Multinational Finance

With the growth in demand for exotic foods, Possum Products CEO, Michael Munger, is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.

Possum Products CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firms financial management process. He has asked you, the firms most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:

h. What is purchasing power parity? If a package of jerky costs $2.5 in the United States and purchasing power parity holds, what should be the price of the jerky package in France?

i. What effect does relative inflation have on interest rates and exchange rates?

j. To what extent do average capital structures vary across different countries?

k. Now consider the following project: A U.S. company can lease a manufacturing facility in Japan for 2 years. The company must spend billion as shown in the table initially to refurbish the plant. The expected net cash flows from the plant for the next 2 years, in millions, are CF1 = and CF2 = . A similar project in the United States would have a risk-adjusted cost of capital of 10%. In the United States, a 1-year government bond pays 2% interest and a 2-year bond pays 2.9%. In Japan, a 1-year bond pays 0.05% and a 2-year bond pays 0.26%. What is the projects NPV?

Cost	0.74
CF1	410
CF2	605