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principles of finance

Questions and Answers of Principles Of Finance

15. The "Riddle." The riddle is an attempt to explain under what conditions an MNE would have a higher or lower debt ratio and beta than its domestic coun- terpart. Explain and diagram these
14. Cost of Capital for MNES Compared to Domestic Firms. Theoretically, MNES should be in a better position than their domestic counterparts to support higher debt ratios, because their cash flows
13. Emerging Markets. It has been suggested that firms located in illiquid and segmented emerging markets could follow Novo's proactive strategy to interna- tionalize their own cost of capital. What
12. Novo Industri (C).a. What was Novo's strategy to internationalize its cost of capital?b. What is the evidence that Novo's strategy suc- ceeded?
11. Novo Industri (B). Novo believed that the Danish capital market was segmented from world capital markets. Explain the six characteristics of the Danish equity market that were responsible for its
10. Novo Industri (A). Why did Novo believe that its cost of capital was too high compared to its competi tors? Why did Novo's relatively high cost of capital create a competitive disadvantage?
9. Market Liquidity and Segmentation Effects. What is the effect of market liquidity and segmentation on a firm's cost of capital?
8. Market Segmentation.a. Define market segmentation.b. What are the six main causes of market segmen- tation?c. What are the main disadvantages for a firm to be located in a segmented market?
7. Market Liquidity.a. Define what is meant by the term market liquidity.b. What are the main disadvantages for a firm located in an illiquid market?c. If a firm is limited to raising funds in its
5. Portfolio Investors. Both domestic and interna- tional portfolio managers are asset allocators.a. What is their portfolio management objective?b. What is the main advantage that international
4. Equity Risk Premiums.a. What is an equity risk premium?b. What is the difference between calculating an equity risk premium using arithmetic returns and using geometric returns?\c. In Exhibit
3. Definitions. Define the following terms:a. Systematic riskb. Unsystematic riskc. Beta (in the Capital Asset Pricing Model)
2. Benefits. What are the benefits of achieving a lower cost and greater availability of capital?
1. Dimensions of the Cost and Availability 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
4. Is the cost of capital really a relevant factor in the competitiveness and strategy of a company like Petrobrs? Does the corporate cost of capital really affect competitiveness? Petrobrs stands
3. The final quote that "one's view on the direction of the broad Brazilian market" suggests that potential investors consider the relative attractiveness of Brazil in their investment decision. How
2. Does this method of using the sovereign spread also compensate for currency risk? Petrobrs stands out in terms of deepwater technol- ogy... but currently lags in the area of cost of capital. We
1. Why do you think Petrobrs's cost of capital is so high? Are there better ways, or other ways, of calculating its weighted average cost of capital? Petrobrs stands out in terms of deepwater
3. Nestle's Financial Statements and Exchange Rates. Using Nestle's Web page, check Current Press Releases for more recent financial results, including what the company reports as the primary
2. Professional Treasury Associations. Corporate treasury, the unit within the typical MNE that man- ages cash balances and foreign exchange positions, is an area of specialized services. There are a
1. Translation Practices: FASB. The Financial Accounting Standards Board promulgates standard practices for the reporting of financial results by companies in the United States. However, it also-
7. Productos Montevideo, S.A. (C). Calculate Montevideo'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 all
6. Productos Montevideo, S.A. (B). Calculate Montevideo's contribution to its parent's translation loss if the exchange rate on December 31 is $U22/$. Assume all peso accounts remain as they were at
4. Trident Europe (D). Using facts in the chapter for Trident Europe, assume as in Trident Europe (C) that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/ to $1.5000/.
3. Trident Europe (C). Using facts in the chapter for Trident Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/ to $1.500/E. Calculate Trident Europe's
2. Trident Europe (B). Using facts in the chapter for Trident Europe, assume as in question Trident Europe (A) that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from
1. Trident Europe (A). Using facts in the chapter for Trident Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/ to $0.9000/ rather than to $1.0000/.
12. Trident and a Weak Dollar. During the year ahead the U.S. dollar is expected to weaken vis--vis the euro. How might this affect the reported consoli- dated earnings of Trident and its operating
11. Trident and a Strong Dollar. During the year ahead the U.S. dollar is expected to appreciate vis--vis the euro. How might this affect the reported consoli- dated earnings of Trident and its
10. Reacting to Potential Losses. How should financial managers react to any differences between potential losses from operating exposure and translation exposure?
9. Foreign Exchange Losses by Any Other Name. What are the primary differences among losses from trans- action exposure, operating exposure, and translation exposure?
8. Hyperinflation. What is hyperinflation and what are its consequences for translating foreign financial statements?
5. Functional Currency. What is a functional currency? What is a nonfunctional currency?
4. Self-Sustaining Subsidiaries. What is the difference between a self-sustaining foreign subsidiary and an integrated foreign subsidiary?
3. The Central Problem. What is the central problem in consolidating the financial statements of a foreign subsidiary?
2. Converting Financial Assets. In the context of preparing consolidated financial statements, are the words translate and convert synonyms?
