tb15

KirtC.Butler,MultinationalFinance,3rdedition111PARTVValuationandtheStructureofMultinationalOperationsChapter15Cross-BorderCapitalBudgetingTrue/False1.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.KirtC.Butler,MultinationalFinance,3rdedition112ANS:False.Separablefinancialsubsidiesmaynotbeincrementalcashflowstoaparticularproject.13.Developingcountriessometimesrequirethatforeigncompaniesinvestingcapitallocallytakeonadditionaldevelopmentorinfrastructureprojects.ANS:True.14.Project-specificexpropriationriskhasnoeffectonexpectedfuturecashflowsfromaproject,butcanincreasethediscountrate.ANS:False.Asset-specificrisks(includingexpropriationrisk)doinfluencecashflowsbutareusuallynotsystematicrisksandhencedonotaffectthediscountrate.15.Managerscareonlyaboutsystematicriskandhenceshouldnothedgepoliticalrisk.ANS:False.Undiversifiedmanagerscareabouttotalriskandsohaveanincentivetohedge.MultipleChoice1.Expectedfuturecashflowsareestimatedby____onlyincrementalcashflowsand____allopportunitycosts.a.including;includingb.including;excludingc.excluding;includingd.excluding;excludinge.noneoftheaboveANS:A2.Nominalcashflowsinaforeigncurrencyshouldbediscounted____.a.atanominaldiscountrateintheforeigncurrencyb.ataratereflectingtheparent’sopportunitycostofcapitalinthedomesticcurrencyc.ataweightedaveragecostofcapitald.atthecostofdebte.atthecostofequityANS:A3.Whichofthefollowingisfalse?a.Cashflowsinaparticularcurrencyshouldbediscountedinthatcurrency.b.Cashflowsshouldbediscountedattheopportunitycostofcapital.c.Cashflowstoequityshouldbediscountedattheweightedaveragecostofcapital.d.Nominalcashflowsshouldbediscountedatnominaldiscountrates.e.Realcashflowsshouldbediscountedatrealdiscountrates.ANS:C4.Whichofstepsa)throughd)isinappropriatewhendiscountingforeigncurrencycashflowsusingtheparent’sperspective?a.Estimateexpectedfuturecashflowsfromtheprojectintheforeigncurrencyandputthemonatimeline.b.Convertexpectedfuturecashflowsintothedomesticcurrencyatthecurrentspotexchangerate.KirtC.Butler,MultinationalFinance,3rdedition113c.Identifytheappropriaterisk-adjusteddiscountrateinthedomesticcurrencyfortheproject.d.CalculatetheNPVinthedomesticcurrency.e.Eachoftheaboveisappropriate.ANS:B5.IfaprojecthasapositiveNPVfromboththeparent’sandtheproject’sperspective,thentheparentfirmshould____.a.accepttheprojectb.rejecttheprojectc.accepttheprojectandtrytocapturethevalueintheforeigncurrencytodayd.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncurrencye.noneoftheaboveANS:A5.IfaprojecthasapositiveNPVfromtheparent’sperspectivebutanegativeNPVfromtheproject’sperspective,thentheparentfirmshould____.a.accepttheprojectb.rejecttheprojectc.accepttheprojectandtrytocapturethevalueintheforeigncurrencytodayd.rejecttheprojectandcontinuetolookforpositive-NPVprojectsintheforeigncurrencye.noneoftheaboveANS:D6.IfaprojecthasanegativeNPVfromtheparent’sperspectivebutapositiveNPVfromtheproject’sperspective,thentheparentfirmshould____.a.accepttheprojectb.rejecttheproj