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international financial management 14th

Questions and Answers of International Financial Management 14th

Effective financing rate. Boca, SA (Spain) needs 4 million euros for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese
IRP application to short-term financing. 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
Break-even financing. Akron Ltd needs dollars.Assume that the local one-year loan rate is 15%, while a one-year loan rate on euros is 7%. By how much must the euro appreciate to cause the loan in
IRP application to short-term financing.a If interest rate parity does not hold, what strategy should Connect Ltd consider when it needs short-term financing?b Assume that Connect Ltd needs pounds.
Effective financing rate. How is it possible for a firm to incur a negative effective financing rate?
Short-term financing analysis. Assume that Tilly Ltd needs £3 million for a one-year period. Within one year, it will generate enough British pounds to pay off the loan. It is considering three
Financing and exchange rate risk. How can a UK firm finance in euros and not necessarily be exposed to exchange rate risk?
Probability distribution.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
Foreign financing.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
Omaha SA (France) plans to finance its UK operations by repeatedly borrowing two currencies with low interest rates whose exchange rate movements are highly correlated. Will the variance of the
The spot rate of the Australian dollar is £0.40. The one-year forward rate of the Australian dollar is£0.38. The Australian one-year interest rate is 9%.Assume that the forward rate is used to
Assume that the Japanese one-year interest rate is 5%, while the UK one-year interest rate is 8%. What percentage change in the Japanese yen would cause a UK firm borrowing yen to incur the same
Using the information in question 1 and assuming a 50% chance of either scenario occurring, determine the expected value of the effective financing rate.
Assume that the interest rate in New Zealand is 9%.A UK firm plans to borrow New Zealand dollars, convert them to UK pounds, and repay the loan in one year. What will be the effective financing rate
Compare and contrast the web provision for exporters from the UK and the US. For the US provision visit http://www.exim.gov and for the UK provision visit http://www.ecgd.gov.
Letters of credit. Channel Traders (UK) is a firm based in Grimsby, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a
Impact of a financial crisis. What steps should Brunch take if a crisis occurs in country X which is a major exporting destination for Brunch Ltd?
Government programmes. What motivates a government to establish/intervene in the credit markets?
Should the World Bank be in charge of providing finance for exports?
Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
ECGD a What is the role today of the ECGD?b Describe the basis of the political opposition to the ECGD.
Role of factors. What is the role of a factor in international trade transactions?
Banker’s acceptances.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
Explain how the Export-Import Bank can encourage UK firms to export to less developed countries where there is political risk.
Explain the difference in the risk to the exporter between accounts receivable financing and factoring.
Long-term cost of debt. The Bloomberg website provides interest rate data for many countries and various maturities. Its address is http://www.bloomberg.com.Go to the ‘Market Data’ section of the
Interest rate swap. Janutis plc has just issued fixed rate debt at 10%. 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
Swap agreement. Grant plc is a well-known UK firm that needs to borrow 10 million dollars to support a new business in the United States. However, it cannot obtain financing from US banks because it
Interaction between financing and invoicing policies. Assume that Hurricane plc is a UK company that exports products to the United States, invoiced in pounds. It also exports products to Denmark,
Cost of financing. Assume that Seminole plc considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7%, even though it has no incoming cash flows to cover the bond
Bond financing analysis. Hatton Ltd just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The
Bond financing analysis. Sambuka plc can issue bonds in either UK pounds or in Swiss francs.Pound-denominated bonds would have a coupon rate of 15%; Swiss franc-denominated bonds would have a coupon
Financing decision. Ivax plc (based in Germany) is a drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European
Exchange rate effects. Katina plc is a UK firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on pound-denominated bonds. What is the most
Financing that reduces exchange rate risk. Kerr plc, a major UK exporter of products to Japan, denominates its exports in pounds and has no other international business. It can borrow pounds at 9%to
Currency diversification. Why would a UK firm consider issuing bonds denominated in multiple currencies?
Bond offering decision. Columbia plc is a UK company with no foreign currency cash flows. It plans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in UK
Exchange rate effects a Explain the difference in the cost of financing with foreign currencies during a strong-pound period versus a weak-pound period for a UK firm.b Explain how a UK-based MNC
Risk from issuing foreign currency-denominated bonds. What is the advantage of using simulation to assess the bond financing position?
Floating rate bonds a What factors should be considered by a UK firm that plans to issue a floating rate bond denominated in a foreign currency?b Is the risk of issuing a floating rate bond higher or
Political considerations Enter the terms: ‘Financial crisis’, ‘chronology’, ‘date’ and ‘country’. Select a reasonably long article in a search engine of newspaper articles. Your
Integrating country risk and capital budgeting.Tovar Cie is a French firm that has been asked to provide consulting services to help Gredia Company(in Country Y) improve its performance. Tovar would
The risk and cost of potential kidnapping. In 2004 following the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local
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
How country risk affects NPV. Monk Ltd 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
JC Penney’s country risk analysis. Recently, JC Penney (an actual US company) decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before
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 dollar along with the
How country risk affects NPV. Hoosier Ltd is planning a project in the United States. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the United
