Foreign investment, MNCs, exchange rates, DFI, Klimewsky

Direct foreign investment is perceived by foreign governments to:

a. be a cause of national problems.
b. be a remedy for national problems.
c. be a cause and a remedy for national problems.
d. have no impact on national problems.

_____ is not a disadvantage of direct foreign investment.

a. The expense of establishing a foreign subsidiary
b. The uncertainty of inflation and exchange rate movements
c. Political risk
d. All of these are disadvantages of direct foreign investment

Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?

a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b. Host governments generally perceive DFI as a remedy to eliminate a country's political problems.
c. The ability of a host government to attract DFI is dependent on the country's markets and resources.
d. Some types of DFI will be more attractive to some governments than to others.
e. All of these are true.

Which of the following is not true regarding the efficient frontier considered by MNCs?

a. There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.
b. The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects.
c. Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
d. All of these are true.

_______ is not a revenue-related motive for direct foreign investment.

a. Attracting new sources of demand
b. Fully benefiting from economies of scale
c. Exploiting monopolistic advantages
d. Entering profitable markets

________ is not a cost-related motive for direct foreign investment.

a. Exploiting monopolistic advantages
b. Fully benefiting from economies of scale
c. Uses foreign factors of production
d. Using foreign raw materials

To fully benefit from economies of scale, an MNC should:

a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other operations.

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

a. the taxes are the same as in the U.S.
b. there are no blocked fund restrictions.
c. the currency of the host country is expected to depreciate consistently.
d. none of these; a discrepancy is not possible.

Exchange rates for purposes of multinational capital budgeting:

a. are very difficult to forecast.
b. can be easily hedged with currency swaps.
c. are much more important, as they do not affect the cash flows of the multinational project.
d. all of these.

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:

a. positively.
b. negatively.
c. either positively or negatively, depending on the percentage appreciation.
d. none of these.

The required rate of return of a project is ______ the MNC's cost of capital.

a. greater than
b. less than
c. the same as
d. any of these, depending on the specific project

Which of the following is not an example of multinational restructuring?

a. an MNC builds a new subsidiary in Malaysia.
b. an MNC acquires a company in Germany.
c. an MNC downsizes its operations in Hong Kong.
d. an MNC shifts some production from its Swiss subsidiary to its Dutch subsidiary.
e. All of these are examples of multinational restructuring.

Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?

a. the firm can immediately expand its international business.
b. the firm benefits from existing customer relationships.
c. international acquisitions are generally cheaper than the establishment of a new subsidiary.
d. an international acquisition typically generates quicker and larger cash flows than the establishment of a new subsidiary.
e. All of these are advantages of international acquisitions.

Scenario 15-1

The information below refers to the following question(s).

Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

- Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

- Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are YR300 million. Revenues are expected to increase by 9% over the following two years.

- Cost of goods sold are expected to be 60% of revenues.

- Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

- The Malaysian tax rate on the target's earnings is expected to be 30%.

- Depreciation expenses are expected to be MYRI5 million per year for each of the next three years.

- The target will need MYR9 million in cash each year to support existing operations.

- The target's current stock price is MYR35 per share. The target has II million shares outstanding.

- Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.

- Klimewsky's required rate of return on similar projects is 13%.

25. Refer to Scenario 15-1. The target's board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage?
premium you should be willing to offer?

a. 30.0%.
b. 25.9%.
c. You should not offer any premium because the market's valuation is below Klimewsky's
valuation.
d. none of these.

Which of the following would probably /lot cause the stock price of a foreign target to decrease?

a. its expected cash flows decline.
b. general stock market conditions in the foreign country are deteriorating.
c. investors anticipate that the target will be acquired.
d. All of these will cause the target's stock price to decrease.

Which of the following types of international restructuring is probably the most difficult to value by an MNC?

a. international acquisition.
b. newly privatized foreign business.
c. international alliance.
d. international divestiture.

Regarding the valuation of privatized business in less developed countries, can normally be estimated with a high degree of accuracy.

a. future cash flows
b. future exchange rate movements
c. the proper discount rate
d. none of these

Firms based in tend to acquire more U.S. target firms than the other countries listed here.

a. Canada
b. Japan
c. Germany
d. Mexico

The earnings of a private European firm are â?¬5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as million Euros.

a. 2.4
b. 60.0
c. 41.7
d. 12

Country risk assessment should be used when:

a. determining whether to establish a subsidiary in a foreign country.
b. determining whether to continue business in a foreign country.
c. both of these.
d. neither of these.

According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to:

a. compare each form of a country risk rating to a benchmark level.
b. estimate the effect of each form of country risk on cash flows.
c. estimate the effect of each form of country risk on the income statement and balance sheet.
d. adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs.

The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with:

a. insurance that covers losses on multilateral netting procedures.
b. exchange rate risk insurance.
c. political risk insurance.
d. guarantees that MNCs will receive the same taxation treatment by the host government as local firms.
e. guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.

Country risk analysis is important because it:

a. can be used by MNCs as a screening device to avoid countries with excessive risk.
b. can be used by MNCs to monitor countries where the MNC is presently engaged in international business.
c. can be used to improve the analysis used to make long-term investing or financing decisions.
d. all of these.

According to the text, MNCs:

a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of these.

Other things being equal, countries with relatively ____ populations and ___ inflation are more likely to have a low cost of capital.

a. young; high
b. old; high
c. old; low
d. young; 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.

a. more; more
b. less; more
c. less; less
d. 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.

a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

According to the text, the cost of debt:

a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.

The term "local target capital structure" is used in the text to represent the:

a. average capital structure of local firms where the MNC's subsidiary is based.
b. average capital structure of local firms where the MNC's parent is based.
c. desired capital structure of a subsidiary of a particular MNC.
d. desired capital structure of a particular MNC overall (including all subsidiaries).

The term "global capital structure" is used in the text to represent the:

a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic firms across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

Which of the following is not a factor that favorably affects an MNC's cost of capital, according to the text?

a. exchange rate risk.
b. size.
c. access to international capital markets.
d. international diversification.

Capital asset pricing theory suggests that ______ risk of projects can be ignored and that _____ risk is relevant.

a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematic

When an MNC is considering financing a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to:

a. derive net present values based on the weighted average cost of capital.
b. adjust the weighted average cost of capital for the risk differential.
c. derive the net present value of the equity investment.
d. none of these.

Solution Summary

Response discusses the foreign investment, MNCs, exchange rates, DFI, Klimewsky