Lien

INTERNATIONAL FINANCIAL MANAGEMENT
HARVARD BUSINESS SCHOOL EC COURSE PAPER DECEMBER 2005

“INTERNATIONAL CAPITAL BUDGETING IN PRACTICE”

MARC LIEN 70605147

INTERNATIONAL CAPITAL BUDGETING IN PRACTICE

INTRODUCTION
I wrote this International Financial Management Paper with four objectives in mind: • To develop a survey instrument aimed at providing a rich description of the practices of international corporate finance, allowing us to infer whether corporate actions are consistent with academic theories. To construct a practical step-by-step approach to implementing such a survey with the objectives of maximizing response rate and minimizing biases. This approach would represent a plan of action to go from idea conception through to publication. To find evidence from prior surveys supporting the theory that multi-national corporations consistently over state their cost-of-capital. To improve my understanding of international corporate finance concepts and to provide an opportunity to research and explore the challenges and tradeoffs that financial executives face.

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I have attempted to provide a real practical aid to the future undertaking of a survey on international capital budgeting practices. To best achieve this aim, I structured this report in the form of a chronological project plan. The major steps in the eight point plan are: 1. Understand previous academic research 2. Define research objectives 3. Develop draft research instruments 4. Refine survey instrument 5. Select target companies 6. Construct delivery mechanism 7. Design marketing approach 8. Undertake research

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1. UNDERSTAND PREVIOUS ACADEMIC RESEARCH
Prior to engaging in a new piece of academic research, I felt it important to review prior literature. Firstly, through a review of contemporary publications on a broad range of International Financial Management topics, I felt better capable of creating an informed survey instrument. Secondly, through a detailed critique of 20 previous surveys on Capital Budgeting since 1970 (see Appendix A), I was able to both identify best practice in survey construction and execution and, finally, this comprehensive review of prior survey literature enabled me to identify where any gaps exist in terms of academic understanding that could guide this piece of work. My survey review highlights three main routes that prior research has followed:

1. Determine whether a gap exists between capital budgeting practices in the field and those espoused by academics
A broad range of surveys going back to Mao (1970) [1]1 have looked to understand and explain differences between the behavior of finance practitioners and the normative view held by the academic world. This body of research has captured three aspects of finance practice: how firms use capital budgeting techniques, how they incorporate and manage risk and how they determine their cost of capital. Klammer [2], Gitman [4], Schall [5] all identify that managers in firms have a preference to use simple payback techniques over more sophisticated DCF ones although this trend is changing over time (Block [7]). Later studies suggest the level of financial sophistication may be increasing in some areas but not in others. Blazouske [10], for example, notes that although firms use advanced capital budgeting techniques, few use any method of risk adjustment or management science techniques. Ryan (2002) [19] reviews past U.S surveys to see whether capital budgeting practices have changed in Fortune 1,000 firms over time. She concludes: “it appears the views of academics and senior managers of Fortune 1,000 companies on basic capital budgeting techniques are in stronger agreement than ever before.”2
Numbers in square brackets ‘[ ]’ reference surveys in Appendix A Ryan, P., “Capital Budgeting Practices of the Fortune 1000: How have things changed?”, Journal of Business and Management, Vol. 8, No. 4, Winter 2002
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The most thorough survey to date is by Campbell (2001) [16] which is unique given its large sample size, broad scope and the availability of firm and manager-specific characteristics.

2. Review whether capital budgeting procedures differ across industries, countries or firms of different size
Given that the line of inquiry around managers trending towards normative approaches had been exhausted, at least in a domestic context, researchers turned their attention to seeing whether these trends were observable across multiple dimensions. Many started investigating differing practices across countries: Kester [9] (Singapore), Blazouske [10] (Canada), Summers [11] (Europe and Asia), Sandahl [12] (Sweden), Lazaridis [13] (Cyprus), Brounen [18] (UK, Netherlands, France and Germany). One of the most interesting results from these studies is the differing shareholder orientations of firm between countries and the impact this has on capital management practices. A second dimension was to look at whether sophisticated techniques were equally prevalent across industries. Block (2005) [15] found that there were significant differences in results relating to goal setting, determining the required rate of return and accounting for the portfolio effect. The impact of firms of different sizes was also explored. Brounen (2004) [18], for example, found that smaller firms rely mostly on payback whilst larger ones on NPV. These differences in practices between countries, industries and firms of varying size present opportunities for further research but also highlight areas of potential bias in any future survey. 3. Investigate the challenges of capital budgeting for Multinational Corporations In addition to comparing capital budgeting practices in a domestic setting across different countries, some researchers have begun to explore capital budgeting practices in multinational corporations (MNCs). Oblak (1980) [6] identified that many MNCs use DCF methods and that they adjust for risk in their evaluation of foreign investment opportunities. He
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notes that MNCs have not significantly changed their way in which returns from foreign projects are measured or the determination of the appropriate discount rate. Block (1984) [7] followed up with a review of capital budgeting methods in MNCs but did not explore the differences between domestic and foreign project investment. Goddard (1990) [14] dove deep into the political risk assessment process in MNCs and found that the analysis was predominantly subjective and that there was little integration of risk analysis into the formal capital budgeting processes. I would suggest that the paper that throws most light onto the international capital budgeting processes is Block (2000) [17]. He explicitly examines the extensions in theory and practice to domestic techniques in 146 multinational corporations. He identifies a number of misapplications such as “applying corporate wide weighted average cost of capital to foreign affiliate cash flows rather than to cash flows actually remitted to the corporation.” Also that “risk is frequently measured on a local project basis (in a foreign country) rather than considering the portfolio effect on the total corporation.” He summarized by saying: “Ultimately, it is shown that the survey respondents hedge against the uncertainty of the procedures by adding a premium to the weighted average cost of capital.” Block’s paper is excellent in capturing the very latest practices in international capital budgeting. He explores corporate policy, foreign investment and risk, capital structure, cost of capital and operations considerations.

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2. DEFINE RESEARCH OBJECTIVES
It is important to determine the particular objectives of this new piece of work before progressing as the structure, content and approach are dependent on the objective. I can see four potential directions that it can take: 1. Extend existing survey research. This could, for instance, take previous work on multinational capital budgeting carried out with the help of US firms and repeat and extend the exercise with South American, European and Asian firms. 2. Perform targeted research through a series of in-depth interview alone, to explore a particular hypothesis. For example, interview with the CFOs of 5 private multinational conglomerates and CFOs of 5 publicly traded multinationals to see explore whether potential differences in shareholder impact capital budgeting approaches. 3. Survey firms to cover a new aspect of international finance that has yet to be investigated in the field. Given the broad nature of previous multinational surveys, there is plenty of scope for a deeper dive into one or two aspects. For instance, how to multinational firms go about assessing risks prior to agreeing to an international investment project. 4. Survey firms to test a hypothesis. For example: firms overestimate the risks involved in investing in international projects and this overestimation is reflected in their capital budgeting analysis.

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3. DEVELOP DRAFT RESEARCH INSTRUMENTS
Types of instrument Researchers frequently use large sample analysis and clinical studies. Large sample studies can increase confidence through their statistical power but are unable to gauge answers to qualitative or probing questions, the research has to infer the answers. Clinical studies offer excellent details and allow many of the biases discussed above to be overcome but the small sample set only makes it impossible to generalize with any confidence beyond the sample population. The survey approach falls somewhere in between these two extremes in that a moderately large sample of firms can often be attained (up to 350 in the case of Campbell, 2001, [16]) at the same time a being able to ask for quantitative answers to specific questions that externally available financial data does not provide. Key issues with selecting survey method

Population issues
If the survey population is global multinational firms, it is important to compile a list of these firms. Reviewing the various databases available at the Baker Library, I could find no such ready made list. Step 5 details one approach that can be taken to compile a list. It is also unclear what is meant a multinational firm for the context of the survey. One would need to decide the following in defining the population: • Ownership – public or private • Subsidiary definition – wholly owned, >50% or 0-50% • Number of foreign subsidiaries – >0, arbitrary threshold, active international investor - one or more investments in last 12 months or >x% of sales that are foreign • Industry – exclude or not investment and banking sectors • Size – only top 500 firms on each stock exchange, range of small to large firms given that capital budgeting practice varies along this dimension • CAPEX spend – limit or not according survey to only firms that have had growing CAPEX over last five years • Growth – limit or not survey to firms that have been increasing shareholder value In addition to defining the survey, we need to determine who the recipient should be. The research is focused on firm behavior yet it is unclear how closely related firm behavior is to the expressed behavior of any one individual. Some people within the firm may not have the knowledge required to answer the questions so the intended recipient should be clearly defined. I would recommend targeting the CFO as that is
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the one person in the firm who would have an overview of all the financial aspects be it capital budgeting, capital structure, performance measurement etc. It is not quite as obvious how to avoid the completion of the survey being deferred to someone without the appropriate oversight. In any case, it will be a challenge to identify name, address and recipient of the CFO of our MNC population.

