tb15.docx
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tb15
PARTVValuationandtheStructureofMultinationalOperations
Chapter15Cross-BorderCapitalBudgeting
True/False
1.Becauseofdifferentcurrenciesandinterestratesineachcountry,capitalbudgetinganalysisforcross-borderinvestmentsisradicallydifferentfromcapitalbudgetinganalysisfordomesticinvestments.
ANS:
False.Althoughtheopportunitiesandrisksdiffer,theunderlyinganalysisisthesame.
2.Inordertocompensatefortheeffectsofinflation,nominalcashflowsshouldbediscountedwitharealdiscountrate.
ANS:
False.Nominal(real)cashflowsmustbediscountedwithanominal(real)discountrate.
3.Inperfectfinancialmarketsinwhichtheinternationalparityconditionshold,discountingmaybedoneeitherinthedomesticorintheforeigncurrency.
ANS:
True.
4.Thediscountrateshouldalwaysbeintheparentfirm’sfunctionalcurrency.
ANS:
False.Thediscountrateshouldbeinthecurrencyinwhichthecashflowsarereceived.
5.Iftheinternationalparityconditionshold,thennominalrequiredreturnsintwodifferentcurrenciesareidenticaloncomparable-riskassets.
ANS:
False.Real(notnominal)requiredreturnsareequal.
6.Incapitalbudgeting,repatriationoccurswhenexpatriateemployeesreturntotheparentfirm.
ANS:
False.Repatriationistheactofremittingcashflowstotheparentfirm.
7.Relevantcashflowsfromtheparent’spointofviewarethosethatareremittedtotheparentinitsfunctionalcurrency.
ANS:
True.
8.Theonlyrelevantcashflowsfromtheproject’spointofviewarethosethataretoberemittedtotheparentintheparent’sfunctionalcurrency.
ANS:
False.Cashflowsinthelocalcurrencyareimportantfromtheproject’sperspective.
9.Blockedfundsarecashflowsgeneratedbyaforeignprojectthatarenotimmediatelyrepatriatedtotheparentbecausetheprojecthasbetteropportunitiesthantheparentcorporation.
ANS:
False.Blockedfundsareblockedbecauseofrestrictionsimposedbyhostgovernments.
10.Blockedfundsinaforeigncountryshouldbediscountedattheriskfreerateofinterestintheforeigncurrency.
ANS:
False.Thediscountrateshoulddependontheriskinessoftheasset(s)inwhichtheyareinvested.
11.Cashflowsfromsubsidizedfinancingarenecessarilytiedtoaspecificproject.
ANS:
False.Financialsubsidiesaresometimesseparablefromanyparticularproject.
12.Accordingtofinancetheory,thevalueofsubsidizedfinancingthatisseparablefromaparticularprojectmuststillbeaddedtothevalueoftheprojectincalculatingprojectvalue.
ANS:
False.Separablefinancialsubsidiesmaynotbeincrementalcashflowstoaparticularproject.
13.Developingcountriessometimesrequirethatforeigncompaniesinvestingcapitallocallytakeonadditionaldevelopmentorinfrastructureprojects.
ANS:
True.
14.Project-specificexpropriationriskhasnoeffectonexpectedfuturecashflowsfromaproject,butcanincreasethediscountrate.
ANS:
False.Asset-specificrisks(includingexpropriationrisk)doinfluencecashflowsbutareusuallynotsystematicrisksandhencedonotaffectthediscountrate.
15.Managerscareonlyaboutsystematicriskandhenceshouldnothedgepoliticalrisk.
ANS:
False.Undiversifiedmanagerscareabouttotalriskandsohaveanincentivetohedge.
MultipleChoice
1.Expectedfuturecashflowsareestimatedby____onlyincrementalcashflowsand____allopportunitycosts.
a.including;including
b.including;excluding
c.excluding;including
d.excluding;excluding
e.noneoftheabove
ANS:
A
2.Nominalcashflowsinaforeigncurrencyshouldbediscounted____.
a.atanominaldiscountrateintheforeigncurrency
b.ataratereflectingtheparent’sopportunitycostofcapitalinthedomesticcurrency
c.ataweightedaveragecostofcapital
d.atthecostofdebt
e.atthecostofequity
ANS:
A
3.Whichofthefollowingisfalse?
a.Cashflowsinaparticularcurrencyshouldbediscountedinthatcurrency.
b.Cashflowsshouldbediscountedattheopportunitycostofcapital.
c.Cashflowstoequityshouldbediscountedattheweightedaveragecostofcapital.
d.Nominalcashflowsshouldbediscountedatnominaldiscountrates.
e.Realcashflowsshouldbediscountedatrealdiscountrates.
ANS:
C
4.Whichofstepsa)throughd)isinappropriatewhendiscountingforeigncurrencycashflowsusingtheparent’sperspective?
a.Estimateexpectedfuturecashflowsfromtheprojectintheforeigncurrencyandputthemonatimeline.
b.Convertexpectedfuturecashflowsintothedomesticcurrencyatthecurrentspotexchangerate.
c.Identifytheappropriaterisk-adjusteddiscountrateinthedomesticcurrencyfortheproject.
d.CalculatetheNPVinthedomesticcurrency.
e.Eachoftheaboveisappropriate.
