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business
international financial management

Questions and Answers of International Financial Management

Interaction between Financing and Invoicing Policies Assume that Hurricane, Inc., is a U.S.company that exports products to the United Kingdom, invoiced in dollars. It also exports products to
Cost of Financing Assume that Seminole, Inc., considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the
Bond Financing Analysis Hawaii Co. 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, Inc., can issue bonds in either U.S. dollars or in Swiss francs.Dollar-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominated bonds would
Financing Decision Cuanto Corp. is a U.S. drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are
Exchange Rate Effects Katina, Inc., is a U.S.firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on dollar-denominated bonds. What is the most
Financing That Reduces Exchange Rate Risk Kerr, Inc., a major U.S. exporter of products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at
Borrowing Combined with Forward Hedging Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling
Bond Offering Decision Columbia Corp. is a U.S. 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
Exchange Rate Effectsa. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm.b. Explain how a U.S.–based
Risk from Issuing Foreign Currency-Denominated Bonds What is the advantage of using simulation to assess the bond financing position?
Floating Rate Bondsa. What factors should be considered by a U.S. 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
Long-term interest rates in some Latin American countries tend to be much higher than those of industrialized countries. Why do you think some projects in these countries are feasible for local
A respected economist recently predicted that even though Japanese inflation would not rise, Japanese interest rates would rise consistently over the next 5 years.Paxson Co., a U.S. firm with no
Some large companies based in Latin American countries could borrow funds (through issuing bonds or borrowing from U.S. banks) at an interest rate that would be substantially less than the interest
Tulane, Inc. (based in Louisiana), is considering issuing a 20-year Swiss franc-denominated bond. The proceeds are to be converted to British pounds to support the firm’s British operations.
Explain why a firm may issue a bond denominated in a currency different from its home currency to finance local operations. Explain the risk involved.
Cost of Equity Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all the equity to be obtained in the United States to finance a new project. The project’s
Change in Cost of Capital Assume that the parent of Naperville Co. will use equity to finance a project in Switzerland, while the parent of Lombard Co. will rely on a dollar-denominated loan finance
MNC’s Cost of Capital Slater Co. is a U.S.–based MNC that finances all operations with debt and equity.It borrows U.S. funds at an interest rate of 11 percent per year. The long-term risk-free
MNC’s Cost of Capital Sandusky Co. is based in the United States. About 30 percent of its sales are from exports to Portugal. Sandusky Co. has no other international business. It finances its
Measuring the Cost of Capital Messan Co.(a U.S. firm) borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The long-term annualized risk-free rate in the United States is 6
Cost of Capital and Risk of Foreign Financing Vogl Co. is a U.S. firm that conducts major importing and exporting business in Japan, whereby all transactions are invoiced in dollars. It obtained debt
Sensitivity of Foreign Project Risk to Capital Structure Texas Co. produces drugs and plans to acquire a subsidiary in Poland. This subsidiary is a lab that would perform biotech research. Texas Co.
Nebraska requires a rate of return of at least 20 percent on its invested equity for this project to be worthwhile. Determine the NPV of this project. Should Nebraska pursue the project?
Assessing Foreign Project Funded with Debt and Equity Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentine pesos (AP) at the end of each of the next
Financing with Foreign Equity Orlando Co.has its U.S. business funded with dollars with a capital structure of 60 percent debt and 40 percent equity. It has its Thailand business funded with Thai
Integrating Cost of Capital and Capital Budgeting Zylon Co. is a U.S. firm that provides technology software for the government of Singapore.It will be paid S$7 million at the end of each of the next
Cost of Foreign Debt versus Equity Carazona, Inc., is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiary’s operations in Indonesia. However, the cost of debt
Financing in a High-Interest-Rate Country Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80
Financing Decision Forest Co. produces goods in the United States, Germany, and Australia and sells the goods in the areas where they are produced. Foreign earnings are periodically remitted to the
Financing Decision In recent years, several U.S.firms have penetrated Mexico’s market. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates
Interaction between Financing and Investment Charleston Corp. is considering establishing a subsidiary in either Germany or the United Kingdom. The subsidiary will be mostly financed with loans from
Nike’s Cost of Capital If Nike decides to expand further in South America, why might its capital structure be affected? Why will its overall cost of capital be affected?
Effects of September 11 Rose, Inc., of Dallas, Texas, needed to infuse capital into its foreign subsidiaries to support their expansion. As of August 2001, it planned to issue stock in the United
Cost of Equity Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bonds yield 2 percent. Based on this
Costs of Capital across Countries Explain why the cost of capital for a U.S.–based MNC with a large subsidiary in Brazil is higher than for a U.S.–based MNC in the same industry with a large
