精选国际财务管理答案Chap018.docx
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精选国际财务管理答案Chap018.docx
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精选国际财务管理答案Chap018
CHAPTER18INTERNATIONALCAPITALBUDGETING
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Whyiscapitalbudgetinganalysissoimportanttothefirm?
Answer:
Thefundamentalgoalofthefinancialmanageristomaximizeshareholderwealth.CapitalinvestmentswithpositiveNPVorAPVcontributetoshareholderwealth.Additionally,capitalinvestmentsgenerallyrepresentlargeexpendituresrelativetothevalueoftheentirefirm.Theseinvestmentsdeterminehowefficientlyandexpensivelythefirmwillproduceitsproduct.Consequently,capitalexpendituresdeterminethelong-runcompetitivepositionofthefirmintheproductmarketplace.
2.WhatistheintuitionbehindtheNPVcapitalbudgetingframework?
Answer:
TheNPVframeworkisadiscountedcashflowtechnique.Themethodologycomparesthepresentvalueofallcashinflowsassociatedwiththeproposedprojectversusthepresentvalueofallprojectoutflows.Ifinflowsareenoughtocoveralloperatingcostsandfinancingcosts,theprojectaddswealthtoshareholders.
3.Discusswhatismeantbytheincrementalcashflowsofacapitalproject.
Answer:
Incrementalcashflowsaredenotedbythechangeintotalfirmcashinflowsandcashoutflowsthatcanbetraceddirectlytotheprojectunderanalysis.
4.Discussthenatureoftheequationsequence,Equation18.2ato18.2f.
Answer:
Theequationsequenceisapresentationofincrementalannualcashflowsassociatedwithacapitalexpenditure.Equation18.2apresentsthemostdetailedexpressionforcalculatingthesecashflows;itiscomposedofthreeterms.Equation18.2bshowsthatthesethreetermsare:
i)incrementalnetprofitassociatedwiththeproject;ii)incrementaldepreciationallowance;and,iii)incrementalafter-taxinterestexpenseassociatedwiththeborrowingcapacitycreatedbytheproject.Note,theincremental“netprofit”isnotaccountingprofitbutrathernetcashactuallyavailableforshareholders.Equation18.2ccancelsouttheafter-taxinteresttermin18.2a,yieldingasimplerformula.Equation18.2dshowsthatthefirsttermin18.2cisgenerallycalledafter-taxnetoperatingincome.Equation18.2eyieldsyetacomputationallysimplerformulabycombiningthedepreciationtermsof18.2c.Equation18.2fshowsthatthefirsttermin18.2eisgenerallyreferredtoasafter-taxoperatingcashflow.
5.WhatmakestheAPVcapitalbudgetingframeworkusefulforanalyzingforeigncapitalexpenditures?
Answer:
TheAPVframeworkisavalue-additivitytechnique.Becauseinternationalprojectsfrequentlyhavecashflowsnotencounteredindomesticprojects,theAPVtechniqueeasilyallowstheanalysttoaddtermstothemodelthatrepresentthespecialcashflows.
6.Relatetheconceptoflostsalestothedefinitionofincrementalcashflow.
Answer:
Whenanewcapitalprojectisundertakenitmaycompetewithanexistingproject(s),causingtheoldproject(s)toexperiencealossinsalesrevenue.Fromanincrementalcashflowstandpoint,thenewproject’sincrementalrevenueisthetotalsalesrevenueassociatedwiththenewprojectminusthelostsalesrevenuefromtheoldproject(s).
7.Whatproblemscanenterintothecapitalbudgetinganalysisifprojectdebtisevaluatedinsteadoftheborrowingcapacitycreatedbytheproject?
Answer:
Ifprojectdebtisgreater(less)thantheborrowingcapacitycreatedbythecapitalproject,andtaxshieldsontheactualnewdebtareusedintheanalysis,theAPVwillbeoverstated(understated)makingtheprojectunjustlyappearmore(less)attractivethanitactuallyis.
8.WhatisthenatureofaconcessionaryloanandhowisithandledintheAPVmodel?
Answer:
Aconcessionaryloanisaloanofferedbyagovernmentalbodyatbelowthenormalmarketrateofinterestasanenticementforafirmtomakeacapitalinvestmentthatwilleconomicallybenefitthelender.ThebenefittotheMNCisthedifferencebetweenthefacevalueoftheconcessionaryloanconvertedintothehomecurrencyandthepresentvalueofthesimilarlyconvertedconcessionaryloanpaymentsdiscountedattheMNC’snormaldomesticborrowingrate.Theloanpaymentswillyieldapresentvaluelessthanthefaceamountoftheconcessionaryloanwhentheyarediscountedatthehighernormalrate.ThisdifferencerepresentsasubsidythehostcountryiswillingtoextendtotheMNCiftheinvestmentismade.ThebenefittotheMNCoftheconcessionaryloanishandledintheAPVmodelviaaseparateterm.
9.WhatistheintuitionofdiscountingthevariouscashflowsintheAPVmodelatspecificdiscountrates?
Answer:
TheAPVmodelisavalue-additivitytechniquewheretotalvalueisdeterminedbythesumofthepresentvaluesoftheindividualcashinflowsandoutflows.Eachcashflowwillnotnecessarilyhavethesameamountofriskassociatedwithit.Toaccountforriskdifferencesintheanalysis,eachcashflowisdiscountedataratecommensuratewiththeinherentriskinessofthecashflow.
