1 The capital budget for the year is approved by a company's

A) board of directors
B) capital budgeting committee
C) officers
D) shareholders
2 Most capital budgeting methods use
A) accrual accounting numbers
B) cash flow numbers
C) net profit
D) accrual accounting revenues
3 The capital budgeting decision depends in part on the
A) availability of funds
B) relationships among proposed projects
C) risk associated with a particular project
D) all of these
4.Capital budgeting is the process
A) used in sell or process further decisions
B) of determining how much capital share to issue
C) of making capital expenditure decisions
D) of eliminating unprofitable product lines
5 A capital budgeting method that takes into consideration the time value of money is the
A) annual rate of return method
B) return on shareholders' equity method
C) cash payback technique
D) Internal rate of return
6.Under the net present value method of budgeting, discounted cash inflows are
compared with the
A) capital outlay required for the investment
B) capital inflows coming from the project
C) undiscounted net cash flows
D) sunk costs of the investment
7.The capital budgeting technique that determines the interest yield of a potential
investment is the
A) external rate of return
B) internal rate of return
C) differential analysis
D) cash flow method

8.The objective under the net present value technique is to calculate

A) the internal rate of return
B) the undiscounted cash flows
C) net present value of cash flows
D) nominal value of money
9.In theory, when making capital budgeting decisions, all projects with positive NPVs
should be
A) rejected
B) recalculated
C) avoided
D) accepted
10.Cash payback is calculated using the following formula
A) cost of capital investment less net annual cash inflow
B) cost of capital investment plus net annual cash inflow
C) cost of capital investment plus net annual cash outflow
D) cost of capital investment less net annual cash outflow
11).Expected annual profit divided by average investment, is the formula used to
calculate
A) return on average investment
B) cash payback
C) earnings per share
D) sunk costs
12). The traditional financial analysis applied to foreign or domestic projects, to
determine the projects value to the firm is called
A) cost of capital analysis
B) capital budgeting Q capital structure analysis
C) capital structure analysis
D) agency theory
13). 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.
14). 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.

15) There are no important differences between domestic and international capital
budgeting methods.
A) True
B) False
16) 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 between the foreign and domestic economies.
d. All of the above add complexity to the international capital budgeting process.
17) It is important that firms adopt a common standard for the capital budgeting process
for choosing among foreign and domestic projects.
18) 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
19) For financial reporting purposes. U.S. firms must consolidate the earnings of any
subsidiary
That is over
A) 20%
B) 40%
C) 50%
D) 75%
20) A foreign firm that is 20% to 49% owned by a parent is called a/an
A) subsidiary
B) affiliate
C) partner
D) rival
21) Affiliate firms are consolidated on the parent's financial statements on a
A) pro rated
B) 50%
C) 75%
D) 100%
22) 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.
23) When evaluating capital budgeting projects, which of the following would NOT
necessarily be an indicator of an acceptable project?
A) AN NPV >50
B) AN IRR > the project's required rate of return
C) AN IRR >
D) All of the above are correct indicators.
24) 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.
25) 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.
26) Of the following, which would NOT be considered an initial outlay at te 0 (today)?
A) Investment in new equipment
B) Initial investment in additional net working capital
C) Shipping and handling costs associated with the new investment
D) All of the above are initial outlays.

27) Refer to Instruction 19.1. What are the annual after-tax cash flows for the Wheel Deal
project?
A) Euro 400,000
B) Euro 240,000
C) euro 120,000
D) Euro 360,000
28) Refer to Instruction 19.1. What is the initial investment for the Wheel Deal project?
A) $1,500,000
B) euro 1,600,000
C) 51,600,000
D) euro 1,500,000

29) Refer to Instruction 19.1. What is the NPV of the European expansion if Wheel Deal
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
30) Refer to Instruction 19.1. In Euros, what is the NPV of the Wheel Deal expansion?
A) Euro 1,524,6%
B) $1,611,317
C) -euro 75,310
D) -cur 111,317
31) Refer to Instruction 19.1. What is the IRR of the Wheel Deal expansion?
A) 14.4%
B) 10.3%
C) 12.0%
D) 8.6%
32) Refer to Instruction 19.1. The European expansion would have a greater NPV in
dollar terms if the eu ro appreciated in value over the five-year life of the project and the
project had a positive NIT, other things equal.
A) True
B) False
33) 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.
A) True
B) False
34) Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of
12%. If Benson is in a 30% tax bracket, and finances 40% of assets with debt, what is the
firm's wacc?
A) 11.20%
B) 10.36%
C) 9.72%
D) 7.68%
35) If a firm undertakes a project with ordinary cash flows and estimates that the firm has
a positive NIT, 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

