International Trade 3rd Edition Robert C. Feenstra, Alan M. Taylor - Solutions

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DIVISIONAL WACC In 2006,Anheuser-Busch Companies Inc. (BUD), engaged in the production and distribution of beer worldwide, operating through four business segments:Domestic Beer, International Beer, Packaging, and Entertainment. The Domestic Beer segment offers beer under Budweiser, Michelob,
CONCEPTUAL EXERCISE Smith Inc. is a public company but is tightly controlled by Joe Smith, the grandson of the founder. Mr. Smith is quite confident about his ability to evaluate investments in all aspects of the business. The situation at Smith Inc. is quite different from that at Jones Inc.,
CONCEPTUAL EXERCISE The term hurdle rate is often used in the context of project evaluation and is sometimes used to refer to the risk-adjusted discount rate—i.e., the required rate of return on a project with a given level of risk. The risk-adjusted discount rate refers to the cost of capital or
CALCULATING A FIRM’S WACC AND PROJECT WACC Amgel Manufacturing Company’s current capital structure is comprised of 30% debt and 70% equity (based on market values). Amgel’s equity beta (based on its current level of debt financing) is 1.20, and its debt beta is 0.29.Also, the risk-free rate
INVESTOR OPTIMISM AND THE COST OF CAPITAL Investment projects located in Indonesia and other emerging markets frequently have low systematic risk, implying that the appropriate discount rates for the projects are quite low. In practice, most firms(with some notable exceptions) use very high
ESTIMATING THE COST OF EQUITY USING THE FAMA-FRENCH METHOD Telecom services is an industry under rapid transformation as telephone, Internet, and television services are being brought together under a common technology. In the fall of 2006, the telecom analyst for HML Capital, a private investment
UNLEVERING AND RELEVERING EQUITY BETAS In 2006, the major airline carriers, with the principal exception of Southwest Airlines (LUV), continued to be in dire financial condition following the attack on the World Trade Center in 2001.
THREE-STEP PROCESS FOR ESTIMATING A FIRM’S WACC Harriston Electronics builds circuit boards for a variety of applications in industrial equipment. The firm was founded in 1986 by two electrical engineers who left their jobs with the General Electric (GE)
CALCULATING THE COST OF EQUITY Smaltz Enterprises is currently involved in its annual review of the firm’s cost of capital. Historically, the firm has relied on the CAPM to estimate its cost of equity capital. The firm estimates that its equity beta is 1.25, and the current yield on long-term
CALCULATING THE PROMISED YTM Evaluate the promised yield to maturity for the bonds issued by Ford (F) and General Motors (GM) as of February 2005. (You may assume that interest is paid semiannually. Also, round the number of compounding periods to the nearest six months.)
CALCULATING THE PROMISED YTM In 2005, the Eastman Kodak Corporation (EK) had a straight bond issue outstanding that was due in eight years.The bonds are currently selling for 108.126 percent, or $1,081.26, per bond and pay a semiannual interest payment based on a 7.25% (annual) coupon rate of
CALCULATING THE EXPECTED YTM International Tile Importers Inc. is a rapidly growing firm that imports and markets floor tiles from around the world that are used in the construction of custom homes and commercial buildings. The firm has grown so fast that its management is considering the issuance
THREE-STEP PROCESS FOR ESTIMATING A FIRM’S WACC Compano Inc. was founded in 1986 in Baytown, Texas. The firm provides oil-field services to the Texas Gulf Coast region, including the leasing of drilling barges. Its balance sheet for year-end 2006 describes a firm with $830,541,000 in assets (book
ESTIMATING THE UNLEVERED BETA The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm’s debt-to-equity capitalization ratio is only 20%), while larger chemical firms use
CALCULATING THE COST OF EQUITY Caliber’s Burgers and Fries is a rapidly expanding chain of fast-food restaurants, and the firm’s management wants to estimate the cost of equity for the firm. As a first approximation, the firm plans to use the beta coefficient for McDonald’s Corp. (MCD), which
CALCULATING A FIRM’S WACC Nestle Enterprises is estimating its cost of capital for the first time and has made the following estimates: The firm’s debt carries an AAA rating, which is currently yielding 6%; the firm pays taxes at a rate of 30%; the cost of equity is estimated to be 14%; and the
PROJECT RISK ANALYSIS USING SIMULATION Rayner Aeronautics is considering a$12.5 million investment that has an estimated project free cash flow (Project FCF) of$2 million in its first year of operations. The project has a five-year life, and Rayner requires a return of 18% in order to justify
INTRODUCTORY SIMULATION EXERCISES Construct a spreadsheet model for each of the following exercises and then use the model to build a simulation model.a. Jason Enterprises faces uncertain future sales. Specifically, for the coming year, the firm’s CFO described her sales expectations as follows:
