201. A previously undertaken project in a foreign country may no longer be feasible because:
A. the MNC is unable to raise sufficient funds in order to undertake the project.
B. the MNC’s cost of capital has decreased.
C. the host government has increased its tax rates substantially.
D. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Answer
C. the host government has increased its tax rates substantially.
202. Other things being equal, a foreign subsidiary in China would more likely be divestedby the U.S. parent if new information caused the parent to suddenly anticipate that:
A. the Chinese yuan would depreciate in the future.
B. the Chinese yuan would appreciate in the future.
C. the Chinese yuan would remain somewhat stable in the future.
D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Answer
A. the Chinese yuan would depreciate in the future.
203. A macro-assessment of country risk:
A. is adjusted for the particular business of the firm involved.
B. excludes all aspects relevant to a particular firm or project.
C. A and B
D. none of the above
Answer
B. excludes all aspects relevant to a particular firm or project.
204. The checklist approach:
A. requires several inspections of the country being evaluated.
B. requires the use of discriminant analysis to assess country risk.
C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D. involves the collection of independent opinions on country risk.
Answer
C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
205. Insurance purchased to cover the risk of expropriation ___ , and will typicallycover ___
A. will be the same for all firms; only a portion of the firm’s total exposure.
B. will be the same for all firms; all of the firm’s total exposure.
C. will be dependent on the firm’s risk; all of the firm’s total exposure.
D. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.
Answer
D. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.
206. If a foreign country follows the “Purchase Homemade Products” philosophy, the least effective strategy would be for a UK firm to:
A. use a licensing arrangement with a local firm in that country.
B. enter into a joint venture in that country.
C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
D. develop a subsidiary (under the US name) that manufactures products in that
Answer
C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
207. A firm may incorporate a country risk rating into the capital budgeting analysis by:
A. adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark level.
B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
C. A and B
D. none of the above
Answer
B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
208. ___ is(are) not a form of political risk.
A. Exchange rate movements
B. Attitude of consumers in the host country
C. Actions of the host government
D. Blockage of fund transfers
Answer
A. Exchange rate movements
209. When quantifying country risk:
A. weights should be equally allocated among factors.
B. weights should be assigned to the political and financial factors according to their perceived importance.
C. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
D. the derived factors will be identical for all MNCs conducting business in that country.
Answer
B. weights should be assigned to the political and financial factors according to their perceived importance.
210. An argument for MNCs to have a debt-intensive capital structure is:
A. they are well diversified.
B. foreign government tax rules may change over time.
C. exposure to exchange rate fluctuations.
D. exposure to fund blockage.
Answer
A. they are well diversified.
211. The capital asset pricing theory is based on the premise that:
A. only unsystematic variability in cash flows is relevant.
B. only systematic variability in cash flows is relevant.
C. both systematic and unsystematic variability in cash flows are relevant.
D. neither systematic nor unsystematic variability in cash flows is relevant.
Answer
B. only systematic variability in cash flows is relevant.
212. One argument for why subsidiaries should be wholly-owned by the parent is that:
A. the potential conflict of interests between the MNC’s managers and shareholders is avoided.
B. the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
C. the potential conflict of interests between the MNC’s existing creditors is avoid
Answer
B. the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
213. 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
Answer
C. old; low
214. According to the text:
A. the cost of debt for each country is somewhat stable over time.
B. the cost of debt for countries change over time, and these changes are negatively correlated.
C. the cost of debt for countries change over time, and these changes are positively correlat
Answer
C. the cost of debt for countries change over time, and these changes are positively correlat
215. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to your text?
A. exchange rate risk.
B. size.
C. access to international capital markets.
D. international diversification.
Answer
A. exchange rate risk.
216. MNC 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 MNC stock?
A. 21%.
B. 41%.
C. 16%.
D. 13%.
Answer
A. 21%.
217. In general, MNCs probably prefer to use ___ foreign debt when their foreign subsidiaries are subject to potentially ___ local currencies.
A. more; strong
B. more; weak
C. less; strong
D. less; weak
Answer
B. more; weak
218. 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.
A. dependent on; less
B. independent of; less
C. dependent on; more
D. independent of; more
Answer
C. dependent on; more
219. The lower a project’s beta, the ___ is the project’s ___ risk.
A. lower; systematic
B. lower; unsystematic
C. higher; systematic
D. higher; unsystematic
Answer
A. lower; systematic
220. The profitability index is:
A. Net present value/Initial outlay.
B. Initial outlay/Gross present value.
C. Gross present volume/Initial outlay.
D. Gross present value/Net present value.
Answer
C. Gross present volume/Initial outlay.
221. Which of the following is a correct method of adjusting for inflation when calculating net present value?
A. Estimate the future cash flows by multiplying by the specific inflation of each cash inflow and outflow item, and then discount using the real rate of return.
B. Estimate the cash flows in real terms and use a real discount rate.
C. Estimate the cash flows in money terms and use a real discount rate.
D. Estimate the cash flows in real terms and use a money discount rate.
Answer
B. Estimate the cash flows in real terms and use a real discount rate.
222. The relationship between the money rate of return, m, the real rate of return, h, and the inflation rate, i, is expressed in which of the following formulae?
A. h = 1 + i / 1 + m
B. m = h + i
C. (1 + m) = (1 + h)i
D. 1 + h = (1 + m) / (1 + i)
Answer
D. 1 + h = (1 + m) / (1 + i)
223. Which of the following is true? A. Risk is the probability of an outturn being less than anticipated. B. An objective probability is one which can be established mathematically or from historical data. C. The discount rate may be raised or lowered to allow for the risk of a project, the extent of the risk premium being based on indisputable theory.
