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Questions and Answers of Finance

Daewoo Motors has been told it could issue $150 million face value in Euro-CP at a discount rate of 8.9% based on a 360-day year.a. If the maturity of Daewoo's Euro-CP is 91 days, what will be its
Commerzbank is seeking to invest $100 million short term. It has the choice between buying Euro-CP yielding 6.34% annually and a U.S. bank deposit yielding 6.36% annually, both maturing in 150 days.
What factors should be considered in deciding whether the cost of capital for a foreign affiliate should be higher, lower, or the same as the cost of capital for a comparable domestic operation?
According to an article in Forbes, ''American companies can and are raising capital in Japan at relatively low rates of interest. Dow Chemical, for instance, has raised $500 million in yen. That cost
In early 1990, major Tokyo Stock Exchange issues sold for an average 60 times earnings, more than four times the 13.8 price/earnings ratio for the S&P 500 at that time. According to Business Week
What are some of the advantages and disadvantages of having highly leveraged foreign subsidiaries?
Compania Troquelados ARDA is a medium-sized Mexico City auto parts maker. It is trying to decide whether to borrow dollars at 9% or Mexican pesos at 75%. What advice would you give it? What
Boeing Commercial Airplane Company manufactures all its planes in the United States and prices them in dollars, even the 50% of its sales destined for overseas markets.What financing strategy would
United Airlines inaugurated service to Japan and wants to finance the purchase of Boeing 747s to service that route. The CFO for United is attracted to yen financing because the interest rate on yen
Rohm & Haas, a Philadelphia-based specialty chemicals company, traditionally finances its Brazilian operations from outside that country because it is ''too expensive'' to borrow local currency in
Nord Resources' Ramu River property in Papua New Guinea contains one of the world's largest deposits of cobalt and chrome outside of the Soviet Union and South Africa. The cost of developing a mine
A firm with a corporatewide debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the
IBM is considering having its German affiliate issue a 10 year, $100 million bond denominated in euros and priced to yield 7.5%. Alternatively, IBM's German unit can issue a dollar-denominated bond
1. What are the pros and cons of Deutsche Bank listing on the NYSE as a global share instead of an ADR?2. Are these pros and cons of a GRS issue likely to change over time? In which direction?3. What
As seen in Exhibit 15.2, Hong Kong stocks are about twice as volatile as U.S. stocks.Does that mean that risk-averse American investors should avoid Hong Kong equities?Explain.
What characteristics of foreign securities lead to diversification benefits for American investors?
Will increasing integration of national capital markets reduce the benefits of international diversifications?
Studies show that the correlations between domestic stocks are greater than the correlations between domestic and foreign stocks. Explain why this is likely to be the case. What implications does
Who is likely to gain more from investing overseas, a resident of the United States or of Mexico? Explain.
Suppose that Mexican bonds are yielding more than 100% annually. Does this high yield make them suitable for American investors looking to raise the return on their portfolios? Explain.
According to one investment adviser, ''I feel more comfortable investing in Western Europe or Canada. I would not invest in South America or other regions with a record of debt defaults and
Investors should avoid Hong Kong, given its problematic outlook now that Britain has surrendered the colony to China. Comment.
As noted in the chapter, from 1949 to 1990, the Japanese market rose 25,000%.a. Given these returns, does it make sense for Japanese investors to diversify internationally?b. What arguments would you
Because ADRs are denominated in dollars and are traded in the United States, they present less foreign exchange risk to U.S. investors than do the underlying foreign shares of stock. Comment.
During the year, the price of British gilts (government bonds) went from £102 to £106, while paying a coupon of £9. At the same time, the exchange rate went from £1:$1.76 to £1:$1.62. What was
During the year, Toyota Motor Company shares went from ¥9,000 to ¥11,200, while paying a dividend of ¥60. At the same time, the exchange rate went from $1 = ¥145 to $1 = ¥120. What was the
a. In 1992, the Brazilian market rose by 1,117% in cruzeiro terms, while the cruzeiro fell by 91.4% in dollar terms. Meanwhile, the U.S. market rose by 8.5%. Which market did better?b. In 1993, the
Suppose that the dollar is now worth €1.1372. If one-year German bunds are yielding 9.8% and one-year U.S. Treasury bonds are yielding 6.5%, at what end-of-year exchange rate will the dollar
In 1990, Matsushita bought MCA Inc. for $6.1 billion. At the time of the purchase, the exchange rate was about ¥145/$. By the time that Matsushita sold an 80% stake in MCA to Seagram for $5.7
Suppose that the standard deviations of the British and U.S. stock markets have risen to 38% and 22%, respectively, and the correlation between the U.S. and British markets has risen to 0.67. What is
A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the following characteristics:a. What
Suppose that the standard deviation of the return on Nestl´e, a Swiss firm, in terms of Swiss francs is 19% and the standard deviation of the rate of change in the dollar franc exchange rate is
1. What barriers to entry has Goodyear created or taken advantage of?2. Goodyear has production facilities throughout the world. What competitive advantages might global production provide
Why do firms from each of the following categories become multinational? Identify the competitive advantages that a firm in each category must have to be a successful multinational.a. Raw materials
a. Why do companies generally follow a sequential strategy in moving overseas?b. What are the pluses and minuses of exporting? Of licensing? Of foreign production?
