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principles of finance

Questions and Answers of Principles Of Finance

1. According to Exhibit 1, were a significant number of portfolio managers consistently able to add value to international portfolios through active (selective) cur- rency management over the time
4. Clearinghouse Associations. Associations like the New York Clearinghouse Association have played major roles in the international financial system for centuries. Use the following Web sites to
3. Working Capital Management (B). Use the New Zealand government's definition and analysis of working capital and compare that presented in this chapter. How does the New Zealand definition of
2. Working Capital Management (A). Many major multinational banks provide a variety of working capital and multinational cash management services described in this chapter. Using the Web sites of a
1. Going Global with CFO. One of the most useful Internet sites with current analysis and thinking on a variety of corporate finance issues is the on-line ver- sion of CFO magazine. Use the three
11. Quinlan Company (France). The following events take place. March 1: Quinlan Company seeks a sale at a price of 10,000,000 for items to be sold to a long-standing client in Poland. To achieve the
9. Adams Corporation (A). Adams Corporation (U.S.), a recently divested unit of Pfizer and the owner of a series of valuable consumer brands such as Listerine and Halls, owns 100% of Adams Brazil,
7. Balanced Tire Company (B). Assume Balanced Tire (previous problem) decided to set the Canadian price at C$65. Both countries, however, have decreased their corporate income tax rates: the U.S. to
1. Asahi-Do, K.K. Asahi-Do, K.K., the Japanese subsidiary of a U.S. company has 100,000,000 in accounts receivable for sales billed to customers on terms of 2/30 n/60. Customers usually pay in 30
25. Foreign Bank Office. What is the difference between a foreign branch and a foreign subsidiary of a home-country bank?
24. France. During the era of the French franc, France imposed a rule on its banks and subsidiaries of inter- national companies operating in France that pre- cluded those subsidiaries from netting
23. Electro-Beam Company. Electro-Beam Company generates and disburses cash in the currencies of four countries: Singapore, Malaysia, Thailand, and Vietnam. What would be the characteristics you
22. Cash Cycle. The operating cash cycle of a multina- tional firm goes from cash collection from cus- tomers, cash holding for anticipated transaction needs (the transaction motive for holding
21. Motives. Explain the difference between the trans- action motive and the precautionary motive for holding cash.
20. Free-Trade Zones. What are the advantages of a free-trade zone?
19. Devaluation Risk. Merlin Corporation of the United States imports raw material from Indonesia on terms of 2/10, net 30. Merlin expects a 36% deval- uation of the Indonesian rupiah at any moment.
18. Receivables Turnover. Why might the time lag for multinational intrafirm accounts receivable and payable (that is, all received or paid to a parent or sister subsidiary) differ substantially from
17. Inventory Turnover. Japanese industry is often praised for its just-in-time inventory practice between industrial buyers and industrial sellers. In the context of the "Days Receivables" turnover
16. Trade Terms. Roberts and Sons, Inc., of Great Britain has just purchased inventory items costing kronor 1,000,000 from a Swedish supplier. The sup- plier has quoted terms 3/15, net 45. Under what
15. Reducing NWC. Assume a firm purchases inven- tory with one foreign currency and sells it for another foreign currency, neither currency being the home currency of the parent or subsidiary where
14. Accounting Exposure. Is any accounting exposure created during the course of a firm's operating cycle?
13. Operating Exposure. Is any operating exposure cre- ated during the course of a firm's operating cycle?
12. Transaction Exposure. Assuming the flow illus trated in Exhibit 22.1, where does transaction expo- sure begin and end if inputs are purchased with one currency at t and proceeds from the sale are
11. Payables and Receivables. As a financial manager, would you prefer that the accounts payable period end before, at the same time, or after the beginning of the accounts receivable period? Explain.
10. Accounts Payable Period. Exhibit 22.1 shows the accounts payable period to be longer than the inven- tory period. Could this be otherwise, and what would be the cash implications?
