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.
strengthening euro
According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
a risk-adjusted discount rate
When evaluating international project cash flows, which of the following factors is relevant?
all of the above (future inflation, blocked funds, exchange rates)
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.
true
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.
true
When assessing a German project administered by a German subsidiary of a US-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?
the German government's tax rate
In capital budgeting analysis, the use of a cumulative NPV is useful for:
determining the time required to achieve a positive NPV
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
the parent's cost of capital
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 ____.
depreciates; decreases
Assume an MNC establishes a subsidiary in a country 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:
the parent finances the entire investment
If an MNC exports to a country and 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 su
adversely; favorably
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 mill
about NZ$11 million
A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
volatile
If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.
false
Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ___ over time, and if the interest rate in that country is relatively ___.
depreciate; low
If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.
true
Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ___ against their home currency, and if their cost of capital is relatively ____.
appreciate; low
The discrepancy between the feasibility of a project in a host country from the perspective of the US parent versus the subsidiary administering the project is likely to be greater for projects in countries where:
the currency of the host country is expected to depreciate consistently
The break-even salvage value of a particular project is the salvage value necessary to:
achieve a zero net present value for the project
The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ___ in the host country and there are investment opportunities in the host country.
very low; limited
A foreign project in Hungary and another in Japan had the same perceived value from the US parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-e
higher than that for the Hungarian project
A US-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determined that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead o
lower
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway.... Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
$1,048,829
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway.... Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cat flow in Year 4 represents the salvage value. Baps is not completely certain that the salvage value will be thi
none of the above
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway.... Refer to Exhibit 14-1. Baps is also understand regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV
$645,147
Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,50
-$94,183
Which of the following is not a characteristic of a tax system that an MNC would consider when conducting a tax assessment of a country?
corporate income taxes
Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.
tax credits
If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.
high; parent's
If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.
none of the above (positively, negatively, either positively or negatively depending on the percentage of appreciation)
When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:
the foreign project should enhance the value of both the parent and the subsidiary
The ___ is (are) likely the major source of funds to support a particular project.
initial investment
Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.
false
The required rate of return of a project is ___ the MNC's cost of capital.
any of the above, depending on the specific project (greater than, less than, the same as)
Holding other factors constant, an international project's NPV is ___ related to the size of the initial investment and ___ related to the project's required rate of return.
negatively; negatively
Holding other factors constant, an international project's NPV is ___ related to consumer demand and ___ related to the project's salvage value.
positively; positively
Everything else being equal, the ___ the depreciation expense is in a given year, the ___ a foreign project's NPV will be.
higher; higher
A foreign project generates a negative cash flow in Year 1 an positive cash flows in Years 2 through 5. The NPV for they project will be higher if the foreign currency ___ in Year 1 and ___ in Years 2 through 5.
depreciates; appreciates
Which of the following is not a factor that should be considered in multinational capital budgeting?
blocked funds
When conducting a capital budgeting analysis to account for effects of exchange rate movements for a foreign project, inflation ___ included explicitly in the cash flow analysis, and debt payments by the subsidiary ___ included explicitly in the cash flow
should be; should be
As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.
increases; increases
In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.
false
The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.
true
The required rate of return used to discount relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.
true
In multinational capital budgeting, depreciation is treated as a cash outflow
false
No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.
false
If a foreign project is financed with a subsidiary's retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.
true
If a host government restricts the remittance from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project.
true
Some capital budgeting projects contain real options in that they provide opportunities to obtain or eliminate specified real assets such as machinery or manufacturing plant.
true
Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.
true
Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.
false
Fixed costs are expenses that are not affected by consumer demand, so they can be estimated without an estimate of that demand when doing multinational capital budgeting.
true
If a parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.
true
If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.
true
Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.
true
The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.
true
The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables
true
____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.
withholding taxes imposed by the host government
___ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
discriminant analysis
Which of the following is not true regarding simulation?
It can only be used for one variable at a time
An argument for an MNC to have a debt-intensive capital structure is that:
it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent
MNC's headquartered in Japan and Germany tend to use a higher degree of financial leverage than MNC's headquarters in the United States.
true
According to the text, the cost of capital for an international project will:
none of the above (always be greater/less/same than the firm's cost of capital)
Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?
high exposure to exchange rate fluctuations
The capital asset pricing theory is based on the premise that:
only systematic variability in cash flows is relevant
Which of the following is a corporate characteristic that may affect an MNC's capital structure decision?
all of the above may affect an MNC's capital structure decision (MNC's cash flow stability, access to retained earnings, credit risk)
An MNC's "global" capital structure is:
the combination of the capital structures of the parent and all of its subsidiaries.
