Questions and Answers of Multinational Business Finance

Connect each term to its definition or description. a. Acquisition of assets b. Acquisition of stock c. Acquisition premium d. Consolidation e. Merger f. Method of payment g. Synergy A. Creation of
Suppose Agile Corporation of the United States acquires Mobile Plc of the United Kingdom. The value of Agile stock on the Nasdaq in the United States is $3 billion. Mobile sells on the London Stock
You are the CEO of XO, a bulk chemical producer and processor. XO is generating quite a lot of free cash flow that cannot be profitably invested domestically. You are looking to expand XO’s
You are the chairman of Tres Equis, a family-run beverage manufacturer based in Guadalupe, Mexico. For years, you have harbored ambitions of expanding operations into other Latin American countries
Japan’s prolonged recession during the 1990s forced many changes on financial institutions and the market for corporate control within Japan. List the largest three financial institutions in Japan.
What are the differences between passive and active investment strategies?
What makes cross-border financial statement analysis difficult?
What alternatives does an MNC have when investors in a foreign country demand accounting and financial information?
Answer each of the following regarding day count conventions.a. In a bond market using a “30/360” price quotation convention, how many days’ worth of accrued interest would fall on July
It is the year 2017 and there are exactly 30 years remaining until maturity on Daimler’s dollar-denominated 8.5 percent bonds. These bonds pay a semiannual coupon of 4.25 percent for 30 years, and
You are an investor evaluating a depository receipt issued by China’s Sinopec Group and selling as an N-share on the NYSE. Sinopec Group’s net asset value in Chinese new yuan is CNY 20 billion.
How is portfolio risk measured? What determines portfolio risk?
What happens to the relevant risk measure for an individual asset when it is held in a large portfolio rather than in isolation?
Name two synonyms for systematic risk.
Name two synonyms for unsystematic risk.
What is a perfect financial market?
What is free float?
Based on the historical returns in Exhibit 19.2, calculate the mean and standard deviation of return in dollars for an equal-weighted portfolio of Canadian and Chinese stocks. Calculate the Sharpe
Based on the historical returns in Exhibit 19.2, calculate the mean and standard deviation of return in dollars for an equal-weighted portfolio of German and U.K. stocks. Calculate the Sharpe index
The MSCI world stock market index in Exhibit 19.2 had a mean annual return of 6.6 percent and a standard deviation of 29.9 percent. Meanwhile, dollar returns to 10-year U.S. treasuries had a mean
Based on the historical returns in Exhibit 19.2, calculate the expected return and standard deviation of return in dollars to an equal-weighted portfolio of U.S., U.K., and Japanese stocks. Calculate
Suppose expected returns in the United States and Germany are 10 percent and 20 percent, respectively. Standard deviations are also 10 percent and 20 percent, respectively. Calculate the standard
Suppose you calculated a Sharpe index for every security in the world over the most recent year. Are any of these securities likely to exhibit performance (measured as excess return per unit of risk)
Suppose that an asset, A, earns 16 percent in the United States over the period of one year. If the cost of a dollar to a resident of the European Union goes from €0.7064/$ at the beginning of the
Share prices on the Philippine Stock Exchange rise 12 percent in Philippine pesos. During the same period, the peso rises from $0.0425/peso to $0.0440/peso. By how much does the Philippine stock
How much of the return variance on a foreign stock investment is likely to come from variation in the foreign stock market and how much from the variation in the exchange rate? What are the
A portfolio manager gathers monthly stock returns going back to the year 1901 and estimates mean returns, variances, and cross-market correlations for 50 countries. She identifies the efficient
What is the capital market line? Why is it important?
What is beta in the one-factor market model? How is it measured? Why is it important?
Describe the size effect and the value premium. Are these found in international stocks? Are these factors evidence of market inefficiency?
What additional factors appear to be priced in required returns?
