1) The traditional financial analysis applied to foreign or domestic projects, to determine the

project's value to the firm is called ________.

A) cost of capital analysis
B) capital budgeting
C) capital structure analysis
D) agency theory

2) Which of the following is NOT a basic step in the capital budgeting process?
A) Identify the initial capital invested.
B) Estimate the cash flows to be derived from the project over time.
C) Identify the appropriate interest rate at which to discount future cash flows.
D) All of the above are steps in the capital budgeting process.

3) Of the following capital budgeting decision criteria, which does NOT use discounted cash
flows?
A) net present value
B) internal rate of return
C) accounting rate of return
D) All of these techniques typically use discounted cash flows.

4) There are no important differences between domestic and international capital budgeting
methods. FALSE

5) Which of the following is NOT a reason why capital budgeting for a foreign project is more
complex than for a domestic project?
A) Parent cash flows must be distinguished from project cash flows.
B) Parent firms must specifically recognize remittance of funds due to differing rules and
regulations concerning remittance of cash flows, taxes, and local norms.
C) Differing rates of inflation between the foreign and domestic economies.
D) All of the above add complexity to the international capital budgeting process.

6) It is important that firms adopt a common standard for the capital budgeting process for
choosing among foreign and domestic projects. TRUE

7) Project evaluation from the ________ viewpoint serves some useful purposes and/but should
________ the ________ viewpoint.
A) local; be subordinated to; parent's
B) local; not be subordinated to; parent's
C) parent's; be subordinated to; local
D) none of the above

8) For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary
that is over ________ owned.
A) 20%
B) 40%
C) 50%
D) 75%
9) A foreign firm that is 20% to 49% owned by a parent is called a/an ________.
A) subsidiary
B) affiliate
C) partner
D) rival

10) Affiliate firms are consolidated on the parent's financial statements on a ________ basis.
A) pro rated
B) 50%
C) 75%
D) 100%

11)Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of
6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power
parity to estimate the one year spot rate of krone per dollar.
A) 7.87 krone per dollar
B) 8.10 krone per dollar
C) 8.34 krone per dollar
D) There is not enough information to answer this question.

12)When evaluating capital budgeting projects, which of the following would NOT necessarily
be an indicator of an acceptable project?
A) an NPV >$0
B) an IRR > the project's required rate of return
C) an IRR > $0
D) All of the above are correct indicators.

13) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates
of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing
power parity to estimate the one year spot rate of krone per dollar.
A) 7.87 krone per dollar
B) 8.10 krone per dollar
C) 8.34 krone per dollar
D) There is not enough information to answer this question.

14) When determining a firm's weighted average cost of capital (wacc) which of the following
terms is NOT necessary?
A) the firm's tax rate
B) the firm's cost of debt
C) the firm's cost of equity
D) All of the above are necessary.

15) When determining a firm's weighted average cost of capital (wacc) which of the following
terms is NOT necessary?
A) the firm's weight of equity financing
B) the risk-free rate of return
C) the firm's weight of debt financing
D) All of the above are necessary to determine a firm's wacc.

16)Of the following, which would NOT be considered an initial outlay at time 0 (today)?
A) investment in new equipment
B) initial investment in additional net working capital
C) shipping and handling costs associated with the new investment
D) All of the above are initial outlays.

30) Which of the following is NOT an example of political risk?

A) Expropriation of cash flows by a foreign government.
B) The U.S. government restricts trade with a foreign country where your firm has
investments.
C) The foreign government nationalizes all foreign-owned assets.
D) All of the above are examples of political risk.

31) Generally speaking, a firm wants to receive cash flows from a currency that is ________
relative to their own, and pay out in currencies that are ________ relative to their home
currency.
A) appreciating; depreciating
B) depreciating; depreciating
C) appreciating; appreciating
D) depreciating; appreciating

32) When dealing with international capital budgeting projects, the value of the project is NOT
sensitive to the firm's cost of capital. FALSE

33) Projects that have ________ are often rejected by traditional discounted cash flow models of ca
pital budgeting.
A) long lives
B) cash flow returns in later years
C) high risk levels
D) all of the above

34) An alternative to traditional discounted cash flow models is ________.

