GEORGIA STATE UNIVERSITY

Instructions: Read carefully.

1. You have 120 minutes to download the exam, answer all the questions, and upload the exam as a single PDF file to iCollege Assignments.

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2. You can use financial calculators and your own help sheet (see below).

3. Partial credit will be given for showing your work in detail, correct approach to the problem and writing legibly. You must write your final answer clearly.

4. State your assumptions, if any, clearly. For questions requiring numerical work, whether multiple choice or numerical problems, no credit will be given unless the working is shown as part of your answer.

5. Manage your time well during the test.

Answer all questions. The total score is 100 points.

  • You may refer to the e-book, notes, and/or videos during the exam but using a help-sheet (8.5” x 11”) is recommended to help you manage time.
  • Good Luck!

Honor Codes

You are expected to follow the Honor Code. Any violation of the code will be reported to the concerned authority. Statement: I have completed this exam on my own with no help from any other person. Signature:

_____________________________________________________________

[Part A: 40 points]

Multiple Choice Questions (Each worth 5 points)

1. The ___________ represents the probability that governments and corporations may default on their foreign currency debt obligations.

  1. Political risk
  2. Country risk
  3. Sovereign risk

2. In sensitivity analysis of foreign projects what matters is the ___________ cash flows generated by the project before you can use different scenarios.

  1. incremental
  2. base-case
  3. parent

3. A foreign project that is _____ when valued on its own can be ________ from the parent firm’s standpoint.

a. unprofitable, profitable

b. positive NPV, negative NPV

c. appreciated, depreciated

4. The relevant cash flows to use in foreign project valuation, when capital markets are segmented, are

a. incremental worldwide project cash flows

b. cashflows discounted by interest rates in the respective countries

c. total worldwide cash flows generated by the project

5. Exchange risk adjustment for risky cashflows can be done using currency content analysis for foreign project valuation. This is useful because

  1. it facilitates country risk reduction and political-risk insurance
  2. it facilitates MNC capital budgeting and hedging strategies
  3. it facilitates NPV calculations in home and foreign countries

6. Country risk can be defined as

a. same as sovereign risk

b. risk due to political instability

c. economic risk at the country level

7. Conflicts of interest generated due to different tax rates in MNC capital budgeting:

  1. can be resolved using the adjusted present value technique
  2. can be resolved using the capital market segmentation technique
  3. can be resolved using the currency content analysis technique

8. Expropriation of assets by foreign country governments is an example of:

  1. mild form of political risk
  2. severe form of political risk
  3. severe form of country risk

[Part B: 60 points]

NOTE: Answer any 6 out of 8 questions. IF you answer all 8, we will take the best 6!

Conceptual questions / Numerical problems

  1. Severe political-risk or expropriation of assets:

Suppose your multinational corporation has made an initial investment of $20 million in a foreign project with a WACC of 15% and that generates a cashflow of $5 million per year for next ten years. If there is a probability of 50% that the foreign government may expropriate your project assets in the third year of the project how will you take this into account in calculating the NPV of the foreign project? Give a brief answer using a time-line and a binomial model for severe political risk (show your calculations).

(7 points)

  1. Cnooc’s gain or loss

Cnooc, a Chinese public-sector company, has made a bid to purchase Canada’s Nexen, a big oil company, for C$ 15.1 billion in June 2012. Treat this as an initial investment made by Cnooc in this two-year, Canadian project.

If it has purchased Nexen in September 2012, how many Yuan does Cnooc save on its initial investment because of the change in the CNY to CAD exchange rate from 6.3698 Yuan/C$ in June 2012 to 6.3465 Yuan/C$ in September, 2012?

(9 points)

  1. Explain briefly how capital market segmentation can be accommodated in foreign project valuation (aka multinational capital budgeting) and importance of such accommodation in capital budgeting for multinational financial-managers.

(7 points)

4. Foreign project valuation

Dr. Catherine Mann, chief economist at Citibank has forecast that the Yuan will rise to 6.8 Yuan/$ by the end of 2017 and to 6.6 Yuan/$ by the end of 2018. If the after-tax cashflows generated by the two-year, U.S. based project are $10 billion at the end of 2017 and $15 billion at the end of 2018, and the Chinese cost of capital is 10%, what is the NPV of this project in Yuan?

(9 points)

    1. Currency Risk Adjustment

What is the role of currency content analysis in multinational capital budgeting (aka foreign project-valuation)

How would you include currency risk adjustment in your foreign project valuation?

(7 points)

6.Adjusted present value or APV technique

How would you define the adjusted present value or APV technique?

Under what conditions will you recommend the APV technique to a U.S. company evaluating a Eurozone project? Give a suitable example. How

does the APV technique compare with the NPV technique? Illustrate.

(9 points)

7.Country risk rating

In doing country risk rating for a country called Bapua-Ginny a country analyst made the following observations:

Variable/Ratio Weight Value Product

GNP growth 10 0.05

GNP/Population 5 0.50

Inflation -10 0.10

Reserves/ Imports50.75
Current Account/ GNP15-0.15
Debt service ratio-250.25
Debt/ GNPPolitical stability-15150.300.50

Based on the observations above the country analyst wants to calculate a country risk rating-score for this country. Please fill out last column entitled ‘Product’ based on data provided.

(6 points)

8. Now calculate the country risk rating-score by adding all the numbers you entered in the column entitled ‘Product’ in Question 7 above. How do you normalize this country risk rating-score? What possible use can this normalized country risk rating-score be for multinational financial-managers?

(6 points)

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