Reference no: EM133234153
Chapter 14 Q: 1, 2 and 4
1. MNC Parent's Perspective Why should capital budgeting for subsidiary projects be assessed from the parent's perspective? Which additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting?
2. Accounting for Risk What is the major limitation of using point estimates of exchange rates in the capital budgeting analysis?
List the various techniques for adjusting risk in multinational capital budgeting. Describe any advantages or disadvantages of each technique.
Explain how simulation can be used in multinational capital budgeting. What can it do that other risk adjustment techniques cannot?
4. Accounting for Risk Your employees have estimated the net present value of Project X to be $1.2 million. Their report says that they have not accounted for risk but that, with such a large NPV, the project should be accepted because even a risk- adjusted NPV would likely be positive. You have the final decision as to whether to accept or reject the project. What is your decision?
Chapter 16 Q: 1 and 3
1. Forms of Country Risk List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC. Identify common financial factors for an MNC to consider when assessing country risk. Briefly elaborate on how each factor can affect the risk to the MNC.
3. Uncertainty Surrounding the Country Risk Assessment Describe the possible errors involved in assessing country risk. In other words, explain why country risk analysis is not always accurate.
Chapter 17 Q: 26
26. Cost of Capital and Risk of Foreign Financing Nevada Co. is a U.S. firm that conducts major importing and exporting business in Japan, with all of these transactions invoiced in dollars. It obtained debt in the United States at an interest rate of
10 percent per year. The long-term risk-free rate in the United States is 8 percent. The stock market return in the United States is expected to be 14 percent annually. Nevada's beta is 1.2. Its target capital structure is
30 percent debt and 70 percent equity. The firm is subject to a 25 percent corporate tax rate (federal
and state combined).
- Estimate the cost of capital to Nevada Co.
- Nevada has no subsidiaries in foreign countries
but plans to replace some of its dollar-denominated debt with Japanese yen-denominated debt because Japanese interest rates are low. It will obtain yen- denominated debt at an interest rate of 5 percent.
It cannot effectively hedge the exchange rate risk resulting from this debt because of parity conditions that make the price of derivatives contracts reflect the interest rate differential. How could Nevada Co. reduce its exposure to the exchange rate risk resulting from the yen-denominated debt without moving its operations?