L4

Question 1

Issues in capital budgeting

Answer 1

Sunk- irrelevant already incurred cost
opportunity cost
real options-can abandon a project

Question 2

difficulties in multinational project appraisal

Answer 2

1. free CF accrued to parent comp
2. Tax treatments
3. Host country foreign exch controls
4. Exchange rate movement
5. country risk
6. DIsc rate

Question 3

Free CF accrued to parent company and why this is a problem

Answer 3

1. transfer of profits/dividends from the foreign sub to the parent
   - capital flight, tax implications, impact
2. sales proceeds of any goods/services exported from home country to the foreign

Question 4

Issues in multinational capital budgeting

Answer 4

1. goods/service supplied to foreign sub by parent
2. exch fluctuation
3. tax regimes
4. country risk: political, economic sovereign

Question 5

1. goods/service supplied to foreign sub by parent

Answer 5

cost become dollar cf, accrued to the parent
home country income tax applies
what to do
*forecast annual after tax dollar profits from exports
* add these forecast to after dollar cf delivered by foreign sub
* disc the aggregate cf to present using parent home county exch

Question 6

2. Exch fluctuations

Answer 6

lead to uncertainty in $cf to parent
- % change in spot exch rate equals the interest differential between the countries

e(s2)=s1 x (1 + (R1-R2)) to the power of T
USA I= 2%
Russia I = 2%
exch = $0.5 to £
E(s2)= 0.5 x (1+ (2-2)) power of 2

Question 7

3. home country tax regimes

Answer 7

diff in corp inc tax regimes
gov can attract capital by introducing tax incentives: tax credit
e.g. Tax Cuts and Jobs Act of 2017- lowed corp tax to 21% in USA

Question 8

4. Country, Political, Sovereign Risk

Answer 8

difficult decision for management have as not clear, if they want to account they need:
1. prob of country risk event
2. cf given if event occurs
3. NPV adjusted for P

Limits
1. hard to find P
2. Uncertainty in likelihood and amount of any compensation
3. P assumed constant in every period