DECISION TREE AND BREAKEVEN SENSITIVITY ANALYSIS Reevaluate the Earthilizer decision tree analysis found in Table 4, where the abandonment value is only $350,000.What is the expected NPV of the project under these circumstances? What is the minimum abandonment value required to produce an expected
SIMULATION ANALYSIS Use your model from Problem 4 to construct a simulation model for the TitMar PTV. Incorporate two random (i.e., stochastic) variables in your model to capture the size of the market for scooters. Each of these variables is modeled differently as follows:MARKET SHARE. Market
PROJECT RISK ANALYSIS—BREAKEVEN SENSITIVITY The TitMar Motor Company is considering the production of a new personal transportation vehicle that would be called the PTV. The PTV would compete directly with the innovative new Segway The PTV will utilize a three-wheel platform capable of carrying
PROJECT RISK ANALYSIS—COMPREHENSIVE Bridgeway Pharmaceuticals manufactures and sells generic over-the-counter medications in plants located throughout the Western Hemisphere. One of its plants is trying to decide whether to automate a portion of its packaging process by purchasing an automated
PROJECT RISK ANALYSIS—SENSITIVITY ANALYSIS Answer the following questions:a. What are the key sources of risk that you see in this project?b. Use the “Goal Seek” function within Excel to find the breakeven values (i.e., values that force the project NPV to equal zero) for each of the
BREAKEVEN SENSITIVITY ANALYSIS The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next five years.The firm’s CFO anticipates additional earnings before interest, taxes,
PROJECT VALUATION Carson Electronics is currently considering whether or not to acquire a new materials-handling machine for its manufacturing operations.The machine costs $760,000 and will be depreciated using straight-line depreciation toward a zero salvage value over the next five years. During
PROJECT VALUATION HMG is considering the manufacture of a new chemical compound that is used to make high-pressure plastic containers. An investment of $4 million in plant and equipment is required.The firm estimates that the investment will have a fiveyear life, using straight-line depreciation
PROJECT VALUATION Glentech Manufacturing is considering the purchase of an automated parts handler for the assembly and test area of its Phoenix, Arizona, plant. The handler will cost $250,000 to purchase plus $10,000 for installation and employee training. If the company undertakes the investment,
INTRODUCTORY PROJECT VALUATION CT Computers Inc. is considering whether to begin offering customers the option to have their old personal computers recycled when they purchase new systems. The recycling system would require CT to invest$600,000 in the grinders and magnets used in the recycling
INTRODUCTORY PROJECT VALUATION South Tel Communications is considering the purchase of a new software management system. The system is called B-Image, and it is expected to drastically reduce the amount of time that company technicians spend installing new software. South Tel’s technicians
INTRODUCTORY PROJECT VALUATION Steve’s Sub Stop (Steve’s) is considering investing in toaster ovens for each of its 120 stores located in the southwestern United States. The high-capacity conveyor toaster ovens, manufactured by Lincoln, will require an initial investment of $15,000 per store
COMPREHENSIVE PROJECT FCF TCM Petroleum is an integrated oil company headquartered in Fort Worth, Texas. Income statements for 2009 and 2010 are found below ($ millions):
CALCULATING PROJECT FCF In the spring of 2010, Jemison Electric was considering an investment in a new distribution center. Jemison’s CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center in 2011, and, over the next five
CALCULATING THE INTERNAL RATE OF RETURN Singular Construction is evaluating whether to build a new distribution facility. The proposed investment will cost Singular $4 million to construct and provide cash savings of $500,000 per year over the next 10 years.a. What rate of return does the
CALCULATING PRESENT VALUES Calculate the present value of each of the following cash flow streams, using a discount rate of 10%:a. $500 received at the end of 5 years.b. $500 received annually for each of the next 5 years.c. $500 received annually for each of the next 50 years.d. $500 received
In March 2007 it was announced that several restaurants in the greater San Francisco area would no longer provide bottled water to their patrons to save on the environmental costs of transporting that water: do an Internet search for the phrase “bottled water backlash” to find articles about
In 2007, several members of Congress in the United States proposed that any further trade negotiations be accompanied by a “grand bargain” on labor standards. The problem with this action is that the current labor practices of the United States sometimes run afoul of the guidelines of the
Refer to following variations of the payoff matrix for the environmental game shown in Figure 11-7. In this problem, a number is assigned to represent the welfare level of each outcome for Home and Foreign.a. First, consider the case of global pollution in which the government puts more weight on