A) the capital asset pricing model
B) dividend growth model
C) real option analysis model
D) none of the above

35) Real option analysis allows managers to analyze all of the following EXCEPT:
A) the option to defer.
B) the option to abandon.
C) the option to alter capacity.
D) All of the above may be analyzed using real option analysis.

36) For international investments, relative to project cash flows, parent cash flows are often
dependent on the form of financing. TRUE

37) Which of the following considerations is NOT important for a parent firm when considering forei
gn investment?
A) the form of financing
B) remittance of funds at risk due to political considerations
C) differing rates of national inflation
D) All of the above are important considerations.

38) Which of the following is NOT a method for considering additional risk with international
projects?
A) adding an additional risk premium to the discount factor used
B) decreasing expected cash flows
C) conducting detailed sensitively and scenario analysis
D) All of the above are legitimate methods for considering additional risk.

39) Your company just received a $500,000 cash remittance from its British subsidiary. If the
Riskfree one-year T-bill rate is 4.5% and the current exchange rate is $1.45/£, and the
one-year forward rate is $1.44/£, then the present value of the remittance is ________.
A) $725,000
B) $500,000
C) $693,780
D) $478,469

40) Capital budgeting analysis for a foreign project is more complex than for the domestic case for all
of the following reasons EXCEPT:
A) differences in national inflation rates.
B) parent cash flows must be distinguished from project cash flows.
C) the possibility of unanticipated foreign exchange rate changes.
D) All of the above are correct.

41) When a parent corporation performs a capital budgeting analysis, the additional risks due to the f
oreign location of a project should generally be handled by
A) decreasing the project's hurdle rate.
B) modifying the quarterly tax payments in advance.
C) adjusting the cash flows to the parent.
D) informing all investors of the risk potential.

42) Cash flows to parents are ultimately the basis for dividends to stockholders, reinvestment elsewh
ere in the world, repayment of corporate wide debt, and other proposals that affect
the firm's many interest groups. Therefore, analysis of any foreign project should be from the viewpoi
nt of the ________.
A) host country
B) parent
C) project
D) local government
43) As in domestic capital budgeting, a potential international project or capital budget will be consid
ered a net benefit to the firms if
A) the project has a net present value greater than zero.
B) the IRR on the project is less than the wacc.
C) the IRR exceed the project's NPV.
D) All of the above are true.

44) An international investment opportunity should be rejected if

A) the project's NPV > parent viewpoint NPV.
B) the IRR of the project is <20%.
C) the NPV of the project is >0, but the NPV of the parental viewpoint is
< 0.
D) all of the above are true.

45) Which of the following is NOT a risk commensurate with international investments?
A) foreign exchange rate risk
B) country risk
C) political risk
D) All of the above are relevant risks.

46) Project finance is characterized by which of the following features?

A) long project life
B) high capital intensity of undertaking the investment
C) production or provision of a basic commodity or service
D) All of the above.

TABLE 19.1
Use the information to answer following question(s).

Jensen Aquatics Inc., which manufactures and sells scuba gear worldwide, is considering an investme
nt in either Europe or Great Britain. Consider the following cash flows for each project, assume a 12%
wacc, and consider these to be average risk projects for the firm. Answer the questions that follow.

47) Refer to Table 19.1. The NPV for the British investment is estimated at ________.
A) $3,092
B) $6,420
C) £3,092
D) $0

48) Refer to Table 19.1. The NPV for the European investment is estimated at ________.
A) euro 4,945
B) $4,945
C) $6,420
D) euro 6,420
49) Refer to Table 19.1. Which of the following best summarizes the preliminary results of the
investment analysis for the two prospective investments.
A) The British investment should be accepted, the European investment rejected.
B) The British investment is superior to the European investment.
C) Both investments are acceptable.
D) None of the above is true.

50) Refer to Table 19.1. If the euro was forecast to remain constant at $1.00/euro throughout the
investment period, how would the investment decision now be characterized?
A) The project would be even better than forecast.
B) The British investment should be chosen over the European investment.
C) The NPV is $6,420.
D) All of the above are true.
51) When a foreign project is analyzed from the parent's point of view, the additional risk that
stems from it's "foreign" location is typically measured by ________ or ________.
A) adjusting the discount rates; adjusting the timing
B) adjusting the timing; adjusting the cash flows
C) adjusting the discount rates; adjusting the cash flows
D) none of the above

52) Which is NOT considered a shortcoming of the parent simply adjusting discount rates to
account for the additional risk that stems from a project's foreign location?
A) Cash flows are already highly subjective.
B) Two sided risk in that foreign currency may appreciate or depreciate.
C) Increased sales volume might offset the lower value of a local currency.
D) These are all shortcomings associated with discount rate adjustment.

