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business
introduction to corporate finance
Questions and Answers of
Introduction To Corporate Finance
What is the value range within which the acquirer should set the acquisition premium?
How should private equity firms value cross-border acquisitions? Ulysses, a Boston-based private equity firm, specializes in transportation with a focus on emerging capital markets. It has identified
Referring to background information provided in problem 1, assume now that the transaction was financed by a jumbo loan for 80 percent of the purchase price. The loan is INR-denominated at 12 percent
Maersk is preparing an offer to acquire the privately held Indian shipping company Salgacoar. In addition to the background information provided in problem 1, Maersk believes that by giving access to
Referring to Ciments Lafarge’s acquisition, explain how the valuation of the Hoang Thach Cement Company would differ if instead of an all-cash deal the transaction had been financed with a VND 1
Which cost of capital? Guillaume Tel of Ciments Lafarge was unsure about the legitimacy of applying a discount rate of 10. 5 percent to value the acquisition of Hoang Thach Cement Company. After all,
GE Capital—a global leader in automobile leasing—started to scrutinize possible acquisitions in Thailand in the early 1990s when the THB was pegged to the U.S. dollar at THB 25 = US$1. With
How should Vietnam gauge the proposed cross-border acquisition described in problems 4 and 5?a. What are the costs and benefits of Ciments Lafarge’s proposed acquisition on Vietnam’s balance of
What is project finance? Identify the sectors of the economy where project finance type deals are most likely to be found.
What are the advantages of using project finance rather than corporate finance for funding large-scale infrastructure investments?
Compare the risks faced by equity sponsors during a project-financed venture’s construction phase versus the operational phase. Are the risks faced by lenders the same?
Why is construction financing provided with recourse to the sponsors?
What are nonrecourse loans, and why are they important to the architecture of project finance?
Why is escrowing for debt servicing a requirement of project finance? Are equity cash flows to sponsors inclusive or exclusive of cash escrowed for debt servicing?
Why do off-takers play a critical role in project finance? What is off-taker risk?
How should the changing leverage be taken into account in valuing project finance?
What are the key metrics of investment analysis?
Compare the Sharpe ratio with the information ratio.
What are the key factors reshaping the asset management industry?
Identify the new players in the global asset management industry.
What is the nature of the benefits to be derived from investing in foreign stocks?How can they be measured?
What are the key barriers to investing in foreign stocks? How can they be overcome?
Discuss the major risks involved in foreign stock investing. How can they be hedged?
Should currency risk be managed independently or conjointly with market risk?
How do you measure the correlation between two market indexes? What does it mean for two markets to be negatively correlated?
Why is globalization reducing the gains from international portfolio diversification?
Consider the following information on the expected return and risk of two country funds—the Taiwan country fund (asset 1) and the Ukraine country fund(asset 2):a. Calculate the expected return and
The standard deviation of Infosys in Indian rupees (INR) is σI = 8. 5 percent, and the standard deviation of the US$/INR exchange rate is σs = 5. 5 percent.a. If the correlation between Infosys’s
During the first quarter of 2012, the Brazilian real depreciated from BRL 1. 65 to BRL 1. 85 = US$1. Shares of Petrobras trading on the New York Stock Exchange in the form of American depositary
Cougar Investments holds 10,000 shares of Embraer and 25,000 shares of Bank Itau, currently worth BRL 100 and BRL 40, respectively. Both stocks have an expected return in Brazilian reals of 12
Kaiwa is a U.S.-based value fund considering investing overseas to benefit from international diversification. It is contemplating investing in the South Korea country fund that offers an expected
Identify the metrics used in evaluating a firm’s performance.
Why is EVA a better metric for gauging performance?
What is variance analysis? What role does it play in the control process?
Why do exchange rates complicate the performance evaluation of a multinational corporation’s foreign operations?
What are “internal” forward rates? How are they used in the international control process?
What is a currency space map? What role does it play in the international control process?
What are “pass-through” coefficients? What do role do they play in the international control process?
What is different about an EVA-based contingent budgeting and control system?
What is the difference between territorial and worldwide tax regimes?
How is foreign-source income treated by the tax authorities of a multinational’s home country?
What is tax deferral, and how is it applied to foreign-source income?
What guidelines are to be followed by multinational corporations in setting cross-border transfer prices?
What is Subpart F income?
What is the economic logic for corporate inversion?
What are reinvoicing centers? How do they differ from tax havens? How do multinational corporations take advantage of reinvoicing centers?
How can leading and lagging intracorporate payments be used to create value for the multinational corporation?
How should multinationals structure their global earnings remittance strategy?
How is centralized global cash management implemented?
The Minneapolis-based medical instruments firm is considering starting an assembly operation in Bratislava (Slovakia) and is hesitating between establishing it as a branch or a subsidiary. The
Fluor Inc. is a U.S.-based global engineering and construction company. Its Brazilian subsidiary earned $112 million in 2012, which is taxed at the Brazilian corporate income tax of 30 percent.
Referring to problem 2, consider the case of Fluor’s wholly owned subsidiary in Ireland, which is taxed at the corporate income tax rate of 12. 5 percent. Fluor-Ireland earned $27 million in
Electrolux—the Swedish multinational manufacturer of household appliances and white goods (refrigerators and washing machines)—manufactures compressors in Kiev (Ukraine) for assembly and
Define in your own words what is meant by globalization.
Discuss the key drivers of globalization.
What is meant by “the world is flat”? (Was Galileo wrong?)
