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Questions and Answers of Finance

Suppose now that Telmex has made its shares tradable internationally via cross listing on NYSE. Again using the CAPM paradigm, estimate Telmex's equity cost of capital. Discuss the possible effects
Why is capital budgeting analysis so important to the firm?
What is the intuition behind the NPV capital budgeting framework?
Discuss what is meant by the incremental cash flows of a capital project.
Discuss the nature of the equation sequence, Equations 18.2a to 18.2f.
What makes the APV capital budgeting framework useful for analyzing foreign capital expenditures?
Relate the concept of lost sales to the definition of incremental cash flows.
What problems can enter into the capital budgeting analysis if project debt is evaluated instead of the borrowing capacity created by the project?
What is the nature of a concessionary loan and how is it handled in the APV model?
What is the intuition of discounting the various cash flows in the APV model at specific discount rates?
In the Modigliani-Miller equation, why is the market value of the levered firm greater than the market value of an equivalent unlevered firm?
Discuss the difference between performing the capital budgeting analysis from the parent firm's perspective as opposed to the project perspective.
Define the concept of a real option. Discuss some of the various real options a firm can be confronted with when investing in real projects.
Discuss the conditions under which the capital expenditure of a foreign subsidiary might have a positive NPV in total currency terms but be unprofitable from the parent firm's perspective.
The Alpha Company plans to establish a subsidiary in Hungary to manufacture and sell fashion wristwatches. Alpha has total assets of $70 million, of which $45 million is equity financed. The
The current spot exchange rate is HUF250/$1.00. Long-run inflation in Hungary is estimated at 10 percent annually and 3 percent in the United States. If PPP is expected to hold between the two
The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 12 percent and its before-tax borrowing rate is 8 percent. Given a marginal tax rate of 35 percent,
Zeda, Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK 15,000,000 at a rate of 4 percent per annum. The
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR10,000. The annual cash flows over the five-year economic life
Suppose that in the case application in the chapter the APV for Centralia had been -$60,000. How large would the after-tax terminal value of the project need to be before the APV would be positive
With regard to the Centralia case application in the chapter, how would the APV change if:a. The forecast of πd and/or πf is incorrect?b. Depreciation cash flows are discounted at Kud instead of
Dorchester, Ltd. is an old-line confectioner specializing in high-quality chocolates. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Western
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strikit- Rich's management
Describe the key factors contributing to effective cash management within a firm. Why is the cash management process more difficult in a MNC?
Discuss the pros and cons of a MNC having a centralized cash manager handle all investment and borrowing for all affiliates of the MNC versus each affiliate having a local manager who performs the
Assume that interaffiliate cash flows are uncorrelated with one another. Calculate the standard deviation of the portfolio of cash held by the centralized depository for the following
The Eastern Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer-size quantities, and sells them through sales affiliates in Hong Kong, the United
The Eastern Trading Company of Singapore presently follows a decentralized system of cash management where it and its affiliates each maintain their own transaction and precautionary cash balances.
Discuss some of the reasons why international trade is more difficult and risky from the exporter's perspective than is domestic trade.
What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each.
How does a time draft become a banker's acceptance?
Discuss the various ways the exporter can receive payment in a foreign trade transaction after the importer's bank accepts the exporter's time draft and it becomes a banker's acceptance.
What is a forfaiting transaction?
What is the purpose of the Export-Import Bank?
Do you think that a country's government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?
Briefly discuss the various types of countertrade.
Discuss some of the pros and cons of countertrade from the country's perspective and the firm's perspective.
What is the difference between a buy-back transaction and a counterpurchase?
Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days. Further assume that the importing bank's acceptance commission is 1.25 percent and that the market rate for
The time from acceptance to maturity on a $1,000,000 banker's acceptance is 120 days. The importer's bank's acceptance commission is 1.75 percent and the market rate for 120-day B/As is 5.75 percent.
American Machine Tools is a Midwestern manufacturer of tool-and-die-making equipment. The company has had an inquiry from a representative of the Moldovan government about the terms of sale for a
Discuss the twin objectives of taxation. Be sure to define the key words.
Compare and contrast the three basic types of taxation that governments levy within their tax jurisdiction.
Show how double taxation on a taxpayer may result if all countries were to tax the worldwide income of their residents and the income earned within their territorial boundaries.
What methods do taxing authorities use to eliminate or mitigate the evil of double taxation?
How might a MNC use transfer pricing strategies? How do import duties affect transfer pricing policies?
