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principles of finance

Questions and Answers of Principles Of Finance

10. Euroequity Public Share Issue. Define what is meant by a "Euroequity public share issue."
11. Private Placement under SEC Rule 144A.a. What is SEC Rule 144A?b. Why might a foreign firm choose to sell its equity in the United States under SEC Rule 144A?
12. Private Equity Funds.a. What is a private equity fund?b. How do they differ from traditional venture cap- ital firms?c. How do private equity funds raise their own cap- ital, and how does this
13. Strategic Alliances.a. Why do firms form international strategic alliances?b. Why can an international strategic alliance lower a firm's cost of capital?
1. Novo's Cost of Equity Prior to April 1980. Assuming that the following data apply, calculate Novo's cost of equity: Danish k 10.0% Denmark purposely maintained high real rates of interest to
2. Novo's WACC Prior to April 1980. Assume that the following data apply:a. What was Novo's weighted average cost of capi- tal?b. How did this affect its capital budget? kg = 12.0% Novo's cost of
3. Novo's Cost of Equity after April 1981. Assuming the following data now apply, calculate Novo's cost of equity: International k 8.0% International Novo = 0.8 International k 12.0% m 1
4. Novo's WACC after July 1981. Assume that the fol- lowing data apply:a. What was Novo's weighted average cost of capi- tal?b. How did this affect its capital budget? k = 10.0% 11.2% E/V - 50% D/V
5. Novo's Cost of Equity in 2004. What was Novo's cost of equity assuming the following: International k 4.0% Risk-free interest rates had fallen International No 0.8 International km 8.0% due to the
6. Novo's WACC in Early 2004. Assume that the fol- lowing data apply:a. What was Novo's weighted average cost of capital?b. How did this affect its capital budget? kj = 6.0% -7.2% Novo's new cost of
7. Hangsung before Equity Issue Abroad. Assume the following data applied to HangSung before it raised equity abroad. What was HangSung's cost of equity? Korean k = 10.0% HangSung's =1.0 Korean k =
8. Hangsung's WACC before Equity Issue Abroad. Assume the following data applied to HangSung before it raised equity abroad. What was HangSungs WACC? k = 12.0% HangSung's cost of debt 14.0%
9. Hangsung after Equity Issue Abroad in 2004. Assume the following data applied to HangSung after it raised equity abroad. What was HangSung's cost of equity? International k 4.0% International
10. Hangsung after Equity Issue Abroad in 2004. Assume the following data applied to HangSung after it raised equity abroad:a. What was HangSung's WACC in 2004?b. How did this affect its capital
1. Global Equities. Bloomberg provides extensive coverage of the global equity markets 24 hours a day. Using the following Bloomberg site, note how the performance of indices differs on the same
2. JPMorgan's ADR Tracking. JPMorgan provides up-to-the-minute performance of American Depositary Receipts in the U.S. marketplace. The site highlights those which are the high-performing equities of
3. Bank of New York Mellon. The Bank of New York Mellon is the world's largest depositary for both American and global depositary receipts. Use the bank's extensive Web site to complete the following
4. London Stock Exchange. The London Stock Exchange (LSE) lists many different global deposi- tary receipts among its active equities. Use the LSE's Internet site to track the performance of the
1. Window Rock Manufacturing, Inc. Window Rock Manufacturing, Inc, a US. multinational company, has the following debt components in its consoli- dated capital section:Income taxes are 30% around the