Buxton plc is thinking of investing in Country Y. The expected return is 20% with a standard deviation due to currency movements of 5%. However, ten years ago Country Y’s currency fell by 40%. How
Country risk ratings. Assauer Ltd would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below.Assauer has assigned an
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 analysis. When Jerrik ApS (Danish)considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk
9 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
Microassessment. Explain the microassessment of country risk.
Country risk analysis. Niagra Ltd 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. Niagra
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
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
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.
Forms of country risk. List some forms of country 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. Identify
5 Rockford Ltd plans to expand its successful business by establishing a subsidiary in France. However, it is concerned that after two years the French government will either impose a special tax on
Explain how a terrorist attack might affect an MNC.
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?
Using the information in question 1, explain how financial risk factors could adversely affect the profitability of Key West Co.
Key West Co. (a US company) 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
MNC investment prospects. Consult the online section for the Foreign Investment Magazine at http://www.fdimagazine.com/ and register to use the search option. Selecting articles from this site,
million euros today that would be used to cover a portion of the acquisition. In this case, it would have to pay a lump sum total of 7 million euros at the end of eight years to repay the loan. There
Capital budgeting and financing. Cantoon plc is considering the acquisition of a unit from the French government. Its initial outlay would be £2.6 million. It will reinvest all the earnings in the
Capital budgeting with hedging. Baxter Co. (US)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
Capital budgeting analysis. Wolverine GmbH(Germany) currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered
Accounting for uncertain cash flows. Blustream Ltd considers a project in which it will sell the use of its technology to firms in South Africa. It already has received orders from South African
Capital budgeting analysis. Zistine plc considers a one-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
Break-even salvage value. A project in Malaysia costs £4 000 000. Over the next three years, the project will generate total operating cash flows of£3 500 000, measured in today’s pounds using a
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
Decisions based on capital budgeting. Marathon plc considers a one-year project with the Belgian government. Its euro revenue would be guaranteed.Its consultant states that the percentage change in
Accounting for exchange rate risk. Carson Ltd is considering a ten-year project in Hong Kong, where the Hong Kong dollar is tied to the US dollar. Carson Ltd uses sensitivity analysis that allows for
Capital budgeting analysis. A project in South Korea requires an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion
Tax effects on NPV. When considering the implementation of a project in one of various possible countries, what types of tax characteristics should be assessed among the countries? (See the chapter
Impact of Asian crisis. Assume that Fordham plc was evaluating a project in Thailand (to be financed with British pounds). All cash flows generated from the project were to be reinvested in Thailand
PepsiCo’s project in Brazil. PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their
Estimating the NPV. Assume that a less developed country called LDC encourages foreign direct investment(FDI) in order to reduce its unemployment rate, currently at 15%. Also assume that several MNCs
Accounting for changes in risk. Santa Monica SA(Portugal) was considering establishing a consumer products division in Germany, which would be financed by German banks. Santa Monica completed its
Impact of financing on NPV. Ventura plc, a UKbased MNC, plans to establish a subsidiary in Japan.It is very confident that the Japanese yen will appreciate against the pound over time. The subsidiary
Capital budgeting example. Cleto Srl (Spain) has just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Cleto intends to leave the plant open for three
Impact of reinvested foreign earnings on NPV.Greet BV is a Dutch-based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next ten years
Capital budgeting logic. Lehigh SA (France) established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh
Capital budgeting logic. Athens GmbH (Germany)established a subsidiary in the United Kingdom that was independent of its operations in Germany. The subsidiary’s performance was well above what was
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
Assessing a foreign project. Huskie SA, a Frenchbased MNC, considers purchasing a small manufacturing company in the US that sells products only within the States. Huskie has no other existing
Impact of events. An MNC in the euro area is thinking of investing outside the area. For each continent, think of events outside the project that might adversely affect cash flows.
Impact of financing on NPV. Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.
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
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
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 UK firm. In what ways is
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
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
Review the capital budgeting example of Spartan Ltd discussed in this chapter. Identify the specific variables assessed in the process of estimating a foreign project’s net present value (from a UK
William Ltd and Niles Ltd (both from the UK) are assessing the acquisition of the same firm in Thailand and have obtained the future cash flow estimates (in Thailand’s currency, baht) from the
Explain how the present value of the salvage value of an Indonesian subsidiary will be affected (from the UK parent’s perspective) by: (a) an increase in the risk of the foreign subsidiary, and (b)
Hampshire Ltd produces small computer components, which are then sold to India. It plans to expand by establishing a plant in India that will produce the components and sell them locally. This plant
Pinpoint the parts of a multinational capital budgeting analysis for a proposed sales distribution centre in Ireland that are sensitive when the forecast of a stable economy in Ireland is revised to

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