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multinational business finance

Questions and Answers of Multinational Business Finance

Timmico Co. (A). Timmico Co. is a South Korean automobile company that exports cars and lorries to Saudi Arabia and invoices its customers in euros. SaudiAutoImp Co. has purchased €15,000,000 of
Timmico Co. (B). Assuming the facts in Problem 3, Saudi Investment Bank is now willing to buy Timmico Co.’s bankers’ acceptance for a discount of 7.5%per annum. What would be Timmico Co.’s
Alliasha-Toshiba. Alliasha-Toshiba buys its laptops from Toshiba-France, and sells them to French customers.One of its customers is Pret-a-Print, a printing service firm that buys laptops from
Forfaiting at Abdulla Oil (Saudi Arabia). Abdulla Oil of Saudi Arabia has purchased £5,000,000 of oil drilling equipment from BBB Drilling of London, U.K.Abdullah Oil must pay for this purchase over
BollyIndia Enterprises (A). BollyIndia Enterprises has sold a combination of films and DVDs to Brazilia Media Incorporated for €1,000,000, with payment due in 3 months. BollyIndia Enterprises has
BollyIndia Enterprises (B). BollyIndia Enterprises has been approached by a factor that offers to purchase the Brazilia Media Imports receivable at a 18% per annum discount plus a 3% charge for a
ThaiTenSport. ThaiTenSport (Bangkok) is considering bidding to sell £2,000,000 of tennis rackets to CairoPro Club, a newly founded Egyptian tennis club.Payment would be due in six months. Since
ThaiTenSport (B). ThaiTenSport could also buy export credit insurance from Export-Import Bank of Thailand for 2% premium. It finances the £2,000,000 receivable from CairoPro from its credit line at
VenezaCot Co. VenezaCot Co. of Caracas, Venezuela, has received an order for 50,000 cotton towels from JapoImp Co. of Tokyo, Japan. The towels will be exported to Japan under the terms of a letter of
Swishing Shoe Company. Swishing Shoe Company of Durham, North Carolina, has received an order for 50,000 cartons of athletic shoes from Southampton Footware, Ltd., of England, payment to be in
Going Abroad. Assume that Great Britain charges an import duty of 10% on shoes imported into the United Kingdom. Swishing Shoe Company, in Problem 12, discovers that it can manufacture shoes in
Letter of Credit Services. Commercial banks worldwide provide a variety of services to aid in the financing of foreign trade. Contact any of the many major multinational banks (a few are listed
The Balanced World. The Balanced World Web site is the equivalent of a social networking site for those interested in discussing a multitude of financial issues in greater depth and breadth. There is
Put another way, investors are more volatile than investments.Economic reality governs the returns earned by our businesses, and Black Swans are unlikely. But emotions and perceptions—the swings of
Evolving into Multinationalism. As a firm evolves from purely domestic into a true multinational enterprise, it must consider (1) its competitive advantages, (2) its production location, (3) the type
Market Imperfections. MNEs strive to take advantage of market imperfections in national markets for products, factors of production, and financial assets. Large international firms are better able to
Competitive Advantage. When firms decide to invest in foreign countries, their decision is based on the competitive advantage of the firm as well as those of the host country. What are some of
Economies of Scale and Scope. It is recognized that economies of scale and scope reduce the average costs of MNEs. Should MNEs avoid excessive expansion to avoid potential diseconomies of scale and
Competitiveness of the Home Market. One method by which MNEs can increase profitability and competitiveness is to operate in competitive home markets.What are the factors that can enhance a home
OLI Paradigm. The OLI paradigm attempts to explain why MNEs choose FDI to alternative modes of foreign market entry. Explain how the financial strategies of MNEs are directly related to the OLI
Financial Links to OLI. Financial strategies are directly related to the OLI Paradigm.a. Explain how proactive financial strategies are related to OLI.b. Explain how reactive financial strategies are
Where to Invest. The decision about where to invest abroad is influenced by behavioral factors.a. Explain the behavioral approach to FDI.b. Explain the international network theory explanation of FDI.
Investing Abroad. What are the factors that would lead a firm to decide to expand its investment and production operations into new foreign markets?
