Question: Explain the various ways in which large

> 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

> Explain the micro-assessment of country risk

> Niagara, Inc., has decided to call a well-known country risk consultant to conduct a country risk analysis in a small country where it plans to develop a large subsidiary. Niagara prefers to hire the consultant because it plans to use its employees for o

> If the potential return is high enough, any degree of country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a capital budgeting analysis of a project considered for a

> Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that the MNC is not evaluating any other proposed projects for that country. Do you agree with this statement? Why or why not?

> Why do you think that an MNC’s strategy of diversifying projects internationally could achieve low exposure to country risk?

> Describe the possible errors involved in assessing country risk. In other words, explain why country risk analysis is not always accurate.

> Duv Co. (a U.S. firm) is planning to invest $2.5 million in a project in Portugal that will exist for one year. Its required rate of return on this project is 18 percent. It expects to receive cash flows of 2 million euros in one year from this project.

> Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a forward cont

> Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in one year under the most likely economic and political conditions. The spot rate of the Argentina peso in one year is expected to be $0

> Assume that interest rate parity exists. At 10:30 a.m., the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso against the dollar over the next month. However, this n

> As a financial analyst for Blades, Inc., you are reasonably satisfied with the firm’s current setup of exporting “Speedos” (roller blades) to Thailand. Due to the unique arrangement with Blades’ primary customer in Thailand, forecasting the revenue to be

> Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the endof this year. It plans to hedge receivables of 10 million euros with a forward contract. Today, the spot rate of the euro is $1.20, the one-ye

> Kansas Co. wants to invest in a project in China. The proposed project would require an initial investment of 5 million yuan, but is expected to generate cash flows of 7 million yuan at the end of one year. The spot rate of the yuan is $0.12, and Kansas

> Wyoming Co. is a nonprofit educational institution that wants to import educational software products from Hong Kong and sell them in the United States. It wants to assess the net present value of this project because any profits it earns will be used fo

> Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Co. (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related to this project. In one year, Tovar will receive payment from

> During a conflict in the Middle East, some MNCs capitalized on opportunities to rebuild the damaged areas. However, some of their employees were kidnapped by local militant groups. How should an MNC account for this potential risk when it considers direc

> In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent. Reevaluate the NPV of the project’s expected scenario using this adjusted discount rat

> Describe the steps involved in assessing country risk once all relevant information has been gathered.

> Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $0.70. In the first and second years of operation, the project will generate 700,000

> Recently, Best Bargain Co., a U.S.-based retailer, decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before making its expansion decisions. Initial screenings of 30 foreign countries were based

> Explain how the capital budgeting analysis in question 16 would need to be adjusted if there were three possible outcomes for the British pound along with the possible outcomes for the British economy and corporate tax rate.

> Recall from Chapter 1 that Jim Logan planned to pursue his dream of establishing his own business, the Sports Exports Company, for exporting footballs to one or more foreign markets. He has decided to initially pursue the market in the United Kingdom bec

> Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the United States. The project would end in one year, when all earnings would be remitted to Hoosie

> Arkansas, Inc., exports to various less developed countries, and its receivables are denominated in the foreign currencies of the importers. It considers reducing its exchange rate risk by establishing small subsidiaries to produce products. By incurring

> Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown in the table. Assauer has assigned overall ratings of 80 percent to political risk factors and 20Â&nbs

> MNCs such as Alcoa, DowDuPont, Kraft Heinz, and IBM have donated products and technology to foreign countries where they had subsidiaries. How could these actions have reduced some forms of country risk?

> When NYU Corp. considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk analysis performed about one year earlier, when it had planned to begin a major exporting bu

> Why do some subsidiaries maintain a low profile as to where their parents are located?

> Explain some methods of reducing exposure to existing country risk while maintaining the same amount of business within a particular country.

> List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC. Identify common financial factors for an MNC to consider when assessing country risk.

> A crisis in a foreign country commonly causes a substantial reduction in cash flows (and valuations) of an MNC’s subsidiaries based in that country. Explain why the MNC will not necessarily sell its subsidiaries even if these subsidiaries are not profita

> Refer to question 7. What are some of the key sources of uncertainty in Blore’s valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC would be lower if Asia experienced a new economic crisi

> Ben Holt, chief financial officer (CFO) of Blades, Inc., has decided to counteract the decreasing demand for Speedos roller blades by exporting this product to Thailand. Furthermore, due to the low cost of rubber and plastic in Southeast Asia, Holt has d

> Blore, Inc., a U.S.- based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided the following information: Blore expect

> Why are valuations of privatized businesses previously owned by the governments of developing countries more difficult than valuations of existing firms in developed countries?

