International Corporate Finance
International Corporate Finance
International Corporate Finance
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You are a Canadian Investor who is trying to calculate the present value of £5 million cash
inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and
the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash flow
is 5.32% and the appropriate £ discount rate is 5.24%.
7) The present value of the £5 million cash inflow computed by first discounting the £s and
then converting into dollars is closest to:
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
Answer: B
Explanation: B) PV£ = = £4,751,045.23
8) The present value of the £5 million cash inflow computed by first converting into dollars
and then discounting is closest to:
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
Answer: B
Explanation: B) FV$ = £5 million × $1.8862/£ = $9,431,000
PV = = $8,954,615
Diff: 3 Type: MC
Topic: 31.1 Internationally Integrated Capital Markets
= (1 + )-1
= (1 + )-1
4) The risk of the foreign project is ________ the risk of Canadian domestic projects because
the foreign project contains ________ that the domestic projects often do not contain.
A) likely to be the same as; residual exchange rate risk
B) unlikely to be exactly the same as; residual exchange rate risk
C) likely to be the same as; residual inflation risk
D) unlikely to be exactly the same as; residual inflation risk
Answer: B
Diff: 2 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
5) Because obtaining forward rate quotes for as long as four years in the future is difficult,
managers normally use the covered ________ to compute ________.
A) interest rate parity; the forward rates
B) price parity; the forward rates
C) interest rate parity; the spot rates
D) price parity; the spot rates
Answer: A
Diff: 2 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
6) Consider the following equation:
= (1 + )-1
= (1 + )-1
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both
countries is flat. The risk-free rate on dollars, r$, is 5.35% and the risk-free interest rate on
pounds, r£, is 4.80%.
8) Using the covered interest parity condition, the calculated one-year forward rate F1 is
closest to:
A) $1.8568/£
B) $1.8764/£
C) $1.9161/£
D) $1.8961/£
Answer: D
Diff: 1 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
9) Using the covered interest parity condition, the calculated three-year forward rate F3 is
closest to:
A) $1.8568/£
B) $1.9161/£
C) $1.8961/£
D) $1.8764/£
Answer: B
Diff: 2 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
10) Luther Industries, a Canadian firm, is considering an investment in Japan. The dollar
cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r$ =
5.5% and r¥ = 1.5% respectively. Luther Industries is willing to assume that capital
markets are internationally integrated. Luther Industries needs to know the comparable
cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with
spot exchange rates. The yen cost of equity for Luther Industries is closest to:
A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%
Answer: C
Diff: 2 Type: MC
Topic: 31.2 Valuation of Foreign Currency Cash Flows
Use the information for the question(s) below.
Free Cash
Flow (£
Year millions)
0 -20
1 10
2 14
3 18
You know that the spot exchange rate is S = 1.8862/£. In addition, the risk-free interest
rate on dollars and pounds is 5.4% and 4.6% respectively. Assume that these markets are
internationally integrated and the uncertainty in the free cash flow is not correlated with
uncertainty in the exchange rate. You have determined that the dollar WACC for these cash
flows is 10.2%.
11) Calculate the pound denominated cost of capital for Luther's project.
Diff: 3 Type: ES
Topic: 31.2 Valuation of Foreign Currency Cash Flows
Diff: 3 Type: ES
Topic: 31.2 Valuation of Foreign Currency Cash Flows
1) Canadian tax policy requires that a ________ is given for foreign taxes paid up to the
amount of the ________.
A) 50 percent tax credit; Canadian tax liability
B) full tax credit; Canadian tax liability
C) 50 percent tax credit; foreign tax liability
D) full tax credit; foreign tax liability
Answer: B
Diff: 1 Type: MC
Topic: 31.3 Valuation and International Taxation
2) If the foreign tax rate ________ the Canadian tax rate, companies must pay ________ on
foreign earnings.
