ECO 410 Week 10 Quiz – Strayer

ECO/410 Week 10 Quiz – Strayer

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Chapter 17

Foreign Direct Investment and Political Risk

17.1 Sustaining and Transferring Competitive Advantage

Multiple Choice

1) An example of economies of scale in financing include:
A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large-scale plant and equipment.
D) all of the above

2) Which of the following is NOT a factor of Porter’s “diamond of national advantage”?
A) factor conditions
B) demand conditions
C) related and supporting industries
D) All of the above are factors of the diamond of national advantage.

3) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.
A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances

4) The O in OLI refers to an advantage in a firm’s home market that is:
A) operator independent.
B) owner-specific.
C) open-market.
D) official designation.

5) The owner-specific advantages of OLI must be:
A) firm-specific.
B) not easily copied.
C) transferable to foreign subsidiaries.
D) all of the above

6) A/An ________ would be an example of an owner-specific advantage for an MNE.
A) patent
B) economy of scale
C) economy of scope
D) all of the above

7) The L in OLI refers to an advantage in a firm’s home market that is a:
A) liability in the domestic market.
B) location-specific advantage.
C) longevity in a particular market.
D) none of the above

8) A/An ________ would be an example of a location-specific advantage for an MNE.
A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

9) The I in OLI refers to an advantage in a firm’s home market that is an:
A) internalization.
B) industry-specific advantage.
C) international abnormality.
D) none of the above

10) A/An ________ would be an example of an internalization advantage for an MNE.
A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

True/False

1) MNEs that are resident in liquid and unsegmented capital markets are more likely to be able to demonstrate financial strength by achieving and maintaining a global cost and availability of capital.

2) A strongly competitive home market tends to dull the competitive advantage relative to firms located in less competitive home markets.

3) The authors were unable to identify in lesser developed countries specific firms that are nearing the status of global MNE.

Essay

1) List and explain three strategic motives why firms become multinationals and give an example of each.

2) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.

17.2 Deciding Where to Invest

Multiple Choice

1) Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?
A) MNEs initially invest in countries with a similar “national psychic.”
B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.

True/False

1) In practice, when expanding into other countries, firms have been observed to follow a sequential search pattern as described in the behavioral theory of the firm.

2) As a general rule, the decision about where to invest abroad for the first time is the same as the decision about where to reinvest abroad.

17.3 How to Invest Abroad: Modes of Foreign Involvement

Multiple Choice

1) Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI?
A) fewer political risks
B) greater agency costs
C) lower front-end investment
D) All of the above are advantages.

2) Which of the following is an advantage to exporting goods to reach international markets rather than entering into some form of FDI?
A) fewer agency costs
B) fewer direct advantages from research and development
C) a greater risk of losing markets to copycat goods producers
D) an inability to exploit R&D as effectively as if also invested abroad

3) Which of the following is NOT a form of FDI?
A) wholly-owned affiliate
B) joint venture
C) exporting
D) greenfield investment

4) With licensing the ________ is likely to be lower than with FDI because of lower profits; however, the ________ is likely to be higher due to a greater return per dollar invested.
A) IRR; NPV
B) NPV; IRR
C) cost of capital; NPV
D) IRR; cost of capital

5) Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of quality control
B) establishment of a potential competitor in third-country markets
C) possible improvement of the technology by the local licensee, which then enters the original firm’s home market
D) All of the above are potential disadvantages to licensing.

6) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate

7) Which of the following is NOT an advantage to a joint venture?
A) Possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) May be a realistic alternative when 100% foreign ownership is not allowed.

8) Greenfield investments are typically ________ and ________ than cross-border acquisition.
A) slower; more uncertain
B) faster; of greater certainty
C) slower; of greater certainty
D) faster; more uncertain

9) All of the following may be justification for a strategic alliance EXCEPT:
A) takeover defense.
B) a joint venture to pool resources for research and development.
C) joint marketing and serving agreements.
D) All of the above are legitimate reasons for strategic alliances.

True/False

1) Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.

2) MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.

3) Joint ventures are a more common FDI than wholly owned subsidiaries.

4) Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm.

17.4 Political Risk

Multiple Choice

1) ________ risks are those that affect the MNE at the local or project level, but originate at the country level.
A) Country-specific
B) Firm-specific
C) Global-specific
D) none of the above

2) Which of the following is NOT an example of a country-specific risk?
A) transfer risk
B) war and ethnic strife
C) cultural and religious heritage
D) All of the above are examples of country-specific risk.

