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introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

7. Licensing versus foreign direct investment (intermediate). The Danish biotech multinational Novo is considering alternative modes of entry into the Indonesian market. It could (1) license the
6. Renault invests in Romania (B-intermediate.) Referring to problem 5 and information provided in “International Corporate Finance in Practice 20.2” about Renault investment in Dacia, prepare a
5. Renault invests in Romania (A-beginner). Refer to “International Corporate Finance in Practice 20.2” relating the French carmaker Renault’s entry into the Romanian automobile market. The
4. Kubota invests in Vietnam (C-intermediate). Social costs/benefits versus privatesector analysis. Vietnam’s Ministry of Industry is conducting its own analysis of the proposed project to assemble
3. Kubota invests in Vietnam (B-advanced). Referring to the information provided in problem 2, evaluate the following:a. How would a 30 percent ad valorem tariff on power train and chassis imposed by
2. Kubota invests in Vietnam (A-intermediate). Kubota, the Japanese manufacturer of tractors and small earthmoving equipment, is considering building an assembly plant in Da Nang (Vietnam). The
1. Puma invests in the Philippines (intermediate). The leading German sport equipment company, Puma, is reviewing a proposal to establish a sport shoe manufacturing plant in the Philippines. The
13. What are real options and how can they be used in valuing foreign projects? How does this methodology differ from traditional discounted cash flows?
12. What is adjusted present value and what are the unique benefits it brings to valuing foreign projects?
11. Why is adjusting the risk premium in the cost of equity capital in discounting reference currency cash flows simple, albeit simplistic?
10. Give a simple example of how break-even analysis can be used in evaluating foreign projects.
9. Is shortening the required payback period an appropriate method for accounting for risk in foreign projects?
8. What are the different methods available for incorporating risks into foreign projects’ evaluation?
7. What are incremental cash flows, and why should they be incorporated into the evaluation of a foreign project?
6. Identify different kinds of risk encountered when operating a subsidiary in a foreign country.
5. Why is it important to first forecast the project’s local currency cash flows?
4. When evaluating foreign projects, why is discounting residual cash flows to equity holders at the equity cost of capital preferable to discounting free cash flows at the weighted cost of capital?
3. What is different about evaluating foreign projects?
2. What are the key phases involved in making foreign direct investment decisions?
1. What are the different metrics used in gauging the attractiveness of capital projects such as plant modernization, product launch, or acquisition of a business unit?
Q: If the INR were to abruptly depreciate by 25 percent in year 1 of operations, by what percentage would you expect the project’s NPV to change?
■ How to account for the many risk factors likely to impact the project
■ What the rationale is for discounting residual equity cash flows at the firm’s equity cost of capital
■ Why it is crucial to value the project in the host country’s local currency terms first and then in the investor’s reference currency
■ How to identify relevant cash flows for an international project
■ What the differences are between valuing international projects and valuing domestic ventures
■ What the foreign direct investment process is within which capital budgeting is embedded
5. What are the costs and benefits to the Indian economy of Carrefour’s entry in the retailing industry as a foreign direct investor? Albert Montgolfier is the deputy head of Carrefour’s
4. Should Carrefour decide to enter India now, what mode(s) of entry would you recommend? Albert Montgolfier is the deputy head of Carrefour’s strategic planning department.He has been charged with
3. Would you advise Carrefour to enter India now or await a full liberalization of FDI for retailers? Albert Montgolfier is the deputy head of Carrefour’s strategic planning department.He has been
2. Would Carrefour be able to replicate its strategy in India? What do you see as the principal obstacles? Albert Montgolfier is the deputy head of Carrefour’s strategic planning department.He has
1. Referring to Carrefour’s financials for Thailand (see Case Exhibit 19.1), compute the Days Sales Outstanding ratios for A/Rs and its payment deferral ratio for A/Ps.What is Carrefour’s cash
3. London Insurance Market (advanced). Access the Lloyd’s of London website at www.lloyds.com and identify the different types of political risks that it can insure. What is uniquely different
2. World Bank’s Political Risk Insurance (intermediate). Access the World Bank’s Multilateral Investment Guarantee Agency website at www.miga.org and identify the different risks that businesses
1. Political Risk Insurance (intermediate). Access the Overseas Private Insurance Corporation website at www.opic.gov and find the different risks that U.S. firms can cover through OPIC insurance
8. Define country risk. Compare the exposure to country risk faced by an exporter, a licensor, a franchisor, and a foreign direct investor. How can such firms mitigate their exposure to country risk?
