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International financial management 9th Edition Jeff Madura - Solutions

Assume that Business Outfitters Inc. in Question 13 experienced abnormal inventory shrinkage of $80,750. Business Outfitters Inc. has decided to record the abnormal inventory shrinkage so that it would be separately disclosed on the income statement. What account would be increased for the abnormal
Which of the following accounts would appear only in an accrual basis accounting system, and which could appear in either a cash basis or an accrual basis accounting system? (a) Capital Stock, (b) Fees Earned,(c) Accounts Payable, (d) Land, (e) Utilities Expense, and(f) Accounts Receivable.
Is the land balance before the accounts have been adjusted the amount that should normally be reported on the balance sheet? Explain.
If the effect of an adjustment is to increase the balance of a liability account, which of the following statements describes the effect of the adjustment on the other account?a. Increases the balance of a revenue accountb. Increases the balance of an expense accountc. Increases the balance of an
If the effect of an adjustment is to increase the balance of an asset account, which of the following statements describes the effect of the adjustment on the other account?a. Increases the balance of a revenue accountb. Increases the balance of a liability accountc. Increases the balance of an
What is a primary control for determining the accuracy of a business’s record keeping?
Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary?
Maude, Inc., a U.S.-based MNC, has recently acquired a firm in Singapore. To eliminate inefficiencies, Maude downsized the target substantially, eliminating two-thirds of the workforce. Why might this action affect the regulations imposed on the subsidiary’s business by the Singapore government?
Poki, Inc., a U.S.-based MNC, is considering expanding into Thailand because of decreasing profit margins in the United States. The demand for Poki’s product in Thailand is very strong. However, forecasts indicate that the baht is expected to depreciate substantially over the next 3 years. Should
Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to produce personal computers (PCs) and market them throughout Russia, where demand for PCs has increased substantially in recent years. Assume that the stock market conditions are not favorable in Russia, as the
Savannah, Inc., a manufacturer of clothing, wants to increase its market share by acquiring a target producing a popular clothing line in Europe. This clothing line is well established. Forecasts indicate a relatively stable euro over the life of the project. Marquette, Inc., wants to increase its
Why are valuations of privatized businesses previously owned by the governments of developing countries more difficult than valuations of existing firms in developed countries?
Blore, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided you with the following information:• Blore expects to keep the target for 3 years,
What are some of the key sources of uncertainty in Blore’s valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC would have been lower as a result of the Asian crisis.
The reduction in expected cash flows of Asian subsidiaries as a result of the Asian crisis likely resulted in a reduced valuation of these subsidiaries from the parent’s perspective. Explain why a U.S.-based MNC might not have sold its Asian subsidiaries.
Provide two reasons why an MNC’s strategy of acquiring a foreign target will backfire. That is, explain why the acquisition might result in a negative NPV.
Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes the purchase, it would keep Estoya’s operations for 2 years and then sell the company. In the recent past,
Senser Co. established a subsidiary in Russia 2 years ago. Under its original plans, Senser intended to operate the subsidiary for a total of 4 years. However, it would like to reassess the situation, since exchange rate forecasts for the Russian ruble indicate that it may depreciate from its
Colorado Springs Co. plans to divest either its Singapore or its Canadian subsidiary. Assume that if exchange rates remain constant, the dollar cash flows each of these subsidiaries would provide to the parent over time would be somewhat similar. However, the firm expects the Singapore dollar to
San Gabriel Corp. recently considered divesting its Italian subsidiary and determined that the divestiture was not feasible. The required rate of return on this subsidiary was 17 percent. In the last week, San Gabriel’s required return on that subsidiary increased to 21 percent. If the sales
Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attack on the United States, Ethridge Co. decided to conduct a capital budgeting analysis to determine whether it should divest the
Merton, Inc., has a subsidiary in Bulgaria that it fully finances with its own equity. Last week, a firm offered to buy the subsidiary from Merton for $60 million in cash, and the offer is still available this week as well. The annualized long-term risk-free rate in the United States increased from
Sunbelt, Inc., plans to purchase a firm in Indonesia. It believes that it can install its operating procedure in this firm, which would significantly reduce the firm’s operating expenses. However, the Indonesian government may approve the acquisition only if Sunbelt does not lay off any workers.