Refer to Figure 11-4 when answering this question.a. Redraw Figure 11-4, panel (a), assuming that the production externality is positive so that the SMC curve lies below the supply curve. Label the area c that reflects the change in the cost of the externality when trade is opened. Is this area an
Using Table 11-3, explain why environmentalists have “lost the battle but won the war” in their dealings with the WTO. Refer to specific WTO cases in your answer. Chapter 11 n International Agreements: Trade, Labor, and the Environment 409
Refer to the survey in Table 11-2 regarding consumers’ attitudes toward working conditions.a. Fill in the survey questions for yourself and at least five friends.b. Average your results, and compare them with those in Table 11-2. Are there any consistent differences in the answers from your
Redraw the graph of trade diversion (Figure 11-3) with the S′Mex curve intersecting the MUS curve between points A and D.a. When the United States and Mexico join NAFTA, who supplies auto parts to the United States? Does the United States import a larger quantity of auto parts after NAFTA; that
Assume that Thailand and India are potential trading partners of China. Thailand is a member of ASEAN but India is not. Suppose the import price of textiles from India (PIndia) is 50 per unit under free trade and is subject to a 20% tariff. As of January 1st 2010, China and Thailand entered into
Consider the following variation of Table 11-1 for the U.S. semiconductor market: U.S. TARIFF 0% 10% 20% From Canada, $46 $W $55.2 before NAFTA From Asia, $42 $X $Y before NAFTA From Canada, $46 $Z $Z after NAFTA From Asia, $42 $X $Y after NAFTA From the $47 $47 $47 United Statesa. Fill in the
Figure 11-2 shows the tariff game among large countries.a. Redraw the payoff matrix for a game between a large and small country.b. What is/are the Nash equilibrium/equilibria, assuming that the large country applies an optimal tariff?c. What does your answer to (b) tell you about the role of the
a. How is a customs union different from a free-trade area? Provide examples of each.b. Why do some economists prefer multilateral trade agreements over regional trade agreements?
13. Provide motivations for the use of export subsidies. Does your answer depend on whether firms compete under perfect or imperfect competition?
12. Who gains and who loses when governments in Europe and the United States provide subsidies to Airbus and Boeing?
10. Refer to Problem 9. Based on your answer there, would foreign countries have a reason to object to the use of a sales tax on cigarettes by the United States? Based on your knowledge of the GATT/WTO provisions (see Side Bar: Key Provisions of the GATT in Chapter 8), are foreign countries
9. Here we examine the effects of domestic sales taxes on the market for exports, as an example of the “targeting principle.” For example, in the domestic market, there are heavy taxes on the purchase of cigarettes. Meanwhile, the United States has several very large cigarette companies that
8. Refer to Problem 7. Now suppose the European government wants Airbus to be the sole producer in the lucrative small-aircraft market. Then answer the following:a. What is the minimum amount of subsidy that Airbus must receive when it produces small aircraft to ensure that outcome as the unique
7. Boeing and Airbus are the world’s only major producers of large, wide-bodied aircrafts. But with the cost of fuel increasing and changing demand in the airline industry, the need for smaller regional jets has increased. Suppose that both firms must decide whether they will produce a smaller
6. Explain why the WTO is more concerned with the use of direct export subsidies than production subsidies in achieving the same level of domestic support.
5. Refer to Problem 3. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 20 tons. But rather than an export subsidy, suppose the Home government provides its domestic producer with a production subsidy of $40 per ton. Use the following figure to
4. Refer to Problem 3. Rather than a small exporter of wheat, suppose that Home is a large country. Continue to assume that the free-trade world price is $100 per ton and that the Home government provides the domestic producer with an export subsidy in the amount of $40 per ton. Because of the
3. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 20 tons. Now suppose the Home government decides to support its domestic producer with an export subsidy of $40 per ton. Use the following figure to answer these questions.a. What is the quantity
2. Consider a large country with export subsidies in place for agriculture. Suppose the country changes its policy and decides to cut its subsidies in half.a. Are there gains or losses to the large country, or is it ambiguous? What is the impact on domestic prices for agriculture and on the world
1. Describe the impact of each of the following goals from the Hong Kong WTO meeting on(i) domestic prices and welfare of the country taking the action and (ii) world prices and welfare for the partner countries.a. Elimination of agriculture export subsidiesb. Reduction of agricultural tariffsc.