36) Generally speaking a firm's cost of

A) Debt; equity
B) Debt; wacc
C) Equity; wacc
D) None of the above is true.
37) 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.
38) Calculate the cost of equity for Boston Industries using the following information:
The cost of debt is 7%, the corporate tax rate is 40%, the rate on Treasury Bills is 4%, the
firm has a beta of 1.1, and the expected return on the market is 12%.
A) 12.8%
B) 12.6%
C) 13.2%
D) 6.6%
39) is the risk that a foreign government will place restrictions such as limiting the
amount of hinds 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
40) 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.
41) 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 cii rrency.
A) appreciating; depreciating
B) depredating; depredating
C) appreciating; appreciating
D) depredating; appreciating
42) When dealing with international capital budgeting projects, the value of the project is
NOT sensitive to the firm's cost of capital.
A) True

B) False
43) Projects that have are often rejected by traditional discounted cash flow models of
capital budgeting.
A) long lives
B) cash flow returns in later years
C) high risk levels
D) all of the above
44. An alternative to traditional discount cash flow model is.
A. the capital assests pricing model
B. dividend growth model
C. real option analysis model
D. none of the above
45. 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
46. For international investment, relative to project cash flows present cash flow are often
dependent on the form of financing.
A. true
B. False
C. Both above

47. which of the following considerations not important for a parent firm when
considering foreign investment?
A. The form of fianancing
B. Remittance of funds at risk due to political considerations
C. Different rates of national inflation
D. All of the above are important considerations
48. Which of the following is not the method for considering additional risk with
international projects?
A) Adding an additional risk premium to the discount factor used
B) Decreasing expected cash flows
C) Considering details sensitively and scenario analysis
D) All of the above
49. Your company just received a 500,000 dollar cash remittance from its british
subsidiary. If the risk free one year T-bill rate is 1.45 euro dollar and the one year
forward rate is 1.44 euro dollar, then the present value of the remittance is .
A. 725,000 dollar

B. 500,000 dollar
C. 693,780 dollar
D. 478,469 dollar
50. In lease system, interest is calculated on
(a)Cash down payment,
(b)Cash price outstanding,
(c) Hire purchase price,
(d)None of the above
51. A short-term lease which is often cancellable is known as
(a)Finance Lease,
(b)Net Lease,
(c)Operating Lease,
(d)LeverageLease
52. Which of the following is not a usual type of leasearrangement?
(a)Sale & leaseback,
(b)Goods on Approval
(c)Leverage Lease,
(d)Direct Lease
53. Under income-tax provisions, depreciation on lease asset isallowed to
(a) Lessor,
(b)Lessee
(c) Any of the two,
(d)None of the two
54. Under the provisions of AS-19 'Leases', a leased asset isshown is the balance sheet of
(a) Manufacturer,
(b)Lessor,
(c)Lessee,
(d) Financing bank
55. A lease which is generally not cancellable and covers fulleconomic life of the asset is
known as
(a) Sale and leaseback,
(b)Operating Lease,
(c)Finance Lease,
(d)Economic Lease
56. Lease which includes a third party (a lender) is knownas
(a)Sale and leaseback,
(b)Direct Lease,
(c)Inverse Lease,
(d)Leveraged Lease

57. One difference between Operating and Financial lease is:

(a)There is often an option to buy in operating lease.
(b)Thereis often a call option in financial lease.
(c)An operating lease is generally cancelable by lease.
(d) Afinancial lease in generally cancellable by lease.
58. From the point of view of the lessee, a lease is a:
(a)Working capital decision,
(b)Financing decision,
(c)Buy ormake decision,
(d)Investment decision
59. For a lessor, a lease is a
(a)Investment decision,
(b)Financing decision,
(c)Dividend decision,
(d)None of the above.
60. Which of the following is not true for a "Lease decision for the lessee?
(a) Helps in project selection
(b) Helps in project financing
(c) Helps in project location
(d) All of the above.
61) Which of the following is NOT a risk commensurate with international investments?
A) Foreign exchange rate risk
B) Country risk
C) Political risk
D) All of the above are relevant risks.
62) Project finance is characterized by which of the following features?
A) Long project life
B) High capital intensity of undertaking the investment
C) Production or provision of a basic commodity or service
D) All of the above.
63) Refer to Table 19.1. The NPV for the European investment is estimated at .
A) Euro 4,945
B) $4,945
C) $6,421]
D) Euro 6,420 {ml
64 Assume that a firm has accurately calculated the net cash flows relating to an
investment proposal. If the net present value of this proposal is greater than zero and the
firm is not under the constraint of capital rationing, then the firm should:

