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business
introduction to corporate finance
Questions and Answers of
Introduction To Corporate Finance
What are the benefits of netting transaction exposures?
When is the establishment of a reinvoicing center warranted?
What is the difference between hedging with forward contracts and with money market hedges? When would you expect their respective costs to be somewhat different?
Compare the pros and cons of using forwards and currency options versus forward protection agreements for hedging transaction exposures.
Why should firms consider financing international trade in a third currency that is neither the exporter’s nor the importer’s currency? Show how financing and hedging can be effectively bundled.
What is different about hedging long-term transaction exposures?
Why do firms generally hedge less than their full exposure? What does it say about their attitude toward risk?
What is different about hedging contingent transaction exposures? What are the most appropriate instruments and techniques for hedging transaction exposures?
Electrolux transaction exposure. The Swedish manufacturer of home appliances exports €175 million of vacuum cleaners every month to Carrefour, the French retailer. Payment is due at the end of each
Bombardier’s exports receivables (A). Bombardier—Canada-based defense contractor—signed a sales contract for the delivery by the end of 2008 of five Dash 8 twin-engine turboprops to Alaska
Bombardier’s exports receivables (B). Royal Bank of Canada had just revised its forecast, saying that the CAD would further rise to CAD 1 = US$1.08 before declining below parity by the middle of
Sony’s royalties payment. The U.S. sales subsidiary of the Japanese consumer electronics giant Sony Inc. is committed to paying a fixed lump sum of money(royalties) set at 2. 5 percent of its U.S.
Currency risk in the travel industry. Ulysses Travel Ltd (UTL) is a Boston-based travel operator that specializes in tour and holiday packages with destinations in Spain, Italy, and Greece where
John Deere’s Chinese acquisition. The U.S. farming equipment giant just won approval from the Chinese authorities for the acquisition of Shen-Zhen Excavators Ltd.—a medium-sized Chinese
Dinky Toys’ cross-border acquisition. Dinky Toys, Inc. (DTI) of Pennsylvania has just purchased a Thai company that manufactures plastic beams and sockets for children’s construction toys. The
Moulinex exports financing. On February 15, 2013, Moulinex, a French manufacturer of kitchen utensils, concluded a major exports contract with British retailer Tesco. It expects export proceeds of
Zanussi exports financing. The Italian manufacturer of household appliances Zanussi is exporting dishwashers to Canada and extending 180 days credit to its Canadian wholesaler. The exports proceeds
Hedging helicopter exports with collars. Eurocopter—the European defense contractor—exports 25 single-engine light helicopters known as Ecureuil (squirrel)to the Japanese Coast Guard with payment
Currency and commodity price risk. Metallgesellschaft (MG), a leading German metal processor, has scheduled the delivery of 20,000 metric tons of copper for August 10, 2013, to Quelle, a German
Lufthansa hedges the purchase of 20 Boeing jets (A). In January 1985, Lufthansa German Airlines purchased 20 Boeing 737 long-distance aircraft for US$500 million payable to Boeing exactly one year
Lufthansa hedges the purchase of 20 Boeing jets (B). Heinz Ruhnan could have considered the use of currency options.a. What would be the advantage of using a currency option to hedge currency risk?
Boeing finances the sale of 20 Boeing jets to Lufthansa (C). Boeing is seeking short-term financing for its export sales to Germany. The Overseas Private Investment Corporation (OPIC) offers
Merck (U.S.) acquires Banyu (Japan). On August 3, 1983, Merck, the giant U.S.-based pharmaceutical company, reached an agreement with Banyu for the friendly acquisition of 50 percent of Banyu’s
What is translation exposure? How does it differ from transaction exposure?
Is hedging translation exposure warranted when financial markets are efficient?
Spell out specific conditions when translation exposure hedging is warranted.
Compare the three principal translation methods: Where are resulting gains and losses reported?
What is a functional currency? How does its choice determine applicable translation rules under FASB Statement No. 52?
Do translation losses negatively impact the firm’s cost of capital?
How can forwards and options be used to hedge translation exposure?
What is the true cost of translation exposure hedging?
How can a company alter its translation exposure?
What is the cost of translation hedging when currency options are used?
Pax Americana measures its Mexican peso translation exposure (A). The U.S.-based multinational Pax Americana Inc. is concerned by the impact of the anticipated Mexican peso devaluation upon its net
Pax Americana hedges its Mexican peso translation exposure (B). Referring to Pax Americana’s translation exposure described in problem 1:a. Identify the alternative hedging methods available to Pax
Firestone’s euro exposure. 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 the euro-zone’s
Motorola’s Argentine peso translation exposure. U.S.-based Motorola has a wholly owned subsidiary in Argentina that assembles consumer electronics products for sale there. The net worth of the
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
Sun Microsystems’ functional currency. Referring to Sun Microsystems’ French subsidiary, Marianne S.A., assume that due to the close production integration between U.S. and French operations the
Galileo’s functional currency. The U.S. multinational manufacturer of drilling and seismic instruments Galileo Ltd. (GLL) is reviewing the rapid deterioration of the Venezuelan economy and how it
Hewlett-Packard’s Indian financing-cum-hedging conundrum. Following the successful introduction of Copernicus, its latest line of laptop computers, in May 2014, Hewlett-Packard-India (HPI) was
Hippocrates hedges its translation exposures (A). Hippocrates Inc. is a leading U.S.-based manufacturer of medical imaging systems such as MRI machines with headquarters offices and manufacturing
Hippocrates’ balance sheet consolidation (B). Referring to information provided in the preceding problem:a. Prepare a consolidated balance sheet for Hippocrates Inc. using current exchange rates.b.