3) According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a/an ________ or ________ level view.
A) foreign; domestic
B) micro; macro
C) internal; external
D) local; global

4) ________ is the ability to exercise effective control over a foreign subsidiary within a country’s legal and political environment.
A) Political risk
B) Portfolio risk
C) Interest rate risk
D) Governance risk

5) Of the following, which would NOT be considered an issue for an investment agreement prior to investing in a foreign country?
A) the basis for setting transfer prices
B) the right to export to third-country markets
C) provision for arbitration of disputes
D) All of the above could be negotiated prior to investing.

6) OPIC stands for:
A) Organization for the Prevention of Insufficient Capitalization.
B) Organization of Petroleum Importing Countries.
C) Overseas Private Investment Corporation.
D) Overseas Public Insurance Commission.

7) ________ is a type of political risk that OPIC does NOT cover.
A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.

8) ________ is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm’s assets.
A) Inconvertibility
B) Expropriation
C) Business income risk
D) none of the above

9) ________ is NOT one of the three main country-specific risks as outlined by your authors.
A) Transfer risk
B) Cultural differences
C) Thin equity base
D) Protectionism

10) Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries?
A) differences in human resource norms
B) differences in religious heritage
C) differences in allowable ownership structures
D) All of the above must be considered.

11) An alternative strategy to engaging in bribery in international investments include:
A) refuse bribery outright.
B) retain local advisors to diffuse requests for bribes.
C) educate management and local employees about the firm’s bribery policy.
D) all of the above

12) ________ industries are NOT typically “protected” by government policy.
A) Textiles
B) Defense
C) Agriculture
D) “Infant” industries

13) Forming regional alliances is one way to help mitigate the practice of government protectionism. Which of the following is NOT a regional trade organization formed by government treaty?
A) EU
B) NAFTA
C) NATO
D) MERCOSUR

14) Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks.
A) firm-specific
B) country-specific
C) institutional
D) global-specific

15) Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk.
A) firm-specific
B) country-specific
C) global-specific
D) cultural-specific

16) The speed at which inventory moves through a manufacturing process is known as:
A) supply chain management.
B) working capital management.
C) inventory velocity.
D) warp speed.

17) As a result of the terrorist attacks of September 11, 2001, many firms have employed a wide range of tactics to ensure continued flow of inventory in the face of government steps to curb terrorism. Which of the following is an inventory sourcing strategy response (as opposed to an inventory management response, or a transportation response)?
A) carrying more inventory on-hand
B) minimizing cross-border exposure from suppliers
C) shifting to air cargo shipments instead of co-habitation of products and passengers on commercial air flights
D) increasing the on-hand supply of critical parts

18) Blocked funds are cash flows that:
A) come in regular intervals in standardized amounts or blocks.
B) have been restricted in transfer out of a local country.
C) come from a certain sector or region of the world.
D) none of the above

19) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.
A) fronting; link financing
B) parallel; a back-to-back loan
C) fronting; a back-to-back loan
D) link financing; parallel loan

20) Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary?
A) The parent makes a deposit equal to the size of the desired loan into a large commercial bank.
B) The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate.
C) The lending bank is located in the subsidiary’s country.
D) All of the above are typical characteristics of a fronting loan.

21) Which of the following could be considered an example of forced reinvestment if the blockage of funds was expected to be temporary?
A) vertical reinvestment by an automobile manufacturer to buy parts suppliers and showrooms
B) A lumber cutting company subsequently builds a paper mill with blocked funds.
C) purchase of local money market instruments and short-term loans
D) all of the above

True/False

1) When faced with additional risk from a foreign investment, firms typically account for the additional risk by adjusting the discount rates or by adjusting cash flows.

2) A number of institutional services provide updated country risk ratings on a regular basis. This is an example of micro-risk information for MNEs using this data.

3) A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value.

4) Banks are very hesitant to engage in fronting loans because of the low probability of repayment and thus their risk exposure up to a 100% loss.

5) Many problems such as poverty, environmental concerns, and cyber attacks are beyond the capabilities of MNEs alone to correct and require government participation as well.

6) Business risk can be measured through sensitivity analysis but from only the project viewpoint.