A) calculate the IRR of this investment to be certain that the IRR is greater than the cost
of capital.
B) compare the profitability index of the investment to those of other possible
investments.
C)calculate the payback period to make certain that the initial cash outlay can be
recovered within an appropriate period of time.
D) accept the proposal, since the acceptance of value-creating investments should
increase shareholder wealth.
65. A project's profitability index is equal to the ratio of the
cash flows to the project's
.
A) present value; initial cash outlay
B) net present value; initial cash outlay
C) present value; depreciable basis
D) net present value; depreciable basis

of a project's future

66) When a foreign project is analyzed from the parent's point of view, the additional
risk that
Stems from it's "foreign" location is typically measured by L or L.
A) Adjusting the discount rates; adjusting t_he timing
B) Adjusting the timing; adjusting the cash ows
C) Adjusting the discount rates; adjusting the cash flows
D) None of the above
67) Which is NOT considered a shortcoming of the parent simply adjusting discount
rates to?
Account for the additional risk that stems from a project's foreign location?
A) Cash ows are already highly subjective.
B) Twosided risk in that foreign currency may appreciate or depreciate.
C) Increased sales volume might offset the lower value ofa local currency.
D) These are all shortcomings associated with discount rate adjustment.
68) Empirical evidence shows that foreign direct investment always increases a US.
Firm's cost
Capital no matter where the foreign investment is made.
A) True
B) False
69) Hydrotech Manufacturing of Houston Texas expects to receive dividends each year
from a foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate
of 7% per year. If the euro appreciates in value against t_he dollar at a rate of 2% per year
over the life of the dividends, then the present value of the euro dividends to Hydrotech
will be if there had been no change in the relative values of the euro and dollar.
A) Less than
B) Greater than
C) The same as

D) There is not enough information to answer this question.

70) Chemical Magic of New Orleans, Louisiana expects to receive dividends each year
from a foreign subsidiary for the next 3 years. The dividend is expected to grow at a rate
of 5% per year. If the euro depreciates in value against the dollar at a rate of 4% per year
over the life of the dividends, then the present value of the euro dividends to Chemical
Magic will be If there had been no change in the relative values of the euro and dollar.
A) Less than
B) Greater than
C) The same as
D) There is not enough information to answer this question.
71) Machintosh Outerwear of Canada is a large retailer of high quality outdoor recreation
Equipment, clothing, and accessories. They are considering opening three U.S. stores in
Minneapolis, Spokane, and Seattle. The current cost of a new store in Canada is C$1,
1,000,000 per year and expected construction costs in the U.S. are expected to increase at
a rate of 15% per year. The U.S.st0res will be built in one year, the current exchange rate
is $1.02/C$, the forward rate is $1.04/C$. If the stores are built in one year and the rm
has a required rate of return of 14%, what is the present value in Canadian dollars of
building the new stores?
A) C$3,000,000
B) $3,000,000
C) C$2,731,092
D) C$3,140,756
72. What does quantitative research measures?
(a) Feelings and opinions
(b) Numbers and figures
(c) Numbers and feelings
73 The discount rate at which two projects have identical
rate of intersection.
A) present values
B) net present values
C) IRRs
D) profitability indexes

is referred to as Fisher's

74 If capital is to be rationed for only the current period, a firm should probably first
consider selecting projects by descending order of
.
A) net present value
B) payback period
C) internal rate of return
D) profitability index
75. What kind of sampling does this example use?

(a) Random sampling

(b) Systematic sampling
(c) Quota sampling
Multiple Choice Answers.
1-a

2-b
12-b
22-c
3242-b
52-b
62-d
72-b

3-d
13-d
23-c
33-b
43-d
53-a
63-b
73-b

4-c
14-c
24-d
34-a
44-c
54-c
64-D
74-d

5-d
15-b
25-b
35-b
45-d
55-c
65-A
75-c

6-a
16-d
26-d
36-c
46-a
56-d
66-c

7-b
17-a
27-d
37-d
47-d
57-c
67-a

8-c
18-a
28-a
38-a
48-d
58-b
68-b

9-d
19-c
29-d
39-c
49-b
59-b
69-b

10-b
20-b
30-c
40-d
50-b
60-b
70-a

11-a
21-a
31-b
41-a
51-c
61-d
71-d