a. What is a multinational corporation? Why do firms expand into other countries?
b. What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?
c. Consider the following illustrative exchange rates.
Canadian Dollars Required to Buy
One Unit of Foreign Currency
Euro .................................. 1.5000
Swedish krona .......................0.1580
1. Are these currency prices direct quotations or indirect quotations?
2. Calculate the indirect quotations for euros and kronas.
3. What is a cross rate? Calculate the two cross rates between euros and kronas.
4. Assume Pure JuiceProducts can produce a litre of apple juice and ship it to Spain for $1.75. If the firm wants a 70% markup on the product, what should the apple juice sell for in Spain?
5. Now assume Pure Juice Products begins producing the same litre of apple juice in Spain. The product costs 1.8 euros to produce and ship to Sweden, where it can be sold for 20 kronas. What is the dollar profit on the sale?
6. What is exchange rate risk?
d. Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?
e. What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?
f. What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? At a discount?
g. What is interest rate parity? Currently, you can exchange 1 euro for 1.5100 dollar in the 180-day forward market, and the risk-free rate on 180-day securities is 6% in Canada and 4% in Spain. Does interest rate parity hold? If not, which securities offer the highest expected return?
h. What is purchasing power parity? If grapefruit juice costs $2.00 a litre in Canada and purchasing power parity holds, what should be the price of grapefruit juice in Spain?
i. What effect does relative inflation have on interest rates and exchange rates?
j. Briefly discuss the international capital markets.
k. To what extent do average capital structures vary across different countries?
l. Briefly describe special problems that occur in multinational capital budgeting and describe the process for evaluating a foreign project. Now consider the following project. A Canadian company has the opportunity to lease a manufacturing facility in Japan for 2 years. The company must spend ¥1 billion initially to refurbish the plant. The expected net cash flows from the plant for the next 2 years, in millions, are: CF1 = ¥500 and CF2 = ¥800. A similar project in Canada would have a risk-adjusted cost of capital of 10%. In Canada, a 1-year government bond pays 2% interest and a 2-year bond pays 2.8%. In Japan, a 1-year bond pays 0.05% and a 2-year bond pays 0.26%. The spot rate = 99 yen/dollar. What is the project's NPV?
m. Briefly discuss special factors associated with the following areas of multinational working capital management.
1. Cash management.
2. Credit management.
3. Inventory management.
Pure Juice Products Ltd. is a medium-sized producer of juice drinks with orchards in southern Ontario. Until now, the company has confined its operations and sales to Canada, but its CEO, George Gaynor, wants to expand into Europe. The first step would be to set up sales subsidiaries in Spain and Sweden, then to set up a production plant in Spain, and, finally, to distribute the product throughout the European Common Market. The firm's financial manager, Ruth Schmidt, is enthusiastic about the plan, but she is worried about the implications of the foreign expansion on the firm's financial management process. She has asked you, the firm's most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of director's meeting. To get you started, Schmidt has supplied you with the following list of questions.