Analysis for Financial Management 10th edition Robert C. Higgins - Solutions

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Today, the annualized interest rate in the U.S. is 4% for any debt maturity. The annualized interest rate in Australia is 4% for debt maturities of 3 months or less, is 5% for debt maturities between 3 months and 6 months, and is 6% for debt maturities more than 6 months. Assume that interest rate
Assume that interest rate parity holds and will continue to hold in the future. At the beginning of the month, the spot rate of the British pound is $1.60, while the one-year forward rate is $1.50. Assume that U.S. annual interest rate remains steady over the month. At the end of the month, the
Assume that the one year interest rate in Canada is 4 percent. The one year U.S. interest rate is 8 percent. The spot rate of the Canadian dollar (C$) is $.94. The forward rate of the Canadian dollar is $.98. a. Is covered interest arbitrage feasible for U.S. investors? Show the results if a
The U.S. three-month interest rate (unannualized) is 1%. The Canadian three-month interest rate (unannualized) is 4%. Interest rate parity exists. The expected inflation over this period is 5% in the U.S. and 2% in Canada. A call option with a three-month expiration date on Canadian dollars is
The nominal (quoted) U.S. one-year interest rate is 6%, while the nominal one-year interest rate in Canada is 5%. Assume you believe in purchasing power parity. You believe the real one-year interest rate is 2% in the U.S, and that the real one-year interest rate is 3% in Canada. Today the
Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $.50 and HK$3.9. The one-year interest rate on the Australian dollar is 11%, while the one-year interest
Boston Co. will receive 1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will be 12% next year,
Assume that you believe purchasing power parity (PPP) exists. You expect that inflation in Canada during the next year will be 3%, and inflation in the U.S. will be 8%. Today the spot rate of the Canadian dollar is $.90 and the one-year futures contract of the Canadian dollar is priced at $.88.
Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The U.S. and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to revise your estimate of Canada's real interest rate
The one-year Treasury (risk-free) interest rate in the U.S. is presently 6%, while the one-year Treasury interest rate in Switzerland is 13%. The spot rate of the Swiss franc is $.80. Assume that you believe in the international Fisher effect. You will receive 1 million Swiss francs in one year. a.
Investors based in the U.S. can earn 11% interest on a one-year bank deposit in Argentina (with no default risk) or 2% on a one-year U.S. bank deposit in the U.S. (with no default risk). Assess the following statement: "According to the international Fisher effect (IFE), if U.S. investors invest
The U.S. has expected inflation of 2%, while Country A, Country B, and Country C have expected inflation of 7%. Country A engages in much international trade with the U.S. The products that are traded between Country A and the U.S. can easily be produced by either country. Country B engages in
Assume that interest rate parity exists. The one-year risk-free interest rate in the U.S. is 3 percent, versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2% inflation rate, and the U.S. will experience a 2% inflation rate
The prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. However, you
Periodically, there are rumors that China will weaken its currency (the yuan) against the U.S. dollar and many European currencies. This causes investors to sell stocks in Asian countries such as Japan, Taiwan, and Singapore. Offer an intuitive explanation for such an effect. What types of Asian
Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is about $.70 while the present exchange rate of the pound is $1.90. Raton Co. has not hedged these positions. The Swiss
Minnesota Co. is a U.S. firm that exports computer parts to Japan. Its main competition is from firms that are based in Japan, which invoice their products in yen. Minnesota's exports are invoiced in U.S. dollars. The prices charged by Minnesota and its competitors will not change during the next
Harz Co. (a U.S. firm) has an arrangement with a Chinese company in which it purchases the products from them every week at the prevailing spot rate, and then sells the products in the U.S. invoiced in dollars. All of its competition is from U.S. firms that have no international business. The
Layton Co. (a U.S. firm) attempts to determine its economic exposure to movements in the Japanese yen, by applying regression analysis to data over the last 36 quarters: SP = b0 + b1e + u where SP represents the percentage change in Layton's stock price per quarter, e represents the percentage
Lance Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present exchange rate of the SF is about $.80 while the present exchange rate of the DK is $.10. Lance Co. has not hedged
Reese Co. will pay 1 million British pounds for materials imported from the U.K. in one month. Reese Co. sells some goods to Poland, and will receive 3 million zloty (the Polish currency) for those goods in one month. The spot rate of the pound is $1.50, while the spot rate of the zloty is about
Milwaukee Co. has an Australian subsidiary that earned A$40 million Australian dollars (A$) this year. Little Rock Co. has an Australian subsidiary that earned A$30 million this year. The subsidiary of Milwaukee plans to reinvest its earnings in Australia while the subsidiary of Little Rock Co.