What factors help determine whether a firm will export its output, license foreign companies to manufacture its products, or set up its own production or service facilities abroad? Identify the
Time Warner is trying to decide whether to license foreign companies to produce its films and records or to set up foreign sales affiliates to sell its products directly.What factors might determine
Given the added political and economic risks that appear to exist overseas, are multinational firms more or less risky than purely domestic firms in the same industry? Consider whether a firm that
Black & Decker, the maker of small, hand-held power tools, finds that when it builds a plant in a foreign country, sales of both its locally manufactured products and its exports to that country
What was the Japanese strategy for penetrating the TV market? What similarities are there between it and the Japanese strategy for entering the U.S. car market? The photocopier market?
The value of a particular foreign subsidiary to its parent company may bear little relationship to the subsidiary's profit-and-loss statement. The strategic purpose or nature of a foreign unit may
In 1989, the British company Beecham Group merged with the U.S. Company SmithKline Beckman. What economic advantages might the two drug companies be expecting from their marriage? More generally,
Suppose the worldwide profit breakdown for General Motors is 85% in the United States, 3% in Japan, and 12% in the rest of the world. Its principal Japanese competitors earn 40% of their profits in
Airbus Industrie, the European consortium of aircraft manufacturers, buys jet engines from U.S. companies. According to a story in the Wall Street Journal, ''As a result of the weaker dollar, the
Tandem Computer, a U.S. maker of fault-tolerant computers, is thinking of shifting virtually all the labor-intensive portion of its production to Mexico. What risks is Tandem likely to face if it
Germany's $28 billion electronics giant, Siemens AG, sells medical and telecommunications equipment, power plants, automotive products, and computers. Siemens has been operating in the United States
Kao Corporation is a highly innovative and efficient Japanese company that has managed to take on and beat Procter & Gamble in Japan. Two of Kao's revolutionary innovations include disposable diapers
In what ways do parent and project cash flows differ on the IDC-U.K. project? Why?
Why are loan repayments by IDC-U.K. to Lloyds and NEB treated as a cash inflow to the parent company?
How sensitive is the value of the project to the threat of currency controls and expropriation? How can the financing be structured to make the project less sensitive to these political risks?
What options does investment in the new British diesel plant provide to IDC-U.S.? How can these options be accounted for in the traditional capital-budgeting analysis?
Early results on the Lexus, Toyota's upscale car, showed it was taking the most business from customers changing from BMW (15%), Mercedes (14%), Toyota (14%), General Motors' Cadillac (12%), and
Comment on the following statement that appeared in The Economist (August 20, 1988, p. 60): ''Those oil producers that have snapped up overseas refineries-Kuwait, Venezuela, Libya and, most recently,
In December 1989, General Electric spent $150 million to buy a controlling interest in Tungsram, the Hungarian state-owned lightbulb maker. Even in its best year, Tungsram earned less than a 4%
Suppose a firm projects a $5 million perpetuity from an investment of $20 million in Spain. If the required return on this investment is 20%, how large does the probability of expropriation in year 4
Suppose a firm has just made an investment in France that will generate $2 million annually in depreciation, converted at today's spot rate. Projected annual rates of inflation in France and in the
Jim Toreson, chairman and CEO of Xebec Corporation, a Sunnyvale, California, manufacturer of disk-drive controllers, is trying to decide whether to switch to offshore production. Given Xebec's
What are the basic problems arising in international trade financing, and how do the main financing instruments help solve those problems?
The different forms of export financing distribute risks differently between the exporter and the importer. Analyze the distribution of risk in the following export-financing instruments:a.
Describe the different steps and documents involved in exporting motors from Kansas to Hong Kong using a confirmed letter of credit, with payment terms of 90 days sight. What alternatives are
Explain the advantages and disadvantages of each of the following forms of export financing:a. Bankers' acceptancesb. Discountingc. Factoringd. Forfaiting
What are the potential advantages and disadvantages of countertrade for the parties involved?
Texas Computers (TC) recently began selling overseas. It currently has 30 foreign orders outstanding, with the typical order averaging $2,500. TC is considering the following three alternatives to
L.A. Cellular has received an order for phone switches from Singapore. The switches will be exported under the terms of a letter of credit issued by Sumitomo Bank on behalf of Singapore
Suppose Minnesota Machines (MM) is trying to price an export order from Russia. Payment is due nine months after shipping. Given the risks involved, MM would like to factor its receivable without
High interest rates put a premium on careful management of cash and marketable securities.a. What techniques are available to an MNC with operating subsidiaries in many countries to economize on
Standard advice given to firms exporting to soft-currency countries is to invoice in their own currency. Critically analyze this recommendation and suggest a framework that will help a financial
Comment on the following statement: ''One should borrow in those currencies expected to depreciate and invest in those expected to appreciate.''