Question issues
Some of the decisions around the specific questions on the survey include: • Should questions be open-ended or structured? Structured questions may be in the form of multiple choice; for example, “How do you determine the target leverage for the project?” a. same as firm’s target leverage, b. debt capacity of project, c. level of cash-on-hand for investment. Answers to multiple choice questions should be mutually exclusive and collectively exhaustive so some answers sets might require an ‘other’ category. Multiple response questions could also provide an insight into how many different tools or approaches a firm takes. For example, “Why does your company invest abroad?” a. access to new markets b. access to raw materials c. improved production efficiency d. development of new knowledge e. political safety f. fear of losing a market g. “bandwagon” effect h. strong competition at home i. diversification benefits. Score assignments might also be useful to gain an idea of perceived relative importance of factors. For example, “When considering an investment, how concerned are you about each of the following political risks [0-6]?” a. expropriation b. inconvertibility c. imposition of a new tax d. removal of agreed subsidy e. implementation of new tariffs f. creating barriers to sourcing g. unilateral changes to key contract provision h. ethnic strife. Forced ranking could also be used. • Complexity of questions is also important. A concern I have is that the survey could ask a series of specific questions about risk management, cash flow analysis etc. but some firms may not manage any risks or analyze cash flows beyond payback period. This would reduce the useable data for some of the questions. • It is worth considering the use of screening questions to see whether the CFO actually did respond to the survey or whether the task was delegated. For instance, the anonymous survey could capture the age of the respondent. This age could then be cross-checked with the age of the CFO as noted in CapitalIQ or the like. Alternatively, we could ask the respondent for how many years they have been with the firm. We could then use this as an extra check when looking to explain outlier data. • The likelihood of completion may be partly dependent on the type of question asked. Is it, for example, worth excluding survey questions that require the
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respondent to look information up. e.g. “What percentage of sales comes from foreign subsidiaries?” I recommend circumventing this problem by converting the answers to multiple choice: “0%, 1-25%, 26-50%, 51-75%, >75%”

Bias issues
Bias may creep into the survey items in a variety of ways. • Ambiguity - Some of the financial terms and concepts may not be commonly understood. For instance, I can see people interpreting the phrases, ‘sensitivity analysis’ and ‘scenario analysis’ incorrectly. It would help to add a description of these phrases: “Sensitivity analysis allows for the change in one input variable at a time, such as sales or cost of capital, to see the change in NPV” and “Scenario analysis allows for the change in more than one variable at a time, including probabilities of such changes, to see the change in NPV”. • Social desirability – Respondents are likely to want to look good in the eyes of others if the survey is not anonymous. Making the survey anonymous, however, will require a separate set of questions that capture key characteristics of the company and the manager so that analysis can still be performed. Even if using an anonymous instrument, it might be the case that a respondent answers based on what they believe should be done or what they think is done; both of which might be different from what is actually done. • Non-response bias Aggarwal (1980) discusses the limits of the usefulness of management science models in more detail. Developing Survey Questions My original objective was to develop a completed survey which covered international capital budgeting practices for multinational corporations and I worked on iterating a series of potential questions. Subsequently, however, and near the completion of this paper, I came across additional surveys by Block and Goddard (as described above) which survey the exact elements that I had originally set out to do. My guiding principal for this project was to provide useful data for implementation in the future so I decided to not repeat the survey design based on my guess at what the research might try and achieve. Additionally, it became apparent that I am not the best judge of the final set of questions to include in a survey – the effectiveness of the questions in eliciting a usable response is. Theory on survey pre-testing (see step 4) recommends starting off with a much larger set of questions than will end up in the final instrument.

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I therefore decided that the most effective use of this element of the report was to collate and structure all the questions from all available surveys so as to provide a useful reference guide when creating a new survey for future research upon clarifying the objective as describe in step 2. Appendix B provides a categorized list of all the research questions asked in 10 available surveys, and their multiple-choice answer options cross-referenced to their source. The categories I used when reviewing the survey questions are: • • • • • • • Firm characteristics (industry, financials, international) Management characteristics Corporate policy (capital budget, capital budgeting process, capital rationing) Management perceptions (purpose of firm, time horizon) Capital budgeting (required rate of return, project selection, techniques Determining the cost of capital (methods, risk adjustment, management science techniques) International investments (risk analysis, capital structure, cost of capital, operations, income measurement)

In addition to this survey question guide, I posit some questions of my own which I believe have not been asked in any survey to date. My questions and recommended multiple-response options (Appendix C) fall into two categories: Corporate strategy and foreign investments, and international capital budgeting.

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4. REFINE SURVEY INSTRUMENT
Pre-testing is absolutely critical to bring to light ambiguities and other sources of bias and error. Converse and Presser (1986) argue that a minimum of two pretests are necessary, with respondents similar to those who will be in the final sample. The first pretest should have up to twice the number of items as the final, as one purpose is to identify weaker items and drop them from the survey. Items may also be dropped if the first pretest shows they exhibit too little variance to be modeled. The first pretest will also have many more probe items that the final, and respondents may even be told they are being given a pretest and their help solicited in refining the instrument. Other purposes of the first pretest are to see if respondent interest is aroused, if respondent attention can be maintained, if interviewers and respondents feel the survey has a natural flow, and if interviewers experience problems such as need to repeat questions, need to correct misinterpretations of questions, need to handle volunteered information, sections where the respondents wanted to say more, or questions which seemed sensitive. The first pretest results, hopefully, in a much-changed, finished instrument. The second pretest is used simply for polishing, trimming, rearranging, and other refinements, but not adding new dimensions or making major substantive changes in the survey. A natural test-base for the survey would be the MBA student body. Students could complete the survey and note the time it took them, where they felt questions were ambiguous and suggest other improvements. The survey should also be shown to researchers in the finance department to gain their input along with marketing research experts go review the design and execution. Again, the objective here is to minimize bias and maximize the response rate.

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5. SELECT TARGET COMPANIES
The following steps can be taken to select target companies, extract relevant information about the recipient and generate a dataset that can be used for further analysis: 1. Decide desired universe of companies as described in step 3. e.g. Only largecap public companies that operate in more than ten foreign geographies. Dataset should have equal population of 300 firms headquartered in each of the US, Europe and Asia and exclude investment firms. 2. Use CapitalIQ – available through the Baker Library Resources – to create a ‘screen’ that matches the population you desire. Here is an example of a CapitalIQ screen:
1 2 3 4 5 Professional Job Function: Chief Financial Officer Geographic Location: United States and Canada (Primary) Investment Type: NOT (Venture Capital Investing OR Private Equity Investing OR Incubation OR Pensions/Savings Fund(s) OR Endowment Fund(s) OR Foundation Fund(s) OR Hedge Fund(s) OR Investor in Public Equity OR Principal Investing OR Mezzanine Investing OR Investor in Principal Investment Funds) Market Capitalization ($mm) [Latest]: is greater than 5000 Industry Classification: NOT (Financials)

3. Cross-reference the filtered CapitalIQ companies with those in the ORBIS dataset – also available through the Baker Library Resources – to remove companies that do not meet the Multi-National Corporation criteria. This can not be done directly using CapitalIQ. 4. Create a CapitalIQ report that includes the CFO (or other executive) in the Professional Job Function field. 5. Run the final CapitalIQ screen and by selecting the CFO of each company, you are able to download a v-card (electronic business card) which can then be imported into a new Microsoft Outlook contact folder. 6. Export the Microsoft Outlook contact folder to a Microsoft Excel document for reference or use it directly for a mail-merge of the survey and cover letter to the CFOs. Appendix D shows a list, created using this method, of the names and addresses of the CFOs of the Top 100 North American companies.

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CONSTRUCT DELIVERY MECHANISM
Once the survey design has been settled on, various means of delivering and receiving back the survey to respondents should be developed. Outbound survey channels 1. Include a paper copy of the survey with a cover letter to the CFO. The survey should not be stamped so as to make it easy to return the document by fax. A stamped-addressed envelope should also be included along with a final checklist of things the respondent should do before returning the material. 2. The survey and cover letter could be faxed to recipients. The most effective way of utilizing this channel is to use on online service which will automatically fax all the documents to the list of fax numbers you provide it. www.myfax.com, www.efax.com, Service providers include: www.rapidfax.com, www.clickfax.com 3. Email a link to an online survey to the CFOs 4. Telephone the CFO and spend 15 minutes completing the survey over the phone. Inbound survey channels 1. Stamped addressed envelopes for those completing the survey by hand and returning it by post 2. Provide a dedicated fax number for completed surveys. This fax number should be an ‘internet fax number’ (provided by one of the companies mentioned above). This will allow for easy collation of all returned faxes. 3. A web based survey tool should be created. There are several companies that www.questionpro.com, provide this service including: www.websurveyor.com, www.surveysystem.com

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7. DESIGN MARKETING APPROACH
The following are some ideas on how to maximize the uptake of the survey: • Identify Harvard Business School MBA and AMP alumni who work in the finance department of their firm or are CFOs and have them personally request the CFO to complete the document. • Present at a CFO forum and have surveys completed there and then. • Create a CFO forum and have registrants complete the survey as part of the registration. • Partner with a consulting Firm who may have access to senior management of US and international firms • Mass email members of the Finance Executives International network • Send a letter to each CFO in the targeted company database. • Phone the CFO of each company and ask for commitment to completing the questionnaire. Offer them the alternative to complete the survey over the phone or to have an email with link to website sent to them. • Offer $500 to three randomly selected participants • Offer $50 for the completion of each survey • Promise advanced copy of results • Have 10 MBA students phone round and follow up non-respondents. Use native speakers. • Resend and refax survey to non-respondents two weeks after initial mailing

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8. UNDERTAKE RESEARCH
Once the survey has been deployed and the results have been collated, we would want to drive for publication of the results in the academic community. One potential area for exploration is the extent to which imbalances in capital budgeting processes lead to a massive unnecessary shortfall in the flow of funds from rich countries to poor. One element of that argument is that firms overstate their cost of capital. It is on this topic that I explore further below. Firms consistently overestimate the cost of capital for international investments leaving wealth-creating opportunities unexploited

Positive NPV projects create wealth for shareholders but setting the required rate of return above the true cost-of-capital will result in positive NPV projects being bypassed
One of the foundations of capital budgeting theory is the determination of equity returns required by sponsors to invest in a particular project as opposed to them investing in other projects. The simplest criterion to apply is that a given project should more than cover the opportunity cost of capital committed to the investment – the Net Present Value rule. When the present value of expected future cash flows exceeds the investment’s costs, the project is unambiguously value creating. The Capital Asset Pricing Model (CAPM) is commonly used to determine required rate of return used in the present value calculation and is based upon two principles: 1) risk and return are positively correlated so investments in a riskier project will require a higher return, and 2) so long as the returns on different assets are less than perfectly correlated, investors can eliminate some risks easily and costlessly by holding a diversified portfolio of risky assets. Only risks which can not be eliminated are priced into the required rate of return. Managers unfortunately engage in shareholder value destruction by executing projects that do not exceed their cost of capital (are NPV negative). Less talked about but equally value destroying are those projects which do have a positive NPV but are not implemented. This will happen if management explicitly excludes some positive NPV projects as a result of setting an investment decision hurdle rate above the true cost of capital. Value destruction also occurs when management miscalculates too high a cost of capital and applies this to project cash flows leading to an erroneously negative NPV.

