Chapter 15

Chapter 15: Multinational Restructuring 51
Chapter 15
Multinational Restructuring
1. Which of the following is not an example of multinational restructuring?

A) an MNC builds a new subsidiary in Malaysia.
B) an MNC acquires a company in Germany.
C) an MNC downsizes its operations in Hong Kong.
D) an MNC shifts some production from its Swiss subsidiary to its Dutch subsidiary.
E) All of these are examples of multinational restructuring.
ANSWER: E
2. Which of the following is not an advantage of international acquisitions over the establishment of a
new subsidiary?
A) the firm can immediately expand its international business.
B) the firm benefits from existing customer relationships.
C) international acquisitions are generally cheaper than the establishment of a new subsidiary.
D) an international acquisition typically generates quicker and larger cash flows than the
establishment of a new subsidiary.
E) All of these are advantages of international acquisitions.
ANSWER: C
3. According to the text, many more international acquisitions are taking place in _______, partially
because of more uniform standards across that region.
A) Europe
B) Latin America
C) Asia
D) Africa
E) none of these
ANSWER: A
4. Which of the following is not true regarding a target’s previous cash flows?
A) They may serve as an initial base from which future cash flows may be estimated after
accounting for other factors.
B) It may be easier to estimate the cash flows to be generated by a target than to estimate the cash
flows to be generated from a new foreign subsidiary.
C) They are always good indicators of future cash flows.
D) All of these are true.
ANSWER: C
52 International Financial Management
5. As far as the managerial talent of the target is concerned:

A) the manner in which the acquirer plans to deal with the managerial talent will affect the
estimated cash flows to be generated by the target.
B) downsizing will reduce expenses and increase productivity and revenues.
C) both of these.
D) none of these.
ANSWER: A
6. Based on information in the text, the following factors should be considered in an international
acquisition except:
A) the target’s willingness to be acquired.
B) the target’s previous acquisition history.
C) the target’s previous cash flows.
D) the target’s local economic conditions.
ANSWER: B
7. Which of the following tax-related factors need not be considered in assessing a foreign target?
A) corporate tax rates in the host country.
B) withholding tax rates in the host country.
C) withholding tax rates in the home country.
D) corporate tax rates in the home country.
E) All of these must be considered in assessing a foreign target.
ANSWER: C
The following information refers to questions 8 through 10.
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political
considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this
target and has provided you with the following information:
 Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for
500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.
 Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for
the next year are MYR300 million. Revenues are expected to increase by 9% over the following
two years.
 Cost of goods sold are expected to be 60% of revenues.
 Selling and administrative expenses are expected to be MYR40 million in each of the next three
years.
 The Malaysian tax rate on the target's earnings is expected to be 30%.
 Depreciation expenses are expected to be MYR15 million per year for each of the next three
years.
 The target will need MYR9 million in cash each year to support existing operations.
 The target's current stock price is MYR35 per share. The target has 11 million shares
outstanding.
 Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky
uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the
next three years. This exchange rate is currently $.23.
 Klimewsky's required rate of return on similar projects is 13%.

8. Based on the information provided above, the net present value of the Malaysian target is $_______
million.
A) 155.9
B) 111.5
C) 138.0
D) 143.0
E) none of these
ANSWER: B
SOLUTION:
Valuation of Bulgarian Target Based on the Assumptions Provided
(numbers are in millions)
Year 1 Year 2 Year 3

Revenue MYR300 MYR327 MYR356.4
Cost of Goods Sold MYR180 MYR196.2 MYR213.8
Gross Profit MYR120 MYR130.8 MYR142.6
Selling & Admin. Exp. MYR40 MYR40 MYR40

Depreciation MYR15 MYR15 MYR15
Earnings Before Taxes MYR65 MYR75.8 MYR87.6
Tax (30%) MYR19.5 MYR22.7 MYR26.3

Earnings After Taxes MYR45.5 MYR53.1 MYR61.3
+ Depreciation MYR15 MYR15 MYR15

– Funds to Reinvest MYR9 MYR9 MYR9
Sale of Firm MYR500
Cash Flows in MYR MYR51.5 MYR59.1 MYR567.3

Exchange Rate of MYR $.23 $.23 $.23
Cash Flows in $ $11.8 $13.6 $130.5
PV (13% disc. rate) $10.4 $10.7 $90.4