What are the key motivations for firms to expand abroad?
Is international financial management different from domestic corporate finance?
What is corporate governance, and how does it vary across countries?
What are the unique risks faced by multinationals?
Explain the international control conundrum faced by multinational corporations.
What are the organizational challenges of managing the finance function in a multinational corporation? Where should the locus of financial decision making be housed?
How can multinationals exploit their global financial systems to create value?
What is the difference between a “clean” float and a “dirty” float?
Why do countries intervene in their foreign exchange markets?
What is the difference between currency convertibility and exchange rate flexibility?
Explain how central bank intervention allows a country to keep its forex rate at a certain level.
What is the difference between central bank intervention in the foreign exchange market in the context of floating versus stabilized exchange rates?
How would you contrast a controlled exchange rate with a stabilized exchange rate?
What does the explosive growth in China’s reserves tell you about the nature of its exchange rate regime?
The last time the U.S. Federal Reserve Bank intervened in the forex market was in 1995. Would you expect the U.S. foreign exchange reserves to have increased or decreased over the past 18 years?
What is the difference between controlled exchange rates and stabilized exchange rates?
Why do many developing countries maintain controlled exchange rates at overvalued exchange rates?
What is the difference between a system of multiple exchange rates and the imposition of different tariff rates on imports?
Explain the Law of One Price. How does it relate to the concept of purchasing power parity?
Contrast the “absolute” and the “relative” versions of purchasing power parity.
When the Swiss franc appreciates. Over the past five years the Swiss franc (CHF)appreciated from CHF 1 = US$0.8215 to peak at CHF 1 = US$1.0697.a. Calculate the percentage appreciation of the Swiss
When the Bengladeshi taka depreciates. The central bank of Bangladesh is contemplating a devaluation of its currency—the taka (BDT)—from BDT 69 to BDT 100 = US$1:a. What would be the percentage
The Malaysian ringgit peg to the U.S. dollar. Malaysia pegs its currency, the Malaysian ringgit (MYR), to the U.S. dollar. The par value is MYR 4 = US$1.a. What is the par value priced in US$ terms
The Hong Kong currency board in the shadow of the rising yuan. Since 1983, the Hong Kong dollar (HK$) is via a currency board pegged to the U.S. dollar at the rate of HK$7.80 = US$1. Since 2005 the
Daily forex rates fixing by the Central Bank of South Korea (advanced). The Central Bank of South Korea announces every business day at 9:00 a.m. a fixed rate at which it will buy or sell U.S.
Advance deposit schemes and effective exchange rates. Over the years, a number of developing countries have maintained an advance deposit scheme for imports.Such systems typically require importers
Telmex dual listing and the Mexican peso devaluation. Shares of Telefonos Mexicanos(Telmex) listed on the New York Stock Exchange fell from $60 to $48 when the Mexican peso (MXN) was devalued on
Hyperinflation in Turkey. Turkey experienced hyperinflation in the late 1990s and early 2000s. The exchange rate stood at Turkish lira (TRY) 650,000 = US$1 on January 1, 2000. With actual quarterly
Purchasing power parity and the Argentine currency board (A). In April 1991 Argentina established a currency board whereby for all practical purposes the Argentine peso was pegged to the U.S. dollar
Purchasing power parity and the Argentine currency board (B). Assume over the 10-year period 1991–2001 the U.S. economy experienced an annualized inflation rate of 1. 5 percent. While the currency
Purchasing power parity and the Argentine currency board (C). In 2002, Argentina suffered from inflation at the rate of 25 percent (still 1. 5 percent in the United States):a. What should be the
A single currency for a global economy. The daily turnover in the foreign exchange market approaches $4 trillion or a yearly turnover of $1,000 trillion(with 252 working days in a given year).
Big Mac currencies. In 2006 a Big Mac cost ARS 7. 00 in Argentina and US$3.10 in the United States. Four years later, in 2010, the same Big Mac cost ARS 14. 00 in Argentina and US$3.73 in the United
Special drawing rights (SDRs). Visit the IMF website at www.imf.org and research the currency composition of the IMF’s artificial currency unit. Explain the logic behind the currency composition of
Valuing SDRs. Using the findings of the previous problem, visit the website of Yahoo! Finance at www.yahoofinance.com to value one SDR at today’s exchange rate. What is the weight accounted by the
Hyperinflation in Turkey. Visit www.imf.org to sketch the nominal lira price of one U.S. dollar over the period 1994–2001. Contrast it with the real/PPP rate over the same period. Was the lira
Denmark’s currency regime. Visit www.pacific.commerce.ubc.ca/xr to sketch the exchange rate of the Danish krone against the euro over the period 1999–2012.How would you characterize the exchange
Explain the role played by gold in the gold standard system of international payments. Why was the gold standard suspended during World War I?
Why did the major industrialized powers fail to reenact the gold standard after World War I? Why did they turn to a “beggar thy neighbor” policy?
What are the defining characteristics of the Bretton Woods international monetary system?
Why was the Bretton Woods system of “pegged yet adjustable” exchange rates reasonably successful until 1958 and increasingly unstable thereafter?
What are exchange controls on current account transactions? How do they differ from controls on capital account transactions? Which ones were the more important in ensuring the stability of the
Why was China able to survive the 1997 Asian financial crisis without devaluing the yuan whereas most Asian countries had to massively devalue their currencies?
Why have England, Sweden, and Denmark refused to join the euro-zone?
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