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18 Chapter International Capital Budgeting
Chapter 18
International Capital Budgeting
Multiple Choice Questions
1. The financial manager's responsibility involves:
A. increasing the per share price of the company's stock at any cost and by any means, ways and
fashion that is possible
B. the shareholder wealth maximization
C. which capital projects to select
D. b and c
2. Perhaps the most important decisions that confront the financial manager are
A. Which capital projects to select.
B. The correct capital structure for the firm.
C. The correct capital structure for projects.
D. None of the above
3. Capital budgeting analysis is very important, because it:
A. involves, usually expensive, investments in capital assets
B. has to do with the productive capacity of a firm
C. will determine how competitive and profitable a firm will be
D. all of the above
18-1
Chapter 18 International Capital Budgeting
Before you pose these next seven questions to your students, give consideration to their finance
backgrounds. At my school (University of Missouri at Columbia) capital budgeting questions in
this level of detail would be "fair game" because the students have had plenty of capital
budgeting before in a prior finance course. Just glancing at equations 18-1 through 18-2f is not
preparation for these seven questions. There are plenty of easier questions in this test bank.
Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost pretax $3 million; this expense will be depreciated straight-line over 30 years to zero
salvage value; the value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are $75,000 per year. The project will require a $10,000 investment in net working
capital.
4. What is the unlevered after-tax incremental cash flow for year 0?
A. -$3,660,000
B. -$5,100,000
C. -$4,000,000
D. -$4,010,000
E. None of the above
5. What is the unlevered after-tax incremental cash flow for year 2?
A. -$4,610
B. $102,300
C. $202,300
D. $255,000
E. None of the above
18-2
Chapter 18 International Capital Budgeting
6. What is the unlevered after-tax incremental cash flow for year 30?
A. $12,432,300
B. $12,225,390
C. $12,332,300
D. $12,485,000
E. None of the above
7. For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 0?
A. -$1,010,000
B. -$1,000,000
C. -$660,000
D. -$2,100,000
E. None of the above
8. For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 1?
A. $4,300
B. -$202,610
C. -$95,700
D. $57,000
E. None of the above
9. For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 30?
A. $9,027,390
B. $9,234,300
C. $9,134,300
D. $9,287,000
E. None of the above
18-3
Chapter 18 International Capital Budgeting
10. Assume that the firm will partially finance the project with a subsidized $3,000,000 interest
only 30-year loan at 8.0 percent APR with annual payments. Note that eight percent is less than
the 10 percent that they normally borrow at. What is the NPV of the loan?
A. $198,469
B. $53,979.83
C. $102,727.55
D. $1,334,851.09
E. None of the above
11. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%. What is the firm's cost of equity capital?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.5%
E. None of the above
12. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%. What is the required return on assets?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.5%
E. None of the above
18-4
Chapter 18 International Capital Budgeting
For the next two questions consider a project with the following data
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6% with an interest-only loan with a maturity of
5 years and annual interest payments. The equipment will be depreciated straight-line to zero
over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no
other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product
at $5; variable costs are $3; there are no fixed costs.
13. What is the NPV of the project using the WACC methodology?
A. $49,613.03
B. $58,028.68
C. $102,727.55
D. 315,666.16
E. None of the above
14. What is the NPV of the project using the APV methodology?
A. $49,613.03
B. $198,469
C. $102,727.55
D. $149,580.12
E. None of the above
18-5
Chapter 18 International Capital Budgeting
For the next 3 questions consider a project with the following data
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the 5year life of the project. There will be a pre-tax salvage value of $5,000. There are no other startup costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.
15. What is the NPV of the project using the WACC methodology?
A. $58,028.68
B. $49,613.03
C. $48,300.47
D. $102,727.55
E. None of the above
16. When using the APV methodology, what is the NPV of the depreciation tax shield?
A. $32,051.52
B. $25,777.35
C. $22,794.65
D. $97,152.98
E. None of the above
17. When using the APV methodology, what is the NPV of the interest tax shield?
A. $9,666.51
B. $12,019.32
C. $9,377.31
D. $7,000.73
E. None of the above
18-6
Chapter 18 International Capital Budgeting
18. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8%.
What is the APV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit.
Select the answer closest to yours.
A. -$3,497,224.43
B. $417,201.05
C. $840,797
D. None of the above
19. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due December 31, 2009 and your taxes are due
January 1 of each year on the previous year's income. The yield to maturity on your firm's
existing debt is 8%. What is the APV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit.
Select the answer closest to yours.
A. -$3,497,224.43
B. $417,201.05
C. $840,797
D. None of the above
20. The required return on assets is 18%. The firm can borrow at 12.5%; firm's target debt to
value ratio is 3/5. The corporate tax rate is 34%, and the risk-free rate is 4% and the market risk
premium is 9.2 percent. What is the weighted average cost of capital?
A. 12.15%
B. 13.02%
C. 14.33%
D. 23.45%
E. None of the above
18-7
Chapter 18 International Capital Budgeting
21. Your firm is in the 34% tax bracket. The yield to maturity on your existing bonds is 8%. The
state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a
5% rate of interest and ANNUAL payments due at the END OF THE YEAR.
The interest will be deductible at the time that you pay. What is the APV of this below-market
loan to your firm? I did not round any of my intermediate steps. You might be a little bit off.
Pick the answer closest to yours.
A. $64,157.38
B. $417,201.05
C. $840,797
D. None of the above
22. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%.Calculate the weighted average cost of capital.
A. 33.33%
B. 8.09%
C. 9.02%
D. 16.5%
E. None of the above
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
18-8
Chapter 18 International Capital Budgeting
23. Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right
-$1,406,301.25
B. $12,494,643.75
C. $36,580,767.55
D. $108,994.618.20
E. $59,459,301.03
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
In next 4 questions, the firm will partially finance the project with an 8% interest-only 4-year
loan.
24. What is the levered after-tax incremental cash flow for year 2?
A. $185,796,000
B. $215,152,000
C. $267,952,000
D. $284,848,000
E. None of the above
25. What is the levered after-tax incremental cash flow for year 4?
A. $281,704,000
B. $465,152,000
C. -$194,848,000
D. $460,796,000
E. None of the above
18-9
Chapter 18 International Capital Budgeting
26. Using the flow to equity methodology, what is the value of the equity claim?
A. -$1,540,000
B. $446,570,866.00
C. $36,580,767.55
D. $470,953,393.70
E. $30,716,236.13
27. Using the APV method, what is the value of this project to an all-equity firm?
A. -$46,502,288.10
B. $12,494,643.75
C. $36,580,767.55
D. -$67,163,445.12
E. $59,459,301.03
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
28. Using the APV method, what is the value of the debt side effects?
A. $239,072,652.70
B. $66,891,713.66
C. $59,459,301.03
D. $660,000,000
E. None of the above
18-10
Chapter 18 International Capital Budgeting
NOTE TO FACULTY: the next six questions are similar to the last six, but have different
answers as the debt-equity ratio changed from 2 to 3. This can discourage cheating, especially if
you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 3; if the firm were financed entirely with equity, the required return
would be 10%
29. Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right -$1,406,301.25
B. $12,494,643.75
C. $36,580,767.55
D. $108,994.618.20
E. $59,459,301.03
NOTE TO FACULTY: the next six questions are similar to the last six, but have different
answers as the debt-equity ratio changed from 2 to 3. This can discourage cheating, especially if
you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 3; if the firm were financed entirely with equity, the required return
would be 10%
For the next 5 questions, the firm will partially finance the project with an 8% interest-only 4year loan.
18-11
Chapter 18 International Capital Budgeting
30. What is the levered after-tax incremental cash flow for year 2?
A. $185,796,000
B. $215,152,000
C. $267,952,000
D. $284,848,000
E. None of the above
31. What is the levered after-tax incremental cash flow for year 4?
A. -$281,704,000
B. $465,152,000
C. -$194,848,000
D. $460,796,000
E. None of the above
32. Using the flow to equity methodology, what is the value of the equity claim?
A. -$1,540,000
B. $446,570,866.00
C. $36,580,767.55
D. $470,953,393.70
E. $30,716,236.13
33. Using the APV method, what is the value of this project to an all-equity firm?
A. -$46,502,288.10
B. $12,494,643.75
C. $36,580,767.55
D. -$67,163,445.12
E. $59,459,301.03
34. Using the APV method, what is the value of the debt side effects?
A. $239,072,652.70
B. $66,891,713.66
C. $59,459,301.03
D. $660,000,000
E. None of the above
18-12
Chapter 18 International Capital Budgeting
35. In the APV model
A. interest tax shields are discounted at i
B. operating cash flows are discounted at Ku
C. depreciation tax shields are discounted at i
D. all of the above
36. Your firm's existing bonds trade with a yield to maturity of eight percent. The state of
Missouri has offered to loan your firm $10,000,000 at zero percent for five years. Repayment
will be of the form of $2,000,000 per year for five years the first payment is due in one year.
What is the value of this offer?
A. $4,729,622.75
B. $2,014,579.93
C. $0
D. $196,929.88
E. None of the above
37. What proportion of the firm is financed by debt for a firm that expects a 15% return on
equity, a 12% return on assets, and a 10% return on debt? The tax rate is 25%.
A. 20%
B. 1/3
C. 60%
D. 2/3
E. 80%
38. The required return on equity for a levered firm is 10.60%. The debt to equity ratio is the
tax rate is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed
entirely with equity.
A. 10%
B. 12%
C. 8.67%
D. None of the above
18-13
Chapter 18 International Capital Budgeting
39. The required return on equity for an all-equity firm is 10.0%. They are considering a change
in capital structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is
