Recall that Blades, Inc., the U.S. manufacturer of roller blades, generates most of its revenue and incurs most of its expenses in the United States. However, the company has recently begun exporting roller blades to Thailand. The company has an agreement with Entertainment Products, Inc., a Thai importer, for a three-year period. According to the terms of the agreement, Entertainment Products will purchase 180,000 pairs of “Speedos,” Blades’ primary product, annually at a fixed price of 4,594 Thai baht per pair. Due to quality and cost considerations, Blades is also importing certain rubber and plastic components from a Thai exporter. The cost of these components is approximately 2,871 Thai baht per pair of Speedos. No contractual agreement exists between Blades and the Thai exporter, so the cost of the rubber and plastic components imported from Thailand is subject to both exchange rate considerations and economic conditions (such as inflation) in Thailand. Shortly after Blades began exporting to and importing from Thailand, Asia experienced weak economic conditions. Because of their fears about the baht’s potential weakness, foreign investors moved their investments out of Thailand, resulting in an excess supply of Thai baht for sale. To counteract the resulting downward pressure on the baht’s value, the Thai government sought to stabilize the baht’s exchange rate. It intervened in the foreign exchange market to maintain the baht’s value; specifically, it swapped its baht reserves for dollar reserves at other central banks and then used its dollar reserves to purchase the baht in the foreign exchange market. However, this agreement required Thailand to reverse this transaction by exchanging dollars for baht at a future date. Unfortunately, the Thai government’s intervention was unsuccessful, as it was overwhelmed by market forces. Consequently, the Thai government ceased its intervention efforts, and the value of the Thai baht declined substantially against the dollar over a three-month period When the Thai government stopped intervening in the foreign exchange market, Ben Holt, Blades’ CFO, was concerned that the value of the Thai baht would continue to decline indefinitely. Because Blades generates net inflow in Thai baht, this would seriously affect the company’s profit margin. Furthermore, one reason why Blades had expanded into Thailand was to appease the company’s shareholders. At last year’s annual shareholder meeting, they had demanded that senior management take action to improve the firm’s low profit margins. Expanding the company’s operations into Thailand had been Holt’s suggestion, and he is now afraid that his career might be at stake. For these reasons, Holt believes that the Asian crisis and its impact on Blades demand his serious attention. One factor that Holt is considering is the issue of govrnment intervention and how it could affect Blades in particular. Specifically, he wonders whether the decision to enter into a fixed agreement with Entertainment Products was a good idea under the circumstances. Another issue is how the future completion of the swap agreement initiated by the Thai government will affect Blades. To address these issues and to gain more insight into the process of government intervention, Holt has prepared the following list of questions for you, Blades’ financial analyst, as he knows that you understand international financial management. 1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain. 2. Did the intervention by the Thai government constitute sterilized or nonsterilized intervention? What is the difference between the types of interventions? Which type do you think would be more effective in increasing the value of the baht? Why? (Hint: Think about the effect of nonsterilized intervention on U.S. interest rates.) 3. If the Thai baht is virtually fixed with respect to the dollar, how could this affect U.S. levels of inflation? Do you think these effects on the U.S. economy will be more pronounced for companies such as Blades that operate under trade arrangements involving commitments or for firms that do not? How are companies such as Blades affected by a fixed exchange rate? 4. What are some of the potential disadvantages in terms of the level of inflation associated with the floating exchange rate system that is now used in Thailand? Do you think Blades contributes to these disadvantages to a great extent? How are companies such as Blades affected by a freely floating exchange rate? 5. What do you think will happen to the Thai baht’s value when the swap arrangement is completed? How will this affect Blades?
> 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.
> Assume that Fordham Co. was evaluating a project in Thailand (to be financed with U.S. dollars). All cash flows generated from the project were to be reinvested in Thailand for several years. Explain how the Asian crisis in 1997 would have affected the e
> PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their demand for soft drinks is increasing. However, the soft drink consumption is still only ab
> Assume that a less developed country called LDC encourages direct foreign investment (DFI) in an effort to reduce its unemployment rate, currently at 15 percent. Also assume that several MNCs are likely to consider DFI in this country. The inflation rate
> Santa Monica Co., a U.S.-based MNC, was considering establishing a consumer products division in Germany, which would be financed by German banks. Santa Monica completed its capital budgeting analysis in August. Then, in November, the government leadersh
> Ventura Corp., a U.S.-based MNC, plans to establish a subsidiary in Japan. It is confident that the Japanese yen will appreciate against the dollar over time. The subsidiary will retain only enough revenues to cover expenses and will remit the rest to th
> Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to keep the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3
> Flagstaff Corp. is a U.S.-based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years because the interest rate earned on these securities is so high. Then, after 10 years, it will remi
> Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated that future cash flows would also be lower than the original cash flow projections.
> Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States. The subsidiary’s performance significantly exceeded expectations. Consequently, when a British firm approached Athens about the poss
> Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? Which additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting?
> Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce MP3 players and sell them there. It expects that its cost of producing these MP3 players will be onethird the cost of producing the devices in the United States. Assuming that
> Ohio, Inc., considers establishing a manufacturing plant in central Asia, which would be used to cover its exports to Japan and Hong Kong. If Ohio is concerned about possible terrorism, how might this factor affect the estimated expenses of the plant?
> Offer your opinion on why the economies of some less developed countries with strict restrictions on international trade and DFI are somewhat independent from the economies of other countries. Why would MNCs desire to enter such countries? If these count
> Some MNCs establish a manufacturing facility where there is a relatively low cost of labor, but they sometimes close the facility later when the cost advantage dissipates. Why do you think the relative cost advantage of these countries is reduced over ti
> If the United States imposed long-term restrictions on imports, would the amount of DFI by non-U.S. MNCs in the United States increase, decrease, or be unchanged? Explain.
> Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash flows. Raider implemented a long-range plan to establish 40 percent of its business in Canada. Ram implemented a long-range plan to establish 30 percent of i
> The Sports Exports Company receives British pounds each month as payment for the footballs that it exports. It anticipates that the pound will depreciate over time against the U.S. dollar. 1. How can the Sports Exports Company use currency futures contra
> Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear has decided to establish distributorship subsidiaries in various countries, whereas Viking has decided to establish manufacturing subsidiaries in
> Packer, Inc., a U.S. producer of tablet computers, plans to establish a subsidiary in Mexico in an effort to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s value is relatively strong and will weaken against the dollar o
> Myzo Co. (based in the United States) sells basic household products that many other U.S. firms produce at the same quality level; these other U.S. firms have approximately the same production costs as Myzo. Myzo is considering DFI. It believes that the
> Trak Co. (of the United States) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Japan. It wants to purchase a manufacturer in India that could produce similar products at a low cost (due to low l
> Decko Co. is a U.S. firm with a Chinese subsidiary that produces smartphones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is stable relative to the dollar. The smartphones sold to Japan are denomina
> Friendly Stores, a U.S. retailer, has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe, Asia, a
> Why would foreign governments provide MNCs with incentives to undertake DFI there?
> Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does this statement mean?
> What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?
> Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by professional sports teams. It recently decided to expand in Europe. What are the potential benefits for this firm from using DFI?
> Blades, Inc. needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery date. Blades has two choices: Purchase two call option
> This chapter concentrates on possible benefits to a firm that increases its international business. a. What are some risks of international business that may not exist for local business? b. What does this chapter reveal about the relationship between an
> Describe some potential benefits to an MNC as a result of direct foreign investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to expand its footwear production in Latin America?
> Carlton Co. and Palmer, Inc., are U.S.- based MNCs with subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers throughout Latin America. Both subsidiaries purchase the products at cost and sell the products a
> Would a more established MNC or a less established MNC be better able to effectively hedge its given level of translation exposure? Why?
> Bartunek Co. is a U.S.-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain some limitations when this MNC hedges translation exposure.
> Explain how a firm can hedge its translation exposure.
> Explain how a U.S.-based MNC’s consolidated earnings are affected by depreciation of foreign currencies.
> When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain
> Albany Corp. is a U.S.-based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of Albany’s total sales volume. The Australian government pays Albany in Australian dollars. Ap
> UVA Co. is a U.S.-based MNC that obtains 40 percent of its foreign supplies from Thailand. It also borrows Thailand’s currency (the baht) from Thai banks and converts the baht to dollars to support its U.S. operations. It currently receives about 10 perc
> Because the Sports Exports Company (a U.S. firm) receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Comp
> Nashville Co. presently incurs costs of approximately 12 million Australian dollars (A$) per year for research and development expenses in Australia. It sells the products that are designed each year, and all of the products sold each year are invoiced i
> Lola Co. (a U.S. firm) expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This transaction is its only international business, and the firm is not exposed to an
> Laguna Co. (a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zloty in one year. It has no other exchange rate risk at this time. However, it needs to buy supplies and can purchase the
> Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake recognizes that hedging on a monthly basis does not really offer any protection against
> Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other international business. The subsidiary will produce computers and export them to Caribbe
> St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information. St. Paul’s U.S. sales are somewhat affected by the value of the New Zealand dollar (
> Nelson Co. is a U.S. firm with annual export sales to Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with a subsidiary in Singapore that generates about S$800 million in annual sales. Any earnings gener
> Colorado, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its products are invoiced in euros. Explain how Colorado can attempt to reduce its
> Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to purchase British supplies. On the day the pounds were
> If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?
> As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades’ primary customer in Thailand, a retaile
> Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand doll
> Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract.
> Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 percent for Switzerland’s one-year interest rate. The spot
> Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the future. Indianapolis Co., a U.S. firm, has a large amount o
> The one-year U.S. interest rate is presently higher than the Japanese interest rate. Assume a real rate of interest of 0 percent in each country. Assume that interest rate parity exists. You believe in purchasing power parity (PPP). You have receivables
> Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the spot rate is the best forecast of future spot rates. You
> San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also need to pay 5 million Swiss francs for imports arrivin
