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Questions and Answers of Accounting

Grant, Inc., is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because
Janutis Co. has just issued fixed rate debt at 10 percent. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps
Bradenton Co. is considering a project in which it will export special contact lenses to Mexico. It expects that it will receive 1 million pesos after taxes at the end of each year for the next 4
Will Currency Swaps Result in Low Financing Costs? Point Yes. Currency swaps have created greater participation by firms that need to exchange their currencies in the future. Thus, firms that finance
1. Jim Logan, owner of the Sports Exports Company, needs to determine whether dollar-denominated debt or pound-denominated debt would be most appropriate for financing this expansion, if he does
1. Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes be
Recall from the previous chapter that your business is considering expansion within Mexico. Recall that you plan to invest a small amount of U.S. dollar equity into this project and finance the
Determine Gandor’s cost of capital. Also, determine Gandor’s required rate of return for the joint venture in China.
Determine the probability distribution of Gandor’s net present values for the joint venture. Capital budgeting analyses should be conducted for these three scenarios:• Scenario 1. Based on
Would you recommend that Gandor participate in the joint venture? Explain.
What do you think would be the key underlying factor that would have the most influence on the profits earned in China as a result of the joint venture?
Is there any reason for Gandor to revise the composition of its capital (debt and equity) obtained from the United States when financing joint ventures like this?
When Gandor was assessing this proposed joint venture, some of its managers recommended that Gandor borrow the Chinese currency rather than dollars to obtain some of the necessary capital for its
a. Describe how foreign trade would be affected if banks did not provide trade-related services.b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
a. Why would an exporter provide financing for an importer?b. Is there much risk in this activity? Explain.
What is the role of a factor in international trade transactions?
a. What is the role today of the Export-Import Bank of the United States?b. Describe the Direct Loan Program administered by the Export-Import Bank.
What are bills of lading and how do they facilitate international trade transactions?
What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish so many programs?
Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It has not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the
Briefly describe the Working Capital Guarantee Program administered by the Export-Import Bank.
Describe the Small Business Policy.
Describe the role of the Overseas Private Investment Corporation (OPIC).
Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem,
Do Agencies That Facilitate International Trade Prevent Free Trade? Point Yes. The Export-Import Bank of the United States provides many programs to help U.S. exporters conduct international trade.
1. How could Jim use a letter of credit to ensure that he will be paid for the products he exports?2. Jim has discussed the possibility of expanding his export business through a second sporting
1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment, Inc., and Major Leagues, Inc., would Blades receive payment for its roller blades before it delivers them? Do the
Recall that your business provides CDs that complement the teaching provided by your employees in Mexico. Assume that you decide to capitalize on these CDs by selling them to a large retail store
Explain why an MNC parent would consider financing from its subsidiaries.
a. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency.b. Discuss the use of specifying a break-even point when
a. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed?b. Once the probability distribution of
How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?
Assume that Tulsa, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) Borrowing U.S. dollars
How is it possible for a firm to incur a negative effective financing rate?
a. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short-term financing?b. Assume that Connecticut Co. needs dollars. It borrows euros at a lower
Akron Co. needs dollars. Assume that the local one-year loan rate is 15 percent, while a one-year loan rate on euros is 7 percent. By how much must the euro appreciate to cause the loan in euros to
Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve lower financing costs by consistently
Boca, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is three percentage points
Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following
Orlando, Inc., is a U.S.- based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 70
Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtained short-term financing from local banks prior to the Asian crisis. Explain why the firm may not be able to easily obtain funds
Homewood Co. commonly finances some of its U.S. expansion by borrowing foreign currencies (such as Japanese yen) that have low interest rates. Describe how the potential return and risk of this
Missoula, Inc., decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following probability distribution for the yen’s degree
Jacksonville Corp. is a U.S.-based firm that needs $600,000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest rate would be 5 percent
Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen
a. Does borrowing a portfolio of currencies offer any possible advantages over the borrowing of a single foreign currency?b. If a firm borrows a portfolio of currencies, what characteristics of the
Raleigh Corp. needs to borrow funds for one year to finance an expenditure in the United States. The following interest rates are available: expenditureBorrowing RateUnited States .......
