Fundamentals of corporate finance 2nd Edition Robert Parrino, David S. Kidwell, Thomas W. Bates - Solutions

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Grant, Inc., is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. It decides to issue dollar-denominated debt (at
Janutis Co. has just issued fixed rate debt at 10 percent. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps variable rate payments of LIBOR plus 1 percent in exchange for payments of 10 percent. The interest rates
Bradenton Co. is considering a project in which it will export special contact lenses to Mexico. It expects that it will receive 1 million pesos after taxes at the end of each year for the next 4 years, and after that time its business in Mexico will end as its special patent will be terminated.
Will Currency Swaps Result in Low Financing Costs? Point Yes. Currency swaps have created greater participation by firms that need to exchange their currencies in the future. Thus, firms that finance in a low interest-rate currency can more easily establish an agreement to obtain the currency that
1. Jim Logan, owner of the Sports Exports Company, needs to determine whether dollar-denominated debt or pound-denominated debt would be most appropriate for financing this expansion, if he does expand. He is leaning toward financing the U.S. project with dollar-denominated debt since his goal is
1. Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes be affected by exchange rate movements? Would the effective financing cost of the yen-denominated
Recall from the previous chapter that your business is considering expansion within Mexico. Recall that you plan to invest a small amount of U.S. dollar equity into this project and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico, but Mexican interest
Determine Gandor’s cost of capital. Also, determine Gandor’s required rate of return for the joint venture in China.
Determine the probability distribution of Gandor’s net present values for the joint venture. Capital budgeting analyses should be conducted for these three scenarios:• Scenario 1. Based on original assumptions• Scenario 2. Based on an increase in the corporate income tax by the Chinese
Would you recommend that Gandor participate in the joint venture? Explain.
What do you think would be the key underlying factor that would have the most influence on the profits earned in China as a result of the joint venture?
Is there any reason for Gandor to revise the composition of its capital (debt and equity) obtained from the United States when financing joint ventures like this?
When Gandor was assessing this proposed joint venture, some of its managers recommended that Gandor borrow the Chinese currency rather than dollars to obtain some of the necessary capital for its initial investment. They suggested that such a strategy could reduce Gandor’s exchange rate risk. Do
a. Describe how foreign trade would be affected if banks did not provide trade-related services.b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
a. Why would an exporter provide financing for an importer?b. Is there much risk in this activity? Explain.
What is the role of a factor in international trade transactions?
a. What is the role today of the Export-Import Bank of the United States?b. Describe the Direct Loan Program administered by the Export-Import Bank.
What are bills of lading and how do they facilitate international trade transactions?
What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish so many programs?
Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It has not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the computer chips. After the September 11, 2001, terrorist attack on the United States, Bronx reconsidered
Briefly describe the Working Capital Guarantee Program administered by the Export-Import Bank.
Describe the Small Business Policy.
Describe the role of the Overseas Private Investment Corporation (OPIC).
Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would
Do Agencies That Facilitate International Trade Prevent Free Trade? Point Yes. The Export-Import Bank of the United States provides many programs to help U.S. exporters conduct international trade. The government is essentially subsidizing the exports. Governments in other countries have various
1. How could Jim use a letter of credit to ensure that he will be paid for the products he exports?2. Jim has discussed the possibility of expanding his export business through a second sporting goods distributor in the United Kingdom; this second distributor would cover a different territory than
1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment, Inc., and Major Leagues, Inc., would Blades receive payment for its roller blades before it delivers them? Do the banks issuing the time drafts guarantee payment on behalf of the Thai retailers if they default on
Recall that your business provides CDs that complement the teaching provided by your employees in Mexico. Assume that you decide to capitalize on these CDs by selling them to a large retail store based in Mexico. The CDs are less effective without the teaching, but still can be useful to
Explain why an MNC parent would consider financing from its subsidiaries.
a. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency.b. Discuss the use of specifying a break-even point when financing in a foreign currency.
a. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed?b. Once the probability distribution of effective financing rates from financing in a foreign currency is developed, how can this
How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?
