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Multinational Business Finance 14th edition David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett - Solutions
How does translation alter the global tax liabilities of a firm? If a multinational firm's consolidated earnings increase as a result of consolidation and translation, what is the impact on tax liabilities?
What are the main differences between losses from transaction exposure and translation exposure?
What activity gives rise to translation exposure?
Can or should a company change the functional currency designation of a foreign subsidiary from year to year? If so, when would it be justified?
What are the two basic methods for translation used globally?
One of the major differences between translation methods is which balance sheet components are translated at which exchange rates, current or historical. Why would accounting practices ever use historical exchange rates?
How does the cross currency swap effectively hedge the three primary exposures McDonalds has relative to its British subsidiary.
"Mauna Loa, a macadamia nut subsidiary of Hershey's with planations on the slopes of its namesake volcano in Hilo, Hawaii, exports Macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of ¥1,200,000,000. At the
Assume the same facts as in Hurte-Paroxysm Products, Inc. (A). HP Products also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 10% per annum for six years. Dollar costs will not change. At the end of six years HP Products' patent
DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002 it collapsed in value to Ps
"Manitowoc Crane (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan8.20/$, but a Hong Kong advisory service predicts the renminbi will drop in
Assume the same facts as in Manitowoc Crane (A). Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum for eight years. Dollar costs will not change. At the end of ten years, Manitowoc's patent expires and it will no longer
"MacLoren Automtive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the foreign exchange risk, and
Using the Ganado Germany analysis in Exhibit 12.5 and 12.6 where the euro depreciates, how would prices, costs, and volumes change if Ganado Germany was operating in a nearly purely domestic, mature market, with major domestic competitors?If all competitors were domestic, Ganado Germany could not
Ganado Germany is now competing in a number of international (export) markets, growth markets, in which most of its competitors are foreign. Now how would you expect Ganado Germany's operating exposure to respond to the depreciation of the euro?Ganado Germany would most likely try to profit from
Rolls-Royce is struggling with its pricing strategy with a number of its major customers in Continental Europe, particularly Airbus. Since Rolls-Royce is a British company with most manufacturing of the Airbus engines in the United Kingdom, costs are predominantly denominated in British Pounds. But
Hurte-Paroxysm Products, Inc. (HP) of the United States exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumor exists that the reais will
Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may be behind the use of the different terms?
How can a multinational firm diversify operations? How can it diversify its financing? Do you believe these are effective ways of managing operating exposure?
What do you see as the primary difference between operating exposure and translation exposure? Would this have the same meaning to a private firm as a publicly traded firm?
Explain the time horizons used to analyze and measure unexpected changes in exchange rates.
What are examples of static exposures versus dynamic exposures?
According to financial theory, which is more important to the value of the firm, financing or operating cash flows?
The objective of both operating and transaction exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm's future cash flows. What strategic alternative policies exist to enable management to manage these exposures?
Why do you think Toyota had waited so long to move much of its manufacturing for European sales to Europe?
Market conditions have changed. Maria Gonzalez now estimates the risk-free rate to be 3.60%, the company's credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international beta at .85, and the company's capital structure is now 30% debt. All other values remain the same. For
Use the following information to answer questions 10 through 12. Genedak-Hogan is an American conglomerate which is actively debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt
Calculate the weighted average cost of capital for Genedak-Hogan for before and after international diversification.Did the reduction in debt costs reduce the firm's weighted average cost of capital? How would you describe the impact of international diversification on its costs of
Many MNEs have greater ability to control and reduce their effective tax rates when expanding international operations. If Genedak-Hogan was able to reduce its consolidated effective tax rate from 35% to 32%, what would be the impact on its WACC?