Figures A, B, and C are taken from a paper by Chad Bown: “The Pattern of Antidumping and Other Types of Contingent Protection” (World Bank, PREM Notes No. 144, October 21, 2009), and updated from Chad Bown, 2012, “Global Antidumping Database,” available at http://econ.worldbank.org/ttbd/a.
If infant industry protection is justified, is it better for the Home country to use a tariff or a quota, and why? 324 Part 4 n International Trade Policies
What is a positive externality? Explain the argument of knowledge spillovers as a potential reason for infant industry protection.
Why is it necessary to use a market failure to justify the use of infant industry protection?
Suppose that in response to a threatened antidumping duty of t, the Foreign monopoly raises its price by the amount t.a. Illustrate the losses for the Home country.b. How do these losses compare with the losses from a safeguard tariff of the amount t, applied by the Home country against the Foreign
Suppose the Home firm is considering whether to enter the Foreign market. Assume that the Home firm has the following costs and demand: Fixed costs = $140 Marginal costs = $10 per unit Local price = $25 Local quantity = 20 Export price = $15 Export quantity = 10a. Calculate the firm’s total costs
Consider the case of a Foreign monopoly with no Home production, shown in Figure 9-7. Starting from free trade at point A, consider a $10 tariff applied by the Home government.a. If the demand curve is linear, as in Problem 6, what is the shape of the marginal revenue curve?b. How much does the
Suppose that the demand curve for a good is represented by the straight line P = 10 − Q Fill in the missing information in the following chart: Quantity Price Total Revenue Marginal Revenue 0 NA 1 2 3 4 5 6 7 8 9 10a. Draw a graph containing both the demand curve and marginal revenue curve.b. Is
In this problem, we analyze the effects of an import quota applied by a country facing a Foreign monopolist. In Figure 9-7, suppose that the Home country applies an import quota of X2, meaning that the Foreign firm cannot sell any more than that amount.a. To achieve export sales of X2, what is the
Refer to the prices of Japanese auto imports under the VER (Figure 9-5) and answer the following:a. What component of the price of imported automobiles from Japan rose the most over the period 1980 to 1985?b. Sketch how Figures 9-5 and 9-6 might have looked if the United States had applied a tariff
Rank the following in ascending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.a. Tariff t in a small country with perfect competitionb. Tariff t in a small country with a Home monopolyc. Quota with the same imports M in a small country, with
Figure 9-2 shows the free-trade equilibrium under perfect competition and under monopoly (both with the price PW). In this problem, we compare the welfare of Home consumers in the no-trade situation and under free trade.a. Under perfect competition, with the price PW, label the triangle of consumer
Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the price P C ) and under monopoly (with the price P M). In this problem, we compare the welfare of Home consumers in these two situations.a. Under perfect competition, with the price P C , label the triangle of consumer
Suppose that a producer in China is constrained by the MFA to sell a certain number of shirts, regardless of the type of shirt. For a T-shirt selling for $2.00 under free trade, the MFA quota leads to an increase in price to $2.50. For a dress shirt selling for $10.00, the MFA will also lead to an
Consider the following hypothetical information pertaining to a country’s imports, consumption, and production of T-shirts following the removal of the MFA quota: Without MFA With MFA (Free Trade) World price ($/shirt) 2.00 2.00 Domestic price ($/shirt) 2.50 2.00 Domestic consumption (million
Consider a small country applying a tariff t as in Figure 8-5. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota amount M′ (which is less than the total imports). This is called a “tariff-rate quota” (TRQ) and
Refer to the graphs in Problem 11. Suppose that instead of a tariff, Home applies an import quota limiting the amount Foreign can sell to 2 units.a. Determine the net effect of the import quota on the Home economy if the quota licenses are allocated to local producers.b. Calculate the net effect of
Suppose Home is a small country. Use the graphs below to answer the questions. Quantity Price (a) Home Market 9 8 6 4 $14 S D 2 4 5 6 8 Price X* X* + t (b) Import Market M 2 6 Import $8 6a. Calculate Home consumer surplus and producer surplus in the absence of trade.b. Now suppose that Home engages
No U.S. tire producers joined in the request for the tariff on tires in 2009. Rather, the petition for a tariff on tires imported from China was brought by the United Steelworkers of America, the union who represents workers in the tire industry. Why did major tire manufacturers operating in the
What provision of U.S. trade law was used by President Barack Obama to apply a tariff on tires imported from China? Does this provision make it easier or harder to apply a tariff than Section 201?
Why did President George W. Bush suspend the U.S. tariffs on steel 17 months ahead of schedule?
