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multinational business finance

Questions and Answers of Multinational Business Finance

Analyze how, in equilibrium, the spot and forward currency markets are aligned with interest differentials and differentials in expected inflation.
Law of One Price. Define the law of one price carefully, noting its fundamental assumptions. Why are these assumptions so difficult to apply in the real world in order to apply the theory?
Purchasing Power Parity. Define the two forms of purchasing power parity, absolute and relative.
Big Mac Index. How close does the Big Mac Index conform to the theoretical requirements for a law of one price measurement of purchasing power parity?
Undervaluation and Purchasing Power Parity. According to the theory of purchasing power parity, what should happen to a currency that is undervalued?
Nominal Effective Exchange Rate Index. Explain how a nominal effective exchange rate index is constructed.
Real Effective Exchange Rate Index. What formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index?
Exchange Rate Pass-Through. What is exchange rate pass-through?
Partial Exchange Rate Pass-Through. What is partial exchange rate pass-through, and how can it occur in efficient global markets?
Price Elasticity of Demand. How is the price elasticity of demand relevant to exchange rate pass-through?
The Fisher Effect. Define the Fisher effect. What would it say about real interest rates if markets are open and efficient?
Approximate Form of Fisher Effect. Why is the approximate form of the Fisher effect frequently used instead of the precise formulation? Does this introduce significant analysis error?
The International Fisher Effect. Define the international Fisher effect. Would it discourage local investors from capitalizing on higher foreign interest rates?
Interest Rate Parity. Define interest rate parity. What would it say about interest rates if spot rates and forward rates were the same?
Covered Interest Arbitrage. Ignoring transaction costs, under what conditions will covered interest arbitrage be plausible?
Uncovered Interest Arbitrage. Explain what expectations an investor or speculator would need to undertake an uncovered interest arbitrage investment?
Forward Rate Calculation. If someone you were working with argued that the current forward rate quoted on a currency pair is the market’s expectation of where the future spot rate will end up, what
Forward Rate as an Unbiased Predictor. Some forecasters believe that foreign exchange markets for the major floating currencies are “efficient,” and forward exchange rates are unbiased predictors
Transaction Costs. If transaction costs for undertaking covered or uncovered interest arbitrage were large, how do you think it would influence arbitrage activity?
Carry Trade. The term carry trade is used quite frequently in the business press. What does it mean, and what conditions and expectations do investors need to hold to undertake carry trade
Market Efficiency. Many academics and professionals have tested the foreign exchange and interest rate markets to determine their efficiency. What have they concluded?
Sovereign Credit Risk. Is sovereign credit risk an example of a micro or macro risk? How can it impact MNEs?
Which is more appropriate for the MNE's accounting purposes, the typical end-ot-period currency hedging strategy or the continuing market-value hedging strategy used in delta-neutral hedging?
The number of countries allowing domestic banks and other financial service providers to create and sell financial derivatives for risk management is continually growing. Many enserging markets,
Assume the same identical values hold as in the case of Dayton in the chapter, with the single exception that the \(£ 1,000,000\) exposure is a 90 -day account payable, not account receivable.a.
Tiffany \& Co., the prestigious U.S. luxury item retailer, sells all merchandise to its Japanese retail representative, Matsusoka. Matsusoka has recently changed its purchasing patterns with its
Using the same assumptions as in the previous question, construct a participating forward with a \(65 \%\) participation rate.a. What is the size of the call option that must now be sold to yield a
Lopez Motor Works of Bilbao, Spain, builds automotive transmission subassemblies for a variety of major auto manufacturers in Europe. It imports a critical computerized "brain-chip" for the
Differentiate the nature and frequency of the interest rate risk associated with the following alternative forms of a three-year loan agreement:a. three-year fixed rate loan (no price resets)b.
