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multinational business finance

Questions and Answers of Multinational Business Finance

‘Preference shares and loan stocks are much the same.’ Is this statement correct?
Current Volatilities. You wish to price your own options, but you need current volatilities on the euro, British pound, and Japanese yen. Using the following websites, collect spot rates and
Hedging Objectives. All multinational companies will state the goals and objectives of their currency risk management activities in their annual reports.Beginning with the following firms, collect
Changing Translation Practices: FASB. The Financial Accounting Standards Board promulgates standard practices for the reporting of financial results by companies in the United States. It also,
Describe how the consolidation of a multinational firm’s foreign entities creates translation exposure.
Examine the two major methods of translation, including their theoretical and practical differences.
Understand how translation can potentially alter the value of a firm.
Explores how to manage translation exposure, including how one company uses swaps to do so.
Translation. How do MNEs translate foreign currency into functional currency when consolidating their financial statements?
Mitigation. How can a firm mitigate translation exposure?
Hedging against exposure. How do MNEs hedge against translation exposure and foreign exchange exposure?
Subsidiaries’ Functional Currencies. What would be the functional currency of a self-sustaining foreign subsidiary and an integrated foreign subsidiary?
Self-Sustaining Subsidiaries. Explain the two dimensions that determine the translation methods that a parent company would use for consolidating its financial statements.
Functional Currency. What are the factors involved in the determination of the functional currency of a firm?
Translation Methods. What are the two basic methods for translation used globally?
Current Versus Historical. One of the major differences between translation methods is which balance sheet components are translated at which exchange rates, current or historical. Why would
Translating Assets. What are the major differences in translating assets between the current rate method and the temporal method?
Translating Liabilities. What are the major differences in translating liabilities between the current rate method and the temporal method?
Selective Hedging. How do you evaluate the decision of an MNE to hedge its foreign currency receivables only when it believes that its domestic currency will strengthen?
Translation Exposure Management. What are the primary options firms have to manage translation exposure?
Changes in Translation Strategies. What are the various hedging transactions that are available to an MNE that is seeking to hedge the translation exposure of its foreign subsidiaries? Do you think
MNE Exposures. What are various risks faced by MNEs and their subsidiaries?
Realization and Recognition. When would a multinational firm, if ever, realize and recognize the cumulative translation losses recorded over time associated with a subsidiary?
Tax Obligations. How does translation alter the global tax liabilities of a firm? If a multinational firm’s consolidated earnings increase as a result of consolidation and translation, what is the
Inflation and Hyperinflation. Should MNEs be worried about inflation and hyperinflation in countries where they operate? How can they hedge against inflation?
Forecasting. MNEs closely monitor forecasts about interest rates and inflation. How can they profit from such future expectations?
Aidan Turkey (A). Using the facts outlined for Aidan Turkey, assume the exchange rate on January 2, 2016, in Exhibit 11.4 dropped in value from 5.2000/€ to 5.5000/€ (rather than to 6.0000/€).
Aidan Turkey (B). Using the facts outlined for Aidan Turkey, assume as in Problem 11.1 that the exchange rate on January 2, 2016, in Exhibit 11.4 dropped from 5.2000/€ to 5.5000/€ (rather than to
Aidan Turkey (C). Using the facts outlined for Aidan Turkey, assume the exchange rate on January 2, 2016, in Exhibit 11.4 appreciated from 5.2000/€to 4.9000/€. Calculate Aidan Turkey’s
Aidan Turkey (D). Using the facts outlined for Aidan Turkey, assume that the exchange rate on January 2, 2016, in Exhibit 11.4 appreciated from 5.2000/€ to 4.9000/€. Calculate Aidan Turkey’s
Tristan Narvaja, S.A. (A). Tristan Narvaja, S.A., is the Uruguayan subsidiary of a U.S. manufacturing company. Its balance sheet for January 1 follows.The January 1 exchange rate between the U.S.
