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business
introduction to corporate finance
Questions and Answers of
Introduction To Corporate Finance
The Argentine peso (ARS) is officially trading at ARS 4. 65 = US$1, with increasing volume of forex transactions channeled through the black market at ARS 6 = US$1. Interest rates on bank loans under
Explain the concept of “mildly segmented” capital markets.
How can one measure degrees of segmentation across national equity markets?
Why was Novo’s P/E ratio so much smaller than its key competitors’ P/Es? What were the implications for Novo’s ability to compete in world markets?
Is the inverse of a firm’s P/E ratio a reasonable proxy for its equity cost of capital?
How do you explain why firms often list their shares on foreign equity markets?Which equity markets are the primary hosts to foreign listing?
What is the difference between “sponsored” and “unsponsored” American depositary receipts programs?
Why do firms sponsor ADR or GDR programs?
What is an ADR?
What is the difference between Level I, Level II, and Level III ADR programs?
What does it mean for a firm to internationalize its cost of capital?
Honda shares trade on the Tokyo Stock Exchange and on the NYSE as an ADR.a. Assuming that Honda stock closed at ¥2,177 and that ¥76.55 = US$1, at what price would you expect Honda to trade on the
Ciments Lafarge trades on the Paris Bourse and on the NYSE as an ADR. If its shares trade for €80.40–81.20 on the Paris Bourse, what would you expect to be the quoted price of its ADR to a
On November 28, 2012, MegaFon—the Russian telecom company—raised £1 billion on the London Stock Exchange. The controversial Uzbeck oligarch Alisher Usmanov owns 55. 8 percent of MegaFon, which
Referring to the information presented in problem 3:a. Explain MegaFon’s principal motivations in raising equity capital in London rather than in Moscow.b. Is the fact that MegaFon is almost
MegaFon stock on the Moscow Stock Exchange trades with a beta of β = 1. 71 while the risk-free rate and risk premium are, respectively, 6 percent and 7 percent.a. Compute MegaFon’s cost of equity
Salgacoar is an Indian shipping company that owns and operates 12 bulk dry cargo freighters. Headquartered in Goa (India), it specializes in shipping coal and iron ore primarily to South Korea. Its
Salgacoar Shipping’s CFO was preparing a final presentation to the firm’s board of directors and wanted to bring additional validation to the decision reached in problem 6.a. Explain how the
Salgacoar Shipping’s CEO expressed reservations about the equity financing recommendation that the firm’s CFO was finalizing for presentation to the board (see problems 6 and 7). He generally
What are the key decisions firms face in establishing their debt financing policies?How do they differ between a domestic and a multinational firm?
Identify the principal sources of foreign debt financing. Are they available only to multinational corporations?
What are the differences between domestic bonds, foreign bonds, and Eurobonds?
Define what is meant by the offshore or Eurobond market.
What is the difference between a bearer and a nominal bond?
What is the difference between the euro bond market and the Eurobond market?
What are Yankee, samurai, or bulldog bonds?
What is meant by bond market segmentation?
What is the difference between the nominal and effective cost of foreign debt?
Explain how currency swaps can be used to compute the effective cost of foreign debt.
Discuss the key factors that should guide firms in determining which currency to borrow in.
Royal Dutch Shell—the Anglo-Dutch oil company—issues a dollar-denominated seven-year zero-coupon Eurobond in the amount of US$1 billion at an annual yield of 6. 5 percent.a. Where would the funds
Consider the following two bond investment opportunities and compare their yields:a. Compute the yield to maturity (YTM) of a zero-coupon bond with a face value of €1,000 with nine years to
An investor is considering investing in one-year zero-coupon Eurobonds. He is comparing investment in either a British pound–denominated bond with a yield of 6. 2 percent or a euro denominated bond
PepsiCo Overseas issues dollar denominated zero-coupon Eurobonds at a price of 67. 25 percent. The bonds are to be repaid at 100 percent three years hence.a. What is the bonds’ yield to maturity?b.
Black & Decker—a U.S. multinational manufacturer of small power tools—is considering financing a plant expansion in France with euro (€) Eurobonds. The bond issue would be a five-year maturity
Nokia—the Finnish manufacturer of cell phones—is considering alternative financing options to fund the$1 billion acquisition of U.S.-based Magic Telecommunications.■ A €-denominated Eurobond
On August 28, 2010, IBM International Finance NV—the Dutch Antilles–based international finance subsidiary of IBM Corporation—issued four $100 million equivalent tranches of Eurobonds
Conoco-Norway—a subsidiary of Houston-based Conoco—christened the world’s first floating oil-production platform built from concrete, which will also be the world’s largest floating
R.J. Reynolds is considering a 25-billion yen debenture to be issued at 101. 50 percent of par. The five-year, annual coupon bond would pay an interest rate of 73∕4 percent denominated in yen, but
On December 1, 1970, the European monetary unit (EMU) was first used as a contractual device for the denomination of a bond issue floated by the European Coal and Steel Community.The value of the EMU
The market for peso-denominated bonds issued outside of Mexico was initiated in 2004. The peso Eurobond market began with the issuance of a MXN $3,000 MM bond by the Inter-American Development Bank
Televisa (TV)—the Mexican media conglomerate—was contemplating the issuance of peso-denominated Euro-notes. It would be the first such issue by a Mexican corporation in a market that was barely
What are the risks faced by exporters?
