Questions and Answers of Introduction To Corporate Finance

Galileo’s functional currency. The U.S. multinational manufacturer of drilling and seismic instruments Galileo Ltd. (GLL) is reviewing the rapid deterioration of the Venezuelan economy and how it
Hewlett-Packard’s Indian financing-cum-hedging conundrum. Following the successful introduction of Copernicus, its latest line of laptop computers, in May 2014, Hewlett-Packard-India (HPI) was
Hippocrates hedges its translation exposures (A). Hippocrates Inc. is a leading U.S.-based manufacturer of medical imaging systems such as MRI machines with headquarters offices and manufacturing
Hippocrates’ balance sheet consolidation (B). Referring to information provided in the preceding problem:a. Prepare a consolidated balance sheet for Hippocrates Inc. using current exchange rates.b.
Explain what economic/operating exposure is. Why does it matter?
What is the difference between economic/operating and transaction exposure to currency risk?
How can operating exposure to currency exposure be measured?
What are the limitations of relying on the purchasing power parity framework to gauge firms’ economic/operating exposure to foreign exchange risk?
What does it mean for operating exposure to be measured by a “regression coefficient”?
Why is operating exposure to currency risk more difficult to manage than transaction exposure?
What is the role played by currency pass-through in exports pricing for managing operating/economic exposure?
How can contractual and financial hedging be harnessed to reduce operating exposure to currency risk? What are the limitations of this approach?
How can marketing policies be used to manage operating exposure to currency risk?
How can manufacturing policies be used to manage operating exposure to currency risk?
It exports fifty 120-passenger jets to regional airlines primarily in the United States and Western Europe. Sales contracts are US$ denominated and average $100 million per plane. Its book of future
Kuoni, a leading Swiss tour operator, sells package tours to Sri Lanka for French and Swiss tourists. On January 1, 2012, Kuoni sent its printed catalog to French, Belgian, and Swiss travel agencies
Portugal’s leather footwear industry has suffered from an expensive euro while its rate of inflation since the launch of the euro in 1999 has exceeded the euro-zone average by an annual average of
In 2011, China experienced an inflation rate of 11 percent against 1 percent in the United States, whereas the renmimbi appreciated from RMB 6. 7 to RMB 6. 3 = $1 during the same period. Walmart, the
In a move toward becoming a major car producer in Eastern Europe, Renault in 2004 purchased the Romanian firm Dacia for €200 million to build Logans in Romania. The pact calls for Renault to start
The company is now positioning itself to take advantage of Romania’s relatively low wages to use its Dacia plant as an export platform to neighboring East European countries such as Bulgaria,
Minneapolis-based Norwest Bank has granted a three-year fixed-interest dollar-denominated loan in the amount of US$25 million to Water Irrigation Systems Inc. for a major export sales to Danang
The national Algerian flag air carrier operates a web of 63 routes mostly to Europe and the Middle East. Its fleet is financed in euros to the tune of €2.5 billion, and ticket sales are
Showa Shell Sekiyu K.K. is the 50 percent owned Japanese subsidiary of the oil giant Royal Dutch Shell. Unlike giant multinationals such as Exxon or Royal Dutch Shell that are vertically integrated
Why do firms often follow a sequential strategy in entering foreign markets?
Discuss the different challenges facing an exporting firm.
What are the pros and cons of international licensing as a mode of foreign market entry?
What are the key elements that a licensing contract should include? What are the clauses that may be the most difficult to enforce?
What are the differences between licensing and franchising?
Identify the key motivations for foreign direct investment.
How do host countries gauge the costs and benefits of foreign direct investments over the life of a project? Why should foreign direct investors understand how such analysis is carried out and the
Define country risk. Compare the exposure to country risk faced by an exporter, a licensor, a franchisor, and a foreign direct investor. How can such firms mitigate their exposure to country risk?
What are the different metrics used in gauging the attractiveness of capital projects such as plant modernization, product launch, or acquisition of a business unit?
What are the key phases involved in making foreign direct investment decisions?
What is different about evaluating foreign projects?
When evaluating foreign projects, why is discounting residual cash flows to equity holders at the equity cost of capital preferable to discounting free cash flows at the weighted cost of capital?
Why is it important to first forecast the project’s local currency cash flows?
Identify different kinds of risk encountered when operating a subsidiary in a foreign country.
What are incremental cash flows, and why should they be incorporated into the evaluation of a foreign project?
What are the different methods available for incorporating risks into foreign projects’ evaluation?
Is shortening the required payback period an appropriate method for accounting for risk in foreign projects?
Give a simple example of how break-even analysis can be used in evaluating foreign projects.
Why is adjusting the risk premium in the cost of equity capital in discounting reference currency cash flows simple, albeit simplistic?
What is adjusted present value and what are the unique benefits it brings to valuing foreign projects?
What are real options and how can they be used in valuing foreign projects?How does this methodology differ from traditional discounted cash flows?