8%. Find the new cost of capital if this firm changes capital structure.
A. 14.93%
B. 8.67%
C. 7.40%
D. None of the above
40. The required return on equity for an all-equity firm is 10.0%. They currently have a beta of
one and the risk-free rate is 5% and the market risk premium is 5%. They are considering a
change in capital structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of
debt is 8%. Find the beta if this firm changes capital structure.
A. 1.12
B. 1
C. 7.4%
D. None of the above
41. What is the expected return on equity for a tax-free firm with a 15% expected return on
assets that pays 12% on its debt, which totals 25% of assets?
A. 24%
B. 15.60%
C. 16%
D. 20%
E. 15.75%
42. What is the expected return on equity for firm in the 40% tax bracket with a 15% expected
return on assets that pays 12% on its debt, which totals 25% of assets?
A. 24%
B. 15.60%
C. 16%
D. 20%
E. 15.75%
18-14
Chapter 18 International Capital Budgeting
43. Assume that XYZ Corporation is a leveraged company with the following information:
Kl = cost of equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted
average cost of capital of 9.3%.
A. 35%
B. 40%
C. 45%
D. 50%
44. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8%.
What is the APV of this subsidized loan? Note that I did not round my intermediate steps. If you
did, your answer may be off by a bit. Select the answer closest to yours.
A. $406,023.10
B. $840,797
C. $64,157.38
D. $20,659.77
E. None of the other answers are within $100 of my answer
18-15
Chapter 18 International Capital Budgeting
45. An Italian firm is considering selling its line of coin-operated cappuccino machines in the
U.K. The business risk will be identical to the firm's existing line of business in the euro zone,
the cost of capital in the euro zone is i = 10%. The expected inflation rate over the next two
years in the U.K. is 3% per year and 2% per year in the euro zone. The spot exchange rates are
$1.80 = 1.00 and $1.15 = 1.00
The pound sterling denominated cash flows are as follows:
What is the -denominated NPV of this project? I did not round my intermediate steps, if you
did, select the answer closest to yours.
A. 5,563.23
B. 2,270.79
C. 7,223.14
D. 3,554.29
E. There is not enough information (e.g. U.S. inflation) to do this problem.
46. The spot exchange rate is 125 = $1. The U.S. discount rate is 10%; inflation over the next
three years is 3% per year in the U.S. and 2% per year in Japan. Calculate the dollar NPV of this
project.
I did not round my intermediate steps, if you did, select the answer closest to yours.
A. $267,181.87
B. $14,176.67
C. $2,536.49
D. $2,137.46
E. None of the above
18-16
Chapter 18 International Capital Budgeting
Some of the factors (with selected explanations) used in calculating the basic "net present value"
and the "incremental" cash flows of a capital project are:
(i)- expected after-tax terminal value, including recapture of working capital
(ii)- net income, which belongs to the equity holders of the firm
(iii)- initial investment at inception
(iv)- depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed from the
calculation of net income, for tax purposes, but added back because it did not actually flow out
of the firm)
(v)- weighted-average cost of capital
(vi)- the firm's after-tax payment of interest to debtholders
(vii)- economic life of the capital project in years
47. The "net present value" of a capital project is calculated by using:
A. (i), (ii), and (iii)
B. (ii), (iv), and (vi)
C. (i), (iii), (v), and (vii)
D. (iv), (v), (vi), and (vii)
48. The "incremental" cash flows of a capital project is calculated by using:
A. (i), (ii), and (iii)
B. (ii), (iv), and (vi)
C. (i), (iii), (v), and (vii)
D. (iv), (v), (vi), and (vii)
49. In the context of the capital budgeting analysis of an MNC that has strong foreign
competitors, "lost sales" refers to:
A. the cannibalization of existing projects by new projects
B. the entire sales revenue of a new foreign manufacturing facility representing the incremental
sales revenue of the new project
C. a) and b)
D. none of the above
18-17
Chapter 18 International Capital Budgeting
50. Which of the following statements is false about "borrowing capacity"?
A. it is an especially important point in international capital budgeting analysis because of the
frequency of large concessionary loans
B. it creates tax shields for APV analysis regardless of how the project is actually financed
C. is synonymous to the "project debt"
D. is based on the firm's optimal capital structure
51. The adjusted present value (APV) model that is suitable for an MNC is the basic net present
value (NPV) model expanded to:
A. distinguish between the market value of a levered firm and the market value of an unlevered
firm
B. discern the blocking of certain cash flows by the host country from being legally remitted to
the parent
C. consider foreign currency fluctuations or extra taxes imposed by the host country on foreign
exchange remittances
D. all of the above
52. Sensitivity analysis in the calculation of the adjusted present value (APV) allows the
financial manager to:
A. analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent
in the investment
B. more fully understand the implications of planned capital expenditures
C. consider in advance actions that can be taken should an investment not develop as anticipated
D. all of the above
53. The ABC Company, a U.S.-based MNC, plans to establish a subsidiary in Spain to
manufacture and sell water pumps. ABC has total assets of $80 million, of which $60 million is
equity financed. The remainder is financed with debt. ABC considers its current capital structure
optimal. The construction cost of the facility in Spain is estimated to be 8,500 million, of which
6,500 million is to be financed at a below-market rate of interest arranged by the Spainish
government. The proposed project will increase the borrowing capacity by:
A. 1,215 million
B. 2,215 million
C. 3,215 million
D. 4,215 million
18-18
Chapter 18 International Capital Budgeting
54. Given the following information for a levered and unlevered firm, calculate the difference in
the cash flow available to investors. Assume the corporate tax rate is 40%. (Hint: Calculate the
tax savings arising form the tax deductibility of interest payments).
A. $8
B. $18
C. $78
D. $90
55. As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward
rate that should prevail?
A. 1.00 = $1.2379
B. 1.00 = $1.2139
C. 1.00 = $0.9903
D. $1.00 = 1.2623
56. As of today, the spot exchange rate is 1.00 = $1.50 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward
rate that should prevail?
A. 1.00 = $1.5147
B. 1.00 = $1.4854
C. 1.00 = $0.6602
D. $1.00 = 0.6602
57. 57 As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to
prevail for the next three years in the U.S. is 2% and 3% in the euro zone. What spot exchange
rate should prevail three years from now?
A. 1.00 = $1.2379
B. 1.00 = $1.2139
C. 1.00 = $0.9903
D. $1.00 = 1.2623
18-19
Chapter 18 International Capital Budgeting
Short Answer Questions
Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is
considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.
The corporate tax rate is 12% in Ireland and 40% in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = 1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8%. The U.S. risk-free rate is 3%; the Irish risk-free rate is 2%.
58. What is CF0 in dollars?
59. What is CF1 in dollars?
18-20
Chapter 18 International Capital Budgeting
60. What is CF5 in dollars?
61. What is the NPV of the U.S.-based project to the Irish firm?
62. What is the dollar-denominated IRR?
What is the euro-denominated IRR?
18-21
Chapter 18 International Capital Budgeting
63. Find the break-even price (in dollars) and break-even quantity for the U.S. project.
64. Repeat the above project analysis assuming that the Irish firm could replicate the project in
Ireland. (i.e. cash flow out the project in Ireland and find break-even price (in ), quantity, NPV,
IRR (in euro not dollars).
Consider the following international investment opportunity. It involves a gold mine that can be
opened at a cost, then produces a positive cash flow, but then requires environmental clean up:
The current exchange rate is $1.60 = 1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
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Chapter 18 International Capital Budgeting
65. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
66. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Please note that your answer is worth ZERO POINTS if it does not contain currency symbols.
67. What is the dollar-denominated IRR of this project?
68. What is the euro-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
Consider the following international investment opportunity. It involves a gold mine that can be
opened at a cost, then produces a positive cash flow, but then requires environmental clean up:
The current exchange rate is $1.55 = 1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
69. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
70. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Your answer is worth ZERO POINTS if it does not contain currency symbols such as $, , ,
!
71. What is the dollar-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
72. What is the euro-denominated IRR of this project?
Consider the following international investment opportunity:
The current exchange rate is $1.60 = 1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
73. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
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Chapter 18 International Capital Budgeting
74. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
75. What is the dollar-denominated IRR of this project?
Answer
76. What is the euro-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
Use this information for the next ten (10) questions.
A French firm is considering a one-year investment in the United Kingdom with a pounddenominated rate of return of i = 15%. The firm's local cost of capital is i= 10%
The project costs 1,000 and will return 1,150 at the end of one year.
The current exchange rate is 2.00 = 1.00
Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:
S1(| ) = 2.20 per
S1(| ) = 1.80 per
Following revaluation, the exchange rate is expected to remain steady for at least another year
77. Find the ex post IRR in euro for the French firm if they undertake the project today and then
the exchange rate falls to S1(| ) = 1.80 per .
78. Find the ex post IRR in euro for the French firm if they undertake the project today and then
the exchange rate rises to S1(| ) = 2.20 per .
Answer:
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Chapter 18 International Capital Budgeting
79. Find the IRR in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(| ) = 2.20 per .
80. Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(| ) = 2.20 per .
81. Find the IRR in euro for the French firm if they wait one year to undertake the project after
