Questions and Answers of Fundamentals Of Financial Management

What would happen to the SML graph in Figure 8.8 if expected inflation increased or decreased?Figure 8.8 268 269 270 271 272 273 274 275 A Required Rate of Return TH-13.0% SML: r, RF+RPM * b D E F H
What is a multinational corporation?
Why do companies “go global”?
Discuss the following statement: The United States is not immune to the influence of foreign corporations over U.S. economic and political policies.
Identify and briefly discuss five major factors that complicate financial management in multinational firms.
What is the international monetary system?
What is the difference between spot and forward exchange rates?
What is the basic difference between floating and fixed exchange rates?
Differentiate between devaluation/revaluation of a currency and depreciation/appreciation of a currency.
What are the two broad categories of the various currency regimes? What are the subgroups of those two broad categories?
Explain the difference between direct and indirect quotations.
What is a cross rate?
Assume that today 1 Canadian dollar is worth 0.75 U.S. dollar. How many Canadian dollars would you receive for 1 U.S. dollar?
Assume that 1 U.S. dollar can be exchanged for 105 Japanese yen or for 0.80 euro.What is the euro/yen exchange rate?
Explain what it means for a forward currency to sell at a discount and at a premium.
Suppose a U.S. firm must pay 200 million Swiss francs to a Swiss firm in 90 days.Briefly explain how the firm would use forward exchange rates to “lock in” the price of the payable due in 90 days.
Using data in Table 18.3, if a U.S. firm entered into a 90-day forward contract, how many dollars would be required to honor the 200 million Swiss franc obligation when it is due?Table 18.3 British
What is interest rate parity?
Assume that interest rate parity holds. When a currency trades at a forward premium, what does that imply about domestic rates relative to foreign interest rates? When a currency trades at a forward
Assume that 90-day U.S. securities have a 3.5% annualized interest rate, whereas 90-day Canadian securities have a 4% annualized interest rate. In the spot market, 1 U.S. dollar can be exchanged for
On the basis of your answer to the previous question, is the Canadian dollar selling at a premium or discount on the forward rate?Previous questionAssume that 90-day U.S. securities have a 3.5%
A television set sells for 3,000 U.S. dollars. In the spot market, $1 = 106 Japanese yen. If purchasing power parity holds, what should be the price (in yen) of the same television set in Japan?
Price differences in “similar” products in different countries often exist. What can explain those differences?
What effects do relative inflation rates have on relative interest rates?
What happens over time to the currencies of countries with higher inflation rates than U.S. inflation rates? To the currencies of countries with lower inflation rates?
Why might a multinational corporation decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country such as Switzerland, where interest rates are low?
What are the three major types of international credit markets?
What is LIBOR?
What is country risk?
What is exchange rate risk?
On what two factors does the return on a foreign investment depend?
What are the relevant cash flows for an international investment—the cash flows produced by the subsidiary in the country in which it operates or the cash flows in dollars that it sends to its
List some key differences in capital budgeting as applied to foreign versus domestic operations.
Why might the cost of capital for a foreign project differ from that of an equivalent domestic project? Could it be lower? Explain.
What adjustments might be made to the domestic cost of capital for a foreign investment due to exchange rate risk, political risk, and country risk?
Do international differences in financial leverage exist? Explain.
Define each of the following terms:a. Multinational, or global, corporationb. Vertically integrated investmentc. International monetary systemd. Exchange ratee. Freely floating regime; managed-float
Suppose the exchange rate between the U.S. dollar and the EMU euro is €0.85 = $1.00 and the exchange rate between the U.S. dollar and the Canadian dollar is $1.00 = C$1.34. What is the cross rate
A currency trader observes that in the spot exchange market, 1 U.S.dollar can be exchanged for 3.4 Israeli shekels or for 106 Japanese yen. What is the cross-exchange rate between the yen and the
Six-month T-bills have a nominal rate of 2%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.25%. In the spot exchange market, 1 yen equals $0.009. If interest rate
Table 18.1 lists foreign exchange rates for August 7, 2020. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars, EMU
Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in Problem 18-5.a. What is the current exchange rate for changing dollars into 1,000 units
Suppose the exchange rate between the U.S. dollar and the Swedish krona was 8.8 krona = $1, and the exchange rate between the dollar and the British pound was£1 = $1.3. What would be the exchange
Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.0094400, while in the 90-day forward market 1 Japanese yen=$0.0094426. In Japan, 90-day risk-free securities yield 2%.
In the spot market, 22.4 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity(PPP) holds, what should be the price of the same
Assume that interest rate parity holds and that 90-day risk-free securities yield a nominal annual rate of 3% in the United States and a nominal annual rate of 3.5% in the United Kingdom. In the spot
Arvin Australian Imports has agreed to purchase 15,000 cases of Australian wine for 4 million Australian dollars at today’s spot rate. The firm’s financial manager, Sarah Vintnor, has noted the
You are the vice president of Worldwide InfoXchange, headquartered in Minneapolis, Minnesota. All shareholders of the firm live in the United States. Earlier this month, you obtained a loan of 10
Early in June 1983, it took 245 Japanese yen to equal $1. In August 2020, that exchange rate had fallen to 106 yen to $1. Assume that the price of a Japanese-manufactured automobile was $9,000 in
After all foreign and U.S. taxes, a U.S. corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be
Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s
Explain why finance theory, combined with well-diversified investors and “homemade hedging,” might suggest that risk management does not add much value to a company.
