Ch.23 Cross-Border Valuation Test Bank Answers - Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack by The book title does not provide the names of the authors.. DOCX document preview.
Chapter: Chapter 23: Cross-Border Valuation
Multiple Choice
1. An analyst is using U.S. Generally Accepted Accounting Principles (GAAP) to estimate the value of a subsidiary of a U.S. firm, and the country of the subsidiary is experiencing hyperinflation. In this case, which of the following accounting techniques is recommended?
a) Current method.
b) Temporal method.
c) Autoregressive method.
d) Inflation-adjusted current method.
Response: []
2. An analyst is estimating the value of a subsidiary using International Financial Reporting Standards (IFRS), and the country of the subsidiary is experiencing moderate inflation. In this case, which of the following accounting techniques is recommended?
a) Current method.
b) Temporal method.
c) Autoregressive method.
d) Inflation-adjusted current method.
Response: []
3. Which of the following are reasons the forward-rate method is more complex than the spot-rate method in estimating the value?
I. Incomplete data.
II. Extra calculations.
III. The possibility of multiple solutions.
IV. The use of more than one currency in the estimation process.
a) I and II only.
b) I and IV only.
c) II and III only.
d) III and IV only.
Response: [The analyst will convert each of the projected cash flows in the foreign currency into the domestic currency using the forward rate for that horizon. It is more complex because it involves a conversion for each cash flow. In addition to the extra calculations, forward rates may not exist beyond a certain horizon. This means the analyst must estimate synthetic forward exchange rates using interest rate parity theory.]
4. Which of the following are categories of assumptions needed when making projections of and discounting cash flows in different currencies?
I. Inflation assumptions.
II. Cash flow projections.
III. Forward exchange rates.
a) I and II.
b) I and III.
c) II and III.
d) I, II, and III.
Response: []
5. Which of the following are issues to address when analyzing foreign companies?
I. Making forecasts in foreign and domestic currencies.
II. Estimating the cost of capital in a foreign currency.
III. Incorporating foreign-currency risk in valuations.
IV. Using translated foreign-currency financial statements.
a) I and II only.
b) I, II, and IV only.
c) II and III only.
d) I, II, III, and IV.
Response: []
6. In the next two years, the expected inflation rates are 1 percent and 2 percent, respectively, and the real interest rates are expected to be 4 percent and 4 percent, respectively. Using this information, calculate the two-year interest rate yield as of now.
a) 1.88 percent.
b) 2.74 percent.
c) 4.94 percent.
d) 5.56 percent.
Response: [
AU: Please rekey equation above. Run in 1st line of text. In 1st two equations, set 1 and 2 as subscripts. Insert spaces around operators (except in subscripts). In last line, change outer parentheses to braces.
7. In the process of estimating the value of foreign companies, with respect to including an additional risk premium in the discount rate to adjust for perceived currency risk, which of the following are true?
I. The risk premiums would probably be relatively small.
II. Currency risk premiums are the reason shareholders would benefit if managers increased their level of currency management.
III. Currency risk premiums are the reason a global application of the CAPM is not recommended.
IV. It is likely that currency risk premiums are included in the spot and/or forward exchange rates used to translate currencies.
a) I and II only.
b) I and IV only.
c) II and III only.
d) III and IV only.
Response: []
True/False
8. The cost of capital is best estimated from the perspective of a global investor and using both the market risk premium and beta measured against a global market portfolio and not against a local (foreign or domestic) market portfolio.
Response: [Capital markets have become global, in the sense that a considerable share of all equity trades is now international, and global traders, primarily large institutional investors, draw their capital from and invest it all over the world.]
9. Market data across countries do show differences in realized premiums, and this is mainly because the markets have distinct systematic risk factors.
Response: [The differences in realized premiums are mostly because of the unique sets of industries that dominate individual countries’ markets.]
10. It is generally accepted practice to make ad hoc adjustments to the discount rate to reflect political risk, foreign-investment risk, or foreign-currency risk.
Response: [Although many practitioners recommend this practice, political or country risk is best handled by adjusting expected cash flows and weighting them by the probability of various scenarios.]
Short Answer
11. List and describe the two methods for converting forecasted cash flows from one currency into another.
In the forward rate method, the analyst projects foreign cash flows in the foreign currency, but in this case, the analyst converts these into the domestic currency using the relevant forward exchange rates. The analyst discounts the resulting forecast of cash flows using the cost of capital in domestic currency.]
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Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack
By The book title does not provide the names of the authors.