7. How do host countries gauge the costs and benefits of foreign direct investments over the life of a project? Why should foreign direct investors understand how such analysis is carried out and the
6. Identify the key motivations for foreign direct investment.
5. What are the differences between licensing and franchising?
4. What are the key elements that a licensing contract should include? What are the clauses that may be the most difficult to enforce?
3. What are the pros and cons of international licensing as a mode of foreign market entry?
2. Discuss the different challenges facing an exporting firm.
1. Why do firms often follow a sequential strategy in entering foreign markets?
Q: What is the necessary percentage of equity capital that a multinational corporation needs to own to exercise managerial control of its local operation?
■ How a cost-benefit analysis of foreign direct investment informs country risk forecasting
■ What country risk is and how to mitigate it
■ What the theories motivating foreign direct investment are
■ What the difference between licensing and franchising is
■ What the pros and cons of international licensing are
■ What the contractual modes of foreign market entry are
5. How would an annual depreciation of the Czech koruna of 2.5 percent in excess of its inflation change Peugeot’s economic exposure? The severe economic downturn engulfing the eurozone was taking
4. How could Peugeot mitigate its exposure to the South Korean won? The severe economic downturn engulfing the eurozone was taking a severe toll on the French automobile industry, which experienced
3. Assuming that, due to Hyundai’s sales gain, French car manufacturers’ losses are equally shouldered by Renault and Peugeot and that the first-year profit and loss are capitalized as a
2. Assuming a 25 percent devaluation of the South Korean won, estimate how much Hyundai car sales would increase in the EU. The severe economic downturn engulfing the eurozone was taking a severe
1. Sketch diagrammatically cash flows for Peugeot-France versus Hyundai’s operations in the Czech Republic. Assume that the Czech koruna is pegged in perpetuity to the € in anticipation of the
9. Showa Shell (advanced). Showa Shell Sekiyu K.K. is the 50 percent owned Japanese subsidiary of the oil giant Royal Dutch Shell. Unlike giant multinationals such as Exxon or Royal Dutch Shell that
8. Air Algérie (advanced). The national Algerian flag air carrier operates a web of 63 routes mostly to Europe and the Middle East. Its fleet is financed in euros to the tune of €2.5 billion, and
7. Financing exports to Vietnam (intermediate). Minneapolis-based Norwest Bank has granted a three-year fixed-interest dollar-denominated loan in the amount of US$25 million toWater Irrigation
6. Renault-Dacia as an exports platform (intermediate). The company is now positioning itself to take advantage of Romania’s relatively low wages to use its Dacia plant as an export platform to
5. Renault SA builds Logans in Romania (intermediate). In a move toward becoming a major car producer in Eastern Europe, Renault in 2004 purchased the Romanian firm Dacia for €211 million to build
4. Walmart as a Chinese retailer (beginner). In 2011, China experienced an inflation rate of 11 percent against 1 percent in the United States, whereas the renminbi appreciated from RMB 6.7 to RMB
3. Leather goods in Portugal and the single currency (beginner). Portugal’s leather footwear industry has suffered from an expensive euro while its rate of inflation since the launch of the euro in
2. Currency risk in the travel industry (intermediate). Kuoni, a leading Swiss tour operator, sells package tours to Sri Lanka for French and Swiss tourists.On January 1, 2012, Kuoni sent its printed
1. Embraer exports to the United States (beginner). Embraer is a Brazilian aircraft manufacturer. It exports fifty 120-passenger jets to regional airlines primarily in the United States andWestern
10. How can manufacturing policies be used to manage operating exposure to currency risk?
9. How can marketing policies be used to manage operating exposure to currency risk?
8. How can contractual and financial hedging be harnessed to reduce operating exposure to currency risk? What are the limitations of this approach?
