Questions and Answers of Introduction To Corporate Finance

What is the difference between territorial and worldwide tax regimes?
How is foreign-source income treated by the tax authorities of a multinational’s home country?
What is tax deferral, and how is it applied to foreign-source income?
What guidelines are to be followed by multinational corporations in setting cross-border transfer prices?
What is Subpart F income?
What is the economic logic for corporate inversion?
What are reinvoicing centers? How do they differ from tax havens? How do multinational corporations take advantage of reinvoicing centers?
How can leading and lagging intracorporate payments be used to create value for the multinational corporation?
How should multinationals structure their global earnings remittance strategy?
How is centralized global cash management implemented?
The Minneapolis-based medical instruments firm is considering starting an assembly operation in Bratislava (Slovakia) and is hesitating between establishing it as a branch or a subsidiary. The
Fluor Inc. is a U.S.-based global engineering and construction company. Its Brazilian subsidiary earned $112 million in 2012, which is taxed at the Brazilian corporate income tax of 30 percent.
Referring to problem 2, consider the case of Fluor’s wholly owned subsidiary in Ireland, which is taxed at the corporate income tax rate of 12. 5 percent. Fluor-Ireland earned $27 million in
Electrolux—the Swedish multinational manufacturer of household appliances and white goods (refrigerators and washing machines)—manufactures compressors in Kiev (Ukraine) for assembly and
Define in your own words what is meant by globalization.
Discuss the key drivers of globalization.
What is meant by “the world is flat”? (Was Galileo wrong?)
What are the key motivations for firms to expand abroad?
Is international financial management different from domestic corporate finance?
What is corporate governance, and how does it vary across countries?
What are the unique risks faced by multinationals?
Explain the international control conundrum faced by multinational corporations.
What are the organizational challenges of managing the finance function in a multinational corporation? Where should the locus of financial decision making be housed?
How can multinationals exploit their global financial systems to create value?
What is the difference between a “clean” float and a “dirty” float?
Why do countries intervene in their foreign exchange markets?
What is the difference between currency convertibility and exchange rate flexibility?
Explain how central bank intervention allows a country to keep its forex rate at a certain level.
What is the difference between central bank intervention in the foreign exchange market in the context of floating versus stabilized exchange rates?
How would you contrast a controlled exchange rate with a stabilized exchange rate?
What does the explosive growth in China’s reserves tell you about the nature of its exchange rate regime?
The last time the U.S. Federal Reserve Bank intervened in the forex market was in 1995. Would you expect the U.S. foreign exchange reserves to have increased or decreased over the past 18 years?
What is the difference between controlled exchange rates and stabilized exchange rates?
Why do many developing countries maintain controlled exchange rates at overvalued exchange rates?
What is the difference between a system of multiple exchange rates and the imposition of different tariff rates on imports?
Explain the Law of One Price. How does it relate to the concept of purchasing power parity?
Contrast the “absolute” and the “relative” versions of purchasing power parity.
When the Swiss franc appreciates. Over the past five years the Swiss franc (CHF)appreciated from CHF 1 = US$0.8215 to peak at CHF 1 = US$1.0697.a. Calculate the percentage appreciation of the Swiss
When the Bengladeshi taka depreciates. The central bank of Bangladesh is contemplating a devaluation of its currency—the taka (BDT)—from BDT 69 to BDT 100 = US$1:a. What would be the percentage
The Malaysian ringgit peg to the U.S. dollar. Malaysia pegs its currency, the Malaysian ringgit (MYR), to the U.S. dollar. The par value is MYR 4 = US$1.a. What is the par value priced in US$ terms
The Hong Kong currency board in the shadow of the rising yuan. Since 1983, the Hong Kong dollar (HK$) is via a currency board pegged to the U.S. dollar at the rate of HK$7.80 = US$1. Since 2005 the
Daily forex rates fixing by the Central Bank of South Korea (advanced). The Central Bank of South Korea announces every business day at 9:00 a.m. a fixed rate at which it will buy or sell U.S.