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There is evidence that suggest that firms do not exclusively hold a shareholder orientation and that they require excessive rates of return
The goal of the firm, from a financial perspective, is to maximize shareholder wealth. There is no reason to believe that firms that do not subscribe to this view would seek to adhere to the NPV criterion given that it is not aligned with their goals. Disturbingly, not all firms see maximizing shareholder wealth as a primary objective. Stanley and Block study3 of the Fortune 1000 companies in the 1980’s found the most frequently stated objective of management was to maximize return on equity (29%) followed by maximizing growth in earnings per share (26%). Maximize stockholder wealth was third at 21%. Even in Block’s most recent study4, 28% of Fortune 1,000 companies voted for growth in earnings per share. The same study found that in some industries, the misaligned goals were even starker with 67% of retail firms choosing growth in earnings per share as the primary objective of the firm. The objective of maximizing shareholder wealth also differs across countries. Brounen, Jong and Koedijk illustrate5 that practioners in Germany and France only rated this corporate goal as 1.7 and 1.9 out of four (0-not important, 4-very important) whereas companies in the UK and Netherlands scored greater than three on average. Arnold and Hatzopoulos asked in their survey6, “what are the cut off points used to evaluate the viability of major capital investments?” They found that the average payback hurdle was set remarkably low at 2-4 years whilst the NPV modal range was high at 11-15%. Pike in his 1986 study7, found that 27% of firms were using an NPV hurdle rate of 20-24%. Cost of capital hurdle rates as high as this are significantly above the long-term market requirement and these firms have invariably destroyed value by passing up projects that would have been NPV positive had an accurate discount rate been applied.

Stanley, M.T. and S.B. Block, “A survey of multinational capital budgeting,” Financial Review, Vol. 19, March 1984, pp. 36-51 4 Block, S.B. “Are there differences in capital budgeting procedures between industries? An empirical study”, The Engineering Economist, Vol. 50, 2005, pp.55-67 5 Brounen, D, Jong, A, Koedijk, K, “Corporate Finance in Europe: Confronting Theory with Practice”, Financial Management, Winter 2004 6 Arnold, G., Hatzopoulos, P.D., “The Theory Practice Gap in Capital Budgeting: Evidence from the United Kingdom” 7 Pike, R.H., “An Empirical Study of the Adoption of Sophisitcated Capital Budgeting Practices and Decision Making Effectiveness”, Accounting and Business Research, Vol. 18, No. 72, pp. 341-51
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Managers have a tendency to overstate the required rate of return on domestic projects Several viable explanations enlighten us to why managers consistently overstate the appropriate cost of capital:

Problems with the NPV method cause project valuations to be understated
The NPV approach, lauded in most academic textbooks8, is “accept project if and only if its NPV is positive”. This approach does not incorporate the value of managerial flexibility. For example, if a company develops a new product, it may invest to expand its production capability or if the cost of a critical part skyrockets, it may choose to scale back production or terminate the venture. Traditional NPV analysis approaches fail to capture the value associated with this managerial flexibility. Koller, Goedhart and Wessels9 note that the value of flexibility is greatest when uncertainty is high and there is room for managers to react to new information. The authors recommend analyzing at least four types of managerial options: the option to defer investment, abandonment option, follow-on options and the option to adjust production. The existence of one of more of these options will increase the NPV of a project and, for borderline projects, could sway a decision from ‘reject’ to ‘accept’. Practitioners inconsistently incorporate real-options with only 25% of CFO’s indicating the use of the technique in Campbell’s 2000 survey10.

Top management’s incentive to scale back the optimism of project sponsors
Poterba and Summers11 in their 1995 paper note that some managers “may set hurdle rates above their required returns as a way to correct for overly optimistic cash flow projections in projects that they are asked to consider.” This approach is flawed; managers should instead scale back the absolute values of the cash flow. By increasing the hurdle rate, managers are inadvertently shortening the corporate investment time horizons due to the discount rate method over-adjusting distant cash flows.

Zimmerman, J., Accounting for Decision Making and Control, 1985, pp.119 Koller, T., Goedhart, M., Wessels, D., “Valuation: Measuring and Managing the Value of Companies”, McKinsey & Company, Fourth Edition, 2005 10 Graham, J., Campbell, H.R., “How do CEOs make Capital Budgeting and Capital Structure Decisions?”, The Journal of Applied Corporate Finance, Vol. 15, No. 1, 2002 11 Poterba, J., Summers, L., “A CEO survey of U.S. Companies’ Time Horizons and Hurdle Rates”, Sloan Management Review, Fall 1995
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When Block12 asked top management whether the “true rate of return” that they require is higher than the computed rate using the weighted average cost of capital, 74% answered in the affirmative. Again, this is a suboptimal approach since the WACC is intended to incorporate all the uncertainty associated with the investment. Additionally, Antle and Eppen13 pointed out that the combination of asymmetric information between managers and an incentive system within a hierarchy that rewards managers for amassing control over corporate resources can induce the imposition of a countervailing force, that is high hurdle rates, to reduce the tendency to over invest. Senior managers apparently have a tendency to overcompensate by demanding excessive discount rates.

These tendencies are compounded by managers overestimating the incremental riskexposure associated with international investments Academics14 and practioners frequently perceive that foreign investments have the greatest risk exposure of any capital allocation opportunity. The explanation given is often that there are additional risk effects that need to be incorporated into the analysis. Block’s 2000 study indicates that 69% of multi-national corporations surveyed think that international investments increase the risk exposure of the firm. 38% saw business economic risk as their predominant concern with international projects. 27% indicated currency risk and 20% selected expropriation risk. Shapiro15 makes a strong case for the contrary: “To the extent that foreign cash flows are not perfectly correlated with those of domestic investments, the total risk (systematic and unsystematic) associated with variations of cash flows appears to be reduced, not increased by international investment.” Block16 supports this argument and says that “the portfolio’s effect argument becomes even more compelling when investments are made in less developed countries. While the inherent risk may be larger in the emerging markets of Latin America,

Block, S., “Integrating Traditional Capital Budgeting Concepts into an International Decision-Making Environment”, The Engineering Economist, 2000 13 Antle, R., Eppen, G., “Capital Rationing and Organizational Slack in Capital Rationing”, Management Science, Vol. 31, No. 2, pp.163-174 14 For example: Ross, S.A., Westerfield, R., Jaffe, J., Corporate Finance, 5th Edition, Irwin/McGraw-Hill, Burr Ridge, 1999 15 Shapiro, A.C., Multinational Financial Management, Ally and Bacon, Boston, 1997 16 Block, S., “Integrating Traditional Capital Budgeting Concepts into an International Decision-Making Environment”, The Engineering Economist, 2000
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Asia, or Africa, the portfolio risk reduction benefits are likely to be greater because of low or even negative correlation between these countries and the United States.” Beyond this portfolio effect, there are two additional reasons that support the idea the MNCs consistently overstate the cost-of-capital associated with international investments The first relates to how adjustments are made to the analysis to incorporate the additional risk. There are two ways of making this adjustment, one is to adjust the discount rate upwards (81% of the managers17) and the other is the certainty equivalent method where yearly cashflows are penalized for lack of certainty. When the adjusted discount rate method is used, only the systematic risk should demand a higher rate of return. “Unsystematic risk such as exchange rate exposure or imposition of a new tariff [or expropriation] can be diversified away and does not merit a higher hurdle rate.”18 This in itself is not of issue, what is, is the fact that less than 15% of respondents19 realize the distinction between systematic and unsystematic risk. Secondly, managers tend to use subjective perceptions of risk to adjust the discount rate. Oblak20 found that 40% of MNC managers subjectively adjust the discount rate to take account of the perceived additional risks that come with international, versus domestic, investment projects. Block21 found the figure to be closer to 80%. Without a clear understanding and delineation between the systematic and unsystematic risks, hurdle rates will consistently be set too high and value-creating opportunities passed over.

