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business
international financial management

Questions and Answers of International Financial Management

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
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
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
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
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
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
Uncertainty Surrounding a Foreign Target Refer to question
Valuing a Foreign Target Blore, Inc., a U.S.–based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like
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
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
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
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
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
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?
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
Why might a U.S.–based MNC prefer to establish a foreign subsidiary rather than acquire an existing firm in a foreign country?
What are some of the barriers to international acquisitions?
Explain why more acquisitions have taken place in Europe in recent years.
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
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.
Capital Budgeting with Hedging Baxter Co.considers a project with Thailand’s government. If it accepts the project, it will definitely receive one lumpsum cash flow of 10 million Thai baht in 5
How is the project’s NPV affected?e. What is the break-even salvage value of this project if Wolverine uses the original financing proposal and funds are not blocked?f. Assume that Wolverine
Capital Budgeting Analysis. Wolverine Corp.currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess
Accounting for Uncertain Cash Flows Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that
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 government
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
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, Inc., considers a 1-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 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
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 and
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 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 for
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 direct foreign investment (DFI) in order to reduce its unemployment rate, currently at 15 percent. Also assume that
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
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
Capital Budgeting Example Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to leave the plant open for 3 years. During the
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 Logic Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated that
Capital Budgeting Logic Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States.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 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
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
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 NPVa. 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 U.S. 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, Inc., discussed in this chapter. Identify the specific variables assessed in the process of estimating a foreign project’s net present value (from a
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,
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)
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
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
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
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
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
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, which
DFI Strategy JCPenney has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand.
Host Government Incentives for DFI Why would foreign governments provide MNCs with incentives to undertake DFI there?
DFI Strategy Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does this statement mean?
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?
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
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
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 cost
Effects of September 11 In August 2001, Ohio, Inc., considered establishing a manufacturing plant in central Asia, which would be used to cover its exports to Japan and Hong Kong. The cost of labor
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
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
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 unchanged?Explain.
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 percent
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 subsidiaries
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
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
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
Sources of Supplies and Exposure to Exchange Rate Risk Laguna Co. (a U.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
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
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
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.
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
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
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 U.S.–based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value.
Hedging Translation Exposure Explain how a firm can hedge its translation exposure.
Exchange Rate Effects on Earnings Explain how a U.S.–based 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 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
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 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,
Long-Term Hedging San Fran Co. imports products. It will pay 5 million Swiss francs for imports in 1 year. Mateo Co. will also pay 5 million Swiss francs for imports in 1 year. San Fran Co. and Mateo
Long-Term Hedging Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10
Forward versus Option Hedge Assume that interest rate parity exists. Today, the 1-year interest rate in Japan is the same as the 1-year interest rate in the United States. You use the international
Money Market versus Put Option Hedge Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in 1 year. The 1-year U.S. interest rate is 5 percent when investing
Long-Term Forward Contracts Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity, and is 13 percent in Mexico for
PPP and Hedging with Call Options Visor, Inc.(a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in 1 year. Interest rate parity presently exists.
Comparison of Hedging Techniques You own a U.S. exporting firm and will receive 10 million Swiss francs in 1 year. Assume that interest parity exists.Assume zero transaction costs. Today, the 1-year
Hedging with Straddles versus Strangles (See the chapter appendix.) Refer to the previous problem.Assume that Brooks believes the cost of a long straddle is too high. However, call options with an
Hedging with Straddles (See the chapter appendix.) Brooks, Inc., imports wood from Morocco.The Moroccan exporter invoices in Moroccan dirham.The current exchange rate of the dirham is $.10. Brooks
Hedging with a Bear Spread (See the chapter appendix.) Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the
Hedging with a Bull Spread (See the chapter appendix.) Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500.
Hedging with Forward versus Option Contracts Assume interest rate parity exists. Today, the 1-year interest rate in Canada is the same as the 1-year interest rate in the United States. Utah Co. uses

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