International financial management 9th Edition Jeff Madura - Solutions

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(Financial Statement Presentation of Available for Sale Investments) Woolford Company has the following portfolio of available for sale securities at Dec 31, 2006Instructionsa.) What should be reported on Woolford's Dec 31, 2006, balance sheet relative to these long-term available for sale
The Zumwalt Company is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's
Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM?
What is the difference between a centralized and decentralized debt denomination for an MNC?
Should an MNC borrow primarily short term when short-term interest rates are lower than long-term interest rates? Or should it keep the maturity the same but use a floating- ate loan rather than a fixed-rate loan? Explain.
What is financial disintermediation?
What are the two main segments of the international bond market, and what types of regulations apply to them?
Why might U.S. investors continue to purchase Eurobonds, despite the fact that the U.S. corporate bond market is well developed?
What are the differences between a straight bond, a floating-rate note, and a convertible bond?
What kind of activities do international banks engage in?
Why is there a need for international banking regulation?
What are the differences between credit risk, market risk, and operational risk?
What is systemic risk?
Which activity would require the largest capital charge under the 1988 Basel Accord: a loan to another bank or a loan to a large MNC? Would this necessarily be true under the Basel II rules?
What is VaR?
What is the difference between a foreign branch and a subsidiary bank?
Will an MNC issuing debt in low-interest-rate currencies necessarily lower its cost of funds? Why?
What is an offshore center?
What is the difference between an Edge Act bank and an international banking facility?
What is the difference between a Eurocredit, a Euronote, and a Euro-medium-term note?
What is the all-in cost of a 5-year loan? What are its main components?
What is a credit rating? What is a credit spread?
Should corporations issue bonds in countries where they face the lowest credit spreads? Be very specific about the concept of credit spread you use.
In 1985, R. J. Reynolds (RJR for short) acquired Nabisco Brands and financed the deal with a variety of financial instruments, including three dual-currency Eurobonds. The first dual-currency bond, leadmanaged by Nikko, raised JPY25 billion (equivalent to USD105.5 million at the time of issue).
GBA Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is considering three sources:i. Borrow USD from Citibank at 1.50%ii. Borrow EUR from Deutsche Bank at 3.00%iii. Borrow GBP from Barclays at 4.00%If the company
FE Company wishes to raise $1,000,000 with debt financing. The treasurer of FE Company considers two possible instruments:i. A 2-year floating-rate note at 1% above the 1-year dollar LIBOR rate on which interest is paid once a year.ii. A 2-year bond with an interest rate of 5% Currently, the dollar
K3 Company wants to borrow $100 million for 5 years. Investment bankers propose to either do a syndicated Eurocredit or issue a Eurobond. The Eurocredit would be denominated in dollars, but the Eurobond would be denominated in different currencies for different markets (these issues are called
Suppose Intel wishes to raise USD1 billion and is deciding between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can be issued at a 5-year maturity with a coupon of 4.50%, paid semiannually. The underwriting, registration, and other fees total 1.00% of the issue size. The
Web Question: In 2010, Coca-Cola FEMSA, a bottler in Mexico, issued a $500 million 10-year bond. Look up more details about this issue. What type of bond is it? How was it rated? What is the credit spread associated with the bond?
What are the differences between public and private bourses?
What is the difference between a price-driven trading system and an order-driven trading system? Which system lends itself most easily to automation?
What is a dark pool?
Do we have a global stock market as we have a global foreign exchange market?
What is turnover?
Does high turnover always signal lower transaction costs?
What is the difference between an ADR and a GDR?
What motivates companies to cross-list their shares?
What is the difference between a GDR and a GRS?
Has cross-listing been beneficial for most listed companies? If yes, why doesn’t every company cross-list?
What is a joint venture?
The following table shows how average share prices jump (in percentage) after the announcement that the stocks will be cross-listed (see Miller, 2000). The price response should be interpreted as corrected for risk and market movements that happened on the same day:Although these numbers appear
Suppose you are a U.S.-based investor, and you would like to diversify your stock portfolio internationally. What advantages do ADRs offer you? Would it be wise to restrict your international portfolio only to ADRs?
Web Question: Go to www.adrbnymellon.com/ files/MS32022.pdf , navigate to Investor Relations, and find the 2010 Annual Report. Sarkissian and Schill (2004) claim that cross-listing firms tend to prefer cross-listing in markets “close to home.” Can you see evidence in favor of this hypothesis in
Is the volatility of the dollar return to an investment in the Japanese equity market the sum of the volatility of the Japanese equity market return in yen plus the volatility of dollar/yen exchange rate changes? Why or why not?
Why is the variance of a portfolio of internationally diversified stocks likely to be lower than the variance of a portfolio of U.S. stocks?
How can you increase the Sharpe ratio of a portfolio? What type of stocks would you have to add to it in order to do so?
Why is the hurdle rate in Section 13.2 lower for Japan than for Canada? Should U.S. investors still invest in Canada?
What is the mean–standard deviation frontier, and what is the mean-variance-efficient (MVE) portfolio?
What is the prediction of the CAPM with respect to optimal portfolio choice?
What is the prediction of the CAPM with respect to the expected return on any security?
What is the beta of a security?
Why might it be useful to estimate the beta for a stock from returns on stocks within its industry rather than from the stock itself?
What does it mean for an equity market to be integrated or segmented from the world capital market?
What would you expect to happen to the risk-free rate and equity returns when a segmented country opens its capital markets to foreign investment?
What accounts for the home bias phenomenon?
Suppose AZT is a small value stock and that you use both the CAPM and the Fama-French model to compute its cost of capital. Under which model is the cost of capital for AZT likely to be higher?