1. By Any Other Name. What does the word translation mean? Why is translation exposure some- times called accounting exposure?
3. What would you recommend that Meaghan do? Meaghan O'Connor had inherited a larger set of problems in the Engineering Equipment Division than she had ever expected. After taking over as the CFO of
2. How would you characterize or structure your analysis of each of the individual country threats to LaJolla? What specific features of their individual problems seem to be intertwined with currency
1. Do you believe Meaghan O'Connor should spend time and resources attempting to manage translation losses, what many consider purely an accounting phenomenon? Meaghan O'Connor had inherited a larger
4. World Bank's International Comparison Program. The World Bank has an ongoing research program that focuses on the relative purchasing power of 107 different economies globally, specifi- cally in
3. International Interest Rates. A number of Web sites publish current interest rates by currency and matu- rity. Use the Financial Times Web site to isolate the interest rate differentials between
2. Purchasing Power Parity Statistics. The Organiza- tion for Economic Cooperation and Development (OECD) publishes detailed measures of prices and purchasing power for its member countries. Go to
1. Big Mac Index Updated. Use The Economist's Web site to find the latest edition of the Big Mac Index of currency overvaluation and undervaluation. (You will need to do a search for "Big Mac
22. London Money Fund. Tim Hogan is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near-risk-free investment with
21. Maltese Falcon: March 2003-2004. The infamous solid gold falcon, initially intended as a tribute by the Knights of Rhodes to the King of Spain in apprecia- tion for his gift of the island of
20. East Asiatic Company-Thailand. The East Asiatic Company (EAC), a Danish company with sub- sidiaries all over Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because
19. Chamonix Chateau Rentals. You are planning a ski vacation to Mt. Blanc in Chamonix, France, one year from now. You are negotiating the rental of a chateau. The chateau's owner wishes to preserve
18. London and New York. Money and foreign exchange markets in London and New York are very efficient. The following information is available:a. What do the financial markets suggest for infla- tion
16. Langkawi Island Resort. You are planning a 30-day vacation on Langkawi Island, Malaysia, one year from now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is
14. Luis Pinzon-UIA. Luis Pinzon, using the same val- ues and assumptions as in the previous question, now decides to seek the full 4.800 % return available in U.S. dollars by not covering his
12. Copenhagen CIA (B). John Duell is now evaluating the arbitrage profit potential in the same market after interest rates change.a. Assume that interest rates in the United States increase to 4%
10. XTerra Exports and Pass-Through. Assume that the export price of a Nissan XTerra from Osaka, Japan, is 3,250,000. The exchange rate is 115.20/$. The forecast rate of inflation in the United
9. Joseph Yazzie and Japanese/United States Parity Conditions. Joseph Yazzie is attempting to deter- mine whether U.S./Japanese financial conditions are new parity. The current spot rate is a flat
8. Akira Numata-UIA Japan. Akira Numata, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the
6. Argentine Peso and PPP. The Argentine peso was fixed through a currency board at Ps1.00/$ through- out the 1990s. In January 2002 the Argentine peso was floated. On January 29, 2003, it was
10. Forward Rate as an Unbiased Predictor of the Future Spot Rate. Some forecasters believe that for- eign exchange markets for the major floating cur- rencies are "efficient" and forward exchange
9. Covered Interest Arbitrage. Define the terms covered interest arbitrage and uncovered interest arbi-trage. What is the difference between these two transactions?
8. Interest Rate Parity. Define interest rate parity. What is the relationship between interest rate parity and forward rates?
7. The International Fisher Effect. Define the international Fisher effect. To what extent do empiri- cal tests confirm that the international Fisher effect exists in practice?
6. The Fisher Effect. Define the Fisher effect. To what extent do empirical tests confirm that the Fisher effect exists in practice?
5. Exchange Rate Pass-Through. Incomplete exchange rate pass-through is one reason that a country's real effective exchange rate can deviate for lengthy peri- ods from its purchasing power
4. Real Effective Exchange Rates: Japan and the United States. Exhibit 6.3 compares the real effec- tive exchange rates for Japan and the United States. If the comparative real effective exchange