Describe how a crisis in Asia could reduce the cash flows of a U.S. firm that exports products (denominated in U.S. dollars) to Asian countries. How could a U.S. firm that exported products (denominated in U.S. dollars) to Asia and anticipates an Asian crisis before it began insulate itself from
Indiana Company expects to receive 5 million euros in one year from exports. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies: a. Unhedged strategy b. Money market hedge c.
You own a U.S. exporting firm and will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transactions costs. Today, the one-year interest rate in the U.S. is 7%, and the one-year interest rate in Switzerland is 9%. You believe that today's spot rate of the
Visor Inc. (a U.S. firm) has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19%. The annual interest rate in the U.S. is 6%. You expect that annual inflation will be
Assume that interest rate parity exists. The annualized interest rate is presently 5% in the U.S. for any term to maturity, and is 13% in Mexico for any term to maturity. Dokar Co. (a U.S. firm) has an agreement in which it will develop and export software to Mexico's government two years from now,
Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5% when investing funds and 7% when borrowing funds. The one-year Swiss interest rate is 9% when investing funds, and 11% when borrowing funds. The spot rate of
Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10 years. The annualized interest rate in the U.S. is 6% regardless of the term to maturity. The annualized interest rate
San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also need to pay 5 million Swiss francs for imports arriving in 2 years. Today, Mateo Co. uses a
Today, the spot rate of the euro is $1.20. The one-year forward rate is $1.16. A one-year call option on euros exists with a premium of $.04 per unit and an exercise price of $1.17. You think the spot rate is the best forecast of future spot rates. You will need to pay 10 million euros in one year.
The one-year U.S. interest rate is presently higher than the Japanese interest rate. Assume a real rate of interest of zero percent in each country. Assume that interest rate parity exists. You believe in purchasing power parity (PPP). You have receivables of 10 million Japanese yen that you will
Grady Co. is a manufacturer of hockey equipment in Chicago, and will need 3 million Swiss francs (SF) in one year to pay for imported supplies. The U.S. one-year interest rate is 2% while Switzerland's one-year interest rate is 7%. The spot rate of the SF is $.90. The one-year forward rate of the
Lola Co. is (a U.S. firm) that expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This is its only international business, and it is not exposed to any other form of exchange rate risk. Lola Co. plans to
Nashville Co. presently incurs costs of about 12 million Australian dollars (A$) per year due to research and development expenses in Australia. The parent company sells the products that are designed each year, and all of products sold each year would be invoiced in U.S. dollars. Nashville
Trak Co. (of the U.S.) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Japan. It wants to purchase a manufacturer in India that could produce similar products at a low cost (due to low labor costs in India) and export the products to Japan.
Myzo Co. (based in the U.S.) sells basic household products that many other U.S. firms produce at the same quality level and these other U.S. firms have about the same production cost as Myzo. Myzo is considering direct foreign investment. It believes that the market in the U.S. is saturated and
Burton Co., based in the U.S., considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs (SF) in one year. The spot rate of the franc is $.80. Burton Co. decides to purchase put options on Swiss francs with an exercise price of $.78 and a
Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in one year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk averse and only takes risk when the potential benefits outweigh the risk. It has no other international
Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in one year from selling the products in Portugal where it already
Konk Co., a U.S. firm, considers a project in which it would build a subsidiary in Belgium that would generate net cash flows of about 10 million euros per year for 5 years and would remit that amount to the parent each year. It has no other international business. It needs about 20 million euros
Louisville Co. is a U.S. firm considering a project in Austria which it has an initial cash outlay of $7 million. Louisville will accept the project only if it can satisfy its required rate of return of 18 percent. The project would definitely generate 2 million euros in one year from sales to a
Gaston Co. (a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of one year. The existing spot rate of the peso is $.14, while the expected spot rate in one year is $.12.
Explain how a foreign target could use poison pills to prevent a takeover or change the terms of a takeover.
Explain the various ways in which large shareholders can attempt to govern an MNC and improve its management.
