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QUESTION

# Direct foreign investment would typically be welcomed if: A) the products to be produced are substitutes for other locally produced products.

NOK15,000,000       NOK17,000,000       NOK20,000,000

The current exchange rate of the Norwegian kroner is \$.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:

Year 1                          Year 2                         Year 3                         Year 4

\$.13                                 \$.14                             \$.12                             \$.15

38. What is the net present value of the Norwegian project?

–\$803,848.

\$5,803,848.

\$1,048,829.

none of these.

39. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%?

–\$17,602.62.

\$8,000,000.

\$1,048,829.

\$645,147.

40.  A firm forecasts the euro’s value as follows for the next year:

Possible

Percentage Change                                Probability

–2%                                             10%

3%                                             50%

6%                                             40%

The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S. firm’s perspective is about:

A)  8.436%.

B)  10.959%.

C)  11.112%.

D)  11.541%.

41.  Smith Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A\$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest \$1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be \$.55 and \$.60, respectively?

\$2,905,817.

–\$94,183.

\$916,128.

none of these.

The following information refers to questions 42 through 43.

Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years.

Cost of goods sold are expected to be 60% of revenues.

Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

The Malaysian tax rate on the target's earnings is expected to be 30%.

Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

The target will need MYR9 million in cash each year to support existing operations.

The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.

Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently \$.23.

Klimewsky's required rate of return on similar projects is 13%.

42.  The Malaysian target’s value based on its stock price is \$_______ million.

1.4

1,673.9

111.5

88.6

none of these

43. The target’s board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer?

30.0%.

25.9%.

You should not offer any premium because the market’s valuation is below Klimewsky’s valuation.

none of these.

44. If the foreign currency _______ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes _______ the change in the exchange rate.

A) appreciates; by a lesser percentage then

B) depreciates; in the same proportion as

C) appreciates; in the same proportion as

D) appreciates; by a greater percentage than

45. To best reduce exposure to a host government takeover, a subsidiary could:

A)  use a long‑run profit perspective for business in that country.

B)  hire people from its own country if the host government does not cooperate.

C)  attempt to obtain supplies from its parent for which substitutes are not available.

D)  borrow funds from its parent rather than from the host country’s creditors.

46. When quantifying country risk:

weights should be equally allocated among factors.

weights should be assigned to the political and financial factors according to their perceived importance.

it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.

the derived factors will be identical for all MNCs conducting business in that country.

47. Perhaps the most appropriate method for incorporating forms of country risk in a capital budgeting analysis is to estimate how the _______ would be affected by each form of risk.

discount rate

cash flows

opportunity cost

none of these

48. The term “global” target capital structure for an MNC represents the MNC’s capital structure:

in the U.S.

relative to competitors across all countries.

where it has its largest subsidiary.

when consolidating all of its subsidiaries.

49. Based on the factors that influence a country’s cost of capital, the cost of capital in less developed countries is likely to be _______ than that of the U.S. and _______ than that of Japan.

A)  higher; higher

B)  higher; lower

C)  lower; lower

D)  lower; higher

50. The term “local target capital structure” is used in the text to represent the:

A)  average capital structure of local firms where the MNC’s subsidiary is based.

B)  average capital structure of local firms where the MNC’s parent is based.

C)  desired capital structure of a subsidiary of a particular MNC.

D)  desired capital structure of a particular MNC overall (including all subsidiaries).