Essay

1) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.

Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions

18.1 Complexities of Budgeting for a Foreign Project

Multiple Choice

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

5) For purposes of international capital budgeting, which of the following statements is NOT true?
A) Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows.
B) Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value.
C) An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent.
D) All of the above are true statements.

True/False

1) When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

2) In international capital budgeting, the appropriate discount rate for determining the present value of the
expected cash flows is always the firm’s domestic WACC.

3) For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

4) For purposes of international capital budgeting, parent cash flows often depend on the form of financing. Thus, we cannot clearly separate cash flows from financing decisions, as we can in domestic capital budgeting.

18.2 Project Versus Parent Valuation

Multiple Choice

1) 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

2) 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%

3) A foreign firm that is 20% to 49% owned by a parent is called a/an:
A) subsidiary.
B) affiliate.
C) partner.
D) rival.

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

True/False

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

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

3) The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

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

5) For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL’s viewpoint.

6) Multinational firms should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project.

Essay

1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent’s viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

2) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

18.3 Illustrative Case: Cemex Enters Indonesia

Multiple Choice

1) 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.

2) 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.

3) 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.

4) 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.

5) 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.

6) 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.

7) 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.

Instruction 18.1:
Use the information to answer the following question(s).

The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm’s required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.

8) Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?
A) $1,500,000
B) €1,600,000
C) $1,600,000
D) €1,500,000

9) Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?
A) €400,000
B) €240,000
C) €120,000
D) €360,000

10) Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?
A) $1,520,000
B) $1,684,210
C) -$75,310
D) -$71,544

11) Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?
A) €1,524,690
B) $1,611,317
C) -€75,310
D) -€111,317

12) Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?
A) 14.4%
B) 10.3%
C) 12.0%
D) 8.6%

13) If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be:
A) less than the cost of capital.
B) greater than the cost of capital.
C) greater than the cost of the project.
D) cannot be determined from this information

14) When estimating a firm’s cost of equity capital using the CAPM, you need to estimate:
A) the risk-free rate of return.
B) the expected return on the market portfolio.
C) the firm’s beta.
D) all of the above

15) ________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.
A) Exchange risk
B) Foreign risk
C) Political risk
D) Unnecessary risk

16) 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

17) When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:
A) adjusting the cash flows.
B) adjusting the discount rates.
C) adjusting both cash flows and discount rates.
D) adjusting all of the above.

True/False

1) When a multinational firm invests abroad, it is common to develop two capital budgets: one from the project viewpoint, and one from the parent viewpoint.

2) When estimating a capital budget, it is common to separate cash flows into: 1) the initial investment, 2) incremental cash flows over the life of the project, and 3) a terminal value.

3) Because international capital budgeting is so difficult, time consuming, expensive, and uncertain, firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

4) A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

18.4 Project Financing

Multiple Choice

1) Which of the following is NOT a factor critical to the success of project financing?
A) separability of the project from its investors
B) long-lived and capital intensive singular projects
C) cash flow predictability from third part commitments
D) All of the above are critical factors for project financing.

2) Which of the following is NOT a characteristic of international long-term capital project financing?
A) The projects are large in scale.
B) The projects are long in life.
C) The projects are generally high in risk.
D) The projects may be all of the above.

3) Which of the following is NOT a reason given for international mergers and acquisitions?
A) gaining access to strategic proprietary assets
B) gaining market power and dominance
C) diversifying and spreading their risks wider
D) All of the above are commonly cited reasons for international mergers and acquisitions.

4) The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:
A) identification and valuation of the target.
B) execution of the acquisition offer and purchase—the tender.
C) management of the post-acquisition transition.
D) All of the above are common elements in acquiring an enterprise anywhere in the world.

True/False

1) Project financing is the arrangement of financing for very large individual long-term capital projects.

2) Currency risk is a concern for any international merger and acquisition activity. For instance, the initial bid, if denominated in a foreign currency, creates a contingent foreign currency exposure for the bidder.

3) Currency risk is a concern for any international merger and acquisition activity. For instance, once the bidder has successfully won the acquisition, the exposure evolves from a transaction exposure to a contingent exposure.

4) The drivers of international merger and acquisitions are only MACRO in scope.

5) As opposed to greenfield investment, a cross-border acquisition is typically quicker.