Class 12 (ch.18)

Question 1

What is stakeholder engagement under political risk mitigation?

Answer 1

Before engaging with a foreign government, you meet that government, the political leaders and impacted communities which is an ounce of protection whereby you create a relationship with them

Question 2

What is domestic partners under political risk mitigation?

Answer 2

It is when the foreign country prefers that business development in a country takes place with domestic companies or where the multinational company partners with a domestic person in the country they are going to

Question 3

Why would a domestic partner help the multinational company?

Answer 3

They act as a champion and a potential “shield” in preventing the government from implementing additional interference in the business

Question 4

Why would a international investment agreements help the multinational company?

Answer 4

It is the best way of mitigating political risk whereby prior negotiations are agreed upon with the host country

Question 5

What is a risk with different culture regarding international investment agreements?

Answer 5

Each culture apply different ethics to their way of honouring contracts or agreements, especially when they were negotiated with previous administration

Question 6

What are IIAs? What do they allow for?

Answer 6

International Investment Agreement

It states the specific rights and responsibilities of both the foreign company and the host government

Question 7

What is gradual investment under political risk mitigation?

Answer 7

It is for a firm entering a potential problematic country where they invest capital in stages often starting with core activities but on a smaller scale. From there, once the business starts to grow, the business will use retained earnings to keep growing their operations

Question 8

What is political risk insurance (PRI) under political risk mitigation?

Answer 8

It is a type of insurance designed to protect businesses, investors and lenders against losses that may come from political events in foreign countries

Question 9

Where is the political risk insurance (PRI) mostly used

Answer 9

For companies operating in emerging markets or politically unstable regions, where risk is such as expropriation, political violence or changes in government policies could negatively impact the business

Question 10

Name some common risks that are covered by political risk insurance (PRI)

Answer 10

-Expropriation: The risk of a government seizing or nationalizing assets without fair competition
-Political violence: coverage for damages caused by war, terrorism, civil unrest or other politically motivated violence
-Currency inconvertibility and transfer restrictions: protection against the government unwilling to allow conversion of currency to transfer funds out of the country
-Breach of contract: when the foreign gov fails to honour the contract agreed
-Arbitration Awards Default: Coverage for non-payment of arbitration awards by a sovereign or state-owned entity
-Forced Abandonment: situations where political conditions force the businesses to abandon operations

Question 11

Name the 3 providers of Political risk insurance (PRI)

Answer 11

-Private insurers
-Multilateral Agencies: Organization that is part of the World Bank
-Export Credit Agencies (ECAs): Government backed entities like the U.S. Export-Import bank or Export Development Canada (EDC)

Question 12

What two factors contribute to foreign project capital budgetting

Answer 12

1) cash flows
2) managerial expectations

Question 13

How should parent cash flows and new project cash flows be recognized? why?

Answer 13

Completely separately since they contribute to different values

Question 14

What do managers need to anticipate regarding inflation with a new project

Answer 14

Different rates of inflation because of their potential to cause changes in competitive position which changes cash flows over time

Question 15

What do managers need to keep in mind that may change their projected cash flows?

Answer 15

Foreign exchange rate

Question 16

What does the use of the host-governement loans complicate?

Answer 16

The capital structure and the parents ability to determine an appropriate weighted average cost of capital for discounting purposes

Question 17

What other sort of non financial issues may haunt the foreign companys cash flows when expanding?

Answer 17

Political risks or events

Question 18

How may a foreign company try to adjust their cash flows with risk?

Answer 18

By adjusting the discount rate or the cash flows themselves

Question 19

If a company decides to adjust the discount rater given the many risks, what is a problem with that?

Answer 19

It may cause them not to think of all the uncertainties that are in the futures

Question 20

Why do changes in foreign exchange have a potential effect on future cash flows? How can this impact net cash inflows?

Answer 20

Because of operating exposure it can impact by increasing or decreasing net cash inflows depending on where the products are sold and sourced

Question 21

If a company increases their discount rate, what may be a problem with that?

Answer 21

it is ignoring that the currency may appreciate

Question 22

What does simulation-based assessment utilize?

Answer 22

Scenario development to estimate cash flows to the parent arising from the project over time under hard economic futures

Question 23

What is project finance?

Answer 23

A financing method focuses on funding large-scale, capital intensive projects such as infrastructures energy, transportation and industrial ventures

Question 24

What are the 6 key characteristics of project finance?

Answer 24

1) non-resources or limited resource financing
2) special purpose vehicle (SPV)
3) cash flow based financing
4) risk allocation
5) high leverage
6) long term nature

Question 25

Describe non-resource or limited resource financing under the 6 key characteristics of project finance

Answer 25

Lenders primarily rely on the project’s cash flow for repayment rather than on the project sponsors

Question 26

Describe special purpose vehicle (SPV) under the 6 key characteristics of project finance

Answer 26

When a separate legal entity is created to manage the project. This SPV owns the assets, contract and liab which isolates the project from the sponsors balance sheet

Question 27

Describe cash flow-based financing under the 6 key characteristics of project finance

Answer 27

The projects ability to generate cash flows is central to securing financing

Question 28

Describe risk allocation under the 6 key characteristics of project finance

Answer 28

Risks are allocated to the parties that are best suited to handle them through contractual agreements

Question 29

Describe high leverage under the 6 key characteristics of project finance

Answer 29

The project typically involves a high debt-to-equity ratio with lenders providing a majority of the funding

Question 30

Describe long term nature under the 6 ket characteristics of project finance

Answer 30

The financing structure often spans many years, matching the project’s operational life and cash flow cycle

Question 31

What are the 3 driving forces behind cross border M&A

Answer 31

1) changes in technology
2) changes in regulation
3) changes in capital markets

Question 32

How does one determine if they should acquire a foreign company?

Answer 32

By trying to determine cash flows

Question 33

Name some challenges that come with trying to assess future cash flows?

Answer 33

1) economic conditions
2) terminal value of the project
3) currency fluctuation
4) capital controls

Question 34

Why do cross-border M&A?

Answer 34

1) faster
2) access to different markets
3) synergies

Question 35

What do regulators have to do with cross border?

Answer 35

Regulators in the foreign country have a say in wether or not the deal should or should not happen