EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Textbook Question
Chapter 31, Problem 12CQ
International Capital Budgeting An investment in a foreign subsidiary is estimated to have a positive
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Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
How may the domestic cost of capital for a foreign venture be adjusted to account for currency rate risk, political risk, and nation risk?
Question
Which of the statements below is FALSE?
A. Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency.
B. If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate.
C. In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value.
D. With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.
Chapter 31 Solutions
EBK CORPORATE FINANCE
Ch. 31 - Spot and Forward Rates Suppose the exchange rate...Ch. 31 - Prob. 2CQCh. 31 - Prob. 3CQCh. 31 - Prob. 4CQCh. 31 - International Risks At one point, Duracell...Ch. 31 - Multinational Corporations Given that many...Ch. 31 - Prob. 7CQCh. 31 - Exchange Rate Movements Some countries encourage...Ch. 31 - Prob. 9CQCh. 31 - Exchange Rate Risk If you are an exporter who must...
Ch. 31 - International Capital Budgeting Suppose it is your...Ch. 31 - International Capital Budgeting An investment in a...Ch. 31 - International Borrowing If a U.S. firm raises...Ch. 31 - International Investment If financial markets arc...Ch. 31 - Using Exchange Rates Take a look back at Figure 3...Ch. 31 - Prob. 2QPCh. 31 - Prob. 3QPCh. 31 - Using Spot and Forward Exchange Rates Suppose the...Ch. 31 - Prob. 5QPCh. 31 - Prob. 6QPCh. 31 - Interest Rates and Arbitrage The treasurer of a...Ch. 31 - Inflation and Exchange Rates Suppose the current...Ch. 31 - Exchange Rate Risk Suppose your company imports...Ch. 31 - Prob. 10QPCh. 31 - The International Fisher Effect You observe that...Ch. 31 - Prob. 12QPCh. 31 - Prob. 13QPCh. 31 - Capital Budgeting Lakonishok Equipment has an...Ch. 31 - Capital Budgeting You are evaluating a proposed...Ch. 31 - Prob. 16QPCh. 31 - Prob. 17QPCh. 31 - Using the Exact International Fisher Effect From...Ch. 31 - Prob. 1MCCh. 31 - What will happen to the companys profits if the...Ch. 31 - Ignoring taxes, what are East Coast Yachts...Ch. 31 - How can the company hedge its exchange rate risk?...Ch. 31 - Taking all factors into account, should the...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Explain the International Fisher effect and Interest Rate Parity. If these parity exists, explain the justification for MNCs to invest excess cash in foreign country. Provide examples in which situation the excess cash investment would gain higher rate of return that the one offered at the home market.arrow_forwardWhat do managers use to evaluate domestic and international capital investment projects? A) capital budgeting B) multilateral netting C) net present value D) transfer pricing E) parent's perspectivearrow_forwardWhich of the statements below is FALSE? A. Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B. If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C. In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D. With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.arrow_forward
- What modifications may be made to the domestic cost of capital for a foreign venture to account for currency rate and political risk?arrow_forwardAn international project can reduce a firms overall risk as a result of international diversification benefits.” Evaluate the statement.arrow_forwardExplain the International Fisher effect and Interest Rate Parity theories. If these theories exist, explain MNCs' justification to invest excess cash in foreign country. Present a situation in which investment in the foreign money market would provide a higher rate of return than the one offered at the home market.arrow_forward
- Discuss the important factors one should consider in the international capital budgeting process to be undertaken by a multinational firm.arrow_forwardCapital budgeting for a foreign project is considerably more complex than the domestic case. Discuss FIVE major factors contribute to this greater complexities.arrow_forward
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