the exchange rate falls to S1(| ) = 1.80 per .
82. Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate falls to S1(| ) = 1.80 per .
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Chapter 18 International Capital Budgeting
83. The CFO who has a CFA notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.
84. Your banker quotes the euro-zone risk-free rate at i = 6% and the British risk free rate at i
= 6%. Find the value of the option and thereby the project.
85. Using your results to the last question, make a recommendation vis--vis when to undertake
the project.
86. Using the notion of a hedge ratio, make a recommendation vis--vis how to undertake the
project today without "buying" the option.
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Chapter 18 International Capital Budgeting
An American Hedge Fund is considering a one-year investment in an Italian government bond
with a one-year maturity and a euro-denominated rate of return of i = 5%. The bond costs
1,000 today and will return 1,050 at the end of one year without risk. The current exchange
rate is 1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to
maturity of 4%. Suppose that the European Central Bank is considering either tightening or
loosening its monetary policy. It is widely believed that in one year there are only two
possibilities:
S1($|) = $1.80 per
S1($|) = $1.40 per
Following revaluation, the exchange rate is expected to remain steady for at least another year
87. Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate falls to S1($|) = $1.40 per .
88. Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate rises to S1($|) = $1.80 per .
89. Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($|) = $1.80 per . Assume that i doesn't change.
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Chapter 18 International Capital Budgeting
90. Find the NPV in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($|) = $1.80 per . Assume that i doesn't change.
91. Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate falls to S1($|) = $1.40 per . Assume that i doesn't change.
92. Find the NPV in euro for the American firm if they wait one year to undertake the project
after the exchange rate falls to S1($|) = $1.40 per . Assume that i doesn't change.
93. The hedge fund manager notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.
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Chapter 18 International Capital Budgeting
94. Your banker quotes the euro-zone risk-free rate at i = 5% and the U.S. risk free rate at i$ =
4%. Find the value of the option and thereby the correct value of the bond to a U.S. investor.
95. Using your results to the last question, make a recommendation vis--vis when to buy the
bond.
96. Using the notion of hedging, make a recommendation vis--vis how to undertake the project
today without "buying" the option.
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Chapter 18 International Capital Budgeting
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it
will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management
believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold
per year. The expansion, including the cost of the land, will cost $500,000. The current price of
gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 (1.06).
Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.
Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold
reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the
foreseeable future. On the other hand, management believes there is some possibility that the
world will soon return to a gold reserve international monetary system. In the latter event, the
price of gold would increase to at least $460 per ounce. The course of the future price of gold
bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by
buying a purchase option on the land for $25,000.
97. Compute the NPV at the current price of gold. Hint: think of the gold mine as a perpetuity
98. Compute the NPV at the two possible prices of gold.
99. Estimate the value of the option on the land to the management of the mine.
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Chapter 18 International Capital Budgeting
100. What should Strik-it-Rich's management do?
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Chapter 18 International Capital Budgeting
Chapter 18 International Capital Budgeting Answer Key
Multiple Choice Questions
1. The financial manager's responsibility involves:
A. increasing the per share price of the company's stock at any cost and by any means, ways and
fashion that is possible
B. the shareholder wealth maximization
C. which capital projects to select
D. b and c
2. Perhaps the most important decisions that confront the financial manager are
A. Which capital projects to select.
B. The correct capital structure for the firm.
C. The correct capital structure for projects.
D. None of the above
3. Capital budgeting analysis is very important, because it:
A. involves, usually expensive, investments in capital assets
B. has to do with the productive capacity of a firm
C. will determine how competitive and profitable a firm will be
D. all of the above
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Chapter 18 International Capital Budgeting
Before you pose these next seven questions to your students, give consideration to their finance
backgrounds. At my school (University of Missouri at Columbia) capital budgeting questions in
this level of detail would be "fair game" because the students have had plenty of capital
budgeting before in a prior finance course. Just glancing at equations 18-1 through 18-2f is not
preparation for these seven questions. There are plenty of easier questions in this test bank.
Tiger Towers, Inc. is considering an expansion of their existing business, student apartments.
The new project will be built on some vacant land that the firm has just contracted to buy. The
land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will
cost pretax $3 million; this expense will be depreciated straight-line over 30 years to zero
salvage value; the value of the land and building in year 30 will be $18,000,000. The $3,000,000
construction cost is to be paid today. The project will not change the risk level of the firm. The
firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the
year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding
depreciation, are $75,000 per year. The project will require a $10,000 investment in net working
capital.
4. What is the unlevered after-tax incremental cash flow for year 0?
A. -$3,660,000
B. -$5,100,000
C. -$4,000,000
D. -$4,010,000
E. None of the above
-$4,010,000 = - [$1,000,000 + $3,000,000 + 10,000]
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Chapter 18 International Capital Budgeting
5. What is the unlevered after-tax incremental cash flow for year 2?
A. -$4,610
B. $102,300
C. $202,300
D. $255,000
E. None of the above
6. What is the unlevered after-tax incremental cash flow for year 30?
A. $12,432,300
B. $12,225,390
C. $12,332,300
D. $12,485,000
E. None of the above
$12,432,300 = $202,300 + return of NWC + building/land
202,300 + $10,000 + $18,000,000 - 0.34 ($18,000,000 - $1,000,000)
Notice that the answer to question 5 is a function of the student's answer to question 4:
Correct response to Q5
= response to Q4 + $10,000 + $18,000,000 - 0.34 ($18,000,000 - $1,000,000)
You may wish to award partial credit based on the following rubric:
12,432,300 if Q4 = c)
12,225,390 if Q4 = a)
12,332,300 if Q4 = b)
$12,485,000 if Q4 = d)
Awarding partial credit on a multiple choice test isn't hard. Import their responses into Excel.
Use "if" statements. The advantage of path-dependent grading is that you can get the same level
of discrimination in grading on a multiple choice test as on an essay test.
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Chapter 18 International Capital Budgeting
7. For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 0?
A. -$1,010,000
B. -$1,000,000
C. -$660,000
D. -$2,100,000
E. None of the above
LCF0 = $3,000,000 - response to Q3
= -$1,010,000
You may wish to award partial credit on this question according to the following rubric
-$1,010,000 is correct if Q3= 4)
-$1,000,000 is correct if Q3 = 3)
-$660,000 is correct if Q3 = 1)
-$2,100,000 is correct if Q3 = 2)
8. For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 1?
A. $4,300
B. -$202,610
C. -$95,700
D. $57,000
E. None of the above
Your response to Q4 - $300,000 0.66
Note: you may wish to award partial credit according to:
$4,300 is correct if Q4 = 3)
-$202,610 is correct if Q4 = 1)
-$95,700 is correct if Q4 = 2)
$57,000 is correct if Q4 = 4)
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Chapter 18 International Budgeting
9. Capital For the next 3 questions, assume that the firm will partially finance the project with a
$3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.
What is the levered after-tax incremental cash flow for year 30?
A. $9,027,390
B. $9,234,300
C. $9,134,300
D. $9,287,000
E. None of the above
the right answer is your response to Q5 - $300,000 0.66 - $3,000,000
You should consider awarding partial credit on this according to this rubric:
$9,027,390 is correct if Q5 = 2)
$9,234,300 is correct if Q5 = 1)
$9,134,300 is correct if Q5 = 3)
$9,287,000 is correct if Q5 = 4)
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Chapter 18 International Capital Budgeting
10. Assume that the firm will partially finance the project with a subsidized $3,000,000 interest
only 30-year loan at 8.0 percent APR with annual payments. Note that eight percent is less than
the 10 percent that they normally borrow at. What is the NPV of the loan?
A. $198,469
B. $53,979.83
C. $102,727.55
D. $1,334,851.09
E. None of the above
Using the cash flow menu on a financial calculator:
CF0 = $3,000,000
CF1 = -$158,400 = -$3,000,000 0.08 .66
F01 = 29
CF2 = -$3,158,400
I = 10%
NPV = $1,334,851.09
11. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%. What is the firm's cost of equity capital?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.5%
E. None of the above
requity = 3% + 1.5 9% = 16.5%
12. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%. What is the required return on assets?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.5%
E. None of the above
16.5% = rasset + 3 [ rasset - rdebt] (1-.34)
rasset = 10.85%
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Chapter 18 International Capital Budgeting
For the next two questions consider a project with the following data
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $20,000 cash and borrow $80,000 at 6% with an interest-only loan with a maturity of
5 years and annual interest payments. The equipment will be depreciated straight-line to zero
over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no
other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product
at $5; variable costs are $3; there are no fixed costs.
13. What is the NPV of the project using the WACC methodology?