A. B
B. C
C. A
D. none
Answer
A. B
224. Which of the following statements about sensitivity analysis is false?
A. Sensitivity analysis allows the decision maker to direct search effort by highlighting variables which, when they change by a small percentage, have a large impact on NPV.
B. Sensitivity analysis can be used to highlight variables of greatest significance to NPV, which then allows monitoring in the implementation phase and the drawing up of contingency plans.
C. Sensitivity analysis allows decision makers to be more informed about project sensitivities, to know what room they have for judgemental error and decide whether they are prepared to accept the risks.
D. Sensitivity analysis permits the decision maker to change all the variables simultaneously and thereby examine a project in various different circumstance
Answer
D. Sensitivity analysis permits the decision maker to change all the variables simultaneously and thereby examine a project in various different circumstance
225. Which of the following does not obey the mean-variance rule?
A. Project X will be preferred to project Y if the standard deviation on X and Y is the same, but the expected return on Y is lower.
B. Project X will be preferred to project Y if the expected return on X exceeds that of Y and the variance is equal to or less than that of Y.
C. Project X will be preferred to project Y if the expected return on X and Y is the same, but Y has a higher standard deviation.
D. Project X will be preferred to project Y if the variance of X is higher than Y and the expected return is lower than Y.
Answer
D. Project X will be preferred to project Y if the variance of X is higher than Y and the expected return is lower than Y.
226. 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.
A. very high; limited
B. very low; limited
C. very low; numerous
D. very high; numerous
Answer
B. very low; limited
227. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK): Year 1 NOK 10,000,000 Year 2 NOK 15,000,000 Year 3 NOK 17,000,000 Year 4 NOK 20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below: Year 1 $.13 Year 2 $.14 Year 3 $.12 Year 4 $.15 Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net p
A. -$17,602.62.
B. $8,000,000
C. $1,048,829.
D. $645,147.
Answer
D. $645,147.
228. 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:
A. the parent’s perspective should be used to evaluate a foreign project.
B. the subsidiary’s perspective should be used to evaluate a foreign project.
C. the foreign project should enhance the value of both the parent and the subsidiary.
D. none of the above
Answer
C. the foreign project should enhance the value of both the parent and the subsidiary.
229. An international project’s NPV is ___ related to the size of the initial investment and ___ related to the project’s required rate of return.
A. positively; positively
B. positive; negatively
C. negatively; positively
D. negatively; negatively
Answer
D. negatively; negatively
230. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
A. a more pronounced impact on revenues than on costs.
B. a less pronounced impact on revenues than on costs.
C. the same impact on revenues as on costs.
D. none of the above
Answer
A. a more pronounced impact on revenues than on costs.
231. Which of the following would probably not 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 acquir
Answer
C. Investors anticipate that the target will be acquir
232. Other things being equal, a foreign subsidiary in China would more likely be divested by theU.S. parent if new information caused the parent to suddenly anticipate that:
A. the Chinese yuan would depreciate in the future.
B. the Chinese yuan would appreciate in the future.
C. the Chinese yuan would remain somewhat stable in the future.
D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Answer
A. the Chinese yuan would depreciate in the future.
233. When quantifying country risk:
A. weights should be equally allocated among factors. 186
B. weights should be assigned to the political and financial factors according to their perceived importance.
C. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
D. the derived factors will be identical for all MNCs conducting business in that country.
Answer
B. weights should be assigned to the political and financial factors according to their perceived importance.
234. The most preferred form of securities for funding by firms in the U.S. is
A. debt
B. preferred stock
C. common stock
D. stock derivatives
Answer
A. debt
235. Which one of the following new issues of stock has the greatest probability of lowering its cost of equity capital?
A. Microsoft in the New York markets
B. Toyota on the Tokyo exchange
C. Apple stock on the London exchange
D. all of the above
Answer
C. Apple stock on the London exchange
236. When computing the weighted average cost of capital, the weighting should be proportionalbased on the ___ rather than the ___ value of the firm.
A. book, market
B. hypothetical, book
C. market, analyst’s
D. market, book
Answer
D. market, book
237. The rate of return on its existing assets that a firm must earn to maintain the current value ofthe firm’s stock is called the:
A. return on equity.
B. internal rate of return.
C. weighted average cost of capital.
D. weighted average cost of equity.
Answer
C. weighted average cost of capital.
238. Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)?
A. An increase in the market risk premium will tend to decrease a firm’s WACC.
B. A reduction in the risk level of a firm will tend to increase the firm’s WACC.
C. A 5 percent increase in a firm’s debt-equity ratio will tend to increase the firm’s WACC.
D. The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
Answer
D. The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
239. Capital structure weights are based on the:
A. market values of a firm’s debt and equity.
B. market value of a firm’s equity and the face value of its debt.
C. initial issue values of a firm’s debt and equity.
D. book value of a firm’s debt and equity.
Answer
A. market values of a firm’s debt and equity.
240. Which one of the following represents the best estimate for a firm’s pre-tax cost of debt?
A. the current yield-to-maturity on the firm’s existing debt
B. the firm’s historical cost of capital
C. twice the rate of return currently offered on risk-free securities
D. the current coupon on the firm’s existing debt
Answer
A. the current yield-to-maturity on the firm’s existing debt
