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financial markets institutions

Questions and Answers of Financial Markets Institutions

Divestiture of a Foreign Subsidiary. Rudecki Co. (a U.S. firm) has a Polish subsidiary that it is considering divesting. This company is completely focused on research and development for Rudecki’s
Poison Pills and Takeovers. Explain how a foreign target could use poison pills to prevent a takeover or change the terms of a takeover.
Governance of MNCs by Shareholders. Explain the various ways in which large shareholders can attempt to govern an MNC and improve its management.
Explain how an MNC’s economic exposure can be hedged.
Explain how an MNC’s translation exposure can be hedged.
Salem Exporting Co. purchases chemicals from U.S. sources and uses them to make pharmaceutical products that are exported to Canadian hospitals.Salem prices its products in Canadian dollars and is
Using the information in question 1, give a possible disadvantage of offsetting exchange rate exposure from the export business.
Coastal Corp. is a U.S. firm with a subsidiary in the United Kingdom. It expects that the pound will depreciate this year. Explain Coastal’s translation exposure.How could Coastal hedge its
Arlington Co. has substantial translation exposure in European subsidiaries. The treasurer of Arlington Co. suggests that the translation effects are not relevant because the earnings generated by
Lincolnshire Co. exports 80 percent of its total production of goods in New Mexico to Latin American countries. Kalafa Co. sells all the goods it produces in the United States, but it has a
Reducing Economic Exposure. Baltimore, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where
Reducing Economic Exposure. UVA Co. is a U.S.-based MNC that obtains 40 percent of its foreign supplies from Thailand. It also borrows Thailand’s currency (the baht) from Thai banks and converts
Reducing Economic Exposure. Albany Corp. is a U.S.-based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of
Tradeoffs When Reducing Economic Exposure.When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain.
Exchange Rate Effects on Earnings. Explain how a U.S.-based MNC’s consolidated earnings are affected when foreign currencies depreciate.
Hedging Translation Exposure. Explain how a firm can hedge its translation exposure.
Limitations of Hedging Translation Exposure.Bartunek Co. is a U.S.-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain
Effective Hedging of Translation Exposure.Would a more established MNC or a less established MNC be better able to effectively hedge its given level of translation exposure? Why?
Comparing Degrees of Economic Exposure.Carlton Co. and Palmer, Inc., are U.S.-based MNCs with subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers
Comparing Degrees of Translation Exposure.Nelson Co. is a U.S. firm with annual export sales to Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with
Managing Economic Exposure. St. Paul Co.does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information.a. St. Paul’s U.S.
Assessing Economic Exposure. Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other
Hedging Continual Exposure. Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake
Sources of Supplies and Exposure to Exchange Rate Risk. LagunaCo. (aU.S. firm)will be receiving 4 million British pounds in 1 year. It will need to make a payment of 3 million Polish zloty in 1 year.
Minimizing Exposure. Lola Co. (a U.S. firm) expects to receive 10 million euros in 1 year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This is its
Review an annual report of an MNC of your choice. Many MNCs provide their annual report on their websites. Look for any comments that relate to the MNC’s economic or translation exposure. Does it
Go to http://finance.yahoo.com and insert the ticker symbol IBM (or use a different MNC if you wish) in the stock quotations box. Then scroll down and click on Historical Prices. Set the date range
describe common motives for initiating direct foreign investment and
illustrate the benefits of international diversification.
Offer some reasons why U.S. firms might prefer to engage in direct foreign investment (DFI) in Canada rather than Mexico.
Offer some reasons why U.S. firms might prefer to direct their DFI to Mexico rather than Canada.
One U.S. executive said that Europe was not considered as a location for DFI because of the euro’s value. Interpret this statement.
Why do you think U.S. firms commonly use joint ventures as a strategy to enter China?
Why would the United States offer a foreign automobile manufacturer large incentives for establishing a production subsidiary in the United States? Isn’t this strategy indirectly subsidizing the
Motives for DFI. Describe some potential benefits to an MNC as a result of direct foreign investment(DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to
Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s
DFI to Achieve Economies of Scale. Bear Co.and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear Co. has decided to establish distributorship
DFI to Reduce Cash Flow Volatility. Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash flows. Raider implemented a long-range plan to establish 40
Impact of Import Restrictions. If the United States imposed long-term restrictions on imports, would the amount of DFI by non-U.S. MNCs in the United States increase, decrease, or be
Capitalizing on Low-Cost Labor. Some MNCs establish a manufacturing facility where there is a relatively low cost of labor. Yet, they sometimes close the facility later because the cost advantage
Opportunities in Less Developed Countries.Offer your opinion on why economies of some less developed countries with strict restrictions on international trade and DFI are somewhat independent from
Effects of September
DFI Strategy. Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereos and sell them there. It expects that its cost of producing these stereos will be one-third the
Risk Resulting from International Business.This chapter concentrates on possible benefits to a firm that increases its international business.a. What are some risks of international business that may
Motives for DFI. Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by professional sports teams. It recently decided to expand in Europe. What are the potential benefits
Disney’s DFI Motives. What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?
DFI Strategy. Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does this statement mean?
Host Government Incentives for DFI. Why would foreign governments provide MNCs with incentives to undertake DFI there?
DFI Location Decision. Decko Co. is a U.S. firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan,
Foreign Investment Decision. Trak Co. (of the United States) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Japan. It wants to purchase a
Foreign Investment Strategy. Myzo Co. (based in the United States) sells basic household products that many other U.S. firms produce at the same quality level, and these other U.S. firms have about