A. $49,613.03
B. $58,028.68
C. $102,727.55
D. 315,666.16
E. None of the above
Using the cash flow menu of a financial calculator: CF0 = -$100,000; C01 = $39,800; F01 = 4;
C02 = $43,100; I = rWACC = 8.74; NPV = $58,028.68
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Chapter 18 International Capital Budgeting
14. What is the NPV of the project using the APV methodology?
A. $49,613.03
B. $198,469
C. $102,727.55
D. $149,580.12
E. None of the above
APV = -Cost + Base-case NPV + NPV depreciation tax shield + NPV interest tax shield =
The project does not cost $100,000 but rather $98,937.49 = -$100,000 + $1,062.51
(100,000 less the present value of after tax salvage value discounted at rasset = 12%)
For the next 3 questions consider a project with the following data
The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will
contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years
and annual interest payments. The equipment will be depreciated straight-line to zero over the 5year life of the project. There will be a pre-tax salvage value of $5,000. There are no other startup costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5;
variable costs are $3; there are no fixed costs.
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Chapter 18 International Capital Budgeting
15. What is the NPV of the project using the WACC methodology?
A. $58,028.68
B. $49,613.03
C. $48,300.47
D. $102,727.55
E. None of the above
Using the cash flow menu of a financial calculator: CF0 = -$100,000; C01 = $39,800; F01 = 4;
C02 = $43,100; I = rWACC = 11.20; NPV = $48,300.47
16. When using the APV methodology, what is the NPV of the depreciation tax shield?
A. $32,051.52
B. $25,777.35
C. $22,794.65
D. $97,152.98
E. None of the above
Using a financial calculator's cash flow menu: N = 5; PMT = $6,800 = $20,000 .34 I/YR = rdebt
= 10%; PVdepreciation tax shield = $25,777.35
17. When using the APV methodology, what is the NPV of the interest tax shield?
A. $9,666.51
B. $12,019.32
C. $9,377.31
D. $7,000.73
E. None of the above
using a financial calculator, N = 5; PMT = $2,550 = .10 $75,000 .34; I/YR = rdebt = 10%;
PVinterest tax shield = $9,666.51
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Chapter 18 International Capital Budgeting
18. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8%.
What is the APV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit.
Select the answer closest to yours.
A. -$3,497,224.43
B. $417,201.05
C. $840,797
D. None of the above
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Chapter 18 International Capital Budgeting
First, get your financial calculator into begin mode and 1 payment per year:
PV = 10,000,000
N= 3
I= 5%
PMT = -$3,497,224.43
Amortize the loan
The size and timing of the cash flows of the loan are:
CF0 = $6,502,775.57
CF1 = -$3,386,677.24
CF2 = -$3,440,602.70
I= 8%; NPV = $417,201.05
If you are covering APV in detail, this kind of question is appropriate. Alternative versions of
this are nearby.
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Chapter 18 International Capital Budgeting
19. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due December 31, 2009 and your taxes are due
January 1 of each year on the previous year's income. The yield to maturity on your firm's
existing debt is 8%. What is the APV of this subsidized loan?
Note that I did not round my intermediate steps. If you did, your answer may be off by a bit.
Select the answer closest to yours.
A. -$3,497,224.43
B. $417,201.05
C. $840,797
D. None of the above
First, enter the loan into a financial calculator and solve for the payment:
PV=10,000,000
N= 3
I= 5%
PMT = 3,672,085
Then amortize the loan:
Now find the APV of the loan as shown in the book:
CF0 = $10,000,000
CF1= -$3,502,085 = -$3,172,085 - .66 $500,000
CF2= -$3,556,011
CF3= -$3,612,632
I= 8%
NPV = $840,797
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Chapter 18 International Capital Budgeting
20. The required return on assets is 18%. The firm can borrow at 12.5%; firm's target debt to
value ratio is 3/5. The corporate tax rate is 34%, and the risk-free rate is 4% and the market risk
premium is 9.2 percent. What is the weighted average cost of capital?
A. 12.15%
B. 13.02%
C. 14.33%
D. 23.45%
E. None of the above
Kl = 23.45% = 18% + 1.5 (18% - 12.5%) (1 - .34)
weighted average cost of capital = 2/5 23.45% + 3/5 (12.5%) (1 - .34)
= 14.33%
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Chapter 18 International Capital Budgeting
21. Your firm is in the 34% tax bracket. The yield to maturity on your existing bonds is 8%. The
state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a
5% rate of interest and ANNUAL payments due at the END OF THE YEAR.
The interest will be deductible at the time that you pay. What is the APV of this below-market
loan to your firm? I did not round any of my intermediate steps. You might be a little bit off.
Pick the answer closest to yours.
A. $64,157.38
B. $417,201.05
C. $840,797
D. None of the above
First, enter the loan into a financial calculator to find the payment:
PV=1,000,000
N= 2
I= 5%
PMT = 537,804.88
Next amortize the loan to find out how much interest is paid in each period (it's deductible)
Finally, find the APV of the loan as the NPV of the after-tax cash flows at 8%:
CF0 = $1,000,000
CF1= -$520,804.88 = -$487,804 - .66 $50,000
CF2= -$529,097 = -$512,195- .66 $25,609.76
I= 8%
NPV = $64,157.38
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Chapter 18 International Capital Budgeting
22. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity
ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk
premium is 9%.Calculate the weighted average cost of capital.
A. 33.33%
B. 8.09%
C. 9.02%
D. 16.5%
E. None of the above
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
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Chapter 18 International Capital Budgeting
23. Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right -$1,406,301.25
B. $12,494,643.75
C. $36,580,767.55
D. $108,994.618.20
E. $59,459,301.03
The weighted average cost of capital is 7 11/15 %
requity = 10% + 2 (10% - 8%) (1 - .34) = 12.64%
rWACC = 12.64% 1/3 + 8% 2/3 .66 = 7 11/15 %
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
In next 4 questions, the firm will partially finance the project with an 8% interest-only 4-year
loan.
24. What is the levered after-tax incremental cash flow for year 2?
A. $185,796,000
B. $215,152,000
C. $267,952,000
D. $284,848,000
E. None of the above
LCF2 = $215,152,000 = $250,000,000 - .08 $660,000,000 (1 - .34)
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Chapter 18 International Capital Budgeting
25. What is the levered after-tax incremental cash flow for year 4?
A. $281,704,000
B. $465,152,000
C. -$194,848,000
D. $460,796,000
E. None of the above
LCF5 = -$194,848,000 = $500,000,000 - $660,000,000 - .08 $660,000,000 (1 - .34)
26. Using the flow to equity methodology, what is the value of the equity claim?
A. -$1,540,000
B. $446,570,866.00
C. $36,580,767.55
D. $470,953,393.70
E. $30,716,236.13
Discount the levered cash flows at Kl = 12.64%
LCF 0 = -330,000,000; LCF 1 = 90,152,000; CF2 = 215,152,000; CF3 =340,152,000; CF4 =
-194,848,000
27. Using the APV method, what is the value of this project to an all-equity firm?
A. -$46,502,288.10
B. $12,494,643.75
C. $36,580,767.55
D. -$67,163,445.12
E. $59,459,301.03
Discount the unlevered cash flows at rasset = 10%
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Chapter 18 International Capital Budgeting
NOTE TO FACULTY: the next six questions are similar to the six that follow them, but have
different answers as the debt-equity ratio changes from 2 to 3. This can discourage cheating,
especially if you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return
would be 10%
28. Using the APV method, what is the value of the debt side effects?
A. $239,072,652.70
B. $66,891,713.66
C. $59,459,301.03
D. $660,000,000
E. None of the above
CF0 = 660,000,000; CF1 = -34,848,000 = .08 $660,000,000 (1 - .34); F01 = 3 CF2 = $694,848,000 = -$660,000,000 - .08 $660,000,000 .66; Use I = 8%
NOTE TO FACULTY: the next six questions are similar to the last six, but have different
answers as the debt-equity ratio changed from 2 to 3. This can discourage cheating, especially if
you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 3; if the firm were financed entirely with equity, the required return
would be 10%
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Chapter 18 International Capital Budgeting
29. Using the weighted average cost of capital methodology, what is the NPV? I didn't round my
intermediate steps. If you do, you're not going to get the right -$1,406,301.25
B. $12,494,643.75
C. $36,580,767.55
D. $108,994.618.20
E. $59,459,301.03
The weighted average cost of capital is
requity = 10% + 3 (10% - 8%) (1 - .34) = 13.96%
rWACC = 13.96% .25 + 8% .75 .66 = 7.45%
NOTE TO FACULTY: the next six questions are similar to the last six, but have different
answers as the debt-equity ratio changed from 2 to 3. This can discourage cheating, especially if
you only give credit to students who have the right answers on the right test!
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental
after-tax cash flows (for an all-equity firm) are shown below in millions:
The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%; the current and
target debt-equity ratio is 3; if the firm were financed entirely with equity, the required return
would be 10%
For the next 5 questions, the firm will partially finance the project with an 8% interest-only 4year loan.
30. What is the levered after-tax incremental cash flow for year 2?
A. $185,796,000
B. $215,152,000
C. $267,952,000
D. $284,848,000
E. None of the above
LCF2 = $190,152,000
= $225,000,000 - .08 $742,500,000 (1 - .34)
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31. What is the levered after-tax incremental cash flow for year 4?
A. -$281,704,000
B. $465,152,000
C. -$194,848,000
D. $460,796,000
E. None of the above
LCF5 = -$281,704,000
= $500,000,000 - $742,500,000 - .08 $742,500,000 (1 - .34)
32. Using the flow to equity methodology, what is the value of the equity claim?
A. -$1,540,000
B. $446,570,866.00
C. $36,580,767.55
D. $470,953,393.70
E. $30,716,236.13
Discount the levered cash flows at requity = 13.96%
LCF 0 = -247,500,000; LCF 1 = 85,796,000;
CF2 = 185,796,000; CF3 = 335,796,000;
CF4 = -281,704,000
33. Using the APV method, what is the value of this project to an all-equity firm?
A. -$46,502,288.10
B. $12,494,643.75
C. $36,580,767.55
D. -$67,163,445.12
E. $59,459,301.03
Discount the unlevered cash flows at rasset = 10%
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Chapter 18 International Capital Budgeting
34. Using the APV method, what is the value of the debt side effects?
A. $239,072,652.70
B. $66,891,713.66
C. $59,459,301.03
D. $660,000,000
E. None of the above
CF0 = 742,500,000; CF1 = -39,204,000 = .08 $742,500,000 (1 - .34); F01 = 3
CF2 = -$781,704,000 = - $742,500,000- .08 $742,500,000 .66