17 18

Ibid. Ibid. 19 Ibid. 20 Oblak, D., Helm, R., “Survey and Analysis of Capital Budgeting Methods Used by Multinationals”, Financial Management, Winter 1980 21 Ibid.
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APPENDIX A

ARTICLE

RESEARCH OBJECTIVES

MAJOR FINDINGS

TOPICS COVERED Objectives of financial management Perceptions of risk Incorporating risk into analysis Sector analysis Capital budgeting techniques Risk analysis 3 stages of capital budgeting process Capital budgeting techniques Project decision criteria Departmental responsibilities Capital budgeting process Capital budgeting techniques

INTERNATIONAL CONTENT None

STUDY METHODOLOGY

1

Survey of Capital Budgeting: Theory and Practice , Compares theory to practice for 8 small Managers were reluctant to use NPV/IRR Mao, James C.T., J of Finance, vol. 25, 1970, 349- companies 360 Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques , Klammer T., Journal of Business, 45, July 1972 Investigate changing capital budgeting practices in industry to see if they kept up with evolving theory DCF gaining over time Some projects did not undergo profitability analysis, e.g., safety

Day long management interviews Survey of 369 firms (184 responses) with minimum CAPEX of $1m for each of 5 years Survey

2

None

3

Capital Budgeting Practices: A Survey , Fremgen, J, Determine the incidences and causes of not available Management Accounting, May 1973 capital rationing and observe management practices Survey of Capital Budgeting Techniques Used by Major U.S. Firms , Gitman, LJ; Forrester, JR, Financial Management, 1977 Capital budgeting procedures and techniques, capital rationing, and handling of risk Increasing use of more sophisticated tools (NPV/IRR) 50% operate in capital rationing environments

None

4

None

Survey of 268 high stock price growth, high CAPEX companies (103 responses) Survey of 424 large firms (189 responses).

5

Testing hypothesis that firms were Survey and Analysis of Capital Budgeting Methods, Schall, LD; Sundem, GL; Geijsbeek, WR, getting smarter through use of more J of Finance, Mar 1978 sophisticated techniques

Risk analysis is also becoming more sophisticated, after-tax weighted average cost of capital being most popular

None When techniques used What techniques are used Pre/post tax cashflow and cost of capital Project risk categories Substantial comparisons between domestic and foreign firms. All companies had headquarters in the US.

6

Survey and Analysis of Capital Budgeting Investigate capital budgeting techniques Methods Used by Multinationals , Oblak, D, Helm, and procedures used to estimate project R, Financial Management, Winter 1980 returns, risk and the required rate of return

Capital budgeting both domestically and 24% of project ideas generated by subsidiaries. 5% (3) companies indicated different weights used when evaluating internationally for MNC foreign and domestic projects. Very high acceptance rate for Income measurement from subsidiaries Risk adjustment projects. 54% use Cash Flow as measure of income from subsidiaries. 50% firms required rate of return is the same for domestic and international projects, of those that do not, 44% use local cost of capital and 40% use a subjective measure. Risk adjustment in general was generally performed through subjective means. Firms tended to consider foreign project risk - forex (67%), inflation (73%), political (73%)

Surveys sent to CFOs of 226 of Fortune 500 firms (58 responses). Firms had subsidiaries in over 12 countries.

7

A Survey of Multinational Capital Budgeting , Stanley, MT; Block, SB, The Financial Review, 1984

Investigation of the sophistication of U.S. multinational firm capital budgeting processes

Firms moving towards a more normative approach reducing gap between theory and practice

Financial objectives of firm Budgeting evaluation techniques Use of WACC Risk-adjustment techniques Initiation and approval of projects Centralization of decision process

U.S. multi-national firms only No comparison between domestic and international projects No assessment of international specific risks

Survey of 339 of Fortune 1000 firms (121 responses) 14-item, 2 page survey mailed to CFOs

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix A: Page 1

APPENDIX A

ARTICLE

RESEARCH OBJECTIVES

MAJOR FINDINGS

TOPICS COVERED Decision making at different levels in firm Mandatory vs discretionary projects Capital budgeting techniques Factors affecting hurdle rate

INTERNATIONAL CONTENT None

STUDY METHODOLOGY

8

Capital Budgeting at Twelve Large Manufacturers , Investigate whether capital rationing is a Smaller projects are subject to higher hurdle rates Ross, M, Financial Management, Winter 1986 rational scheme for focusing effort on Decision making is different between discretionary and most profitable opportunities mandatory projects; Simpler tools used lower down firm; Rationed firms have much higher hurdle rates than those that do not; importance of asking how capital budgeting practices differ at the plant, division, investment committee, and CEO and Board levels Capital budgeting practices of listed firms in Singapore, Kester G, Chong, T, Singapore Management Review, Jan. 1998

Sample of 400 energy conservation projects at 12 large manufacturing firms. 13 days of interviews at each

9

Investigate capital budgeting practices of In contrast to US and Australian companies, IRR and payback Capital budgeting techniques Risk analysis Singaporean Firms are perceived to be equally important. Sophisticated risk analysis techniques were seldom used. Only 17% used CAPM Capital rationing to determine firm's WACC, none used CAPM to determine project WACC. Little evidence of capital rationing. Most analysis performed after tax Most companies used advanced capital budgeting techniques but few used any method of risk adjustment. Very few used management science techniques beyond sensitivity analysis Hurdle rates tend to be higher than cost of capital. US CEOs believed they had shorter time horizons than in Europe and Asia. Capital budgeting techniques Risk adjustment techniques Management science tools Hurdle rate Cost of capital Time horizons Government policy

Survey of 211 listed None although domestic Singaporean firms operating setting is Singapore. Some in Singapore (54 responses) comparison made between results with those typical for US firms None although domestic setting is Canada 500 large Canadian companies (208 responses)

10

Capital Budgeting Practices in Corporate Canada , Understand capital budgeting practices Blazouske, J., Carlin I, Kim S, CMA, March 1988 in Canada

11

A CEO Survey of U.S. Companies’ Time Horizons and Hurdle Rates , Poterba, J, Summers, L., Sloan Management Review, 1995

Investigate Fortune 1000 firm hurdle rates and time horizons

None

Survey of Fortune 1000 CEOs (268 responses). 68 unusable since no way of identifying the firm. Four months between mailing and followup Survey of 528 of large Swedish companies (110 responses)

12

Present general description of the state Capital budgeting methods among Sweden's largest groups of companies , Sandahl, G, Sjogren S, of the art of capital budgeting methods used by Swedish corporations International Journal of Production Economics, April 2003 Capital Budgeting Practices: A Survey in the Firms in Cyprus , Lazaridis T, Journal of Small Business Management, 2004

Public sector companies are most frequent users of DCF methods. The payback method is the most used in all industries; also matters size of company. Tradition is an important factor explaining the choice of method.. Manufacturing companies tend to use DCF more.

Capital budgeting techniques Risk analysis Sector analysis

None although domestic setting is Sweden

13

Over 50% of firms used simplified evaluation technique. 37% Capital budgeting techniques Investigate methods used by Cypriot companies to evaluate investments, and used payback period. Only 9% use IRR Risk analysis approach to handling estimation problems

None although domestic setting is Greece

100 Cypriot companies surveyed (56 responses) 32 questions in 5 sections

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix A: Page 2

APPENDIX A

ARTICLE

RESEARCH OBJECTIVES

MAJOR FINDINGS When firms undertake political risk analysis, it is typically subjective, rather than formal and systematic; Few multinationals have an employee responsible for examining political risk or seeking to formally integrate political risk with the decision process; Little use is made of external advisers to aid risk assessment; Decisions are often made on "go-no go" basis without determining if expected returns are high enough to compensate for the risk

TOPICS COVERED MNCs Political risk Risk adjustment techniques

INTERNATIONAL CONTENT None although domestic setting is UK

STUDY METHODOLOGY

14

Political Risk in International Capital Budgeting , Determine how companies evaluate Goddard, S, Managerial Finance, Vol 16, 1990 political risk

Interview with 20 UK multinationals

15

Are there Differences in Capital Budgeting Procedures Between Industries? An Empirical Study, Block, S, The Engineering Economist, Vol. 50, 2005 The theory and practice of corporate finance: Evidence from the field , Graham, J, Campbell, H, Journal of Financial Economics, June 2001

Investigate whether all industries have become equally sophisticated in using capital budgeting techniques

Significant differences in results relating to goal setting, determining required rate of return and utilizing portfolio effect

Corporate goal-setting Selection of hurdle rate Divisional cost of capital Risk adjustment Portfolio effect Cost of capital Capital budgeting techniques Risk assessment

None

Survey of Fortune 1000 companies (302 responses)

16

Investigate management practice relating to the cost of capital, capital budgeting, and capital structure

Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. This study finds some support for the peckingorder and trade-off capital structure hypotheses. There are a number of misapplications such as applying corporate-wide WACC to foreign affiliate cash flow rather than to cash flows remitted to the corporation. Also, risk is frequently measured on a local project basis rather than considering the portfolio effect to the total corporation. Firms hedge against uncertainty by adding a premium to WACC

None

Survey of 392 CFOs

17

Integrating Traditional Capital Budgeting Concepts Into an International Decision-Making Environment, Block, S, The Engineering Economist, 2000

Analyze capital budgeting processes of multinationals in light of current financial theory. Examine extensions of domestic practices into international area.

MNCs Capital budgeting techniques Risk adjustment techniques Project cash flows Portfolio effects

Substantial

Survey of 483 Fortune 1000 firms (146 responses). All firms had to operate in more than six countries.