ANS:
B
5.IfaprojecthasapositiveNPVfromboththeparent’sandtheproject’sperspective,thentheparentfirmshould____.
a.accepttheproject
b.rejecttheproject
c.accepttheprojectandtrytocapturethevalueintheforeigncurrencytoday
d.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncurrency
e.noneoftheabove
ANS:
A
5.IfaprojecthasapositiveNPVfromtheparent’sperspectivebutanegativeNPVfromtheproject’sperspective,thentheparentfirmshould____.
a.accepttheproject
b.rejecttheproject
c.accepttheprojectandtrytocapturethevalueintheforeigncurrencytoday
d.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncurrency
e.noneoftheabove
ANS:
D
6.IfaprojecthasanegativeNPVfromtheparent’sperspectivebutapositiveNPVfromtheproject’sperspective,thentheparentfirmshould____.
a.accepttheproject
b.rejecttheproject
c.accepttheprojectandtrytocapturethevalueintheforeigncurrencytoday
d.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncountry
e.noneoftheabove
ANS:
C
7.IfaprojecthasapositiveNPVbuttheNPVisgreaterfromtheproject’sthanfromtheparent’sperspective,thentheparentfirmshould____.
a.accepttheproject
b.rejecttheproject
c.accepttheprojectandhedgetheforeigncurrencycashflows
d.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncountry
e.noneoftheabove
ANS:
C
8.AprojecthasanetpresentvalueofNPV€=€10,000.Inordertoinvestintheproject,theGermangovernmentrequiresthatyouundertakeanotherprojectwiththefollowingcashflowstream:
CF0€=-€5000,E[CF1€]=€1000,E[CF2€]=€1000,andE[CF3€]=€1000.Theappropriatediscountrateforthisprojectisi€=10%.Whataffectdoesthistie-inprojecthaveonyouroriginalNPV€estimate?
a.ItincreasesNPV€from€10,000to€12,513.15.
b.ItincreasesNPV€from€10,000to€17,486.85.
c.ItdecreasesNPV€from€10,000to€7,486.85.
d.ItincreasesNPV€from€10,000to€2,513.15.
e.ItisaseparateprojectandhasnoeffectonNPV.
ANS:
C
9.SupposethegovernmentofGermanyoffersyoua3-year,non-amortizing€50,000loantoenticeyoutoundertakeaparticularprojectwithinitsborders.Inaddition,thegovernmentoffersyouanattractiverateofi€=10%whenloansofsimilarriskyieldareturnofi€=15%.TheGermantaxrateis50%.Whatisthepresentvalueoftheinterestsubsidyonthisloan?
a.€2854.03
b.€3108.56
c.€3250.66
d.€4895.60
e.€5708.06
ANS:
C
10.RefertoExhibitT15.1.AssumethattheappropriatediscountrateforthecashflowsinExhibitT15.1isi€=5%.WhatistheNPV€ineuros?
a.€25,598.43
b.€26,232.48
c.€27,232.48
d.€29,000.00
e.€29,432.52
ANS:
B
11.RefertoExhibitT15.1.Assumetheinternationalparityconditionshold.ThecurrentspotrateisS0£/€=£2/€.Ifi£=7%andi€=5%,whatistheexpectedfuturespotrate[E(S3£/€)]attimet=3?
a.£1.890/€
b.£1.963/€
c.£2.020/€
d.£2.116/€
e.£2.250/€
ANS:
D
12.RefertoExhibitT15.1.Assumetheinternationalparityconditionshold.ThecurrentspotrateisS0£/€=£2/€.Ifi£=7%andi€=5%,whatisNPV£?
a.£48,591.54
b.£50,786.92
c.£52,464.96
d.£54,527.33
e.£55,328.10
ANS:
C
13.RefertoExhibitT15.1.Assumetheinternationalparityconditionsdonothold.Expectedfuturespotratesare:
E(S1£/€)=£2.060/€,E(S2£/€)=£2.100/€,andE(S3£/€)=£2.220/€.CalculateNPV£byconvertingeurostopoundsattheexpectedfuturespotratesanddiscountinginpounds.AssumeS0£/€=£2/€andi£=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
ANS:
D
14.RefertoExhibitT15.1.Supposethereisa10%chancethatthehostgovernmentwillseizetheassetsoftheprojectinyear3.Iftheassetsarenotseized,youexpecttoreceivethecashflowsasshown.Iftheassetsareseized,youexpecttoreceiverepatriatedfundsinyear1andyear2only.Assuminginternationalparityconditionshold,S0£/€=£2/€,i€=5%,andi£=7%,whatistheNPVinpounds?
a.£42,431.49
b.£47,018.46
c.£47,368.32
d.£49.652.21
e.£50,737.29
ANS:
E
15.RefertoExhibitT15.1.Supposethatbeginninginyear1,thereisa10%chanceeachyearthehostgovernmentwillseizetheproject’sassets.Iftheassetsarenotseized,youexpecttoreceivethecashflowsasstatedabove.Iftheassetsareseizedinaparticularyear,youexpecttoreceivenorepatriatedfundsthereafter.Assuminginternationalparityconditionshold,S0£/€=£2/€,i€=5%,andi£=7%,whatistheNPVinpounds?
a.£42,431.49
b.£47,018.46
c.£47,368.32
d.£49.652.21
e.£50,737.29
ANS:
A
16.RefertoExhibitT15.1.Assumethat50%oftheproject’sexp
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