What are the various means the taxing authority of a country might use to determine if a transfer price is reasonable?
Discuss how a MNC might attempt to repatriate blocked funds from a host country.
There are three production stages required before a pair of skis produced by Fjord Fabrication can be sold at retail for NOK2,300. Fill in the following table to show the value added at each stage in
The Docket Company of Asheville, NC, USA, is considering establishing an affiliate operation in the city of Wellington, on the south island of New Zealand. It is undecided whether to establish the
Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y are 20 percent and 30 percent, respectively. The transfer price per unit is currently set at $1,000, but it
Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. The transfer price
Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. Additionally,
Sigma Corporation of Boston is contemplating establishing a wholly owned subsidiary operation in the Mediterranean. Two countries under consideration are Spain and Cyprus. Sigma intends to repatriate
The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong, the United Kingdom, and the United States, where they are resold by sales affiliates. Eastern Trading is concerned with
How would you define transaction exposure? How is it different from economic exposure?
Discuss and compare hedging transaction exposure using the forward contract versus money market instruments. When do alternative hedging approaches produce the same result?
Discuss and compare the costs of hedging by forward contracts and options contracts.
What are the advantages of a currency options contract as a hedging tool compared with the forward contract?
Suppose your company has purchased a put option on the euro to manage exchange exposure associated with an account receivable denominated in that currency. In this case, your company can be said to
Recent surveys of corporate exchange risk management practices indicate that many U.S. firms simply do not hedge. How would you explain this result?
Should a firm hedge? Why or why not?
Explain contingent exposure and discuss the advantages of using currency options to manage this type of currency exposure.
Explain cross-hedging and discuss the factors determining its effectiveness.
Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently, the six-month forward exchange rate is $1.10/€ and
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward
You plan to visit Geneva, Switzerland, in three months to attend an international business conference. You expect to incur a total cost of SF 5,000 for lodging, meals, and transportation during your
Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million payable in one year. The current spot exchange rate is $1.05/€ and the one-year
Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm and gave the Swiss client a choice of paying either $10,000 or SF 15,000 in three months.a. In the example, Baltimore
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is 110/$. The
Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the
Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on
Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned about the euro proceeds from international sales and would like to
In April 1995, Lisa Stone ended a conversation with Benjamin Bisno, the president and chief executive officer of Diva Shoes, Inc., concerning his firm's growing exchange rate exposure. Since joining
How would you define economic exposure to exchange risk?
Explain the following statement: "Exposure is the regression coefficient."
Suppose that your company has an equity position in a French firm. Discuss the condition under which dollar leuro exchange rate uncertainty does not constitute exchange exposure for your company.
Explain the competitive and conversion effects of exchange rate changes on the firm's operating cash flow.
Discuss the determinants of operating exposure.
Discuss the implications of purchasing power parity for operating exposure.
General Motors exports cars to Spain, but the strong dollar against the euro hurts sales of GM cars in Spain. In the Spanish market, GM faces competition from Italian and French car makers, such as
What are the advantages and disadvantages to a firm of financial hedging of its operating exposure compared to operational hedges (such as relocating its manufacturing site)?
Discuss the advantages and disadvantages of maintaining multiple manufacturing sites as a hedge against exchange rate exposure.
Evaluate the following statement: "A firm can reduce its currency exposure by diversifying across different business lines."
Exchange rate uncertainty may not necessarily mean that firms face exchange risk exposure. Explain why this may be the case.
Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British
A U.S. firm holds an asset in France and faces the following scenario:In the above table, p* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset.a. Compute the
Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity
Consider Case 3 of Albion Computers PLC discussed in the chapter. Now, assume that the pound is expected to depreciate to $1.50 from the current level of $1.60 per pound. This implies that the pound
Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.
How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current! noncurrent method, the
Identify some instances under FASB 52 when a foreign entity's functional currency would be the same as the parent firm's currency.
Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than
It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other
Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.6 in the text.
Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from €1.1000/$1.00 to
In Example 10.2, a forward contract was used to establish a derivatives "hedge" to protect Centralia from a translation loss if the euro depreciated from €1.1 000/ $1.00 to €1.1,786/$1.00. Assume
Sundance Sporting Goods, .Inc., is a U.S. manufacturer of high-quality sporting goods-principally golf, tennis, and other racquet equipment, and also lawn sports, such as croquet and badminton-with
Briefly discuss some of the service that international banks provide their customers and the marketplace.
Briefly discuss the various types of international banking offices.

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