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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

Assume that the business in Mexico grows. Explain how financial markets could help to finance the growth of the business.
Given the factors that affect the value of a foreign currency, describe the type of economic or other conditions in Mexico that could cause the Mexican peso to weaken and thereby to adversely affect
a. Explain how your business will likely be affected (at least in the short run) if the central bank of Mexico intervenes in the foreign exchange market by exchanging Mexican pesos for dollars.b.
Mexican interest rates are normally substantially higher than U.S. interest rates.a. What does this imply about the inflation differential (Mexican inflation minus U.S.inflation), assuming that the
a. Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate?b. Does the forward rate
Recall that your Mexican business invoices in Mexican pesos.a. You are already aware that a decline in the value of the peso could reduce your dollar cash flows. Yet, according to purchasing power
Mexican interest rates are normally substantially higher than U.S. interest rates.a. Assuming that interest rate parity exists, do you think hedging with a forward rate will be beneficial if the spot
Assume that you want to expand your English teaching business to other non-U.S.countries where some individuals may want to learn to speak English.a. Explain why you might be able to stabilize the
a. Review the different items that are used in the multinational capital budgeting example(Spartan, Inc.). Describe the items that you would include on a spreadsheet if you conducted a multinational
You have an opportunity to purchase a private competitor called Fernand in Mexico. If you decide to purchase the company, you will use only your own funds.a. When you attempt to determine the value
a. Review the political risk factors, and identify those that could possibly affect your business. Explain how your cash flows could be affected.b. Explain why threats of terrorism due to friction
Forms of Country Risk. List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC.
Country Risk Assessment. Describe the steps involved in assessing country risk once all relevant information has been gathered.
Uncertainty Surrounding the Country Risk Assessment. Describe the possible errors involved in assessing country risk. In other words, explain why country risk analysis is not always accurate.
Diversifying Away Country Risk. Why do you think that an MNC’s strategy of diversifying projects internationally could achieve low exposure to country risk?
Monitoring Country Risk. Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for
Country Risk Analysis. If the potential return is high enough, any degree of country risk can be tolerated.Do you agree with this statement? Why or why not? Do you think that a proper country risk
Country Risk Analysis. Niagara, Inc., has decided to call a well-known country risk consultant to conduct a country risk analysis in a small country where it plans to develop a large subsidiary.
Microassessment. Explain the microassessment of country risk.
Incorporating Country Risk in Capital Budgeting.How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a
Reducing Country Risk. Explain some methods of reducing exposure to existing country risk, while maintaining the same amount of business within a particular country.
Managing Country Risk. Why do some subsidiaries maintain a low profile as to where their parents are located?
Country Risk Analysis. When NYU Corp. considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk analysis
Reducing Country Risk. MNCs such as Alcoa, DuPont, Heinz, and IBM donated products and technology to foreign countries where they had subsidiaries.How could these actions have reduced some forms of
Country Risk Ratings. Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below.POLITICAL RISK FACTOR
Effects of September 11. Arkansas, Inc., exports to various less developed countries, and its receivables are denominated in the foreign currencies of the importers. It considers reducing its
How Country Risk Affects NPV. Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for 1 year in a shopping mall to sell expensive clothes manufactured in the United
How Country Risk Affects NPV. Explain how the capital budgeting analysis in the previous question would need to be adjusted if there were three possible outcomes for the British pound along with the
How Country Risk Affects NPV. Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinar; the dinar is currently valued at
How Country Risk Affects NPV. In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent.