Use the same assumptions as in the cap valuation demonstrated in the chapter, with the exception that the three month U.S. dollar LIBOR is \(6.250 \%\) (not \(6.000 \%\). State each answer in both
Use the same assumptions as in the floor valuation demonstrated in the chapter, with the exception that the six-month DM LIBOR is \(5.500 \%\) (not \(6.000 \%\) ). State each answer in both
Chipolte Properties has just purchased the following interest rate cap agrecment:Using the assumption that the actual three-month U.S. dollar LIBOR rate is \(7.25 \%\) at the time of the next
Sun City is a U.S. pension fund management firm. It must, by law, hold a minimum percentage of its assets in highly liquid interest-bearing deposits of 360 days maturity or less. It can and does hold
Pinon Corporation (U.S.) operates subsidiaries in Brazil and Indonesia. In the United States Piñon typically requires \(\$ 1,000,000\) in accounts receivable and \(\$ 162,500\) in inventory to
Southern Cross Ski Company of Santiago de Chile has sales and service centers in Argentina and Peru and also maintains a corporate wide account in dollars in Miami. Accounts are maintained in the
Coldcase Appliances manufactures houschold refrigerators and freczers in Mexico, Spain, and California. Each affiliate has monthly unsettled balances due to or from other affiliates. At the end of
Michigan Medical Company has received an order for medical equipment to be exported to Turkey under the terms of a letter of credit issued by London Bank Corporation on behalf of the Turkish
Prefabricated log cabins from Finland are very popular with homebuilders in the mountains of the western United States. A Flagstaff developer has just ordered one such cabin for a client. The terms
Explain and diagram the steps involved in an export of wine from California to Japan, using a confirmed letter of credit, payment to be made 90 days from sight.
Explain why an exporter might want a confirmed letter of credit rather than an uncontirmed onc. What are its advantages and disadvantages?
One of the major issues firms must confront when implementing EVA on the business unit level is whether or not to differentiate the cost of capital per unit by the riskiness of its business. Business
Many firms and management consultants believe that in order for a firm's managers to buy into a financial performance metric, they must be compensared on the basis of their performance as measured by
Working capiral, the current assets and liabilities of the firm, is often considered something of a necessary evil of conducting business. Bur many management strategies today focus on minimizing the
As the newest member of the asset allocation team in your firm, you con. stantly find yourselt being quizzed by your fellow group members. The topic this morning is international diversification. One
Giri Tyer is European analyst and strategist for Tristar Funds, a New Yorkbased mutual fund company. Mr. Jyer is currently evaluating the recent performance of shares in Pacific Wietz, a publicly
Firms with operations and assets across the globe, true MNEs, are in many ways as international in composition as the most internationally diversified portfolio of unrclated securitics. Why do
An investor is evaluating a two-asset portfolio of the following two securities:a. If the two securities have a correlation of +.6 , what is the expected risk and return for a portfolio that is
When you are constructing your portfolio, you know you want to include Cementos de Mexico (Mexico) in it, but you cannot decide whether you wish to hold it in the form of ADRs traded on the NYSE or
Exhibit 22.3 presented summary statistics for monthly returns on 18 major stock markets across the globe. All returns have been converted to U.S. dollars. In this form, which investors does this data
Assume the following U.S. dollar returns (monthly averages) for these Baltic republics. Calculate the Sharpe and Treynor measures of market performance.a. In comparing these measures with those
Consider the following statement: Academia always focuses on the present value of free cash flow as the definition of value, yet companies seem to focus on "earnings" or "profits."a. Do you think
Discounted cash flow (DCF) valuation requires the analyst to estimate and isolate the expected free cash flows that a specific asset or investment will produce in the future. The analyst then must
The shares of Global.com (U.S.), a new high-flying worldwide cellular phone company, are valued largely on the bases of price/earnings multiples. Other firms trading on U.S. exchanges in its similar