> Savannah, Inc., a manufacturer of clothing, wants to increase its market share by acquiring a target producing a popular clothing line in Europe. This clothing line is well established. Forecasts indicate that the euro will remain relatively stable over

> Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to produce tablet computers and market them throughout Russia, where demand for tablets has increased substantially in recent years. Assume that the stock prices of most

> Kylee Co. (a U.S. firm) has a British subsidiary that will generate cash flows of 3 million pounds at the end of each of the next two years. It uses the prevailing spot rate of the British pound of $1.80 as a forecast of the future value of the pound. It

> Poki, Inc., a U.S.-based MNC, is considering expanding into Thailand because of decreasing profit margins in the United States. The demand for Poki’s product in Thailand is very strong. However, forecasts indicate that the baht is expected to depreciate

> Dallen Co. has a subsidiary in Mexico that does research and development and produces prescription pills that are transported to and sold in the United States. The parent used its own funds to build the subsidiary. Dallen Co. pays for the operations in M

> Ved Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. It will soon decide whether to divest the subsidiary. One week ago, a company offered to purchase the subsidiary from Ved Co., and Ved has not yet r

> Explain how a foreign target could use poison pills to prevent a takeover or change the terms of a takeover

> In every chapter of this text, some of the key concepts are illustrated with an application to a small sporting goods firm that conducts international business. These “Small Business Dilemma” features allow students to recognize the challenges and possib

> Rudecki Co. (a U.S. firm) has a Polish subsidiary that it is considering divesting. The subsidiary is completely focused on research and development for Rudecki’s other business. Rudecki has cash outflows (paid in zloty, the Polish currency) for the labo

> Gaston Co. (a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of one year. The existing spot rate of the peso is $0.14, and

> Targ Co. of the United States has been targeted by three firms that consider acquiring it: Americo (from the United States), Japino (of Japan), and Canzo (of Canada). These three firms do not haveany other international business, have similar risk levels

> Clemson Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, Clemson received an offer from a company to purchase the German subsidiary, and it has not yet responded to this offer. a. Since l

> Baltimore Co. considers divesting its six foreign projects as of today. Each project will last one year. The company’s required rate of return on each project is the same. The cost of operations for each project is denominated in dollar

> Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Another Italian company, Venice Co., also wants to buy the business but will not hav

> Maude, Inc., a U.S.-based MNC, has recently acquired a firm in Singapore. To eliminate inefficiencies, Maudedownsized the target substantially, eliminating two-thirds of the workforce. Why might this action affect the regulations imposed on the subsidiar

> Co. consists of two businesses. Its local business is expected to generate cash flows of $1 million at the end of each of the next three years. It also owns a foreign subsidiary based in Mexico, whose business is selling technology in Mexico. This busine

> Florida Co. produces software. Its primary business in Boca Ratonis expected to generate cash flows of $4 million at the end of each of the next three years, and Florida expects that it could sell this business for $10 million (after accounting for capit

> Sunbelt, Inc., plans to purchase a firm in Indonesia. It believes that it can install its operating procedure in this firm, which would significantly reduce the firm’s operating expenses. However, the Indonesian government will approve the acquisition on

> Blades, Inc., is a U.S.-based company that has been incorporated in the United States for 3 years. Blades is a relatively small company, with total assets of only $200 million. The company produces a single type of product, roller blades. Due to the boom

> Merton, Inc., has a subsidiary in Bulgaria that it fully finances with its own equity. Last week, a firm offered to buy the subsidiary from Merton for $60 million in cash, and the offer is still available this week. The annualized long-term risk-free rat

> Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attacks on the United States, Ethridge Co. decided to conduct a capital budgeting analysis

> San Gabriel Corp. recently considered divesting its Italian subsidiary, but determined that the divestiture was not feasible. Therequired rate of return on this subsidiary was 17 percent. In the last week, San Gabriel’s required return on that subsidiary

> Colorado Springs Co. plans to divest either its Singapore subsidiary or its Canadian subsidiary. Assume that if exchange rates remain constant, the dollar cash flows that each of these subsidiaries would provide to the parent over time would be somewhat

> Senser Co. established a subsidiary in Russia two years ago. Under its original plans, Senser intended to operate the subsidiary for a total of four years. However, it would like to reassess the situation because exchange rate forecasts for the Russian r

> Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes the purchase, it would keep Estoya’s operations for two years an

> Provide two reasons why an MNC’s strategy of acquiring a foreign target could backfire. That is, explain why the acquisition might result in a negative NPV.

> Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary?

> When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park sufficient to assess the feasibility of this project? Were there any other “relevant cash flows” that deserved t

> Huskie Industries, a U.S.-based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing business in France and no cash flows in euros. Would the proposed acquisition likely be

> As the Sports Exports Company exports footballs to the United Kingdom, it receives British pounds. The check (denominated in pounds) for last month’s exports just arrived. Jim Logan, the owner of the Sports Exports Company, usually deposits the check wit

> Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In the face of Greece’s government-debt crisis, its expected cash flows and earnings from this acquisition were reduced only slightly. Yet the firm de

> Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.

> a. Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany today by a U.S.-based MNC. Will the sensitivity of the project value be affected by the perc

> Your employees have estimated the net present value of Project X to be $1.2 million. Their report says that they have not accounted for risk but that, with such a large NPV, the project should be accepted because even a risk adjusted NPV would likely be

> Explain why a territorial tax law could encourage U.S.-based MNCs to consider moving their headquarters to another country.

> The appendix to this chapter explains how tax laws can affect how much earnings subsidiaries remit to their parents. Explain why the U.S. tax rules prior to 2017 encouraged foreign subsidiaries of U.S.-based MNCs to reinvest their earnings in their locat

> Louisville Co. is a U.S. firm considering a project in Austria that will require an initial cash outlay of $7 million. Louisville will accept the project only if it can satisfy its required rate of return of 18 percent. The project would definitely gener

> Konk Co., a U.S. firm, considers a project in which it would build a subsidiary in Belgium that would generate net cash flows of approximately 10 million euros per year for five years and would remit that amount to the parent each year. Konk Co. has no o

> Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in one year from selling

> Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in one year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk averse and takes on risk only when the potential benefits outwe

> Recall that Blades, a U.S. manufacturer of roller blades, has chosen Thailand as its primary export target for Speedos, Blades’ primary product. Moreover, Blades’ primary customer in Thailand, Entertainment Products, h

> The Asian crisis showed that a currency crisis could affect interest rates. Why did the crisis put upward pressure on interest rates in Asian countries? Why did it put downward pressure on U.S. interest rates?

> Burton Co., based in the United States, considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs in one year. The spot rate of the Swiss franc is $0.80. Burton Co. decides to purchase put options

> Using the capital budgeting framework discussed in this chapter, explain the sources of uncertainty surrounding a proposed project in Hungary being considered by a U.S. firm. In what ways is the estimated net present value of this project more uncertain

> Cantoon Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $4 million. Cantoon will reinvest all the earnings in the unit. It expects that at the end of eight years, it will sell the unit for 12 million e

> Baxter Co. is considering a project with Thailand’s government. If it accepts the project, it will definitely receive one lump-sum cash flow of 10 million Thai baht in five years. The spot rate of the Thai baht is presently $0.03. The annualized interest

> Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $50 million in New Zealand dolla

> Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 3 million Mexican pesos (MXP) in revenue at the end of the next year. However, i

> Zistine Co. considers a one-year project in New Zealand so that it can capitalize on its technology. Although the company is generally risk averse, it is attracted to the project because of a government guarantee. The project will generate a guaranteed N

> A project in Malaysia costs $4 million. Over the next three years, the project will generate total operating cash flows of $3.5 million, measured in today’s dollars using a required rate of return of 14 percent. What is the break-even salvage value of th

> Assume that Nike decides to build a shoe factory in Brazil; half the initial outlay will be funded by the parent’s equity and half by borrowing funds in Brazil. Assume that Nike wants to assess the project from its own perspective to determine whether th

> Marathon, Inc., considers a one-year project with the Belgian government. Its euro revenues would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal distribution and that, based on a 95 percent confiden

> Jim Logan, owner of the Sports Exports Company, is concerned about the value of the British pound over time because his firm receives pounds as payment for footballs exported to the United Kingdom. He recently read that the Bank of England (the central b

> Carson Co. is considering a 10-year project in Hong Kong, where the Hong Kong dollar is tied to the U.S. dollar. Carson Co. uses sensitivity analysis that allows for alternative exchange rate scenarios. Why would Carson use this approach rather than usin

> A project in South Korea requires an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion won and 4 billion won in the two years of operation, respectively. The project has no

> What is the major limitation of using point estimates of exchange rates in the capital budgeting analysis? List the various techniques for adjusting risk in multinational capital budgeting. Describe any advantages or disadvantages of each technique. Expl

> When considering the implementation of a project in one of various possible countries, what types of tax characteristics should be assessed among the countries? (See the chapter appendix.