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business
multinational business finance

Questions and Answers of Multinational Business Finance

Identify the expected future cash flows generated over the life of the investment, including the initial cost of investment .
How can the multinational corporation protect its competitive advantages in the international marketplace?
What is an international investment agreement? What conditions might it include?
What is the difference between a macro and a micro country risk? Give an example of each. Why is this distinction important for the cost of capital?
What are the advantages and disadvantages of foreign direct investment, international acquisitions and mergers, and international joint ventures?
The spot exchange rate between won and dollars is. Nominal interest rates are equal in the United States and South Korea, so through interest rate parity. The Korean subsidiary of a U.S. parent
Consider Problem 11.3. The owner often has Canadian visitors that prefer to pay in Canadian dollars. Her intuition tells her that the Canadian dollar will close above the $1.10/C$ 6-month forward
Consider Problem 11.3. The accounts receivable balance is an anticipated receipt of €60,000 in six months from a German tourist agency. The tourist agency insists on paying in euros.Silver Saddle
Advanced problem on pricing strategy. Dow of the United States makes bungee cords for sale in the United Kingdom. Dow charges $6 per cord, or £4 at the $1.50/£ spot rate. At this price, Dow expects
Sterling & Company is a silverware manufacturer based in the town of Sevenoaks in the United Kingdom. Although Sterling exports to companies around the world, its biggest customers are in the United
What is the price elasticity of demand? Why is it important?
List financial market alternatives for hedging operating exposure to currency risk. How effective are these in hedging the cash flows of the firm's nonmonetary assets?
State how each of the following firms are affected by a real depreciation of the domestic currency: (a) an exporter, (b) an importer, and (c) a diversified MNC competing in globally competitive
What is an integrated market? What is a segmented market?Why is this distinction important in multinational financial management?
Hippity Hops is a Slovakian-based grower of high-quality hops that uses the euro as its functional currency. Czech brewer Pilsner Urquel promises to pay Hippity Hops CZK40 million in one year. The
Suppose percent, and percent. You are to receive £100,000 in one year on a shipment of Cornish hens.a. Form a forward market hedge. Identify which currency you are buying and which currency you are
Answer the following questions based on the information in Problem 9.3.a. How can Rupert hedge his dollar exposure with currency futures? What is the difference between a futures contract and a
You recently graduated and accepted a position in the receivables division of Ex-Im-Age Corporation, a software company located in California and specializing in icon-based software. Ex-Im-Age has
Define or give an example of each of the following: (a)currency forwards, (b) currency futures, (c) currency options, (d)currency swaps, and (e) money market hedges.
What is multinational netting? Why do multinational corporations use it?
What is a risk (or payoff) profile?
Taking the same circumstances as in Problem 14.1, without the takeover CDD Ltd had expected annual end-of-year cash inflows of £1.5m for ever, and an estimated cost of capital of 18 per cent
ABB plc has a cost of capital of 20 per cent p.a., and it is expected to generate annual end of year cash inflows of £12m a year for ever.The capital projects department has identified a smaller
Generally, have mergers in the UK been successful?
What is the difference between a sell-off and a spin-off?
What is the difference between a management buy-in and a management buyout?
What is the general stance of UK monopolies regulation with regard to mergers and takeovers?
Bidder plc is expected to generate net positive cash flows of £1m p.a. for ever. The level of risk associated with these cash flows is perceived by the capital market as justifying a rate of return
The MSCI world stock market index in Exhibit
What is home bias? What might be its cause?
Do nations with large equity markets also tend to have large bond markets? Are there notable exceptions? Refer to Exhibits 18.2 and 18.5 for a comparison.
are selling at 105.66 percent of par value.a. What is the yield to maturity using the bond equivalent yield calculation of the United States?b. What is the yield to maturity using Europe's effective
Suppose Daimler's bonds in Problem
Connect each term to its definition or description.a. Acquisition of assets A. Creation of an entirely new firmb. Acquisition of stock B. Combines assets & liabilities of two firmsc. Acquisition
What is synergy?
How might Grolsch's decisions be different in Problems 16.1, 16.2 and 16.6 if Grolsch's actions influence its competitors'actions, and vice versa?