Compare the capital budgeting analysis of an MNC’s subsidiary versus its parent,
Demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented, and
Explain how the risk of international projects can be assessed.
Two managers of Marshall, Inc., assessed a proposed project in Jamaica. Each manager used exactly the same estimates of the earnings to be generated by the project, as these estimates were provided
Pinpoint the parts of a multinational capital budgeting analysis for a proposed sales distribution center in Ireland that are sensitive when the forecast of a stable economy in Ireland is revised to
New Orleans Exporting Co. produces small computer components, which are then sold to Mexico. It plans to expand by establishing a plant in Mexico that will produce the components and sell them
Explain how the present value of the salvage value of an Indonesian subsidiary will be affected (from the U.S. parent’s perspective) by (a) an increase in the risk of the foreign subsidiary and (b)
Wilmette Co. and Niles Co. (both from the United States) are assessing the acquisition of the same firm in Thailand and have obtained the future cash flow estimates(in Thailand’s currency, baht)
Review the capital budgeting example of Spartan, Inc., discussed in this chapter. Identify the specific variables assessed in the process of estimating a foreign project’s net present value (from a
MNC Parent’s Perspective. Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? What additional factors that normally are not relevant for a purely
Accounting for Risk. What is the limitation of using point estimates of exchange rates in the capital budgeting analysis?List the various techniques for adjusting risk in multinational capital
Uncertainty of Cash Flows. Using the capital budgeting framework discussed in this chapter, explain the sources of uncertainty surrounding a proposed project in Hungary by a U.S. firm. In what ways
Accounting for Risk. Your employees have estimated the net present value of project X to be $1.2 million.Their report says that they have not accounted for risk, but that with such a large NPV, the
Impact of Exchange Rates on NPV.a. Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany
Impact of Financing on NPV. Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.
September 11 Effects on NPV. In August 2001, Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In response to the September 11, 2001, terrorist
Assessing a Foreign Project. Huskie Industries, a U.S.-based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing
Relevant Cash Flows in Disney’s French Theme Park. When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park
Capital Budgeting Logic. Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated
Impact of Reinvested Foreign Earnings on NPV. Flagstaff Corp. is a U.S.-based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10
Capital Budgeting Example. Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for 3 years. During the
Impact of Financing on NPV. Ventura Corp., a U.S.-based MNC, plans to establish a subsidiary in Japan.It is very confident that the Japanese yen will appreciate against the dollar over time. The
Accounting for Changes in Risk. Santa Monica Co., a U.S.-based MNC, was considering establishing a consumer products division in Germany, which would be financed by German banks. Santa Monica
Estimating the NPV. Assume that a less developed country called LDC encourages direct foreign investment (DFI) in order to reduce its unemployment rate, currently at 15 percent. Also assume that
Impact of Asian Crisis. Assume that Fordham Co. was evaluating a project in Thailand (to be financed with U.S. dollars). All cash flows generated from the project were to be reinvested in Thailand
Accounting for Exchange Rate Risk. Carson Co. is considering a 10-year project in Hong Kong, where the Hong Kong dollar is tied to the U.S. dollar.Carson Co. uses sensitivity analysis that allows for
Decisions Based on Capital Budgeting. Marathon, Inc., considers a 1-year project with the Belgian government. Its euro revenue would be guaranteed. Its consultant states that the percentage change in
Estimating Cash Flows of a Foreign Project.Assume that Nike decides to build a shoe factory in Brazil; half the initial outlay will be funded by the parent’s equity and half by borrowing funds in
Break-even Salvage Value. A project in Malaysia costs $4 million. Over the next 3 years, the project will generate total operating cash flows of $3.5 million, measured in today’s dollars using a
Capital Budgeting Analysis. Zistine Co. considers a 1-year project in New Zealand so that it can capitalize on its technology. It is risk averse but is attracted to the project because of a
Capital Budgeting with Hedging. Baxter Co.considers a project with Thailand’s government. If it accepts the project, it will definitely receive one lump-sum cash flow of 10 million Thai baht in 5
Capital Budgeting and Financing. Cantoon Co.is considering the acquisition of a unit from the French government. Its initial outlay would be $4 million. It will reinvest all the earnings in the unit.
Sensitivity of NPV to Conditions. Burton Co., based in the United States, considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs (SF) in 1
Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in 1 year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk-averse and
NPV of Partially Hedged Project. Sazer Co.(a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and
Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal
Erie Co. has most of its business in the United States, except that it exports to Belgium. Its exports were invoiced in euros (Belgium’s currency)last year. It has no other economic exposure to
Using the cost and revenue information shown for DeKalb, Inc., on the next page, determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for
Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange rate. It believes that the impact may occur
Spratt Co.(a U.S. firm) attempts to determine its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:where SP represents the
Assume the euro’s spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. While these firms concentrate on business in the United States,
Harz Co. (a U.S. firm) has an arrangement with a Chinese company in which it purchases products from them every week at the prevailing spot rate, and then sells the products in the United States
Assume that Maine Co.(a U.S. firm) measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:where SP represents the
Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros.
Yazoo, Inc., is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $.01. The yen exchange rate was $.008 three
Explain how firms can benefit from forecasting exchange rates,
Describe the common techniques used for forecasting,
Explain how forecasting performance can be evaluated.
An MNC’s cash flows and therefore its valuation can be affected by expected exchange rate movements (as explained in Chapter 1). Sanoma Co. is a U.S.-based MNC that wants to assess how its

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