3. Real Effective Exchange Rate Index. What formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index?
2. Nominal Effective Exchange Rate Index. Explain how a nominal effective exchange rate index is con- structed.
1. Purchasing Power Parity. Define the following terms:a. The law of one priceb. Absolute purchasing power parityc. Relative purchasing power parity
3. In the case of Iceland, the country was able to sustain a large current account deficit for several years, and at the same time have ever-rising interest rates and a stronger and stronger
2. Many countries have used interest rate increases to protect their currencies for many years. What are the pros and cons of using this strategy?"More than almost anything icelanders like a soak in
1. Do you think a country the size of Iceland or New Zealand is more or less sensitive to the potential impacts of global capital movements? "More than almost anything icelanders like a soak in hot
4. A Futures Trade. A newspaper shows the following prices for the previous day's trading in U.S. dollar- euro currency futures:What do the above terms indicate? Month: December Open 29124
1. Peregrine Funds-Jakarta. Samuel Samosir trades currencies for Peregrine Funds in Jakarta, Indonesia. He focuses nearly all of his time and attention on the U.S. dollar/Singapore dollar ($/S$)
5. Madera Capital. Katya Berezovsky is a currency speculator for Madera Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise
9. Giri the Contrarian. Giri Patel works for CIBC Currency Funds in Toronto. Giri is something of a contrarian-as opposed to most of the forecasts, he believes the Canadian dollar (CS) will
10. Downing Street. Sydney Reeks is a currency trader for Downing Street, a private investment house in London. Downing Street's clients are a collection of wealthy private investors who, with a
11. U.S. Dollar/Euro. The exhibit on the following page indicates that a one-year call option on euros at a strike rate of $1.25/ will cost the buyer $0.0366/, or 4.56%. But that assumed a volatility
2. Hindustan Lever. Unilever's affiliate in India, Hindustan Lever, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment
3. Seattle Scientific, Inc. Josh Miller is chief financial officer of a medium-sized Seattle-based medical device manufacturer. The company's annual sales of $40 million have been growing rapidly,
6. Caterpillar. Caterpillar (U.S.) just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,030 million. Won1,000 million has already been
8. South Face. South Face, Ltd., a Canadian manufac- turer of raincoats, does not selectively hedge its trans- action exposure. Instead, if the date of the transaction is known with certainty, all
9. Translucent/H20. Translucent/H20 is a U.S.-based company that manufactures, sells, and installs water purification equipment. On April 20 the company sold a system to the City of Nagasaki, Japan,
10. Farah Jeans. Farah Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q8,400,000 is due in six months. ("Q" is the symbol for
11. Pan American Travel. PanAmerican Travel, a Honolulu, Hawaii, based 100% privately owned travel company has signed an agreement to acquire a 50% ownership share of Taipei Travel, a Taiwan based
13. Micca Metals, Inc. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific pre- cious metals and materials that are used
14. Pixel's Financial Metrics. Leo Srivastava is the director of finance for Pixel Manufacturing, a U.S.- based manufacturer of hand-held computer systems for inventory management. Pixel's system
15. Maria Gonzalez and Trident (A). Trident-the same U.S.-based company as discussed throughout this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.).
16. Maria Gonzalez and Trident (B). One year later Maria Gonzalez is still on the job at Trident. Trident's business is booming, and sales have now expanded to include exports to Germany and Japan,
18. TEK-Italian Account Receivable (Spreadsheet on Web Site) TEK wishes to hedge a $4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment is due in three months. TEK's Italian
19. TEK-Japanese Account Payable. TEK has imported components from its joint venture in Japan, Sony-TEK, with payment of 8,000,000 due in six months. Citibank has offered TEK the follow- ing
20. TEK-British Telecom Bidding. TEK has made a 1,500,000 bid to supply and install a network moni- toring system for British Telecom in Manchester, UK. The bid is good for 30 days at which time the
21. TEK-Swedish Price List. TEK offers oscilloscopes and other off-the-shelf products through foreign- currency-denominated price lists. The prices are valid for three months only. One example is a
22. TEK-Swiss Dividend Payable. TEK's European subsidiaries are formally owned by a holding com- pany, TEK-Switzerland. Thus, the subsidiaries pay dividends to the Swiss holding company, which in
4. Garman-Kohlhagen Option Formulation. For those of the brave of heart and quantitatively adept, check out the following Internet site's detailed presenta- tion of the Garman-Kohlhagen option
3. Option Pricing. OzForex Foreign Exchange Services is a private firm with an enormously power- ful foreign currency derivative-enabled Web site. Use the following Web site to evaluate the various
2. Risk Management of Financial Derivatives. If you think this book is long, take a look at the freely downloadable U.S. Comptroller of the Currency's handbook on risk management related to the care
1. Financial Derivatives and the ISDA. The ISDA, the International Swaps and Derivatives Association,publishes a wealth of information about financial derivatives, their valuation, and their use, in
13. Euro/Japanese Yen. Legrand (France) is expecting to receive 10.4 million in 90 days as a result of an export sale to a Japanese semiconductor firm. What will it cost, in total, to purchase an
12. U.S. Dollar/Japanese Yen. What would be the pre- mium expense, in home-currency, for Nakagama of Japan's purchase of an option to sell 750,000 U.S. dollars, assuming the initial values listed in
8. Call Profits. Assume that a call option on euros is written with a strike price of $1.25/ at a premium of 3.80 cents per euro ($0.0380/) and with an expira- tion date three months from now. The
7. Gnome Capital (B). Stefan Weir believes the Swiss franc will appreciate versus the U.S. dollar in the coming three-month period. He has $100,000 to invest. The current spot rate is $0.5820/SF, the
6. Gnome Capital (A). Stefan Weir trades currency for Gnome Capital of Geneva. Stefan has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The

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