4. Quatrefoil Construction Company. Quatrefoil Construction Company consists of a U.S. parent and wholly owned subsidiaries in Malaysia (Q-Malaysia) and Mexico (Q-Mexico). Selected portions of their
7. Xavier and Zulu. Xavier Manufacturing and Zulu Products both seek funding at the lowest possible cost. Xavier would prefer the flexibility of floating rate borrowing, while Zulu wants the security
8. Trident's Cross-Currency Swap: Sfr for US$. Trident entered into a three-year cross currency interest rate swap in the chapter to receive U.S. dollars and pay Swiss francs. Trident, however,
6. Pounds and Dollar Interest Rates. The Web site yieldcurve.com provides real-time quotes on major maturities of both U.S. dollar-denominated fixed income securities and British pound-denominated
5. The International Swaps and Derivatives Associa- tion (ISDA). The ISDA is the primary global organ- ization that attempts to both standardize the use of interest rates and cross-currency swaps and
4. Current Interest Rates and Yield Curves. Use the New York Federal Reserve Bank's Web page for recent interest rates on all maturities of U.S. dollar- denominated debt issues. Historical data is
3. Euro Yield Curve. Eurstat, the statistics unit of the European Union (EU), posts an up-to-date graphic of the yield curve for euro-denominated European Central Bank debt outstanding. Use the site
1. Living Yield Curve. SmartMoney's Web site allows the user to see a detailed graphic exposition of the U.S. Treasury yield curve in motion from 1977 to the present. Use the graphic to see how
10. Delphi. Delphi is the U.S.-based automotive parts supplier which was spun off from General Motors in 2000. With annual sales of over $26 billion, the com- pany has expanded its markets far beyond
9. Trident's Cross-Currency Swap: Yen for Euros. Using the same table of swap rates (Exhibit 15.8), assume Trident enters into a swap agreement to receive euros and pay Japanese yen, on a notional
6. Caon Chemicals. Amanda Suvari, the treasurer of Caon Candy Company believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. At
5. Chrysler LLC. Chrysler LLC, the now privately held company sold off by DaimlerChrysler, must pay floating rate interest three months from now. It wants to lock in these interest payments by buying
4. Agnelli Motors. Agnelli Motors of Italy recently took out a four-year 65 million loan on a floating rate basis. It is now worried, however, about rising interest costs. Although it had initially
3. Raid Gauloises. Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfit- ter. The company has decided to borrow 20,000,000 via a euro-euro floating rate loan for four
2. Botany Bay Corporation. Botany Bay Corporation of Australia seeks to borrow US$14,000,000 in the Eurodollar market. Funding is needed for two years. Investigation leads to three possibilities:a.
1. Chavez S.A. Chavez S.A., a Venezuelan company, wishes to borrow $8,000,000 for eight weeks. A rate of 6.250% per annum is quoted by potential lenders in New York, Great Britain, and Switzerland
10. Currency Swaps. Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars?
9. Defaulting on an Interest Rate Swap. Smith Company and Jones Company enter into an interest rate swap, with Smith paying fixed interest to Jones, and Jones paying floating interest to Smith. Smith
8. Eurodollar Futures. The newspaper reports that a given June Eurodollar future settled at 93.55. What was the annual yield?
5. Policy Statements. Explain the difference between a goal statement and a policy statement.
4. Forecast Types. What is the difference between a specific forecast and a directional forecast?
3. Risk and Return. Some corporate treasury depart- ments are organized as service centers (cost centers), while others are set up as profit centers. What is the difference and what are the