Tristan Narvaja, S.A. (B). Using the same balance sheet as in Problem 11.5, calculate Tristan Narvaja’s contribution to its parent’s translation loss if the exchange rate on December 31 is
Tristan Narvaja, S.A. (C). Calculate Tristan Narvaja’s contribution to its parent’s translation gain or loss using the current rate method if the exchange rate on December 31 is $U12/$. Assume
Nataja Mumbai Ltd. (A). Nataja Mumbai Ltd., the Indian subsidiary of a Belgian corporation, is a cardiothoracic instruments manufacturer. Nataja manufactures the instruments primarily for the medical
Nataja Mumbai Ltd. (B). Using the original data provided for Nataja Mumbai, assume that the Indian rupee appreciated in value from INR59.39/€ to INR54.50/€ between March 31 and April 1. Assuming
Cairo Ingot, Ltd. Cairo Ingot, Ltd., is the Egyptian subsidiary of Trans-Mediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. Trans-Mediterranean’s
Foreign Sourced Income. If you are a citizen of a country in the eurozone and you receive income from outside your home country—foreign sourced income—how must you report this income? Use the
Translation in the United Kingdom. What are the current practices and procedures for translation of financial statements in the United Kingdom? Visit the Institute of Chartered Accountants in England
Changing Translation Practices: MASB. The Malaysian Accounting Standards Board (MASB) promulgates standard practices for the reporting of financial statements by companies in Malaysia. It also,
Yearly Average Exchange Rates. When translating foreign currency values into U.S. dollar values for individual reporting purposes in the United States, which average exchange rates should you use?
Examine how operating exposure arises in a multinational firm through unexpected changes in corporate cash flows
Analyze how to measure operating exposure’s impact on a business unit through the sequence of volume, price, cost, and other key variable changes
Evaluate strategic alternatives to managing operating exposure
Detail the proactive policies firms use in managing operating exposure
Measurement of Operating Exposure.a. What is the difference between operating exposure and transaction exposure?b. How is operating exposure measured?c. Why is it difficult to measure operating
Operating Exposure versus Transaction Exposure.What are the main differences and similarities between operating exposure and transaction exposure?Which of the two exposures is more relevant for
Unexpected Exchange Rate Changes. Explain why the management of MNEs finds that quantifying and hedging operational exposure are challenging tasks.
Unexpected Exchange Rate Changes. Explain when exchange rate uncertainty does not expose firms to exchange risk.
Static versus Dynamic. Why is static risk insurable while dynamic risk is not insurable?
Operating Versus Financing Cash Flows. According to financial theory, which is more important to the value of the firm, financing or operating cash flows?
Economic Exposure. Economic exposure is highest for MNEs with multiple foreign currency operations.Is economic exposure confined to MNEs or does it involve local firms as well?
Strategic Exposure. Operating or strategic exposure has become a concern of long-term corporate strategy. Which level of management is responsible for mitigating and managing strategic
Managing Operating Exposure. The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned
Managerial Strategic Roles. What are the diversification strategies and financing policies that the management of the firm adopts to mitigate transaction and operating exposure?
Proactive Management. Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly
Currency Switching. Explain how currency switching can offset long-term exposure to a foreign currency.
Currency Risk Sharing. Explain why suppliers are ready to get into currency risk sharing deals with MNEs. How do such deals impact the financial position of both parties?.
Back-to-Back Loans. Back-to-back loans have caused many of the banking crises in emerging economies in the 1990s. What guarantees can firms obtain in order to use this type of foreign exchange hedge?
Currency Swaps. Do currency swaps always hedge against foreign exchange exposure? What other precautions are needed for effective hedging?
