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Question;16.3 Illustrative Case: Cemex Enters Indonesia;1) Given a;current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation;rates of 6% in Norway and 3% per annum in the U.S., use the formula for;relative purchasing power parity to estimate the one-year spot rate of krone;per dollar.;A) 7.87 krone per;dollar;B) 8.10 krone per;dollar;C) 8.34 krone per;dollar;D) There is not;enough information to answer this question.;2) When;evaluating capital budgeting projects, which of the following would NOT;necessarily be an indicator of an acceptable project?;A) an NPV > $0;B) an IRR >;the project's required rate of return;C) an IRR > $0;D) All of the;above are correct indicators.;3) Given a;current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation;rates of 3% in Norway and 6% per annum in the U.S., use the formula for;relative purchasing power parity to estimate the one-year spot rate of krone;per dollar.;A) 7.87 krone per;dollar;B) 8.10 krone per;dollar;C) 8.34 krone per;dollar;D) There is not;enough information to answer this question.;4) When;determining a firm's weighted average cost of capital (wacc) which of the;following terms is NOT necessary?;A) the firm's tax;rate;B) the firm's;cost of debt;C) the firm's;cost of equity;D) All of the;above are necessary.;5) When;determining a firm's weighted average cost of capital (wacc) which of the;following terms is NOT necessary?;A) the firm's;weight of equity financing;B) the;accumulated depreciation;C) the firm's;weight of debt financing;D) All of the;above are necessary to determine a firm's wacc.;6) Of the;following, which would NOT be considered an initial outlay at time 0 (today)?;A) investment in;new equipment;B) initial;investment in additional net working capital;C) shipping and;handling costs associated with the new investment;D) All of the;above are initial outlays.;Instruction 16.1;Use the;information for the following question(s).;The Wheel Deal;Inc., a company that produces scooters and other wheeled non-motorized;recreational equipment is considering an expansion of their product line to;Europe. The expansion would require a purchase of equipment with a price of;euro 1,200,000 and additional installation of euro 300,000 (assume that the;installation costs cannot be expensed, but rather, must be depreciated over the;life of the asset). Because this would be a new product, they will not be;replacing existing equipment. The new product line is expected to increase;revenues by euro 600,000 per year over current levels for the next 5 years;however, expenses will also increase by euro 200,000 per year. (Note: Assume;the after-tax operating cash flows in years 1-5 are equal, and that the;terminal value of the project in year 5 may change total after-tax cash flows for;that year.) The equipment is multipurpose and the firm anticipates that they;will sell it at the end of the five years for euro 500,000. The firm's required;rate of return is 12% and they are in the 40% tax bracket. Depreciation is;straight-line to a value of euro 0 over the 5-year life of the equipment, and;the initial investment (at year 0) also;requires an increase in NWC of euro 100,000 (to be recovered at the sale of the;equipment at the end of five years). The current spot rate is $0.95/euro, and;the expected inflation rate in the U.S. is 4% per year and 3% per year in;Europe.;7) Refer to;Instruction 16.1. What are the annual after-tax cash flows for the Wheel Deal;project?;A) euro 400,000;B) euro 240,000;C) euro 120,000;D) euro 360,000;8) Refer to;Instruction 16.1. What is the initial investment for the Wheel Deal project?;A) $1,500,000;B) euro 1,600,000;C) $1,600,000;D) euro 1,500,000;9) Refer to;Instruction 16.1. What is the NPV of the European expansion if Wheel Deal first;computes the NPV in euros and then converts that figure to dollars using the;current spot rate?;A) $1,520,000;B) $1,684,210;C) -$75,310;D) -$71,544;10) Refer to;Instruction 16.1. In euros, what is the NPV of the Wheel Deal expansion?;A) euro 1,524,690;B) $1,611,317;C) -euro 75,310;D) -euro 111,317;11) Refer to;Instruction 16.1. What is the IRR of the Wheel Deal expansion?;A) 14.4%;B) 10.3%;C) 12.0%;D) 8.6%;12) Refer to;Instruction 16.1. The European expansion would have a greater NPV in dollar;terms if the euro appreciated in value over the five-year life of the project;and the project had a positive NPV, other things equal.;13) The only;proper way to estimate the NPV of a foreign project is to discount the;appropriate cash flows first and then convert them to the domestic currency at;the current spot rate.;14) Benson;Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%.;If Benson is in a 30% tax bracket, and finances 40% of assets with debt, what;is the firm's wacc?;A) 11.20%;B) 10.36%;C) 9.72%;D) 7.68%;15) If a firm;undertakes a project with ordinary cash flows and estimates that the firm has a;positive NPV, then the IRR will be ________.;A) less than the;cost of capital;B) greater than;the cost of capital;C) greater than;the cost of the project;D) cannot be;determined from this information;16) Generally;speaking a firm's cost of ________ capital is greater than the firm's ________.;A) debt, equity;B) debt, wacc;C) equity, wacc;D) None of the;above is true.;17) When;estimating a firm's cost of equity capital using the CAPM, you need to estimate;A) the risk-free;rate of return.;B) the expected;return on the market portfolio.;C) the firm's;beta.;D) all of the;above.;18) Calculate the;cost of equity for Boston Industries using the following information: The cost;of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%;the firm has a beta of 1.1, and the expected return on the market is 12%.;A) 12.8%;B) 12.6%;C) 13.2%;D) 6.6%;19) ________ is;the risk that a foreign government will place restrictions such as limiting the;amount of