Licensing and Management Contracts versus Producing Abroad. What are the advantages and disadvantages of licensing and management contracts compared to producing abroad?
MNE Entry in a Foreign Market. What is the optimal entry mode into a foreign market for MNEs that require tight control over technological know-how?Explain.
Greenfield Investment versus Acquisition. What are the advantages and disadvantages of serving a foreign market through a greenfield foreign direct investment compared to an acquisition of a local
Strategic Alliance. What are the main advantages and disadvantages that parties should consider before forming strategic alliances?
Governance Risk. Explain the methods by which MNEs can tackle issues of governance as they expand into new nations.
Host Government Investment Duties. Host governments often engage investment advisers to assist them with investments, investment agreements, and investment insurance. What are advisors’
Investment Insurance and Guarantees: OPIC. Answer the following questions:a. What is OPIC?b. What types of political risks can OPIC insure against?
Operating Strategies after the FDI Decision. The following operating strategies, among others, are expected to reduce damage from political risk. Explain each and how it reduces damage.a. Local
Political Risks. What are the various micro and macro political risks that MNEs have to assess before deciding to invest in a foreign country?
Blocked Funds. Why do MNEs operate in countries that impose transfer restrictions and how can they manage impending transfer risks?
Sovereign Credit Risk. Is sovereign credit risk an example of a micro or macro risk? How can it impact MNEs?
Emerging Market Institutional Risks. It is commonly argued that many cultural risks in emerging market economies can be reduced by institutional development.Explain whether you agree or disagree with
MNEs and Protectionism. Answer the following questionsa. What are the main reasons that emerging economies protect their domestic markets?b. What are some of the arguments against protectionism?c. Is
Political Risks. Should MNEs worry more about micro, country-specific, or global political risks?
Mitigating Political Risks. Explain whether it is more feasible for MNEs to manage or mitigate micro, country-specific, or global political risks.
Reputation Risk. MNEs are forbidden to engage in unethical transactions by the local anti-bribery, anti-child-labor law, and anti-corruption laws of the countries in which they operate as well as
Global Corruption Report. Transparency International(TI) is considered by many to be the leading nongovernmental anticorruption organization in the world today. Recently, it has introduced its own
Sovereign Credit Ratings Criteria. The evaluation of credit risk and all other relevant risks associated with the multitude of borrowers on world debt markets requires a structured approach to
Milken Capital Access Index. The Milken Institute’s Capital Access Index (CAI) is one of the most recent informational indices that aids in the evaluation of how accessible world capital markets
Overseas Private Investment Corporation. The Overseas Private Investment Corporation (OPIC) provides long-term political risk insurance and limited recourse project financing aid to U.S.-based firms
Political Risk and Emerging Markets. Check the World Bank’s political risk insurance blog for current issues and topics in emerging markets.Political Insurance Blog
We lived a long time with Elan (ELN). We always appreciated its science and scientists, and, at times, we hated its former management, or whoever caused it to turn from ascending towards becoming a
Capital Budgeting Theoretical Framework. Capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting. What are the basic steps in domestic capital
Foreign Complexities. Capital budgeting for a foreign project is considerably more complex than the domestic case. What are the factors that add complexity?
Sensitivity Analysis. What is sensitivity analysis? How do MNEs use sensitivity analysis to assess various types of risks inherent in investment decisions?
Viewpoint and NPV. Which viewpoint, project or parent, gives results closer to the traditional meaning of net present value in capital budgeting?
Viewpoint and Consolidated Earnings. Which viewpoint gives results closer to the effect on consolidated earnings per share?
Operating and Financing Cash Flows. Capital projects provide both operating cash flows and financial cash flows. Why are operating cash flows preferred for domestic capital budgeting but financial
Risk-Adjusted Return. Should the anticipated internal rate of return (IRR) for a proposed foreign project be compared to (a) alternative home country proposals, (b) returns earned by local companies
MNEs’ Investment Decisions. When evaluating a potential foreign investment, how would inflation in the host country affect an MNE’s decision to invest in that nation? Would blocked cash flows
Host Country Inflation. How does host country inflation impact the operations of MNEs? How can MNEs mitigate these effects?