Do MNCs Increase Their Risk When Borrowing Foreign Currencies? Point Yes. MNCs should borrow the currency that matches their cash inflows. If they borrow a foreign currency to finance business in a
1. Should Jim borrow dollars or pounds to finance his joint venture business? Why?2. Jim could also borrow euros at an interest rate that is lower than the U.S. or British rate. The values of the
1. What is the amount, in baht, that Blades needs to borrow to cover the payments due to the Thai suppliers? What is the amount, in yen, that Blades needs to borrow to cover the payments due to the
You are considering a major marketing campaign in Mexico. If you implement it, you will incur high expenses in Mexican pesos and will need to finance the cost. To cover the cost, you can either
Discuss the general functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary.
Explain the benefits of netting. How can a centralized cash management system beneficial to the MNC?
How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?
If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies
Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to
Why would a U.S. firm consider investing short-term funds in euros even when it does not have any future cash outflows in euros?
Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage since the euro’s 90-day interest rate is higher than the U.S. interest rate.
Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to Mexican pesos, it can
Rollins, Inc., has $3 million in cash available for 180 days. It can earn 7 percent on a U.S. Treasury bill or 9 percent on a British Treasury bill. The British investment does require conversion of
Repeat question 9 but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days.
Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially underestimate the spot rate to be realized in 180 days.
Assume that the one-year U.S. interest rate is 10 percent and the one-year Canadian interest rate is 13 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian
Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?
Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for one-year Treasury bills. The one-year forward rate of the euro has a discount of
Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and
Should McNeese Co. consider investing funds in Latin American countries where it may expand facilities? The interest rates are high, and the proceeds from the investments could be used to help
Palos Co. commonly invests some of its excess dollars in foreign government short-term securities in order to earn a higher short-term interest rate on its cash. Describe how the potential return and
Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in value during the
Ithaca Co. considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year Canadian dollar deposit. The Singapore
Should Interest Rate Parity Prevent MNCs from Investing in Foreign Currencies?Point Yes. Currencies with high interest rates have large forward discounts according to interest rate parity. To the
1. If Jim invests the excess cash in U.S. Treasury bills, would this reduce the firms exposure to exchange rate risk? 2. Jim decided to use the excess cash to pay off the British loan. However, a
1. There is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. What does this mean?2. If the net baht received from the Thailand subsidiary are
Assume that this year you decide not to implement the marketing campaign that you considered in the previous chapter. Instead, you will invest some of this year’s profits in money market
Determine the investment portfolio composition for Kent’s eastern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent.
What is the expected effective yield of the investment portfolio?
Based on the expected effective yield for the portfolio and the initial investment amount of $15 million, determine the annual interest to be earned on the portfolio.
Determine the financing portfolio composition for Kent’s western branch that would minimize the expected effective financing rate while satisfying the restriction imposed by the parent.
What is the expected effective financing rate of the total amount borrowed?
Based on the expected effective financing rate for the portfolio and the total amount of $15 million borrowed, determine the expected loan repayment amount beyond the principal borrowed.
When the expected interest received by the eastern branch and paid by the western branch of Kent Co. are consolidated what is the net amount of interest received?
If the eastern branch and the western branch worked together, the eastern branch could loan its $15 million to the western branch. Nevertheless, one could argue that the branches could not take
Why is a dollar today worth more than a dollar one year from now?
What is a time line, and why is it important in financial analysis?
What is compounding, and how does it affect the future value of an investment?
What is the difference between simple interest and compound interest?
How does changing the compounding period affect the amount of interest earned on an investment?
What is the present value and when is it used?
What is the discount rate? How does the discount rate differ from the interest rate in the future value equation?
What is the relation between the present value factor and the future value factor?
Explain why you would expect the discount factor to become smaller the longer the time to payment.
What is the difference between the interest rate (i) and the growth rate (g) in the future value equation?
Explain the phrase “a dollar today is worth more than a dollar tomorrow. ”
Explain the importance of a time line.
What are the two factors to be considered in time value of money?
Differentiate future value from present value.
Differentiate between compounding and discounting.
Explain how compound interest differs from simple interest.
If you were given a choice of investing in an account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both offer the same stated interest rate and

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