10.IntheModigliani-Millerequation,whyisthemarketvalueoftheleveredfirmgreaterthanthemarketvalueofanequivalentunleveredfirm?
Answer:
Theleveredfirmhasagreatermarketvaluebecauselessmoneyistakenfromthefirmbythegovernmentintaxesduetotax-deductibleinterestpayments.Thus,thereismorecashleftforinvestorgroupsthanwhenthefirmisfinancedwithall-equityfunds.
11.Discussthedifferencebetweenperformingthecapitalbudgetinganalysisfromtheparentfirm’sperspectiveasopposedtotheprojectperspective.
Answer:
Thegoalofthefinancialmanageroftheparentfirmistomaximizeitsshareholders’wealth.AcapitalprojectofasubsidiaryoftheparentmayhaveapositiveNPV(orAPV)fromthesubsidiary’sperspectiveyethaveanegativeNPV(orAPV)fromtheparent’sperspectiveifcertaincashflowscannotberepatriatedtotheparentbecauseofremittancerestrictionsbythehostcountry,orifthehomecurrencyisexpectedtoappreciatesubstantiallyoverthelifeoftheproject,yieldingunattractivecashflowswhenconvertedintothehomecurrencyoftheparent.Additionally,ahighertaxrateinthehomecountrymaycausetheprojecttobeunprofitablefromtheparent’sperspective.Anyofthesereasonscouldresultintheprojectbeingunattractivetotheparentandtheparent’sstockholders.
12.Definetheconceptofarealoption.Discusssomeofthevariousrealoptionsafirmcanbeconfrontedwithwheninvestinginrealprojects.
Answer:
ApositiveAPVprojectisacceptedundertheassumptionthatallfutureoperatingdecisionswillbeoptimal.Thefirm’smanagementdoesnotknowattheinceptiondateofaprojectwhatfuturedecisionsitwillbeconfrontedwithbecauseallinformationconcerningtheprojecthasnotyetbeenlearned.Consequently,thefirm’smanagementhasalternativepaths,oroptions,thatitcantakeasnewinformationisdiscovered.Theapplicationofoptionspricingtheorytotheevaluationofinvestmentoptionsinrealprojectsisknownasrealoptions.
Thefirmisconfrontedwithmanypossiblerealoptionsoverthelifeofacapitalasset.Forexample,thefirmmayhaveatimingoptionaswhentomaketheinvestment;itmayhaveagrowthoptiontoincreasethescaleoftheinvestment;itmayhaveasuspensionoptiontotemporarilyceaseproduction;and,itmayhaveanabandonmentoptiontoquittheinvestmentearly.
13.DiscussthecircumstancesunderwhichthecapitalexpenditureofaforeignsubsidiarymighthaveapositiveNPVinlocalcurrencytermsbutbeunprofitablefromtheparentfirm’sperspective.
Answer:
TheprojectNPVmightbenegativefromtheparentfirm’sperspectivewhenitispositiveinlocalcurrencytermsifallforeigncashflowscannotbelegallyrepatriatedtotheparentfirm.Additionally,ifthePPPassumptiondoesnothold,suchthattheactualfuturerealexchangeratehasdepreciatedinforeigncurrencyterms,theafter-taxcashflowswillyieldlessunitsofhomecurrencyfromtheparentfirm’sperspectivethanexpected,possiblyresultinginanegativeNPV.
PROBLEMS
1.TheAlphaCompanyplanstoestablishasubsidiaryinHungarytomanufactureandsellfashionwristwatches.Alphahastotalassetsof$70million,ofwhich$45millionisequityfinanced.Theremainderisfinancedwithdebt.Alphaconsidereditscurrentcapitalstructureoptimal.TheconstructioncostoftheHungarianfacilityinforintsisestimatedatHUF2,400,000,000,ofwhichHUF1,800,000,000istobefinancedatabelow-marketborrowingratearrangedbytheHungariangovernment.Alphawonderswhatamountofdebtitshoulduseincalculatingthetaxshieldsoninterestpaymentsinitscapitalbudgetinganalysis.Canyouofferassistance?
Solution:
TheAlphaCompanyhasanoptimaldebtratioof.357(=$25milliondebt/$70millionassets)or35.7%.Theprojectdebtratiois.75(=HUF1,800/HUF2,400)or75%.Alphawilloverstatethetaxshieldoninterestpaymentsifitusesthe75%figurebecausetheproposedprojectwillonlyincreaseborrowingcapacitybyHUF856,800,000(=HUF2,400,000,000x.357).
2.ThecurrentspotexchangerateisHUF250/$1.00.Long-runinflationinHungaryisestimatedat10percentannuallyand3percentintheUnitedStates.IfPPPisexpectedtoholdbetweenthetwocountries,whatspotexchangeshouldoneforecastfiveyearsintothefuture?
Solution:
HUF250(1+.10)5/(1+.03)5=HUF347.31/$1.00.
3.TheBetaCorporationhasanoptimaldebtratioof40percent.Itscostofequitycapitalis12percentanditsbefore-taxborrowingrateis8percent.Givenamarginaltaxrateof35percent,calculate(a)theweighted-averagecostofcapital,and(b)thecostofequityforanequivalentall-equityfinancedfirm.
Solution:
(a)K=(1-.40).12+(.40).08(1-.35)
=.
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