53) Empirical evidence shows that foreign direct investment always increases a U.S. firm's cost
capital no matter where the foreign investment is made. FALSE

54) Hydrotech Manufacturing of Houston Texas expects to receive dividends each year from a
foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate of 7% per
year.
If the euro appreciates in value against the dollar at a rate of 2% per year over the life
of the dividends, then the present value of the euro dividends to Hydrotech will be ________
if there had been no change in the relative values of the euro and dollar.
A) less than
B) greater than
C) the same as
D) There is not enough information to answer this question.

55) Chemical Magic of New Orleans, Louisiana expects to receive dividends each year from a
foreign subsidiary for the next 3 years. The dividend is expected to grow at a rate of 5% per
year.
If the euro depreciates in value against the dollar at a rate of 4% per year over the life
of the dividends, then the present value of the euro dividends to Chemical Magic will be
________ if there had been no change in the relative values of the euro and dollar.
A) less than
B) greater than
C) the same as
D) There is not enough information to answer this question.

56) Machintosh Outerwear of Canada is a large retailer of high quality outdoor recreation
equipment, clothing, and accessories. They are considering opening three U.S. stores in
Minneapolis, Spokane, and Seattle. The current cost of a new store in Canada is
C$1,000,000 per year and expected construction costs in the U.S. are expected to increase at a
rate of 15% per year. The U.S.stores will be built in one year, the current exchange rate is
$1.02/C$, the forward rate is $1.04/C$.
If the stores are built in one year and the firm has a
required rate of return of 14%, what is the present value in Canadian dollars of building the
new stores?
A)C$3,000,000
B)$3,000,000
C)C$2,731,092
D) C$3,140,756

Holding all else equal, the profitability index will fall following an increase in the:
a.cost of capital.
b.benefit-cost ratio.
c.IRR.
d.NPV

The discount rate that equates present value of cash inflows and outflows is called the:
a.component cost of capital.
b.weighted average cost of capital.
c.after-tax weighted average cost of capital.
d.IRR.

Acceptance of investment projects where IRR > MCC:

a.will increase the value of the firm.
b.will decrease the value of the firm.
c.have no impact on the value of the firm.
d.none of these

Acceptance of new investment projects will increase the value of the firm provided that:
a.IRR > ROE.
b.ROE < IRR.
c.ROE = IRR.
d.none of these.

The change in net cash flows due to an investment project is called:

a.marginal profit.
b.marginal revenue.
c.incremental cash flow.
d.marginal cash flow

6.Generally, a firm's estimated component cost of debt:

a.accurately estimates the firm's true opportunity cost of debt.
b.equals the firm's weighted cost of capital.
c.underestimates the firm's true opportunity cost of debt.
d.overestimates the firm's true opportunity cost of debt.

An estimate of the firm's cost of equity capital is:

a.the market return on common stocks
b.the market return on common stocks multiplied by beta, the firm's risk index.
c.expected dividend yield plus projected growth.
d.expected dividend yield.

The pattern of returns for all potential investment projects is the:

a.investment opportunity schedule.
b.marginal cost of capital.
c.optimal capital budget.
d.optimal capital structure

Examples of mandatory nonrevenue-producing investments are provided by:

a.cost reduction projects.
b.expansion projects.
c.replacement projects.
d.safety and environmental projects

Net present value is the:

a.current-dollar difference between marginal revenues and marginal costs.
b.change in net cash flows due to an investment project.
c.change in before-tax cash flows due to an investment project.
d.change in net after-tax cash flows due to an investment project.

Capital budgeting is the process of planning investment expenditures when returns are expected to:
a.be earned at any time in the future.
b.be earned within one year.
c.extend beyond one generation.
d.extend beyond one year.

When net present value is positive:

a.the internal rate of return equals the cost of capital.
b.the internal rate of return exceeds the cost of capital.
c.the internal rate of return is less than the cost of capital.
d.the internal rate of return equals zero