Use I = 8%
35. In the APV model
A. interest tax shields are discounted at i
B. operating cash flows are discounted at Ku
C. depreciation tax shields are discounted at i
D. all of the above
36. Your firm's existing bonds trade with a yield to maturity of eight percent. The state of
Missouri has offered to loan your firm $10,000,000 at zero percent for five years. Repayment
will be of the form of $2,000,000 per year for five years the first payment is due in one year.
What is the value of this offer?
A. $4,729,622.75
B. $2,014,579.93
C. $0
D. $196,929.88
E. None of the above
Using a financial calculator: N = 5; I/Y = 8% PMT = -$2,000,000 solve for PV = $7,985,420.07
The state is giving you $10,000,000 for a promise that's worth only $7,985,420.07. The value of
that is $2,014,579.93
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Chapter 18 International Capital Budgeting
37. What proportion of the firm is financed by debt for a firm that expects a 15% return on
equity, a 12% return on assets, and a 10% return on debt? The tax rate is 25%.
A. 20%
B. 1/3
C. 60%
D. 2/3
E. 80%
From Modigliani-Miller Proposition II (perhaps not displayed to its best advantage in footnote 2,
but surely something students know coming into the course) we can find the debt-equity ratio.
With a debt equity ratio, it's easy to find debt to value:
38. The required return on equity for a levered firm is 10.60%. The debt to equity ratio is the
tax rate is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed
entirely with equity.
A. 10%
B. 12%
C. 8.67%
D. None of the above
From Modigliani and Miller proposition 2 the required return on equity for a levered firm is Kl =
Ku + (1- )(Ku - i)(Debt/Equity)
Instructors note: some students will select b) the WACC. Students who have had corporate
finance should know M&M proposition 2. Good questions for graduate courses.
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39. The required return on equity for an all-equity firm is 10.0%. They are considering a change
in capital structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is
8%. Find the new cost of capital if this firm changes capital structure.
A. 14.93%
B. 8.67%
C. 7.40%
D. None of the above
From Modigliani and Miller proposition 2 that the required return on equity for a levered firm is
Kl = Ku + (1- )(Ku - i)(Debt/Equity)
Instructors note: Students who have had corporate finance should know M&M proposition 2. A
common mistake will be a); a grievous mistake confusing D/E and D/V would be c). Good
questions for graduate courses.
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40. The required return on equity for an all-equity firm is 10.0%. They currently have a beta of
one and the risk-free rate is 5% and the market risk premium is 5%. They are considering a
change in capital structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of
debt is 8%. Find the beta if this firm changes capital structure.
A. 1.12
B. 1
C. 7.4%
D. None of the above
From Modigliani and Miller proposition 2: Kl = Ku + (1- )(Ku - i)(Debt/Equity)
Instructors note: Students who have had corporate finance should know M&M proposition 2 and
the difference between an asset beta and an equity beta. Good questions for graduate courses.
41. What is the expected return on equity for a tax-free firm with a 15% expected return on
assets that pays 12% on its debt, which totals 25% of assets?
A. 24%
B. 15.60%
C. 16%
D. 20%
E. 15.75%
Start with debt-to-value ratio of 25%, find debt-to-equity ratio, then use
Kl = Ku + (1- )(Ku - i)(Debt/Equity)
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42. What is the expected return on equity for firm in the 40% tax bracket with a 15% expected
return on assets that pays 12% on its debt, which totals 25% of assets?
A. 24%
B. 15.60%
C. 16%
D. 20%
E. 15.75%
Start with debt-to-value ratio of 25%, find debt-to-equity ratio, then use
Kl = Ku + (1- )(Ku - i)(Debt/Equity)
43. Assume that XYZ Corporation is a leveraged company with the following information:
Kl = cost of equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted
average cost of capital of 9.3%.
A. 35%
B. 40%
C. 45%
D. 50%
Equation 17.1
Let D = debt-to-total-market-value ratio
0.093 = (1 - D/V) 0.13 + D/V (1 - 0.30) 0.08
0.093 = 0.13 - 0.13D/V + D/V 0.70 0.08
0.13D/V - 0.056 D/V = 0.13 - 0.093
0.074D/V = 0.037
D/V = 0.50 = 50%
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44. Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will
be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)
payments over 3 years. The first payment is due today and your taxes are due January 1 of each
year on the previous year's income. The yield to maturity on your firm's existing debt is 8%.
What is the APV of this subsidized loan? Note that I did not round my intermediate steps. If you
did, your answer may be off by a bit. Select the answer closest to yours.
A. $406,023.10
B. $840,797
C. $64,157.38
D. $20,659.77
E. None of the other answers are within $100 of my answer
First, get into begin mode
and 1 payment per year:
PV = 10,000,000
N= 3
I= 5%
PMT = -$3,497,224.43
Amortize the loan
The size and timing of the cash flows of the loan are:
CF0 = $6,502,775.57
CF1 = -$3,497,224.43
CF2 = -$3,386,667.24
CF3 = -$56,621.73
I= 8%
NPV = $406,023.10
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45. An Italian firm is considering selling its line of coin-operated cappuccino machines in the
U.K. The business risk will be identical to the firm's existing line of business in the euro zone,
the cost of capital in the euro zone is i = 10%. The expected inflation rate over the next two
years in the U.K. is 3% per year and 2% per year in the euro zone. The spot exchange rates are
$1.80 = 1.00 and $1.15 = 1.00
The pound sterling denominated cash flows are as follows:
What is the -denominated NPV of this project? I did not round my intermediate steps, if you
did, select the answer closest to yours.
A. 5,563.23
B. 2,270.79
C. 7,223.14
D. 3,554.29
E. There is not enough information (e.g. U.S. inflation) to do this problem.
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the appropriate cost of capital for the firm to use on these -denominated cash flows is
Use that discount rate in the cash flow menu of a financial calculator with CF0 = -100,000; CF1
= 25,000; CF2 = 100,000; NPV = 3,554.2877
Finally translate to pounds at the spot cross rate: Most students will take this approach:
Where the year-1 cash flow is given by
, and the year-two cash flow is
given by
These euro-denominated cash flows have an NPV of exactly 5,563.23. Students who take this
approach have lots of room for grievous rounding errors.
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46. The spot exchange rate is 125 = $1. The U.S. discount rate is 10%; inflation over the next
three years is 3% per year in the U.S. and 2% per year in Japan. Calculate the dollar NPV of this
project.
I did not round my intermediate steps, if you did, select the answer closest to yours.
A. $267,181.87
B. $14,176.67
C. $2,536.49
D. $2,137.46
E. None of the above
the easy way to do this is to estimate the yen-denominated required return
The yen-denominate cash flows given above yield an NPV = 267,181.87, which converts to
$2,137.46 at the spot exchange rate.
In the alternative, you could convert the cash flows at the exchange rates expected to prevail over
the next three years
When discounted at 10% this series of dollar-denominated cash flows has NPV = $2,137.46
Students prefer taking this approach, but they do tend to make a great deal of rounding errors.
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Chapter 18 International Capital Budgeting
Some of the factors (with selected explanations) used in calculating the basic "net present value"
and the "incremental" cash flows of a capital project are:
(i)- expected after-tax terminal value, including recapture of working capital
(ii)- net income, which belongs to the equity holders of the firm
(iii)- initial investment at inception
(iv)- depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed from the
calculation of net income, for tax purposes, but added back because it did not actually flow out
of the firm)
(v)- weighted-average cost of capital
(vi)- the firm's after-tax payment of interest to debtholders
(vii)- economic life of the capital project in years
47. The "net present value" of a capital project is calculated by using:
A. (i), (ii), and (iii)
B. (ii), (iv), and (vi)
C. (i), (iii), (v), and (vii)
D. (iv), (v), (vi), and (vii)
48. The "incremental" cash flows of a capital project is calculated by using:
A. (i), (ii), and (iii)
B. (ii), (iv), and (vi)
C. (i), (iii), (v), and (vii)
D. (iv), (v), (vi), and (vii)
49. In the context of the capital budgeting analysis of an MNC that has strong foreign
competitors, "lost sales" refers to:
A. the cannibalization of existing projects by new projects
B. the entire sales revenue of a new foreign manufacturing facility representing the incremental
sales revenue of the new project
C. a) and b)
D. none of the above
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Chapter 18 International Capital Budgeting
50. Which of the following statements is false about "borrowing capacity"?
A. it is an especially important point in international capital budgeting analysis because of the
frequency of large concessionary loans
B. it creates tax shields for APV analysis regardless of how the project is actually financed
C. is synonymous to the "project debt"
D. is based on the firm's optimal capital structure
51. The adjusted present value (APV) model that is suitable for an MNC is the basic net present
value (NPV) model expanded to:
A. distinguish between the market value of a levered firm and the market value of an unlevered
firm
B. discern the blocking of certain cash flows by the host country from being legally remitted to
the parent
C. consider foreign currency fluctuations or extra taxes imposed by the host country on foreign
exchange remittances
D. all of the above
52. Sensitivity analysis in the calculation of the adjusted present value (APV) allows the
financial manager to:
A. analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent
in the investment
B. more fully understand the implications of planned capital expenditures
C. consider in advance actions that can be taken should an investment not develop as anticipated
D. all of the above
53. The ABC Company, a U.S.-based MNC, plans to establish a subsidiary in Spain to
manufacture and sell water pumps. ABC has total assets of $80 million, of which $60 million is
equity financed. The remainder is financed with debt. ABC considers its current capital structure
optimal. The construction cost of the facility in Spain is estimated to be 8,500 million, of which
6,500 million is to be financed at a below-market rate of interest arranged by the Spainish
government. The proposed project will increase the borrowing capacity by:
A. 1,215 million
B. 2,215 million
C. 3,215 million
D. 4,215 million