What are the three basic types of bank loans? Describe their differences.
A $1.5 billion Italian multinational manufacturing company has a total of $600 million in intercompany trade flows and settles accounts in 13 currencies. It also has about $400 million in third-party
SmithKline Beckman, the healthcare products multinational (now part of GlaxoSmithKline), has 105 affiliates worldwide. There is a great deal of intercompany sales, dividend flows, and fee and royalty
A major food and beverage manufacturer with three major divisions, 150 countries of operation, and international revenues accounting for 15% of total revenues of$6 billion conducted a treasury audit.
Twenty divisions of Union Carbide, now part of Dow Chemical, sell to thousands of customers in more than 50 countries throughout the world. The proceeds are received in the form of drafts, checks,
Newport Circuits is trying to decide whether to shift production overseas of its relatively expensive integrated circuits (they average around $11 each). Offshore assembly would save about 11.1¢ per
Tiger Car Corporation, a leading Japanese automaker, is considering a proposal to locate a factory abroad in Tennessee. Although labor costs would rise by ¥33,000 per car, the time in transit for
If Consolidated Corporation issues a Eurobond denominated in yen, the 7% interest rate on the $1 million, one-year borrowing will be 2% less than rates in the United States. However, ConCorp would
Ford can borrow dollars at 12% or pesos at 80% for one year. The peso: dollar exchange rate is expected to move from $1 = Ps 3300 currently to $1 = Ps 4500 by year's end.a. What is the expected
The following questions relate to the internal financial transfer system of a multinational firm.a. What is the internal financial transfer system of the multinational firm?b. What are its
California, like several other states, applies the unitary method of taxation to firms doing business within the state. Under the unitary method, a state determines the tax on a company's worldwide
In comparisons of a multinational firm's reported foreign profits with domestic profits, caution must be exercised. This same caution must also be applied when analyzing the reported profits of the
In 1987, U.S. controlled companies earned an average 2.09% return on assets, nearly four times their foreign controlled counterparts. A number of American politicians have used these figures to argue
Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of $27,000 per unit. Assume that the Canadian and French marginal tax rates on corporate
Suppose a U.S. parent owes $5 million to its English affiliate. The timing of this payment can be changed by up to 90 days in either direction. Assume the following effective annualized after-tax
Suppose that DMR SA, located in Switzerland, sells $1 million worth of goods monthly to its affiliate DMR GmbH, located in Germany. These sales are based on a unit transfer price of $100. Suppose the
Suppose a firm earns $1 million before tax in Spain. It pays Spanish tax of $0.52 million and remits the remaining $0.48 million as a dividend to its U.S. parent. Under current U.S. tax law, how much
Suppose a French affiliate repatriates as dividends all the after-tax profits it earns. If the French income tax rate is 50% and the dividend withholding tax is 10%, what is the effective tax rate on
The Willow Furniture Company produces tables. The fixed monthly cost of production is $8,000, and the variable cost per table is $65. The tables sell for $180 apiece.a. For a monthly volume of 300
The Retread Tire Company recaps tires. The fixed annual cost of the recapping operation is $60,000. The variable cost of recapping a tire is $9. The company charges $25 to recap a tire.a. For an
The Rolling Creek Textile Mill produces denim. The fixed monthly cost is $21,000, and the variable cost per yard of denim is $0.45. The mill sells a yard of denim for $1.30.a. For a monthly volume of
Evergreen Fertilizer Company produces fertilizer. The company’s fixed monthly cost is $25,000, and its variable cost per pound of fertilizer is $0.15. Evergreen sells the fertilizer for $0.40 per
Graphically illustrate the break-even volume for the Retread Tire Company determined in Problem 2.
Graphically illustrate the break-even volume for the Evergreen Fertilizer Company determined in Problem 4.
Andy Mendoza makes handcrafted dolls, which he sells at craft fairs. He is considering mass producing the dolls to sell in stores. He estimates that the initial investment for plant and equipment
If the maximum operating capacity of Evergreen Fertilizer Company described in Problem 4 is 120,000 pounds of fertilizer per month, determine the break-even volume as a percentage of capacity.
If the Retread Tire Company in Problem 2 changes its pricing for recapping a tire from $25 to $31, what effect will the change have on the break-even volume?
If Evergreen Fertilizer Company in Problem 4 changes the price of its fertilizer from $0.40 per pound to $0.60 per pound, what effect will the change have on the break-even volume?
If Evergreen Fertilizer Company changes its production process to add a weed killer to the fertilizer in order to increase sales, the variable cost per pound will increase from $0.15 to $0.22. What
If Evergreen Fertilizer Company increases its advertising expenditures by $14,000 per year, what effect will the increase have on the break-even volume computed in Problem 13?
Pastureland Dairy makes cheese, which it sells at local supermarkets. The fixed monthly cost of production is $4,000, and the variable cost per pound of cheese is $0.21. The cheese sells for $0.75
For the doll-manufacturing enterprise described in Problem 7, Andy Mendoza has determined that $10,000 worth of advertising will increase sales volume by 400 dolls. Should he spend the extra amount

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