Skip to content

CA Final · Advanced Financial Management · International Financial Management

Bharat Auto Ltd is evaluating a project in a foreign country. Which statement best describes why the foreign project's cash flows are commonly analysed from the parent's perspective as well as the project's perspective?

Parent-perspective analysis is used because only cash flows that can be remitted to the parent, after host-country taxes and restrictions on repatriation, add to the parent's shareholder wealth. Project-level cash flows may include funds blocked locally, so they can overstate the value created for the parent.

  1. ABecause cash flows blocked or delayed by the host government may not be available to the parent, so only remittable cash flows add to parent wealthCorrect
  2. BBecause the parent's perspective always shows higher NPV than the project perspective
  3. CBecause exchange rates do not affect the project's local currency cash flows
  4. DBecause the parent's cost of capital is irrelevant to foreign projects

Explanation

Parent shareholders benefit only from cash flows that can actually be remitted to the parent, after taxes, blocked funds and restrictions. The project perspective may overstate value when remittances are restricted. The parent view is not always higher; it is often lower.

Did you get it right without looking?

One question tells you little. A timed set on International Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise International Financial ManagementFree diagnostic mock

More International Financial Management questions