Using the original cost of capital data for Ganado used in the chapter, calculate both the CAPM and ICAPM costs of capital for the following equity risk premium estimates.a. 8.00%b. 7.00%c. 5.00%d. 4.00%
Thunder horse Oil is a U.S. oil company. Its current cost of debt is 7%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3%. The expected return on the market portfolio is 8%. The company's effective tax rate is 39%. Its optimal capital structure is 60%
Nestle of Switzerland is revisiting its cost of equity analysis in 2014. As a result of extraordinary actions by the Swiss Central Bank, the Swiss bond index yield (10-year maturity) has dropped to a record low of 0.520%. The Swiss equity markets have been averaging 8.400% returns, while the
Corcovado Pharmaceutical's cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes, Corcovado's effective tax rate is 25%. Its optimal capital structure is 60% debt and 40% equity.a. If Corcovado's beta is estimated at
WestGas Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 million to finance expansion. WestGas wants a capital structure that is 50% debt and 50% equity. Its corporate combined federal and state income tax rate is 40%. WestGas finds that it can finance in the
Kashmiri is the largest and most successful specialty goods company based in Bangalore, India. It has not entered the North American marketplace yet, but is considering establishing both manufacturing and distribution facilities in the United States through a wholly owned subsidiary. It has
Cargill is generally considered to be the largest privately held company in the world. Headquartered in Minneapolis, Minnesota, the company has been averaging sales of over $113 billion per year over the past 5 year period. Although the company does not have publicly traded shares, it is still
You have joined your friends at the local watering hole, The Tombs, for your weekly debate on international finance. The topic this week is whether the cost of equity can ever be cheaper than the cost of debt. The group has chosen Brazil in the mid-1990s as the subject of the debate. One of the
What are the most common challenges a firm resident in a segmented market faces in regards to its access to capital?
Firms located in illiquid and segmented emerging markets would benefit from nationalizing their own cost of capital. What do they need to do, and what conditions must exist for their efforts to succeed?
Do multinational firms have a higher or lower cost of capital than their domestic counterparts? Is this surprising?
Do multinational firms use relatively more or less debt than their domestic counterparts? Why?
Do multinational firms have higher lower betas than their domestic counterparts?
What is the riddle?
Why might emerging market multinationals list their shares abroad?
What are the benefits of achieving a lower cost and greater availability of capital?
What are the classifications used in defining risk in the estimation of a firm's cost of equity?
What is an equity risk premium? For an equity risk premium to be truly useful, what need it do?
Both domestic and international portfolio managers are asset allocators. What is their portfolio management objective?
International CAPM. What are the fundamental distinctions that the international CAPM tries to capture which traditional domestic CAPM does not?
Why did Novo believe that its cost of capital was too high compared to its competitors? Why did Novo's relatively high cost of capital create a competitive disadvantage?
The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado (US), borrows £5,000,000 for one year at 7.375% interest.a. What is the dollar cost of this debt if the pound depreciates from $2.0260/£ to $1.9460/£ over the year?b. What is the dollar cost of this debt if the
BBVA utilized a rather innovative approach to dealing with both country and currency risk in their December 20, 2004 report on Petrobras. Evaluate the methodology and assumptions used in this cost of capital calculation.
The various estimates of the cost of capital for Petrobras of Brazil appear to be very different, but are they? Reorganize your answers to the previous five problems into those costs of capital which are in U.S. dollars versus Brazilian reais. Use the estimates for 2004 as the basis of comparison.
Grupo Modelo, a brewery out of Mexico that exports such well-known varieties as Corona, Modelo and Pacifico, is Mexican by incorporation. However, the company evaluates all business results, including financing costs, in U.S. dollars. The company needs to borrow $10,000,000 or the foreign currency
The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.5 million, a one year period, an initial spot rate of SF1.5000/$, a
Mc Dougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a time when the exchange rate is $1.3460/€. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis à vis the dollar
Morning Star Air, headquartered in Kunming, China, needs US$25,000,000 for one year to finance working capital. The airline has two alternatives for borrowing:Borrow US$25,000,000 in Eurodollars in London at 7.250% per annumBorrow HK$39,000,000 in Hong Kong at 7.00% per annum, and exchange
"If Pantheon Capital, S.A., is raising funds via a euro-medium-term note with the following characteristics, how much in dollars will Pantheon receive for each $1,000 note sold?Coupon rate: 8.00% payable semiannually on June 30 and December 31Date of issuance: February 28, 2011Maturity: August 31,
Westminster Insurance Company plans to sell $2,000,000 of euro-commercial paper with a 60-day maturity and discounted to yield 4.60% per annum. What will be the immediate proceeds to Westminster Insurance?
Sunrise Manufacturing, Inc, a U.S. multinational company, has the following debt components in its consolidated capital section. Sunrise's finance staff estimates their cost of equity to be 20%. Current exchange rates are also listed below.Income taxes are 30% around the world after allowing for
Petrol Ibérico, a European gas company, is borrowing US$650,000,000 via a syndicated eurocredit for 6 years at 80 basis points over LIBOR. LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight leading investment bankers, which will charge up-front
Adamantine Architectonics consists of a U.S. parent and wholly owned subsidiaries in Malaysia (A-Malaysia) and Mexico (A-Mexico). Selected portions of their non-consolidated balance sheets, translated into U.S. dollars, are shown below.What are the debt and equity proportions in Adamantine's
Why does the strategic path to sourcing equity start with debt?