9. The Cycle. The operating cycle of a firm, domestic or multinational, consists of the following time periods:a. Quotation periodb. Input sourcing periodc. Inventory periodd. Accounts receivable
8. Fee Treatment. In the context of unbundling cash flows from subsidiary to parent, why might a host government be more lenient in its treatment of fees than in its treatment of dividends? What
7. Distributed Overhead. What methods might the U.S. Internal Revenue Service use to determine whether allocations of distributed overhead are being fairly allocated to foreign subsidiaries?
6. Allocated Fees-B. What are the differences between a management fee, a technical assistance fee, and a license fee for patent usage? Should they be treated differently for income tax purposes?
5. Allocated Fees-A. What is the difference between a license fee and a royalty fee? Do you think license and royalty fees should be covered by the tax rules that regulate transfer pricing? Why?
4. Sister Subsidiaries. Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. Presently, each subsidiary imports from the
3. What would you do if you were heading the Honeywell SAC group negotiating the deal? The Space and Avionics Control Group (SAC) of Honeywell, Incorporated (U.S.) was quite frustrated in June of
2. Do you think the services that Makran is offering are worth the costs? The Space and Avionics Control Group (SAC) of Honeywell, Incorporated (U.S.) was quite frustrated in June of 1997. The
1. Estimate what cash flows in which currencies the proposal would probably yield. What is the expected U.S. dollar value that would, in the end, be received? The Space and Avionics Control Group
3. Conduits. In the context of unbundling cash flows from subsidiary to parent, explain how each of the following creates a conduit. What are the tax conse- quences of each?a. Imports of components
2. Unbundling. What does this term mean? Why would unbundling be needed for international cash. flows from foreign subsidiaries, but not for domestic cash flows between related domestic subsidiaries.
1. Constraints on Positioning Funds. Each of the fol- lowing factors is sometimes a constraint on the free movement of funds internationally. Why would a government impose such a constraint? How
5. Tax Practices for International Business. Many of the major accounting firms provide on-line informa- tion and advisory services for international business activities as related to tax and
4. Official Government Tax Authorities. Tax laws are constantly changing, and an MNE's tax planning and management processes must therefore include a continual updating of tax practices by country.
3. International Taxpayer. The United States Internal Revenue Service (IRS) provides detailed support and document requirements for international tax- payers. Use the IRS site to find out what the
2. Global Taxes. Sites like the following one, Tax World, provide detailed insights into the conduct of business and the associated tax and accounting requirements of doing business in a variety of
1. International Taxation and Bulgaria. The following Web site is a good resource for finding a multitude of global tax and accounting rules, regulations, and rates. Use it to find the specific tax
6. Wuzhou Blade (C). Not to leave any potential tax repositioning opportunities unexplored, Cranfield Eversharp wants to combine the components of Problem 4 with a redistribution of overhead costs.
5. Wuzhou Blade (B). Encouraged by the results from Problem 4's analysis, corporate management of Cranfield Eversharp wishes to continue to reposition profit in Hong Kong. It is, however, facing two
4. Wuzhou Blade (A). Corporate management of Cranfield Eversharp is considering repositioning profits within the multinational company. What hap- pens to the profits of Wuzhou Blade and Cranfield
2. Discovery Bay Airlines (Hong Kong). Discovery Bay Airlines is a US-based air freight firm with a wholly owned subsidiary in Hong Kong. The sub- sidiary, DBay-Hong Kong, has just completed a long-
1. Pfizer's Foreign-Source Income. Pfizer is a U.S.- based global manufacturer and distributor of a wide array of pharmaceutical products. As part of the training in its corporate treasury offices,
15. Passive. Why do the U.S. authorities tax passive income generated offshore differently from active income?
14. Tax Treaties. What do most bilateral tax treaties cover? How do they affect the operations and struc- ture of MNES?
13. Tax Haven Subsidiary.a. What is meant by the term tax haven?b. What are the desired characteristics for a country if it expects to be used as a tax haven?c. Identify five tax havensd. What are
12. Correct Pricing, Section 482 of the US. Internal Revenue Code specifies use of a "correct" transfer price, and the burden of proof that the transfer price is "correct" lies with the company. What
11. Sister Subsidiaries. Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. Presently, cach subsidiary imports from the
10. Transfer Pricing Motivation. What is a transfer price and can a government regulate it? What diffi- culties and motives does a parent multinational firm face in setting transfer prices?