Calculate equity required return under each of the following, assuming the CAPM holds.a. The risk-free rate is 8 percent, beta is 1.5, and the market risk premium is 8.5 percent.b. The risk-free
The correlation between returns to BMW shares on the Deutsche Börse and the German DAX stock market index is 0.44 when all returns are calculated in euros. The standard deviations of monthly returns
As a security analyst covering the French market, you’ve identified the following factors and factor sensitivities for Elf Acquitaine (“Elf”): Elf’s functional currency is the euro. Factors
The regional directors of a major investment bank are discussing investment strategies for their respective countries.a. As director of North American investments, describe to your foreign
Suppose a fund manager places equal weights on each publicly traded stock in the world. Support your answers to each of the following by citing the relevant empirical asset pricing
What factors seem likely to explain the popularity of the limited liability company as the legal form of so many UK businesses?
How does the position of a limited company compare with that of a human person regarding liability for commercial debts?
How does the position of a shareholder in a limited company differ from that of a sole trader?
‘Preference shares and loan notes are much the same.’ Is this statement correct?
Why are many investment and financing decisions of particular importance to the business?
How are risk and return related, both in theory and in practice?
A plc and B Ltd are two businesses similar in size, activity, gearing and dividend cover. A plc is Stock Exchange listed, B Ltd is not. The dividend yield for A plc is 10 per cent. B Ltd has recently
C plc and D Ltd are two businesses similar in size, activity and gearing. C plc is listed, D Ltd is not. The P/E ratio for C plc is 12; the after-tax earnings per share for D Ltd have been £0.30
The statement of financial position of E Ltd is as shown below. What is the value of each E Ltd share?
When making a decision, an item of information needs to satisfy two criteria in order to be relevant and worthy of taking into account. What are these two criteria?
Why is profit maximisation considered incomplete as the definition of what most businesses seek to achieve?
A monopoly supplier charges its customers very high prices. Is this consistent with the objective of maximising shareholders’ wealth? Explain your response.
A business has £1 million at its disposal and managers feel that this could either be invested in new production facilities or be paid to shareholders as a dividend. What does the separation theorem
Explain why, according to the separation theorem, the financing method (equity or loan) does not affect shareholders’ wealth.
Why, in practice, would borrowing by the business to raise cash to pay a dividend not be economically equivalent to borrowing by the individual shareholders to provide themselves with cash?(Note that
Talco Ltd undertakes research work. It also manufactures engineering products. It is currently engaged on a research project which, when completed, will be sold for £250,000. So far, Talco has
Tariq Ltd is a business that owns a machine that cost £5,000 when it was bought new a year ago. Now the business finds that it has no further use for the machine. Enquiries reveal that it could be
What is a statement of financial position? Does the statement of financial position tell us how much the business is worth?
The first entry in the standard-layout statement of cash flows is ‘cash flows from operating activities’. How is this figure different from the operating profit for the same period?
People often refer to a business as having a ‘strong statement of financial position’. What do they mean by this?
What does the matching convention of accounting say?
The acid test ratio is not included in Taffler’s Z-score model for identifying potentially failing businesses. Why is this?
Why is ratio analysis of financial statements considered to be so useful? Why is a careful reading of the statements not enough?
Counterpoint plc, a wholesaler, has the following accounting ratios for last year and this year:On the basis of these ratios, comment on the performance of the business this year as compared with
The following are the highly simplified financial statements of Duration Ltd for last year: Turnover Income statement for the year ended 31 December Cost of sales Gross profit Operating expenses
The following are the financial statements of Persona Ltd for last year and this year: Turnover Income statement for the year ended 31 December Last year 000 Cost of sales Gross profit Operating
The following is the statement of financial position (in abbreviated form) of Projections Ltd for last year:The following plans have been made for next year:1 Sales revenue is expected to total
The following are the financial statements of Prospect plc for last year and this year: Turnover Cost of sales Gross profit Income statement for the year ended 31 December Last year 000 Operating
The following are the financial statements of High Street Enterprises plc for last year and this year: Turnover Cost of sales Gross profit Income statement for the year ended 31 December Last year
Is the objective of discounting to take account of inflation? Explain.
When we say that future cash flows should be discounted at a rate that takes accountof the opportunity cost of finance, what do we mean by opportunity?
What is the key point about the net present value approach to investment decision makingthat makes it the most correct method, in theory?
The payback period method of assessing potential investment projects is badly flawed, but it is widely used nonetheless. Why is it so widely used?
What is the fundamental flaw of using the internal rate of return method? Is it a problem in practice?