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54. Given the following information for a levered and unlevered firm, calculate the difference in
the cash flow available to investors. Assume the corporate tax rate is 40%. (Hint: Calculate the
tax savings arising form the tax deductibility of interest payments).
A. $8
B. $18
C. $78
D. $90
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55. As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward
rate that should prevail?
A. 1.00 = $1.2379
B. 1.00 = $1.2139
C. 1.00 = $0.9903
D. $1.00 = 1.2623
Take the spot rate and gross up each side by the respective inflation rates
56. As of today, the spot exchange rate is 1.00 = $1.50 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward
rate that should prevail?
A. 1.00 = $1.5147
B. 1.00 = $1.4854
C. 1.00 = $0.6602
D. $1.00 = 0.6602
Take the spot rate and gross up each side by the respective inflation rates
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Chapter 18 International Capital Budgeting
57. 57 As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to
prevail for the next three years in the U.S. is 2% and 3% in the euro zone. What spot exchange
rate should prevail three years from now?
A. 1.00 = $1.2379
B. 1.00 = $1.2139
C. 1.00 = $0.9903
D. $1.00 = 1.2623
Take the spot rate and gross up each side by the respective inflation rates
Short Answer Questions
Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is
considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year,
sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be
depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is
projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the
start of each year.
The corporate tax rate is 12% in Ireland and 40% in the U.S.
For simplicity, assume that taxes are paid like sales taxes: immediately.
The spot exchange rate is $1.50 = 1.00. The cost of capital to the Irish firm for a domestic
project of this risk is 8%. The U.S. risk-free rate is 3%; the Irish risk-free rate is 2%.
58. What is CF0 in dollars?
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Chapter 18 International Capital Budgeting
59. What is CF1 in dollars?
60. What is CF5 in dollars?
61. What is the NPV of the U.S.-based project to the Irish firm?
62. What is the dollar-denominated IRR?
What is the euro-denominated IRR?
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Chapter 18 International Capital Budgeting
63. Find the break-even price (in dollars) and break-even quantity for the U.S. project.
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Chapter 18 International Capital Budgeting
64. Repeat the above project analysis assuming that the Irish firm could replicate the project in
Ireland. (i.e. cash flow out the project in Ireland and find break-even price (in ), quantity, NPV,
IRR (in euro not dollars).
Consider the following international investment opportunity. It involves a gold mine that can be
opened at a cost, then produces a positive cash flow, but then requires environmental clean up:
The current exchange rate is $1.60 = 1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
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Chapter 18 International Capital Budgeting
65. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
66. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Please note that your answer is worth ZERO POINTS if it does not contain currency symbols.
67. What is the dollar-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
68. What is the euro-denominated IRR of this project?
Consider the following international investment opportunity. It involves a gold mine that can be
opened at a cost, then produces a positive cash flow, but then requires environmental clean up:
The current exchange rate is $1.55 = 1.00. The inflation rate in the U.S. is 6 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
69. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
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Chapter 18 International Capital Budgeting
70. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
Your answer is worth ZERO POINTS if it does not contain currency symbols such as $, , ,
!
71. What is the dollar-denominated IRR of this project?
72. What is the euro-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
Consider the following international investment opportunity:
The current exchange rate is $1.60 = 1.00. The inflation rate in the U.S. is 3 percent and in the
euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of
this risk is 8 percent.
73. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
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Chapter 18 International Capital Budgeting
74. Find the dollar cash flows to compute the dollar-denominated NPV of this project.
75. What is the dollar-denominated IRR of this project?
Answer
76. What is the euro-denominated IRR of this project?
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Chapter 18 International Capital Budgeting
Use this information for the next ten (10) questions.
A French firm is considering a one-year investment in the United Kingdom with a pounddenominated rate of return of i = 15%. The firm's local cost of capital is i= 10%
The project costs 1,000 and will return 1,150 at the end of one year.
The current exchange rate is 2.00 = 1.00
Suppose that the bank of England is considering either tightening or loosening its monetary
policy. It is widely believed that in one year there are only two possibilities:
S1(| ) = 2.20 per
S1(| ) = 1.80 per
Following revaluation, the exchange rate is expected to remain steady for at least another year
77. Find the ex post IRR in euro for the French firm if they undertake the project today and then
the exchange rate falls to S1(| ) = 1.80 per .
78. Find the ex post IRR in euro for the French firm if they undertake the project today and then
the exchange rate rises to S1(| ) = 2.20 per .
Answer:
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Chapter 18 International Capital Budgeting
79. Find the IRR in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(| ) = 2.20 per .
80. Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate rises to S1(| ) = 2.20 per .
81. Find the IRR in euro for the French firm if they wait one year to undertake the project after
the exchange rate falls to S1(| ) = 1.80 per .
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82. Find the NPV in euro for the French firm if they wait one year to undertake the project after
the exchange rate falls to S1(| ) = 1.80 per .
83. The CFO who has a CFA notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.
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84. Your banker quotes the euro-zone risk-free rate at i = 6% and the British risk free rate at i
= 6%. Find the value of the option and thereby the project.
85. Using your results to the last question, make a recommendation vis--vis when to undertake
the project.
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Chapter 18 International Capital Budgeting
86. Using the notion of a hedge ratio, make a recommendation vis--vis how to undertake the
project today without "buying" the option.
Feedback
An American Hedge Fund is considering a one-year investment in an Italian government bond
with a one-year maturity and a euro-denominated rate of return of i = 5%. The bond costs
1,000 today and will return 1,050 at the end of one year without risk. The current exchange
rate is 1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to
maturity of 4%. Suppose that the European Central Bank is considering either tightening or
loosening its monetary policy. It is widely believed that in one year there are only two
possibilities:
S1($|) = $1.80 per
S1($|) = $1.40 per
Following revaluation, the exchange rate is expected to remain steady for at least another year
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Chapter 18 International Capital Budgeting
87. Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate falls to S1($|) = $1.40 per .
88. Find the ex post IRR in euro for the American firm if they buy the bond today and then the
exchange rate rises to S1($|) = $1.80 per .
89. Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($|) = $1.80 per . Assume that i doesn't change.
90. Find the NPV in dollars for the American firm if they wait one year to buy the bond after the
exchange rate rises to S1($|) = $1.80 per . Assume that i doesn't change.
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Chapter 18 International Capital Budgeting
91. Find the IRR in dollars for the American firm if they wait one year to buy the bond after the
exchange rate falls to S1($|) = $1.40 per . Assume that i doesn't change.
92. Find the NPV in euro for the American firm if they wait one year to undertake the project
after the exchange rate falls to S1($|) = $1.40 per . Assume that i doesn't change.
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Chapter 18 International Capital Budgeting
93. The hedge fund manager notices the optionality in starting this project today. He asks you to
comment and outline your valuation strategy.
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Chapter 18 International Capital Budgeting
94. Your banker quotes the euro-zone risk-free rate at i = 5% and the U.S. risk free rate at i$ =
4%. Find the value of the option and thereby the correct value of the bond to a U.S. investor.
95. Using your results to the last question, make a recommendation vis--vis when to buy the
bond.
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Chapter 18 International Capital Budgeting
96. Using the notion of hedging, make a recommendation vis--vis how to undertake the project
today without "buying" the option.
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it
will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management
believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold
per year. The expansion, including the cost of the land, will cost $500,000. The current price of
gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 (1.06).
Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent.
Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold
reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the
foreseeable future. On the other hand, management believes there is some possibility that the
world will soon return to a gold reserve international monetary system. In the latter event, the
price of gold would increase to at least $460 per ounce. The course of the future price of gold
bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by
buying a purchase option on the land for $25,000.
97. Compute the NPV at the current price of gold. Hint: think of the gold mine as a perpetuity
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98. Compute the NPV at the two possible prices of gold.
99. Estimate the value of the option on the land to the management of the mine.
100. What should Strik-it-Rich's management do?
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Ohio State - ACCTMIS - 626