Cumulative PV $10.4 $21.1 $111.5
The value of the Malaysian target based on the information provided is $111.5 million.
9. The Malaysian target’s value based on its stock price is $_______ million.
A) 1.4
B) 1,673.9
C) 111.5
D) 88.6
E) none of these
ANSWER: D
SOLUTION: Since the Malaysian target has 11 million shares outstanding, each of which is worth
MYR35 per share, its market value is 11,000,000 × 35 = MYR385 million × $.23 = $88.6 million.
10. The target’s board has indicated that it finds a premium of 30 percent appropriate. You have been
asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage
premium you should be willing to offer?
A) 30.0%.
B) 25.9%.
C) You should not offer any premium because the market’s valuation is below Klimewsky’s
valuation.
D) none of these.
ANSWER: B
SOLUTION: Since your valuation of the target is $111.5 million and the market’s valuation of the
target is $88.55 million, you should be willing to offer a maximum premium of ($111.5/$88.55) – 1
= 25.9%.
11. Which of the following would probably not cause the stock price of a foreign target to decrease?
A) its expected cash flows decline.
B) general stock market conditions in the foreign country are deteriorating.
C) investors anticipate that the target will be acquired.
D) All of these will cause the target’s stock price to decrease.
ANSWER: C
12. Which of the following factors is least likely to cause the required rate of return to vary among
MNCs assessing the same foreign target?
A) differences in the timing of remittances from the target to the parent.
B) differences in the desired use of the target.
C) differences in the local risk-free interest rate.
D) differences in the ability to use financial leverage.
ANSWER: A
13. Which of the following types of international restructuring is probably the most difficult to value by
an MNC?
A) international acquisition.
B) newly privatized foreign business.
C) international alliance.
D) international divestiture.
ANSWER: B
14. A previously undertaken project in a foreign country may no longer be feasible because:
A) the MNC is unable to raise sufficient funds in order to undertake the project.
B) the MNC’s cost of capital has decreased.
C) the host government has increased its tax rates substantially.
D) exchange rate projections changed from a depreciation to an appreciation of the foreign
currency.
ANSWER: C
15. An international alliance typically requires a _______ initial outlay than an international
acquisition, and the cash flows to be received will typically be _______ than the cash flow resulting
from an international acquisition.
A) smaller; larger
B) smaller; smaller
C) larger; smaller
D) larger; larger
ANSWER: B
16. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S.
parent if new information caused the parent to suddenly anticipate that:
A) the Chinese yuan would depreciate in the future.
B) the Chinese yuan would appreciate in the future.
C) the Chinese yuan would remain somewhat stable in the future.
D) none of these; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
ANSWER: A
17. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a
subsidiary?
A) the required rate of return on the subsidiary.
B) forecasted exchange rates of the subsidiary’s currency relative to the dollar.
C) the initial outlay on the project.
D) the possible selling price of the project.
ANSWER: C
18. Regarding the valuation of privatized business in less developed countries, _______ can normally
be estimated with a high degree of accuracy.
A) future cash flows
B) future exchange rate movements
C) the proper discount rate
D) none of these
ANSWER: D
19. U.S. firms acquire more target firms in _______ than in any other country.
A) Germany
B) Mexico
C) France
D) United Kingdom
ANSWER: D
20. Firms based in _______ tend to acquire more U.S. target firms than the other countries listed here.
A) Canada
B) Japan
C) Germany
D) Mexico
ANSWER: A
21. An MNC’s parent would consider investing in a target only if the estimated present value of the
cash flows it would ultimately receive from the target over time _______ the initial outlay necessary
to purchase the target.
A) is less than
B) is the same as
C) is greater than
D) none of these
ANSWER: C
22. Which of the following is not a reason that the initial outlay for acquiring a firm in Asia was lower
as a result of the Asian crisis?
A) property values in Asia had declined.
B) the parent’s currency (for parents in the United States of Europe) has less purchasing power due
to the weakening of the Asian currencies.
C) many firms in Asia were near bankruptcy and were unable to obtain necessary funding.
D) the governments in Asian countries were more willing to allow foreign acquisitions of local
firms as a means of resolving the crisis.
ANSWER: B
23. The adoption of the euro as the local currency by several European countries has _______ capital
budgeting analysis for an MNC that is comparing possible target firms in those countries.
A) simplified
B) complicated
C) had no effect on
D) none of these
ANSWER: A
24. Potential targets in countries where economic conditions are _______ are more likely to experience
strong demand for their products in the future and may generate _______ cash flows.
A) strong; lower
B) weak; higher
C) weak; lower
D) strong; higher
ANSWER: D
25. When an MNC assesses targets among countries, it would prefer a country where the growth
potential for its industry is _______ and the competition within the industry is _______.
A) low; not excessive
B) high; excessive
C) high; not excessive
D) low; excessive
ANSWER: C
26. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock
market prices are generally _______. (Assume that economic conditions are held constant when
completing this statement.)
A) low
B) high
C) volatile
D) none of these
ANSWER: A
27. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded
European firms in the same industry is 12. This firm is considering the possibility of going public in
which it would issue one million shares. If the private firm has similar growth potential and other