Exhibit 15.4 illustrated how the market capitalization of Semen Gresik varied over four different dates in the summer of 1998. If the measure of "value" for this Indonesian company is actually the
A consortium of global telecommunication firms is about to submit a bid to purchase the rights to provide cellular telephone services to central São Paulo. The bid must be submitted, and payment
The discount rate applied to major investments, domestic or cross-border, is consistently one of the most controversial debates within a firm. How would you assess the following statements, ofien
Rogue River Tractor (U.S.) is reviewing the methodology of how it analyzes forcign investment opportunities. What data, investment information, and corporate structure information would you request
This chapter introduced the concept of a country beta. How would you explain to your immediate superiors the fact that a country beta may be significantly lower than the firm's own beta, or that the
The word "risk" in finance is often measured as the standard deviation of some financial value. But if some risks are indeed one-sided, how would you go about incorporating their riskiness in
Exhibit 16.1 presents a varicty of country-risk ratings for five different countries, including Indonesia, the home country of P.T. Semen Gresik. Utilizing the data presented in this exhibit, compare
Using the structure for calculating LiS. corporate taxes for foreign-sourced income shown in Exhibit 17.3, assume a foreign subsidiary has \(\$ 2,750,000\) in gross carnings, LiS , and forcign
Tuskeegee Airlines is a U.S.-based air freight firm with a wholly owned sub. sidiary in Hong Kong. The subsidiary, Tuskecgee-Hong Kong, has just completed a long term planning report for the parent
Stutz is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several largc automobile companies in Germany, including Mercedes, BMW, and Opel. The firm, like
ZNZ Petroleum is a U.S.-based multinational pecroleum and petrochemical exploration, production, and distribution company. ZNZ's subsidiary in Zairc, a new promising area of petroleum exploration is
Gamboa, Incorporated, is a relatively new U.S. based retailer of specialty fruits and vegetables. The firm is vertically integrated with fruit and vegetable-soureing subsidiaries in Central America,
The New Haven Autolock Company of Connccticut manufacturcs automobile door locks that work by a number combination as well as by kevs. Manufacturing each lock involves direct labor cost of \(\$ 20\),
American Wolverine, Inc, of the United States owns \(100 \%\) of WolverineIsrach. This year Wolverine-Israel carned 120 million Isracli shekels (Shk) before income taxes, equal to \(\$ 30,000,000\)
Gremlin Games, Inc., of Los Gatos, California, wants to advance USS4,000,000 to its Chinese manufacturing affiliate, Guangdong Disks, Ltd. Gremlin Games creates, designs, and sells children's
Cia. Sevilla de Olivos, S.A. (Sevilla Olive Company) sells containers of Spanish olives to its wholly owned distribution afriliate in Frankfurt, Germany. Spanish income tax rates are \(25 \%\) and
Penang Stove Company manufactures propane kitchen stoves for sale to retail outlets in Malaysia and, through a wholly owned distribution subsidiary in neighboring Thailand. Annual capacity of the
What advantages accrue to firms in emerging market countries from increasing the transparency of their financial performance so as to qualify for selling equiry securities in the major financial
What advantages accrue to firms, such as Daimler-Benz (Illustrative Case in this chapter) that are from countries with highly developed equity markets, from qualifying to list their shares directly
ADRs are designed so that U.S, investors can invest in equity positions of forcign firms without the difficulty of executing an order on a foreign exchange, of converting foreign currency dividends
Exhibit 11.5 reported market \(P / E\) ratios for equity markets across the globe. Using the data reported in the exhibit, answer the following questions:a. Which three markets provide the highest
Grupo Milano is a multinational manufacturer of small gasoline-generator motor scooters located in Iraly. Most of its cash flow is gencrated in euros. Grupo Milano wishes to access the international
Iowa Grain Syndicate exports large quantitics of corn and wheat to Russia and eastern Europc. The Syndicate was quoted a borrowing rate of \(9 \%\) p.a. in Chicago, but borrowed \(€ 3,000,000\) for
The Egyptian Solidarity Fund is holding a 60 -day US \(\$ 1,000,000\) cerrificate of deposit in a New York bank on which it is carning \(4 \%\). A Beirut bank offers to pay \(4.5 \%\) if the Egyptian