A) exceeds; this higher rate
B) exceeds; an extra rate
C) exceeds; the same as the Canadian tax rate
D) exceeds; a lower rate in Canada
Answer: A
Diff: 1 Type: MC
Topic: 31.3 Valuation and International Taxation
3) If the foreign tax rate is ________ the Canadian tax rate, the company pays total taxes
________ the Canadian tax rate on its foreign earnings.
A) greater than; equal to
B) greater than; more than
C) less than; equal to
D) less than; less than
Answer: C
Diff: 1 Type: MC
Topic: 31.3 Valuation and International Taxation
Japan Ireland
Earnings before interest and taxes
(EBIT) ¥5,920 €32
Host country taxes paid ¥2,427 €4
Earnings before interest after taxes ¥3,493 €28
11) After the Japanese taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Japanese operations is closest to:
A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million
Answer: B
Explanation: B) = $29.50 million
Diff: 2 Type: MC
Topic: 31.3 Valuation and International Taxation
12) After the Irish taxes are paid, the amount of the earnings before interest and after
taxes in dollars from the Ireland operations is closest to:
A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million
Answer: C
Explanation: C) €28 million × $1.27/€ = $35.56
Diff: 2 Type: MC
Topic: 31.3 Valuation and International Taxation
13) The amount of the taxes paid in dollars for the Japanese operations is closest to:
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
Answer: D
Explanation: D) = $20.5 million
Diff: 3 Type: MC
Topic: 31.3 Valuation and International Taxation
14) The amount of the taxes paid in dollars for the Irish operations is closest to:
A) $20.5 million
B) $5.1 million
C) $29.5 million
D) $50.0 million
Answer: B
Explanation: B) €4 million × $1.27/€ = $5.08 million
Diff: 3 Type: MC
Topic: 31.3 Valuation and International Taxation
15) Luther Industries, a Canadian firm, has a subsidiary in the United Kingdom. This year,
the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of £45
million. The current exchange rate is $1.86/£. The tax rate in the U.K. for this activity is
28%. Under Canadian tax codes, Luther is facing a 35% corporate tax rate on their
earnings. What is Luther's Canadian tax liability on its U.K. subsidiary?
Answer: When the foreign tax rate is below the Canadian tax rate the firm is only
responsible for the difference in the tax rates, so Luther will only be taxed at a rate of 7%
on the £45 million.
3) Currency swaps allow firms to mitigate their exchange rate risk exposure between
________, while still making investments and raising funds in the most attractive locales.
A) assets and liabilities
B) long-term liabilities and equity
C) assets and equity
D) equity and liabilities
Answer: A
Diff: 1 Type: MC
Topic: 31.4 Internationally Segmented Capital Markets
6) Suppose the interest rate on Russian government bonds is 7.8%, and the current
exchange rate is 26.8 rubles per dollar. If the forward exchange rate is 27.2 rubles per
dollar, and the current Canadian risk-free interest rate is 4.6%, what is the implied credit
spread for the Russian government bonds?
1) Whenever a project has cash flows that depend on the values of ________, the most
convenient approach is to ________ the cash flows according to the currency they depend
on.
A) multiple currencies; separate
B) multiple currencies; consolidate
C) single currency; separate
D) single currency; combine
Answer: A
Diff: 1 Type: MC
Topic: 31.5 Capital Budgeting with Exchange Risk
2) What conditions cause the cash flows of a foreign project to be affected by exchange rate
risk?
Answer: The working assumptions made thus far are that the project's free cash flows are
uncorrelated with the spot exchange rates. Such an assumption often makes sense if the
firm operates as a local firm in the foreign market—it purchases its inputs and sells its
outputs in that market, and price changes of the inputs and outputs are uncorrelated with
exchange rates. However, many firms use imported inputs in their production processes or
export some of their output to foreign countries. These scenarios alter the nature of a
project's foreign exchange risk and, in turn, change the valuation of the foreign currency
cash flows.
Diff: 2 Type: ES
Topic: 31.5 Capital Budgeting with Exchange Risk
3) How do we make adjustments when a project has inputs and outputs in different
currencies?
Answer: Whenever a project has cash flows that depend on the values of multiple
currencies, the most convenient approach is to separate the cash flows according to the
currency they depend on.
Diff: 3 Type: ES
Topic: 31.5 Capital Budgeting with Exchange Risk