1. Triumvirate of Risks. Define and explain the three main financial risks facing a multinational enter- prise.
3. Should Anka-and McDonald's-worry about OCI?McDonald's Corporation has investments in over 100 countries. It considers its equity investment in foreign subsidiaries to be at risk, subject to
2. How does the cross-currency swap hedge the long- term equity exposure in the foreign subsidiary?McDonald's Corporation has investments in over 100 countries. It considers its equity investment in
1. How does the cross-currency swap effectively hedge the three primary exposures McDonald's has relative to its British subsidiary? McDonald's Corporation has investments in over 100 countries. It
4. Brady Bonds and Emerging Markets. Emerging mar- kets have repeatedly been beaten down with every major international financial crisis, whether it be the Mexican peso (1994), the Thai baht (1997),
3. Dynamic Yield Curve. This Internet site provides real-time data on the U.S. dollar fixed income securi- ties markets. The dynamic yield curve that is pre- sented allows the reader to see changing
2. Sovereign Credit Ratings Criteria. The evaluation of credit risk and all other relevant risks associated with the multitude of borrowers on world debt mar- kets requires a structured approach to
1. Country Credit Ratings History. Fitch, the U.S.- based firm which provides detailed analysis and rat- ings of countries and companies maintains a historical time line of how the credit ratings of
10. Aire Asia. Aire Asia, headquartered in Kunming, China, needs US$25,000,000 for one year to finance working capital. The airline has two alternatives for borrowing:a. Borrow US$25,000,000 in
9. Sicilian Capital, S.A. Sicilian Capital, S.A., is raising funds via a euro-medium-term note with the follow- ing characteristics: Coupon rate: 8.00% payable semiannually on June 30 and December
8. River Thames Insurance Company. River Thames Insurance Company plans to sell $2,000,000 of euro- commercial paper with a 60-day maturity and dis- counted to yield 4.60% per annum. What will be the
7. Gas du Ancy. Gas du Ancy, a European gas com- pany, is borrowing US$650,000,000 via a syndicated Eurocredit for six years at 82 basis points over LIBOR. LIBOR for the loan will be reset every six
6. Zermatte Air (Switzerland). Zermatte Air of Switzerland retains $12,000,000 from tickets sold to U.S. dollar holders, after paying fuel and landing costs associated with its frequent flights
5. Grupo Bimbo de Mexico. Grupo Bimbo, although Mexican by incorporation, evaluates all business results, including financing costs, in U.S. dollars. The company needs to borrow $10,000,000 or the
3. Argosy Associates (USA). Argosy Associates, a U.S.-based investment partnership, borrows 80,000,000 at a time when the exchange rate is $1.3460/. The entire principal is to be repaid in three
2. The Flatiron Group (USA). The Flatiron Group, a private equity firm headquartered in Boulder, Colorado, borrows 5,000,000 for one year at 7.375% interest.a. What is the dollar cost of this debt if
18. Maximizing Present Value. Do the equity investors in investments based on project financing seek to maximize the present value of their investment, or are they compensated by some other manner?
17. Infinite Lives. Why do projects with infinite lives and grandiose growth projects not appeal to credi- tors who would engage in project financing, whereas those attributes are normally very
16. Predictability. Predictability of future cash flows is essential to induce creditors to participate in project financing. How does financial leverage increase the risk in highly leveraged
15. Singular Project. In the context of project financing. what is a "long-lived, capital-intensive, singular proj- ect"?
14. Separation. In project financing, the project is a legal entity separate from the corporations that are the equity owners. Why?
13. Euro versus Foreign Bonds. What is the difference between a Eurobond and a foreign bond, and why do two types of international bonds exist?
12. International Debt Instruments. Bank borrowing has long been the manner by which corporations and governments borrowed funds for short periods of time. What, then, is the advantage over bank bor-
11. Define the following terms:a. LIBORb. Euro LIBORc. Eurocreditsd. Syndicated bank credits
10. Eurodollar Deposits. Why would anyone, individual or corporation, want to deposit U.S. dollars in a bank outside of the United States when the natural location for such deposits would be a bank
9. Eurodollars. Which of the following are Eurodol- lars and which are not?a. A U.S. dollar deposit owned by a German corpo- ration and held in Barclay's Bank in Londonb. A U.S. dollar deposit owned
8. Internal Financing. What is the difference between "internal" financing and "external" financing for a subsidiary? List three types of internal financing and three types of external financing
7. Argentina. In January 2002, the government of Argentina broke away from its currency board sys- tem that had tied the peso to the U.S. dollar and devalued the peso from APs1.0000/$ to APs1.40000$.
6. Local Norms. Should foreign subsidiaries of multi- national firms conform to the capital structure norms of the host country or to the norms of their parent's country? Discuss.
5. Ex-Post Cost of Borrowing. Exhibit 14.2 shows that Deutsche Bank borrowed funds at a nominal cost of 9.59% per annum, but at a later date that debt was selling to yield 7.24%. Near the other
4. Diversified Cash Flows. If a multinational firm is able to diversify its sources of cash inflow so as to receive those flows from several countries and in several currencies, do you think that
3. Availability of Capital. How does the availability of capital influence the theory of optimal capital struc- ture for a multinational enterprise?