characteristics similar to other publicly traded firms in the industry, its value can be estimated as
_______ million euros.
A) 2.4
B) 60.0
C) 41.7
D) 12
ANSWER: B
SOLUTION: Market valuation = €5 million × 12 = €60 million
28. If the foreign currency _______ by the time the acquirer makes payment, the acquisition will be
more costly, and the cost of the acquisition changes _______ the change in the exchange rate.
A) appreciates; by a lesser percentage then
B) depreciates; in the same proportion as
C) appreciates; in the same proportion as
D) appreciates; by a greater percentage than
ANSWER: C
29. If an MNC targets a successful foreign company with plans to continue the target’s local business in
a more efficient manner, the risk of the business will be relatively _______, and therefore the
MNC’s required return from acquiring the target will be relatively _______.
A) high; high
B) high; low
C) low; high
D) low; low
ANSWER: D
30. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the
business would generate more value to the MNC if it was restructured.
A) true.
B) false.
ANSWER: A
31. At present, U.S. firms acquire more targets in the former Soviet Union than in any other
country.
A) true.
B) false.
ANSWER: B
32. The U.S. is one of the few countries with agencies that monitor mergers and acquisitions.
A) true.
B) false.
ANSWER: B
33. The government of a country may prevent a foreign firm from acquiring local targets and
downsizing the targets.
A) true.
B) false.
ANSWER: A
34. Since the cash flows generated by a foreign target will eventually be converted to the parent’s
currency, there is no need to consider the foreign exchange rate in the capital budgeting process.
A) true.
B) false.
ANSWER: B
35. From a foreign currency perspective, the ideal conditions would be a weak foreign currency at
the time of acquisition and a strengthening of the foreign currency over time as funds are remitted
back to the parent.
A) true.
B) false.
ANSWER: A
36. Premiums required to entice a target’s board of directors to approve an acquisition are usually
between 1 and 3 percent of the target’s market price.
A) true.
B) false.
ANSWER: B
37. A foreign target’s expected future cash flows generally vary among different MNCs valuing the
target.
A) true.
B) false.
ANSWER: A
38. An acquirer based in a low-tax country may be able to generate higher cash flows from
acquiring a foreign target than an acquirer based in a high-tax country.
A) true.
B) false.
ANSWER: A
39. The value of an MNC (from the parent’s perspective) is independent of the MNC’s desired
scheduling of remitted funds from the target.
A) true.
B) false.
ANSWER: B
40. If potential acquirers are based in different countries, their required rates of return when
considering a specific target will only vary if the desired use of the target is different.
A) true.
B) false.
ANSWER: B
41. Acquirers may have different required rates of return because of differences in the ability to use
financial leverage.
A) true.
B) false.
ANSWER: A
42. An international acquisition is different from the establishment of a new subsidiary in that the
MNC can immediately expand its international business since the target is already in place.
A) true.
B) false.
ANSWER: A
43. An MNC that plans to acquire a target would prefer to time its bid for the target when the local
stock market prices are generally high.
A) true.
B) false.
ANSWER: B
44. Privatization involves the sale of previously government-owned businesses by the government.
A) true.
B) false.
ANSWER: A
45. An MNC should periodically reassess its investments to determine whether to divest them.
A) true.
B) false.
ANSWER: A
46. The initial outlay for a project in a foreign country may decline if property values in that
country decline.
A) true.
B) false.
ANSWER: A
47. The valuation of newly privatized businesses is generally more difficult than the valuation of a
foreign target that has operated privately for several years.
A) true.
B) false.
ANSWER: A
48. Even if an existing business adds value to the MNC, it may be worthwhile to assess whether the
business would generate more value to the MNC if it was restructured.
A) true.
B) false.
ANSWER: A
49. A target’s previous cash flows are typically an accurate indicator of future cash flows, especially
when the target’s cash flows would have to be converted into the acquirer’s home currency as they
are remitted to the parent.
A) true.
B) false.
ANSWER: B
50. If a target is privately held, general stock market conditions will not affect the amount that an
acquirer has to pay for a foreign target.
A) true.
B) false.
ANSWER: B
51. Even after an MNC’s accept/reject decision of a foreign acquisition has been made, it should be
reassessed at various times. In fact, this analysis may indicate that a previously accepted project
should be divested.
A) true.
B) false.
ANSWER: A
52. An international acquisition may be preferable to the establishment of a new subsidiary because the
firm can immediately expand its international business and benefit from existing customer
relationships.
A) true.
B) false.
ANSWER: A
53. The Sarbanes-Oxley Act requires more accountability by executives and the board of directors
when assessing acquisitions.
A) true.
B) false.
ANSWER: A

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Chapter 15: Multinational Restructuring 51

1. Which of the following is not an example of multinational restructuring?

5. As far as the managerial talent of the target is concerned:

The following information refers to questions 8 through 10.

 Cost of goods sold are expected to be 60% of revenues.

 The Malaysian tax rate on the target's earnings is expected to be 30%.

 Klimewsky's required rate of return on similar projects is 13%.

Year 1 Year 2 Year 3

Selling & Admin. Exp. MYR40 MYR40 MYR40

Tax (30%) MYR19.5 MYR22.7 MYR26.3

+ Depreciation MYR15 MYR15 MYR15

Sale of Firm MYR500

Cash Flows in MYR MYR51.5 MYR59.1 MYR567.3

PV (13% disc. rate) $10.4 $10.7 $90.4

SOLUTION: Market valuation = €5 million × 12 = €60 million

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