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 U.S. earnings and on Thailand earnings is 30 percent (federal and state combined). The annualized 10-year risk-free interest rate is 6 percent in the United States and 21 percent in Thailand. The annual real rate of interest is 2 percent in the United States and 2 percent in Thailand. Interest rate parity exists. Orlando pays 3 percentage points above the risk-free rates when it borrows, so it’s before-tax cost of debt is 9 percent in the United States and 24 percent in Thailand. Orlando expects that the U.S. stock market return will be 10 percent per year, whereas the Thailand stock market return will be 28 percent per year. Its business in the United States has a beta of 0.8 relative to the U.S. market, while its business in Thailand has a beta of 1.1 relative to the Thai market. The equity used to support Orlando’s Thai business was created from retained earnings by the Thailand subsidiary in previous years. Now, however, Orlando Co. is considering a stock offering in Thailand that is denominated in Thai baht and targeted at Thai investors. Estimate Orlando’s cost of equity in Thailand that would result from issuing stock in Thailand.
> 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.
> 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
> 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
> 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