funds that can be remitted to the parent firm, or even expropriation;of cash flows earned in that country.;A) Exchange risk;B) Foreign risk;C) Political risk;D) Unnecessary;risk;20) Which of the;following is NOT an example of political risk?;A) There could be;expropriation of cash flows by a foreign government.;B) The U.S.;government restricts trade with a foreign country where your firm has;investments.;C) The foreign;government nationalizes all foreign-owned assets.;D) All of the;above are examples of political risk.;21) Generally;speaking, a firm wants to receive cash flows in a currency that is;relative to their own, and pay out in currencies that are ________ relative to;their home currency.;A) appreciating;depreciating;B) depreciating;depreciating;C) appreciating;appreciating;D) depreciating;appreciating;22) When dealing;with international capital budgeting projects, the value of the project is NOT;sensitive to the firm's cost of capital.;Answer: FALSE;23) Projects that;have ________ are often rejected by traditional discounted cash flow models of;capital budgeting.;A) long lives;B) cash flow;returns in later years;C) high risk;levels;D) all of the;above;TABLE 16.1;Use the;information to answer the following question(s).;Jensen Aquatics;Inc., which manufactures and sells scuba gear worldwide, is considering an;investment in either Europe or Great Britain. Consider the following cash flows;for each project, assume a 12% wacc, and consider these to be average risk;projects for the firm. Answer the questions that follow.;24) Refer to;Table 16.1. The NPV for the British investment is estimated at ________.;A) $3,092;B) $6,420;C) ?3,092;D) $0;25) Refer to;Table 16.1. The NPV for the European investment is estimated at ________.;A) euro 4,945;B) $4,945;C) $6,420;D) euro 6,420;26) Refer to;Table 16.1. Which of the following best summarizes the preliminary results of;the investment analysis for the two prospective investments?;A) The British;investment should be accepted, the European investment rejected.;B) The British;investment is superior to the European investment.;C) Both;investments are acceptable.;D) None of the;above is true.;27) Refer to;Table 16.1. If the euro was forecast to remain constant at $1.00/euro;throughout the investment period, how would the investment decision now be;characterized?;A) The project;would be even better than forecast.;B) The British;investment should be chosen over the European investment.;C) The NPV is;$6,420.;D) All of the;above are true.;28) When a;foreign project is analyzed from the parent's point of view, the additional;risk that stems from it's "foreign" location is typically measured by;or ________.;A) adjusting the;discount rates, adjusting the timing;B) adjusting the;timing, adjusting the cash flows;C) adjusting the;discount rates, adjusting the cash flows;D) none of the;above;29) Which is NOT;considered a shortcoming of the parent simply adjusting discount rates to account;for the additional risk that stems from a project's foreign location?;A) Cash flows are;already highly subjective.;B) Two-sided risk;in that foreign currency may appreciate or depreciate.;C) Increased;sales volume might offset the lower value of a local currency.;D) These are all;shortcomings associated with discount rate adjustment.;30) Hydrotech;Manufacturing of Houston Texas expects to receive dividends each year from a;foreign subsidiary for the next 5 years.;The dividend is expected to grow at a rate of 7% per year. If the euro appreciates in value against the;dollar at a rate of 2% per year over the life of the dividends, then the;present value of the euro dividends to Hydrotech will be ________ if there had;been no change in the relative values of the euro and dollar.;A) less than;B) greater than;C) the same as;D) There is not;enough information to answer this question.;16.4 Real Option Analysis;1) Real option;analysis allows managers to analyze all of the following EXCEPT;A) the option to defer.;B) the option to;abandon.;C) the option to;alter capacity.;D) All of the;above may be analyzed using real option analysis.;2) At its core;real option analysis is a cross between decision-tree analysis and pure;option-based valuation.;3) Real option;analysis is a particularly powerful device when addressing potential investment;projects ________.;A) that do not;commence until future dates.;B) with extremely;long life spans.;C) both A and B.;D) None of the;above.;4) Real option;analysis treats cash flows in terms of future value in a negative sense;whereas DCF treats future cash flows positively.;16.5 Project Financing;1) Project;financing is the arrangement of financing for very large individual long-term;capital projects.;Answer: TRUE;2) Which of the;following is NOT a factor critical to the success of project financing?;A) separability;of the project from its investors;B) long-lived and;capital intensive singular projects;C) cash flow;predictability from third part commitments;D) All of the;above are critical factors for project financing.;16.6 Cross-Border Mergers and Acquisitions;1) The process of;acquiring an enterprise anywhere in the world has the following common elements;EXCEPT ________.;A) identification;and valuation of the target;B) the tender;offer;C) management of;the post-acquisition transition;D) All of the;above are common elements in the process.;2) Which of the;following would NOT be a potential reason for firms to pursue a cross-border;merger or acquisition?;A) gaining access;to strategic proprietary assets;B) gaining market;power and dominance;C);diversification and the spreading of risk;D) All of the;above are potential reasons for an M & A.;3) Generally;speaking, currency risk decreases as time prior to acquisition of a foreign;firm decreases.;Answer: TRUE

 

Paper#51243 | Written in 18-Jul-2015

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