Cost of Equity. A foreign subsidiary does not have an independent cost of capital. However, in order to estimate the discount rate for a comparable host-country firm, the analyst should try to
MNEs and International Capital Budgeting. What are some of the problems that MNEs may encounter during their capital budgeting process?
Cross-Border Mergers and Acquisitions. Explain why cross-border mergers and acquisitions are difficult to implement.
Investment Analysis. Compare and contrast NPV, APV, and real option analysis, explaining how each of these analysis techniques affects investment decisions.
M&A Business Analysis. Should MNEs conduct real options or conventional financial options analysis in cross-border M&As?
Three Stages of Cross-Border Acquisitions. What are the three stages of a cross-border acquisition?What are the core financial elements integral to each stage?
Currency Risks in Cross-Border Acquisitions. What are the currency risks that arise in the process of making a cross-border acquisition?
Contingent Currency Exposure. What are the largest contingent currency exposures that arise in the process of pursuing and executing a cross-border acquisition?
Novo is a Danish multinational firm that produces industrial enzymes and pharmaceuticals (mostly insulin). In 1977, Novo’s management decided to “internationalize” its capital structure and
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
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. What is portfolio management?What are the various steps in the portfolio management process?
Portfolio Management Diversification. Why do portfolio managers often add securities issued on emerging markets in spite of the high risks associated with these markets?
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 the six main causes of market segmentation?
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 “Riddle.” What is the riddle?
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
Ganado’s Cost of Capital. Maria Gonzalez now estimates the risk-free rate to be 3.60%, the company’s credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international beta
Ganado and Equity Risk Premiums. Using the original weighted average cost of capital data for Ganado used in the chapter in “Sample Calculation: Ganado’s Cost of Capital,” calculate both the
Pharos Papers. Pharos Papers is a large U.K. firm. Its cost of debt is 12%. The risk-free rate of interest on 10-year Treasury bonds is 5%. The expected return on the market portfolio is 9%. After
Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis in 2014. As a result of extraordinary actions by the Swiss Central Bank, the Swiss bond index yield
EuroAsia AutoPart Firm. EuroAsia Auto Firm is a Polish manufacturer of auto-parts. Its cost of debt is 16%. The risk-free rate of interest is 8.5%. The expected return on the Turkish market portfolio
Petro-U.K. (U.K.). Petro-U.K. is a British energy firm that needs to raise £150 million to finance expansion projects. Suppose that Petro-U.K. is seeking a capital structure comprising 30% debt and
Mobi-SA (South Africa). Mobi-SA is a large mobile phone provider based in South Africa. It has not entered the Nigerian marketplace yet, but is considering establishing network and distribution
Xiaomi’s Cost of Capital. Xiaomi has rapidly grown during the last five years to become one of the largest smartphone manufacturers. Having most of its sales in China, its average annual sales over
The Tombs. You have joined your friends at the local watering hole, The Tombs, for your weekly debate on international finance. The topic this week is whether the cost of equity can ever be cheaper
Genedak-Hogan Cost of Equity. Senior management at Genedak-Hogan are actively debating the implications of diversification on its cost of equity. All agree that the company’s returns will be less
Genedak-Hogan’s WACC. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification.a. Did the reduction in debt costs reduce the firm’s weighted
Genedak-Hogan’s WACC and Effective Tax Rate.Many MNEs have greater ability to control and reduce their effective tax rates when expanding international operations. If Genedak-Hogan was able to
International Diversification via Mutual Funds. All major mutual fund companies now offer a variety of internationally diversified mutual funds. The degree of international composition across funds,
Novo Industri. Novo Industri A/S merged with Nordisk Gentofte in 1989. Nordisk Gentofte was Novo’s main European competitor. The combined company, now called Novo Nordisk, has become the leading
Cost of Capital Calculator. Ibbotson and Associates, a unit of Morningstar, is one of the leading providers of quantitative estimates of the cost of capital across markets. Use the Ibbotson and
The national oil company of Brazil, Petrobrás, suffered from an ailment common in emerging markets—a high and uncompetitive cost of capital. Despite being widely considered the global leader in
It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem. More specifically, Mr.Toyoda Shuhei, the new President of TMEM, had a problem.He was on his way to Toyota Motor
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.

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