Advance deposit schemes and effective exchange rates. Over the years, a number of developing countries have maintained an advance deposit scheme for imports.Such systems typically require importers
Telmex dual listing and the Mexican peso devaluation. Shares of Telefonos Mexicanos(Telmex) listed on the New York Stock Exchange fell from $60 to $48 when the Mexican peso (MXN) was devalued on
Hyperinflation in Turkey. Turkey experienced hyperinflation in the late 1990s and early 2000s. The exchange rate stood at Turkish lira (TRY) 650,000 = US$1 on January 1, 2000. With actual quarterly
Purchasing power parity and the Argentine currency board (A). In April 1991 Argentina established a currency board whereby for all practical purposes the Argentine peso was pegged to the U.S. dollar
Purchasing power parity and the Argentine currency board (B). Assume over the 10-year period 1991–2001 the U.S. economy experienced an annualized inflation rate of 1. 5 percent. While the currency
Purchasing power parity and the Argentine currency board (C). In 2002, Argentina suffered from inflation at the rate of 25 percent (still 1. 5 percent in the United States):a. What should be the
A single currency for a global economy. The daily turnover in the foreign exchange market approaches $4 trillion or a yearly turnover of $1,000 trillion(with 252 working days in a given year).
Big Mac currencies. In 2006 a Big Mac cost ARS 7. 00 in Argentina and US$3.10 in the United States. Four years later, in 2010, the same Big Mac cost ARS 14. 00 in Argentina and US$3.73 in the United
Special drawing rights (SDRs). Visit the IMF website at www.imf.org and research the currency composition of the IMF’s artificial currency unit. Explain the logic behind the currency composition of
Valuing SDRs. Using the findings of the previous problem, visit the website of Yahoo! Finance at www.yahoofinance.com to value one SDR at today’s exchange rate. What is the weight accounted by the
Hyperinflation in Turkey. Visit www.imf.org to sketch the nominal lira price of one U.S. dollar over the period 1994–2001. Contrast it with the real/PPP rate over the same period. Was the lira
Denmark’s currency regime. Visit www.pacific.commerce.ubc.ca/xr to sketch the exchange rate of the Danish krone against the euro over the period 1999–2012.How would you characterize the exchange
Explain the role played by gold in the gold standard system of international payments. Why was the gold standard suspended during World War I?
Why did the major industrialized powers fail to reenact the gold standard after World War I? Why did they turn to a “beggar thy neighbor” policy?
What are the defining characteristics of the Bretton Woods international monetary system?
Why was the Bretton Woods system of “pegged yet adjustable” exchange rates reasonably successful until 1958 and increasingly unstable thereafter?
What are exchange controls on current account transactions? How do they differ from controls on capital account transactions? Which ones were the more important in ensuring the stability of the
Why was China able to survive the 1997 Asian financial crisis without devaluing the yuan whereas most Asian countries had to massively devalue their currencies?
Why have England, Sweden, and Denmark refused to join the euro-zone?
What is the difference between a currency board and dollarization?
Why did the Argentine currency board collapse whereas Hong Kong has been able to hold on to its fixed exchange rate against the U.S. dollar?
What are the key macroeconomic variables that explained devaluation or revaluation in the Bretton Woods system?
Should Greece exit the euro-zone? What would be the implications for Greece versus the euro-zone and the European Union?
Would the euro-zone’s economic problems be alleviated if the currency were to depreciate significantly against the U.S. dollar and the Japanese yen? Which euro-zone country would benefit the most?
Why did the European Monetary System fail? How does the euro differ from the EMS? Were the lessons from the EMS failure learned when the euro was designed?
The euro-zone is sometimes referred as a DM-zone (the Deutsche mark being the former currency of Germany); explain.
Why are member countries of the euro-zone experiencing different rates of inflation when the European Central Bank implements a single monetary policy with a single interest rate?
What are the defining characteristics of an optimum currency area? What are the main differences between the United States and the euro-zone in this respect?