Hedging the Unhedgeable. How do some firms attempt to hedge their long-term operation exposure with contractual hedges? What assumptions do they make in order to justify contractual hedging of their
Mauna Loa Macadamia. Mauna Loa Macadamia, a macadamia nut subsidiary of Hershey’s with plantations on the slopes of its namesake volcano in Hilo, Hawaii, exports macadamia nuts worldwide. The
Acuña Leather Goods. DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment
Manitowoc Crane (A). Manitowoc Crane (U.S.)exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The
Manitowoc Crane (B). Assume the same facts as in Problem 12.3. Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum for
MacLoren Automotive. MacLoren Automotive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New
Aidan Turkey—All Domestic Competitors. Using the Aidan Turkey analysis in Exhibits 12.5 and 12.6 where the Turkish lira depreciates, how would prices, costs, and volumes change if Aidan Turkey was
Aidan Turkey—All Foreign Competitors. Aidan Turkey is now competing in a number of international(export) markets, growth markets, in which most of its competitors are foreign. Now how would you
International Aero Engines Turbofan Engines. International Aero Engines is reevaluating its pricing strategy with a number of major customers in Brazil, particularly Embraer S.A. Since International
Hurte-Paroxysm Products, Inc. (A). Hurte-Paroxysm Products, Inc. (HP) of the United States exports computer printers to Brazil, whose currency, the reais (R$), has been trading at R$3.40/US$. Exports
Hurte-Paroxysm Products, Inc. (B). Assume the same facts as in Problem 12.9. HP also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 10%
Centurion Batteries’ Japanese Yen Exposure. Centurion Batteries Ltd. is a privately held battery manufacturer located just outside of Melbourne, Australia.The company is one of the leading
Operating Exposure: Recent Examples. Using the following major periodicals as starting points, find a current example of a firm with a substantial operating exposure problem. To aid in your search,
U.K.’s Company House. To analyze an individual firm’s operating exposure more carefully, it is necessary to have more detailed information available than in the normal annual report. Choose a
Explore the evolution of how corporate strategy and financial globalization may align?
Examine how international portfolio theory and diversification alter the global cost of capital?
Describe how international portfolio investors impact the cost of capital?
Compare the weighted average cost of capital for an MNE with its domestic counterpart?
Analyze the illustrative and seminal case of Novo Industri’s strategy to internationalize its cost and availability to capital?
Segmented Markets. What are the strategies that MNEs can adopt in order to access capital in segmented markets?
Dimensions of Capital. Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets.What are the dimensions of a strategy to capture
MNEs’ Capital. When compared to domestic firms, why do MNEs enjoy more capital availability and lower capital costs?
Equity Cost and Risk. What are the classifications used in defining risk in the estimation of a firm’s cost of equity?
Equity risk premiums.a. Why is equity risk premium important to investors?b. Why is it necessary to use one consistent measurement of risk premiums?
Portfolio Management Diversification. Why do portfolio managers often add securities issued on emerging markets in spite of the high risks associated with these markets?
International Portfolio Management. What is the main advantage that international portfolio managers have compared to portfolio managers limited to domestic-only asset allocation?
International CAPM. What are the fundamental distinctions that the international CAPM tries to capture that traditional domestic CAPM does not?
Dimensions of Asset Allocation. Portfolio asset allocation can be accomplished along many dimensions depending on the investment objective of the portfolio manager. Identify the various dimensions.
Market Liquidity. What happens to a firm’s marginal cost of capital as it expands in an illiquid market?How can it overcome these difficulties?
Market Segmentation. What is market segmentation, and what are its main causes?
Market Illiquidity and Segmentation. Explain why illiquidity and segmentation lead to financial market imperfections. Can MNEs tackle market imperfections?
MNEs Internationalizing the Cost of Capital. What are the factors that determine the efficiency of MNEs’ strategies for internationalizing their cost of capital? Explain how such strategies have
Cost of Capital for MNEs. Do multinational firms have a higher or lower cost of capital than their domestic counterparts? Is this surprising?
Multinational Use of Debt. Do multinational firms use relatively more or less debt than their domestic counterparts? Why?
MNEs’ Systemic Risk. Explain why emerging market MNEs have lower systemic risks in comparison to their developed market MNEs.
The “Paradox.” What is the paradox?
Emerging Market MNEs. Explain why some firms in MNEs have managed to expand their operations outside their national borders. How can MNEs in emerging markets raise extra funds to finance their
Novo and Segmented Capital Markets. What were the impacts on Novo as a result of operating in a segmented market? What were the primary causes of the market segmentation?
Novo Escapes. Ultimately, what actions did Novo take to escape its segmented market?
Electrolux of Sweden. Kristian Thalen has just joined the corporate treasury group at Electrolux of Sweden, a multinational Swedish appliance maker.Electrolux is considering making an offer for
McLaren’s IPO and WACC. McLaren, the famous high-performance automotive group, launched its initial public offering (IPO) on October 20, 2019.Although the share price had initially risen to over 60

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