Rank the following in ascending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.a. Tariff of t in a small country corresponding to the quantity of imports Mb. Quota with the same imports M in a small country, with quota licenses distributed to
Rank the following in ascending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.a. Tariff of t in a small country corresponding to the quantity of imports Mb. Tariff of t in a large country corresponding to the same quantity of imports Mc.
a. If the foreign export supply is perfectly elastic, what is the optimal tariff Home should apply to increase welfare? Explain.b. If the foreign export supply is less than perfectly elastic, what is the formula for the optimal tariff Home should apply to increase welfare?c. What happens to Home
Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9. How does the size of the termsof-trade gain compare with the size of the deadweight loss when (i) the tariff is very small and (ii) the tariff is very large? Use graphs to illustrate your answer.
Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9.a. How does the export supply curve in panel (b) compare with that in the small-country case? Explain why these are different.b. Explain how the tariff affects the price paid by consumers in the
Consider a small country applying a tariff t to imports of a good like that represented in Figure 8-5.a. Suppose that the country decides to reduce its tariff to t′. Redraw the graphs for the Home and import markets and illustrate this change. What happens to the quantity and price of goods
The following questions refer to Side Bar: Key Provisions of the GATT.a. If the United States applies a tariff to a particular product (e.g., steel) imported from one country, what is the implication for its steel tariffs applied to all other countries according to the “most favored nation”
11. It is widely noted that even though China is the favored destination for manufacturing offshoring, it is far behind India in the business of offshored services. What differences between these two countries might account for this observation?
10. Why might it be relatively easier for a developing country like India to export service activities through offshoring than to participate in the global economy by producing manufacturing components?
9. In Figure 7-11, we saw that a fall in the relative price of components leads to an increase in the amount of components imported but that the amount of R&D exported from Home does not necessarily increase. To explore this further, complete the following:a. Let the relative price of components
8. The quote from the 2004 Economic Report of the President at the beginning of the chapter generated a lot of controversy that year, as discussed at the beginning of section 3 here. The chairman of the Council, N. Gregory Mankiw, made the following additional comments in a speech while presenting
7. Read the following excerpt, and using what you have learned in this chapter, discuss how offshoring creates opportunities for the countries involved. Sudhakar Shenoy, chief executive of Information Management Consultants (IMC) in Reston, makes an effective pitch for offshoring. Several years ago
6. The following diagram shows what happened to the relative wage and relative demand for skilled labor in the U.S. manufacturing sector during the 1990s. These points are plotted using the data from Figures 7-5 and 7-6. To interpret this diagram, let us think about the offshoring of service
5. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows: Components: Total costs of production = PC • QC = 100 Earnings of high-skilled labor = WH • HC = 25 Earnings of low-skilled labor = WL • LC = 25 Earnings of capital = R •
4. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows: Components: Total costs of production = PC • QC = 100 Earnings of high-skilled labor = WH • HC = 10 Earnings of low-skilled labor = WL • LC = 40 Earnings of capital = R •
3. Consider a U.S. firm’s production of automobiles, including research and development and component production.a. Starting from a no-trade equilibrium in a PPF diagram, illustrate the gains from offshoring if the United States has a comparative advantage in component production.b. Now suppose
2. Consider an offshoring model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production activities.a. Will Home’s offshored production activities be high or low on the value chain for a
1. Consider an offshoring model in which the hours of labor used in four activities in the United States and Mexico are as follows: Note that labor hours in Mexico are twice those in the United States, reflecting Mexico’s lower productivity.Also note that the ratio of high-skilled to low-skilled
9.a. Of two products, rice and paintings, which product do you expect to have a higher index of intra-industry trade? Why?b. Access the U.S. TradeStats Express website at http://tse.export.gov/. Click on “National Trade Data” and then “Global Patterns of U.S. Merchandise Trade.” Under
6. The United States, France, and Italy are among the world’s largest producers. To answer the following questions, assume that their markets are monopolistically competitive, and use the gravity equation with B = 93 and n = 1.25.a. Using the gravity equation, compare the expected level of trade
5. Our derivation of the gravity equation from the monopolistic competition model used the following logic:(i) Each country produces many products.(ii) Each country demands all of the products that every other country produces.(iii) Thus, large countries demand more imports from other countries.The
4. Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated in Figure 6-7, consider what happens when industry demand D increases. For instance, suppose that this is the market for cars, and lower gasoline prices generate higher demand D.a. Redraw Figure

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International Trade 3rd Edition Robert C. Feenstra, Alan M. Taylor - Solutions

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