18

Corporate Finance in Europe: Confronting Theory Understand how Professionals deal with with Practice , Brounen, D, Jong, A, Koedijk, K, different dilemmas within modern Financial Management, Winter 2004 financial management and to what extent theoretical concepts have been adopted in practice Capital Budgeting Practices of the Fortune 1000: How Have Things Changed? , Ryan, P, Journal of Business and Management, Winter 2002 The Theory-Practice Gap in Capital Budgeting: Evidence from the United Kingdom , Arnold, G, Hatzopoulos, P Explore whether there really is a gap between firms use of sophisticated capital budgeting techniques and those that do not

Small firms rely mostly on payback whilst large firms use NPV. In capital structure policy, financial flexibility appears to be the most important factor in determining the amount of corporate debt. Corporate finance practice seems to be influenced mostly by firm size and shareholder orientation but less so by state.

Capital budgeting Cost of capital Capital structure CAPM International differences

Differences in practice between firms operating domestically but located in UK, Netherlands, Germany and France None

Sampled 6,500 companies (313 responses)

19

Management sees NPV as preferred capital budgeting tool and Capital budgeting see both NPV and IRR as superior to other tools.

Survey of Fortune 1000 firms (120 responses)

20

Collect information on UK firms' capital UK corporations have increasingly adopted textbook financial Capital budgeting investment decision making processes analyses - only a small minority do not use DCF, formal risk Risk adjustment techniques analysis, appropriate inflation adjustment, and post-auditing Inflation adjustments Post-audting

None although domestic setting is UK

Survey of 300 of Times 1000 top UK companies. (145 replies, 96 useable)

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix A: Page 3

APPENDIX B

QUESTION FIRM CHARACTERISTICS INDUSTRY Which industry are you in Which industry does your firm operate in?

ANSWERS

APPENDIX A REF.

Construction, hotel, manufacturing, property, retail/wholesale, finance, multiple lines of business Agricultural and related, logging & forestry, mining quarry & oil well, manufacturing, transportation & storage, communication & other utility, wholesale trade, retail trade, other Building construction materials, food industry, … [data not available] Manufacturing; transportation, communication and utilities; finance, insurance and real estate; wholesale and retail trade; services; construction; mining 2 digit SIC code Energy, Manufacturing, Finance, Utilities, Technology, Retail, Healthcare, Transportation, Other Retail and wholesale; mining, construction; manufacturing; transport/energy; communications/media; bank/finance/insurance; tech (software/biotech/etc) $billion: 1-2; 2-3; 3-4; 4-6; 6-10; 10-15; 15-25; >25

9 10

Which industry do you operate in? Which industry is your firm in? Which industry are you in? Which industry does your firm operate in? Which industry is your firm in?

13 11 2 15 16

FINANCIALS What is your annual sales volume? What is the FY200x turnover of your firm, profit after taxes, net income? What is the end of FY200x book value of assets, equity capital, short and long term liabilities? P/E ratio; current ratio; % change in EPS; total equity return; beta; Tobin's q; stock turnover rate; fraction of institutional holding What are the average operating assets over prior 8 years? What is the yearly depreciation (a) and yearly operating assets (b) over prior 8 years? (a/b - high ratio indicates capital intensive firm) What was your firm's total revenue in FY2003? What was your firm's total assets in FY2003? What was your firm's ratio of fixed-to-total assets in FY2003? What was your firm's ratio of net income to stockholders equity at year end FY2003 What is your firm's approximate (trailing) Price/Earnings ratio over the past 3 years? What is the credit rating for your firm's debt? What is your firm's approximate long-term debt/total assets ratio? What is your sales revenue? What are the return and risk characteristics of domestic and foreign projects over the last 5 years? If all options were exercised, what percent of common stock would be owned by the top three officers? What fraction of your R&D budget are devoted to projects that won't pay off in the next 5 years?

17 13 13 11 2 2 15 15 15 15 16 16 16 16 6 16 11

Independently identified given survey was not anonymous Independently identified. Used to measure size of the firm Independently identified. Used to capital intensity

P/E ratio Rating; not rated <25m; 25-99m; 100-499m; 500-999m; 1-5bn; >5bn % return on domestic and foreign projects; higher, same, lower variation in returns from foreign vs domestic projects <5%;5-10%;10-20%; >20% 0-10%; 10-30%; 30-50%; 50-70%; 70-100%

INTERNATIONAL What percentage of sales are sourced from foreign affiliates? What % are foreign sales as a % of your total sales? What proportion of sales are foreign sales? Do you operate internationally? How many foreign countries does your firm operate in? How many foreign countries are there in which your firm has operating wholly owned subsidiaries? MISC How many employees in your firm? How long has your firm be in operation? Where is your company located?

% 0-10%; 10-20…>70% 0%; 1-24%; 25-49%; >50% Yes, No 6-9; 10-14; 15-19; 20-24; 25-29; 30-34; 34-39; >50

6 17 16 13 17 6

[data not available] Canadian provinces

13 13 10

What is the ownership status of your firm? Are you a regulated utility?

Public; private Yes, no

16 16

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 1

APPENDIX B

QUESTION

ANSWERS

APPENDIX A REF.

MANAGEMENT CHARACTERISTICS GENERAL Who completed the survey? What position are you in the finance department? What is the CEO's tenure? Does the CEO have a finance background? Does the CEO have an MBA? What it the CEO's education? How old is the CEO? What is the CEO's tenure (time in current job)?

Financial manager, … [data not available] Treasurer, VP finance, CFO, junior financial officers Yes; No Yes; No Undergraduate; MBA; non-MBA Masters <40; 40-49; 50-59; >60 <4 years; 4-9 years; >9 years

13 6 11 11 11 16 16 16

CORPORATE POLICY CAPITAL BUDGET What is the average size of your company's annual capital budget? What is your annual capital budget? What is your annual capital budget? Is a long-range capital budget formally prepared? What proportion of projects require formal capital budgeting analysis? When are outline capital budgets prepared for? When are detailed capital budgets prepared for? Is there at least one member of your staff assigned full time to capital budgeting? CAPITAL BUDGETING PROCESS Are standard forms generally used for budget and appropriation requests? Does your firm have a formal method of considering risk? Does your company require proposals for capital investment to meet minimum standards of profitability? Are alternatives to major investment proposals specifically searched for and considered? What is the approximate (based on $ value) of capital projects for which your firm makes and estimate of profit contribution? Does your firm carry out post-audits of major projects? CAPITAL RATIONING Does your firm place a limit on the size of its annual capital budget? Are there specific capital expenditure ceilings placed on operating units which sometimes lead to the rejection of viable projects? MANAGEMENT PERCEPTIONS PURPOSE OF FIRM What is the primary goal of your firm? Which goals are important to your firm?

<$1m, 1-2.5, 2.5-5, 5-10, 10-25, 25-100, >100 <1m; 1-50m; 50-100m; 100-200m; >200m Yes; No % 1, 2, 3, 4, >4 years ahead 1, 2, 3, 4, >4 years ahead Yes; No

9 6 20 2 6 20 20 2

Yes; No Yes; No Most; some; few Yes; No 0-25; 25-50; 50-75; 75-100; 100% Yes; No

2 2 2 2 2 2

Yes, No Yes; no; Investment decisions important for the whole group and require central control; management wants to control cash, because of a shortage of funds; management wants to control areas of activity and mix of products; shortage of other key resources; other

9 20

Stockholder wealth maximization, growth in earnings per share, return on stockholders equity Maximize profits; Maximize sustainable growth; market position, service, quality; Cost control, productivity, efficiency; Continuity; maximize shareholder wealth; maximize dividends; optimize leverage [0 - not important -> 4 - very important] Maximize return on assets; maximize growth in revenue; maximize growth in EPS; maximize stockholder wealth Yes; No x per week % increase Frequently, occasionally, never Longer -> shorter

15 cfeu

What does management view the primary goal of the firm to be?

17

TIME HORIZON Do you regard your firm as undervalued by the market? And vs 5 years ago? How often does the CEO meet with money managers? How much would you increase your long-term investments if the stock market properly valued those investments? Have you ever decided not to undertake a profitable investment opportunity because the stock market might penalize the decision? How does your firm's planning horizon compare with your European (and Asian) competitors?

11 11 11 11 11 11 17

How do various (17 questions asked) public policy issues affect corporate hurdle rates and time Would significantly lengthen horizons -> would significantly shorten horizons horizons? [economic, financial, policy environment] In valuing your firm in the marketplace, what earning figure(s) do you believe investors primarily Next quarter's earnings; next year's earnings; outlook for next 5 years; outlook beyond the next emphasize? 5 years

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 2

APPENDIX B

QUESTION CAPITAL BUDGETING REQUIRED RATE RETURN What is the normal required rate of return equal to? Is the true rate of return required by management higher than the computed normal rate of return of the firm? How important are hurdle rates in your capital budgeting process? What cut-off points are used to evaluate the viability of a major capital investment?

ANSWERS

APPENDIX A REF.

the rate of return the corporation has earned in the past; the desired growth rate of the firm; the WACC Yes; no Very important; somewhat important; unimportant Payback period - 0-2, 2-4, 4-6, 6-10 years ARR (ROCE) - 11-15%, 16-20%, 21-30%, 31% IRR/NPV - 0-10%; 11-15%; 16-20%; 21-30%; >30%

17 17 11 20

What is your firm's average hurdle rate?