What is the significance of IPOs versus FOs?
What is a private placement? What are the comparative pros and cons of private placement versus a pubic issue?
What are the primary alternative instruments available for raising debt on the international marketplace?
If the cost of debt is less than the cost of equity, why doesn't the firm's cost of capital continue to decrease with the use of more and more debt?
What are the primary methods of funding foreign subsidiaries, and how do host government concerns affect those choices?
How does the multinational's ability to diversify its cash flows alter its ability to use greater amounts of debt?
Foreign Currency Denominated Debt. How does borrowing in a foreign currency change the risk associated with debt?
What are the alternative structures available for raising equity capital on the global market?
What is a directed public issue? What is the purpose of this kind of an international equity issuance?
What is a depositary receipt? What are equity shares listed and issued in foreign equity markets in this form?
Avon is a U.S.-based direct seller of a wide array of products for women. Avon markets leading beauty, fashion and home products in more than 100 countries. As part of the training in its corporate treasury offices, it has its interns build a spreadsheet analysis of the following hypothetical
Pacific Jewel Airlines is a U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent company in San Francisco, in which it has estimated the following expected earnings and payout rates
Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes, BMW, and Opel. The firm, like many firms in Germany today, is revising its financial policies in line with the increasing
Gamboa, Incorporated, is a relatively new U.S.-based retailer of specialty fruits and vegetables. The firm is vertically integrated with fruit and vegetable-sourcing subsidiaries in Central America, and distribution outlets throughout the southeastern and northeastern regions of the United States.
Use the following company case to answer questions 5 through 7. Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 30%. Chinglish calculates its profit per container as
Encouraged by the results from the previous problem's analysis, corporate management of Torrington Edge wishes to continue to re-position profit in Hong Kong. It is, however, facing two constraints. First , the final sales price in Great Britain must be £20,000 or less to remain competitive.
Not to leave any potential tax repositioning opportunities unexplored, Torrington Edge wants to combine the components of question 5 with a redistribution of overhead costs. If overhead costs could be reallocated between the two units, but still total £5,000 per unit, and maintain a minimum of
What do the terms active and passive mean in the context of U.S. taxation of foreign source income?
What is earnings stripping, and what are some examples of how multinational firms pursue it?
What is a controlled foreign corporation and what is its significance in global tax management?
What is fund positioning?
What is the income tax effect, and how may a multinational firm alter transfer prices as a result of the income tax effect?
Define cross-crediting and explain why it may or may not be consistent with a worldwide tax regime.
Explain how the check-the-box regulatory change altered the effectiveness of Subpart F income regulations.
What role does transfer pricing have within multinational companies when measuring management performance? How can transfer pricing practices within a firm conflict with performance measurement?
What is a tax haven? Is it the same thing as an international offshore financial center? What is the purpose of a multinational creating and operating a financial subsidiary in a tax haven?
What is a corporate inversion, and why do many U.S. corporations want to pursue it although it is highly criticized by public and private parties alike?
What is tax neutrality? What is the difference between domestic neutrality and foreign neutrality?
What is meant by tax deferral in the U.S. system of taxation? What is the deferral privilege?
What is a value-added tax, and how does it differ from an income tax?
What is a withholding tax, and why do governments impose them?
What is usually included within a tax treaty?
Assume Nikken Microsystems has sold Internet servers to Telecom España for €700,000. Payment is due in 3 months and will be made with a trade acceptance from Telecom España Acceptance. The acceptance fee is 1.0% per annum of the face amount of the note. This acceptance will be sold at a 4% per
Whatchamacallit could also buy export credit insurance from FCIA for a 1.5% premium. It finances the $100,000 receivable from Phang from its credit line at 6% per annum interest. No compensating bank balance would be required.a. What is Whatchamacallit's annualized percentage all-in-cost of
Assume that Nikken Microsystems prefers to receive U.S. dollars rather than euros for the trade transaction described in problem 1. It is considering two alternatives:1) It can sell the acceptance for euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of
Motoguzzie exports large-engine motorcycles (greater than 700cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,000,000 of merchandise from Motoguzzie, with payment due in 6 months. The payment will be made with a bankers' acceptance issued by
Assuming the facts in problem 3, Bank of America is now willing to buy Motoguzzie's bankers' acceptance for a discount of 6% per annum. What would be Motoguzzie's annualized percentage all-in-cost of financing its $3,000,000 Australian receivable?
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