Florida Co. produces software. Its primary business in Boca Raton is expected to generate cash flows of $4 million at the end of each of the next 3 years, and Florida expects that it could sell this business for $10 million (after accounting for capital gains taxes) at the end of 3 years. Florida
Minnesota Co. consists of two businesses. Its local business is expected to generate cash flows of $1 million at the end of each of the next 3 years. It also owns a foreign subsidiary based in Mexico, whose business is selling technology in Mexico. This business is expected to generate $2 million
Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Alternatively, Venice Co. wants to buy the business but will not have the funds to make the acquisition until 2 years from now.
Baltimore Co. considers divesting its six foreign projects as of today. Each project will last one year. Its required rate of return on each project is the same. The cost of operations for each project is denominated in dollars and is the same. Baltimore believes that each project will generate the
Washington Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, it received an offer from a company to purchase the subsidiary, and it has not yet responded to this offer. a. Since last week, the expected stream of euro cash flows has
Targ Co. of the United States has been targeted by three firms that consider acquiring it: (1) Americo (from the United States), Japino (of Japan), and Canzo (of Canada). These three firms do not have any other international business, have similar risk levels, and have a similar capital structure.
Can a Foreign Target Be Assessed Like Any Other Asset?Point Yes. The value of a foreign target to an MNC is the present value of the future cash flows to the MNC. The process of estimating a foreign target’s value is the same as the process of estimating a machine’s value. A target has expected
1. Are there any reasons why the business that has been so successful in the United Kingdom will not necessarily be successful in other European countries?2. If the business is diversified throughout Europe, will this substantially reduce the exposure of the Sports Exports Company to exchange rate
1. Using a spreadsheet, determine the NPV of the acquisition of Skates’n’Stuff. Based on your numerical analysis, should Blades establish a subsidiary in Thailand or acquire Skates’n’Stuff?2. If Blades negotiates with Skates’n’Stuff, what is the maximum amount (in Thai baht) Blades
List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC. Identify common financial factors for an MNC to consider when assessing country risk. Briefly elaborate on how each factor can
Describe the steps involved in assessing country risk once all relevant information has been gathered.
Describe the possible errors involved in assessing country risk. In other words, explain why country risk analysis is not always accurate.
Why do you think that an MNC’s strategy of diversifying projects internationally could achieve low exposure to country risk?
Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for that country. Do you agree with this statement? Why or why not?
If the potential return is high enough, any degree of country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a capital budgeting analysis of a project considered for a foreign country? Explain.
Niagra, Inc., has decided to call a well-known country risk consultant to conduct a country risk analysis in a small country where it plans to develop a large subsidiary. Niagra prefers to hire the consultant since it plans to use its employees for other important corporate functions. The
Explain the micro-assessment of country risk.
How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a project’s estimated cash flows?
Explain some methods of reducing exposure to existing country risk, while maintaining the same amount of business within a particular country.
Why do some subsidiaries maintain a low profile as to where their parents are located?
When NYU Corp. considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk analysis performed about one year earlier, when it had planned to begin a major exporting business to Zenland firms. Then it updated the
MNCs such as Alcoa, DuPont, Heinz, and IBM donated products and technology to foreign countries where they had subsidiaries. How could these actions have reduced some forms of country risk?
Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below.Assauer has assigned an overall rating of 80 percent to political risk factors and of 20 percent to financial risk factors. Assauer is not willing
Arkansas, Inc., exports to various less developed countries and its receivables are denominated in the foreign currencies of the importers. It considers reducing its exchange rate risk by establishing small subsidiaries to produce products. By incurring some expenses in the countries where it
Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the United States. The project would end in one year, when all earnings would be remitted to Hoosier, Inc. Assume that no additional corporate
Explain how the capital budgeting analysis in the previous question would need to be adjusted if there were three possible outcomes for the British pound along with the possible outcomes for the British economy and corporate tax rate.
Recently, J.C. Penney decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before making its expansion decisions. Initial screenings of 30 foreign countries were based on political and economic factors that contribute to country risk. For
Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinar; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinar in each year. After 2 years, Monk will
In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent. Reevaluate the NPV of the project’s expected scenario using this adjusted discount rate.
In 2004 during the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local militant groups. How should an MNC account for this potential risk when it considers direct foreign investment (DFI) in any particular country?
Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Company (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related to this project. In one year, Tovar will receive payment from Grecia, which will be tied to Grecia’s
Wyoming Co. is a nonprofit educational institution that wants to import educational software products from Hong Kong and sell them in the United States. It wants to assess the net present value of this project since any profits it earns will be used for its foundation. It expects to pay HK$5
Kansas Co. wants to invest in a project in China. It would require an initial investment of 5 million yuan. It is expected to generate cash flows of 7 million yuan at the end of one year. The spot rate of the yuan is $.12, and Kansas thinks this exchange rate is the best forecast of the future.
Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of this year. It plans to hedge receivables of 10 million euros with a forward contract. Today, the spot rate of the euro is $1.20, while the one-year forward rate of the euro is
Does Country Risk Matter for U.S. Projects? PointNo. U.S.-based MNCs should consider country risk for foreign projects only. A U.S.-based MNC can account for U.S. economic conditions when estimating cash flows of a U.S. project or deriving the required rate of return on a project, but it does not
1. Under the current conditions, is the Sports Exports Company subject to country risk?2. If the firm does decide to develop a small subsidiary in the United Kingdom, will its exposure to country risk change? If so, how? MINI CASE The Sports Exports Company produces footballs in
1. Based on the information provided in the case, do you think the political risk associated with Thailand is higher or lower for a manufacturer of leisure products such as Blades as opposed to, say, a food producer? That is, conduct a microassessment of political risk for Blades, Inc.2. Do you
Present an argument in support of an MNC’s favoring a debt-intensive capital structure. Present an argument in support of an MNC’s favoring an equity-intensive capital structure.
Wizard, Inc., has a subsidiary in a country where the government allows only a small amount of earnings to be remitted to the United States each year. Should Wizard finance the subsidiary with debt financing by the parent, equity financing by the parent, or financing by local banks in the foreign
Describe general differences between the capital structures of firms based in the United States and those of firms based in Japan. Offer an explanation for these differences.
Why might a firm use a “local” capital structure at a particular subsidiary that differs substantially from its “global” capital structure?
Explain how characteristics of MNCs can affect the cost of capital.
Explain why managers of a wholly owned subsidiary may be more likely to satisfy the shareholders of the MNC.
LaSalle Corp. is a U.S.- based MNC with subsidiaries in various less developed countries where stock markets are not well established. How can LaSalle still achieve its “global” target capital structure of 50 percent debt and 50 percent equity, if it plans to use only debt financing for the
Drexel Co. is a U.S.-based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could provide most of the financing, or the subsidiary could be supported by local loans from banks in that country. Which
Veer Co. is a U.S.-based MNC that has most of its operations in Japan. Since the Japanese companies with which it competes use more financial leverage, it has decided to adjust its financial leverage to be in line with theirs. With this heavy emphasis on debt, Veer should reap more tax advantages.
Pullman, Inc., a U.S. firm, has been highly profitable, but prefers not to pay out higher dividends because its shareholders want the funds to be reinvested. It plans for large growth in several less developed countries. Pullman would like to finance the growth with local debt in the host countries
Explain why the cost of capital for a U.S.-based MNC with a large subsidiary in Brazil is higher than for a U.S.-based MNC in the same industry with a large subsidiary in Japan. Assume that the subsidiary operations for each MNC are financed with local debt in the host country.
An MNC has total assets of $100 million and debt of $20 million. The firm’s before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm’s weighted average cost of capital?
Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bonds yield 2 percent. Based on this information, what is Wiley’s estimated cost of equity?
Blues, Inc., is an MNC located in the United States. Blues would like to estimate its weighted average cost of capital. On average, bonds issued by Blues yield 9 percent. Currently, T-bill rates are 3 percent. Furthermore, Blues’ stock has a beta of 1.5, and the return on the Wilshire 5000 stock
Rose, Inc., of Dallas, Texas, needed to infuse capital into its foreign subsidiaries to support their expansion. As of August 2001, it planned to issue stock in the United States. However, after the September 11, 2001, terrorist attack, it decided that long-term debt was a cheaper source of
If Nike decides to expand further in South America, why might its capital structure be affected? Why will its overall cost of capital be affected?