7. What is the role played by currency pass-through in exports pricing for managing operating/economic exposure?
6. Why is operating exposure to currency risk more difficult to manage than transaction exposure?
5. What does it mean for operating exposure to be measured by a “regression coefficient”?
4. What are the limitations of relying on the purchasing power parity framework to gauge firms’ economic/operating exposure to foreign exchange risk?
3. How can operating exposure to currency exposure be measured?
2. What is the difference between economic/operating and transaction exposure to currency risk?
1. Explain what economic/operating exposure is. Why does it matter?
Q: Nintendo 3DS is priced at $200 in the U.S. market. Assuming that the Japanese yen has appreciated from 125 to 100 to the dollar, should Nintendo increase its price by the percentage of yen
Q: Why would a steady devaluation of the peso in line with inflation have helped Gillette-Argentina’s competitiveness in Argentina?
■ How marketing, pricing, manufacturing, and financial strategies can mitigate operating exposure to foreign exchange risk
■ How to measure operating exposure to exchange rate risk using regression analysis
■ What key factors are shaping operating exposure to foreign exchange risk
■ How to recognize the different categories of operating exposures to foreign exchange rate risk
3. How should the launch of Quattro in Turkey be financed? It was late December 2000 and Banu Ozcan, president and general manager of Wilkinson Sword–Turkey S.A., frowned as she examined the
2. What is Wilkinson Sword–Turkey’s translation exposure without Quattro? How would each financing option impact Wilkinson Sword’s translation exposure in Turkish lira? It was late December
1. How would you characterize Turkey’s foreign exchange market? What is your outlook for the Turkish lira? What does it mean forWilkinson Sword’s competitive position in Turkey? Why did Wilkinson
12. Procter & Gamble Foreign Exchange Risk Management. Access Procter &Gamble website at www.proctorgamble.com and search the firm’s annual report/Form 10K. How does the company manage currency
11. FASB 52. Log in to the Financial Accounting Standard Board website at www.fasb.org and review FASB 52: How should financial statements of subsidiaries operating in hyperinflationary countries be
10. Hippocrates’ balance sheet consolidation (B-advanced). Referring to information provided in the preceding problem:a. Prepare a consolidated balance sheet for Hippocrates Inc. using current
9. Hippocrates hedges its translation exposures (A-advanced). Hippocrates Inc.is a leading U.S.-based manufacturer of medical imaging systems such as MRI machines with headquarters offices and
8. Hewlett-Packard’s Indian financing-cum-hedging conundrum (intermediate).Following the successful introduction of Copernicus, its latest line of laptop computers, in May 2014,
7. Galileo’s functional currency (intermediate). The U.S. multinational manufacturer of drilling and seismic instruments Galileo Ltd. (GLL) is reviewing the rapid deterioration of the Venezuelan
6. Sun Microsystems’ functional currency (intermediate). Referring to Sun Microsystems’ French subsidiary (see Exhibit 17.5), Marianne S.A., assume that due to the close production integration
5. Archimedes SA’s money market hedge. On December 31, 2014, Archimedes SA, the Philippine affiliate of a U.S. irrigation equipment manufacturing company, is projecting its Philippines peso
4. Motorola’s Argentine peso translation exposure (intermediate). U.S.-based Motorola has a wholly owned subsidiary in Argentina that assembles consumer electronics products for sale there. The net
3. Firestone’s euro exposure (intermediate). On July 1, 2014, the Dutch subsidiary of Firestone Company–USA has a projected net translation exposure of €50,000,000 for July 1, 2015. Because of
2. Pax Americana hedges its Mexican peso translation exposure (B-beginner).Referring to Pax Americana’s translation exposure described in problem 1:a. Identify the alternative hedging methods
1. Pax Americana measures its Mexican peso translation exposure (A-beginner).The U.S.-based multinational Pax Americana Inc. is concerned by the impact of the anticipated Mexican peso devaluation
10. What is the cost of translation hedging when currency options are used?
9. How can a company alter its translation exposure?
8. What is the true cost of translation exposure hedging?
7. How can forwards and options be used to hedge translation exposure?
6. Do translation losses negatively impact the firm’s cost of capital?

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