Explain what economic/operating exposure is. Why does it matter?
What is the difference between economic/operating and transaction exposure to currency risk?
How can operating exposure to currency exposure be measured?
What are the limitations of relying on the purchasing power parity framework to gauge firms’ economic/operating exposure to foreign exchange risk?
What does it mean for operating exposure to be measured by a “regression coefficient”?
Why is operating exposure to currency risk more difficult to manage than transaction exposure?
What is the role played by currency pass-through in exports pricing for managing operating/economic exposure?
How can contractual and financial hedging be harnessed to reduce operating exposure to currency risk? What are the limitations of this approach?
How can marketing policies be used to manage operating exposure to currency risk?
How can manufacturing policies be used to manage operating exposure to currency risk?
It exports fifty 120-passenger jets to regional airlines primarily in the United States and Western Europe. Sales contracts are US$ denominated and average $100 million per plane. Its book of future
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 catalog to French, Belgian, and Swiss travel agencies
Portugal’s leather footwear industry has suffered from an expensive euro while its rate of inflation since the launch of the euro in 1999 has exceeded the euro-zone average by an annual average of
In 2011, China experienced an inflation rate of 11 percent against 1 percent in the United States, whereas the renmimbi appreciated from RMB 6. 7 to RMB 6. 3 = $1 during the same period. Walmart, the
In a move toward becoming a major car producer in Eastern Europe, Renault in 2004 purchased the Romanian firm Dacia for €200 million to build Logans in Romania. The pact calls for Renault to start
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 neighboring East European countries such as Bulgaria,
Minneapolis-based Norwest Bank has granted a three-year fixed-interest dollar-denominated loan in the amount of US$25 million to Water Irrigation Systems Inc. for a major export sales to Danang
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 ticket sales are
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 are vertically integrated
Why do firms often follow a sequential strategy in entering foreign markets?
Discuss the different challenges facing an exporting firm.
What are the pros and cons of international licensing as a mode of foreign market entry?
What are the key elements that a licensing contract should include? What are the clauses that may be the most difficult to enforce?
What are the differences between licensing and franchising?
Identify the key motivations for foreign direct investment.
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
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?
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?
What are the key phases involved in making foreign direct investment decisions?
What is different about evaluating foreign projects?
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?
Why is it important to first forecast the project’s local currency cash flows?
Identify different kinds of risk encountered when operating a subsidiary in a foreign country.
What are incremental cash flows, and why should they be incorporated into the evaluation of a foreign project?
What are the different methods available for incorporating risks into foreign projects’ evaluation?
Is shortening the required payback period an appropriate method for accounting for risk in foreign projects?
Give a simple example of how break-even analysis can be used in evaluating foreign projects.
Why is adjusting the risk premium in the cost of equity capital in discounting reference currency cash flows simple, albeit simplistic?
What is adjusted present value and what are the unique benefits it brings to valuing foreign projects?
What are real options and how can they be used in valuing foreign projects?How does this methodology differ from traditional discounted cash flows?
The leading German sport equipment company, Puma, is reviewing a proposal to establish a sport shoe manufacturing plant in the Philippines. The investment will require initial capital of Philippine
Kubota—the Japanese manufacturer of tractors and small earthmoving equipment—is considering building an assembly plant in Da Nang (Vietnam). The initial investment would amount to dong (VND)200
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 the Vietnam government impact Kubota’s
Social costs/benefits versus private-sector analysis. Vietnam’s Ministry of Industry is conducting its own analysis of the proposed project to assemble small-scale bulldozers by Kubota for sale in
Refer to International Corporate Finance in Practice 20. 2 on page 560 relating the French carmaker Renault’s entry into the Romanian automobile market. The year is 2004 and Romania is barely
Referring to problem 5 and information provided in International Corporate Finance in Practice 20. 2 about Renault investment in Dacia, prepare a five-year pro forma cash-flow statement for the
Novo—the Danish biotech multinational—is considering alternative modes of entry into the Indonesian market. It could (1) license the Indonesian state-owned pharmaceutical agency known as Farma
Cardiex is a world-leading manufacturer of implantable defibrillators based in Maastricht (Netherlands). Gustav Lund, Cardiex’s senior vice president for production and logistics, is trying to
Referring to information provided in problem 8, Cardiex’s sales in the European Union are projected to remain stable at €100 million for the next 5 years. Show pro-form income and cash-flow
Referring to the information provided in problems8 and 9, inflation in the Philippines is expected to run at an annual rate of8 percent over the next five years while the peso, currently trading at
Discuss the logic for mergers and acquisitions. Are cross-border M&As substantially different?
What is meant by a control premium? Who are the primary beneficiaries in M&As?
What are the pros and cons of international acquisition as a mode of foreign market entry?
What is unique about valuing cross-border acquisitions? What valuation methodology would you recommend?
Contrast cross-border acquisitions carried out by multinationals, private equity firms, and sovereign wealth funds.
What is the appropriate discount rate to use in valuing foreign companies?
Discuss the pros and cons of valuation by multiples in cross-border acquisitions.
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