International Corporate Governance and Control - Chapter 15 Comprehensive Exam Study Guide, Exams of Business Economics

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1. International governance is achieved by all of the following except: a. poison pills. b. board of directors. c. institutional investors. d. blockholders. e. All of the above achieve governance.

ANS: A PTS: 1

2. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary? a. The firm can immediately expand its international business. b. An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary. c. International acquisitions are generally cheaper than the establishment of a new subsidiary. d. An international acquisition typically generates larger cash flows than the establishment of a new subsidiary. e. All of the above are advantages of international acquisitions.

ANS: C PTS: 1

3. According to your text, U.S. firms pursue more international acquisitions in than in other countries. a. the U.K. b. Mexico c. Japan d. Germany e. France

ANS: A PTS: 1

4. Which of the following is not true regarding a target's previous cash flows? a. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors. b. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary. c. They are always good indicators of future cash flows. d. All of the above are true.

ANS: C PTS: 1

5. As far as the managerial talent of the target is concerned: a. the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target. b. downsizing will reduce expenses and increase productivity and revenues. c. governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated. d. all of the above e. A and C only

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ANS: E PTS: 1

6. Based on information in your text, all of the following factors should be considered in an international acquisition, except: a. the target's willingness to be acquired. b. the target's previous acquisition history. c. the target's previous cash flows. d. the target's local economic conditions.

ANS: B PTS: 1

7. Which of the following tax-related factors need not be considered in assessing a foreign target? a. corporate tax rates in the host country. b. withholding tax rates in the host country. c. withholding tax rates in the home country. d. corporate tax rates in the home country. e. all of the above must be considered in assessing a foreign target.

ANS: C PTS: 1

Exhibit 15- 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.

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ANS: D

SOLUTION: Since the Malaysian target has 11 million shares outstanding, each of which is worth MYR35 per share, its market value is 11,000,000  35 = MYR million  $.23 = $88.6 million.

PTS: 1

10. Refer to Exhibit 15-1. 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? a. 30.0%. b. 25.9%. c. you should not offer any premium because the market's valuation is below Klimewsky's valuation. d. none of the above

ANS: B SOLUTION: Since your valuation of the target is $111.5 million and the market's valuation of the target is $88.55 million, you should be willing to offer a maximum premium of $111.5/$88.55  1 = 25.9%.

PTS: 1

11. Which of the following would probably not cause the stock price of a foreign target to decrease? a. Its expected cash flows decline. b. General stock market conditions in the foreign country are deteriorating. c. Investors anticipate that the target will be acquired. d. All of the above will cause the target's stock price to decrease.

ANS: C PTS: 1

12. Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target? a. differences in the timing of remittances from the target to the parent. b. differences in the desired use of the target. c. differences in the local risk-free interest rate. d. differences in the ability to use financial leverage.

ANS: A PTS: 1

13. Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC? a. international acquisition. b. newly privatized foreign business. c. international alliance. d. international divestiture.

ANS: B PTS: 1

14. A previously undertaken project in a foreign country may no longer be feasible because: a. interest rates have declined. b. the MNC's cost of capital has decreased.

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c. the host government has increased its tax rates substantially. d. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.

ANS: C PTS: 1

15. An international alliance typically requires a initial outlay than an international acquisition, and the cash flows to be received will typically be than the cash flow resulting from an international acquisition. a. smaller; larger b. smaller; smaller c. larger; smaller d. larger; larger

ANS: B PTS: 1

16. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured. a. True b. False

ANS: T PTS: 1

17. At present, U.S. firms acquire more targets in the former Soviet Union than in any other country. a. True b. False

ANS: F PTS: 1

18. The U.S. is one of the few countries with agencies that monitor mergers and acquisitions. a. True b. False

ANS: F PTS: 1

19. The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets. a. True b. False

ANS: T PTS: 1

20. Since the cash flows generated by a foreign target will eventually be converted to the parent's currency, there is no need to consider the foreign exchange rate in the capital budgeting process. a. True b. False

ANS: F PTS: 1

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28. An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place. a. True b. False

ANS: T PTS: 1

29. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target's country are generally high. a. True b. False

ANS: F PTS: 1

30. Privatization involves the sale of previously government-owned businesses by the government. a. True b. False

ANS: T PTS: 1

31. An MNC should periodically reassess its investments to determine whether to divest them. a. True b. False

ANS: T PTS: 1

32. The initial outlay for a project in a foreign country may decline if property values in that country decline. a. True b. False

ANS: T PTS: 1

33. The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign target that has operated privately for several years. a. True b. False

ANS: T PTS: 1

34. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that: a. the Chinese yuan would depreciate in the future. b. the Chinese yuan would appreciate in the future. c. the Chinese yuan would remain somewhat stable in the future. d. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

ANS: A PTS: 1

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35. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary? a. the required rate of return on the subsidiary. b. forecasted exchange rates of the subsidiary's currency relative to the dollar. c. the initial outlay on the project. d. the possible selling price of the project.

ANS: C PTS: 1

36. Regarding the valuation of privatized businesses in less developed countries, can normally be estimated with a high degree of accuracy. a. future cash flows b. future exchange rate movements c. the proper discount rate d. none of the above

ANS: D PTS: 1

37. U.S. firms acquire more target firms in than in any other country. a. Spain b. Italy c. Belgium d. United Kingdom

ANS: D PTS: 1

38. Firms based in tend to acquire more U.S. target firms than the other countries listed here. a. Canada b. Japan c. Germany d. Mexico

ANS: A PTS: 1

39. The sale of a subsidiary by an MNC is referred to as a divestiture. a. True b. False

ANS: T PTS: 1

40. An MNC's parent would consider investing in a target only if the estimated present value of the cash flows it would ultimately receive from the target over time the initial outlay necessary to purchase the target. a. is less than b. is the same as c. is greater than d. none of the above

ANS: C PTS: 1

41. Which of the following would not enhance the value of a target from the acquirer's perspective? a. Expected sales of the target have increased.

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47. If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target. a. True b. False

ANS: F PTS: 1

48. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as million euros. a. 2. b. 60. c. 41. d. 12

ANS: B SOLUTION: Market valuation = €5 million  12 = €60 million

PTS: 1

49. 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

ANS: C PTS: 1

50. If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively , and therefore the MNC's required return from acquiring the target will be relatively. a. high; high b. high; low c. low; high d. low; low

ANS: D PTS: 1

51. Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested. a. True b. False

ANS: T PTS: 1