1. An example of economies of scale in financing include:
a. being able to access the Euroequity, Eurobond, and Eurocurrency markets.
b. being able to ship product in shiploads or carloads.
c. being able to use large-scale plant and equipment.
d. being able to use a vast piece of land for production.
2. Which of the following is NOT a factor of Porter's "diamond of national advantage"?
a. Factor conditions.
b. Demand conditions.
c. Related and supporting industries.
d. Government support and subsidies.
3. The OLI paradigm is an attempt to create a framework to explain why MNEs choose
rather than some other form of international venture.
a. licensing
b. joint ventures
c. foreign direct investment
d. strategic alliances
4. A/An would be an example of a location-specific advantage for an MNE.
a. patent
b. economy of scale
c. unique source of raw materials
d. possession of proprietary information
5. Many MNEs invested in China in the past few decades for its vast consumer base and a relatively low-cost labor force. According to the OLI paradigm, what are these advantages for the MNEs?
a. Owner-specific advantages.
b. Location-specific advantages.
c. Internalization advantages.
d. National competitive advantages.
6. A/An would be an example of an internalization advantage for an MNE.
a. patent
b. economy of scale
c. unique source of raw materials
d. possession of proprietary information
7. With licensing the is likely to be lower than with FDI because of lower profits; however, the is likely to be higher due to a greater return per dollar invested.
a. IRR; NPV
b. NPV; IRR
c. cost of capital; NPV
d. IRR; cost of capital
8. OPIC stands for:
a. Organization for the Prevention of Insufficient Capitalization.
b. Organization of Petroleum Importing Countries.
c. Overseas Private Investment Corporation.
d. Overseas Public Insurance Commission.
9. Terrorism, cyber attacks, and the anti-globalization movement are each examples of risks.
a. firm-specific
b. country-specific
c. institutional
d. global-specific
10. The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called:
a. cost of capital analysis.
b. capital budgeting.
c. capital structure analysis.
d. agency theory.
11. Which of the following is NOT a basic step in the capital budgeting process?
a. Identify the initial capital invested.
b. Estimate the cash flows to be derived from the project over time.
c. Identify the appropriate interest rate at which to discount future cash flows.
d. Pay back existing debt.
12. Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?
a. Parent cash flows must be distinguished from project cash flows.
b. Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms.
c. Differing rates of inflation exist between the foreign and domestic economies.
d. International projects must use NPV and IRR methods together while domestic projects require only IRR analysis.
13. Project evaluation from the viewpoint serves some useful purposes and/but should the viewpoint.
a. local; be subordinated to; parent's
b. local; not be subordinated to; parent's
c. parent's; be subordinated to; local
14. 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., what is the expected one-year spot rate of krone per dollar according to PPP?
Assume that an MNE considers two alternative modes of entering a potential market abroad: licensing and foreign direct investment. The initial investment outlays in year 0 and free cash flows for subsequent years are presented below ($ millions):
|
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Licensing
|
-150
|
50
|
50
|
50
|
50
|
50
|
|
FDI
|
-2100
|
650
|
650
|
650
|
650
|
650
|
Refer to this information for Questions 15 to 17.
15. What is the IRR for the licensing alternative?
16. What is the NPV for FDI alternative if cost of capital for the project is 12%?
17. Which alternative would you recommend if the two alternatives are mutually exclusive?
a. Licensing.
b. FDI.
c. Neither is acceptable.
18. Assume that a proposed investment project requires an initial investment of $10 million and the expected cash flow is $2 million each year for the next five years. Starting from year 6, the project will have a perpetual net operating cash flow of $1.2 million each year. The project's cost of capital is 15%. What is the project's NPV?
19. On February 26, 2015, an American company, Company A, sold an euro-denominated eight- year bond at a fixed interest rate of 1%. In comparison, a similarly rated company, Company B, sold a bond with the same maturity in the U.S. with a coupon of 2.5%. The exchange rate on February 26, 2015 was $1.1199/€. Assume that the International Fisher Effect holds true. What will be the total expected foreign exchange gain or loss for both the interest payment and the value of the bond (in percentage) for Company A each year in the next eight years?
20. At the end of 2014, a Eurozone firm considers an investment project in Switzerland. The firm's cost of capital is 10% and the firm uses this as its discount rate for the proposed investment. The initial investment and free cash flows for subsequent years (a horizon of five years) are presented in the table below.
|
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Swiss franc cash flow
|
|
120
|
120
|
120
|
120
|
120
|
|
Exchange rate (Sfr/Euro)
|
1.2
|
1.2
|
1.2
|
1.2
|
1.2
|
1.2
|
|
Euro cash flows
|
-400
|
100
|
100
|
100
|
100
|
100
|
On January 15, 2015, the Swiss National Bank removed the exchange rate cap and the exchange rate changed from Sfr 1.20/€ to Sfr1.00/€. The exchange rate is expected to stay at the new level for the investment horizon. The exchange rate change does not affect cash flows in Swiss franc but does affect the conversion from Swiss franc cash flows to euro cash flows. Which of the following statement addresses correctly the effect of the exchange rate change on the firm's capital budgeting?
a. NPV is positive both before and after the exchange rate change.
b. NPV is negative both before and after the exchange rate change.
c. NPV is positive before the exchange rate change but turns negative after the exchange rate change.
d. NPV is negative before the exchange rate change but turns positive after the exchange rate change.