10. Multinational capital budgeting Aa Aa The basic principles of capital budget
ID: 1170172 • Letter: 1
Question
10. Multinational capital budgeting Aa Aa The basic principles of capital budgeting are valid for both domestic and multinational capital budgeting analysis However, it is important to recognize the unique risks that multinational firms face when they perform capital budgeting analysis in a foreign market. For instance, a U.S.-based multinational firm might conduct business in Brazil, but any profits made must be repatriated, or returned, to the parent company and converted to U.S. dollars There are significant risks inherent in these rather simple operations. In the table below, correctly identify whether each type of risk being described is an exchange-rate risk or a political risk Exchange-R Political ate Risk Risk The risk of expropriation (seizure) of a foreign subsidiary's assets by the host country or restrictions on cash flows to the parent company The risk that action by the host country will reduce the value of the investment The risk related to the foreign currency cash flows that will be turned over to the parent company and converted into U.S. dollars LoRusso Industries has considerable operations in Indonesia, producing component electronic parts. LoRusso's Indonesian operation has been very successful, but the firm is now concerned about the effect of the decline in the value of the Indonesian rupiah on the firm's profits Which type of multinational capital budgeting risk is being illustrated by LoRusso's situation? Stand-alone rislk Political risk O Market risk O Exchange-rate risk O Corporate riskExplanation / Answer
Political risk arises due to change in government policies or regulations and exchange rate risk arises when there is hige fluctuation in currecy exchange rate.
Risk of expropriation of a foreign subsidiary's assets by the host country or restrictions on the cashflow of the parent company is an example of political risk because it arises due to political issue of the host country.
Similarly the action by the host country to reduce the value of investment is also an example of political risk because due to soem regulations changes the value of the investment by the company reduces.
Third one is exchange rate risk because it arises due fluctuation in exchange rate.
In LoRusso's situation their is exchange rate risk because it arises due to decline in value of Indonesian Rupiah.
True False:
1st statement is true because it is advisable to raise money from host country it that way any regulation will impact the whole business environment of the host country and host impact their banking system.
2nd statement is false.
3rd stateemnt is true because company should take insurance for the businesses strating in any country it reduces the risk in case of multinational capital budgeting.
4th statement is false because companies include political risk related to foreign investment into the required rate of return.
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