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business
multinational business finance
Questions and Answers of
Multinational Business Finance
How does the Iceland story fit with our understanding of the impossible trinity? In your opinion, which of the three elements of the trinity should Iceland have taken steps to control to a greater
In the case of Iceland, the country was able to sustain a large current account deficit for several years, and at the same time have ever-rising interest rates and a stronger and stronger currency.
What is the business reason for China Noah’s potential currency exposure? Does the company really need to subject itself to substantial exchange rate risk? Is the risk “material” to China Noah?
How does China Noah’s profitability (using return on sales as the primary metric) change depending on whether the IDR/CNY exchange rate follows (a) forecast spot rates, (b) forward rate quotes, or
What would be your outlook on the future direction of the Indonesian rupiah and the Chinese renminbi?Should this influence the hedging approach used by Noah?
Which of the hedging choices would you recommend?
Which currency exposure—transaction, translation, or operating—is Electrolux hedging under its 2015 financial policy? Which under its 2016 financial policy?
Why is Electrolux continually experiencing such a large short currency position in U.S. dollars? What could change this in the coming years?
Electrolux acknowledges that its consolidated earnings are impacted by translation exposure, but explicitly states that it does not hedge this exposure. What do you think the company’s rationale is
Why do you think Rolls has continued to bear this structural currency mismatch for so long? Why hasn’t it done what many automobile companies have done, and move some of their manufacturing and
Why are Rolls-Royce’s foreign currency hedges performing so poorly? Shouldn’t the hedges be protecting its sales and earnings against exchange rate movements?
If you were a member of the leadership team at Rolls-Royce, what would you recommend the company do to manage the risks arising from Brexit?
Ferrari believed its value arose from scarcity. Would a slow volume growth strategy to maintain that scarcity yield sufficient financial returns for investors?
What role in the valuation of Ferrari did R&D expenditure play?
In your opinion, and using DCF analysis, was Ferrari priced appropriately in its IPO?
Why do you think CEMEX overpaid for Rinker?What was the result of this overpayment?
How had the decline in both CEMEX’s and Rinker’s operations’ EBITDAs altered the debt-carrying capacity of CEMEX?
What combination of actions—what plan—would you recommend CEMEX undertake to meet the company’s debt service obligations for 2009?
What is the single most important element of Apple’s global tax strategy?
Why do most of Apple’s businesses in Ireland not have a country of tax residence?
Why does Apple Operations International (AOI)—the Irish subsidiary that captures most of Apple’s global profits outside the Americas—not pay taxes to Ireland or the United States?
How are pricing, currency of denomination, and financing interrelated in the value-chain for Crosswell’s penetration of the Brazilian market? Can you summarize them using Exhibit B?
How important is Sousa to the value-chain of Crosswell?What worries might Crosswell have regarding Sousa’s ability to fulfill his obligations?
If Crosswell is to penetrate the market, some way of reducing its prices will be required. What do you suggest?
Why would a company like Chevron invest so much capital in a project with so many risks?
How had Chevron tried to mitigate the political risks of the project?
How had the risks associated with Tengiz changed or evolved over time?
Using the sales forecasts for Tysabri presented in Exhibit A, and using the discounted cash flow model presented in Exhibit B, what do you think Elan is worth?
What other considerations do you think should be included in the valuation of Elan?
What would be your recommendation to shareholders—to approve management’s proposals killing RP’s offer—or say “no” to the proposals, probably prompting the acceptance of RP’s offer?
Explore the complexities of budgeting for a foreign project?
Illustrate multinational capital budgeting with the case of Cemex entering Indonesia?
Describe the use of real option analysis?
Examine the use of project finance to fund and evaluate large global projects?
Introduce the principles of cross-border mergers and acquisitions?
Capital Budgeting Theoretical Framework. Capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting. What are the basic steps in domestic capital
Foreign Complexities. Capital budgeting for a foreign project is considerably more complex than the domestic case. What are the factors that add complexity?
Sensitivity Analysis. What is sensitivity analysis?How do MNEs use sensitivity analysis to assess various types of risks inherent in investment decisions?
Viewpoint and NPV. Which viewpoint, project or parent, gives results closer to the traditional meaning of net present value in capital budgeting?
Viewpoint and Consolidated Earnings. Which viewpoint gives results closer to the effect on consolidated earnings per share?
Operating and Financing Cash Flows. Capital projects provide both operating cash flows and financial cash flows. Why are operating cash flows preferred for domestic capital budgeting but financial
Risk-Adjusted Return. Should the anticipated internal rate of return (IRR) for a proposed foreign project be compared to (a) alternative home country proposals, (b) returns earned by local companies
MNEs’ Investment Decisions. When evaluating a potential foreign investment, how would inflation in the host country affect an MNE’s decision to invest in that nation? Would blocked cash flows
Host Country Inflation. How does host country inflation impact the operations of MNEs? How can MNEs mitigate these effects?
Cost of Equity. A foreign subsidiary does not have an independent cost of capital. However, in order to estimate the discount rate for a comparable host-country firm, the analyst should try to
MNEs and International Capital Budgeting. What are some of the problems that MNEs encounter during their capital budgeting process?
Cross-Border Mergers and Acquisitions. Explain why cross-border mergers and acquisitions are difficult to implement.
Investment Analysis. Compare and contrast NPV, APV, and real option analysis, explaining how each of these analysis techniques affects investment decisions.
M&A Business Analysis. Should MNEs conduct real options or conventional financial options analysis in cross-border M&As?
Three Stages of Cross-Border Acquisitions. What are the three stages of a cross-border acquisition?What are the core financial elements integral to each stage?
