Question 19

Which of the following would not enhance the value of a target from the acquirer's perspective?

Accepted Answer

Any increase in expected sales or strengthening of subsidiary currency are positive indicators that would enhance the value of the target. However, an increase in required rate of return means that the acquirer would have to generate higher returns to justify the investment, making the target less valuable from the acquirer's perspective.

Question 20

An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a public target.

Accepted Answer

This is generally true, as the premium is typically paid to win over the shareholders of the target company and compensate for the potential growth or synergies that the acquirer expects from the acquisition.

Quiz 15: International Corporate Governance and Control

If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively , and therefore the MNC's required return from acquiring the target will be relatively .