Chapter 17 International Capital Structure and the Cost of CapitalChapter 17International Capital Structure and the Cost of CapitalMultiple Choice Questions1. The cost of capital is:A. The minimum rate of return an investment project must generate in

Ohio State - ACCTMIS - 626

Chapter 16 Foreign Direct Investment and Cross-Border AcquisitionsChapter 16Foreign Direct Investment and Cross-Border AcquisitionsMultiple Choice Questions1. Under a 1981 Voluntary Trade Agreement Japanese automobile manufacturers were notallowed to

Ohio State - ACCTMIS - 626

Chapter 15 International Portfolio InvestmentChapter 15International Portfolio InvestmentMultiple Choice Questions1. Under the investment dollar premium system,A. U.K. residents received a premium over the prevailing commercial exchange rate when the

Ohio State - ACCTMIS - 626

Chapter 13 International Equity MarketsChapter 13International Equity MarketsMultiple Choice Questions1. The sale of new common stock by corporations to initial investors occurs inA. The primary marketB. The secondary marketC. The OTC marketD. The

Ohio State - ACCTMIS - 626

Chapter 11 International Banking and Money MarketChapter 11International Banking and Money MarketMultiple Choice Questions1. International banks are different from domestic banks in what way(s)?A. International banks can arrange trade financingB. In

Ohio State - ACCTMIS - 626

Chapter 10 Management of Translation ExposureChapter 10 Management of Translation ExposureMultiple Choice Questions1. Translation exposure refers to:A. accounting exposureB. the effect that an unanticipated change in exchange rates will have on the c

Ohio State - ACCTMIS - 626

Chapter 09 Management of Economic ExposureChapter 09Management of Economic ExposureMultiple Choice Questions1. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change inexchange rateA. Can have significant economic con

Ohio State - ACCTMIS - 626

Chapter 06 International Parity Relationships and Forecasting Foreign ExchangeChapter 06International Parity Relationships and Forecasting Foreign ExchangeMultiple Choice Questions1. An arbitrage is best defined as:A. A legal condition imposed by the

Ohio State - ACCTMIS - 626

Chapter 05 The Market for Foreign ExchangeChapter 05 The Market for Foreign ExchangeMultiple Choice Questions1. The world's largest foreign exchange trading center is:A. New YorkB. TokyoC. LondonD. Hong Kong2. On average, worldwide daily trading o

Ohio State - ACCTMIS - 626

Chapter 04 Corporate Governance around the WorldChapter 04Corporate Governance around the WorldMultiple Choice Questions1. Corporate governance can be defined as:A. the economic, legal, and institutional framework in which corporate control and cash

Ohio State - ACCTMIS - 626

Chapter 01 Globalization and the Multinational FirmChapter 01 Globalization and the Multinational FirmMultiple Choice Questions 1. What major dimension sets apart international finance from domestic finance? A. foreign exchange and political risks B. Ma

Ohio State - ACCTMIS - 626

Chapter 08 - Management of Transaction ExposureChapter 08Management of Transaction ExposureMultiple Choice Questions1. Transaction exposure is defined as:A. the sensitivity of realized domestic currency values of the firm's contractual cash flowsden

UNAM MX - INGENIERIA - 1

D ISTRIBUCIONES DE FRECUENCIAUna d istribucindeu na o rdenacin e nfrecuencias o t ablaformade t abla d edefrecuencias e slos d atosestadsticos ,a signando a cada d ato s u f recuencia correspondiente .TIPOS DE FRECUENCIAFRECUENCIA ABSOLUTALa

Rutgers - PSYCHOLOGY - 101

Psychology Exam 3NotesDevelopmental Psychology-Study of how you grow (morally, socially, and mentally)Nature-Maturation: Critical Periodse.g., McGraws toilet training study (1940)-24-36 months-activity that is very difficult to accomplishprior to

Rutgers - PSYCHOLOGY - 101

Psychology Exam 4 Notes4/16/12Continuing from last lecture (Disorders)Medical Student Syndrome-Syndrome in which medical students start to see symptoms within themselves-Premature conclusions Psychodynamic Perspectives Attempts to explain Freuds ps

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionIntroduction to DecisionAnalysis for Engineering A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy0aFALL 2003Dr . Ibrahim. AssakkafENCE 627 Deci

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionIntroduction to DecisionAnalysis for Engineering A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy0bFALL 2003Dr . Ibrahim. AssakkafENCE 627 Deci

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionIntroduction to DecisionAnalysis A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy1FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionElements of DecisionProblems A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy2FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for Eng

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionMaking Choices A. J. Clark School of Engineering Department of Civil and Environmental EngineeringByFALL 20034aDr . Ibrahim. AssakkafENCE 627 Decision Analysis for EngineeringDepar

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionMaking Choices A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy4bFALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for EngineeringDepar

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionCREATIVITY ANDDECISION MAKING A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy6FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for En

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionModeling Uncertainty A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy7aFALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for Engineering

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionProbability Basics A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy7bFALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for EngineeringD

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionSubjective Probability A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy8FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for Engineerin

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionTheoretical Probability Models A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy9FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for En

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionTheoretical Probability Models A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy9FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for En

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionUsing Data A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy10FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for EngineeringDepartmen

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionUsing Data A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy10FALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for EngineeringDepartmen

UCF - ESI - 6385

CHAPTERDuxburyThomsonLearningMaking Hard DecisionThird EditionMONTE CARLOSIMULATION A. J. Clark School of Engineering Department of Civil and Environmental EngineeringBy11aFALL 2003Dr . Ibrahim. AssakkafENCE 627 Decision Analysis for Engineer

UCF - ENC - 1101

Terrestrial PlanetsInner solar system(closer to the sun)Rocky surfacesSmaller mass and sizeDenseMetal interiorFew moons if any & no ringsMercuryNo atmosphereNo moonsSmall lava plains/volcanoes not activeStill heavily cratered Fewer craters than

Waterloo - MATH - 431

ANSWERS TO ASSIGNMENT 1 ACTSC 431/831, FALL 20121. (a)FY L (y ) = Prcfw_Y L y = 0, y+80,200 y+50 1501,y < 0;0 y < 40;+ 0.6, 40 y < 100;y 100.[5 marks](b)FY P (y ) = Prcfw_Y L y | X > 80 =0,y,120y 10,901,y 0;0 < y < 40;40 y < 10

Waterloo - MATH - 431

ASSIGNMENT 2 ACTSC 431/831, FALL 2012Due at the beginning of the class on Friday, October 5.1. Suppose that loss X has a two-point mixture distribution with the following cdf:FX (x) = 0.3F1 (x) + 0.7F2 (x) for all x,where Fj (x) is the cdf of eXj for