9. Subpart F Income. The rule that US. shareholders do not pay taxes on foreign-source income until that income is remitted to the United States (tax defer- ral) was amended in 1962 by the creation
8. Value-Added Tax.a. What is a value-added tax?b. What are the advantages and disadvantages of a value-added tax?c. Although the value-added tax has been proposed numerous times, the Unites States
7. Foreign Tax Credit. What is a foreign tax credit? Why do countries give credit for taxes paid on foreign-source income?
6. Tax Types. Taxes are classified on the basis of whether they are applied directly to income, called direct taxes, or to some other measurable perfor mance characteristic of the firm, called
5. Tax Treaties.a. What is a bilateral tax treaty?b. What is the purpose of a bilateral tax treaty?c. What policies do most tax treaties cover?
4. Tax Deferral.a. What is meant by the term tax deferral?b. Why do countries allow tax deferral on foreign- source income?
3. Worldwide versus Territorial Approach. Nations typically structure their tax systems along one of two basic approaches: the worldwide approach or the territorial approach. Explain these two
2. Tax Neutrality.a. Define the term tax neutrality.b. What is the difference between domestic neutral- ity and foreign neutrality?c. What are a country's objectives when determin- ing tax policy on
1. Tax Morality.a. What is meant by the term tax morality?b. Your company has a subsidiary in Russia, where tax evasion is a fine art. Discuss whether you should comply fully with Russian tax laws or
3. If you were John Trani, would you continue to pursue the outbound inversion or choose to stay put? This strategic initiative will strengthen our company over the long-term. An important portion of
2. Do you believe that the U.S. government should allow a company like Stanley to reincorporate outside the country in order to pay lower taxes? This strategic initiative will strengthen our company
1. If Stanley did indeed reincorporate offshore, how do you think the company would restructure its opera- tions, both inside and outside the United States? This strategic initiative will strengthen
3. Yahoo! Finance Investment Learning Center. Yahoo! Finance provides detailed current basic and advanced research and reading materials related to all aspects of investing, including portfolio
2. 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
1. Modern Portfolio Theory. Use the MoneyOnLine. Internet site to review the fundamental theories, assumptions, and statistical tools that make up mod- ern portfolio theory. MoneyOnLine Limited
12. Russian-U.S. Equity Portfolio (B). Rework the pre- vious problem, but assume that you have reduced the expected correlation coefficient from 0.52 to 0.38. Which weights (use increments of 5% such
10. Brazilian Investors Diversify. The Brazilian econ- omy in 2001 and 2002 had gone up and down. The Brazilian reais (R$) had also been declining since 1999 (when it was floated). Investors wished
9. Lancaster Technology: Euro-Based Investors (B). Using the data above, now assume that the pound consistently appreciates versus the euro 1.5% per year. Begin with the 1.4844/ in June 2004.
