Questions and Answers of International Financial Management 14th

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
Two managers of Marshall Ltd 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 by
Select three articles from the online FDI magazine(registration for the search function is free) at http://www.fdimagazine.com/. For search-words choose well-known MNCs or countries. For each article
FDI location decision. Pimlico Ltd is a UK firm with a Chinese subsidiary that produces mobile phones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan,
FDI strategy. JC Penney (a real US company) has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal,
Host government incentives for FDI. Why would foreign governments provide MNCs with incentives to undertake FDI there?
FDI strategy. Once an MNC establishes a subsidiary, FDI remains an ongoing decision. What does this statement mean?
Disney’s FDI 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?
Motives for FDI. Starter Ltd (UK) produces sportswear that is licensed by professional sports teams. It recently decided to expand in Europe. What are the potential benefits for this firm from using
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
FDI strategy. Luigi SpA (an Italian company) has decided to establish a subsidiary in Taiwan that will produce stereos and sell them there. It expects that the cost of producing these stereos will be
Consider the effects on FDI of a major political incident involving the host country of the MNC making the investment.
Opportunities in less developed countries. Offer your opinion on why economies of some less developed countries with strict restrictions on international trade and FDI are somewhat independent from
Capitalizing on low-cost labour. Some MNCs establish a manufacturing facility where there is a relatively low cost of labour. Yet, they sometimes close the facility later because the cost advantage
Impact of import restrictions. If the United Kingdom imposed long-term restrictions on imports, would the amount of FDI by non-UK MNCs in the United Kingdom increase, decrease, or be
FDI to reduce cash flow volatility. Rideau Chemical SA and Robert Sarl (both French companies)have similar intentions to reduce the volatility of their cash flows. Rideau implemented a long-range
FDI to achieve economies of scale. Max AG and Marie AG are German automobile manufacturers that desire to benefit from economies of scale. Max has decided to establish distributorship subsidiaries in
Impact of a weak currency on feasibility of FDI.Tilda AB, a Swedish producer of computer disks, plans to establish a subsidiary in the Ukraine in order to penetrate the Middle Eastern market.
Motives for FDI. Describe some potential benefits to an MNC as a result of foreign direct investment(FDI). Elaborate on each type of benefit. Which motives for FDI do you think encouraged Nike (a US
Why would the United Kingdom offer a foreign automobile manufacturer large incentives for establishing a production subsidiary in the United Kingdom? Isn’t this strategy indirectly subsidizing the
Why do you think UK firms commonly use joint ventures as a strategy to enter China?
One UK executive said that Europe was not considered as a location for FDI because of the euro’s value. Interpret this statement.
Offer some reasons why UK firms might prefer to direct their FDI to Latin America rather than Europe.
Offer some reasons why UK firms might prefer to direct their foreign direct investment (FDI) to Europe rather than Latin America.
Vogel recognizes that its year-to-year hedging strategy hedges the risk only over a given year and does not insulate it from long-term trends in the Canadian dollar’s value. It has considered
Assume that the Canadian dollar net inflows may range from C$20 000 000 to C$40 000 000 over the next year.Explain the risk of hedging C$30 000 000 in net inflows. How can Vogel Ltd avoid such a
Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in pound cash flows that would result from hedging the net cash
Assume that today’s spot rate is used as a forecast of the future spot rate one year from now. The New Zealand dollar, Mexican peso and Singapore dollar are expected to move in tandem against the
Based on the information provided, determine Vogel’s net exposure to each foreign currency in dollars.
Offer another solution to hedging the economic exposure in the long run as Jim’s business grows.What are the disadvantages of this solution?
How could Jim adjust his operations to reduce his economic exposure? What is a possible disadvantage of such an adjustment?
Based on your answers to the previous three questions, what actions could Blades take to reduce its level of economic exposure to Thailand?
Now repeat your analysis in question 3 but assume that the US dollar and the Thai baht are perfectly correlated. For example, if the baht depreciates by 5%, the dollar will also depreciate by 5%.
For each of the three possible values of the Thai baht and the dollar, use a spreadsheet to construct a pro forma income statement for the next year. Briefly comment on the level of Blades’
Holt believes that the Thai importer will renew its commitment in two years. Do you think his assessment is correct? Why or why not? Also, assume that the Thai economy returns to the high growth
How will Blades be negatively affected by the high level of inflation in Thailand if the Thai customer renews its commitment for another three years?
Researching MNCs and exposure. The following website provides annual reports of numerous MNCs:http://reportgallery.com. You may also access annual reports via the FT website at http://www.ft.com and
Hedging continual exposure. Consider this common real-world dilemma faced by many firms that rely on exporting. Clearlake Ltd produces its products in its factory in the UK and exports most of the
Assessing economic exposure. Alhambra plc plans to create and finance a subsidiary in Argentina that produces computer components at a low cost and exports them to other countries. It has no other
Managing economic exposure. St Paul Ltd (a UK company) does business in the United Kingdom and New Zealand. In attempting to assess its economic exposure, it compiled the following information.a St
Comparing degrees of translation exposure.Nelson Ltd is a UK firm with annual export sales to Singapore of about £20 million. Its main competitor is Hamilton Ltd, also based in the United Kingdom,
Comparing degrees of economic exposure.Carlton Ltd and Palmer Ltd are UK-based MNCs with subsidiaries in Brazil that distribute medical supplies(produced in the United Kingdom) to customers
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?
Limitations of hedging translation exposure.Bartunek Co. is a US-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain
Hedging translation exposure. Explain how a firm can hedge its translation exposure.
Exchange rate effects on earnings. Explain how an MNC’s consolidated earnings are affected when foreign currencies depreciate.
Tradeoffs when reducing economic exposure.When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain.
Reducing economic exposure. Alright Ltd is a UK-based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of Albany’s
Reducing economic exposure. UVA Ltd is a UKbased MNC that obtains 40% of its foreign supplies from Thailand. It also borrows Thailand’s currency(the baht) from Thai banks and converts the baht to
Reducing economic exposure. Banter plc is an Irish based MNC that obtains 10% of its supplies from US manufacturers. Of its revenues, 60% are due to exports to the US, where its product is invoiced
Lincolnshire Ltd manufactures wholly in the UK and exports 80% of its total production of goods to Latin American countries. Kalafa Ltd sells all the goods it produces to Latin America, but it has a
Cheriton plc has substantial translation exposure in US subsidiaries. The treasurer of Cheriton plc suggests that the translation effects are not relevant because the earnings generated by the US
Neve NV is a Dutch firm with a subsidiary in the United States. It expects that the dollar will depreciate this year. Explain Neve’s translation exposure.How could Neve hedge its translation
Using the information in question 1, give a possible disadvantage of offsetting exchange rate exposure from the export business.
Salem Exporting Ltd (UK) purchases chemicals from UK sources and uses them to make pharmaceutical products that are exported to US hospitals. Salem prices its products in dollars and is concerned
Given Blades’ exporting agreements, are there any long-term hedging techniques Blades could benefit from? For this question only, assume that Blades incurs all of its costs in the United Kingdom.
Could Blades modify its payment practices for the Thai imports in order to reduce its transaction exposure?What is the tradeoff of such a modification?
Could Blades modify the timing of the Thai imports in order to reduce its transaction exposure? What is the tradeoff of such a modification?

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