Financing Tradeoffs Pullman, Inc., a U.S. firm, has been highly profitable, but prefers not to pay out higher dividends because its shareholders want the funds to be reinvested. It plans for large
Financing Decision Veer Co. is a U.S.–based MNC that has most of its operations in Japan. Since the Japanese companies with which it competes use more financial leverage, it has decided to adjust
Financing Decision Drexel Co. is a U.S.–based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could
Target Capital Structure LaSalle Corp. is a U.S.–based MNC with subsidiaries in various less developed countries where stock markets are not well established. How can LaSalle still achieve its
Capital Structure and Agency Issues Explain why managers of a wholly owned subsidiary may be more likely to satisfy the shareholders of the MNC.
Cost of Capital Explain how characteristics of MNCs can affect the cost of capital.
Local versus Global Capital Structure Why might a firm use a “local” capital structure at a particular subsidiary that differs substantially from its“global” capital structure?
Country Differences Describe general differences between the capital structures of firms based in the United States and those of firms based in Japan. Offer an explanation for these differences.
Optimal Financing Wizard, Inc., has a subsidiary in a country where the government allows only a small amount of earnings to be remitted to the United States each year. Should Wizard finance the
Capital Structure of MNCs Present an argument in support of an MNC’s favoring a debt-intensive capital structure. Present an argument in support of an MNC’s favoring an equity-intensive capital
Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods in an undeveloped country. Assume that the host country’s economy is very dependent on oil prices,
Atlanta, Inc., has a large subsidiary in Venezuela, where interest rates are very high and the currency is expected to weaken. Assume that Atlanta perceives the country risk to be high. Explain the
Duever Co. (a U.S. firm) noticed that its financial leverage was substantially lower than that of most successful firms in Germany and Japan in the same industry. Is Duever’s capital structure less
Lynde Co. is a U.S.–based MNC with a large subsidiary in the Philippines financed with equity from the parent. In response to news about a possible change in the Philippine government, the
When Goshen, Inc., focused only on domestic business in the United States, it had a low debt level.As it expanded into other countries, it increased its degree of financial leverage (on a
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
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
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
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
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
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 to
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
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
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.
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 dinars; the dinar is currently valued at
JCPenney’s Country Risk Analysis. Recently, JCPenney decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before making its expansion
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 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
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 exchange
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. 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 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
Managing Country Risk Why do some subsidiaries maintain a low profile as to where their parents are located?
Reducing Country Risk Explain some methods of reducing exposure to existing country risk, while maintaining the same amount of business within a particular country.
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
Micro-assessment Explain the micro-assessment of 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.
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
Diversifying Away Country Risk Why do you think that an MNC’s strategy of diversifying projects internationally could achieve low exposure to country risk?
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.
Country Risk Assessment Describe the steps involved in assessing country risk once all relevant information has been gathered.
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. Identify
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 any
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.
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. 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
Divestiture of a Foreign Subsidiary Ved Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. It will soon decide whether to divest the subsidiary. One
Governance of MNCs by Shareholders Explain the various ways in which large shareholders can attempt to govern an MNC and improve its management.
Poison Pills and Takeovers Explain how a foreign target could use poison pills to prevent a takeover or change the terms of a takeover.
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
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
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),
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
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
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 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
Foreign Acquisition Decision Florida Co.produces software. Its primary business in Boca Raton is expected to generate cash flows of $4 million at the end of each of the next 3 years, and Florida
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
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
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
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 17

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