The leading German sport equipment company, Puma, is reviewing a proposal to establish a sport shoe manufacturing plant in the Philippines. The investment will require initial capital of Philippine
Kubota—the Japanese manufacturer of tractors and small earthmoving equipment—is considering building an assembly plant in Da Nang (Vietnam). The initial investment would amount to dong (VND)200
Referring to the information provided in problem 2, evaluate the following:a. How would a 30 percent ad valorem tariff on power train and chassis imposed by the Vietnam government impact Kubota’s
Social costs/benefits versus private-sector analysis. Vietnam’s Ministry of Industry is conducting its own analysis of the proposed project to assemble small-scale bulldozers by Kubota for sale in
Refer to International Corporate Finance in Practice 20. 2 on page 560 relating the French carmaker Renault’s entry into the Romanian automobile market. The year is 2004 and Romania is barely
Referring to problem 5 and information provided in International Corporate Finance in Practice 20. 2 about Renault investment in Dacia, prepare a five-year pro forma cash-flow statement for the
Novo—the Danish biotech multinational—is considering alternative modes of entry into the Indonesian market. It could (1) license the Indonesian state-owned pharmaceutical agency known as Farma
Cardiex is a world-leading manufacturer of implantable defibrillators based in Maastricht (Netherlands). Gustav Lund, Cardiex’s senior vice president for production and logistics, is trying to
Referring to information provided in problem 8, Cardiex’s sales in the European Union are projected to remain stable at €100 million for the next 5 years. Show pro-form income and cash-flow
Referring to the information provided in problems8 and 9, inflation in the Philippines is expected to run at an annual rate of8 percent over the next five years while the peso, currently trading at
Discuss the logic for mergers and acquisitions. Are cross-border M&As substantially different?
What is meant by a control premium? Who are the primary beneficiaries in M&As?
What are the pros and cons of international acquisition as a mode of foreign market entry?
What is unique about valuing cross-border acquisitions? What valuation methodology would you recommend?
Contrast cross-border acquisitions carried out by multinationals, private equity firms, and sovereign wealth funds.
What is the appropriate discount rate to use in valuing foreign companies?
Discuss the pros and cons of valuation by multiples in cross-border acquisitions.
What is the value range within which the acquirer should set the acquisition premium?
How should private equity firms value cross-border acquisitions? Ulysses, a Boston-based private equity firm, specializes in transportation with a focus on emerging capital markets. It has identified
Referring to background information provided in problem 1, assume now that the transaction was financed by a jumbo loan for 80 percent of the purchase price. The loan is INR-denominated at 12 percent
Maersk is preparing an offer to acquire the privately held Indian shipping company Salgacoar. In addition to the background information provided in problem 1, Maersk believes that by giving access to
Referring to Ciments Lafarge’s acquisition, explain how the valuation of the Hoang Thach Cement Company would differ if instead of an all-cash deal the transaction had been financed with a VND 1
Which cost of capital? Guillaume Tel of Ciments Lafarge was unsure about the legitimacy of applying a discount rate of 10. 5 percent to value the acquisition of Hoang Thach Cement Company. After all,
GE Capital—a global leader in automobile leasing—started to scrutinize possible acquisitions in Thailand in the early 1990s when the THB was pegged to the U.S. dollar at THB 25 = US$1. With
How should Vietnam gauge the proposed cross-border acquisition described in problems 4 and 5?a. What are the costs and benefits of Ciments Lafarge’s proposed acquisition on Vietnam’s balance of
What is project finance? Identify the sectors of the economy where project finance type deals are most likely to be found.
What are the advantages of using project finance rather than corporate finance for funding large-scale infrastructure investments?
Compare the risks faced by equity sponsors during a project-financed venture’s construction phase versus the operational phase. Are the risks faced by lenders the same?
Why is construction financing provided with recourse to the sponsors?
What are nonrecourse loans, and why are they important to the architecture of project finance?
Why is escrowing for debt servicing a requirement of project finance? Are equity cash flows to sponsors inclusive or exclusive of cash escrowed for debt servicing?
Why do off-takers play a critical role in project finance? What is off-taker risk?
How should the changing leverage be taken into account in valuing project finance?
What are the key metrics of investment analysis?
Compare the Sharpe ratio with the information ratio.
What are the key factors reshaping the asset management industry?
Identify the new players in the global asset management industry.
What is the nature of the benefits to be derived from investing in foreign stocks?How can they be measured?
What are the key barriers to investing in foreign stocks? How can they be overcome?
Discuss the major risks involved in foreign stock investing. How can they be hedged?
Should currency risk be managed independently or conjointly with market risk?
How do you measure the correlation between two market indexes? What does it mean for two markets to be negatively correlated?
Why is globalization reducing the gains from international portfolio diversification?
Consider the following information on the expected return and risk of two country funds—the Taiwan country fund (asset 1) and the Ukraine country fund(asset 2):a. Calculate the expected return and
The standard deviation of Infosys in Indian rupees (INR) is σI = 8. 5 percent, and the standard deviation of the US$/INR exchange rate is σs = 5. 5 percent.a. If the correlation between Infosys’s
During the first quarter of 2012, the Brazilian real depreciated from BRL 1. 65 to BRL 1. 85 = US$1. Shares of Petrobras trading on the New York Stock Exchange in the form of American depositary
Cougar Investments holds 10,000 shares of Embraer and 25,000 shares of Bank Itau, currently worth BRL 100 and BRL 40, respectively. Both stocks have an expected return in Brazilian reals of 12
Kaiwa is a U.S.-based value fund considering investing overseas to benefit from international diversification. It is contemplating investing in the South Korea country fund that offers an expected
Identify the metrics used in evaluating a firm’s performance.
Why is EVA a better metric for gauging performance?
What is variance analysis? What role does it play in the control process?
Why do exchange rates complicate the performance evaluation of a multinational corporation’s foreign operations?
What are “internal” forward rates? How are they used in the international control process?
What is a currency space map? What role does it play in the international control process?
What are “pass-through” coefficients? What do role do they play in the international control process?
What is different about an EVA-based contingent budgeting and control system?

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