2. Varying Debt Proportions. As debt in a firm's capi- tal structure is increased from no debt to a signifi- cant proportion of debt (say, 60%), what tends to happen to the cost of debt, to the cost
1. Objective. What, in simple wording, is the objective sought by finding an optimal capital structure?
3. Exhibit 1 is Julie's spreadsheet analysis of what she considers relevant choices. Using these, what would you recommend as a financing package?The objects of a financier are, then, to secure an
2. Does the currency of denomination depend on the currency of the parent or the currency of the business unit that will be responsible for servicing the debt?The objects of a financier are, then, to
1. Which of the many debt characteristics-currency, maturity, cost, fixed versus floating rate-do you believe are of the highest priority for Julie and Tirstrup?The objects of a financier are, then,
5. Productos Montevideo, S.A. (A). Montevideo Products, 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
10. 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
1. Trident's Cost of Capital. Exhibit 12.2 showed the calculation of Trident's weighted average cost of cap- ital. Assuming that financial conditions have wors- ened, and using the following current
3. Deming Pipelines, Inc. Deming Pipelines, Inc. is a large U.S. natural gas pipeline company that wants to raise $120 million to finance expansion. Deming wants a capital structure that is 50% debt
4. Tata's Cost of Capital. Tata is the largest and most successful specialty goods company based in India. It has not entered the North American marketplace yet, but is considering establishing both
6. The Tombs. You have joined your friends at the local watering hole, The Tombs, for your weekly debate on international finance. The topic this week is whether the cost of equity can ever be
7 Cargill's Cost of Capital. Cargill is generally considered to be one of the three largest privately held companies in the world. Headquartered in Minneapolis, Minnesota, the company has been
8. Stevenson-Kwo's Cost of Equity. Senior manage- ment at Stevenson-Kwo is actively debating the implications of diversification on its cost of equity. Although both parties agree that the company's
11. JPMorgan. JPMorgan's Latin American Equity Research department produced the following WACC calculation for Petrobrs of Brazil versus Lukoil of Russia in their June 18, 2004, report. Evaluate the
12. UNIBANCO. UNIBANCO estimated the weighted average cost of capital for Petrobrs to be 13.2% in Brazilian reais in its August 12, 2004, report. Evaluate the methodology and assumptions used in the
13. Citigroup Smith Barney (dollar). Citigroup regularly performs a U.S. dollar-based discounted cash flow (DCF) valuation of Petrobrs in its coverage. That DCF analysis requires the use of a
14. Citigroup Smith Barney (reais). In a report dated June 17, 2003, Citigroup SmithBarney calculated a WACC for Petrobrs denominated in Brazilian reais (R$). Evaluate the methodology and assumptions
15. BBVA Investment Bank. BBVA utilized a rather innovative approach to dealing with both country and currency risk in their December 20, 2004, report on Petrobrs. Evaluate the methodology and
3. 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
2. The Data Page. Aswath Damodaran, a distin- guished professor at the NYU Stern School of Business, maintains a detailed financial data page on a variety of topics-one of which is the cost of capi-
1. Weighted Average Cost of Capital Calculator. The Financial Times has a simple online way to use a weighted average cost of capital calculator. Use the link below to explore the impacts of changing
16. Petrobrs's WACC Comparison. The various esti- mates of the cost of capital for Petrobrs of Brazil appear to be very different, but are they? Reorganize your answers to the previous five prob-
10. Stevenson-Kwo's WACC and Effective Tax Rate. Many MNES have greater ability to control and reduce their effective tax rates when expanding international operations. If Stevenson-Kwo was able to
9. Stevenson-Kwo's WACC. Calculate the weighted average cost of capital for Stevenson-Kwo for before and after international diversification.a. Did the reduction in debt costs reduce the firm's
5. Country Equity Risk Premiums. Using the century of equity market data presented in Exhibit 12.3, answer the following questions:a. Which country had the largest differential between the arithmetic
2. Curacao Pharmaceuticals. Curacao Pharmaceuti- cals's cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes Curacao's
16. Emerging-Market MNEs. Apart from improving liquidity and escaping from a segmented home mar- ket, why might emerging-market MNEs further lower their cost of capital by listing and selling equity

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