An MNC's "global" target capital structure is:
sometimes different from the MNC's "local" capital structure (at a subsidiary)
One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the
parent and managers at the subsidiary who are minority shareholders
One argument for why subsidiaries should be allowed to issue their own stock is that:
having local investors as minority shareholders may offer some protection against adverse actions by the local government
The cost of capital incurred by U.S.-based MNCs is primarily driven by the global stock market volatility.
false
Other things being equal, countries with relatively ___ populations and ___ inflation are more likely to have a low cost of capital.
old; low
Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are likely to rescue them (in the event of failure), and if their home countries are ___ likely to experience a recession.
more; less
Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than that of the U.S. and ____ than that of Japan.
higher; higher
According to the text, the cost of debt in each country:
changes over time, and these changes are positively correlated among countries
The term "local capital structure" is used in the text to represent the:
capital structure of a subsidiary of a particular MNC
Which of the following is not an external source of debt for an MNC?
borrowing in the federal funds market
An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
true
Assume that the risk-free interest rate in the US is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to
higher; lower
When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.
increases; increases
Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?
the MNC's exposure to exchange rate risk
According to your text, which of the following is not a factor that increases an MNC's cost of capital?
an increase in the size of the MNC
The ___ an MNC, the ___ its cost of capital is likely to be.
larger; lower
Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?
21%
Which of the following is not a reason provided in the text for why the cost of debt can very across countries?
a high price-earnings multiple
In general, MNCs probably prefer to use ___ foreign debt when their foreign subsidiaries are subject to ___ local interest rates.
more; low
In general, MNCs probably prefer to use ___ foreign debt when their foreign subsidiaries are subject to potentially local currencies.
B and C (more; weak, less; strong)
A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
retained earnings
The ___ an MNC's cost of capital, the ___ will be the net present value for a proposed project with a given set of expected cash flows.
lower; higher
To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.
independent of; less
In general, an MNC that is ___ exposed to exchange rate fluctuations will usually have a ___ distribution of possible cash flows in future periods.
more; wider
According to the CAPM, the required rate of return on a stock is a positive function of all of the following except:
the company's earnings
The lower a project's beta, the ___ is the project's ___ risk.
lower; systematic
Capital asset pricing theory suggests that ___ risk of projects can be ignored and that ___ risk is relevant.
unsystematic; systematic
Capital asset pricing theory would most likely suggest that the cost of capital is generally ___ for ___.
lower; MNCs
When assuming that investors in the US are most concerned with their exposure to the US stock market, it is acceptable to use the US market when measuring a US based MNC's project's beta.
true
Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
lower than its cost of equity
Normally, each subsidiary of an MNC will issue its own stock where it does business.
false
In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital
false
Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.
true
Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of debt in many less developed countries.
false
In the US, government rescues of failing firms are not as common as they are in some other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for US firms than for firms in countr
true
An MNC's cost of equity is unrelated to the local risk-free rate
false
Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have c
false
Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital
false
Since the cost of funds can vary among markets, an MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.
true
Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms
true
An MNC with stable cash flows can probably handle more debt than an MNC with erratic cash flows.
true
When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs
false
There is an advantage to using equity rather than financing because dividend payments are tax deductible.
false
An MNC's cost of capital may differ from that of domestic firms because of the MNC's access to international capital markets, its exposure to exchange rate risk, and other characteristics
true
When a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.
true
The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.
false
The cost of an MNC's capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity.
true
It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries
false
It is probably easier to estimate the cost of equity than it is to estimate the cost of debt
false
When a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ___ price, so the firm incurs a ____ cost of equity.
low; high
If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.
true
Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.
higher; higher
The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:
all of the above (the risk-free rate of interest, the market rate of return, the stock's beta)
Which of the following is not a source of equity for an MNC?
all of the above are sources of equity for an MNC (retained earnings, a global equity offering, a domestic equity offering)
Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average
10.8%
The US risk-free rate is currently 3%. The expected US market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
11.4%
Which of the following is least likely to influence an MNC's capital structure?
the MNC's decision to invest in excess cash in a Treasury bill rather than in a bank
Which of the following is not a host country characteristic that can affect an MNC's capital structure decision?
political decisions to increase penalties for criminals in the host country
If the parent ___ the debt of the subsidiary, the subsidiary's borrowing capacity might be ___.
C and D (does not back; reduced, backs; increased)
___ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
private placements
Most MNCs obtain equity funding:
in their home country