Referring to the North American Free Trade Agreement (NAFTA), should the United States, Mexico, and Canada adopt a common currency?
Brazilian real appreciates. Wharton Econometrics Forecasting Associates expects the Brazilian real (BRL) to depreciate by 30 percent against the U.S. dollar over the next 90 days from its current
Calculating par values against the dollar and gold. In 1958, the French franc(FF) was defined as worth 1/175 ounce of gold. What was the FF’s par value against the dollar? What were the floor and
The ECU as a basket of currencies. What is the percentage/weight of the ECU’s total value accounted by the Spanish peseta? Refer to Exhibit 3. 4 in the text.Would you get a different result if you
The CFA franc devalues. The CFA franc was defined in terms of the French franc (FF) as CFA 50 = FF 1 from 1947 until 1994, when its value changed to CFA 100 = FF 1. Was the CFA devalued or revalued
The CFA franc and the birth of the euro. In 1999, the launch of the euro buried the French franc to which the CFA franc was pegged: the CFA franc would now be convertible into euros (€) rather than
Exchange controls for foreign portfolio investments. The Boston-based Flying Dragon emerging market fund (FDE) was planning to purchase 1 million shares of Bangkok Bank at the price of THB 129 when
Asian financial crisis and the Thai baht. On July 3, 1997, the Thai baht was unpegged from the U.S. dollar and promptly depreciated from THB 25 = US$1 to THB 60 = US$1. What was the baht’s
Hong Kong currency board and the Chinese yuan. For the past 25 years Hong Kong has relied on a currency board to peg its currency against the U.S. dollar at HK$7.80 = US$1. Since 2005, the Chinese
Denmark pegs its currency to the euro. Even though Denmark opted not to join the single currency in 1999, it has pegged its currency very tightly to the euro ever since and keeps the value of the
A single currency for the Gulf states. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates have long been rumored to be seriously onsidering the adoption of a common currency.
Britain’s love affair with the euro (web exercise). Even though Britain is a member of the European Union, it opted not to join the euro-zone in 1998. Acrimonious debate within the British
Mapping central bank intervention strategies (web exercise). Log in to www.pacific.commerce.ubc.ca/xr to plot the Thai baht, Mexican peso, Indian rupee, and Egyptian pound against the U.S. dollar
The Ecuadorian sucre finds peace (web exercise). Log in to www.pacific commerce.ubc.ca/xr to plot the Ecuadorian sucre over the period 1997−2012.What happened to the sucre in 2000?
When Switzerland becomes a dirty floater (web exercise). Log in to www.pacific.commerce.ubc.ca/xr. Explain the National Swiss Bank foreign exchange policy over the period 2008−2013. Would a partial
Why should a balance of payments always balance?
If the balance of payments always balances, how can a nation have a balance of payments surplus or deficit?
What are the major transaction categories making up the current account?
What is the difference between international portfolio investment and foreign direct investment? Where do they appear on the balance of payments?
What are the major differences between the United States’ and China’s balance of payments?
Why is China accumulating forex reserves so rapidly? Is its balance of payments indeed balancing?
What are the key transactions making up the balance of invisible trade? Where does it appear on the balance of payments?
What are international remittances? Where do they appear on the balance of payments?
Where are illicit activities such as drug trafficking and international terrorism recorded on the balance of payments?
What is the cash-flow relationship between the net international indebtedness of a country and its balance of payments?
What major differences would you expect between the balance of payments of a country that operates under a system of fixed exchange rates versus floating exchange rates?
Does it make sense for France or any other member country of the euro-zone to keep a national balance of payments? Given the single currency, do you believe that the euro-zone balance of payments is
Balance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign
Balance-of-payments double-entry bookkeeping. Show how the following transactions should be recorded in the U.S. balance of payments using a double-entry accounting system:■ Newmont Mining—a U.S.
Boeing’s big-ticket exports. Cathay Pacific, the Hong Kong–based airline, purchases five Boeing Dreamliners in 2013 for $750 million. The U.S. Export-Import Bank provides a seven-year loan for

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