The EAFE is the international index comprising markets in Europe, Australia, and the Far East. Consider the following annualized stock return data:Average U.S. index return: ........... 14%Average EAFE index return: ......... 13%Volatility of the U.S. return: .......... 15.5%Volatility of the EAFE
Let the expected pound return on a U.K. equity be 15%, and let its volatility be 20%. The volatility of the dollar/pound exchange rate is 10%.a. Graph the (approximate) volatility of the dollar return on the U.K. equity as a function of the correlation between the U.K. equity’s return in pounds
Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The beta for GM is 1.185, the beta for the automobile industry is 0.97, the equity premium on the world market is assumed to be 6%, and the risk-free rate is 3%.
Thom Yorke is a typical mean-variance investor, currently invested 100% in a diversified U.S. equity portfolio with expected return of 12.46% and volatility of 15.76%. Thom is considering adding the STCMM fund to his portfolio. STCMM invests in U.S. small-capitalization, high-technology firms and
Economists continue to be puzzled by the apparent home bias of investors across countries. With mean-variance preferences, investors ought to allocate much more of their wealth to foreign equities and bonds. Three explanations for the phenomenon are given below, all of them based on empirical
Consider Softmike, a software company. Softmike’s world market beta is 1.75. Regressing Softmike’s return on the world market return and the global HML factor gives betas of 1.50 and -1.2, respectively. Assume that the world equity premium is 6%, the HML premium is 3%, and the risk-free rate is
Web Question: Estimate the cost of capital for a project that has the same risk as the cash flows earned by Google.
Describe the differences between country risk and political risk. What is sovereign risk?
What economic variables would give some indication of the country risk present in a particular country?
Suppose an MNC is considering investing in Bolivia. Will an overall assessment of Bolivia’s country risk suffice to understand the political risk present in the investment?
What are three political risk factors?
When, where, and why did the Debt Crisis start?
What is debt overhang?
What is a debt buyback? Why was a program of debt buybacks not sufficient to resolve the Debt Crisis?
What were the main characteristics of the Brady Plan?
Why should the discount rate not be adjusted for political risk?
What are some examples of organizations that provide country risk ratings?
How can we use current quantitative information to predict future political events, such as expropriation?
Suppose a multinational corporation is particularly worried about ethnic warfare in a few countries in which it is considering investing. Do country risk ratings have information on this particular risk?
Can Panama issue a bond denominated in dollars at the same terms (that is, at the same yield) as the U.S. government? Why or why not?
What stops governments from defaulting on loans or bonds held by foreigners?
What is a Brady bond?
How is a political risk probability related to a country spread?
What are Cetes? What are Tesobonos?
What are the three main types of political risk covered by political risk insurance?
What are some organizations or firms that provide political risk insurance?
How is it possible to embed political risk insurance in a capital budgeting analysis?
What is project finance?
In February 1994, Argentina’s currency board was in place, and 1 peso was exchangeable into 1 dollar. The following interest rates were available:U.S. LIBOR 90 days: 3.25%Peso 90-day deposits: 8.99%Dollar interest rate in Argentina, 90-day deposits: 7.10%The latter two rates were
Consider the numbers in the previous question. Assume that if the peso were to depreciate, investors figure it will depreciate by 25%. Also, assume that if the Argentine bank were to default on its dollar obligations, it would pay nothing to investors. Compute the probability that the peso will
Consider a 10-year Brady bond issued by Brazil. The coupon payment is 6.50%, and the par value has been collateralized by a U.S. Treasury bond. The current price of the bond is $98 (per $100 in par value). Compute the (blended) yield-to-maturity for the bond. What is the stripped yield? Assume
At the height of the Mexican peso crisis in January 1995, the default probabilities on U.S. dollardenominated emerging-market bonds were quite high. A British investment bank, assuming that these bonds would pay 15 cents on the dollar upon default, calculated a 61% chance of default on Venezuelan
Badwella United Company (BUC) is worried that its banana plantation in El Salvador will be expropriated during the next 2 years. However, BUC, through an agreement with El Salvador’s central bank, knows that compensation of $100 million will be paid if the plantation is expropriated. If the
You are the chief financial officer of Clad Metal, a U.S. multinational with operations throughout the world. Your capital budgeting department has presented a proposal to you for a 5-year ore-extraction project in Mexico. The expected year-end net dollar cash flows are as follows:The initial
Web Question: How will the political turmoil in a number of Middle East countries in early 2011, such as Egypt, affect political risk? Try to use Web resources on ratings and spreads to come up with a quantitative answer.
Should an MNC Reduce Its Ethical Standards to Compete Internationally? Point Yes. When a U.S.-based MNC competes in some countries, it may encounter some business norms there that are not allowed in the United States. For example, when competing for a government contract, firms might provide
a. Explain the agency problem of MNCs.b. Why might agency costs be larger for an MNC than for a purely domestic firm?
a. Explain how the theory of comparative advantage relates to the need for international business.b. Explain how the product cycle theory relates to the growth of an MNC.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.b. If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar than under conditions of imperfect markets? Why?
a. Do you think the acquisition of a foreign firm or licensing will result in greater growth for an MNC? Which alternative is likely to have more risk?b. Describe a scenario in which the size of a corporation is not affected by access to international opportunities.c. Explain why MNCs such as
a. What factors cause some firms to become more internationalized than others?b. Offer your opinion on why the Internet may result in more international business.
As an overall review of this chapter, identify possible reasons for growth in international business. Then, list the various disadvantages that may discourage international business.
Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain.
Would the agency problem be more pronounced for Berkely Corp., which has its parent company make most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?

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