Chapter 14 Multinational Capital Budgeting

Chapter 14 Multinational Capital Budgeting

1. 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. A) strengthening euro B) stable euro C) weak euro

D) B and C are both ideal.

ANSWER: A

2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use: A) a risk-adjusted discount rate. B) payback period.

C) certainty equivalents. D) simulation.

ANSWER: D

3. When evaluating international project cash flows, which of the following factors is relevant?

A) future inflation. B) blocked funds. C) exchange rates. D) all of the above

ANSWER: D

4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger. A) true. B) false.

ANSWER: A

5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project. A) true. B) false.

ANSWER: A

6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis? A) the withholding tax rate. B) the euro's exchange rate.

C) the U.S. tax rate on earnings remitted to the U.S. D) the German government's tax rate. E) A and C

ANSWER: D

7. In capital budgeting analysis, the use of a cumulative NPV is useful for: A) determining a probability distribution of NPVs.

B) determining the time required to achieve a positive NPV.

C) determining how the required rate of return changes over time. D) determining how the cost of capital changes over time. E) A and B

ANSWER: B

8. 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 in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:

A) the cost of borrowing funds in the U.K. B) the cost of borrowing funds in the U.S. C) the parent's cost of capital. D) A and B

ANSWER: C

9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso _______, the dollar amount of remitted funds _______.

A) appreciates; decreases B) depreciates; is unaffected C) appreciates; is unaffected D) depreciates; decreases E) B and C

ANSWER: D

10. Assume an MNC establishes a subsidiary where it has no other existing business.The present value of parent cash flows from this subsidiary is more sensitive to exchange rate

movements when:

A) the subsidiary finances the entire investment by local borrowing. B) the subsidiary finances most of the investment by local borrowing. C) the parent finances most of the investment. D) the parent finances the entire investment.

ANSWER: D

11. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be _______ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be _______ affected by the project. A) adversely; adversely B) favorably; adversely C) favorably; favorably D) adversely; favorably

ANSWER: D

12. 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%. The required rate of return on this project is 18%. 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? 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.

ANSWER: E

SOLUTION:

1. NZ$12,000,000 x $.60 = $7,200,000 $7,200,000/(1.18) = $6,101,695 2. NZ$30,000,000 x $.60 = $18,000,000 $18,000,000/(1.18)2 = $12,927,320

$19,029,015

Break-even

salvage = [Initial outlay - PV of cash flows] (1 + k)m

value

= [$30,000,000 - $19,029,015] (1.18)2

= $15,276,000

Break-even salvage

value in NZ$ = $15,276,000/$.60 = NZ$25,459,999