Currency Risks in Cross-Border Acquisitions. What are the currency risks that arise in the process of making a cross-border acquisition?
Contingent Currency Exposure. What are the largest contingent currency exposures that arise in the process of pursuing and executing a cross-border acquisition?
. Capital Projects and the EBRD. The European Bank for Reconstruction and Development (EBRD) was established to foster market-oriented business development in the former Soviet Bloc. Use the EBRD
. Emerging Markets: China. Long-term investment projects such as electrical power generation require a thorough understanding of all attributes of doing business in that country. China is currently
. BeyondBrics: The Financial Times’ Emerging Market Hub. Check the FT’s blog on emerging markets for the latest debates and guest editorials.Financial Times Blog on Emerging Markets
Carambola de Honduras. Slinger Wayne, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola. Slinger Wayne estimates
Finisterra, S.A. Finisterra, S.A., located in the state of Baja California, Mexico, manufactures frozen Mexican food, which enjoys a large following in the U.S.states of California and Arizona to the
Grenouille Properties. Grenouille Properties (U.S.)expects to receive cash dividends from a French joint venture over the coming three years. The first dividend, to be paid December 31, 2011, is
Natural Mosaic. Natural Mosaic Company (U.S.) is considering investing Rs50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After five years, the
Doohicky Devices. Doohicky Devices, Inc., manufactures design components for personal computers.Until the present, manufacturing has been subcontracted to other companies, but for reasons of quality
Wenceslas Refining Company. Privately owned Wenceslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original
Hermosa Components: Baseline Analysis. Evaluate the proposed investment in Argentina by Hermosa Components (U.S.). Hermosa’s management wishes the baseline analysis to be performed in U.S.
Hermosa Components: Revenue Growth Scenario.As a result of its analysis in Problem 18.7 , Hermosa wishes to explore the implications of being able to grow sales volume by 4% per year. Argentine
Hermosa Components: Revenue Growth and Sales Price Scenario. In addition to the assumptions employed in Problem 18.8 , Hermosa now wishes to evaluate the prospect of being able to sell the Argentine
Hermosa Components: Revenue Growth, Sales Price, and Currency Risk Scenario. Melinda Deane, a new analyst at Hermosa and a recent MBA graduate, believes that it is a fundamental error to evaluate the
Examine the three major foreign exchange exposures experienced by firms
Explore why firms hedge foreign exchange exposure
Examine how transaction exposure is defined and measured
Describe how one company may hedge its transaction exposures
Detail how foreign exchange risk management is conducted by firms today
Foreign Exchange Exposure. Define the three types of foreign exchange exposure.
Currency Exposure and Contracting. Which of the three currency exposures relate to cash flows already contracted for, and which of the exposures do not?
Currency Risk. Define currency risk.
Hedging. What is a hedge? How does that differ from speculation?
Value of the Firm. What—according to financial theory—is the value of a firm?
Cash Flow Variability. How does currency hedging theoretically change the expected cash flows of the firm?
Arguments for Currency Hedging. Describe four arguments in favor of a firm pursuing an active currency risk management program.
Arguments against Currency Hedging. Describe six arguments against a firm pursuing an active currency risk management program.
Hedging versus Speculating. What is the difference between hedging and speculating?
Hedging with Forward Contracts. Explain how a Singaporean corporation could hedge a receivable in British pounds using a forward contract. What is the cost of such a forward market hedge?
Unperformed Contracts. Which contract is more likely not to be performed, a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the
Cash Balances. Why do foreign currency cash balances not cause transaction exposure?
Contractual Currency Hedges. What are the four main contractual instruments used to hedge transaction exposure?
Money Market Hedges. How does a money market hedge differ for an account receivable versus that of an account payable? Is it really a meaningful difference?
Balance Sheet Hedging. What is the difference between a balance sheet hedge, a financing hedge, and a money market hedge?
Forward Versus Money Market Hedging. Theoretically, shouldn’t forward contract hedges and money market hedges have the same identical outcome?Don’t they both use the same three specific
Foreign Currency Option Premia. Why do many firms object to paying for foreign currency option hedges? Do firms pay for forward contract hedges?How do forwards and options differ if at all?
Decision Criteria. Ultimately, a treasurer must choose among alternative strategies to manage transaction exposure. Explain the two main decision criteria that must be used.
Risk Management Hedging Practices. According to surveys of corporate practices, which currency exposures do most firms regularly hedge?
Hedging Booked Exposures. Why do many firms only allow hedging of existing exposures, and not allow the hedging of anticipated exposures?
BioTron Medical, Inc. Brent Bush, CFO of a medical device distributor, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical
Bobcat Company. Bobcat Company, a U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was
P&G India. Procter & Gamble’s affiliate in India, P&G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India,
Elan Pharmaceuticals. Elan Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol reduction drug with a prospective Indonesian
Embraer of Brazil. Embraer of Brazil is one of the two leading global manufacturers of regional jets(Bombardier of Canada is the other). Regional jets are smaller than the traditional civilian
Caribou River. Caribou River, Ltd., a Canadian manufacturer of raincoats, does not selectively hedge its transaction exposure. Instead, if the date of the transaction is known with certainty, all
Kraftangan Ornamentals. Kraftangan Ornamentals, a Malaysian, 100% privately-owned ornamentals company, has signed an agreement to acquire a 60% ownership share of Taiwan Ornamentals, a Taiwan-based,
Mattel Toys. Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas)and one-third in euros (Europe). In September, Mattel delivers a large shipment of
Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to many countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially conservative.
Wing Sang Jeans Limited. Wing Sang Jeans Limited of Hong Kong is completing a new assembly plant near Bangkok, Thailand. A final construction payment of 28,200,000 is due in six months. (“ ” is
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