What is the relationship between credit and currency risk?
What is different about gauging the credit risk of a foreign buyer?
What are letters of credit? Distinguish between revocable and irrevocable letters of credit.
Explain how letters of credit are used for international trade financing purposes.
Why are confirmed letters of credit an effective hedge against country risk?
What is the nature of currency risk in international trade?
Identify the key documents accompanying an export transaction. Which specific functions do they perform?
What is the difference between a bank loan collateralized with A/Rs and factoring?
What is international leasing?
Explain why governments subsidize national exports.
Discuss the function performed by the bill of lading, commercial invoice, insurance certificate, and consular invoice.
Discuss the principal forms of government assistance provided by governments to their exporters.
Cisco Systems (U.S.) has sold to France-Telecom Internet servers for the amount of €10 million to be paid in three months. The transaction is secured by a trade acceptance from France-Telecom.a.
Cisco Systems has sold to Dhaka’s municipal water and sewer company an integrated computer system to modernize its citywide billing procedure. The trade acceptance in the amount of US$5 million has
BSI has sold to Cambodia’s Angkor Wat Entertainment Inc.(CAWE) INR 10 million licensing rights to 10 of its recent films. Payment is due in six months. BSI can simply finance its exports by drawing
BSI has been approached by a factor that offers to purchase the Angkor Wat Entertainment Inc.exports receivable at a 15 percent per annum discount plus a 150 basis points charge for a nonrecourse
What is the role that government-directed finance played in the economic development of Asia?
What are the functions performed by the main bank in Japanese finance?
What are the differences between the Japanese keiretsu and the South Korean chaebol?
What is the difference between relationship-based governance and rules-based governance? Why is it important to the development of capital markets?
What is meant by relationship banking? Why is it prevalent in East Asia?
Why is the absence of well-functioning bond markets in Asia a hindrance to the development of a complete derivatives market?
What is the logic of several classes of shares in Chinese stock exchanges?
What have been the major governance reforms promulgated in the aftermath of the Asian financial crisis?
Explain what ijara or leasing is and how it can be reconciled with the principles of Islamic finance. Is it appropriate to refer to ijara as debt-like financing?
Is there such a thing as an Islamic bond?
Explain how the concept of a diminishing musharaka is used in Shariahcompliant real estate finance.
How is the sukuk construct used in Shariah-compliant long-term financing?
What is the key financial innovation that has greatly facilitated the growth of Islamic-style asset management?
Is private equity–style investing consistent with the cardinal principles of Islamic finance?
Why did Islamic financial institutions escape relatively unscathed from the 2008 subprime crisis? What are the key lessons that financial regulators should draw from this episode?
What is foreign exchange risk?
How does the firm’s level of risk aversion impact its propensity to hedge currency risk?
What is the rationale for hedging currency risk?
Why is hedging value-creating?
Which type of firms are the best candidates for hedging currency risk?
Under what assumptions is hedging currency risk redundant?
What are the principal steps of the foreign exchange risk management process?
What are exchange rate forecasts used for?
What are market-based forecasts?
What is different about forecasting pegged yet adjustable foreign exchange rates?
How do you reconcile the efficient market hypothesis with the existence of model-based foreign exchange rate forecasting services?
What does it mean for forward rates to be unbiased forecasters of future spot exchange rates? What are the implications in risk management situations?
What is the difference between fundamental forecasting models and technical forecasting models?
What is the chartist approach to forecasting exchange rates?
How do you gauge the accuracy of a foreign exchange forecasting model?
What are econometric foreign exchange forecasting models?
What are composite forecasts?
South Korean treasury bonds maturing in seven years currently trade at 91 percent and pay an annual coupon of 7. 5 percent while similar U.S. Treasuries paying an annual coupon of 4. 25 percent
Pernod-Ricard—the French distiller—is exporting to Thailand and is concerned about the euro value of its Thai baht–denominated sales revenue. It considers two forecasts for the 90-day baht/euro
As the chief economist of the Lusitania country fund with extensive holdings in Brazil, you have been approached by Third Eye, a professional currency forecasting firm that claims to have superior
The chief economist of the Lusitania country fund believes that the firm will be better served in the long term by using a composite forecasting model combining the forward rate and the Third Eye
As the Mumbai-based currency analyst for Infosys, you have been approached by 20/20, a professional currency forecasting firm that claims to have superior forecasting accuracy on the US$/INR. Its
You are the chief investment strategist for the Tiger Emerging Market Fund, which has approximately 20 percent of its assets invested in the Buenos Aires Bolsa. It is January 2001 and Argentina will
Consider the case of Greece in the spring of 2010; its national currency, the drachma, was abolished when it joined the euro-zone and it officially adopted the euro as its currency. Apply the
What is transaction exposure to foreign exchange risk?
Why is hedging transaction exposure generally warranted?
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