You own land in Kenya on which five tanzanite mines can be constructed. Each mine costs 20 million Kenyan schillings (KS)and will yield either 1,000 or 2,000 carats (ct) of tanzanite with equal
Grolsch management has gone ahead with the investment in Problem 16.1. The market has grown increasingly competitive, and nearly all of the brewery investments in Central Europe are losing money. To
Solve Problem 16.4 assuming a nominal yen discount rate of 10 percent per year and a corporate tax rate of percent. The initial cash outflow of ¥600,000 will be capitalized on the balance sheet and
You have discovered a mountain of guano in Japan. Up to five guano mines could be constructed on the mountain. Each mine costs ¥600,000 and is expected to yield 150 ounces of guano in one year. The
A proposed automotive plant will produce automobiles in Brazil. The Brazilian currency is the real. The following facts apply.Initial investment ; rises by 20% each year Price of automobile per
The “Dubi Dubbel” investment of Problem 16.1 is one of five brewery investments that Grolsch is considering. The quality of the beer produced in Dubiety will determine the quality of beer that
What are the shortcomings of option pricing methods for valuing real assets?de whether to begin production today or in one year. The following facts apply:Initial investment ; rises by 10% each year
What are assets-in-place? What are growth options?
Are taxes the most important consideration in global location decisions? What other considerations might be important?
United Kingdom's Vodafone Group needs a cost of capital estimate to evaluate an investment in Brazil's mobile phone market. Vodafone's experience investing in mobile phone infrastructure in emerging
As the People's Republic of China evolves toward a market economy, capital markets will begin to displace the government as the primary source of funds for investment. Nevertheless, the Chinese
Find Grand Pet's WACC under each of the following scenarios.a. Domestic financing: Grand Pet has a market value debt-to-equity ratio of 33 percent if funds are raised within the United Kingdom. Grand
Find L'Occitane's WACC under each of the following scenarios.a. L'Occitane has a market value debt-to-value ratio of 40 percent. L'Occitane's pretax borrowing cost on new long-term debt in France is
Suppose the systematic risk of a domestic investment is , where is the correlation between domestic asset returns and world market returns, is the standard deviation of returns to the domestic asset,
What is project finance, and when is it an appropriate source of funds?
What is a targeted registered offering, and why is it useful to the MNC?
What is a capital market liberalization? What is its effect on (a) the correlation of emerging market returns with the world return, (b) local market volatility, and(c) the local cost of capital?
An important input into the required return on equity in the security market line is the equity risk premium. How large is the equity premium?
Does the required return on a foreign project depend on who is investing the money or on where the money is being invested?
Does corporate financial policy matter in a perfect financial market? What distinguishes an integrated from a segmented capital market?
Consider the investment in Problem 13.1. The Chinese government insists that you build an airport near this project at a cost of CNY 100 million. Should you still accept the project?
Consider the investment in China from Problem 13.1.Suppose that in any given year, there is a 10 percent chance that the Chinese government will expropriate your assets. If your assets are
Consider the investment in China from Problem 13.1.Suppose each cash flow generated by the project must be loaned to the China Construction Bank for one year at a zero percent interest rate. China
Consider the investment in China from Problem 13.1. China Construction Bank is willing to provide you with a nonamortizing loan of CNY 600 million at its borrowing rate of 6.09 percent per annum
Consider the investment cash flows in Problem 13.1. The spot rate is . Risk-free bond yields of percent and percent mirror the 2.91 percent inflation differential:.However, nominal required returns
Consider the investment cash flows in Problem 13.1. The spot rate is . Risk-free bond yields of percent and percent mirror the 2.91 percent inflation differential:. However, nominal required returns
Consider the investment in China from Problem 13.1.a. Suppose that a manager expects the following future exchange rates:Using a yuan discount rate of 11.745 percent and the shekel discount rate of
Chofu Fukuhara is the production manager of Asahi Chemicals, a Japanese chemical manufacturer operating throughout Southeast Asia. Fukuhara-san is considering building a chemical plant in Thailand to
You currently live in Land-of-Leisure (currency is the leisure-unit L), and you are considering investing in a diploma-printing shop in a foreign country called Land-ofWork (currency is the work-unit
The following project-specific information is known about investment in a beer brewery in a Western European country that uses the euro.The project lasts 2 years. Operating cash flows are received at
You work for an Israeli company that is considering an investment in China's Sichuan province. The investment yields expected after-tax Chinese new yuan cash flows (in millions) as follows:Expected
Discuss each cell in Exhibit 13.8. What should (or shouldn't)a firm do when faced with a foreign project that fits the description in each cell?