8. Lancaster Technology: Euro-Based Investors (A). Using the data above, calculate the annual average total return (including dividends) to a Euro- based investor holding the shares for the entire
7. Lancaster Technology: U.S.-Dollar-Based Investors (B). Using the data above, now assume that the pound consistently appreciates versus the dollar 3.0% per year. Begin with the $1.8160/ in June
6. Lancaster Technology: U.S. Dollar-Based Investors (A). Using the data above, calculate the annual average total return (including dividends) to a U.S. dollar-based investor holding the shares for
5. Lancaster Technology: British Pound-Based Investors. Using the data above, calculate the annual average capital appreciation rate on Lancaster shares, as well as the average total return
13. ADRs versus Direct Holdings. When you are con- structing your portfolio, you know you want to include Cementos de Mexico (Mexico), but you can- not decide whether you wish to hold it in the form
12. Are MNEs Global Investments? Firms with opera- tions and assets across the globe, true MNEs, are in many ways as international in composition as the most internationally diversified portfolio of
11. International Equities and Currencies. As the newest member of the asset allocation team in your firm, you constantly find yourself being quizzed by your fellow group members. The topic is
10. Relative Risk and Return. Conceptually, how do the Sharpe and Treynor performance measures define risk differently? Which do you believe is a more useful measure in an internationally diversi-
9. Correlation Coefficients. The benefits of portfolio construction, domestically or internationally, arise from the lack of correlation among assets and mar- kets. The increasing globalization of
8. International Risk. Many portfolio managers, when asked why they do not internationally diversify their portfolios, answer that "the risks are not worth the expected returns." Using the theory of
7. Minimum Risk Portfolios. If the primary benefit of portfolio diversification is risk reduction, is the investor always better off choosing the portfolio with the lowest expected risk?
6. Optimal Domestic Portfolio. Define in words (with- out graphics) how the optimal domestic portfolio is constructed.
5. Currency Risk. The currency risk associated with international diversification is a serious concern for portfolio managers. Is it possible for currency risk ever to benefit the portfolio's return?
4. Market Risk. If all national markets have market risk, is all market risk the same?
3. Measurement of Risk. How, according to portfolio theory, is the risk of the portfolio measured exactly?
2. Risk Reduction. What types of risk are present in a diversified portfolio? Which type of risk remains after the portfolio has been diversified?
1. Diversification Benefits. How does the diversifica- tion of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified
3. If you were Sean, what would you conclude from this specific study? Strategic currency hedging policy can be an important risk-control measure for funds with international assets. Passive currency
2. According to Exhibit 2, would the international. investor in an Australian portfolio be better off, on average, with a completely hedged or unhedged port- folio? Strategic currency hedging policy
3. Export-Import Bank of the United States. The EXIM Bank of the United States provides financing for U.S.-based exporters. Like most major industrial country trade-financing organizations, it is
2. Letter of Credit Services. Commercial banks world- wide provide a variety of services to aid in the financing of foreign trade. Contact some of the many major multinational banks (a few are listed
1. Going Global with CFO. One of the most useful Internet sites with current analysis and thinking on a variety of corporate finance issues is the on-line ver- sion of CFO magazine. Use the three
10. Andersen Sports (B): Bank Credit Line with Export Credit Insurance. Andersen could also buy export credit insurance from FCIA for a 1.5% premium. It finances the $100,000 receivable from Kim from
9. Andersen Sports (A). Andersen Sports (Andersen) is considering bidding to sell $100,000 of ski equip- ment to Kim Family Enterprises of Seoul, Korea. Payment would be due in six months. Since
8. Forfaiting at Kaduna Oil (Nigeria). Kaduna Oil of Nigeria has purchased $1,000,000 of oil drilling equipment from Unicorn Drilling of Houston, Texas. Kaduna Oil must pay for this purchase over the
7. Hollywood Entertainment (B). Hollywood Enter- tainment has been approached by a factor that offers to purchase the Hong Kong Media Imports receiv- able at a 16% per annum discount plus a 2% charge
6. Hollywood Entertainment (A). Hollywood Enter- tainment has sold a combination of films and DVDs to Hong Kong Media Incorporated for US$100,000, with payment due in six months. Hollywood
5. Sun Microsystems (B). Assume that Sun Microsystems prefers to receive US. dollars rather than euros for the trade transaction described in Problem 4. It is considering two alternatives: 1) It can
4. Sun Microsystems (A). Assume Sun Microsystems has sold Internet servers to Telecom Italia for 700,000. Payment is due in three months and will be made with a trade acceptance from Telecom Italia

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