Risk and Cost of Potential Kidnapping. In 2004 during the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local militant
Integrating Country Risk and Capital Budgeting. Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Co.(in Greece) improve its performance. Tovar would need to
Capital Budgeting and Country Risk. Wyoming Co. is a nonprofit educational institution that wants to import educational software products from Hong Kong and sell them in the United States. It wants
Accounting for Country Risk of a Project.Kansas Co. wants to invest in a project in China. It would require an initial investment of 5 million yuan.It is expected to generate cash flows of 7 million
Accounting for Country Risk of a Project.Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of this year. It plans to hedge receivables
Political Risk and Currency Derivative Values.Assume that interest rate parity exists. At 10:30 a.m., the media reported news that the Mexican government’s political problems were reduced, which
Political Risk and Project NPV. Drysdale Co.(a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and
Country Risk and Project NPV. Atro Co. (a U.S.firm) considers a foreign project in which it expects to receive 10 million euros at the end of 1 year. While it realizes that its receivables are
Key West Co. exports highly advanced phone system components to its subsidiary shops on islands in the Caribbean. The components are purchased by consumers to improve their phone systems. These
Using the information in question 1, explain how financial risk factors could adversely affect the profitability of Key West Co.
Given the information in question 1, do you expect that Key West Co. is more concerned about the adverse effects of political risk or of financial risk?
Explain what types of firms would be most concerned about an increase in country risk as a result of the terrorist attack on the United States on September 11, 2001.
Rockford Co. plans to expand its successful business by establishing a subsidiary in Canada. However, it is concerned that after 2 years the Canadian government will either impose a special tax on
identify the common factors used by MNCs to measure country risk,
explain the techniques used to measure country risk,
explain how to derive an overall measure of country risk,
explain how MNCs use the assessment of country risk when making financial decisions, and
explain how MNCs prevent host government takeovers.
The Sports Exports Company produces footballs in the United States and exports them to the United Kingdom.It also has an ongoing joint venture with a British firm that produces some sporting goods
Go to the website of the CIA World Factbook at www.cia.gov/library/publications/the-world-factbook/index.html. Select a country and review the information about the country’s political conditions.
Recently, Ben Holt, Blades’ chief financial Officer(CFO), has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to
Ranger Supply Company is a large manufacturer and distributor of office supplies. It is based in New York but sends supplies to firms throughout the United States. It markets its supplies through
MapleLeaf Paper Company is a Canadian firm that produces a particular type of paper not produced in the United States. It focuses most of its sales in the United States. In the past year, for
Gretz Tool Company is a large U.S.-based multinational corporation with subsidiaries in eight different countries. The parent of Gretz provided an initial cash infusion to establish each subsidiary.
Bruin Aircraft, Inc., is a designer and manufacturer of airplane parts. Its production plant is based in California. About one-third of its sales are exports to the United Kingdom.Though Bruin
Capital Crystal, Inc., is a major importer of crystal from the United Kingdom. The crystal is sold to prestigious retail stores throughout the United States. The imports are denominated in British
Hull Importing Company is a U.S.-based firm that imports small gift items and sells them to retail gift shops across the United States. About half of the value of Hull’s purchases comes from the
Zuber, Inc., is a U.S.-based MNC that has been aggressively pursuing business in Eastern Europe since the Iron Curtain was lifted in 1989. Poland has allowed its currency’s value to be market
Flame Fixtures, Inc., is a small U.S. business in Arizona that produces and sells lamp fixtures. Its costs and revenues have been very stable over time. Its profits have been adequate, but Flame has
Whaler Publishing Company specializes in producing textbooks in the United States and marketing these books in foreign universities where the English language is used.Its sales are invoiced in the
Recall the situation of Whaler Publishing Company from the previous chapter. Whaler needed to develop confidence intervals of four exchange rates in order to derive confidence intervals for U.S.
This case is intended to illustrate how forecasting exchange rates and hedging decisions are related. Blackhawk Company imports goods from New Zealand and plans to purchase NZ$800,000 1 quarter from
The situation for Madison, Inc., was described in this chapter to illustrate how alternative operational structures could affect economic exposure to exchange rate movements.Ken Moore, the vice
Having done business in the United States for over 50 years, Blues Corporation has an established reputation. Most of Blues’ business is in the United States. It has a subsidiary in the western
This case is intended to illustrate that the value of an international project is sensitive to various types of input. It also is intended to show how a computer spreadsheet format can facilitate
Redwing Technology Company is a U.S.-based firm that makes a variety of high-tech components. Five years ago, it established subsidiaries in Canada, South Africa, and Japan.The earnings generated by
King, Inc., a U.S. firm, is considering the establishment of a small subsidiary in Bulgaria that would produce food products. All ingredients can be obtained or produced in Bulgaria.The final
describe the common forms of corporate governance by MNCs,
provide a background on how MNCs use corporate control as a form of governance,
explain the motives, barriers, and valuation process in international corporate control,
identify the factors that are considered when valuing a foreign target,
explain why valuations of a target firm vary among MNCs that consider corporate control strategies, and
identify other types of international corporate control actions.