Ved Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. It will soon decide whether to divest the subsidiary. One week ago, a company offered to purchase the subsidiary from Ved Co., and Ved has not yet responded to this offer. a. Since last week,
Dallen Co. has a subsidiary in Mexico that does research and development and produces prescription pills that are transported to and sold in the U.S. The parent used its own funds to build the subsidiary. Dallen Co. pays for the operations in Mexico in Mexican pesos, but all of its revenue from
Kylee Co. (a U.S. firm) has a British subsidiary that will generate cash flows of 3 million pounds at the end of each of the next two years. It uses the prevailing spot rate of the British pound of $1.80 as a forecast of the future value of the pound. Its required rate of return on this business
Assume that interest rate parity exists. At 10:30 a.m., the media reported news that the Mexican government political problems were reduced, which reduced the expected volatility of the Mexican peso against the dollar over the next month. However, this news had no effect on the prevailing one-month
Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in one year under the most likely economic and political conditions. The spot rate of the Argentina peso in one year is expected to be $.40 based on these conditions. However, it
Atro Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. While it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a forward contract today. As of today, the spot rate of the euro
a. Duv Co. (a U.S. firm) is planning to invest $2.5 million in a project in Portugal that will exist for one year. Its required rate of return on this project is 18%. It expects to receive cash flows of 2 million euros in one year from this project. The spot rate of the euro in one year is expected
The subsidiaries of Forest Company produce goods in the U.S., 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 Company has decided
Nevada Co. is a U.S. firm that conducts major importing and exporting business in Japan, and all transactions are invoiced in dollars. It obtained debt in the U.S. at an interest rate of 10 percent per year. The long-term risk-free rate in the U.S. is 8 percent. The stock market return in the U.S.
Messan Co. (a U.S. firm) borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The long-term annualized risk-free rate in the U.S. is 6 percent. The stock market return in the U.S. is expected to be 16 percent annually. Messan's target capital structure is 40 percent debt
Newark Co. is based in the U.S. About 30% of its sales are from exports to Portugal. Newark Co. has no other international business. It finances its operations with 40% equity and the remainder of funds with dollar-denominated debt. It borrows its funds from a U.S. bank at an interest rate of 9
Slater Co. is a U.S.-based MNC that finances all operations with debt and equity. It borrows U.S. funds at an interest rate of 11 percent per year. The long-term risk-free rate in the U.S. is 7 percent. The stock market return in the U.S. is expected to be 15 percent annually. Slater's beta is 1.4.
Assume that Naperville Co. will use equity to finance a project in Switzerland, while Lombard Co. will rely on a dollar-denominated loan to finance a project in Switzerland, and that Addison Co. will rely on a Swiss franc-denominated loan to finance a project in Switzerland. The firms will arrange
Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all equity to be obtained in the U.S. to finance a new project. The project's cash flows are not affected by U.S. interest rates. Just before Illinois Co. obtains new equity, the risk-free interest rate in the
Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinland, and it expects that the subsidiary will generate large earnings in zin (the currency). However, it is the Zinland government's policy to block all funds so that earnings cannot be remitted to the U.S.
The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Since the operating costs of this business are very low, Nester Co. expects this business to generate much cash flows in Swiss francs that will be remitted to the
Compton Co. has a subsidiary in Thailand that produces computer components. The subsidiary sells the components to manufacturers in the U.S. The components are invoiced in U.S. dollars. Compton pays employees of the subsidiary in Thai baht and makes a large monthly lease payment in Thai baht.
Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years. a. Explain why Chile's term structure of interest rates (as reflected in its yield curve) might cause the subsidiary to borrow for a different term to maturity. b. If Omaha is offered
Dryden Co. is a U.S. firm that plans a foreign project in which it needs $8,000,000 as an initial investment. The project is expected to generate cash flows of 10 million euros in one year, after the complete repayment of the loan (including the loan interest and principal). The project has zero
Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to make loan payments in dollars. Assume that
Ivax Corp. (based in Miami) 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
Greensboro, 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 Greensboro
Lakeland, 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, Lakeland is considering borrowing dollars, which it would convert to pesos to cover the operating
Assume that Davenport 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%, (2) Borrowing Japanese yen at an interest rate of 3%, or (3) Borrowing
Connecticut Co. plans to finance its operations in the U.S. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short term financing?a. Assume that
Providence Co. needs dollars. Assume that the local one year loan rate is 15%, while a one year loan rate on euros is 7%. By how much must the euro appreciate to cause the loan in euros to be more costly than a U.S.-dollar loan?
a. Discuss the corporate control of your business. Explain why your business in Mexico is exposed to agency problems. b. How would you attempt to monitor the ongoing operations of the business? c. Explain how you might be able to use a compensation plan that limits the potential agency problems?
Recall that your Mexican business invoices in Mexican pesos. a. You are already aware that a decline in the value of the peso could reduce your dollar cash flows. Yet, according to purchasing power parity, a weak peso should only occur in response to a high level of Mexican inflation, and such
Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time? b. Would hedging with a
a. Explain how your business is subject to translation exposure. b. How could you hedge against this translation exposure? c. Is it worthwhile for your business to hedge the translation exposure?
Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English. a. Explain why you might be able to stabilize the profits of your total business in this manner. Review the motives for direct foreign investment that are
a. Review the different items that are used in the multinational capital budgeting example (Spartan Inc.). Describe the items that would be included on a spreadsheet if you were to conduct a multinational capital budgeting analysis of investing dollars to expand your existing language business in
You have an opportunity to purchase a private competitor called Fernand in Mexico. You will use only your funds if you decide to purchase the company. a. When you attempt to determine the value of this company, how will you derive your required rate of return? Specifically, should you use the U.S.
a. Review the political risk factors, and identify those that could possibly affect your business. Explain how your cash flows could be affected? b. Explain why any threats of terrorism due to friction between two countries could possibly your business, even if the terrorism has no effect on the
a. Assume that your business is considering expansion within Mexico. 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 the interest rates in Mexico are higher than in the
Your business provides CDs on learning English that compliment the teaching that is provided by your employees based 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 not as effective without the teaching, but can be
Your business provides CDs for free to customers who pay for the English courses that you offer in Mexico. You consider the idea of mass production of the CDs in the U.S., so that you can sell (export) them to distributors or to retail stores throughout Mexico. You would price the CDs in dollars
If you decide to implement a major marketing campaign in Mexico, you will incur high expenses in Mexican pesos. You would need to finance the cost of your marketing. You could either borrow dollars at a low interest rate and convert them to Mexican pesos to cover the cost, or borrow Mexican pesos
Assuming that the business in Mexico grows, explain how financial markets could help to finance the growth of the business.
Explain how currency futures could be used to hedge your business in Mexico. Explain how currency options could be used to hedge your business in Mexico.
a. Explain how your business would likely be affected (at least in the short run) if the central bank of Mexico intervened in the foreign exchange market by exchanging Mexican pesos for dollars in the foreign exchange market. b. Explain how your business would likely be affected if the central
Mexican interest rates are normally substantially higher than U.S. interest rates. a. What does this imply about the forward premium or discount of the Mexican peso? b. What does this imply about your business using the forward or futures contracts to hedge your periodic profits in pesos that
Mexican interest rates are normally substantially higher than U.S. interest rates. a. What does this imply about the inflation differential (Mexico inflation minus U.S. inflation), assuming that the peso interest rate is the same in both countries? Does this imply that the Mexican peso will
a. Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate? b. Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the
a. What does it mean when cash flow from operations on a company's cash flow statement is negative? Is this bad news? Is it dangerous? b. What does it mean when cash flow from investing activities on a company's cash flow statement is negative? Is this bad news? Is it dangerous? c. What does it
Selected information for Blake's Restaurant Supply follows.a. During 2011, how much cash did Blake's collect from sales? b. During 2011, what was the cost of goods produced by the company? c. Assuming the company neither sold nor salvaged any assets during the year, what were the company's capital
Epic Trucking's equity has a market value of $15 million with 700,000 shares outstanding. The book value of its equity is $9 million. a. What is Epic's stock price per share? What is its book value per share? b. If the company repurchases 25 percent of its shares in the stock market at their
Why do you suppose financial statements are constructed on an accrual basis rather than a cash basis when cash accounting is so much easier to understand?
You are responsible for labor relations in your company. During heated labor negotiations, the General Secretary of your largest union exclaims, "Look, this company has $15 billion in assets, $7.5 billion in equity, and made a profit last year of $300 million-due largely, I might add, to the effort
Please ignore taxes for this problem. During 2010, Mead, Inc. earned a net income of $400,000. The firm increased its accounts receivable during the year by $250,000. The book value of its assets declined by an amount equal to the year's depreciation charge, or $180,000, and the market value of
The Board of Directors of Collins Entertainment, Inc. has been pressuring its CEO to boost ROE. During a recent interview on CNBC, he announces his plan to improve the firm's financial performance. He will raise prices on all of the company's products by 10 percent. He justifies the plan by
Given the following information, complete the balance sheet shown next. Collection period ........................... 71 days Days' sales in cash .......................... 34 days Current ratio ................................. 2.6 Inventory turnover ........................... 5
Financial data for Industrial Inc follows: ($ in thousands)a. Calculate the current and quick ratio at the end of each year. How has the company's short-term liquidity changed over this period? b. Assuming a 365-day year for all calculations, compute the following: i. The collection period each
Answer the questions below based on the following information. The tax rate is 35 percent and all dollars are in millions.a. Calculate each company's ROE, ROA, and ROIC. b. Why is Stork's ROE so much higher than Locktite's? Does this mean Stork is a better company? Why or why not? c. Why is

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Analysis for Financial Management 10th edition Robert C. Higgins - Solutions

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