List and explain some reasons companies might employ risk management techniques.
How does a nonsymmetric hedge differ from a natural hedge? Provide an example of a nonsymmetric hedge.
List three reasons the derivatives markets have grown more rapidly than any other major market in recent years.
Underwater Technology stock is currently trading at $30 a share. A call option on the stock with a $25 strike price currently sells for $12. What are the exercise value and the premium of the call
Describe how a risk-free portfolio can be created using stocks and options. How can such a portfolio be used to help estimate a call option’s value?
What is the purpose of the Black-Scholes option pricing model?
Explain what a “riskless hedge” is and how the riskless hedge concept is used in the Black-Scholes OPM.
Describe the effect of a change in each of the following factors on the value of a call option:i. Stock price ii. Exercise price iii. Option life iv. Risk-free ratev. Stock price variance (that
What is the value of a call option with these data: P 5 $25, X = $25, rRF = 8%, t = 0.5 (6 months), σ2 = 0.09, N(d1) = 0.61586, and N(d2) = 0.53287
What is a forward contract?
What is a futures contract? What are the key differences between forward and futures contracts?
What is the key difference between futures contracts and options?
What is the difference between the initial margin and the maintenance margin on a futures contract?
Suppose you buy a December futures contract on a hypothetical 10-year, 6% semiannual coupon note with a settlement price today of 125-060. You post the initial margin required for this transaction
Briefly describe the following types of derivative securities:i. Swaps i. Structured notes iii. Inverse floaters
Explain how a company can use the futures market to hedge against rising interest rates.
What is a swap? Describe the mechanics of a fixed-rate swap and a floating-rate swap.
Explain how a company can use the futures market to hedge against rising raw materials prices.
How should derivatives be used in risk management? What problems can occur?
Define the following terms:i. Pure risks ii. Speculative risks iii. Demand risks iv. Input risks v. Financial risks vi. Property risks vii. Personnel risks viii. Environmental risks ix.
The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2021 to help finance a new research and development laboratory. Assume that interest rate futures maturing in March 2021 are
Should preferred stock be considered as equity or debt? Explain.
Who are the major purchasers of “regular” preferred stock? How do tax considerations affect these purchases?
What are the advantages and disadvantages of preferred stock from the perspective of its issuer?
Are the economic effects of buying or leasing an asset similar? Explain.
How has the implementation of ASC 842 corrected the off-balance-sheet financing issue?
What is the intent of the new guidance given in ASC 842?
List the sequence of events for the lessee that leads to a lease arrangement.
Why is it appropriate to compare the cost of lease financing with that of debt financing?
What is a warrant? Describe how a new bond issue with warrants is valued.How are warrants used in corporate financing?
The use of warrants lowers the coupon rate on the corresponding debt issue. Does this mean that the component cost of a debt-plus-warrants package is less than the cost of straight debt? Explain.
A company recently issued bonds with attached warrants. The bond-plus-warrants package sells at a price equal to its $1,000 face value. The bonds mature in 10 years and have a 6% annual coupon. The
What is a conversion ratio? A conversion price? A straight-bond value?
What is meant by a convertible’s floor value?
What are the advantages and disadvantages of convertibles to issuers? To investors?
How do convertibles reduce agency costs?
A convertible bond has a par value of $1,000 and a conversion price of $40. The stock currently trades for $30 a share. What are the bond’s conversion ratio and conversion value at t = 0?
What are some differences between debt-with-warrant financing and convertible debt?
Explain how bonds with warrants might help small, risky firms sell debt securities.
What are the two possible methods for reporting EPS when warrants and convertibles are outstanding?
Which methods are most used in practice?
Why should investors be concerned about a firm’s outstanding warrants and convertibles?
Define each of the following terms:a. Cumulative; adjustable-rate preferred stockb. Arrearagesc. Lessee; lessord. Off-balance-sheet financing; ASC 842e. Residual valuef. Warrant; detachable warrant;
The Olsen Company has decided to acquire a new truck. One alternative is to lease the truck on a 4-year contract for a lease payment of $9,748 per year, with payments to be made at the beginning of
You are told that one corporation just issued $100 million of preferred stock and another purchased $100 million of preferred stock as an investment. You are also told that one firm has an effective
One alleged advantage of leasing voiced in the past was that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This
Explain the difference in treatment for short-term leasing (lease terms of 12 months or less)versus longer-term operating leases. Is there any difference in the accounting treatment of long-term
Construction needs a piece of equipment that can be leased or purchased.The firm conducts a purchase-versus-leasing analysis and determines that the PV cost of owning is 2$25,750 and the PV cost of

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