Precision Parts plc is a UK business that makes a small range of components for motor cars. These parts are sold to UK-based manufacturers. The components are made from steel, bought from a UK
Lee plc has just made a sale to an Australian customer for A$500 000, the payment to be made in three months’ time. The current exchange rate is £1 = A$2.6. Nominal interest rates for three months
Pavlov plc has just made a sale to an Australian customer for A$500 000, the payment to be made in three months’ time. The current exchange rate is £1 = A$2.6. Nominal interest rates for three
Planters plc manufactures agricultural implements, components for which are acquired from a number of sources, including some overseas ones. The implements are marketed in the UK and, increasingly,
What is a ‘money market hedge’?
How are the three risks of being involved in international business usually described?
What causes foreign exchange markets not to be price efficient?
What are the four theoretical rules on foreign exchange rates that derive from the law of one price?
Broadly, there are four types of people or organisations that use the foreign exchange market. Who are they?
Why is it claimed that a UK business can achieve its objectives more effectively by internationalising its activities?
Suppose Savvy Fare sells a $1 million receivable to a factor.The receivable is due in six months. The factor charges an upfront fee of 4 percent for purchasing the receivable on a nonrecourse basis,
What is the difference between passive and active FX risk management?
How might our competitors respond to a change in exchange rates?
How has the relationship between exchange rates and operating cash flows changed?
What is likely to happen to exchange rates and to our business in the future?
Monitor performance. Monitor the exposures and revisit as necessary.
Evaluate hedging alternatives. Evaluate the performance of each alternative, given the forecasted distributions and exposures, in order to select and implement a hedging strategy.
To hedge or not. Determine the desirability of hedging, given the firm's estimated risk exposures and risk management objectives.
Estimate sensitivities. Estimate the firm's sensitivities to changes in these currency values.
Identify exposures. Identify currencies to which the firm is exposed, as well as the distribution of future exchange rates for each of these currencies.
Consider Problem 7.4.a. Verify GE's all-in cost by identifying the incremental cash flows of GE's fully covered swap and then calculating the internal rate of return on these cash flows.b. Verify
Consider Problem 7.3.a. Verify JI's all-in cost by identifying the incremental cash flows of JI's fully covered swap and then calculating the internal rate of return on these cash flows.b. Verify
As VP Finance (Europe) at GE Capital, you manage GE's European exposures to currency risk. GE's light bulb plant in Poland generates Polish zloty (Z) after-tax operating cash inflows of Z10 million
Consider the following swap pricing schedule for currency coupon swaps of yen and pounds.Currency Coupon Swap Pricing Schedule (¥/£)Maturity Midrate (in£)3 years 4.12% sa Deduct 5 bps if the bank
A swap bank quotes the following pricing schedule for a Polish zloty coupon (interest rate) swap.Coupon Swap Pricing Schedule (Polish zloty)Maturity Bank Pays Fixed Rate Bank Receives Fixed Rate
Little Prince (LP) has 100 million Brazilian reals (BRL) of 2-year fixed rate debt with a bond equivalent yield of 8.25 percent compounded semiannually. LP prefers floating rate BRL debt, and the
What is a coupon swap?
What is a currency coupon swap?
Rather than varying the maturity of the options as in Problem 6A.4, let's vary the exercise price. Fill in the following table, assuming a 3-month time to expiration and the information from Problem
As head of currency trading at Ball Bearings Bank in London, you need to price a series of options of various maturity on Danish kroner. The current spot rate is .Continuously compounded risk-free
Consider a “December Yen 84 call” on the NASDAQ OMX.Current call price $0.000118/¥Price of underlying asset $0.008345/¥Exercise price $0.008400/¥Risk-free rate (continuously compounded) in
Suppose in Problem 6A.1 that currency markets are unusually volatile. If the true standard deviation of the yen/dollar spot rate is 20 percent, by how much have you under- or overestimated the value

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