Exhibit 12.5 illussrates the pricing of a Euro-medium-term note. Assume that an EMTN is sold on March 25, 2001, with a maturity on September 30, 2003, and with set coupon dates of June 30 and
Kelly \& Murphy, Inc., wishes to raise \(\$ 4,000,000\) in U.S. dollars with debt financing. The funds, needed to augment working capital, will be repaid with interest in one year. Ms. Kelly, the
In 1998 Chrysles Corporation of the Lnited States and Daimler-Benz of Ger many announced a merger of their two firms. Evaluate whether or nor the following theoretical synergies from a merger apply
In the late 1980 s and early 1990s, many Japanese financial institutions and firms from a varicty of industries invested in U.S. real estate such as hotels, office buildings, and golf courses. Such
Firms often find it difficult to find capital for new and riskier investments. In 1992 the Pequot Indians of Ledyard, Connecticut (U.S.) wished to build and operate a casino on their reservation but
What are the relative merits of management contracts compared with foreign direct investments? Answer this question both from the perspective of a host country and from the perspective of a firm that
What are the advantages and disadvantages of joint ventures from the viewpoint of each of the following:a. A multinational firmb. A local joint-venture partnerc. The host country
Compare licensing to foreign direct investment from the viewpoint of:a. The licensor (multinational firm)b. The licensee (host country firm)c. The host country
Most service industries, such as accounting, law, advertising, consulting, and banking, have become multinational. What motivates these industries to cstablish offices abroad: What theories apply?
a. According to the assumptions in this bascline case, the project rate of return is negative and the parent rate of return is positive. Should the project be accepted?b. Are there assumptions that
Questions a-i are all based on the following scenario for Santa Clara Electronics, Inc.Santa Clara Electronics, Inc. of California exports 24,000 sets of lowdensity light bulbs per year to Argentina
What would be the one-month interest payment due on a principal of \(\mathrm{Y} 150\) million at \(2.375 \%\) annual interest assuming the following interest rate practices?a. 360 days per year, 28
Interest rates and exchange rates are theoretically equivalent in their relative impacts on the value of a firm. Yer interest rate risk is commonly considered by management as a "necessary evil" of
Exhibit 9.3 provided an analysis of Puebla Corporation's all-in-cost (AIC) of servicing a floating rate loan. Recalculate the Joan's AIC, using the same assumptions, with the exception that the loan
Use Exhibit 9.4 to answer the following questions.a. How is the yield for the Junc 2000 Eurodollar interest rate future calculated:b. A financial manager wishing to hedge the interest the firm would
Kyocera is a Japanese MNE that operates in at least 12 countrics around the world but has little name recognition outside Japan. It has traditionally raised all capital in its home market and
What would be the result of Puebla's swap (the example used in this chapter) if the exchange rate at the time of unvinding were SE1.4260/S and the two year fixed rate of interest on Swiss trancs were
Assume that Nestlé is updating its weighted-average cost of capital. The firm has altered its capiaal structure in recent years and wishes to use the revised redative weights of debt and equity in
It is obvious that Novo served as a role model for other Nordic multinationals to attain a global cosr and availability of capital. Does it follow that the Nordic experience could be relevant for
L'Oreal is a well known-French MNE specializing in cosmetics and fragrances. Its 1998 sales were \(€ 10.9\) billion ( \(\$ 12\) billion), with profits of \(€ 681\) million (\$749 million), and a
YummyYummies (Bangladesh). ArtemisPrivEqui, a Greek-based private equity firm, is trying to determine what it should pay for YummyYummies, a food processing firm in Bangladesh. ArtemisPrivEqui
Finisterra, S.A. Finisterra, S.A., located in the state of Baja California, Mexico, manufactures frozen Mexican food that is popular in the states of California and Arizona (U.S.). In order to be
Emancipation Co. Emancipation Co., South Africa, expects to receive cash dividends from an Irish joint venture over the coming three years. The first dividend, to be paid on December 31, 2015, is

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