Waterloo - MATH - 431

ANSWERS TO ASSIGNMENT 2 ACTSC 431/831, FALL 20121. (a) E (X ) = 0.3E (eX1 ) + 0.7E (eX2 ) = 0.3MX1 (1) + 0.7MX2 (1) = 4.7485. [4 marks](b) We have E (X 2 ) = 0.3E (e2X1 ) + 0.7E (e2X2 ) = 0.3MX1 (2) + 0.7MX2 (2) = 330.934.Hence V ar(X ) = 308.386.[4 m

Waterloo - MATH - 431

ACTSC 371 Corporate Finance 1Assignment 2 Due Date March 2, 2012 at 3 pmPlease submit your assignment in the DROP BOXESQuestion 1: The annual earnings of Avalanche Skis Inc will be $4 per share in perpetuity if the firmmakes no new investments. Under

Waterloo - MATH - 431

Waterloo - MATH - 431

Math 235Tutorial 6 Problems1: Find a and b to obtain the best tting equation of the form y = a + bt for the givendata.t 1 1 3.y 1 052: Find all least square solutions of the equation Ax = b where11071 1 021 1 03A=b= ,1 0 161 0 151014

Waterloo - MATH - 431

ACTSC 331 - Fall 2012 - Assignment 2Due Friday Oct 12 at start of class1. A contract issued to a life age x pays a sum insured of 10,000 immediately on death withinn years, and pays 20,000 on survival to n years. Level premiums are payable continuously

Waterloo - MATH - 431

ACTSC 331 Life ContingenciesFall 2012Instructor:officeDiana Skrzydlo M3 3144phonex36721emailoffice hoursdkchisho@uwaterloo.ca Mon 11 - 12, Wed 1 - 3Textbook: The primary source for this course is the notes given during class. The textbook isAct

Waterloo - MATH - 431

BusinessProcessesandTypesofISChapter02MichaelLiuUniversityofWaterloo1Table11,BusinessFunctionsFunctionPurposeSalesandMarketing SellingtheorganizationsproductsandservicesManufacturingandProductionProducingproductsandservicesFinanceandAccount

Waterloo - MATH - 431

ReviewLecture12Casestudies BusinessfunctionsBusinessprocesses4commonBFsImplicitorexplicitWithinoracrossISandbusinessprocessesAutomation,enablenewservice/productBI1BusinessProcessesandTypesofISChapter02MichaelLiuUniversityofWaterloo2ThreeK

Waterloo - MATH - 431

BusinessProcessesandTypesofISChapter02MichaelLiuUniversityofWaterloo1CoreModulesofAISAccountsreceivablewherethecompanyentersmoneyreceived Accountspayablewherethecompanyentersitsbillsandpaysmoneyitowes Generalledgerthecompany's"books" Billingwh

Waterloo - MATH - 431

OrganizationandMISChapter03MichaelLiuUniversityofWaterloo1TechnicalviewofOrganization Astable,formalsocialstructurethattakesresourcesfromtheenvironmentandprocessesthemtoproduceoutputs2BehavioralviewofOrganizationFigure333ReviewofLecture31AI

Waterloo - MATH - 431

Social,Legal,andEthicalIssuesintheDigitalFirmMichaelLiuChapter04UniversityofWaterloo1Ethical,Social,Legal Ethical:Principlesofrightandwrongthatindividualsusetomakechoicestoguidetheirbehaviors Social:affectingpeopleorcommunication Legal/Politica

Waterloo - MATH - 431

Ethical,Social,LegalandIssuesintheDigitalFirmMichaelLiuChapter04UniversityofWaterloo11.InformationRightsPrivacy:Claimofindividualstobeleftalone,freefromsurveillanceorinterferencefromotherindividuals,organizations,orthestate.PersonalInformationP

Waterloo - MATH - 431

InformationSystemSecurityMichaelLiuChapter05UniversityofWaterloo1LearningObjectivesCommoncyberthreats Definitionofcomputersecurity 6categoriesofsecurityservices Implementationsofsecurityservices Securitypolicyandsecurityaudit2ContemporarySec

Waterloo - MATH - 431

InformationSystemSecurityMichaelLiuChapter05UniversityofWaterloo1ImplementationFirewallAntivirussoftwareProvideauthentication,accesscontrol,availabilityExample:dedicatedhardware,smartcard,fingerprintscan,retinascan,VPNdongle,backupetcSecurity

Waterloo - MATH - 431

InformationSystemSecurityMichaelLiuChapter05UniversityofWaterloo1SteganographyAnalternativetoencryptionforsecrecy HidesexistenceofmessageUsingonlyasubsetofletters/wordsinalongermessagemarkedinsomewayHidingdataingraphicimageorsoundfileUsinginv

Waterloo - MATH - 431

ITInfrastructureandEmergingTechnologiesChapter06MichaelLiuUniversityofWaterloo1ITInfrastructureThesharedtechnologyresourcesthatprovidetheplatformforthefirmsinformationsystemapplications.Includesinvestmentinhardware,software,andservices,suchasco

Waterloo - MATH - 431

ITInfrastructureandEmergingTechnologiesChapter06MichaelLiuUniversityofWaterloo11.ComputerHardwarePlatformsClientmachinesServermachinesDesktops,laptops,PDAsandportablecomputingdevicesMostuseIntelorAMDCPUsHighendPCBladeservers(thin,modulardevic

Waterloo - MATH - 431

ITInfrastructureandEmergingTechnologiesChapter06MichaelLiuUniversityofWaterloo1TechnologyTrends2IntegrationIntegrationofComputingandTelecommunications Increasingly,computinghappensonthenetwork Clientlevel:IntegrationofcellphonesandPDAs Serverl

Waterloo - MATH - 431

DatabaseandInformationManagementChapter07MichaelLiuUniversityofWaterloo1HowtoStoreDataDigitally?Howtostore?InafileInadatabaseWhichwayisbetterandwhy?ImageSource:http:/www.lasvegasbuyeragent.com/loans/mortgages/variableratemortgage/WhichIsBetterV

Waterloo - MATH - 431

DatabaseandInformationManagementChapter07MichaelLiuUniversityofWaterloo1DatabaseDesign2EntityRelationshipDiagramItisusedtographicallyandinformallydescribethedatawewanttostoreEntity:representedasabox,representsubjectintherealwordAttribute:repr

Waterloo - MATH - 431

TelecommunicationsandNetworksChapter08MichaelLiuUniversityofWaterloo1CopyrightandAcknowledgementTherearetwomajorsourcesfortheseslides:FromthetextbookwrittenbyLaudon,LaudonandBrabston(2009).ManagementInformationSystems:ManagingtheDigitalFirm,Fou

Waterloo - MATH - 431

TelecommunicationsandNetworksChapter08MichaelLiuUniversityofWaterloo1TheInternetAnetworkofnetworksAcollectionoflocal,regional,nationalandinternationalcomputernetworkslinkedtogethertoexchangedataandinformationUsesTCP/IPandclient/serverarchitectu

Waterloo - MATH - 431

SystemDevelopmentandManagementChapter10MichaelLiuUniversityofWaterloo1Motivation:WebforaCompanyJanetisconsideringbuildingawebsiteforherfirm.Whatarethestepsofbuildingawebsite?Whatneedstobedecidedbeforeshehiressomeonetodoit?Whatelseneedstobedone

Waterloo - MATH - 431

ACTSC 232 - Spring 2012 - Assignment 1Due: Friday, May 25 at 11:30 am21. The function 1900090xx has been proposed for the survival function S0 (x) for a19000mortality model.(a) What is the implied limiting age ?(b) Verify that S0 (x) satises the 3

Waterloo - MATH - 431

ACTSC 232 - Spring 2012 - Assignment 1 SOLUTIONS21. The function 1900090xx has been proposed for the survival function S0 (x) for a19000mortality model.(a) What is the implied limiting age ?2Since S0 ( ) = 1900090 = 0,19000we need 2 + 90 19000 =

Waterloo - MATH - 431

ACTSC 232 - Spring 2012 - Assignment 2Due: Friday, June 29 at 11:30 am1. (a) Describe in words the insurances with the present values given.i. Z1 =20000v Tx , Tx 1010000v Tx , Tx 10Tx 15 0,10000v Tx , 15 Tx 25ii. Z2 =10000v 25 , Tx 25(b) Write

Waterloo - MATH - 431

ACTSC 232 - Spring 2012 - Assignment 2 SOLUTIONS1. (a) Describe in words the insurances with the present values given.20000v Tx , Tx 1010000v Tx , Tx > 10This benet pays 20000 immediately on death if death occurs within 10years, but the benet reduces

Waterloo - MATH - 431

ACTSC 232 - Spring 2012 - Assignment 3Due: Wednesday, July 25 at 11:30 am1. Suppose that Makehams law applies with A = 0.001, B = 0.0007 and c = 1.082.Assume also that the eective rate of interest is 2% per year, and = 120.(a) Use Excel (your spreadsh