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 interest and principal). The project has zero salvage value and will be terminated at the end of one year. Dryden considers financing this project using the following options: All U.S. equity All U.S. debt (loans) denominated in dollars provided by U.S. banks All debt (loans) denominated in euros provided by European banks Half of funds obtained from loans denominated in euros and half obtained from loans denominated in dollars Which form of financing will cause the project’s NPV to be the least sensitive to exchange rate risk?
> 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.
> Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is true: “If interest rate parity does not hold, U.S. fir
> 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
> 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.
> Slater Co. is a U.S.-based MNC that finances all of its operations with debt and equity. It borrows U.S. funds at an interest rate of 11 percent per year. The long-termrisk-free rate in the United States is 7 percent. The stock market return in the Unite
> Newark Co. is based in the United States. Approximately 30 percent of its sales are from exports to Portugal, and the company has no other international business. It finances its operations with 40 percent equity and 60 percent dollar-denominated debt. N
> Messan Co., a U.S. firm, borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The longterm annualized risk-free rate in the United States is 6 percent. The stock market return in the United States is expected to be 16 percent a
> Vogl Co. is a U.S. firm creating a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales come from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported sup
> Nevada Co. is a U.S. firm that conducts major importing and exporting business in Japan, with all of these transactions invoiced in dollars. It obtained debt in the United States at an interest rate of 10 percent per year. The long-term risk-free rate in
> Texas Co. produces pharmaceutical drugs and plans to acquire a subsidiary in Poland. This subsidiary, a laboratory, would perform biotechnology research. Texas Co. is attracted to the lab because of the cheap wages paid to scientists in Poland. The paren
> Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentinean pesos (AP) at the end of each of the next four years. It will have to pay operating expenses of AP3 million per year. The Argentine government will c
> The U.S. firm Orlando Co. is funded in dollars, with a capital structure of 60 percent debt and 40 percent equity. Its Thailand business is funded in Thai baht, with a capital structure of 50 percent debt and 50 percent equity. The corporate tax rate on
> Zylon Co. is a U.S. firm that provides technology software for the government of Singapore. It will be paid S$7 million at the end of each of the next five years. The entire amount of the payment represents earnings because Zylon created the technology s
> Carazona, Inc., is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiary’s operations in Indonesia, but the cost of debt is currently about 30 percent there for firms like Carazona or government agencies that have a ver
> Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does nothave an established stock market, but loans by local banks are a
> Wizard, Inc., has a subsidiary in a country where the government allows only a small amount of earnings to be remitted to the United States each year. Should Wizard finance the subsidiary with debt financing by the parent, equity financing by the parent,
> The subsidiaries of Forest Co. produce goods in the United States, Germany, and Australia and sell those goods in the areas where they are produced. Foreign earnings are periodically remitted to the U.S. parent. As the euro’s interest rates have declined
> In recent years, several U.S. firms have entered the market in Mexico. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much higher than U.S. interest rates. In some periods, the Mexi
> Kent Co. is a large U.S. firm with no international business. It has two branches in the United States, an eastern branch and a western branch. Each branch currently makes investing or financing decisions independently, as if it were a separate entity. T
> Charleston Corp. is considering establishing a subsidiary in either Germany or the United Kingdom. The subsidiary will be mostly financed with loans from the local banks in the host country chosen. Charleston has determined that the revenue stream genera
> If Nike decides to expand further in South America, why might its capital structure be affected? Why will its overall cost of capital be affected?
> Rose, Inc., of Dallas, Texas, needed to infuse capital into its foreign subsidiaries to support their expansion. As of August 2001, it planned to issue stock in the United States. However, after the September 11, 2001, terrorist attacks, it decided that
> Blues, Inc., is an MNC located in the United States. The firm would like to estimate its weighted average cost of capital (WACC). On average, bonds issued by Blues yield 9 percent. Currently, Treasury security rates are 3 percent. Furthermore, Blues’ sto
> Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bonds yield 2 percent. Based on this information, what is Wiley’s estimated cost of equity?
> An MNC has total assets of $100 million and debt of $20 million. The firm’s before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 20 percent. What is this firm’s cost of capital
> Explain why the cost of capital for a U.S.-based MNC with a large subsidiary in Brazil is higher than for a U.S.-based MNC in the same industry with a largesubsidiary in Japan. Assume that the subsidiary operations for each MNC are financed with local de
> Pullman, Inc., a U.S. firm, has been highly profitable but prefers not to pay out higher dividends because its shareholders want the funds to be reinvested. It plans for aggressive growth in several less developed countries. Pullman would like to finance
> Present an argument in support of an MNC favoring a debt-intensive capital structure. Present an argument in support of an MNC favoring an equity-intensive capital structure.
> How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a project’s estimated cash flows?
> Gandor Co. is a U.S. firm that is considering a joint venture with a Chinese firm to produce and sell DVDs. Gandor will invest $12 million in this project, which will help finance the Chinese firm’s production. For each of the first thr