11

PROJECT SELECTION What percentage of projects pass through your capital budgeting process? All, some, none How do you decide which projects need to be evaluated using capital budgeting decision process? Depending on budgetary cost restrictions, [data not available] What project size requires a formal quantitative analysis in your company What is the typical acceptance rate of projects that are formally analyzed? Has there been a major switch in the techniques used in the last five years? TECHNIQUES What investment evaluation techniques do you use? If you do not use capital budgeting techniques, why do you not do so? No specified amount, 0-50k, 50-100k, 100-500k, 500-1m, 1-5m, >5m % Yes; No

13 13 9 20

NPV, IRR, Profitability index, Annual equivalent amount, Payback period, ROI, None Unfamiliar with methods, do not believe they would change profitability, do not have the staff time or experience, no available services What risk adjustment techniques do you use? No adjustment made, adjustment is made subjectively, shortened payback period, risk-adjusted discount rate, certainty equivalent approach, two methods are used, three methods are used, four methods are used, other methods Indicate the relative importance of each of the following quantitative techniques used in your firm IRR, payback period, NPV, accounting rate of return, other. to rank proposed capital investments and to decide whether or not they should be accepted for Not used, 1, 2,3, 4, Important inclusion in a capital budget [0-5 scale] Do you apply your hurdle rate to nominal or constant dollar cash flows? Nominal; constant dollar What form do you measure standards of profitability by? Urgency; payback before/after tax; payback reciprocal before/after tax; average accounting rate of return on total investment before/after tax; average accounting rate of return on average investment before/after tax; minimum rate of discounted cash flow; discounted present value of cash flow Rank the importance of these capital budgeting techniques Accounting rate of return; internal rate of return; net present value; payback period; profitability index Always; sometimes/on major projects; rarely; never Does your company conduct post-audits of major capital expenditures? How frequently does your firm use the following techniques when deciding which projects or Net Present Value; Internal Rate of Return; Hurdle rate; Earnings multiple approach; Adjusted acquisitions to pursue? Present Value; Payback period; Discounted payback period; profitability index; accounting rate of return (book rate of return on assets); sensitivity analysis (good vs fair vs bad); value at-risk or other simulation analysis; we incorporate "real options" of a project when evaluating it; other What financial analysis techniques do you use when appraising major investments? Payback; ARR; IRR; NPV; DCF; (IRR or NPV); Non-financial criteria

13 13 10

9

11 2

6 20 16

20

What percentage of realized investments relates to each of the following? How frequently do you use different financial analysis techniques? What is the primary metric used as the required rate of return (hurdle rate)? Are estimated cash flows (or earnings) of proposed capital investments evaluated before or after income tax?

Expansion of productivity and replacement of old equipment, production of new goods, locating new target markets, energy-saving projects Payback, ARR, IRR. NPV; rarely, often, mostly, always Weighted average cost of capital, return on stockholders' equity, required rate in EPS, other Before income taxes, after income taxes, both

13 20 15 9

MISC Do you explicitly consider the interaction between projects when making an investment decision? Yes; no Have any of these considerations led to the acceptance of non-economic projects? Health & safety; legislation; R&D/strategically necessary; social/environmental; repair/maintenance; charitable; other

17 20

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 3

APPENDIX B

QUESTION DETERMINING THE COST OF CAPITAL METHODS What factors determine the cost of capital for investments' financing? Do you determine the cost of capital based on a before or after tax basis? Which of the following procedures does your firm use to determine risk-adjusted discount rates?

ANSWERS

APPENDIX A REF.

Cost of borrowing, past experience, cost of equity capital, average cost of all capital the business uses, yield on an asset without risk plus a percentage relating to the risk, other Before-tax, after-tax Proposed capital expenditures (projects) are classified into subjectively defined risk categories (i.e. replacements, expansion of existing products, etc.) The discount rate for higher-risk projects is a rate higher than the average cost of capital. The discount rate for lower-risk projects is a rate lower than the average cost of capital ; A two-step procedure is used. First, divisional cost of capital are established for each major operating division of the company. Second, within each division, projects are classified into risk categories. Then, each division uses its divisional cost of capital for average risk projects, and higher and lower discount rates for projects of higher and lower risk, respectively ; The CAPM is used to determine project discount rates based on estimates of each project's beta (or market risk) Capital Asset Pricing Model based upon the firm's equity beta; dividend yield plus growth rate (discounted cash flow method); cost of debt plus risk premium; other Cost of debt; measure based on past experience; rate based upon expected growth in earnings and dividend; CAPM; WACC; another rate WACC; cost of equity derived from CAPM; interest payable on debt capital; arbitrary chosen figure; dividend yield on shares plus estimated growth in capital value of shares; earnings yield on shares; other Using the CAPM for equity and the market rate of return on debt capital; cost of equity calculated other than through the CAPM with the cost of debt derived from current market interest rates; other a long term target of debt and equity ratio; the present market values of debt and equity; balance sheet ratios of debt and equity Divisional cost-of-capital, corporate-wide measure of cost-of-capital Yes; No with average historic returns on common stock; using the capital asset pricing model (CAPM, the "beta" approach), using the CAPM but including some extra "risk factors"; whatever our investors tell us they require; by regulatory decision; back out from the dividend/earnings model e.g. price = div./(cost of cap. - growth); other

13 13 9

Which of the following methods does your firm use to estimate its cost of equity capital? If you use DCF, how do you determine the discount rate to use? How does your company derive the discount rate used in the appraisal of major capital investments? How do you calculate the weighted average cost of capital?

9 6 20

20

If WACC is used, how do you define the weights? Do you use a divisional cost of capital or a corporate-wide measure? Does your firm estimate the cost of equity capital? How do you determine your firm's cost of equity?

20 15 16 16

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 4

APPENDIX B

QUESTION

ANSWERS

APPENDIX A REF.

RISK ADJUSTMENT How do you determine the risk of a project? How do you incorporate risk into the capital budgeting process? What risk adjustment techniques do you use?

Subjective criteria, probability of losses, project cash flows relative to other different projects

13 13 10

Increase the required rate of return, decrease the time of the payback period, increasing the discount rate No adjustment made, adjustment is made subjectively, shortened payback period, risk-adjusted discount rate, certainty equivalent approach, two methods are used, three methods are used, four methods are used, other methods Indicate the relative importance of the following techniques used in your firm to assess risk [0-5 Scenario analysis (i.e. optimistic, most likely, pessimistic forecasts), sensitivity analysis, decision scale] tree analysis, probabilistic, (Monte carlo) simulation, other Not used, 1, 2,3, 4, Important Which of the following approaches is used in your company to determine the minimum acceptable Single discount rate based on company's overall weighted average cost of capital used to evaluate rate of return (discount rate) to evaluate capital investments? all proposed capital investments ; multiple risk-adjusted discount rates are used; the riskier the investment, the higher the rate ; the discount rate used for each project is the cost of the specific capital used to finance the project (i.e. the discount rate for a project financed entirely by debt is the cost of debt) What method does your firm use to consider risk? Raising the required return; shortening the payback period; determining the probability distribution; measuring the covariance of projects; other [yes; no] What techniques do you use to assess the risk of major projects?

9

9

2

Sensitivity/scenario analysis; raise the required rate of return; subjective assessment; probability analysis; shorten payback period; beta analysis; ignore risk; other Do you adjust investment appraisal for inflation? Specify cash flows in constant prices and apply a real rate of return; all cash flows expressed in inflated price terms and discounted at the market rate of return; considered at risk analysis or sensitivity stage; no adjustment; other What procedure do you use to adjust for risk? Subjective decision making, certainty equivalent approach, risk-adjusted discount rate. A table explaining the latter was provided: Low or no risk (equipment replacement) - 0% through to highest risk (new product in foreign market) - 20% When valuing a project, do you adjust either the discount rate or cash flows for the following risk Risk of unexpected inflation; interest rate risk (change in general level of interest rates); term factors? structure risk (change in the long-term vs. short-term interest rate); GDP or business cycle risk; commodity price risk; foreign exchange risk; distress risk (probability of bankruptcy); size (small firms being riskier); “market-to-book” ratio (ratio of market value of firm to book value of assets); momentum (recent stock price performance); other Do you consider portfolio effects when analyzing individual investments? How do you adjust for risk? MANAGEMENT SCIENCE TECHNIQUES Which risk analysis techniques to you use If you do not use risk analysis tools, why not? Which management science techniques do you use? Yes/No Risk-adjusted discount rate; certainty equivalent approach; combination of the two; none

20 20

15

16

15 17

Total statistical analysis, Risk analysis with application scenarios, Sensitivity analysis, Risk analysis with decision trees, none Would not affect profits, unfamiliar with methods, no services available Decision theory, computer simulation, mathematical programming, game theory, PERT critical analysis, regression analysis, two methods, three methods, four or more methods, none Game theory; linear programming; non-linear programming; computer simulation; probability theory; decision theory; PERT/critical path; utility theory

13 13 10

Which management science techniques do you use?

2

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 5

APPENDIX B

QUESTION INTERNATIONAL INVESTMENTS RISK ANALYSIS Do foreign investments tend to increase or decrease the risk exposure of your firm? Which risk do you perceive to be the greatest risk in foreign investments? How is risk associated with a division or project measured in a capital budgeting context?

ANSWERS

APPENDIX A REF.

Do you differentiate between systematic and unsystematic risk when incorporating risk into your capital budgeting analysis? Do you use the same capital budgeting techniques for domestic and foreign investments? Do you give different weight to the applicability of different capital budgeting techniques for international vs domestic projects? What method(s) do you use to adjust for different levels of risk in foreign projects?

