Question: Assume that the U.S. interest rate

> Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the United States, wants to expand internationally by selling the same golf clubs in Brazil. a. Describe the trade-offs that are involved for each method (such as exporting, direct forei

> Duve, Inc., desires to penetrate a foreign market either by creating a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm and the

> Review this book’s table of contents and indicate whether each of the chapters from Chapter 2 through Chapter 21 has a macro or micro perspective.

> McCanna Corp., a U.S. firm, has a French subsidiary that produces and exports wine. All of the European countries where it sells its wine use the euro as their currency, which is the same currency used in France. Is McCanna Corp. exposed to exchange rate

> Why do interest rates vary among countries? Why are interest rates usually similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than the governme

> Explain why morestandardized product specifications across countries can increase global competition

> Would the agency problem be more pronounced for Berkeley Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?

> Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in politic

> As an overall review of this chapter, identify possible reasons for growth in international business. Then list the various disadvantages that may discourage international business

> Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro (the currency used in many European countries) would affect Plak’s valuation

> Rollins, Inc., has $3 million in cash available for 1 year. It can earn 3 percent on aU.S. Treasury bill or 5 percent on a British Treasury security. The British investment requires conversion of the company’s dollars to British pounds. Assume that inter

> Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to Mexican pesos, it can earn 1.5 percent on a Mexican deposit. The spot rate o

> Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage because the euro’s 90-day interest rate is higher than the U.S. interest rate. What will determine whether this strategy is feasible?

> Why would a U.S. firm consider investing its short-term funds in euros even when it does not have any future cash outflows in euros?

> Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire.

> Walmart has established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These massive outlets sell imported goods in addition to products produced locally. As Walmart generates earnings beyond what it needs in Sha

> If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with high interest rates?

> How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?

> Explain the benefits of netting. How can a centralized cash management system be beneficial to the MNC?

> Ithaca Co. considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year Canadian dollar deposit. The Singapore one-yearinterest rate is 15 percent,

> Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in value during the next year is shown next: What is the e

> Palos Co. commonly invests some of its excess dollars in foreign governments’ short-term securities in an effort to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the

> Should McNeese Co. consider investing funds in Latin American countries where it may expand facilities? The interest rates are high in this region, and the proceeds from the investments could be used to help support the expansion. When would this strateg

> Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and subject to a low degree of exchange rate risk? Explain

> Dallas Co. has determined that the interest rate on euros is 6 percent and the U.S. interest rate for one-year Treasury bills is 3 percent. The one-year forward rate of the euro has a discount of 5 percent. Does interest rate parity exist? Can Dallas ach

> Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?

> Why do you think the terrorist attacks on the United States on September 11, 2001, were expected to cause a decline in U.S. interest rates? Given the expectations for a decline in U.S. interest rates and stock prices, how were capital flows between the U

> Assume that the one-year U.S. interest rate is 2 percent and the one-year Canadian interest rate is 5 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian dollar have to depreciate to make its effective yield the same

> Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially underestimate the spot rate to be realized in 1 year.

> Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially overestimate the spot rate to be realized in 1 year

> Discuss the general functions involved in international cash management. Explain how an MNC can optimize cash flows.

> Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve lower financing costs by consistently borrowing a foreign currency with a low interest rate?

> Seabreeze Co. needs to finance some dollar-denominated expenses for oneyear. It can borrow euros at a lower cost than it can borrow dollars. Interest rate parity exists. The oneyear forward rate of the euro contains a premium of 4 percent. If the company

> Connecticut Co. plans to finance its U.S. operations. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars. a. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs s

> How is it possible for a firm to incur a negative effective financing rate?

> Assume that Davenport, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) borrowing U.S. dollars at an interest rate of 6 percent, (2) borrowing

> How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?

> Chapman Co. is a privately owned MNC in the United States that plans to engage in an initial public offering (IPO) of stock so that it can finance its international expansion. Currently, world stock market conditions are very weak, but they are expected

> a. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed? b. Once the probability distribution of effective financing rates from financing in a foreign

> a. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency. b. Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the future spot rate, ex

> Raleigh Corp. needs to borrow funds for one year to support its operations in the United States. The following interest rates are available: The percentage changes in the spot rates of the Canadian dollar and Japanese yen over the next year are as follo

> a. Does borrowing a portfolio of currencies offer any possible advantages over borrowing a single foreign currency? b. If a firm borrows a portfolio of currencies, what characteristics of the currencies will affect the potential uncertainty of the portf

> Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year are as follows: The interest rate on t

> Jacksonville Corp. is a U.S.-based firm that needs $600,000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest rate would be 5 percent versus 9 percent in the United States. Assume that intere

> Missoula, Inc., decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following probability distribution for the yen’s degree of fluctuation against the dollar: Give

> Homewood Co. commonly finances some of its U.S. expansion by repeatedly borrowing on a short-term basis. Explain how a global credit crisis might limit the firm’s ability to repeatedly borrow short-term funds and increase the cost of borrowing.

> Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtains short-term financing from local banks. If Asiasuddenly experiences an economic crisis, explain why Bradenton may not be able to easily obtain funds from the local banks.

> Mizner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos to cover its operating expenses. The subsidiary can borrow pesos at 11 percent and can use peso revenues to be received over t

> Explain why some financial institutions prefer to provide credit in financial markets outside their own country.

> Greensboro, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is 3 percentage points lower than the U.S. rate. Assume that interest rate par

> Explain why an MNC parent would consider financing from its subsidiaries.

> What is countertrade?

> This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs?