Assume that Tulsa, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) Borrowing U.S. dollars at an interest rate of 6 percent, (2) Borrowing Japanese yen at an interest rate of 3 percent, or
How is it possible for a firm to incur a negative effective financing rate?
a. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short-term financing?b. Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that for dollars. If interest rate parity exists and if the forward rate of the
Akron Co. needs dollars. Assume that the local one-year loan rate is 15 percent, while a one-year loan rate on euros is 7 percent. By how much must the euro appreciate to cause the loan in euros to be more costly than a U.S. dollar loan?
Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve lower financing costs by consistently borrowing a foreign currency with a low interest rate?
Boca, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is three percentage points lower than the U.S. rate. Assume that interest rate parity exists; also assume that Boca believes that
Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is true: “Interest rate parity does not hold; therefore, U.S. firms could lock in a lower
Orlando, Inc., is a U.S.- based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 70 percent, Orlando is considering borrowing dollars, which it would convert to pesos to cover the operating
Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtained short-term financing from local banks prior to the Asian crisis. Explain why the firm may not be able to easily obtain funds from the local banks since the crisis.
Homewood Co. commonly finances some of its U.S. expansion by borrowing foreign currencies (such as Japanese yen) that have low interest rates. Describe how the potential return and risk of this strategy may have changed after the September 11, 2001, terrorist attack on the United States.
Missoula, Inc., decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following probability distribution for the yen’s degree of fluctuation against the dollar:Possible Degree of Fluctuation Percentageof Yen against the
Jacksonville Corp. is a U.S.-based firm that needs $600,000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest rate would be 5 percent versus 9 percent in the United States. Assume that interest rate parity exists.a. Can Jacksonville
Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year are as follows:The interest rate on the Canadian dollar is 9 percent, and the
a. Does borrowing a portfolio of currencies offer any possible advantages over the borrowing of a single foreign currency?b. If a firm borrows a portfolio of currencies, what characteristics of the currencies will affect the potential variability of the portfolio’s effective financing rate? What
Raleigh Corp. needs to borrow funds for one year to finance an expenditure in the United States. The following interest rates are available: expenditureBorrowing RateUnited States ....... 10%Canada ....... .... 6Japan .......... 5The percentage changes in the spot rates of the
Do MNCs Increase Their Risk When Borrowing Foreign Currencies? Point Yes. MNCs should borrow the currency that matches their cash inflows. If they borrow a foreign currency to finance business in a different currency, they are essentially speculating on the future exchange rate movements. The
1. Should Jim borrow dollars or pounds to finance his joint venture business? Why?2. Jim could also borrow euros at an interest rate that is lower than the U.S. or British rate. The values of the euro and pound tend to move in the same direction against the dollar but not always by the same degree.
1. What is the amount, in baht, that Blades needs to borrow to cover the payments due to the Thai suppliers? What is the amount, in yen, that Blades needs to borrow to cover the payments due to the Thai suppliers?2. Given that Blades will use the receipts from the receivables in Thailand to repay
You are considering a major marketing campaign in Mexico. If you implement it, you will incur high expenses in Mexican pesos and will need to finance the cost. To cover the cost, you can either borrow dollars at a low interest rate and convert them to Mexican pesos or borrow Mexican pesos. You
Discuss the general functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary.
Explain the benefits of netting. How can a centralized cash management system beneficial to the MNC?
How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?
If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with high interest rates?
Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire?
Why would a U.S. firm consider investing short-term funds in euros even when it does not have any future cash outflows in euros?
Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage since the euro’s 90-day interest rate is higher than the U.S. interest rate. What will determine whether this strategy is feasible?
Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to Mexican pesos, it can earn 1½ percent on a Mexican deposit. The spot rate of the Mexican peso is $.12. The spot rate 30
Rollins, Inc., has $3 million in cash available for 180 days. It can earn 7 percent on a U.S. Treasury bill or 9 percent on a British Treasury bill. The British investment does require conversion of dollars to British pounds. Assume that interest rate parity holds and that Rollins believes the
Repeat question 9 but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days.
Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially underestimate the spot rate to be realized in 180 days.
Assume that the one-year U.S. interest rate is 10 percent and the one-year Canadian interest rate is 13 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian dollar have to depreciate to make its effective yield the same as the U.S. interest rate from the U.S.
Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?
Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for one-year Treasury bills. The one-year forward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using
Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and subject to a low degree of exchange rate risk? Explain.
Should McNeese Co. consider investing funds in Latin American countries where it may expand facilities? The interest rates are high, and the proceeds from the investments could be used to help support the expansion. When would this strategy backfire?
Palos Co. commonly invests some of its excess dollars in foreign government short-term securities in order to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the September 11, 2001, terrorist attack on the United
Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in value during the next year is shown below:Possible Rate of Changein the Mexican Peso over Probability ofthe Life of
Ithaca Co. considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year Canadian dollar deposit. The Singapore one-year interest rate is 15 percent, while the Canadian one-year interest rate is 13 percent. The
Should Interest Rate Parity Prevent MNCs from Investing in Foreign Currencies?Point Yes. Currencies with high interest rates have large forward discounts according to interest rate parity. To the extent that the forward rate is a reasonable forecast of the future spot rate, investing in a foreign
1. If Jim invests the excess cash in U.S. Treasury bills, would this reduce the firms exposure to exchange rate risk? 2. Jim decided to use the excess cash to pay off the British loan. However, a friend advised him to invest the cash in British Treasury bills, stating that the loan provides an
1. There is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. What does this mean?2. If the net baht received from the Thailand subsidiary are invested in Thailand, how will U.S. operations be affected?3. Construct a spreadsheet that compares
Assume that this year you decide not to implement the marketing campaign that you considered in the previous chapter. Instead, you will invest some of this year’s profits in money market investments and then use this money to cover the campaign next year. You can retain the profits earned this
Determine the investment portfolio composition for Kent’s eastern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent.
What is the expected effective yield of the investment portfolio?
Based on the expected effective yield for the portfolio and the initial investment amount of $15 million, determine the annual interest to be earned on the portfolio.
Determine the financing portfolio composition for Kent’s western branch that would minimize the expected effective financing rate while satisfying the restriction imposed by the parent.
What is the expected effective financing rate of the total amount borrowed?
Based on the expected effective financing rate for the portfolio and the total amount of $15 million borrowed, determine the expected loan repayment amount beyond the principal borrowed.
When the expected interest received by the eastern branch and paid by the western branch of Kent Co. are consolidated what is the net amount of interest received?
If the eastern branch and the western branch worked together, the eastern branch could loan its $15 million to the western branch. Nevertheless, one could argue that the branches could not take advantage of interest rate differentials or expected exchange rate effects among currencies. Given the
Why is a dollar today worth more than a dollar one year from now?
What is a time line, and why is it important in financial analysis?
What is compounding, and how does it affect the future value of an investment?
What is the difference between simple interest and compound interest?
How does changing the compounding period affect the amount of interest earned on an investment?
What is the present value and when is it used?
What is the discount rate? How does the discount rate differ from the interest rate in the future value equation?
What is the relation between the present value factor and the future value factor?
Explain why you would expect the discount factor to become smaller the longer the time to payment.
What is the difference between the interest rate (i) and the growth rate (g) in the future value equation?
Explain the phrase “a dollar today is worth more than a dollar tomorrow. ”
Explain the importance of a time line.
What are the two factors to be considered in time value of money?
Differentiate future value from present value.
Differentiate between compounding and discounting.
Explain how compound interest differs from simple interest.
If you were given a choice of investing in an account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both offer the same stated interest rate and why?

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Fundamentals of corporate finance 2nd Edition Robert Parrino, David S. Kidwell, Thomas W. Bates - Solutions

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