Increase; decrease Expropriation risk; currency risk; business (economic) risk; tax law changes; quotas and tariffs; cultural problems An objective measure such as beta of a public company in the line of business as the subsidiary; an objective measure that is not market related such as variability of the division's earnings compared to the overall corporate earnings; a subjective measure such as top management's view of the perceived risk generally associated with the division Yes; no Yes; No Yes; No Adjusted cash flows; adjust cost of capital present value analysis; adjust payback period; adjust required accounting rate of return on investment; borrow funds locally; insure risks where possible; no distinction is made Yes; No Yes; No Yes; No

17 17 17

17 6 6 6

Do you consider foreign project risk due to changes in exchange rates? Do you consider foreign project risk due to changes in inflation rates? Do you consider foreign project risk due to changes in political environment? CAPITAL STRUCTURE Should a subsidiaries capital structure conform to the MNC's worldwide capital structure or to meet local conditions? What factors affected your decision to issue debt in foreign countries?

6 6 6

Worldwide; local

17

Favorable tax treatment relative to the U.S (e.g., different corporate tax rates); keeping the “source of funds” close to the “use of funds”; providing a “natural hedge” (e.g., if the foreign currency devalues, we are not obligated to pay interest in US$); foreign regulations require us to issue debt abroad; foreign interest rates may be lower than domestic interest rates; other Yes; no the discount rate for the entire company; the discount rate for the overseas market (country discount rate); a divisional discount rate (if the project line of business matches a domestic division); a risk-matched discount rate for this particular project (considering both country and industry); a different discount rate for each component of cash flow that has a different risk characteristic (e.g. depreciation vs. operating cash flows) Country of origin; Industry

16

COST OF CAPITAL Do you use corporate-wide WACC as a base-line for all firm investments? How frequently would your company use the following discount rates when evaluating a new project in an overseas market? To evaluate this project we would use…

17 16

What is more important in determining WACC, country of origin or industry? OPERATIONS Should the activities of subsidiaries be monitored to ensure corporate wide targets are met? Has your firm seriously considered issuing debt in foreign countries? How do you evaluate your foreign affiliates? INCOME MEASUREMENT What definition do you use when measuring income from foreign affiliates?

17

Yes; no Yes; No Based on remittance to MNC; affiliate profit (or cash flow)

17 16 17

Earnings - count all expected accounting profits after foreign taxes, regardless of currency, count all expected accounting profits after foreign taxes except where there are currency restrictions, expected return on book investment; Cash flow - count all expected cash flows to the parent after domestic and foreign taxes regardless of currency; count all the expected cashflows to the parent plus reinvested earnings adjusted for domestic and foreign taxes; count all expected cash flows to the parent plus reinvested earnings adjusted for foreign taxes only; Other

6

Marc Lien 70605147

International Financial Management EC Course Paper

Appendix B: Page 6

APPENDIX C

QUESTION CORPORATE STRATEGY AND FOREIGN INVESTMENTS Why does your company invest abroad?

ANSWERS

How do you decide where to invest? How do you go about investing internationally? Do you have a preferred method? Which factors influence your choice of governance structure? Do you actively position liquid cash balances between international affiliates? If so, how?

Access to new markets, access to raw materials, improved production efficiency, development of new knowledge, political safety, fear of losing a market, “bandwagon” effect, strong competition at home, diversification benefits Based on competitive advantages, market imperfections, knowledge of geography, competitor investments JV with foreign partners, M&A of existing foreign firm, licensing a foreign firm, undertaking a management contract with a foreign firm Domestic taxation treatment, foreign taxation treatment, political requirements, prior business relationships, loan subsidies Unbundling fund transfers; dividend remittances; payment of fees, royalties and home overhead charges; transfer pricing; fronting loans; creating unrelated exports

INTERNATIONAL CAPITAL BUDGETING At what level(s) do you perform your cash flow analysis for international projects? Do you adjust return/risk requirements for international projects? Do you adjust the discount rate due to the project being international in nature? For which risks? How? Project/subsidiary, parent/headquarter, group/shareholder Shorten payback period, increase minimum investment thresholds – cash flows, revenues, profits

Exchange rate risk, inflation risk, interest rate risk, political risk, operational risk, different cost of local debt, different equity beta -- risk premiums on international bonds/sovereign spreads, insurance premiums charged by international risk insurers, export credit agencies, country and political risk ratings Do you adjust the projected cash flows due to the project being international in nature? For which Exchange rate risk, inflation risk, interest rate risk, political risk, operational risk -- subtract NPV risks? How? of forgone cash flows, scenario probability analysis, more conservative on projection assumptions Local, regional, global Shorten-payback period, increased required rate of return, limit capital available Same as firm’s target leverage, debt capacity of project, level of cash-on-hand for investment Funds generated internally by foreign affiliates – noncash charges, retained earnings; funds generated from within the corporate family – equity investment/cash loans from parent, loans other affiliates, affiliate borrow with parent guarantee; funds from sources external to the corporate family – borrowing from sources in parent country (banks, securities markets), outside of parent country (local/international debt markets), local equity (local shareholders, JV partners) Expropriation, inconvertibility, imposition of a new tax, removal of agreed subsidy, implementation of new tariffs, creating barriers to sourcing, unilateral changes to key contract provision, ethnic strife Political risk insurance, political lobbying, project governance Local, parent, $ Local, parent Spot, forecast Foreign trade, balance of payments, official reserves, GNP growth, industrial output, CAPEX, consumer spending, unemployment, inflation, monetary policy, political stability, labor attitudes, sociopolitical trends, interest rates, key dates, other Translational, transactional, operating -- fully, partially, none -- forwards, options, other

Do you assess the cost of capital relative to local, regional or global firms? Do you subjectively adjust project analysis based on intuition/gut feel? How do you determine the target leverage for the project? Which sources of funds do you use more frequently when funding an international project?

What political risks are of greatest concern?

Do you try and mitigate any of the political risks associated with international investments? What is the functional currency of foreign affiliates? Do you forecast cash flows in local or parent currency? Do you use spot or forecast exchange rates for converting analysis into parent currency? Do you try and predict FOREX rates? If so, which factors do you monitor?

Which of the following foreign exchange risks do you identify? Do you hedge against them? With what instrument?

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APPENDIX D

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NAME D. D. Humphreys Chris Liddell Thomas M. Schoewe Clayton C. Daley Robert J. Darretta Andy D. Bryant Alan Levin Dinyar S. Devitre Stephen J. Crowe George Reyes Dennis D. Powell David Ebersman Richard D. Nanula Indra K. Nooyi Richard G. Lindner Doreen A. Toben Carol B. Tome John A. Carrig D. ScoDavis Wayne H. Pace Robert J. Dellinger Gary Ellis Safra Catz Judy C. Lewent Rajiv Dutta David W. Devonshire Patrick D. Campbell Peter Oppenheimer Charles E. Golden John R. Alchin Thomas C. Freyman Susan Decker Jean-Marc Perraud Kenneth J. Martin James E. Geisler Kevin P. March Robert F. Hull Ronald M. Dykes Thomas Staggs David F. DeVoe Gerald R. Cahill William M. Rudolphsen J. PedReinhard Andrew Bonfield Gary M. Pfeiffer John D. Watson William J. Teuber C. Chr Gaut Stephen I. Chazen Walter J. Galvin

COMPANY Exxon Mobil Corp. (NYSE:XOM) Microsoft Corp. (NasdaqNM:MSFT) Wal-Mart Stores Inc. (NYSE:WMT) Procter & Gamble Co. (NYSE:PG) Johnson & Johnson (NYSE:JNJ) Intel Corp. (NasdaqNM:INTC) Pfizer Inc. (NYSE:PFE) Altria Group Inc. (NYSE:MO) Chevron Corp. (NYSE:CVX) Google Inc. (NasdaqNM:GOOG) Cisco Systems Inc. (NasdaqNM:CSCO) Genentech Inc. (NYSE:DNA) Amgen Inc. (NasdaqNM:AMGN) Pepsico Inc. (NYSE:PEP) AT&T Inc. (NYSE:SBC) Verizon Communications Inc. (NYSE:VZ) Home Depot Inc. (NYSE:HD) ConocoPhillips (NYSE:COP) United Parcel Service Inc. (NYSE:UPS) Time Warner Inc. (NYSE:TWX) Sprint Nextel Corp. (NYSE:S) Medtronic Inc. (NYSE:MDT) Oracle Corp. (NasdaqNM:ORCL) Merck & Co. Inc. (NYSE:MRK) eBay Inc. (NasdaqNM:EBAY) Motorola Inc. (NYSE:MOT) 3M Co. (NYSE:MMM) Apple Computer Inc. (NasdaqNM:AAPL) Eli Lilly & Co. (NYSE:LLY) Comcast Corp. (NasdaqNM:CMCS.A) Abbott Laboratories (NYSE:ABT) Yahoo! Inc. (NasdaqNM:YHOO) Schlumberger Ltd. (NYSE:SLB) Wyeth (NYSE:WYE) United Technologies Corp. (NYSE:UTX) Texas Instruments Inc. (NYSE:TXN) Lowe's Companies Inc. (NYSE:LOW) BellSouth Corp. (NYSE:BLS) Walt Disney Co. (NYSE:DIS) News Corp. (NYSE:NWS.A) Carnival Corp. (NYSE:CCL) Walgreen Co. (NYSE:WAG) Dow Chemical Co. (NYSE:DOW) Bristol-Myers Squibb Co. (NYSE:BMY) EI DuPont de Nemours & Co. (NYSE:DD) EnCana Corp. (TSX:ECA) EMC Corp. (NYSE:EMC) Halliburton Co. (NYSE:HAL) Occidental Petroleum Corp. (NYSE:OXY) Emerson Electric Co. (NYSE:EMR)