Charleston Corp. is considering establishing a subsidiary in either Germany or the United Kingdom. The subsidiary will be mostly financed with loans from the local banks in the host country chosen. Charleston has determined that the revenue generated from the British subsidiary will be slightly
In recent years, several U.S. firms have penetrated Mexico’s market. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much higher than U.S. interest rates. In some periods, the Mexican government does not attempt to lower
Forest Co. produces goods in the United States, Germany, and Australia and sells the goods in the areas where they are produced. Foreign earnings are periodically remitted to the U.S. parent. As the euro’s interest rates have declined to a very low level, Forest has decided to finance its German
Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does not have an established stock market, but loans by local banks are available with a 90 percent interest rate.
Carazona, Inc., is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiary’s operations in Indonesia. However, the cost of debt is currently about 30 percent there for firms like Carazona or government agencies that have a very strong credit rating. A consultant
Zylon Co. is a U.S. firm that provides technology software for the government of Singapore. It will be paid S$7 million at the end of each of the next 5 years. The entire amount of the payment represents earnings since Zylon created the technology software years ago. Zylon is subject to a 30
Orlando Co. has its U.S. business funded with dollars with a capital structure of 60 percent debt and 40 percent equity. It has its Thailand business funded with Thai baht with a capital structure of 50 percent debt and 50 percent equity. The corporate tax rate on U.S. earnings and on Thailand
Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentine pesos (AP) at the end of each of the next 4 years. It will have to pay operating expenses of AP3 million per year. The Argentine government will charge a 30 percent tax rate on profits. All
Texas Co. produces drugs and plans to acquire a subsidiary in Poland. This subsidiary is a lab that would perform biotech research. Texas Co. is attracted to the lab because of the cheap wages of scientists in Poland. The parent of Texas Co. would review the lab research findings of the subsidiary
Vogl Co. is a U.S. firm that conducts major importing and exporting business in Japan, whereby all transactions are invoiced in dollars. It obtained debt in the United States at an interest rate of 10 percent per year. The long-term risk-free rate in the United States is 8 percent. The stock market
Should the Reduced Tax Rate on Dividends Affect an MNC’s Capital Structure? Point No. The change in the tax law reduces the taxes that investors pay on dividends. It does not change the taxes paid by the MNC. Thus, it should not affect the capital structure of the MNC.Counter-Point A dividend
1. What is an advantage of using equity to support the subsidiary? What is a disadvantage?2. If Jim decides to use long-term debt as the primary form of capital to support this subsidiary, should he use dollar-denominated debt or pound-denominated debt?3. How can the equity proportion of this
1. If Blades expands into Thailand, do you think its cost of capital will be higher or lower than the cost of capital of roller blade manufacturers operating solely in the United States? Substantiate your answer by outlining how Blades’ characteristics distinguish it from domestic roller
a. What factors should be considered by a U.S. firm that plans to issue a floating rate bond denominated in a foreign currency?b. Is the risk of issuing a floating rate bond higher or lower than the risk of issuing a fixed rate bond? Explain.c. How would an investing firm differ from a borrowing
What is the advantage of using simulation to assess the bond financing position?
a. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm.b. Explain how a U.S.-based MNC issuing bonds denominated in euros may be able to offset a portion of its exchange rate risk.
Columbia Corp. is a U.S. company with no foreign currency cash flows. It plans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in U.S. dollars with a floating interest rate. It estimates its periodic dollar cash flows for each bond. Which bond do you
Why would a U.S. firm consider issuing bonds denominated in multiple currencies?
Kerr, Inc., a major U.S. exporter of products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it will be exposed to exchange rate risk. How can Kerr
Cuanto Corp. is a U.S. drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the cost in Germany or Switzerland. Furthermore, there is a strong demand for
Sambuka, Inc., can issue bonds in either U.S. dollars or in Swiss francs. Dollar-denominated bonds would have a coupon rate of 15 percent; Swiss franc–denominated bonds would have a coupon rate of 12 percent. Assuming that Sambuka can issue bonds worth $10 million in either currency, that the
Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9 percent versus 3 percent in Japan. Assume
Assume that Seminole, Inc., considers issuing a Singapore dollar–denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate, since U.S. dollar–denominated bonds issued in the United
Assume that Hurricane, Inc., is a U.S. company that exports products to the United Kingdom, invoiced in dollars. It also exports products to Denmark, invoiced in dollars. It currently has no cash outflows in foreign currencies, and it plans to issue bonds in the near future. Hurricane could likely

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