> Briefly describe the role of the Private Export Funding Corporation (PEFCO).

> What is forfaiting? Specify the type of traded products for which forfaiting is applied.

> What are bills of lading, and how do they facilitate international trade transactions?

> a. What is the role today of the Export-Import Bank of the United States? b. Describe the Direct Loan Program administered by the Ex-Im Bank.

> What is the role of a factor in international trade transactions?

> Explain why firms may issue stock in foreign markets. Why might U.S. firms have issued more stock in Europe after the inception of the euro?

> a. Why would an exporter provide financing for an importer? b. Is there much risk in this activity? Explain.

> Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued b

> Describe the role of the Overseas Private Investment Corporation (OPIC).

> Describe the Small Business Policy of the Export-Import Bank.

> Briefly describe the Working Capital Loan Guarantee Program administered by the Export Import Bank.

> Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It has not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the computer chips. However, Bronx Co. is concerned that the f

> a. Describe how foreign trade would be affected if banks did not provide trade-related services. b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?

> Sambuka, Inc., can issue bonds either in U.S. dollars or in Swiss francs. Dollar-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominated bonds would have a coupon rate of 12 percent. Assuming that Sambuka can issue bonds worth $

> Cuanto Corp. is a U.S. drug company that has attempted to capitalize on opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the costs in Germany or Switzerland. Fu

> Katina, Inc., is a U.S. firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on dollar-denominated bonds. What is the most critical point in time when the exchange rate will have the greatest impact

> You just came back from Canada, where the Canadian dollar was worth $0.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $0.60. Next week, you will be

> Kerr, Inc., a major U.S. exporter of products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it will be exp

> Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to mak

> Columbia Corp. is a U.S. company with no foreign currency cash flows. It plans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in U.S. dollars with a floating interest rate. It estimates its periodic dollar ca

> a. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm. b. Explain how a U.S.-based MNC issuing bonds denominated in euros may be able to offset a portion of i

> Dryden Co. is a U.S. firm that plans a foreign project in which it needs $8 million as an initial investment. The project is expected to generate cash flows of 10 million euros in one year after the complete repayment of the loan (including the loan inte

> What is the advantage of using simulation to assess the bond financing position?

> Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years. a. Explain why Chile’s term structure of interest rates (as reflected in its yield curve) might cause the subsidiary to borrow for a diffe

> Compton Co. has a subsidiary in Thailand that produces computer components. The subsidiary sells the components to manufacturers in the United States. The components are invoiced in U.S. dollars. Compton pays employees of the subsidiary in Thai baht and

> Vix Co. (a U.S firm) presently serves as a distributor of products: It purchases these products from other U.S. firms and sells them in Europe. Vix Co. wants to acquire a manufacturer in Thailand that could produce similar products at a low cost (due to

> The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co. expects this business to generate large cash flows in

> a. With regard to Euro credit loans, who are the borrowers? b. Why would a bank desire to participate in syndicated Euro credit loans? c. What is LIBOR, and how is it used in the Euro credit market?

> Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to mak

> Janutis Co. has just issued fixed-rate debt at 10 percent, but it wants to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps variable rate payments of LIBOR plus 1 percent in exchange for pa

> Grant, Inc., is a wellknown U.S. firm that needs to borrow 10 million British pounds to support a new business in theUnited Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. The c

> Assume that Hurricane, Inc., is a U.S. company that exports products to the United Kingdom, invoiced in dollars. It also exports products to Denmark, invoiced in dollars. The company currently has no cash outflows in foreign currencies, and it plans to i

> Assume that Seminole, Inc., considers issuing a Singapore dollar– denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate

> Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate i

> a. What factors should be considered by a U.S. firm that plans to issue a floating-rate bond denominated in a foreign currency? b. Is the risk of issuing a floating-rate bond higher or lower than the risk of issuing a fixed-rate bond? Explain. c. How w

> Veer Co. is a U.S.-based MNC that has most of its operations in Japan. Because the Japanese companies with which it competes use more financial leverage, it has decided to adjust its own financial leverage to be in line with theirs. With this heavy empha

> Drexel Co. is a U.S.-based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing: Either the parent could provide most of the financing, or the subsidiary could be supported by local

> LaSalle Corp. is a U.S.-based MNC with subsidiaries in various less developed countries where stock markets are not well established. How can LaSalle still achieve its “global” target capital structure of 50 percent debt and 50 percent equity if it plans

> Explain why the Greece credit crisis could cause contagion effects throughout Europe.

> It is commonly argued that high interest rates reflect the expectation of high inflation. Based on this theory, how would expectations of Asian exchange rates change after interest rates in Asia increased? Why? Is the underlying reason logical?

> Explain why managers of a wholly owned subsidiary may be more likely to satisfy the shareholders of the MNC

> Explain how characteristics of MNCs can affect the cost of capital

> Why might a firm use a “local” capital structure at a particular subsidiary that differs substantially from its “global” capital structure?

> Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinlandto weaken by 20 percent per year against the dollar over time. Marks Co. will borrow some funds to finance the subsidiary. Should the company (a) obtain a doll

> Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all the equity to be obtained in the United States to finance a new project. The project’s cash flows are not affected by U.S. interest rates. Just before Illinois Co

> Assume that Naperville Co. will use equity to finance a project in Switzerland, that Lombard Co. will rely on a dollardenominated loan to finance a project in Switzerland, and that Addison Co. will rely on a Swiss franc– denominated loan to finance a pro

> Describe general differences between the capital structures of firms based in the United States and those of firms based in Japan. Offer an explanation for these differences.