Explain why more acquisitions have taken place in Europe in recent years.
What are some of the barriers to international acquisitions?
Why might a U.S.-based MNC prefer to establish a foreign subsidiary rather than acquire an existing firm in a foreign country?
Provo, Inc. (based in Utah), has been considering the divestiture of a Swedish subsidiary that produces ski equipment and sells it locally. A Swedish firm has already offered to acquire this Swedish
Motives for Restructuring. Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary?
Exposure to Country Regulations. Maude, Inc., a U.S.-based MNC, has recently acquired a firm in Singapore. To eliminate inefficiencies, Maude downsized the target substantially, eliminating
Global Expansion Strategy. Poki, Inc., a U.S.-based MNC, is considering expanding into Thailand because of decreasing profit margins in the United States. The demand for Poki’s product in Thailand
Valuation of a Private Target. Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to produce personal computers (PCs)and market them throughout Russia, where demand
Comparing International Projects. Savannah, Inc., a manufacturer of clothing, wants to increase its market share by acquiring a target producing a popular clothing line in Europe. This clothing line
Privatized Business Valuations. Why are valuations of privatized businesses previously owned by the governments of developing countries more difficult than valuations of existing firms in developed
Uncertainty Surrounding a Foreign Target.Refer to question
What are some of the key sources of uncertainty in Blore’s valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC would be lower if
Divestiture Strategy. The reduction in expected cash flows of Asian subsidiaries as a result of the Asian crisis likely resulted in a reduced valuation of these subsidiaries from the parent’s
Why a Foreign Acquisition May Backfire. Provide two reasons why an MNC’s strategy of acquiring a foreign target will backfire. That is, explain why the acquisition might result in a negative
Pricing a Foreign Target. Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If
Global Strategy. Senser Co. established a subsidiary in Russia 2 years ago. Under its original plans, Senser intended to operate the subsidiary for a total of 4 years. However, it would like to
Divestiture Decision. Colorado Springs Co.plans to divest either its Singapore or its Canadian subsidiary. Assume that if exchange rates remain constant, the dollar cash flows each of these
Divestiture Decision. San Gabriel Corp. recently considered divesting its Italian subsidiary and determined that the divestiture was not feasible. The required rate of return on this subsidiary was
Divestiture Decision. Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attack on the
Feasibility of a Divestiture. Merton, Inc., has a subsidiary in Bulgaria that it fully finances with its own equity. Last week, a firm offered to buy the subsidiary from Merton for $60 million in
Accounting for Government Restrictions.Sunbelt, Inc., plans to purchase a firm in Indonesia. It believes that it can install its operating procedure in this firm, which would significantly reduce the
Foreign Acquisition Decision. Minnesota Co.consists of two businesses. Its local business is expected to generate cash flows of $1 million at the end of each of the next 3 years. It also owns a
Decision to Sell a Business. Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million(after capital gains taxes are paid).
Foreign Divestiture Decision. Baltimore Co.considers divesting its six foreign projects as of today.Each project will last 1 year. Its required rate of return on each project is the same. The cost of
Factors That Affect the NPV of a Divestiture.Washington Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, it received an offer from a
Impact of Country Perspective on Target Valuation. Targ Co. of the United States has been targeted by three firms that consider acquiring it:(1) Americo (from the United States), Japino (of Japan),
Valuation of a Foreign Target. Gaston Co.(a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300

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