Chapter 14 Multinational Capital Budgeting 1. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a _______ after the subsidiary is established. A) strengthening euro B) stable euro C) weak euro D) stable and weak euro ANSWER: A 2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use: A) a risk-adjusted discount rate. B) payback period. C) certainty equivalents. D) simulation. ANSWER: D 3. When evaluating international project cash flows, which of the following factors is relevant? A) future inflation. B) blocked funds. C) exchange rates. D) all of these. ANSWER: D 4. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary’s perspective, which variable will most likely influence the capital budgeting analysis? A) the withholding tax rate. B) the euro’s exchange rate. C) the U.S. tax rate on earnings remitted to the U.S. D) the German government’s tax rate. E) the withholding tax rate AND the U.S. tax rate on earnings remitted to the U.S. ANSWER: D 39
40 International Financial Management 5. In capital budgeting analysis, the use of a cumulative NPV is useful for: A) determining a probability distribution of NPVs. B) determining the time required to achieve a positive NPV. C) determining how the required rate of return changes over time. D) determining how the cost of capital changes over time. E) determining a probability distribution of NPVs AND determining the time required to achieve a positive NPV. ANSWER: B 6. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by: A) the cost of borrowing funds in the U.K. B) the cost of borrowing funds in the U.S. C) the parent’s cost of capital. D) the cost of borrowing funds in both the U.K. and the U.S. ANSWER: C 7. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso _______, the dollar amount of remitted funds _______. A) appreciates; decreases B) depreciates; is unaffected C) appreciates; is unaffected D) depreciates; decreases ANSWER: D 8. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when: A) the subsidiary finances the entire investment by local borrowing. B) the subsidiary finances most of the investment by local borrowing.
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