Evidence shows that many businesses use more than one of the four methods of investmentappraisal found in practice. What could be the reason for this?
Barclay plc is assessing an investment project. The estimated cash flows are as follows:The business’s cost of finance is 15 percent p.a. and it seeks projects with a three year maximum discounted
Branton & Co Ltd is choosing between two mutually exclusive investment opportunities, Project A and Project B. The estimated cash flows for the two projects are as follows:The business’s cost
Turners Ltd is considering the purchase of a new machine that is expected to save labour on an existing project. The estimated data for the two machines available on the market are as follows:Which
RTB plc has recently assessed a potential project to make and sell a newly developed product.Two possible alternative systems have been identified, either one of which could be used to make the
Cantelevellers plc’s primary financial objective is to maximise the wealth of its shareholders.The business specialises in the development and assembly of high quality television sets. It normally
Cool Ltd’s main financial objective is to maximise the wealth of its shareholders. Cool specialises in providing a service for its clients. All of the work that it undertakes is of a similar type
Seagull plc has identified that it could make operating cost savings in production by buying an automatic press. There are two suitable such presses on the market, the Zenith and the Super. The
A business is faced with an investment opportunity that involves an initial investment of £35,000, which is expected to generate annual inflows of £10,000 at the end of each of the next five years.
What is the IRR of a project where an initial investment of £120 is followed a year later by a cash inflow of £138 with no further inflows?
Two mutually exclusive projects have the following features:If the cost of finance to support the project is 10 per cent p.a., which of these two projects should the business pursue (assuming no
A business is unable or unprepared to invest more than £500,000 in the current year, but has the following projects available to it:Which of these projects should the business invest in? Project A B
Listed below are the cash flow characteristics of four investment projects. Investment finance is rationed in Years 0 and 1 to £100,000 at each time. Projects cannot be delayed nor can they be
Wessex Mining owns a site in Dorset on which there is an oil well. The business does not pump oil any longer because the price of oil is such that it is not economic to do so. Furthermore,
Depreciation is taken into account when deducing profit (in the income statement), but ignored in NPV assessments. If both accounting profit and NPV are meant to be decision-making tools, is this
Is it logical to include interest payments on cash borrowed to finance a project as cash outflows of the project in an NPV assessment? Explain your answer.
Is it true that the ‘money’ rate of interest is equal to the ‘real’ rate plus the rate of inflation?Explain your answer.
When inflation is predicted over the life of a project under assessment, there are two approaches to dealing with inflation. What are these? Which one is the more practical to use?
How can it be argued that hard capital rationing does not exist in real life?
What is meant by a ‘profitability index’? Is it a helpful approach to dealing with multiperiod capital rationing problems?
Dodd Ltd is assessing a business investment opportunity, Project X, the estimated cash flows for which are as follows:All of the above figures are expressed at 1 January 20X2 prices. Inflation is
Lateral plc has a limit of £10 million of investment finance available to it this year. It has the following investment opportunities:Assuming that the capital shortage relates only to the current
The management of Roach plc is currently assessing the possibility of manufacturing and selling a new product. Two possible approaches have been proposed.Approach A This involves making an immediate
Livelong Ltd has the continuing need for a cutting machine to perform a particular function vital to the business’s activities. There are two machines on the market, the Alpha and the Beta.
Mega Builders plc (Mega), a civil engineering contractor, has been invited to tender for a major contract. Work on the contract must start in January 20X6 and be completed by 31 December 20X7. The
Marine Products Ltd has identified three possible investment projects. Two of these would have to be started very shortly (Year 0), the third in a year’s time (Year 1). None of these projects can
Prentice Products Ltd’s products development department has just developed a new product, a cordless hair dryer for use in hairdressing salons. Were production to go ahead it would start on 1
Penney Products plc has a manufacturing plant devoted exclusively to production of one of the business’s products, a toy known as Zapper. The product is produced only at this factory. Recently
Using the data from Example 6.1, let us assume that all the factors are known with certainty(impossible in real life) except sales volume.Extensive market research suggests that annual demand will
Still staying with the data in Example 6.1, let us assume not only that the sales volume has the same three possible outcomes, but that, independent of the sales volume, the cost of labour will be●

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