JOB TITLE Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial

Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer

ADDRESS 5959 Las Colinas Boulevard One Microsoft Way 702 SW Eighth Street One Procter & Gamble Plaza One Johnson & Johnson Plaza 2200 Mission College Boulevard 235 East 42nd Street 120 Park Avenue 6001 Bollinger Canyon Road 1600 Amphitheatre Parkway 170 West Tasman Drive 1 Dna Way South One Amgen Center Drive 700 Anderson Hill Road 175 East Houston 1095 Avenue of the Americas 2455 Paces Ferry Road NW 600 North Dairy Ashford 55 Glenlake Parkway NE One Time Warner Center 2001 Edmund Halley Drive 710 Medtronic Parkway 500 Oracle Parkway PO Box 100One Merck Drive 2145 Hamilton Avenue 1303 East Algonquin Road 3-M Center 1 Infinite Loop Lilly Corporate Center 1500 Market Street 100 Abbott Park Road 701 First Avenue 153 East 53 Street57th Floor Five Giralda Farms United Technologies Building 12500 Ti BoulevardPO Box 660199 1000 Lowes Boulevard 1155 Peachtree Street NE 500 South Buena Vista Street 1211 Avenue of the Americas 3655 NW 87th Avenue 200 Wilmot Road 2030 Dow Center 345 Park Avenue 1007 Market Street 855-2nd Street SWSuite 1800 176 South Street 1401 MckinneySuite 2400 10889 Wilshire Boulevard 8000 W Florissant AvenuePO Box 4100

Irving Redmond Bentonville Cincinnati New Brunswick Santa Clara New York New York San Ramon Mountain View San Jose San Francisco Thousand Oaks Purchase San Antonio New York Atlanta Houston Atlanta New York Reston Minneapolis Redwood City Whitehouse Station San Jose Schaumburg St Paul Cupertino Indianapolis Philadelphia Abbott Park Sunnyvale New York Madison Hartford Dallas Mooresville Atlanta Burbank New York Miami Deerfield Midland New York Wilmington Calgary Hopkinton Houston Los Angeles St. Louis

Texas Washington Arkansas Ohio New Jersey California New York New York California California California California California New York Texas New York Georgia Texas Georgia New York Virginia Minnesota California New Jersey California Illinois Minnesota California Indiana Pennsylvania Illinois California New York New Jersey Connecticut Texas North Carolina Georgia California New York Florida Illinois Michigan New York Delaware Alberta Massachusetts Texas California Missouri

75039-2298 98052-6399 72716 45202 08933 95052-8119 10017 10017 94583 94043 95134 94080-4990 91320-1799 10577 78205 10036 30339 77079 30328 10019 20191 55432 94065 08889-0100 95125 60196 55144 95014 46285 19102-2148 60064-6400 94089 10022-4624 07940 06101 75266-0199 28117 30309-3610 91521 10036 33178-2428 60015 48674 10154 19898 T2p 2s5 01748 77010 90024 63136

United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States Canada United States United States United States United States

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APPENDIX D

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

NAME Paul A. Smith David J. Anderson Michael S. Ciskowski James B. Flaws Nancy H. Handel Alan B. Graf Stephen C. Patrick Robert J. Bertolini Mark A. Buthman Brian J. Jennings Jeffrey W. Henderson Christoph E. Kubasik J. KenAlley Thomas A. Fanning Douglas A. Proll Jon C. Kinney Kirk R. Oliver John J. Greisch Richard B. Kelson John F. Milligan Darren R. Jackson Peter J. Clemens R. Milt Johnson Michael J. Mancuso Richard A. Galanti Siim A. Vanaselja Janet F. Clark David B. Rickard Donald W. Blair Roger B. Plank Kenneth L. Rice Gregory L. Cauthen R. A. Walker David J. AFlowers Richard O'Brien Ernest F. HRoberts Wesley G. Bush Keith E. Brauer George Ste Finley Thomas J. Szkutak John K. Stubblefield Robert J. Bahash Michael S. Wyzga Gregory E. Myers

COMPANY Imperial Oil Ltd. (TSX:IMO) Honeywell International Inc. (NYSE:HON) Valero Energy Corp. (NYSE:VLO) Corning Inc. (NYSE:GLW) Applied Materials Inc. (NasdaqNM:AMAT) FedEx Corporation (NYSE:FDX) Colgate-Palmolive Co. (NYSE:CL) Schering-Plough Corp. (NYSE:SGP) Kimberly-Clark Corp. (NYSE:KMB) Devon Energy Corp. (NYSE:DVN) Cardinal Health Inc. (NYSE:CAH) Lockheed Martin Corp. (NYSE:LMT) Suncor Energy Inc. (TSX:SU) Southern Co. (NYSE:SO) Canadian Natural Resources Ltd. (TSX:CNQ) Illinois Tool Works Inc. (NYSE:ITW) TXU Corp. (NYSE:TXU) Baxter International Inc. (NYSE:BAX) Alcoa Inc. (NYSE:AA) Gilead Sciences Inc. (NasdaqNM:GILD) Best Buy Co. Inc. (NYSE:BBY) Caremark Rx Inc. (NYSE:CMX) HCA Inc. (NYSE:HCA) General Dynamics Corp. (NYSE:GD) Costco Wholesale Corp. (NasdaqNM:COST) BCE Inc. (TSX:BCE) Marathon Oil Corp. (NYSE:MRO) CVS Corp. (NYSE:CVS) Nike Inc. (NYSE:NKE) Apache Corp. (NYSE:APA) Boston Scientific Corp. (NYSE:BSX) Transocean Inc. (NYSE:RIG) Anadarko Petroleum Corp. (NYSE:APC) Liberty Media Corp. (NYSE:L) Newmont Mining Corp. (NYSE:NEM) Petro-Canada (TSX:PCA) Northrop Grumman Corp. (NYSE:NOC) Guidant Corp. (NYSE:GDT) Baker Hughes Inc. (NYSE:BHI) Amazon.com Inc. (NasdaqNM:AMZN) Sysco Corp. (NYSE:SYY) McGraw-Hill Companies Inc. (NYSE:MHP) Genzyme Corp. (NasdaqNM:GENZ) Symantec Corp. (NasdaqNM:SYMC)

JOB TITLE Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial Chief Financial

Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer Officer

ADDRESS 111 St Clair Avenue West Toronto 101 Columbia Road Morris Township One Valero Way San Antonio One Riverfront Plaza Corning 3050 Bowers AvenuePO Box 58039 Santa Clara 942 South Shady Grove Road Memphis 300 Park Avenue New York 2000 Galloping Hill Road Kenilworth PO Box 619100 Dallas 20 North Broadway Oklahoma City 7000 Cardinal Place Dublin 6801 Rockledge Drive Bethesda 112 Fourth Avenue SWPO Box 38 Calgary 270 Peachtree Street NW Atlanta 855-2nd Street SWSuite 2500 Calgary 3600 West Lake Avenue Glenview 1601 Bryan Street Dallas One Baxter Parkway Deerfield 201 Isabella Street Pittsburgh 333 Lakeside Drive Foster City 7601 Penn Avenue South Richfield 211 Commerce StreetSuite 800 Nashville One Park Plaza Nashville 2941 Fairview Park DriveSuite 100 Falls Church 999 Lake Drive Issaquah 1000 Rue De La Gauchetire OuestBureau 3700 Montreal 5555 San Felipe Road Houston One CVS Drive Woonsocket One Bowerman Drive Beaverton Suite 100 One Post Oak Central2000 Post Oak BouleHouston One Boston Scientific Place Natick 4 Greenway Plaza Houston 1201 Lake Robbins Drive The Woodlands 12300 Liberty Boulevard Englewood 1700 Lincoln Street Denver 150-6th Avenue SW Calgary 1840 Century Park East Los Angeles 111 Monument Circle29th Floor Indianapolis 3900 Essex LaneSuite 1200 Houston 1200 12th Avenue SouthSuite 1200 Seattle 1390 Enclave Parkway Houston 1221 Avenue of the Americas New York 500 Kendall Street Cambridge 20330 Stevens Creek Boulevard Cupertino

Ontario New Jersey Texas New York California Tennessee New York New Jersey Texas Oklahoma Ohio Maryland Alberta Georgia Alberta Illinois Texas Illinois Pennsylvania California Minnesota Tennessee Tennessee Virginia Washington Quebec Texas Rhode Island Oregon Texas Massachusetts Texas Texas Colorado Colorado Alberta California Indiana Texas Washington Texas New York Massachusetts California

M5W 1K3 07962 78249 14831 95052-8039 38120 10022 07033 75261-9100 73102-8260 43017 20817 T2P 2V5 30303 T2P 4J8 60026-1215 75201-3411 60015-4633 15212-5858 94404 55423 37201 37203 22042-4153 98027 H3B 4Y7 77056-2723 02895 97005-6453 77056-4400 01760-1537 77046 77380-1046 80112 80203 T2P 3E3 90067 46204-5129 77027 98144-2734 77077-2099 10020 02142 95014-2132

Canada United States United States United States United States United States United States United States United States United States United States United States Canada United States Canada United States United States United States United States United States United States United States United States United States United States Canada United States United States United States United States United States United States United States United States United States Canada United States United States United States United States United States United States United States United States

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